New barriers to trade seen as one of four key risks facing Irish firms

Increased currency volatility, new barriers to trade, large scale cyber-attacks, and a decline in Ireland's competitiveness are among the key risks facing Irish businesses over the next two years according to research carried out by the UCD Michael Smurfit Graduate Business School earlier this year.

The research also revealed a worrying divergence between corporate strategy and the actual risks faced by companies.

For example, market diversification was set as a low priority by the great majority of companies surveyed while many of those same companies had cited increased trade barriers as a major threat for the coming years.

This may be due to the fact that Irish firms continue to rely heavily on the UK as a source of trade and expansion, with no foreseeable change according to the research findings.

The Executive Agenda report was produced following a large-scale study of 225 senior executives from 180 of Ireland's largest companies along with a series of in-depth, open-ended interviews with 31 CEOs and other senior executives from 23 major companies.

"We live in times of almost unprecedented uncertainty and this research provides a unique insight into the attitudes and approach of senior executives at Ireland's leading companies in relation to the range of risks faced by their organisations in the coming years", says Professor Pat Gibbons, academic director of Smurfit Executive Development at UCD Smurfit School.

“It also gives us an overview of the strategies being employed to overcome these challenges.”

Two categories of risk were explored by the research – macro risks affecting all sectors and sector-specific risks. The five key macro risks identified by respondents were: unpredictable currency swings and shifts, new international trade barriers, major cybersecurity breaches, increased border controls, and a deterioration in Ireland’s cost competitiveness.

These findings are more or less in line with expectations given current events on both the domestic and international stages. However, the response of the companies surveyed was somewhat surprising, according to Dr Ciarán Heavey, associate professor at UCD Smurfit School.

Low priority

“The prospect of new international trade barriers and border controls was cited as a significant risk, yet market diversification is a very low priority among respondents. This is both surprising and a cause for concern given developments regarding Brexit and changing trade policy in the US.”

When it came to sector specific risk an increase in the intensity of competition was identified as the most important with the health and pharma, food and agri, manufacturing, and retail sectors all ranking it at number one.

The introduction of new disruptive technologies was identified as the top risk for the financial services and technology sectors. Respondents from the professional services sector believed that the emergence of lower cost competitors represented the greatest single risk to their organisations.

The emergence of ride sharing platforms such as Uber and the prospect of entirely new transport modes being ushered in by the development of autonomous vehicles clearly influenced respondents in the transport and aviation sector who pointed to a significant increase in customer options as the top risk facing them.

Unsurprisingly, given the pressures created by the climate change agenda, the energy and resources sector place a significant slowdown of industry sales growth at the top of its risk list.

The research findings indicate that firms are more interested in preparing for sector-specific risks than they are for the macro risks. This may help explain the apparent lack of planning for macro risks also noted in the report.

“Our analysis concludes that contingency planning was primarily centred on those risks perceived as most controllable”, says Prof Gibbons.

“The risks for which firms are most prepared include large-scale cyber-attacks, a slowdown in economic growth, massive incidents of data fraud or theft, currency shocks, and a dampening of customer confidence. But aside from these areas, we were surprised that firms appear to be seriously under-prepared for some real and tangible risks such as geopolitical tensions, political uncertainty, border controls, trade barriers, tax policy, and regulation.”

Strategic planning

Possibly of most concern is the inference that companies are not engaged in the sort of long-term strategic planning which would take these risks into account as a matter of routine.

“The focus appears to be devoting resources to responding to events that are perceived not only to have an impact upon performance but are also controllable,” notes Dr Heavey.

This was evidenced by the fact that 61 per cent of respondent firms have a contingency plan in place to deal with the main risk identified, increased competition.

By contrast, less than half of the firms surveyed are prepared for the emergence of disruptive technologies, the entry of competitors with disruptive business models, or the emergence of low cost and technically superior alternative products and services. Of deep concern should be the fact that just one third (35 per cent) of food and agri sector firms have a contingency plan in place to deal with a major cyber-attack.

There may be a benign reason for this apparent lack of preparedness, however, and it may not yet be time to ring the alarm bells. Firms surveyed were generally highly optimistic in relation to their prospects for growth for the next two years.

“Given the high level of confidence respondents expressed in their ability to achieve increased sales, it is possible that they are underestimating the likelihood and impact of certain risks, believing that they know how to handle such events without the need to engage in contingency planning,” Prof Gibbons concludes.

The full report can be accessed on www.smurfitschool.ie/news