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| | | Today’s organizations face no shortage of risks. But companies that think their problems are limited to the most immediate threats should think again. Indeed, risk managers often fail to anticipate how acute, obvious threats can multiply across the entire value chain and wreak even greater havoc.
Consider the global financial crisis of 2008, whose lessons, underscored in this 2009 McKinsey Quarterly classic, can be instructive for global companies today. In the wake of the 2008 crisis, Canada’s currency appreciated 30 percent in value versus the US dollar. Manufacturers in Canada knew the currency change would affect their cost competitiveness in US markets. But what they didn’t plan for was the flurry of cross-border shopping from Canadian consumers, who started purchasing big-ticket items in the United States, which forced Canadian companies to lower their prices at home. The combined effects of profit compression in both Canada and the United States did far more damage than these companies had initially anticipated.
Understanding how risk can cascade across a company’s value chain—including its suppliers, distribution channels, and customers—and how it might change the dynamic with competitors is crucial for developing a comprehensive risk plan. For more on how executives can better prepare for second-order effects, read Eric Lamarre’s 2009 classic, “Risk: Seeing around the corners.” | | | | |
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| | —Edited by Drew Holzfeind, editor, Chicago
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