Strategic and business risks
Kendrion’s strategic and business risks identified are reviewed below. The most important risks selected based on the financial outcome of the risk management survey are:
1. Pressure from large customers and customer dependency;
2. Increased competition;
3. Future product portfolio, including impact of megatrends;
4. Technological substitution;
5. Attraction and retention of qualified staff;
6. Non-performing Information Systems and cyber security
These risks are associated with Kendrion’s strategic objectives and could impact these objectives as follows:
|ROI >20% as from end 2023||EBITDA margin >15% as from end 2023||Dividend 35-50% of net profit|
|Pressure from large customers and customer dependency||X||X||X|
|Future product portfolio||X||X||X|
|Atrtraction and retention of qualified staff||X||X|
|Information Systems and cyber security||X||X|
Pressure from large customers and customer dependency
Kendrion has a wide range of customers in various markets and, consequently, the company’s dependency on a small number of large customers is relatively low. Customer concentration in Automotive is higher than in Industrial; however, in the past years, these risks have also been ranked higher by the industrial business units. Losing one of the large customers in Automotive would have a high impact and, in the absence of compensatory measures, would be detrimental to Kendrion's growth objective and profitability. The likelihood of this happening is assessed as low to moderate as Kendrion is a technologically advanced player which offers tailor-made customer solutions whose development times and costs are usually high. Apart from the risks related to large customer accounts, large customers provide opportunities for accelerating (international) growth.
Kendrion’s main response to this risk is to actively pursue the reduction of single customer dependency by securing projects from other large customers.
Increased competition and technological substitution
Kendrion faces competition from peers, in some cases from competing technologies and on some occasions also from (potential) customers. If Kendrion were to lose its competitive edge in relation to these parties and competing technologies, it would lessen Kendrion’s ability to achieve its profitability and growth targets. Furthermore, Kendrion could become unable to offer its markets or customers the solutions they need, due to the company’s inability to meet customer requirements. This is particularly important for the Automotive activities. The impact on organic growth and profitability could be significant, the likelihood and vulnerability are moderate. In view of the pressure imposed on prices in this competitive market, especially high technological solutions are essential to realise opportunities for profitability.
The company carries out innovative projects in close consultation with its customers, an approach which Kendrion also perceives as contributing to the company’s provision of added value. However, new technologies and innovations in the market environment could result in the imposition of changed requirements on Kendrion’s products and operations. Although this would offer the company opportunities it could also result in the risk of being unable to meet the requirements or lagging in developing new solutions. Kendrion uses a number of tools to strengthen innovative development in its operations.
Kendrion’s strategy to localise production as much as is feasible reduces its vulnerability to risks from competitive shifts resulting from exchange rate movements and changes in export or import restrictions. Although Kendrion's main focus is on technological leadership, it also actively manages the cost price by exploiting low-cost production opportunities within the group as well as exploring alternative use of materials and sources.
Future product portfolio, including impact of megatrends
A focus on products that ultimately prove to be unsuccessful and a failure to respond adequately to market disruptions and to the impact of megatrends could lead in the longer term to stagnation and even a decline in market share and financial performance.
The mitigating measures relating to the risks ‘Increased competition’ and ‘Technical substitution’ also apply to this risk. In addition to Kendrion’s innovation activities, M&A can provide further support in ensuring an effective future product portfolio and technology base. With the new five- year EUR 150 million revolving loan facility entered into on 24 July 2018, Kendrion has sufficient funding in place for investments in new technologies and possible M&A transactions.
Recruitment and retention of qualified staff
Central to achieving Kendrion’s strategic objectives is the creation of a culture and environment that empowers everyone to reach their full potential to achieve the best results. Kendrion supports the creation of a sustainable culture of high performance. A lack of skilled employees could impede the achievement of Kendrion’s strategic objectives. The likelihood and vulnerability are moderate to high and this is consequently an important area for attention. Kendrion’s required know-how is highly specific and requires on-the-job training.
Mitigating actions include:
- Succession Planning tool for Kendrion’s potential top management;
- The Kendrion Leadership & Performance Programme for senior management at the Rotterdam School of Management, which provides high-quality management training;
- The HIPO programme for high potentials;
- Apprentice programmes at several companies;
- Regular contact with relevant educational institutions;
- Various in-house training programmes;
- Health & safety programmes, good labour conditions and staff satisfaction surveys.
Non-performing Information Systems (IS) and cyber security
Inadequate or non-performing IS (including the infrastructure) could have a significant impact on the company’s business processes and, consequently, the results. The likelihood and vulnerability are moderate as a range of mitigating actions have been taken.
The major IS risks include the risk of faults in IS operations, interruptions, loss of data, unauthorised system access and other events as a result of insufficient cyber security controls and monitoring, or poorly managed system changes and new implementations. Information Systems are of importance to Kendrion, both in terms of the risks and business support. Kendrion’s Executive Board, in particular, the CFO bears the overall IS responsibility. Kendrion has implemented a corporate IS policy and strategy that governs:
- The arrangements for IS decision-making including which decisions can be made at which level (central or local);
- IT governance for system and data responsibility (master data management);
- The arrangements for sourcing IS products and services for operating companies;
- The requirements to be met by the IS organisation in serving its internal customers;
- Periodical information security audits, covering both external penetration testing, and internal security risks and mitigations;
- The measures to mitigate risks, such as access security programmes, equipment backup and recovery, change management procedures, etc.;
- The development of solutions for customer requirements (such as EDI) and the integration of suppliers in the supply chain for Kendrion’s processes (supplier portals).
The implementation of new software, servers and network systems can pose interruption risks that can in turn pose major consequential risks (loss of orders, customers, or the company’s reputation etc.). These implementations and upgrades are managed carefully through:
- A formal governance structure throughout the entire project;
- Thorough preparation and impact assessment;
- Balanced selection of financially strong suppliers;
- Milestones and extensive cutover planning and reviews;
- Audits for important go/no-go decisions;
- Business case analysis – internal and external (benchmark against other companies);
- End user acceptance and training.
Infrastructure – Operating companies are supported by the group’s central IT department in Villingen (Germany), as well as by local IT teams who take responsibility for site-specific infrastructure. These teams work together to set and coordinate the service level agreements with suppliers such as application and network providers, security providers, maintenance companies and suppliers of hardware and networks for the entire group. Kendrion works with highly skilled IT staff and reputable external and international IT suppliers. The servers are well protected against outsiders, with firewall and unauthorised-access control. Appropriate procedures have also been implemented for regular backups and disaster recovery of the data.
Software application portfolio – Operating companies use a standardised ERP system, Microsoft Operating Systems (OS) and applications and software for specific applications such as project management. The software is stable and Kendrion has sufficient knowledge required for user support.