Strategy for risky and uncertain markets

The political turmoil in the Middle East over the past few weeks reminds us how risky emerging markets can be.  In rapid succession, Tunisia, Egypt, Jordan, Yemen and Bahrain have experienced significant unrest resulting in the destabilization of local economies as well as the foreign firms that operate and sell there.  Caught unprepared most multinationals across a variety of industries got hammered.  For example, Thomas Cook Group, a tour operator, announced that they would lose $32 million due to the Egyptian and Tunisian uprisings.  Lafarge, a large French cement provider, saw its share price fall four percent in one day.

Despite a semblance of normalcy, all emerging markets contain a myriad of risks – by themselves or in combination – ranging from war, civil unrest, and arbitrary government actions to executive abduction, natural disasters and large currency fluctuations. Magnifying the local hazards are fragile infrastructures, weak government institutions and socio-cultural chasms. 

Not surprisingly, political and economic risk is not limited to the Middle East.  Other rapidly growing flashpoints pose considerable risk for Western companies that depend on location operations and markets.  As examples, both Korean states technically remain in a state of war; nuclear-armed states India and Pakistan have fought 4 wars over the past 60 years and still have a simmering dispute over Kashmir and; China has territorial issues with all of its neighbors and experiences thousands of anti-government incidents every year.  For these countries as well as many others, disorder is not a question of if but when.  

In order to understand and cope with these risks, prudent executives need to consider three fundamental questions:  1) What is the likelihood of the most plausible disturbances; 2) What is the potential business impact of each of these problems and; 3) How can the company preempt these problems or mitigate the impact following the disruption.  To help firms make the right strategic choices, we deploy a comprehensive analytical framework that drills deep into the regional political and economic environment to develop integrated market and non-market risk management strategies.

Deeply understand the local society

Firms often have a great deal of knowledge about the customers, suppliers and regulations in the markets they operate in.  Yet, these same firms will possess significant cultural and historical blind spots which prevent them from truly understanding the pulse of the nation as well as its relations with its neighbors.  In the case of Egypt, virtually every multinational was caught unprepared by a situation that could have been anticipated given current political realities – extreme income inequality, religious conflict, a 30 plus year old authoritarian regime and political leadership behind a 82 year old dictator and his cronies.  To better understand their international markets, companies need to closely monitor political, social and economic developments both historically as well as up close on the streets. 

Choose a lower risk market strategy

Out of fear or ignorance, many firms choose to follow the market entry strategies of their competitors or peers. While executives may feel that they are playing it safe by replicating a rivals’ strategy, they are often unwittingly magnifying their own risk by ignoring better options.  For example, foreign direct investment (i.e. setting up a plant) may be an ideal approach during stable periods.  However, in turbulent times, an immobile and vulnerable fixed investment can turn into a corporate albatross.  Lower risk entry strategies could include joint ventures, strategic alliances, licensing strategies or in the simplest case, simple exporting. In addition, companies can choose to base vital assets like data centers and manufacturing in nearby but more stable geographies (Israel vs Egypt) while leaving less critical operations in the target market.    

Develop and refine contingency plans

Recent events in the Middle East as well as the Asian financial crisis of the 1990s have taught us that turmoil can spread quickly throughout a region. This means that managers need to anticipate potential problems and have plans ready before the crowds flood the streets. Companies should regularly engage in scenario planning where alternative operating models could be evaluated against key objectives like investment rate of return and supply chain viability.  Much of this planning should include non-market tactics such as political lobbying, coalition-building with your peers and participation in local associations and industry bodies.  However, firms need to tread carefully to avoid a nationalistic or religious backlash.  A case in point was the American conglomerate ITT who was implicated in the overthrow of Chile’s Allende government in the early 1970s.

Given the potential,  firms can ill afford to ignore doing business in emerging markets.   However, managers need to tread carefully and strategically manage their risk.

For more information on services and work, please visit the Quanta Consulting Inc. web site.


2 comments so far

  1. […] plans are then developed based on the most likely to occur “what if” scenarios.  These plans would include financial, operational and human resource strategies for coping with the s….  Though this planning is handled internally, many companies may choose to gain an independent, […]

  2. […] plans are then developed based on the most likely to occur “what if” scenarios.  These plans would include financial, operational and human resource strategies for coping with the s….  Though this planning is handled internally, many companies may choose to gain an independent, […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: