How does a changing world affect the business environment and how should organizations consider reacting? Jeremy Greenstock investigates.
The launching of the Arab Spring revolutions in 2011 and Russia’s intervention in Ukraine in 2014 have made it impossible for businesses to ignore the potential impact of sudden political developments. The rapidity of geopolitical shifts, after the apparent stability of previous decades, has created an area of commercial discomfort that has coincided very disturbingly with the economic and financial tribulations of the post-2007 period. Yet, for all the talk about global change and political risk, there is little clarity about what it all means for the private sector.
Multinational companies have been increasingly inclined to engage special advisers, appoint international advisory boards or bring in consultants to remedy the problem and broaden their under- standing. But these investments tend to lead to partial satisfaction at best.
Most businesses are rather poor at framing the questions that need to be asked about political risk, and the advisory industry too often tries to respond on the basis that the customer must be right. With this confusion in the air, senior executives are disinclined to leave their comfort areas to review their approach to lateral risk, and many find they have greater faith in their own instincts than in the opinions of “experts”. Shareholders should not sleep happily with either approach.
This article seeks to do two things: describe how a changing world affects the business environment and suggest how companies should consider reacting.
Torrents of change
The intensity of social and political change witnessed so far this century is the product of globalization and greater freedom. The first has become a cliché, but the implications of the second are poorly understood. Democracy’s victory in the Cold War and progress in science and technology, especially information technology, have generated greater equality between nations than in previous eras – and a different balance of power between governments and individual citizens. The world has spawned a plethora of independent decision-making centres, and national and international order is harder to keep on the basis of agreed rules, especially when so many more people dispute those rules.
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The rise in impact of the people’s voice has already had far-reaching political consequences. Every human being’s default setting is tribal – we like to be part of a team of our own identity. The spread of freedom has made this core comfort
more widely attainable, leading to a marked process of localization in political activity. Weakly governed states, or governments that completely fail to meet public expectations, find their rule much more powerfully contested than before. The examples of Scotland and Catalonia show that, even in a reasonably governed state, the appeal of local identity can overcome the logic of well-structured co-operation.
Part of this loss of traction by central governments – in democracies as well as autocracies – can be attributed to the growing popular disaffection with the use of force or top-down command. Governments have lost both legitimacy and authority if they rely on suppression or if they use military power to pursue their external interests. The impact of international public opinion, enlarged by open communications and global connectivity, has produced a concrete change in the relationship between rulers and subjects. That can constrain unjust government, but it can also make all government that much more difficult.
This gradual delegitimization of centralised authority has had the effect of turning economic capacity into a more telling criterion of national or community strength than political, diplomatic or military capability. Virtually everyone wants a better material life for them- selves and their family, and the denial of their expectations can be a factor for instability. But the competition between communities for resources, capital and skilled labour also tends to increase under these circumstances, while trade patterns develop more among the like-minded than as a global opening-up of low-barrier trade. It seems like a paradox that horizons should narrow as a result of greater freedom of choice, but that is the conclusion to draw from the last two decades of geopolitics. International businesses have to take account
of these trends. The controls on disordered behaviour have become weaker and the institutions that have fostered widespread agreement on keeping the peace and expanding trade are running out of steam. This places a premium on knowing where you are and what could happen next. Self-sufficiency in this respect helps to maintain the licence to operate.
As for companies moving into new markets, or reviewing their marketing strategies in countries they thought they knew, the trend towards distinctive local choices and cultural preferences has to be assessed. Regional and even national
approaches may have to be subdivided into tailored tactics for each identity space. The business strategy map is taking on a greater variety of colours, which need to be checked for change on almost a monthly basis.
It is more complicated than it sounds to evolve the right corporate mindset against this back- ground. With a world so focused on economic outcomes, the commercial environment has grown very mobile and variable – so all the more power to the quick-footed.
But there is a catch here. First-movers do not have it all their own way. Firms have to generate a high degree of linear momentum and efficiency to beat the competition and deliver share- holder value. This concentration on bottom- line targets is fine in a context of general stability, but in a period of dynamic political and social change, a company is more exposed to lateral shocks – unless care is taken to balance linear drive with the right sort of resilience. Having one’s eye on one enemy, the competition, is not enough when another, habitat change, is sneaking up from right or left field.
How does a company keep up with all of this? Flows of information on events, on what has just happened out there in the world, are comforting, but not enough to interpret what might happen next – unless they are very deliberately used within the company structure to share perceptions and assess implications and consequences. Firms often fail to test information quality rigorously enough when it lacks a good basis of evidence; nor are companies inclined to insist on a variety of sources – internal/external, UK-/non- UK-based, publicly/privately sourced, and so on. Accountability for the mixing and distribution of information flows can be loose, and not enough time is spent discussing and challenging corporate assumptions, whether derived from the CEO or externally. Even the business of defining what really matters for a company’s next moves can be left confused or subjective.
A top-down or centre-periphery culture in the organization can be beneficial and has certainly become the norm when the drive for linear efficiency is paramount. But it magnifies the errors when the top/centre gets it wrong and it stifles the intellectual and information-gathering potential of those capillaries that are likely to be the first to spot clouds on the horizon.
The three essential ingredients for managing this complex area of lateral risk – indeed the three principal characteristics of the domination of homo sapiens over all other creatures
– are intelligence, adaptability and teamwork. The analysis has to be right; the capacity to plan, turn and diversify has to be nurtured; and the team needs to be constituted and organized to ensure the right skills are available and used.
No one can predict what might happen next. But it is possible for a business to under- stand the range of probabilities and to decide what choices and contingencies flow from that assessment. Outside advice should not substitute the internal capacity to handle this, although it can help with the development of that capacity, as my company tries to do. The important thing is to ask the awareness question in the first place: what is it in our lateral environment that is most likely to affect our performance? Then a company might be on the way to riding the storm.