Globalization and Emerging Risks (Part 3)

Due to the increasing interdependence of global systems, risks now transmit much further and more quickly than before, jumping from one industry or country into several countries or sectors.

In the previous two articles, I looked at where the risks lie and how they impact the business.

This article looks at the other risks: Natural Disasters, Climate Change, Urbanization, Cybercrime, Regulatory Changes, and China Uprising.

1. Natural Disasters: This year alone, 2010, natural disasters have had a significant impact on business across the globe. In January, a massive 7.0 magnitude earthquake struck the Caribbean nation of Haiti wrecking the presidential palace, UN headquarters and other buildings.

A large number of UN personnel and peacekeepers from different parts of the world were reported missing while others were buried and feared dead.

Then in March, though not having extensive physical damage like the Haiti earthquake, a cloud of volcanic ash erupted in Iceland. This Icelandic volcanic ash disrupted air travel in Europe and across the world.

Global airports were forced to shut down, supply chains were disrupted, business meetings were cancelled as employees failed to travel, flight users were stranded in hotels or at airports with no extra cash to spare.

A report by the European Commission put the cost to European tourism sector at one billion euros.

Having a more damaging impact than the above events is the oil leak in April in the Gulf of Mexico where an oil drill rig operated by British Petroleum (BP) Company exploded on April 20, 2010 killing 11 people, injuring 17 others and causing a massive oil spill which has become the largest accidental marine oil spill in the history of the petroleum industry.

As a result of the oil spill, BP incurred $30bn in costs in the first half of 2010.

With total clean up and compensation costs running into billions of dollars, already this year, the company has sold some of its assets in North America, South America, Asia and Africa for a total of about $21bn to try and meet these expenditures.

Yesterday, Bloomberg reported, “BP considering $1bn sale of some of its assets in the North Sea as it attempts to cover clean up costs.”

The above events illustrate why environmental risk management is very important and strategic in nature. Managing environmental risks should form part of the decision making process.

Some countries are more prone to natural disasters such as natural bush fires, earthquakes and hurricanes. These areas should be identified before locating offices there.

2. Cybercrime: As organizations continue to take advantage of the internet to conduct their businesses, cybercrime and cyber-warfare is more likely to intensify. Identity theft is reportedly on the rise- both for individuals and commercial enterprises.

Hackers and criminals are always attempting to find new ways to interfere and manipulate the wireless and mobile signals. Cyber-warfare is also on the increase in the form of anti-satellite operations.

For example, China has been accused of conducting low-level anti-satellite operations against the United States. In 2006, Defense News reported that a U.S. reconnaissance satellite was blinded by a laser while over China.

The communist nation “fired high-power lasers at U.S. spy satellites flying over its territory”, in what experts see as a test of Chinese ability to blind the spacecraft.

However, China downplayed the test and argued the test was was not directed at any country and does not constitute a threat to any country.

Companies should be aware of how many public and private transactions go through satellites and how serious their disruptions could be.

3. The Power of China: The communist country has just overtaken Japan to be the world’s number two largest economy, after USA. Over the last decade, China has sought to establish itself as the new global economic titan.

The country has amassed close to $3 trillion in foreign currency reserves and continues to be heavily involved in infrastructural development projects both at national and international level.

As an emerging economy which relies mostly on exports, China has the potential of hugely destabilizing the global economy. In the past months there has been talk of “currency wars” with China being accused of manipulating its currency to boost exports.

The Western world, the main destination of Chinese exports is still reeling from the aftermath of the global financial crisis.

With burgeoning budget deficits, these nations are more likely to reduce their imports hence the need for China to find ways to stimulate its domestic demand although there has been slight improvements over the past few years.

The population in China is growing at an alarming rate and the country is forecast to have 22million ‘spare’ 18-25 year old males in 10 years time. This demographic and gender imbalance is more likely to cause problems for China.

The big question is, “Can China withstand these pressures in its present form, and what effect will this have on the global economy?”

4. Legislation: Various jurisdictions are passing various laws everyday. What might be acceptable in one country might not be acceptable in another country, maybe because of cultural differences.

The risks and consequences of non-compliance are far much greater than those posed by compliance. The new Bribery Act to be enacted in the UK next year, for example, will punish any individual who knew about any kind of corruption or bribery and did not deal with it effectively.

This is more likely to increase the companies’ exposure and encourage them to get cover. In the US, the Securities and Exchange Commission is increasingly filing claims against European companies operating in the country.

As regulators begin to take tougher stances on foreign companies, managers should ensure that all compliance is adhered to.

5. Urbanization and Resource Wars: Recent research has revealed the world is widely expected to undergo huge urbanization. By 2035, 70% of the world population is expected to be living in the cities, a 20% jump from the current statistics.

This is forecast to have huge implications on infrastructure, living space and resources. Competition for resources will rise as the population continues to increase and the effect will be a rapid increase in prices too.

We are also more likely to experience a series of wars over resource disparities that will exist. Businesses, therefore, need to be always on the guard, establish how these events will affect operations and bottom-line and implement protective measures.

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This is the final article of the 3-part series Globalization and Emerging Risks. The risks mentioned in this series are not conclusive, there are still a host of other risks that the business should be on the watch-out for.

As conditions begin to improve, businesses must learn from the mistake of the past decade. There is need to take a holistic view of all the risks and other threats to the business.

Also, it is important that risk be viewed over a longer time frame, and not just focus on the latest threat.

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Leading in Uncertain Times

One of the biggest challenges facing business leaders today is making the right decisions that will ensure their organizations succeed, survive, and remain competitive in an increasingly uncertain and complex environment.

A recent post, The best way to lead in uncertain times may be to throw out the playbook, by Strategy+Business has several good points.

The article is about the COVID-19 pandemic, how global companies navigated through the crisis, and how best to prepare for future disruptions. Here are some key points and my comments.

  • Rather than follow a rigid blueprint, executives must help organizations focus on sensing and responding to unpredictable market conditions.
    • Comment: Senior leaders play a vital role in providing clarity about the organization’s strategic direction, creating alignment on key priorities to ensure the achievement of enterprise objectives, and ensuring the business model is continuously evolving to create and capture value in the face of uncertainty. They must not rest on their laurels and stick to the beliefs and paradigms that got them to where they are today and hope they will carry them through tomorrow. Regulatory changes, new products, competition, markets, technologies, and shifts in customer behavior are upending many outdated assumptions about business success. Thus, the businesses you have today are different from the ones you will need in the future hence the importance of continuously sensing changes in the global economy. Employees and teams often feed off the energy of their leaders and tend to focus their attention where the leader focuses attention. If the leader is comfortable with current business practices and rarely embraces the future or challenges the status quo, then the team is highly likely to follow suit.
  • When it became clear that supply chains and other operations would fracture, organizations began scenario planning to shift production sources, relocate employees, and secure key supplies.
    • Comment: Instead of using scenario planning to anticipate the future and prepare for different outcomes, it seems most of the surveyed organizations used scenario planning as a reactionary tool. Don’t wait for a crisis or a shift in the market to start thinking about the future. The world is always changing. As I wrote in The Resilient Organization, acknowledge that the future is a range of possible outcomes, learn and develop capabilities to map out multiple future scenarios, develop an optimal strategy for each of those scenarios, then continually test the effectiveness of these strategies. This does not necessarily mean that every change in the market will impact your business. Identify early warnings of what might be important and pay closer attention to those signals. In other words, learn to separate the signals from the noise.
  • The pandemic forced the organization’s senior management team to re-examine how all decisions were made.
    • Comment: Bureaucracy has for a very long time stood in the way of innovation and agility. To remain innovative and adapt quickly in a fast-changing world, the organization must have nimble leadership and an empowered workforce where employees at all levels can dream up new ideas and bring them to life. Identifying and acting on emerging threats and potential opportunities is not the job of the leader alone but every team member. To quote Rita McGrath, in her book Seeing Around Corners, she writes, “Being able to detect weak signals that things are changing requires more eyes and ears throughout the organization. The critical information that informs decision-making is often locked in individual brains.” In addition to the internal environment, the leader must also connect with the external environment (customers, competitors, regulators, and other stakeholders), looking for what is changing and how.
  • It’s worthwhile for leaders of any team to absorb the lessons of sense-respond-adapt, even if there is no emergency at hand.
  • Sensing: Treat the far-flung parts of your enterprise as listening stations. The question leaders must ask is, “What are we learning from our interactions beyond the usual information about costs and sales?” Train your people to listen for potentially significant anomalies and ensure that important information is not trapped in organizational silos.
    • Comment: Cost and sales data are lagging indicators that reveal the consequences or outcomes of past activities and decisions. Although this information can help leaders spot trends by looking at patterns over time, it doesn’t help understand the future and inform what needs to be done for the numbers to tell a different story. In addition to lagging indicators, pay attention to current and leading indicators and understand the relationship between these indicators and outcomes.
  • Responding: Improve communication across intra- and inter-organizational boundaries. Leaders should view business continuity as an essential function that acts as connective tissue for the enterprise.
    • Comment: In addition to creating mechanisms that allow the free flow of information both inside and outside the organization, decision-makers should also be comfortable receiving information that challenges their personal view of the world, even if it’s not what they want to hear. Create a culture of psychological safety where people are not afraid to share bad news for fear of getting punished, but rather are acknowledged and rewarded for speaking up. Leveraging the diversity of thought enables leaders to anticipate the future as an organization, decide what to do about it collectively, and then mobilize the organization to do what’s necessary.
  • Adapting: Challenge assumptions, and question orthodoxies. There’s always the temptation to mitigate threats simply by applying existing practices harder and faster. One way to get at those deeper issues and encourage double-loop learning is to ask, “What needs to be true for this to be the right approach?”
    • Comment: In an increasingly uncertain environment, it’s difficult to survive and thrive with an old business model or outdated technologies. Many businesses fail because they continue doing the same thing for too long, and they don’t respond quickly enough and effectively when conditions change. As a leader, stay curious and connected to the external environment, look for market shifts, understand what needs to be regularly refreshed and reimagined, adopt new technologies and capabilities, and adapt in ordinary times but also during times of transition. Unfortunately for many leaders, it’s just more convenient for them to continually downplay the fact that conditions are changing than take the appropriate course of action that drives business success.

How are you preparing your organization for potential future disruptions?

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The Collaborative Organization

These days the term collaboration has become synonymous with organizational culture, creativity, innovation, increased productivity, and success.

Let’s look at the COVID-19 pandemic as an example. At the peak of the crisis, several companies instructed their workers to adopt remote working as a health and safety precautionary measure.

Two years into the pandemic, they are now asking their employees back to the office full time or are planning to adopt a hybrid model.

The need to preserve our collaborative culture and accelerate innovation are two of the top benefits being cited by organizational and team leaders for bringing workers back.

Collaboration is indeed essential for the achievement of team goals, functional objectives, and the overall success of the organization.

Today’s breakthrough innovations are emerging from many interacting teams and collaborative relationships.

When teams, functions, and organizations collaborate, the whole is greater than the sum of its parts; group genius emerges, and creativity unfolds.

But, what makes a successful collaboration? What are the key enabling conditions?

  • It extends beyond the boundaries of the organization. Business success is a function of internal and external relationships. Instead of viewing your business in vacuo, understand that you are part of an ecosystem. External to your organization, who do you need to partner with to enhance your value creation processes, achieve/exceed your objectives, or successfully execute your strategy?
  • Ensure the objectives are clear and there is shared understanding by everyone. Unclear objectives are one of the topmost barriers to team and organizational performance.
  • Foster a culture that encourages opinions and ideas that challenge the consensus. People should feel free to share their ideas and not hold back for fear of others penalizing them or thinking less of them. Collaboration is hindered when one or two people dominate the discussion, are arrogant, or don’t think they can learn anything from others.
  • Groups perform more effective under certain circumstances, and less effective under others. There is a tendency to fixate on certain topics of discussion amongst groups which often leaves members distracted from their ideas. To reduce the negative effects of topic fixation, members of the group should be given periods to work alone and switch constantly between individual activity and group interaction.
  • Effective collaboration can happen if the people involved come from diverse backgrounds and possess complementary skills to prevent conformity. The best collective decisions or creative ideas are often a product of different bodies of knowledge, multiple opinions, disagreement, and divergent thought processes, not consensus or compromise.
  • New technologies are making collaboration easier than ever, enabling us to increase our reach and broaden our network. Although new technology helps, it will not make your organization collaborative without the right culture and values in place. First, define what you want to achieve through collaboration then use these tools to promote creative collaboration.

How else are you championing collaboration within your organization to create value and succeed?

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Preparing for Geopolitical Shocks

Geopolitical instability has steadily increased over the past years, and uncertainty in the global economy is at an all-time high. Thanks to globalization and advances in technologies, we now live and work in a tightly interconnected world, one in which the boundaries that previously separated domestic from global issues have disappeared.

Threats are no longer confined to traditional political borders, social structures, and geographic boundaries. Geopolitical shifts have dramatically altered the global economic landscape and brought politics and business together.

The rise of China as an economic and politically influential power has threatened the dominance of the United States as the world’s largest economy. Although the opening of China and a market of 1.4 billion people have benefited both countries, it has also intensified competition and sparked U.S. economic and technological espionage accusations against China, leading to strained relations between the two giants.

U.S. companies operating from China have felt the impact of this tense relationship. The opposite is true for Chinese companies in the U.S.

Across Europe, national populism is on the rise and now a serious force. In 2016, the United Kingdom shocked the world when it voted to leave the European Union, generating reverberating effects across markets.

Banks and financial services companies that once benefited from the EU passporting system have had their cross-border banking and investment services to customers and counterparties in the many EU Member States impacted, causing them to reimagine their value proposition models.

The recent invasion of Ukraine by Russia is another example of a geopolitical event that has had devastating effects on human livelihood and businesses. Although the conflict between the two countries has risen over the years, I think it’s fair to say that few political analysts, governments, and businesses predicted a war to happen.

The war has created a humanitarian crisis, rattled global commodity and energy markets, caused prices to soar, and forced many international companies to temporarily suspend their Russian activities or completely cut ties with the country.

Global supply chains which are already fragile and sensitive due to the COVID-19 pandemic are now facing new challenges in the aftermath of the Russia-Ukraine crisis. Multilateral economic sanctions have been imposed on Russia. A state of affairs that was unthinkable months ago and is now threatening to derail the nascent global economic recovery from the COVID-19 pandemic.

Given the global domino effect of geopolitical events and the shrinking of the distance between markets and politics, the need to better understand and more effectively mitigate geopolitical risk has become more urgent. The business impacts, whether direct or indirect, vary by company type and industry sector.

Your company may not be able to prevent wars between nations, but you can anticipate and better prepare for geopolitical shocks:

  • Integrate strategy, risk, and performance decision-making. Consideration of risks to business success is an important part of the strategy selection and execution process, not an afterthought.
  • Develop a better understanding of geopolitical trends and how they are changing. For example, what are the megatrends in business, politics, and technology that are making geopolitical risks more diverse, prevalent, and consequential?
  • Assess the links between these geopolitical events and business performance. What are the events that matter most to your business? For example, how might current global political trends pose physical, business, and reputational risks to your parent organization?
  • Anticipate how these trends are likely to play out in the short, medium, and long terms, and develop mitigation strategies for each geopolitical scenario. Proactively anticipate and plan for radically different worlds, instead of reacting to problems as they arise
  • Review your mitigation strategies as the world changes. Are they effective enough in case of a major shock?
  • Develop capabilities for continuous learning to anticipate, address, and recover from geopolitical crises.

What do you think?

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