Global Politics

Managing Risk in a Globalized Economy

By Marina Schlotzhauer

Gone are the good old days where the major risks for businesses were costs running out of control or the threat of imminent local competition. Globalization has introduced a whole new array of challenges that vary from foreign financial economic ripples to cyber security and beyond. Just in time production and the outsourcing of unskilled labour seems very good from a microeconomics level; However, when applied at a global scale, it increases the chances of sudden demand and supply shifts that threaten to eliminate regional markets in only a matter of months. This presents a fundamental problem for planning and sourcing any kind of business. How to plan for the future in a world where variables are constantly in flux?

Although it may seem oversimplified, the healthiest way to exercise damage control in unstable environments is to eliminate the dependency of vital business functions on volatile variables. This translates to taking certain factors completely ‘off the grid’. This concept is not easy to carry out, and it requires leaders to switch their thinking from managerial mode to visionary mode. The cost of not making this transition is reflected on a company culture that is constantly on reactive mode and ultimately, leads to extinction as variables move faster than the organization is able to adapt. Business cycles show that the premonition of financial collapse is reflected on the organization’s inability to adapt to change. Unfortunately, the role of visionaries is not something that leaders with a managerial background can easily transition into without any training. Only because managerial strengths rely on looking at the current state of things after they happened and ‘fixing’ the problem based on experience; Therefore, they need for things to ‘happen’ in order to fix them. Developing a vision requires detecting the patterns of something new and emerging that can impact the organization in a negative or positive way. It is very hard to look forward when operating in reactive mode because every anomaly seems like a pattern.

If the organization successfully understands the value of developing a vision in today’s globalized world. It will be wise to invest in training their leaders to achieve the following results that will allow the organization to exercise damage control in an effective way:

Financial stability: During the last 30 years the world has experienced several financial crises whose ripples were felt across the globe. Even during times classified by the government as financially ‘stable’, it was possible to observe large fluctuations in the Dow Jones, Forex exchange market and interest rates. Thirty years of instability are clear indicators that the new reality of the financial backbone that supports the free market economy, has stepped into uncharted territory and volatility is the new norm. Therefore, in order to achieve financial stability the name of the game is ‘constant positive cash flow.’ Companies can no longer afford to do business relying on borrowed money to cover operational expenses on a daily basis, not even on occasions. The availability of credit and fluctuations on interest rate are too great to be relied upon as a constant. Neither it serves a purpose to be in reactive mode and try to fix this problem after it has emerged. The closing Target stores in Canada are a very good example of this risk and how it can snowball out of control very quickly. Why didn’t Target’s leaders see this coming? Why did it take so long to correct massive daily loses after being discovered? Two reasons: operating in reactive mode and lacking clear vision before entering the market. Thankfully, their positive cash flow in the US was large enough to cover the vacuum created by the Canadian market without pulling the company into a black hole. This underscores the role of positive cash flows and savings in pulling a company out of the unexpected.

Another important aspect of globalization is the fact that international contracts are priced in different currencies, and currency exchange rates can fluctuate during the time to contract completion. To manage the associated risks companies sometime have to implement smart techniques, like hedging against the unfavorable changes. For instance hedging currency related risks can be done via purchasing currency options on the counterparty base currency. You can read more on trading currency options here.

Cyber simplicity: with everything being connected into the internet matrix, it is hard to imagine that certain things can be taken ‘off the grid’ without becoming extinct or spending massive amounts of money on encryption. However, this can be achieved at a very low-cost, if the architectural infrastructure of  the IT department is created with a vision in mind. Things to consider in this vision are:

  1. How much data is really needed to remain competitive? How can customer information be validated by means other than storing 100% of their confidential data?
  2. How much of this data needs to be in electronic form and plugged into the grid? Are some data formats harder to hack into than others?

How many companies request client’s full credit card information, email address, date of birth and mother’s maiden name to confirm their identity when calling to make any transaction? Now, what percentage of their operational expenses has to be allocated to protecting this information as a consequence? Wouldn’t it be easier to design unique set of 4-6 questions to which only the customer would know the answer to, as well as their password without keeping confidential information? In the event that information is hacked, what could the hackers possibly do with security questions alone? The answer is: not much without credit card information.

Positively identifying emerging competitors: It is easy to identify other companies offering similar products attempting to gain a share of the market. However, when operating in reactive mode, very little time is left to find potential technological disruptions that can come from seemingly unrelated fields. Let’s take 3D printing for instance, the obvious answer is that it is a direct competitor for small parts manufacturers; However, as technology advances in this new industry, it will create ripples in the medical industry, car manufacturing industry, and even farming, as it is moving towards producing 3D printed food. These changes may not seem relevant to someone in the software industry; However, if the way computers are manufactured is significantly changed, it is safe to assume that the way software is developed is bound to change as well. The emergence of smart phones is a great example of a technological disruption that was a game changer. In a few years, a whole new apps industry was developed to meet the smart phone demand.

Technological disruptions take us to the last factor that affects vision and that is macroeconomic readings: despite all changes in variables in the globalized world, there is a basic fact that has remained constant, and that is the void a company’s product fills in a consumer’s bundle of choice based solely on their budget constraint. In other words, the role played by a product in the macroeconomic landscape is decided by the way consumers classify the product. Is the product a luxury good or a necessity? If it is a necessity, can it be replaced by a more affordable versions in times of crisis? If so, can your company produce a more affordable version (lower quality) to support your pool of customers when an economic crisis is approaching? Can your company increase the supply of luxury goods to accommodate increased demand before the competition when approaching an economic expansion? Are there new technologies that can help the organization meet these goals or may threaten the market all together? Answering these questions would imply having leaders who can spot signs of distress or growth in the markets before they are made ‘official’ by public research of economic indicators. Hence their name: ‘macroeconomic readings.’

The factors mentioned above show that it is possible to effectively manage risk in a changing environment by using programmatic planning and being able to effectively differentiate isolated anomalies from growing trends. However, this can only be achieved by having the right mix of vision and experience and knowing how to retain that talent. Extensive experience in the industry only tells us what happened in the past, slow changing factors with few moving variables. In essence what has changed in the last thirty years, is not the number of variables that affect a business, but the frequency and speed in which these changes are unraveling. The new globalized economy is only testing an organization’s preparedness to adapt to change. While ‘change’ is the new name of the game, understanding what factors should adapt and which ones should be purposely kept constant is the key to effectively managing risk in a globalized economy.

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