Michael R. Czinkota and Gary Knight
How does the newly visible instability in the Middle East affect international managers and their firms? What strategic adjustments are needed for managers to cope with possibly hostile business environments abroad?
Business is more interconnected today than ever before. Specifically, global commerce today relies on layers of suppliers, distributors, and customers, located all around the world. Such extensive networks increase firms’ exposure to events that occur at once distant locations. Even firms that rely little on international business may depend on the receipt of imported goods. We have asked several hundred international corporations and their managers about their responses to crises. What international businesses repercussions do we need to watch out for?
Managers respond not necessarily to reality, but to widespread perceptions of reality. In times of conflict, the ‘winner’ may well be the side that most effectively communicates their victory. If all anticipate major uncertainty, then times will be uncertain. If threats to personal fortunes are expected, then capital flight will take place. And therein turns the wheel of fortune – if enough believe in a condition, it may well become reality.
Though authoritarian regimes may have been able to minimize local terrorism, new instability may lead to ungoverned spaces. Civil unrest is a fertile breeding ground for the emergence of violence and terrorism. Thus, the instability we are witnessing overseas may give rise to “exogenous shocks” that threaten global supply chains, distribution channels, and other infrastructure that firms need for their international operations.
Managers will adjust their planning activities – higher risks will be assumed not just in the disrupted locality, but globally. Lenders and insurance companies will expect higher premiums. The return-on-investment expectations for new investments will rise. As a result, global investment plans may be significantly delayed or even terminated
Crises will disrupt local conditions and lead to a lack of employment. There may not be enough bread, and insufficient delivery of alimentation, leading to hungry masses. For the multinational firm it means there will be disruptions of global supply chains and distribution networks.
Crises typically also lead to a depression of buyer psychology and reduced consumption. Local markets may shrink, (just imagine possible effects on the Suez Canal, which handles 8% of global sea trade and over two million barrels of oil daily), and supplies of international markets will be reduced. Accessing markets will be more difficult and less efficient. There is likely to be more security scrutiny , and increased exposure to perils when delivering goods to crisis zones. The safety cost of such deliveries may increase logistics expenses by up to 15 percent.
Firms will encounter rising transaction costs. Managers will need to find new suppliers, who will cost more. New shipping routes will be more expensive. Routine processes become unroutinized, since new participants in a new settingare inexperienced and prone to mistakes. Co-ordinating costs between suppliers and distributors are likely to surge..
Larger inventories will have to be held, particularly by companies with just-in-time systems, in order to assure flexibility and production continuity. These inventories will cost more money, with increases of ten percent and more.
All of these changes add up. Smaller firms may withdraw from markets to avoid intolerable risk levels For the U.S., the aim to double exports by 2014 will be in jeopardy. Rising cost of energy, food and commodities will affect inflation and levels of economic balance. Consider today’s U.S. current account, which measures all the inflows and outflows of the economy. Almost 25% of U.S. imports consist of oil. Even if one can stabilize import quantity, a higher price per barrel will still increase this burden.
Today, firms need a big picture perspective, and choose between short-term gains and long-term success. Managers need to explore opportunities for collaboration, using a planning umbrella that considers customers, suppliers, and suppliers’ suppliers.
In the wake of major shifts, firms need to become part of the solution. Businesses need to move away from focusing only on self-serving or localized concerns and ensure the survival of the organization by examining itsw long-term future fit within the societies where it operates.
Michael R. Czinkota teaches international business and marketing at Georgetown University and the University of Birmingham in the UK. He served in trade policy positions during the Reagan and Bush administrations. Gary Knight is a professor of international marketing at Florida State University, after working as head of exports for various firms.