Firms are facing challenging social-political situations in their home
markets. Whether itʼs Brexit in the UK, the Yellow Vest Movement in
France, civil unrest in Venezuela, or the U.S. government shutdown, firms
are having to adapt their investment, growth plans, and allocation of
resources to deal with greater political uncertainty.
This uncertainty has a significant impact upon economic conditions, such
as the cost of inputs (work, resources) and customer behavior. But it can
also threaten business continuity: the simple ability for firms to carry out
their daily activities. Operations may have to stop because goods can no
longer cross the frontiers or because service provision becomes
impossible.
How should firms adapt?
As part of our advisory work around Brexit uncertainty, we interviewed
more than 150 executives from 50 UK-based organizations. Our goal was
to better understand their challenges and whether firms were
considering leaving the UK. This helped us devise a framework for how
firms should think about restructuring operations in cases of extreme
political uncertainty.
Adapting corporate strategy to extreme political uncertainty first requires
evaluation of the nature and the scope of uncertainty. Is the uncertainty
limited to economic conditions, meaning that there is some significant
variation in the costs of inputs and the competitiveness of the firmʼs
product? Or is uncertainty extreme to the point of threatening business
continuity? This assessment can differ depending on the industry
(uncertainty around economic conditions might threaten business
continuity for some industries more than others) and on the firm (some
organizations can better predict and respond to uncertainty than others).
A firmʼs strategy also has to consider the nature of the markets it has a
presence on: Does the firm have a safe position in a steady (or declining)
market, or in a growing one? Is the firm at risk of losing market shares? In
the case of steady or declining markets, firms will have to remain prudent
with regards to shifting operations abroad. Shifting activities to a new
location is costly and might eat up the limited margin the market is
offering — but it may be the preferable option to protect the key
activities that will help the firm survive through the crisis. In the case of
growing markets, firms are likely to have both the opportunities and the
resources to be more aggressive in their reaction to uncertainty.
Two strategies for steady or declining markets
When firms perceive a limited level of uncertainty, or uncertainty around
economic conditions, they can adopt a hedging strategy. The portfolio
of activities will be rebalanced toward those that can survive the political
turmoil – whether those are productive activities or transversal functions
of a multinational firm, such as human resources or internal control. The
firm can reduce the cost of those functions and put up with a drop in
sales. For example, in response to Brexit, Sony decided to maintain a
strong presence in the UK but moved its EU headquarters to the
neighboring Netherlands. The cost of such move is limited and can be
reverted, while at the same time it moves key activities to a safer
location.
However, in a case of high uncertainty, the threat to business continuity
can be fatal to firms without reserves of cash and a presence on mostly
declining markets. In such context, a salvaging strategy is the best
option: the idea is to minimize the consequences of the situation and
save what can be saved. In this situation, firms will have to deal with
shrinking sales. They will have to burn their reserves of cash to
compensate for the drop in profit, and avoid having to sell off previous
assets that might be useful when the economy picks up again. Jaguar
Land Rover for example, expecting important Brexit disruptions for its
value chain, has simply decided to shut down their four UK plants to cope
with the fall in demand and looming concerns around the possibility of a
no-deal Brexit.
The strategy is not new for automotive car makers. Renault, the French
car maker, for example, has had one of its main bases in Argentina for
decades despite political turmoil. Renault Argentina was established in
1997 but when the country went through a deep crisis in 2001, Renault
reduced its exports from Argentina to Brazil (where it could have moved a
significant part of its production) but managed to maintain a 20% market
share. Renault basically cadged in and its salvaging strategy worked out –
it placed the firm in a strategic position to take advantage of the brighter
economic spell which followed. Difficulties are still prevalent in Argentina,
as the country is facing a 25% inflation rate, but Renault has been able to
grow its sales by 16.3% in 2017.
Two strategies for fast-growing markets
For firms that can capitalize on a fast-growing market, the objective is to
avoid letting uncertainty drag them behind their competitors. If the
uncertainty is limited to economic conditions, meaning it has implications
for the costs of resources and for the cost competitiveness of products,
firms can engage in a rebalancing strategy. The idea is to move strategic
and leadership assets to another geographical base, close to a well
identified growth engine. (Unlike the hedging strategy, which is mostly
defensive and aimed at survival, rebalancing is aimed at reducing the
exposure to the uncertain market and taking advantage of growth
opportunities elsewhere.) Rebalancing involves costlier and strategic
moves. Dyson, for example, although it claims it has nothing to do with
Brexit, is shifting its headquarters and its center of gravity to Singapore,
hoping to capitalize on the growth of the region.
If business continuity is at risk in fast-growing markets, firms have to
consider a shifting strategy: quickly moving a significant part of their
activities abroad, starting with those functions that can be shifted at
minimal costs. This strategy also implies a reallocation of resources to
more secure and stable markets. Like the rebalancing strategy, it is a
proactive approach that taps into the resources of the firm to avoid the
consequences of uncertainty. But in this case itʼs a more radical
approach: a shifting tactic is more systematic and fast-paced, and it also
aims at ultimately reducing the exposure to the uncertain market to zero.
In the UK, a number of banks including Barclays, Goldman Sachs, and
HSBC have already transferred a share of their activities and staff to Paris
and the Frankfurt.
Finding certainty in uncertain times
Paradoxically, the businesses that will survive and ultimately stand out
are those that create certainty for themselves, forging a path depending
on how the situation unfolds. In the case of Brexit, a no-deal scenario will
almost surely threaten business continuity, and we could expect
numerous firms to engage in salvaging or shifting strategies. For
example, while most business commentators have gasped at Jaguar-
Land Roverʼs idea of closing down their plant in the days following the
Brexit cliff-edge, this strategy suggests that the firm is planning for the
worst case scenario. At least, it expects Brexit to impact the automotive
industry to an extent that can only be minimized rather than dealt with.
Among the executives we talked to, we found two significant groupings
of respondents. The first are paralyzed: they are waiting for the Brexit
uncertainty to resolve before committing to any strategic decisions. They
have considered shifting activities abroad but have not thought about
how this can be adapted depending on the outcome of Brexit; they are
waiting to understand the value of the pound before undertaking financial
forecasts and cost analyses. Most of the people in this group worked
within English companies.
The second group, mostly representing Scottish Companies, were more
optimistic and, in fact, were thriving on the uncertainty, looking for the
market opportunities created by the paralysis of their English
competitors. One of the primary reasons for this proactive behavior we
discovered, was that many Scottish leaders expect in the near future for
the nation to achieve independence from the United Kingdom and to
subsequently (re) join the European Union. Theyʼre panning for the long
term where as many English counterparts are focusing on the immediate
horizon.
Scottish firms expect Brexit to generate limited uncertainty, mostly
around economic conditions, and are therefore going for limited strategic
changes – mostly a rebalancing or a hedging approach. They seem to be
adapting much quicker in a post-Brexit world than their English
counterparts. Scottish exports to the European Union have increased by
£1.7 billion (to £14.9 billion) in 2017, a 13.3% rise on the previous year;
while international exports (excluding oil and gas) increased by 6.2%
to £32.4 billion. These businesses are finding their exports become more
competitive due to a falling sterling currency. They are trying to exploit
this short-term advantage as much as they can to gain market share
before their cost structure adapts itself to the new currency exchange
rate.
Itʼs clear that firms should be mapping out potential Brexit deal scenarios
and preparing their operations for change. For example, firms should be
assessing what theyʼd do if trade barriers are erected. Can production be
shifted to another country? What will be the costs and consequences of
such a move? In such case, a rebalancing strategy – meaning only a
limited adjustment – might be a safer option than a shifting tactic.
By anticipating different political scenarios and preparing a range of
strategic responses that make sense for each, firms can create certainty
for themselves. Whether firms decide to rebalance their activities, or to
flee as fast as possible through a shifting strategy, not only depends on
whether they have the resources to do so – it also depends on their
assessment of the level of uncertainty and their evaluation of both the
risks at home and the risks of expanding abroad. Ultimately, the firms
that will survive uncertainty are those that will have thought about how
they would move forward once the storm has passed.