Dr Yusaf Akbar, Hult International Business School
Today’s managers face unprecedented uncertainty thanks to the volatile and ambiguous social and political climates in which they operate. There is an increasing sense that the magnitude and velocity of turbulence is rising and that the complexity and scale of change is accelerating like never before.
This is why, at Hult International Business School, we set out to research whether executives who had considerable experience in emerging markets, or who had grown up in these countries, developed different mechanisms to cope with turbulence, compared with managers who were relatively inexperienced or who had grown up in developed economies.
These days, change is the only constant
Increasingly, executives are required to develop businesses in countries which are institutionally weak; where the rules are opaque and regulations are difficult to predict. This is also coupled with broader shifts in socio-economic forces and technology.
Just take a look at what has happened in Egypt since the ‘Arab Spring’ anti-government protests took hold of the country; or in Turkey where an attempted coup failed or in Venezuela where anti-government protests were precipitated by a state of economic collapse. In fact, even countries once considered to be relatively predictable, such as Saudi Arabia, have become increasingly unstable as new, untested leaders have begun to exert an influence on government policy.
While in the past you may have been able to line up your political and legal resources in a certain way, that is now not a given. As businesses expand to regions further away (in economic terms), they are discovering that regulatory systems are simply not there. In the 1980s when globalisation started to take business across the Atlantic this wasn’t significant; now if you are moving into sub-Saharan Africa or Latin America the differences are vast.
Within these markets, rules and regulations are not always well developed, meaning leaders have no legal guarantees. If you have developed Intellectual Property (IP)in Germany and bring the patent to China, for example, you can’t expect to be legally safe, because the court system in China is not set up for defending IP. Thus, top managers need to not only master the market aspects of corporate strategy, they must also align business strategy with the corporation’s socio-political context.
It may seem like a cliché, but change really is the only constant. Particularly within unpredictable developing countries, executives can no longer rely solely on a series of conventional competitive weapons such as IP, technology and branding. In fast-changing industries with shortening product lifecycles and dramatically transforming competition, the capability to change quickly and continuously is vital for company survival.
Managers from uncertain environments cope better
Our research explored whether executives who have grown up within or had extended exposure to emerging markets, have capabilities which someone from a developed country does not possess, to help them cope with this kind of turbulence.
We began our exploration of socio-political turbulence in emerging markets.Our study drawing on comprehensive interviews with Director, MD and C-level executives, based in Africa, Asia, Latin America and the Middle East- identified differences in the way these leaders, from a range of backgrounds and environments, operate within these markets.
Overall, we found that managers who have had significant exposure to or who originate from emerging economies, have ways of managing uncertainty that those from developed countries simply do not have. People who have grown up in turbulent environments have a flexibility in mind-set: they possess agility of thinking, willingness to delegate, openness in knowledge sharing and recognition that in these emerging markets, compliance can slow things down.
In many of these markets you cannot always play by established rules of the game. Many multinationals, however, are (for the most part rightly) held back by company ethics codes. In these environments many executives feel hamstrung, as they can’t do what they need to get the job done, whereas competitors from other countries often have more flexibility.
One manager born in the Middle East, based in Dubai and operating across Africa and the Persian Gulf observed: “[T]here’s a lot of unwritten rules. When faced with uncertainty or turbulence, I don’t panic. It’s normal. We’ll just figure it out.”
Meanwhile, we asked a French manager who operates mainly in Africa whether she trusted staff to take decisions. She replied that she always makes sure to follow up on every single decision her staff makes because she is not sure they have made the right decision.
By contrast a manager born in Dubai, operating in the Middle East answered – “I give autonomy to my staff, as they are on ground so they can react faster. They have a local context and take quick decisions on spot.”
A South African manager working for a US security firm in Central Asia reported he is frequently frustrated by the HQ in the US constantly slowing things down due to compliance, whereas ultimately he would rather give autonomy to the team on the ground.
Managers from emerging economies also have an openness to experimenting and innovating in the way in which they engage with socio-political and regulatory stakeholders:
The Chief Innovation Officer of one of the world’s biggest firms in the retail industry with a strong emerging market presence stated: “I think that if you grow up in volatility […] you’re constantly pushed to think of ways to mitigate potential disaster in your future. You don’t get shocked by change or unrest”.
Executives unfamiliar with emerging markets struggle with agility
By contrast, executives relatively new to emerging markets tend to struggle with the need for agility, either constraining their teams and organizations with closer control over nonmarket affairs or taking considerable time to learn that flexibility and fast-learning are core features of successful nonmarket strategy in turbulent environments.
A senior executive from a European security firm operating in Africa told us: “I think I’m more traditional. My direct reports are younger than me so I feel that they don’t have enough experience so I prefer to check”.
Western European and North American executives seem to struggle with the contradictory situation of following rules and being flexible at the same time. Those from North America in particular tend to institutionally impose vertical control over their operations in emerging markets, to be seen to be complying with US rules on regulatory matters – with the implication that American corporates may be less agile faced with this turbulence.
A Regional Director for a large US engineering firm in oil and gas felt his initiatives were often slowed down by headquarters: “They’re probably pulling up the brakes and saying, ‘Stop.’”.
There also seemed to be a default response among these leaders from Western cultures:
When asked if he was willing to give gifts and offer his team autonomy to do this, an Austrian executive working in the automotive industry in China replied that he would “never do that in Austria.” This implied that he wouldn’t. However he recognised that this put him at a disadvantage, as his local competitors could do this in a heartbeat.
Three key skills to navigate turbulence
A failure to address this socio-political and regulatory turbulence can lead to lost opportunities at best, to catastrophic failures at worst. Ultimately companies will make bad decisions and these will feed through into overall performance. Developing skills to cope, drawing on a combination of agility, innovation and knowledge of the socio-political realm are key.
An executive working for large American technology firm operating in Saudi Arabia told us that things change very quickly there because the established order is being shaken up, meaning rules and regulations are changing on daily basis. So if you are in charge of importing technology it is almost impossible to predict activities, as you rely on a supply chain which can change in a matter of days.
For managers to successfully navigate uncertain environments such as this, we identified three key sets of skills they need to possess.
- Organizational and individual flexibility
The ability to change direction flexibly as the situation evolves and avoid rigidities in thinking at an organizational level.
- The ability to process new knowledge.
Being able to combine what you already know from experience, with new information coming through the pipeline.
- Innovation to manage the external environment
Quickly finding ways of doing things differently than you’ve done in the past.
Our research also uncovered a number of key lessons which can help organizations and individuals working within these markets:
Immersion is crucial
If you are working in a fast-changing environment, in which you haven’t grown up (meaning your reactions are almost subconscious), you need to place yourself within the environment itself, rather than observe it from a distance. Executives who have been sent from developed economies need to be more open to the turbulent contexts in which they are expected to operate and immerse themselves.
One Italian CEO of a pharmaceutical company in China, lives in a Chinese district and cycles to work (though he could easily have a driver), rather than living with expats in a compound. This gives him a true sense of what is going on, as he is immersed in Chinese society. Through doing this, he has been able to observe people and gain a deeper understanding of socio-cultural differences, which has helped him to succeed.
Organizations need to rethink the rules
Many of these findings speak to overall organizational set-up and attitudes, rather than just the individual. Ultimately organizations need to transform their mind-set around who should be at the upper echelons, as well as be more willing to work flexibly and rethink the rules of the game.
If, after very careful consideration, companies do decide to expand into these markets, it is critical to have managers who can drive business forward and cope with uncertainty. It is bad news for everyone – both individuals and organizations – if executives are not equipped with the right attitudes and skills. Agility and innovation in the socio-political realm are key to coping with turbulence in the nonmarket realm, as much as in more traditional business areas.
Actively seeking and training the right executives is key
These findings did not correlate with either the industry or the nationality of the executive interviewed –what really mattered was the executive’s exposure to emerging markets.
Ultimately, companies need to seek out and promote executives who have significant prior exposure to emerging markets. In particular, they need to look for managers who have grown up in these environments, since these people recognize and respond to turbulence much more quickly and pragmatically than executives from developed countries.
If they do identify high potential executives (particularly junior ones), companies need to give them full exposure to these markets as quickly as possible. This means that they will be able to build up a series of experiences and essential skills at an early stage, which will help them down the road as they become more senior.
There are so many gifted executives from these regions – at Hult International Business School we see a constant flow coming through the door – so it not enough for companies to say that they can’t hire them or are unable to find such people. They must actively go looking for them.
Battling Covid collateral damage, Renault says 2021 will be volatile
By Gilles Guillaume
PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.
Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.
“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”
De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.
The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.
Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.
Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.
The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.
The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.
Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.
“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”
Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.
The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.
Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.
The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.
In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.
Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.
Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.
Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.
It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.
De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.
($1 = 0.8269 euros)
(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)
UK delays review of business rates tax until autumn
LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.
Many companies are demanding reductions in their business rates to help them compete with online retailers.
“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.
Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.
($1 = 0.7152 pounds)
(Writing by William Schomberg, editing by David Milliken)
Discounter Pepco has all of Europe in its sights
By James Davey
LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.
The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.
Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.
“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.
To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.
The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.
Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.
Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.
That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.
“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.
Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.
Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.
Sales rose 3% to 3.5 billion euros, reflecting new store openings.
($1 = 0.8279 euros)
(Reporting by James Davey; Editing by David Goodman)
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