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Managing International Risk: the Art of Prevoir

Posted By Olga Annushkina On 18/02/2015 @ 16:43 In Doing Business in… | No Comments

Foto del profilo di Olga Annushkina

by Olga Annushkina

SDA Professor of Strategic and Entrepreneurial Management

International markets expose firms to an ample variety of risks, comprising the currency exchange rate fluctuations. In the past two months many firms had to deal with a number of “surprises” that confirmed the two mantras of the expert scenario planners: one cannot “cheat” forever the laws of economics and the unsustainable trends will reverse, at a certain point.

It is certainly easy to discuss and interpret the past events and fish out the “early warnings” that could have indicated to us the Russian Rouble’s plunge against most of the world currencies, the Swiss franc’s appreciation and the Euro’s decline against the US Dollar. But the ability to read between the lines and to imagine the key possible scenarios of the macroeconomic, social and political context evolution is the starting point for any manager or entrepreneur.

For instance, in one of its November 2014 articles The Economist illustrated how the debt repayments by Russian organizations to the European Banks no longer were available to refinance the credit lines because the political sanctions would have created an important pressure against the Russian currency in December 2014 and later in February and March 2015. On “Black Monday” December 15 the Rouble fell almost 10% in one day, the Russian Central Bank’s decision to raise the interest rate to 17% did not produce any significant healing effect. The chart published by The Economist in November 2014 with the Russia’s external debt payments schedule could have told a lot to the companies exporting to Russia or Russian entrepreneurs importing goods and services via contracts denominated in Euro or US Dollars. Right now, Russian macroeconomists further predict that Rouble devaluation might lead to 15-20% reduction in the value of imported goods and services. According to Russian Federal Customs Service, in January 2015 Russia’s import was lower by 41% compared to January 2014:


 Managing international risk: predicting "predictable" outcomes

In a classical work on management of early 1900s, Henri Fayol
 spoke about the following key five functions of a manager, placing the forecasting ability as the first one:

  1. “Prevoir”: often is erroneously translated as “planning” while Henri Fayol spoke in the first place about the ability to see several possible future scenarios and then to plan the enterprise’s activity accordingly;
  2. “Organiser”: the ability to define the organizational structure and its key functions and processes;
  3. “Commander”: or, to put in the modern management language, exercise the leadership function;
  4. “Coordonner”: coordinate by ensuring a harmonic functioning of the whole enterprise;
  5. “Contrôler”: ensure that the activities are performed according to the initial intentions leaving the possibility of ongoing corrections.

prevoirThe first function, “prevoir”, is often left apart by managers and entrepreneurs with the excuse of the context volatility. Since no one takes the trouble to predict the economic, social, technological future, the enterprises don’t lose any time and effort and make investment decisions according to the 0-5% principle: that in the next year the ongoing trends will continue with 0-5% error.
The strategy meetings are dedicated to the current business emergencies, discussions of 1-3 years budgets built on 0-5% principle or formal approval of the “strategic” plans presented by various departments. Rarely top managers are willing to “throw the sheep in the boardroom” and launch the discussion of a potentially disruptive event, even if the event can be classified as a “predictable outcome” – an event with a very high probability but uncertain timing.

The predictable outcomes – events due with high probability sometime in the future include the following life certainties:

  1. Demographic trends. Immigration, fertility and mortality rates, urbanization trends – these and other trends happening now that will strongly predict the consumers’ behaviour and future demand composition are often being erroneously overlooked by companies producing consumer goods and services, but also by B2B businesses that can be dragged into the unforeseen events with a strong impact on their customers’ business.
  2. Economic trends. The diminishing rates of return, the monetary and budget pressures on currencies resulting in the exchange rate fluctuations or the implicit cost of weak institutions on business – these and many other economic axioms can be easily if not predicted at least included in the possible scenarios of the external context development.
  3. Competitive trends. The industry overcapacity will lead to the crisis of oversupply and eventually to the price wars, while the positive economies of scale will eventually stimulate the industry players to merge at least some of their activities, and the structural changes in the distribution channels will impact, positively or negatively, the profit margins, trouble with a customer’s customers will most probably result in diminishing profitability of our own business – many uncomfortable truths could have been told and thought through about the consequences well ahead if managers and entrepreneurs start engaging themselves in true strategic conversations about the company future.

How to become an effective "Prevoir"

predictThe ability to “see” the predictable outcome in your company future depends on the managers’ reasoning abilities and variety of the sources of information at their hands. To enhance the “prevoir” ability we suggest:

  1. Field trips: a good habit extremely useful for the future scenario and strategy formulation is to visit regularly clients, competitors, suppliers and company divisions and factories. As Sam Walton, the founder of Wal-Mart stores, said “I’d still say that visiting the stores and listening to our folks was one of the most valuable uses of my time as an executive. But really, our best ideas usually do come from the folks in the stores. Period.”
  2. Learn about, acknowledge and avoid cognitive biases and logical errors in reasoning that might have a negative impact on your ability to detect and interpret the early signs of future important trends: stereotypes, labels and popular concepts, reasoning without facts, building of casual links between chronologically linked events, halo effect
  3. Search for the sources of information about the industry context beyond the traditional industry boundaries. For instance, the analysts who spoke about the importance of the Big Data in nowadays are saying “we told you so” while observing the entrance of the technology giants to the traditionally conservative insurance business

In the new normal context the managers’ time is the most precious resource. Even almost 40 years ago, when Henry Mintzberg made his famous research on the strategic decision making, he found that half of managers’ activities were done in less than 10 minutes. While any top-manager would avoid by large a fund manager who routinely make uninformed investments, their own actions and investment decisions regarding the enterprise they are in charge of are often based on “future +0-5%” principle.
An apparent paradox? And then the carefully detailed strategic plans and budgets are crashing and becoming useless under the massive paw of the devaluating Russian Rouble.

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