Business Growth: Mitigating Political Risk

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Dan Arens is an Indiana-based business growth advisor. Dan Arens is an Indiana-based business growth advisor.

The political climate of today is caustic, to say the least. It used to be fairly straight forward; political risk related more to the toppling of foreign governments or someone seizing control in a faraway country. Not so much anymore. From videos on local street corners and their immediate impact in the media, to cybercrimes, to the potential closing of manufacturing facilities that exist half the way around the world affecting our business; politics and their impact on business is increasing at a staggering pace.

The biggest growth issue facing businesses today is clearly politics and what effect it has on your business. Former Secretary of State Condoleezza Rice presents an excellent case for how political risk has changed dramatically in the last few decades. Her book Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity, does a wonderful job of spelling out the dangers being faced today and how they have escalated over the years to where we are now. She also postulates that even with the uncertainty in the political environment of today, there are still ways companies can anticipate and prepare for change as a result of the difficulties they encounter.

According to Rice, managing political risk is very similar to effectively managing risk in general. One of her main points, however, is that some companies are much better at it than others. She suggests there are four primary competencies in managing political risk: understanding, analyzing, mitigating it, and responding to a crisis.

In order to understand political risk, your company needs to determine its appetite for risk. Consumer based companies are focused on their reputation. For example, hotels interface directly with the consumer. They are typically averse to taking risks because the outcome can be very swift and painful. Oil companies, on the other hand, must have a higher tolerance for risk because their investments impact the environment. They interface with foreign governments and have pretty much come to expect regime changes, environmental hazards, and having to re-assess their amount of risk on a regular basis.

Analyzing the risks your company faces is also very important. Rice points out a perfect case study on the failure of a business to analyze political risk. "When General Electric’s legendary CEO Jack Welch tried to acquire Honeywell International, in 2001, the merger sailed through the U.S. Justice Department review, and Welch assumed that EU approval would soon follow. It didn't. The European Union focused on the potential impact on competitors, not consumers."

Managing your exposure to risk in the first place is a great place to start. Make sure your assets are not strategically dependent. They need to be spread out in different geographies or locales, as an example. Build in additional capacity within your supply chain, just in case one of your suppliers runs into trouble. Finally, reach out to your industry peers and develop some shared learning experiences. Someone else may have already run into a situation that your business is going through right now. Plan ahead with different problem scenarios, then develop courses of action that will minimize your exposure and serve to mitigate your risk, not to mention give you some practice just in case the real situation come along.

If something does happen that requires a response, you need to develop a communications strategy that will effectively address the problem. Depending upon what situation your business is facing, it will be dealing with many very different audiences: the media, activists, government officials, consumers, investors, and law enforcement. As Rice says, "Each audience can affect the others, generating new risks and making the situation worse. Managing the dynamics among the interested parties is essential."

Finally, with each and every situation your company faces, learn from them. Unfortunately, many companies do not learn from their failures. Be certain that your company figures out what was done correctly and what was done in error.

In her book, Condoleezza Rice strongly suggests "The best crisis response systems institute feedback loop for learning before disaster strikes, to lower the odds that a crisis will occur and improve the response when one does. Few companies get this right. Indeed, it may surprise you that the best continuous learning organizations that we know of are top-notch football teams. In football, errors are everywhere, and success and failure are obvious. Elite coaches study wins as well as losses, analyzing each and every play."

Help your company to survive and even thrive by mitigating your political risk. Plan ahead.

Dan Arens is an Indiana-based business growth advisor.