Political Risk Strategy Formulation
Introduction
Globalisation has both enabled and compelled firms to seek opportunities in emerging markets, where there is higher
growth and cheaper inputs than in many established business territories. Yet political risk, in terms of instability,
weak governance and conflict, is endemic in many emerging markets. The risk-reward equation is pronounced, and
only firms with a robust approach to political risk management can reap the rewards without suffering periodic severe
disruption in their global portfolios.
Political risk management is often regarded as a series of stop-gaps, plugging holes (or points of exposure) in an
operation or strategic initiative. It is seldom seen as a mode of strategy, with its own formulation process and
reflective of the firm's unique identity and ambitions. We suggest here that political risk can be managed
strategically, and that the concept of political risk strategy is both valid and valuable. There are valid approaches to
developing a strategy to address political risk, and one is suggested here.
First we outline the strategy formulation process, then characterise political risk strategy at a conceptual level.
Contextual Variables
In order to understand and interpret its political risks, a company first needs to understand some of its own
attributes.
First, what is the global growth strategy? How important are emerging markets, and what are the pressures and
opportunities for going beyond current comfort zones? This establishes the strategic rationale for engaging with
potentially high-risk emerging markets.
Second, what is the company's tolerance for political risk? Risk tolerance means a firm's willingness to expose itself to
potentially hazardous environments and indeed to periodically incur manifested risk, which of course entails a degree
of loss or liability. Risk tolerance is a factor of: competitive pressure to enter emerging markets; corporate culture
with respect to risk, and people's willingness to endure risk; the expectations of key stakeholders with respect to the
company's risk exposure; and the company's ability to develop and manage the resources required for risk
management. A useful benchmark in assessing risk tolerance is where a firm currently operates versus the highest risk
environments where leading and adventurous players in similar sectors are present: Do we need to remain where we
are? Are we ready to stretch ourselves to these new limits?
Third, we need to understand our the profile of our current global portfolio. Mapping our overseas operations in
terms of strategic relevance and risk in the operating environment yields a macro-picture of the level of exposure we
currently face. Our strategic intentions aside, does this map indicate that we have been risk averse in selecting growth
initiatives? Is there room to take on more risk? Or, conversely, are we overexposed, and therefore vulnerable to
strategic disruption if several operating environments did become untenable?
Finally, we need to consider what specific assets we currently expose and how this would change in the near future as
we roll out our current growth plans. In terms of the firm's critical assets (people, reputation, and performance as a
factor of continuity and control), what have we exposed to potentially unstable environments? What is at risk?
These variables form the backdrop of a meaningful risk assessment: We know what any risk is in relation to, and we
know how to interpret risk in our own unique context.
Risk Assessment
Knowing our own attributes, we can move onto to assess our operating environment in terms of political risk. First
we develop hypotheses about relevant risk factors. These are not risks per se, rather trends and conditions which
would be risks if we were exposed to them. Hypotheses derive from two exercises. First we try to understand the
political actors (civil society, governments, NGOs, opposition groups etc) who are likely to have an interest in our
operations. Those who regard our success as antithetical to their own interests, or whom we might negatively affect,
would likely react to our presence, and their potential reactions become risk factors. Second, we examine the
exogenous political terrain, independently of our operations. What is going on in the environment in terms of
instability, weak governance and conflict? If we did enter a certain region or market, what risks would we be exposed
to? These too are added to our list of risk factors.
We then assess these factors against our exposed assets. Where a factor could have a negative effect on an asset, it
becomes an actual risk. We then assess actual risks in terms of their impact on us if they did manifest, and in terms of
the probability of their manifesting. Risks are then mapped using impact and probability as the primary axes. The
intersection of impact and probability reveals our priority risks.
At this point we understand our current and near-future risks, but we also need to consider how the whole operating
environment, whether global or operational, might shift over time, and the implications of potential shifts for
political risk. We can apply scenario analysis to map relevant future states, and to derive indicators and warnings
which we can monitor to be forewarned of the emergence of a given scenario. In a risk management context, the
intersection of plausibility and negativity defines our priority scenarios.
Intelligence to Action
At this point we understand our priority risks and priority risk scenarios. Priority risks require near-term risk
management planning, and priority scenarios require regularly updated contingency plans to align our risk
management capabilities with plausible future states. We assess the risk mitigation options, including portfolio
management, security, relationship-building and risk transfer, and we select relevant options on the basis of
cost-effectiveness. Then we define specific initiatives to manage our priority issues. Near-term risk management
initiatives will be on-going programmes aimed at avoidance and at ensuring preparation to minimise the impact of a
risk if it did occur. Contingency planning initiatives will likely entail periodic reviews of the situation and periodic
projects to adjust our preparedness for priority scenarios.
We assign leaders for each initiative, and they in turn recruit teams to provide the necessary expertise for
implementation. The heads of each initiative form the core political risk management task force, which in turn would
report to either the senior corporate executive responsible for international operations, or, at the operational level,
the country or project manager. The role of oversight would be to ensure that there were no significant gaps or
overlaps in the risk management approach, that each initiative had reasonable performance indicators, and that all
initiatives were integrated as one coherent risk management strategy.
Although we have conducted a risk assessment, we continue to monitor priority risks and the evolution of the
political environment, and regularly adjust our risk management plans in accordance with significant changes.
Finessing the Outcome
A logical process led us to programmes and initiatives to manage priority risks. To the extent that this process can be
scientific, we have made it as objective as possible, and necessarily so to provide a baseline indication of risk
management imperatives. But what about our intuitive sense of how we should approach risk? Should we ignore that
in the face of process and logic? At our own risk.
The outcome of the Intelligence to Action process might yield a baseline approach, but ultimately we can assume
that it, like most human to human assessments (political risk is caused by the interaction of us, people, and other
people, in the end), is open to interpretation, not just our mechanistic adherence to analytical outcomes. In light of
the experience of ourselves and others, and pure gut sense, we will probably need to tailor, or finesse, the results.
We already know our interpretive stance in terms of the context of our business and our philosophy to risk, as
elucidated by a consideration of the contextual variables. We can add to this the experience of other firms in
comparable circumstances. How did they fare, and what did they do in response to risk? What worked, what did not?
What is our own intuitive sense of what would mitigate risk in our given context (global / corporate or operational)?
What measures are we prepared to live with, and which would we prefer not to be associated with?
There is much left over from the bare-bones assessment of risk and the definition of risk management initiatives. We
are people, and as a company we have our own culture. A scientific (or pseudo-scientific) analysis provides a baseline,
but we will have our own, often valuable, ideas on how to tailor and apply this baseline in practice.
We therefore have an opportunity to tailor our response to political risk in accordance with our gut sense of the right
responses, and our own culture. If we stray too far from the logical baseline, we enter the realm of guesswork and
unfounded hope, but if we adhere strictly to the analytical outcome, then we will be responding to risk as anyone
else, in the absence of a unique identity. There is a necessary balance, and in the end a firm's strategy to address
political risk needs to be its own.
Strategy
Political risk management strategy is a firm's unique learned response to political risk evolving from experience and
intuition, and aligned to our strategy, culture and identity. Two firms in the same sector, operating in similarly risky
regions, might both have effective risk management strategies, but these are likely to be very different. For example,
one firm might prefer to outsource security and to make risk transfer a lynchpin in its approach, in order remain
maximally agile and to keep management attention focused on business execution. Another might see its acceptance
in its host communities as key to both risk mitigation and to market penetration, and might emphasise
relationship-building, including corporate social responsibility, as the major element of its risk management strategy.
Although some risk management measures will be essential to any firm in a certain operating environment, there is
still considerable room to tailor one's approach to political risk in accordance with the firm's own unique insights,
character and ambitions. We need to listen to and address the outputs of sound analysis, but we need to balance this
with our own characteristics and experience-based intuition for an optimal strategy.
We can draw a comparison with business unit or corporate strategy. All companies aspire to profit, via growth and
efficiency. Yet no two companies, even in the same sector, will have the same way of achieving these goals. The
strategy that they apply to pursue them will be aligned to the company's unique competencies, culture and identity.
So too with political risk strategy. And just like business strategy, political risk strategy must be regularly reviewed
against the changing attributes of the company and the external environment, to ensure that it does not ossify or
become an impediment over time.
Copyright: Harmattan Associates
Globalisation has both enabled and compelled firms to seek opportunities in emerging markets, where there is higher
growth and cheaper inputs than in many established business territories. Yet political risk, in terms of instability,
weak governance and conflict, is endemic in many emerging markets. The risk-reward equation is pronounced, and
only firms with a robust approach to political risk management can reap the rewards without suffering periodic severe
disruption in their global portfolios.
Political risk management is often regarded as a series of stop-gaps, plugging holes (or points of exposure) in an
operation or strategic initiative. It is seldom seen as a mode of strategy, with its own formulation process and
reflective of the firm's unique identity and ambitions. We suggest here that political risk can be managed
strategically, and that the concept of political risk strategy is both valid and valuable. There are valid approaches to
developing a strategy to address political risk, and one is suggested here.
First we outline the strategy formulation process, then characterise political risk strategy at a conceptual level.
Contextual Variables
In order to understand and interpret its political risks, a company first needs to understand some of its own
attributes.
First, what is the global growth strategy? How important are emerging markets, and what are the pressures and
opportunities for going beyond current comfort zones? This establishes the strategic rationale for engaging with
potentially high-risk emerging markets.
Second, what is the company's tolerance for political risk? Risk tolerance means a firm's willingness to expose itself to
potentially hazardous environments and indeed to periodically incur manifested risk, which of course entails a degree
of loss or liability. Risk tolerance is a factor of: competitive pressure to enter emerging markets; corporate culture
with respect to risk, and people's willingness to endure risk; the expectations of key stakeholders with respect to the
company's risk exposure; and the company's ability to develop and manage the resources required for risk
management. A useful benchmark in assessing risk tolerance is where a firm currently operates versus the highest risk
environments where leading and adventurous players in similar sectors are present: Do we need to remain where we
are? Are we ready to stretch ourselves to these new limits?
Third, we need to understand our the profile of our current global portfolio. Mapping our overseas operations in
terms of strategic relevance and risk in the operating environment yields a macro-picture of the level of exposure we
currently face. Our strategic intentions aside, does this map indicate that we have been risk averse in selecting growth
initiatives? Is there room to take on more risk? Or, conversely, are we overexposed, and therefore vulnerable to
strategic disruption if several operating environments did become untenable?
Finally, we need to consider what specific assets we currently expose and how this would change in the near future as
we roll out our current growth plans. In terms of the firm's critical assets (people, reputation, and performance as a
factor of continuity and control), what have we exposed to potentially unstable environments? What is at risk?
These variables form the backdrop of a meaningful risk assessment: We know what any risk is in relation to, and we
know how to interpret risk in our own unique context.
Risk Assessment
Knowing our own attributes, we can move onto to assess our operating environment in terms of political risk. First
we develop hypotheses about relevant risk factors. These are not risks per se, rather trends and conditions which
would be risks if we were exposed to them. Hypotheses derive from two exercises. First we try to understand the
political actors (civil society, governments, NGOs, opposition groups etc) who are likely to have an interest in our
operations. Those who regard our success as antithetical to their own interests, or whom we might negatively affect,
would likely react to our presence, and their potential reactions become risk factors. Second, we examine the
exogenous political terrain, independently of our operations. What is going on in the environment in terms of
instability, weak governance and conflict? If we did enter a certain region or market, what risks would we be exposed
to? These too are added to our list of risk factors.
We then assess these factors against our exposed assets. Where a factor could have a negative effect on an asset, it
becomes an actual risk. We then assess actual risks in terms of their impact on us if they did manifest, and in terms of
the probability of their manifesting. Risks are then mapped using impact and probability as the primary axes. The
intersection of impact and probability reveals our priority risks.
At this point we understand our current and near-future risks, but we also need to consider how the whole operating
environment, whether global or operational, might shift over time, and the implications of potential shifts for
political risk. We can apply scenario analysis to map relevant future states, and to derive indicators and warnings
which we can monitor to be forewarned of the emergence of a given scenario. In a risk management context, the
intersection of plausibility and negativity defines our priority scenarios.
Intelligence to Action
At this point we understand our priority risks and priority risk scenarios. Priority risks require near-term risk
management planning, and priority scenarios require regularly updated contingency plans to align our risk
management capabilities with plausible future states. We assess the risk mitigation options, including portfolio
management, security, relationship-building and risk transfer, and we select relevant options on the basis of
cost-effectiveness. Then we define specific initiatives to manage our priority issues. Near-term risk management
initiatives will be on-going programmes aimed at avoidance and at ensuring preparation to minimise the impact of a
risk if it did occur. Contingency planning initiatives will likely entail periodic reviews of the situation and periodic
projects to adjust our preparedness for priority scenarios.
We assign leaders for each initiative, and they in turn recruit teams to provide the necessary expertise for
implementation. The heads of each initiative form the core political risk management task force, which in turn would
report to either the senior corporate executive responsible for international operations, or, at the operational level,
the country or project manager. The role of oversight would be to ensure that there were no significant gaps or
overlaps in the risk management approach, that each initiative had reasonable performance indicators, and that all
initiatives were integrated as one coherent risk management strategy.
Although we have conducted a risk assessment, we continue to monitor priority risks and the evolution of the
political environment, and regularly adjust our risk management plans in accordance with significant changes.
Finessing the Outcome
A logical process led us to programmes and initiatives to manage priority risks. To the extent that this process can be
scientific, we have made it as objective as possible, and necessarily so to provide a baseline indication of risk
management imperatives. But what about our intuitive sense of how we should approach risk? Should we ignore that
in the face of process and logic? At our own risk.
The outcome of the Intelligence to Action process might yield a baseline approach, but ultimately we can assume
that it, like most human to human assessments (political risk is caused by the interaction of us, people, and other
people, in the end), is open to interpretation, not just our mechanistic adherence to analytical outcomes. In light of
the experience of ourselves and others, and pure gut sense, we will probably need to tailor, or finesse, the results.
We already know our interpretive stance in terms of the context of our business and our philosophy to risk, as
elucidated by a consideration of the contextual variables. We can add to this the experience of other firms in
comparable circumstances. How did they fare, and what did they do in response to risk? What worked, what did not?
What is our own intuitive sense of what would mitigate risk in our given context (global / corporate or operational)?
What measures are we prepared to live with, and which would we prefer not to be associated with?
There is much left over from the bare-bones assessment of risk and the definition of risk management initiatives. We
are people, and as a company we have our own culture. A scientific (or pseudo-scientific) analysis provides a baseline,
but we will have our own, often valuable, ideas on how to tailor and apply this baseline in practice.
We therefore have an opportunity to tailor our response to political risk in accordance with our gut sense of the right
responses, and our own culture. If we stray too far from the logical baseline, we enter the realm of guesswork and
unfounded hope, but if we adhere strictly to the analytical outcome, then we will be responding to risk as anyone
else, in the absence of a unique identity. There is a necessary balance, and in the end a firm's strategy to address
political risk needs to be its own.
Strategy
Political risk management strategy is a firm's unique learned response to political risk evolving from experience and
intuition, and aligned to our strategy, culture and identity. Two firms in the same sector, operating in similarly risky
regions, might both have effective risk management strategies, but these are likely to be very different. For example,
one firm might prefer to outsource security and to make risk transfer a lynchpin in its approach, in order remain
maximally agile and to keep management attention focused on business execution. Another might see its acceptance
in its host communities as key to both risk mitigation and to market penetration, and might emphasise
relationship-building, including corporate social responsibility, as the major element of its risk management strategy.
Although some risk management measures will be essential to any firm in a certain operating environment, there is
still considerable room to tailor one's approach to political risk in accordance with the firm's own unique insights,
character and ambitions. We need to listen to and address the outputs of sound analysis, but we need to balance this
with our own characteristics and experience-based intuition for an optimal strategy.
We can draw a comparison with business unit or corporate strategy. All companies aspire to profit, via growth and
efficiency. Yet no two companies, even in the same sector, will have the same way of achieving these goals. The
strategy that they apply to pursue them will be aligned to the company's unique competencies, culture and identity.
So too with political risk strategy. And just like business strategy, political risk strategy must be regularly reviewed
against the changing attributes of the company and the external environment, to ensure that it does not ossify or
become an impediment over time.
Copyright: Harmattan Associates
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