Black Swans and White Knights: Risks of Operating in a VUCA and Global Environment

Global Businesses operate in an international environment that is volatile, unpredictable, uncertain, and accelerated.

The term VUCA or Volatility, Uncertainty, Complexity, and Ambiguity is used to describe to the global environment in which multinational firms operate. In addition, a PESTLE or Political, Economic, Social, Technological, Legal, and Environment framework can also be applied to understand and assess the global macro environmental factors at play for multinational firms.

Therefore, in this article, we use these two models or tools to assess and identify the global risks that arise from the intersection of the various environmental factors and provide decision makers with a handy guide to navigate such risks as well as to mitigate the impact of such risks.

Black Swans

The term Black Swans refers to random events that have a very less chance of occurring, but, yet cause maximum damage when they hit.

The term was coined by the famous risk mitigation expert, Nassim Nicholas Taleb, who referred to the discovery of Black Swans in Australia wherein those who chanced across them realized that until then, they were not even aware of the existence of Black Swans and once they were made aware, realized the extent to which their worldview changed consequently.

In risk terms, Taleb mentions how seemingly uncertain events which everyone thinks would not occur leave behind the maximum effect once they manifest leading to shocks to the system that are simply not quantified in advance.

Thus, decision makers in global corporations do have to ensure that they remain cognizant of such risks though the probability of them happening is miniscule and hence, most of key personnel are simply not trained to look for such risks.

VUCA Environment

Volatility

The global macro environment is highly volatile due to the intersection of global and local events.

Further, what happens in an isolated corner of the world is no longer restricted to that place in terms of impact, but, has cascading effects on all regions worldwide. This is the result of systemic integration and interconnection which has the consequence known as the Butterfly Effect.

According to this theory, a Butterfly flapping its wings in one corner of the world has the effect of causing hurricanes in an entirely different region due to the systemic nature of cause and effect. In other words, we live in a globalized world where one event somewhere has the effect of causing volatility in another region anywhere.

Uncertainty

Apart from volatility, the present global environment is also highly uncertain. This is mainly due to the convergence of different forces all coalescing around the same time leading to systemic vulnerabilities that bring with them uncertainty.

Indeed, decision makers in global corporations can no longer be content with planning for the longer term or even the medium term since once their decisions are taken, a totally unrelated event happens that leads to uncertainty and volatility thereby throwing a spanner into their well laid plans.

This is the reason why most global corporations now have very specific plans for each region as well as have empowered local and regional representatives to decide what is best for the businesses according to the exigencies of the situation.

Complexity

It would be an understatement to say that the global environment in which multinational corporations operate is complex. Indeed, one can go as far as to say that the current macroeconomic environment is hyper complex as well as multilayered which means that complexity is the norm rather than the exception.

For instance, global corporations operate in multiple jurisdictions which means that they are subject to the specific laws and regulations of each country in addition to the rules governing bilateral and multilateral trade agreements.

This has the effect of actualizing a multi layered set of rules on top of each other as well as intersecting with each other. Thus, complexity is inherent in the global economy and hence, risks are likewise multiplied with each country determining its own set of rules leading to a matrix of laws and rules that create more risks than simplifying matters.

Ambiguity

Another characteristic of the global economy is the many layers of ambiguity that present themselves to decision makers in multinational firms. For instance, the intersection of the various forces means that decision makers now have to first understand the situation by digging in deep and peeling through the layers of complexity and confusion.

Indeed, given the fact that the world is becoming more fragmented and connected at the same time, it is tough for decision makers to sort what is global and what is local and at the same time have a clearheaded view of which risk arises due to which factor.

Apart from this, decision makers also have to sift through and analyze the relationships between the various factors that can result in an Onion like risk matrix wherein each layer unpeeled leads to other hidden risks.

Political Risks

As the saying goes, all politics is local and this means political risks and political factors play an important role in influencing the actions of decision makers in global corporations. For instance, specific national policies aimed at protecting domestic industries through tariffs, non takeover clauses, and restricting foreign investment in the country can all have a cascading effect on the fortunes of global corporations as they operate in different countries across the globe.

Indeed, the fact that political risk is now considered among the top risks that global corporations face indicates the extent of the influence of this factor as well as the seriousness with which decision makers in global corporations pay heed to small and big risks arising from political decisions.

Economic Risks

This risk is somewhat known to the global decision makers as recessions and the boom and the bust economic cycles are inherent to global capitalism and occur in all countries with free market systems.

Indeed, it was the West which was the first to experience the cyclical boom and bust trends and hence, global corporations and especially those that are Western based are cognizant of this risk. In addition, with the rapid spread of capitalism, even Asian firms are now exposed to the economic risks and hence, decision makers in global corporations do have a basic understanding and a grip on how economic risks play out.

Having said that, it is also the case that the Global Economic Crisis of 2008 caught most firms worldwide off guard and especially, the immediate aftermath of the collapse of the American Investment Bank, Lehmann Brothers, was so chaotic and unpredictable that decision makers in most firms realized the extent to which the global economy has become integrated and interconnected as well as unpredictable and uncertain.

Social Risks

Changing sociocultural as well as demographic trends impact the global corporations more than anything else.

With the globalization of the world economy, large swathes of consumers from developing countries have begun to aspire to Western standards of living and luxury. Moreover, globalization has also resulted in prosperity in the hitherto poor countries and has succeeded in creating a sizeable middle class in many countries.

Taken together, the aspirational middle class means that global corporations now operate in countries and regions where the intersection of demography and sociocultural forces determines the risks that they face.

As mentioned, culture plays a major role in shaping consumer behavior and this is the reason why many global corporations adopt a Glocal approach as far as risk mitigation is concerned. For instance, Chinese and Indian Middle Income consumers often want to consume goods and services that were hitherto the preserve of Westerners.

On the other hand, they are also reluctant to give up their culturally determined attitudes which mean that global corporations run the risk of alienating this consumer segment if they adopt purely global strategies in local markets.

Technological Risks

The unprecedented convergence of digital technologies means that technological risks play a very important role in creating more risks for the decision makers. For instance, if a firm introduces a product in a specific market only to realize that within a few months, another product has been launched by advanced technology that changed in the duration of these few months.

Indeed, anyone who has bought a Smartphone would relate to how each upgrade or each version is advanced technologically to such an extent that rivals now think in terms of months and quarters rather than years which leads to acceleration in product releases and the attendant risk of becoming obsolete within no time.

Geopolitical Risks

In addition to the aforementioned risks, global corporations are majorly impacted by geopolitical risks that arise due to relation between nations deteriorating and leading to armed conflict.

Indeed, in the post 911 world, business is inseparable from geopolitics since the global system is interconnected and integrated to such an extent that it is inevitable for global corporations to fall prey to geopolitical risks.

For instance, if say Unilever is operating in both India and Pakistan and armed conflict breaks out between these countries. Then, it is certainly the case that Unilever’s operations in these countries are affected to the extent that it has to choose between them.

In addition, sanctions and restrictions on countries impact the firms operating there. For instance, the recent bout of sanctions on Iran has made it difficult for European and American firms to continue doing business there.

Apart from this, even the ban on Russian firms from trading with American entities has led to unpredictable consequences including the resignation of chairpersons in several multinational Russian firms that operate across the world.

Trade Wars

No discussion on the risks facing global corporations is complete without taking into account the ongoing trade wars between nations in the global trading system.

Indeed, when the United States imposes tariffs on goods made in China, India, or the European Union and Canada and Mexico, it runs the risk of these countries retaliating likewise which means that global corporations are caught in the crossfire in a Pincer Manner where they are subject to tariffs on both the exports and the imports.

This has the result of such firms having to run the risk of declining profits and decreasing profitability since their goods and services become costlier leading to consumers preferring substitutes and alternatives.

Indeed, it would not be an understatement to say that the ongoing trade wars represent the biggest risk to global corporations especially because they operate in multiple regions and countries and hence, have to take into account the complexities of each country’s taxation and tariffs system.

White Knights

The discussion so far has described the VUCA Environment in which global corporations operate and has analyzed how the risks from the various causal factors confront decision makers in global corporations.

As can be seen, there are multiple risks that originate from the intersection of all these factors and this is where proper risk mitigation strategies have to be put in place.

This calls for a White Knight approach from the decision makers wherein the term refers to the Shining Knight in Armor who saves the day in the face of insurmountable odds.

Indeed, while we are not suggesting that executives of global corporations be superheroes and rescue their firms, nonetheless, what we are recommending is that decision makers must assess the risks facing their firms in a realistic manner and then take steps to mitigate them accordingly.

To conclude, the OODA loop which advocates observation of risks, orienting the firms accordingly, deciding on the appropriate course of action, and then acting on the strategies for risk mitigation is the need of the hour for businesses to thrive in chaos.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.