How Does Global Risk Impact YOUR Company’s Revenue? Let Me Count the Ways!

Andrew Rudin | Feb 17, 2017 61 views No Comments

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The World Economic Forum, or WEF, holds its annual conference every January in Davos Switzerland, two hours from Zurich by train. Public policy wonks, government officials, and monetary experts flock there in search of brutally cold weather and panel discussions delivered in monotone. I’d rather hang out at a knitting convention. Why should Main Street Americans care about the WEF or what it does? Now there’s a challenging marketing problem!

should care, because the World Economic Forum has its fingers on the pulse of something very important. An issue that every man, woman, and child on this planet grapples with: risk. The WEF painstakingly studies all kinds of risks, and categorizes them into five enigmatic groups: economic, geopolitical, societal, environmental, and technological.

It’s hard to avoid yawning, but these categories are packed with potent, visceral, keep-you-up-at-night subsidiary risks. Ones like armed conflict, filthy air, contaminated water, tsunamis, organized crime, terrorism and data theft. I am confident that one day, a savvy political operative will use risk to exploit people’s fears, and help a long-shot presidential candidate win an election!

Every year, the WEF conducts a survey about risk. Their latest report reflects the opinions of 13,340 people in 130 economies. The five risks respondents listed as most concerning for doing business in 2017:

1. Unemployment or underemployment (economic)
2. Energy price shocks (economic)
3. Fiscal crises (economic)
4. Failure of national governance (geopolitical)
5. Profound social instability (societal)

In total, respondents cited 29 risks, and it’s significant that economic risks are ranked as the top 3. The most concerning technological risk, Cyberattacks, hit the list at #12, and the top environmental risk, Extreme weather events, was #19. Overall, economic conditions appear most worrisome, but other risks are evenly spread. Of the 29, nine are economic, five geopolitical, five environmental, six societal, and four technological.

The survey also examined sentiment regarding the 2017 Top Five Global Risks – Impact. In other words, respondents were asked for their opinions about the most consequential risks. That produced a different set that involve cataclysmic events:

1. Weapons of mass destruction (geopolitical)
2. Extreme weather events (environmental)
3. Water crises (societal)
4. Major natural disasters (environmental)
5. Failure of climate change mitigation and adaptation (environmental)

Here, not one economic risk made the Top 5. That’s a big change from 2012, when three of the Top Five Risks – Impact were economic: Major systemic financial failure, Chronic fiscal imbalances, and Extreme volatility in energy and agriculture prices. We know that things are changing faster than ever. This comparison gives us a glimpse into how developments alter assessments of future challenges.

And, when respondents were asked about the 2017 Top Five Global Risks – Likelihood, they revealed another set of concerns:

1. Extreme weather events (environmental)
2. Large-scale involuntary migration (societal)
3. Major natural disasters (environmental)
4. Large-scale terrorist attacks (geopolitical)
5. Massive incident of data fraud/theft (technological)

As with – Impact, economic risks didn’t make this list, but every other risk category is represented. A major shift from 2012, when respondents cited Severe income disparity (societal), Chronic fiscal imbalances (economic), Rising greenhouse gas emissions (environmental), Cyber- attacks (technological), and Water supply crises (environmental).

Risk does not exist in silos. The categories expose a curious discrepancy. In 2017, Water crises was categorized as a societal risk, and in 2012, Water supply crises was categorized as an environmental one. Perhaps this is not an anomaly. I think the inconsistency represents how tightly risks are connected. For a detailed map of global trends and their risk connections, check out Report’s Interactive Global Risks Landscape infographic.

You will see, for example, how innovations in artificial Intelligence (AI), Internet-of-Things (IoT), and Robotics increase cyber-dependency, which increases vulnerabilities to Cyberattacks, a technological risk connected to Terrorist attacks, which is a geopolitical one. And terrorist organizations develop schemes by recruiting men from populations of the under-employed and unemployed – the result of economic risk. Other risk connections revealed in the infographic include the trend of rising urbanization, connecting it with the failure of urban planning (societal), the failure of critical infrastructure (economic), along with other risks. And the trend toward increasing nationalist sentiment with interstate conflict (geopolitical) and large scale involuntary migration (societal).

How close to home does this get? I live in Virginia just outside our nation’s capital, and many risks in the WEF study seem remote to me. When I turn on a tap in my house or elsewhere, potable water flows freely. My neighbors generally have jobs – at least the ones who aren’t retired. When I drive around the DC area, I don’t cross boundaries protected by belligerent warlords, and the closest thing we have to roadside vigilantes demanding cash is the reviled Dulles Toll Road. While in my mind, I can still see and smell the smoke rising from the nearby Pentagon after September 11, 2001, I feel safe. All of this means a lot to me.

Nonetheless, global risks percolate into my life every day, and they have deep and profound impact. A reality shared on editorial page of The Wall Street Journal last week in a letter from Beth Bosley, CEO of Boron Specialties in Ambridge, Pennsylvania. If you haven’t heard of Ms. Bosley, her company, or Ambridge, that’s the point. No one is immune from global risk and its effects:

“My company, Boron Specialties, is also part of a global industry, and the proposed [border adjustment] tax policy will have unpredictable effects on our supply chain and that of our customers, who are also American manufacturers. If enacted, the border adjustment must be designed to avoid damage to small, growing manufacturing businesses like ours.”

If you make your living planning revenue, or generating it, unpredictability creates more than just acid indigestion and insomnia. Ms. Bosley’s letter reveals what happens to an American company when nationalist sentiment, a geopolitical risk, infects public policy, and creates reactionary trade protectionism. Imagine that you’re the VP of Sales at Ms. Bosley’s company. Do you still reflexively insist on the absurdity that your reps produce 25% more revenue this year, as so many companies do? Can you demand that your reps just “just tough it out,” and bank on their “street smarts” and tenacity to overcome the near-inevitability of erratic price swings and supply chain interruptions?

American companies often manage risks just this way, by casually dropping them onto the stooped shoulders of their marketing teams and sales forces. Or, by living in a state of denial. Evidence: the familiar proclamation, “Quotas are going up like they do every year!” That’s a strategic mistake. The current global risk landscape should cause executives to examine the risks that jeopardize revenue plans, as well as identifying emerging revenue opportunities they might not have considered. No matter where you do business, when it comes to revenue planning, these developments matter:

1. Rising income and wealth disparities. This global phenomenon is particularly acute in the US, where in 2013, the richest 10% of families held an estimated $51 trillion in assets, while the poorest 50% held approximately $1 trillion – more than twice the gap that existed in 1989. (Source: Congressional Budget Office, Trends in Public Wealth, 1989 – 2013). This development portends many social challenges, not the least of which is a significant erosion of the consumer middle class, which has propelled business growth over the past 40 years.

2. Polarization of societies. We are in the “post-truth” era, where regular emotive political debates are unabashed in their goal of dividing public opinions. Today, few of us can boast not having a wayward family member or (former) close friend who doesn’t hold an “opposite” viewpoint on something we deem important. The latest WEF survey revealed 31% of respondents identifying polarization as a key driver of risk, along with a related trend, rising nationalist sentiment (14%). Both portend developments likely to exert negative pressure on revenue, including scuttling of trade agreements, restricted travel, diminished international collaboration, and less – or slower – innovation.

A recent editorial in The Economist (In Retreat, January 28) took a wistful view of this development. “The golden age of global firms has also been a golden age for consumer choice and efficiency. Its demise may make the world seem fairer. But the retreat of the multinational cannot bring back all the jobs that the likes of Mr. Trump promise. And it will mean rising prices, diminishing competition and slowing innovation. In time, millions of small firms trading across borders could replace big firms as transmitters of ideas and capital. But their weight is tiny.”

3. Changing climate. The United Nations High Commissioner for Refugees (UNHCR) estimates that climate change refugees – people dislocated by weather and climate-related events – will number between 250 and 1,000 million people over the next 50 years. And the Indian government estimates that 330 million of its citizens were affected by drought in 2016 alone. Transient populations bring societal and geopolitical risks that destabilize governments and undermine business growth.

4. Environmental hazards. Around the world, governments and industries appear resolved to fight the risks of human industrial activity. But the benefits are far from certain. The international aviation industry has agreed that there will be no net growth in emissions after 2020. And significantly, the Financial Stability Board (FSB) began an industry-led process to develop norms for reflecting climate-related performance into the mainstream financial reporting. For the first time, investors could have a comparable and consistent metric for deciding how to allocate capital – if the FSB’s recommendations are formally adopted.

5. Technological disruption. Gut NAFTA! Deep-six the TPP! Popular hype. But I bet you didn’t hear this anecdote during the presidential debates: economists estimate that between 1997 and 2007, 86% of US manufacturing job losses resulted from technological innovations, not from trade. And regardless what the current administration says, those jobs are not returning. Technology and collaboration are driving the 4th Industrial Revolution, and nationalist fervor to restrict travel and immigration around the world threatens both.

6. Diminished appetite for regulatory governance. Contrary to some political bloviation, governmental regulation has been essential to American prosperity – not a hindrance. But the current animosity toward government “red tape” casts all regulation in a bad light. This myopia is especially problematic with technologies such as AI, IoT, robotics, and biotech, where innovation has rapidly outpaced governance. With revenue and profits at stake, don’t look for industry self-regulation to spare people and institutions from exploitation and abuse.

These trends and their downstream risks highlight perceived weaknesses in social protection systems. People want to know: Are we safe? Can we improve our standard of living? Are opportunities to receive an education and to sustain good health equitably shared in society? And global citizens are reacting by loudly demanding that their governments protect them from uncertainty and tumult. Leaders who appear weak and feckless will be shoved from power.

Global risk permeates every market and every industry. It affects monetary policy, and the cost and availability of capital. Around the world, the cost of risk will impact financial outcomes, regardless a company’s size, age, location, or product. The WEF risk taxonomy reveals that global risks are complex, interdependent, fueled by some trends, and accelerated by others. On the macro-level, governments must mitigate risks through international collaboration, and by resisting calls for economic isolationism. And on the micro-level, companies, like Boron Specialties of Ambridge, Pennsylvania, will discover that managing global risk begins right here, at home.

Author’s note: In my next article, I will describe several risk mitigation strategies, and the best ways to use them.

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