True North?
Are we sailing in the right direction?
We love the world we live in! With tea from
India, chocolate from Belgium and computers from the United States delighting
us as consumers, what is not to love about our world? What is easy to overlook however
is the incremental cost of such delights. Is the framework of globalisation as
its delivery vehicle a viable true north for us to sail towards in business and
indeed as a society? Whilst the benefits of globalisation has transformed the
world we live in which is felt nearly everywhere we go, this does not answer
the kernel question for the longer term; is our developed model of
globalisation a true north to continuous and positive development in mankind’s
march through time? If so, how do we wrestle with the enormity of trading
internationally and what can we do to better reap the rewards for trading
across international borders?
One thing is for sure, its not the first time
we have tried it! John Maynard Keynes talked of globalisation when he lamented of how a gentleman in
London could be sipping tea from India before August 1914. Keynes in the 1920’s
went onto talk of internationalisation and how it did not prevent war complicating
the ability of nations to be self-sufficient. After the Bretton Woods agreement (1944), of which Keynes was instrumental in its draft, the
transformation from colonial globalism to modern economic globalism, as we know
it was complete.
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| John Maynard Keynes Source: Biographyonline.net |
Globalisation 101 defines globalisation as “a process of interaction and integration
among the people, companies, and governments of different nations, a process
driven by international trade and investment and aided by information technology.” The more recent addition of highly impacting information
technology has seeded a disruptor wave that is transforming the landscape, as
we know it. For any person, small business or multinational, this brings great
opportunities but only if one is astutely reading the global landscape and exercising
information driven decision-making skills before venturing into international
trade.
Thinking international trade, we often think
big business, but if we are pursuing information and understanding, the
resulting decision-making at any size or level will have increased efficacy
leaving sustainable success as the likely outcome. In thinking about our “true
north” in international trade, I believe we should consider the following
elements as key in our organisational approach and management of our business
in international trade.
Risk
Management is key in gathering,
quantifying, assessing, ranking and addressing risks, both positive and
negative in relation to international trade. The focus on internal risk areas
like company preparedness, supply chain length, financial risk, and organisational
set up are as important as territory culture mapping, market demand analysis
and risk assessments of any strategic entry into an international market. A
business will never be successful if it cannot keep its promises to its
customers and run its business in a solvent manner.
Geo-Political
Risk should always be explored assessing
impacting risks like the upheavals we have seen of late in many territories
altering the trading landscape. The US/EU sanctions on Russia for its part in
the chaos in the Ukraine is a good example why we should as international
traders monitor geo-political risk and open up options in timely manner for
remediation of identified risks.
Economic
Risk is a reality for all businesses
trading either directly or indirectly in the market place. After all, if your
end customer cannot afford to buy your product, your business will not be
successful. The macro economic indicators like GNP, GDP and Jobs Data are some good
indicators of overall macro economic management of a country or territory. However, it's always advisable to dig a little deeper with activities like monitoring news outlets local to the territory to see what is ‘big news’ such as layoffs, potential strikes, new investments
in business and local government infrastructure investments.
Currency/FX
Risk is certainly an issue to consider
if you are billing in local currency or have a treasury strategy that bill’s in
a regional currency. Your investment in currency into your books through
billing, FX purchases or complex financial products like forward
contracts will bring loss and gain risks that your business needs to
understand and integrate into its wider strategic plans for entry to the market
place. For example, as the European Central Bank (ECB) is now considering minus
interest rates on the already low ECB base rate, banks would be wise to reconsider
their strategic plans and how they trade in the Eurozone given they could be
subject to interest charges, not payments on the cash they bank on deposit.
Another good example is the strict and sometimes volatile FX controls placed on
foreign currency in China. Its impact merits consideration in any planning
session involving the country.
Country/Trading
Risk is another area to think about.
How do you want to enter the market place? Are you sure of your demand side
analysis? What are the pricing strategies for this market? Is it compatible
with your supply chain and distribution model? Is indirect sales preference a
temporary or permanent feature to be reviewed into the future? How will your
branding be exposed and developed especially in an indirect sales model? What
security will be required on the high-risk territories such as letters of
credit, 3rd party guarantees or more complex forms of security on
trade? Will lengthening supply chains be an issue in the territory given its
security and governance levels? Have you developed management plans addressing
the identified risks from these posed questions?
Thinking about the main areas, the best way
for entities big and small to start the process of collection, evaluation,
ranking and output is to develop a risk register. Even on an excel spreadsheet,
a risk register can be highly effective with the focus on risk classification
(individual/group/aggregate risk), risk type
(country/fx/internal/political/etc), risk grouping (link similar risks), risk
weighting (what is the likelihood of it happening?), risk impact (the impact it
will have on your business, financial and non financial). The other side of the
risk register is the evaluated risk management response which should be
acceptance (deal with it when it arises/reserve funds or resources for the
eventually), mitigation (take steps to reduce the impact and/or risk weighting
to acceptable levels), sharing (involve 3rd parties whom can lower
the level of risk you are exposed to) or rejection (risk is too high therefore
you cannot proceed to exposure the company to that element/point).
This type of information driven approach will
inform us of our ‘true north’ in
trading internationally. The resulting outcomes will be based on a higher level
of awareness and understanding, which can only herald greater success
probability. So when trading internationally, I submit that if we all take
greater care with our risk management approach, less will get trapped in the
pitfalls and more success will befall those whom embrace information driven
decision making and in enough numbers can alter the course and trajectory of
our societies true north in international trade making it safer, more informed
and less subject to humanities dark side that is as clandestine as it is
plentiful for the international trader.
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