BEA (Business Environment Analysis): The Science of Site Selection
Business Environment Analysis is the Science of Site Selection
Many decision-makers are scrambling to learn a lot about new countries and unfamiliar jurisdictions as global supply lines become more unstable. If you have to expand or shift your supply chain – how do you find a new site?
Business Environment Analysis is a type of business analysis that studies those things you can’t change but have an impact on you.?This is what we mean by “business environment”. When you are creating a product or service, you have a lot of control over your own actions and decisions. But there are environmental factors like legal system & regulations, economic activity, taxes, market trends, etc. You can’t affect them – but they affect you.?Your only options when it comes to working with the environment are to:
Note that sometimes managing means avoiding the environment altogether, which is much easier if you do your analysis BEFORE you invest money, time, and opportunity.
The cases we’ll be discussing in this series have to do with setting up a factory in a country you don’t know particularly well.?A relevant example is a foreign-invested manufacturing company with heavy China exposure transitioning to Mexico.
Output:?Your Own Private Scenario
This method is often called scenario analysis because the output of the process is a “story” of what the world looks like and behaves like in a new place in the future. You are inputting relevant data into your own squishy head computer and churning out a description of city X in country Y at time Z with ABC economic conditions. In some ways it won’t be a very complete scenario – you’ll have basic ideas about how to minimize risk or maximize gains.?But the data you have will be focused on your specific situation.
If I asked you to give me a 15-minute thumbnail sketch about the business environment in your city, you’d be able to put together a pretty cogent, comprehensive summary – and give some general value-adding advice.?In this series, we are going to learn to deliver that same kind of business analysis about Medellin Colombia (or any other city you don’t know well).?
You Need a 360-Degree view.
Another common name for this type of study is a 360-degree analysis. As the name indicates, the emphasis here is on seeing the ENTIRE range of inputs. There are all kinds of human biases attached to this type of decision. We tend to see what we want to see – or what everyone else wants to see. This leads to lots of signed contracts and celebrations early – and business problems later. You are better off spending as much time as you can looking for problems BEFORE you make your decision.
Think of a 360-degree analysis as having a fortune teller doing due diligence on your site selection. You will get hints about things than can go wrong before you make a decision … sometimes.
When it works:?The advantages of BEA.
?BEA is an analytic tool that is best tuned for Risk Reduction or Revenue Maximization of a strategic plan. Of course, you will get useful data across the entire spectrum of potential events.?But there is definitely going to be a theme to your first pass investigation.
The Risk Avoidance approach (my favorite)
For someone selecting the site of a new factory, BEA is most useful when it is screaming NO and flashing all kinds of warning lights. You will research economies, corruption, inflation, and all kinds of risks and potential bottlenecks. We will use simple tools and deep analysis to understand known risks and get glimpses of potential, as of now unknown risks. (Spoiler alert – Our method involves 3 “passes” or tries with the same tools in different ways.)?Our “first pass” research is mostly scanning the internet for themes that are so unprofitable, unnerving, or frightening will make you say, “there is no darned way would I even consider putting my factory there”. ???
The big warning lights are:
Good stuff. I learned a lot about Mexico, about its size and heft, about its multiple economies, about its foreign trade agreements, etc. It was all very useful. Incomplete, but useful.
An unseen unknown
In the time I’ve been in Mexico, the Mexican Peso has appreciated more than 15% against the US Dollar.?That didn’t show up in my analysis 2 years ago, because no one expected it or published on it.?If I used the phrase Black Swan Event – which I don’t, and neither should you – the peso-dollar rate shift would be one of those times.?
When you are doing this kind of environmental analysis you are seeking answers, so you will be spending a lot of time dealing with unknowns. Get into the habit of dealing with the world in terms of broad categories of your own ignorance:
??????Seen unknowns – What is the inflation rate of Colombia? Occupancy rate projections in Guadalajara. That sort of thing. You know what the questions are, even if you have no clue about the answers.
??????Unseen unknowns – These hit you on the back of the head. For me on this trip, it’s been the exchange rate.?I never even thought to investigate, and I probably wouldn’t have gotten useful data even if I had.?When I first started working in China IP theft was a big unseen problem, though now it’s pretty well known.?For me, the biggest unseen unknowns in China right now have to do with regulations and restrictions.
The Revenue Maximization approach
I can sense the marketers and some investors losing interest right now. They want something sexier and much, much more fun to talk about than exchange rates and geopolitics. Well, for the more positively inclined, I’ve got just 3 words:?burgeoning middle class.?Say it with me. Burgeoning. Middle. Class. These are the magic words to turn any project into a potential gold mine. “We can buy raw materials cheap, the government LOVES pollution, labor protection is non-existent --- AND IT HAS BURGEONING MIDDLE-CLASS MARKET. It's the emerging markets love story that writes itself.?Other factors that give cause for optimism:
Scenario analysis can produce a wide range of potential outcomes, but it’s important not to let your IMPLICIT biases color your results.?Make those biases explicit. That’s why I want you to decide in advance whether you are building on a risk-reduction or a revenue maximation approach.
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Mechanics of BEA:?The Grid
We’re going to build this scenario with the help of a simple grid.?The X axis is labeled IMPACT. There are high impact and low impact events.???The Y axis (the up and down one) is LIKELIHOOD of occurring. Is this event or situation almost certain to occur, highly unlikely, or someplace in between?
So, you are left with 4 quadrants.
1.??????High Impact, High Likelihood
2.??????High Impact, Low Likelihood
3.??????Low Impact, High Likelihood
4.??????Low Impact, Low Likelihood
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Which one is most important to would-be scenario analyzers who want to know where to site their new factory?
1.??????High Impact, high likelihood makes sense. It’s got two highs!?It must be important. It is. It’s such an important quadrant that you are already spending a lot more time there than you’d like.?These are all of your known problems – and you know how to handle them, and how to anticipate them.?You have experience, resources, and perspective on this kind of event, because you are presented with them all the time. That’s the high likelihood part.?This is where you live.
2.??????Yes. Ladies and gentlemen, we have a winner.?High impact and low likelihood are your winning quadrant, whether you are maximizing gain or minimizing risk. Think about it – high impact is always important. If the news is good, you have to take advantage of the opportunity, and if the news looks bad you have to take what action you can. But the low likelihood means that you will be taken by surprise by a new, unforeseen situation.
3.??????Low impact, High likelihood.?Unfortunately, you’re already doing this one. Maybe more than you want to.
4.??????Who cares? If you’ve read the impact potential, then just move on.?
So, this grid of Likelihood / Impact is how we are going to sort our inputs to help us understand a new operating environment. But where are we getting the data? Where is the raw material coming from?
I’m so glad you asked.
We’re going to take a simple tool but make it a whole lot more useful than it was back in undergrad.?A lot of you are already familiar with the STEEPLE framework. It’s also called PESTLE, STEP, of Pest.?It’s a framework, which is MBA talk for a list, which attempts to anticipate the entire universe of possible events or situations.?Our STEEPLE framework looks like this:
STEEPLE: A Simple, Powerful Tool
The STEEPLE framework is a very powerful tool because it makes you look at EVERYTHING on the horizon.?You are required to scan the entire environment.
3 Pass Method
We’re going to use the STEEPLE framework 3 times as our analysis gets increasingly granular and detailed.
Pass #1 – We are scanning headlines looking for BAD NEWS. In Pass #1, we want the NO. In practice, we’ll be using a relatively small number of variables to scan a number of different economies at the same time.?We have decided in advance what our key metrics are, and we plan on being quite brutal when it comes to cutting candidates off the list. In this part of the process, we are knocking out inappropriate choices. If your business model requires large numbers of cheap workers, then you will focus on metrics like unemployment level, wages, literacy rates, and skill level. If your model is more consumer oriented, you are looking for relatively high per capita GDP and moderate inflation.?
Let’s look at GENERAL CLASSES of potential “deal killers” in this framework.
STEEPLE Deal-Killers (Pass #1):
Society:??Instability is the killer here. Also look at religious and social movements. This is also where society norms and controls come in. If your business is selling pork products, then societal and religious factors are sending you signals to move on.
Politics:??Here again, one of the big risks is instability. But now we are also looking at alliances or entanglements with undesirable partners.
Economics:?You want high growth or low prices. Ideally, you’ll get high GDP growth and low inflation/low wages, but that situation is rare.?Here’s where you have to decide on your key variables and follow the numbers.
Environment:?Flooding and pollution can impact your facilities’ performance. This is becoming a bigger deal in coastal areas.
Legal:?The big indicators here have to do with property rights and protections. Can foreigners or foreign invested firms control their own profits and assets. Is there a legal framework in place to protect your interests or not?
Ethical:?Bribery, nepotism, quality control, compliance, etc. The list goes on. Ethics is a double-edged sword for foreign investors because you have to comply with US regs (which even applies to non-US citizens in many cases), but you also have to stay competitive in your local market.
Now that we know what to look for, let’s start our desk research.?Remember, we’ll be doing the STEEPLE analysis 3 times, with different goals and different levels of detail.
Output of the 3 Passes:
First Pass:?Knock-out factors. In our first pass, we are trying to get rid of bad options that would not lead to viable businesses. This is a site-selection exercise, so we are focusing on economic and social factors. If we can earn a profit in a place or it isn’t safe for us to keep our people or assets there, the potential choice is “knocked off” the list.
Second Pass: ?Operational issues. Now that we have a short list of candidates, the second pass STEEPLE will focus more on operational issues.?In the first pass STEEPLE, we were getting rid of bad options. In Pass #2, we are focusing on coming up with the best choice.?In the second pass, we are researching and collecting data that we think will help optimize our operation for the new environment. In the second pass, we are using SWOT techniques to compare two cities or regions. Pass #2 should yield a short list of viable sites.
Pass #3 extends the analysis to building a competitive advantage for our firm. Pss #3 is going to help us tailor our operation for the new operating environment. We are now using BEA to adjust our business plan and develop our unique competitive advantage. We’re doing our final STEEPLE analysis, but now we are digging down to the operating level and referencing specific people, firms, and situations.?This is where we deploy Porter’s 5 Forces model and other more sophisticated models. Our goal is not merely to replicate our other facilities, but to leverage the unique environmental characteristics of our new site.
I’ll start the practical demonstration of how to apply these techniques in the next post.?
Next:?Setting up a practical BEA analysis. Case:?Medellin Colombia
by Andrew Hupert, Professor of International Negotiation, Hult International Business School.