Business Strategy in a New Era of Uncertainty by Cesar Polvorosa, Jr.

Editor’s note: Cesar Polvorosa Jr. is a business school professor of economics, world geography, and international business in Canada. He is also a published writer in economics, business, and literature. This is a significantly revised and extended version of the article that originally appeared in The Canadian Business Strategist Magazine entitled Business Strategy in a New Era of Uncertainty.

True in 2019 for the Philippines and true now in general for the world as well.

There is a growing sense that the world is at a major crossroad. Critical global trends and developments indicate that the path ahead will be fraught with challenges of sluggish economic growth and geopolitical uncertainty. The much anticipated global economic recovery had been anemic and the Great Recession had degenerated into “secular stagnation” and “Greater Depression” - these terms recently used by renowned economists Lawrence Summers and J. Bradford DeLong respectively attest to the pervading air of pessimism. The persistence of the economic malaise has cast doubts on the continuing efficacy of traditional counter cyclical fiscal and monetary policies now in place for several years. Keynesian policies are making little headway in restoring growth and reducing unemployment. In the meantime, the Arab Spring has morphed into the Autumn of upheavals and internecine strife with ISIS emerging as a new and deadly peril. The crisis in Ukraine heralds years of confrontation between EU and NATO against a resurgent Russia. There’s also the Ebola threat in West Africa which is growing exponentially in virulence and scope. The West Philippine Sea and the East China Sea are wracked by tension over the territorial disputes between China and Japan, the Philippines and Vietnam. What is the significance of these developments in a global geopolitical and economic context?

The current global economic and political uncertainty stands in stark contrast to the prosperity of the late 20th century and much of the first decade of the 21st century. The 1980s were comparatively benign and the rapid economic expansion in the 1990s lulled especially North American managers and technocrats into complacency. In the boom years of the 1990s, the main agenda for global companies had been exploiting profitable opportunities from the vigorous U.S. market, the transition economies of East Europe, investment opportunities in China and the advent of the internet. The demise of the business cycle was one view gaining traction. Many young managers and professionals of that period had no memory or appreciation of a recession. The Philippines specifically during the administration of Pres. Fidel Ramos had been proclaimed as the next Newly Industrialized Country (NIC) in the making. The global economy would stride into the new millennium with sustained growth and rush headlong into a future of peace and prosperity guided by free markets and advanced technologies.

The New Normal

Uncertainty or volatility is not a novel experience for the world economy which had been historically characterized by business cycles or the periodic ebb and flow of economic activities. Indeed, the 1930s was the era of the Great Depression. The eminent economist, Joseph Schumpeter proposed the idea of a “creative destruction” or the process where economic progress is achieved through the creation of new and better technology at the expense or destruction of obsolescent technology. Companies have historically been confronted by the challenge and opportunities of the emergence of new technologies and disruptive effects of innovations. Thus, a manufacturer of pagers that do not adapt to the era of cell phones is doomed to extinction. Economic progress under Capitalism is therefore necessarily disruptive.

The dot com bust at the turn of the 21st century was a rude awakening and the 9/11 attacks came as an unprecedented traumatic shock. Though economic recovery returned there was always now the heightened national security fears about terrorist plots. Finally, the prolonged Great Recession ended any semblance of business normalcy for while the expansions and contractions of the business cycle occurs periodically the economic weakness and uneasiness since late 2007 had been unusually long and severe. The unsettled environment has become the new normal. We have entered a new era of global uncertainty.

The New Era of Uncertainty and how can the Philippines Cope?

How different is this new era of uncertainty? Profound and extensive interconnectedness engendered by globalization and advanced telecoms indicates greater potential for depth, breadth and speed in the transmission of instability. With the maturation of the internet and I.T., external shocks will rapidly ripple across global markets intensifying the potential for panic and knee jerk reactions. Financial risks are magnified due to over leveraging in response to the wave of deregulation. The spread of globalization has created fierce and more numerous competitors.

It may be tempting to dismiss the relevance of the feeble world economy and the role of global uncertainty for the Philippines as the country had been achieving heady economic expansion since 2010. But the Philippines cannot decouple itself from the state of the global economy in terms of the country’s engagement with world trade, investments, OFW deployment, reliance on remittances and the prevalence of conflict and instability may eventually curb the country’s economic growth.

How can the country cope with the greater uncertainty? In general, a country’s economy reduces its risks in an unstable environment by adopting more prudent financial and economic policies. We can analyze the necessary responses from both micro and macroeconomic perspectives. Let’s start with the micro level which refers in this case to Philippine firms:

Philippine Companies in the Era of Uncertainty

How are businesses affected and how would they cope with the highly uncertain business environment? A sudden bout of volatility will reflect in a decline in stock market prices. A company stock will be hit as part of a general negative market sentiment and the perceived specific adverse effects on the company through the operations side or the costs of doing business (CODB) and via the output side through their revenues and markets.

On the operations side, the CODB that are most susceptible to short run, violent fluctuations are foreign exchange and interest rates-factors that trigger rapid increases in prices of oil and raw materials and depreciation of the domestic currency. Inimical effects on firms depend on their sensitivity or vulnerability to changes in these specific variables. Interest rates would affect credit costs which impact all firms. For exchange rate fluctuations, the most vulnerable would be firms dependent on raw materials imports, semi processed products etc. used in their supply chain and exchange rate losses from off shore operations as well as companies that use oil or gas for their production. Thus, investors react as the turmoil moves from the financial markets to the real sector i.e. from Wall Street to Main Street.

On the output side, turbulent economies and politics can severely impact the market of the company. Thus, Greek companies got a double whammy not only from the domestic fiscal crisis but the tanking of demand for shipping and tourism services- the two major pillars of the Greek economy as Western European economies went into a tailspin. Across the Mediterranean, some MNCs operating in Libya and Syria had been forced to leave when those countries were wracked by civil war. The Canadian company Bombardier’s planned JV to manufacture airplanes in Russia is on hold due to the deterioration of relations between Russia and the West.

The airline industry illustrates a business that is buffeted by the headwinds on both input and output side. Battered by the free fall in air travel from the post 9/11 period, airlines?then stalled from a confluence of both high oil prices and the Great Recession. Meanwhile, the industry deregulation encouraged the growth of budget carriers that challenged the legacy carriers.

What can businesses do in this new era of uncertainty?

1. A Strategic Mindset: Acceptance

In the new era of uncertainty expect the unexpected. Managers and professionals need to recognize that rare, major, unforeseen events or “black swan” events as conceptualized by statistician and scholar Nassim Taleb can occur. The classic event to illustrate the black swan event had been the massive tragedy of 9/11 but they can also refer to the emergence of disruptive technologies such as the computers and internet. The acceptance of the likelihood of black swan events facilitates the planning and response process as it pushes the organization to be dynamic and open to changes. The organization needs to accept that incorporating seemingly irrational scenarios is a rational exercise. The strategic mindset of acceptance of black swan events is an impetus to undertake an uncertainty preparation framework for the organization.

2. Effective Environmental Scanning

Knowing that the firm is operating in a new era of uncertainty encourages the organization to undertake a thorough and effective environmental scanning.?There will always be pure black swan events (e.g. 3/11 Tsunami in Japan) but there will also be developments whose possible outcomes can be incorporated into various scenarios such as the trajectory of the Eurozone crisis, the rise of mobile devices, Chinese economic growth, the Syrian and Iraqui crisis etc.

3. Due Diligence and Analysis

Having engaged in a meaningful environmental scanning, the company can examine in greater detail, analyze and evaluate various scenarios. Thus, the company can use sensitivity analysis that focuses on assuming a wide range for specific variables to assess their consequences on the firm. The strategic mindset of acceptance of the improbable becomes relevant as e.g. while oil prices may reasonably reach a high of $150 per barrel, incorporating an unknown extreme event may mean assuming a maximum of $175 per barrel and gauge how it may affect the firm.

4. Strengthen the Business

While management should try to strengthen their company at all times, it becomes an imperative in an era of uncertainty. A firm with a stronger balance sheet will be able to better withstand any external shock and to be simultaneously opportunistic such as Apple Computers with cash of $159 billion in 2013. Such a staggering cash hoard is a defensive strategy to insulate the company from a liquidity crisis but it is also an arsenal to empower the company to engage in necessary strategic acquisitions.

A prudent, realistic expansion program is vital especially in the current era of uncertainty. For example, the downfall of the iconic Pan Am can be partly explained by the acquisition of too many 747s. It ended up with a lot of empty seats when the oil shock of the mid 1970s struck- certainly a black swan event. Other measures include a tighter monitoring and review of both suppliers and customers to determine those who are most vulnerable to financial shocks.

5. Enhance Competitive Advantage

Whether the challenge arose from market contraction, the urgency to supply a new market, a huge spike in the CODB or a convergence of various elements, the dynamic company seeks its competitive advantage as the basis for its sustainable position in the economy.

An agile and flexible company will perform well even as it operates in the era of uncertainty. The nimble firm can act speedily and decisively in responding to quickly unfolding black swan events. Firms can restructure to become flatter organizations. Often, the lines of authority and decision making are difficult to reform as they are embedded in the corporate culture. When Toyota had to grapple with major quality issues in its cars it was criticized for its slow response though this was in accordance with the Japanese management practice of consensus management (ringisei). Consensus is time intensive and while it may be optimal during stable periods, it may become a stumbling block during periods of rapid developments, uncertainty and volatility.

Some companies rely on subcontracting, outsourcing and offshoring to keep costs down. However, improper implementation can hamper the formation of a dedicated in-house pool of experts and lessen control on the production process e.g. supply chain issues delayed Boeing’s 787 project because of over reliance on subcontractors.

?6. Stay the Course but be Flexible

With unexpected changes it may appear timely to question the strategy of the organization, if not its very mission itself. However, unless there’s a fundamental change in the business environment that adversely affects the competitive advantage of the company it is best for it to stay the course. The challenge for management is that such clarity of adhering or changing strategy may only come after some period as the contours of the fluid environment becomes definite. An optimal approach for the company can be to adopt an “emergent strategy” which as propounded by business scholar Henry Mintzberg means being flexible and opportunistic while continuing to stay the course on its main path for as long as a “game changer” has not occurred.

Strategies at the Philippine National Level

?At the macroeconomics level these are just a few of the policies and strategies that the Philippines can adopt. These are not meant to be exhaustive nor detailed due to space constraints.

?1. Flexibility in the Comparative Advantage Theory

The Comparative Advantage Theory argues that a country should specialize in the production of a product or service where it has relative cost advantages. It is the foundation of modern international trade but it is not the be- all and end- all of international economic relations especially as it assumes an open international trading system- which is not a guarantee in the Age of Uncertainty as well as uniform tariffs and trade regulations. A country needs to prioritize objectives of attaining food and national security as well as recognizing that comparative advantages are dynamic i.e. they change over time and a country and its government can influence where its comparative advantages will be in the future.

A notable case is that of Japan’s rice production whose cost is higher than the average world price but it persists in growing rice to enhance its food self sufficiency. This is directly relevant to the Philippines for if a trade blockade is imposed on the country or there is a major disaster that befalls the major supplier the country will be in turmoil if not literally starve. The objective of improving food self sufficiency is practiced by many industrialized countries.

A Japan METI (Ministry of Economy, Trade and Industry) official noted that if Japan only followed the standard comparative advantage theory then the country would remain just a producer of silk. Nobel laureate Joseph Stiglitz noted that 40 years ago the comparative advantage of South Korea was in rice production. Instead, South Korea deliberately built up its military industrial complex since then as part of a comprehensive industrial policy and now the Philippines is purchasing its FA50s.

There is a dynamic comparative advantage i.e. the relative cost of resources change over time and therefore those comparative advantages of countries also change in the long term and can be shaped – though this is not a license to abuse the principles of comparative advantage. China’s comparative advantage was in very low cost labor but as their wages increased (40% up in recent years) it’s no longer highly labor intensive industries where they are competitive. They prepared for this day. China’s comparative advantage is shifting to higher value added services as there is a signal improvement in their skills, infrastructure, logistics and supply chains. A new technology Chinese made passenger plane (Comac C919) will soon take off and Boeing anticipates that China will be a major competitor in the widebody market in 10 years.

2. Strengthen and Diversify Political Alliances and Diplomatic Initiatives

The Philippine armed forces are among the weakest in South East Asia which is now a critical issue as the country is being confronted by an increasingly belligerent and growing superpower. Even if the Philippines embarks on an ambitious military build up it will take several years to achieve a credible defense capability. The military capability upgrade is not only for external defense but it is also important to attain enhanced sealift and airlift capability to protect the overall interests of the country that includes the evacuation of Filipinos during times of natural calamities as well as overseas workers and nationals from crisis zones and providing supplies.

Forging closer diplomatic relations with other countries especially those with common interests in the freedom of navigation in the Asia Pacific region strengthens the position of the country in negotiations as well as seeking out sources of support during times of crisis.?In the Asia Pacific region closer relationships and cooperative agreements can be forged with Japan, Vietnam, Australia, Indonesia and India. In the Middle East the emerging key player is Turkey. These diplomatic initiatives and alliances need to be deliberately programmed and strategized so that they are not construed as hostile and provocative while being an effective deterrent for the country to avoid being out maneuvered and bullied by stronger powers.

3. Strengthen and Diversify Economic Ties

A country also lessens its risks and mitigates economic vulnerabilities by diversifying its economic relationships. For the past decades the Philippines had been over reliant on its economic relationships with the U.S. and Japan. The country has underdeveloped economic ties with India, Latin America, Sub Sahara Africa as well as Canada. The country needs to prepare itself for the post Bretton Woods global economic landscape that is taking shape and often referred to as New Bretton Woods or Bretton Woods II. There may be opportunities in such initiatives as the New Development Bank being established by the BRIC countries by 2016 as it can complement IMF resources. Not only are the conditionalities of the New Development Bank expected to be less stringent than the IMF but its mere availability leverages the bargaining position of the Philippines as a borrower.

4. Strengthen and Diversify the Domestic Economy

Likewise, a country can better withstand the volatilities in world markets and manage international geopolitical risks by strengthening and relying more on the domestic economy for its sources of growth and development. Whereas city states such as Singapore and Hong Kong have no choice except to rely on international trade to expand their economies, the Philippines has a potentially big domestic market of 100 million. Strengthening the domestic economy does not mean neglecting exports but may require a more diversified export mix to spread out the risks of a down turn in demand among specific product lines and markets. Globalization is in fact under threat in the current era of uncertainty and it’s possible that we are past the peak of globalization. As the local economy develops, many OFWs will elect to stay or go home to the Philippines as they find jobs with local businesses that will also reverse the brain drain of previous years.

Inclusive growth as measured by jobs growth and declining inequality is not only vital for long term sustainable growth and progress but it also leads to greater social cohesion and national unity. The call for sacrifices that may take place during times of crisis is facilitated and support for the national agenda is easier to muster with national unity and cohesion.

5. Prudent Macroeconomic Management

The country’s sound and prudent macroeconomic management has resulted to stable fundamentals: manageable inflation and reasonable interest rates, gradually improving fiscal position and sustainable BOP even while the country has been achieving an annual average of 6% GDP growth since 2010. The country has achieved considerable progress in the stable foundation of the economy for its sustainable growth. The economy withstands the turbulence of a worsening economy with stable financials.

The cases of the U.S. and Canada present interesting contrasts. The U.S. by about 2001 had a budget surplus but that rapidly reversed with its massive expenditures in the Iraq and Afghanistan wars. With the advent of the financial meltdown of 2007 – 08 it was already in a precarious fiscal position. In contrast, prudent Canadian fiscal management became a strength when it needed to jump start the economy during the Great Recession.

At the Cusp of Structural Change

The prolonged crisis arising from the financial meltdown of 2007 – 08 has naturally led to the present malaise and even soul searching among economists and policy makers worldwide about the effectiveness of the present capitalist system. Why is it taking a long time to mitigate the high unemployment rate? Why is it difficult to restart the engine of the world economy? Can it be because of the drag of greater automation on employment? What will be the ultimate consequences of growing inequality? These are some of the issues that will be investigated in future articles. It is now abundantly clear that the past half decade was no mere cyclical downturn but that we may be undergoing the birth pangs of a new Order. The world is at the cusp of structural transformation. One critical lesson of history is the resiliency of economies and societies. The 1930s to 1940s were years of the Great Depression and the Second World War but these were followed by the boom years of the 1950s to 1960s. The tumultuous 1970s likewise became forgotten with the wealth of the 1980s and 1990s. We are in a new era of volatility and uncertainty in the wake of the Great Recession. The best case forecast point to fragile global growth up to about 2020 laden with risks in the context of a highly fluid economic and political situation. It is not clear what the new Order will be though there are various scenarios including that we may simply indefinitely drift but history shows that stability and prosperity will eventually return. It is the strategic imperative for the Philippines and its enterprises to adapt to the dynamics of the environment to enhance long term survival and achieve prosperity.

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