Setting Strategy in Egypt’s (and Other) Shifting Sands: A Four-Part Approach
by Vinod K. Aggarwal and Simon J. Evenett
Developments in the Middle East — first the removal of long-time Tunisian President Zine el-Abidine Ben Ali in January 2011 and now Hosni Mubarak’s stepping down in Egypt — suggest that authoritarian regimes in the region are not immune to “people power.” To forestall unrest, Jordan’s King Abdullah II removed his cabinet, and Yemen’s President Ali Abdullah Saleh has committed to leave at the end of his term.
Although it is too early to tell if Tunisia and Egypt will prove the exceptions rather than the rule when it comes to dramatic political transitions in the Middle East, multinationals operating in the region have already faced significant losses. Thomas Cook Group, the tour operator, indicated that the cost of the Egyptian and Tunisian uprisings would be on the order of $32 million and Tui Travel has warned it could lose up to 30 million pounds. Lafarge, the French cement group, saw its share price fall four percent in one day. Faced with such disruption, multinationals have responded rapidly in some respects. Many shuttered plants and flew home expatriate staff and families. Consultants came to their assistance with solutions to short-term concerns ranging from moving out cash to halting expansion plans.
Such actions are important, but the longer-term question still looms: How will firms deal with the ongoing political risks of operating in the region? There is a danger that even after dealing with the crisis, managers will continue to give short shrift to their nonmarket and other fundamental corporate choices.
Worse, some managerial reactions are myopic — addressing current exigencies but failing to consider future waves of change. By now, it should be clear that, like financial crises, political turmoil can spread quickly throughout a region. This means that senior managers need to anticipate potential contagion — and take steps before crowds flood the streets and start demanding the overthrow of more incumbent leaders.
What is needed now are well thought-out nonmarket strategies — beginning with a recognition that a nonmarket strategy is much bigger than litigation and purchasing political risk (though both are valuable). It also involves considerations of coalition-building, lobbying, participation in advisory committees, and more.
Managers often think about strategy in narrow terms, engaging consultants to advise on such questions as divisional structures and the restructuring of reporting lines. Meanwhile, they often fail to think deeply about truly strategic questions, involving political risk, like: how should we supply foreign markets? As a result, we tend to see herd behavior — as we have in the rush to choose foreign direct investment strategies rather than make a careful calculation of how it might work to supply markets through licensing or direct exports. The preference for following the crowd is even greater when (as with foreign direct investment versus alternative routes to market) a choice is easy to communicate. What manager relishes explaining to their board that they have decided not to invest in an 80-million-person, fast-growing, emerging market like Egypt (let alone an even bigger market like China)? Thus managers play it safe, choosing to replicate rivals’ strategy and, ultimately, to earn close-to-the-mean returns.
Instead, managers should develop their strategic responses to political transitions using a four-step process:
- First, managers need to develop transition scenarios for the countries in which operate — even relating to the unlikely or low-probability events. This is especially important in situations where one black swan (rare event) raises the likelihood of a subsequent black swan. Again, once it starts, political turmoil tends to spread across borders.
- Second, managers need to assess how alternative developments will impact their specific business operations based on the sector they are in, the size of their investment, the stage in the value chain and alternatives, and their existing strategic objectives.
- Third, firms need to consider their nonmarket strategies vis à vis their home government.
- And fourth, they need to develop an integrated market, nonmarket, and organizational strategy toward the countries facing political transitions.
For veteran business observers, some of this may carry some very negative connotations. They will recall, for example, how ITT was implicated in overthrowing the Allende government in Chile in the early 1970s; and they will note the not-unfrequent practice of firms bribing dictators to secure key business concessions. Yet there is a world of possibilities apart from such blunt approaches, which indeed can be as ineffective as they are unethical and illegal. Pursuing the four-part approach we suggest can yield a coherent mix of techniques adding up to a far more sophisticated strategy.
The Case of Egypt
Let’s apply this four-part approach, then, to the problem of setting strategy for Egypt. In practical terms, what kinds of analysis would it lead firms investing there to conduct?
In terms of scenario planning, firms would think about alternative paths. Among these is a strong role for the Muslim Brotherhood, a military takeover, continuing chaos, or a more benign outcome with a new constitution and organized elections that bring stability to the country. Whichever of these or other options materializes, there are some clear political-economic issues that will persist. As the Council on Foreign Relations’ Isobel Coleman notes, Egypt will continue to face three key problems no matter who comes to power. These include tremendous income inequality, rapidly rising commodity prices (Egypt imports the largest amount of wheat of any country in the world), and poor educational outcomes. On the latter score, the fact that college graduates have a 30% unemployment rate, in contrast to the illiterate segment’s 5% rate, clearly signals further turmoil ahead.
Next, firms would assess the likely impact of alternative scenarios on their operations. For example, it is likely that food importing firms, providers of medicine, and other necessities are likely to continue to operate with success. By contrast, tour operators will have a long period of recovery, but ultimately are likely to do well as stability returns to the country. With respect to other firm factors, those with close ties to the Mubarak regime that have secured concessions as political favors and who did not build up ties with other key elements of civil society will be hurt by his departure. Those involved in building and land deals may also face significant turmoil. Here, the degree to which they are involved in joint ventures and with whom will be the key variable.
At the level of home country strategy, some tour operators have been working with the Foreign Ministry in the UK to discuss how that government issues travel warnings that clearly impact their business. In terms of working with the US government, we suspect that for now business is likely to receive a cold shoulder. With key high-politics issues of the peace agreement with Israel in question, and concern with a radical takeover, the US is unlikely to do much to assist firms in the near future. By contrast, Chinese firms may find that their government is quite amenable to helping them to position themselves in another key long-term market with a huge population of potential consumers.
Finally, in terms of host country strategies, the importance of developing a market strategy that focuses on the poor is crucial given the huge underclass in Egypt. As C.K. Prahalad noted several years ago, multinationals can both serve a key market and make profits by serving the “bottom of the pyramid.” With respect to nonmarket strategy, using local staff to build ties to groups other than Mubarak’s coterie is critical. Given Egypt’s dramatic unemployment problem among the educated, any efforts to help promote jobs and training for graduates to make them more marketable with have important medium run benefits for companies with a long-term commitment to the Egyptian market.
* * *
The issues we are discussing here are central not only to an Egypt market strategy but to a broader re-evaluation of how to supply foreign markets. As we have argued, firms need to consider political risk in addition to the traditional factors that make foreign direct investment attractive: low labor costs, closeness to the target market, access to key raw materials. In many cases, simply following others into emerging markets with FDI may be a mistake.
Unless firms systematically evaluate the options of licensing products or exporting directly from their home market (or nearby countries) they may be in for more rude shocks in the wake of falling authoritarian regimes. Perhaps one longer-term consequence of the re-emergence of political risk in emerging markets is the greater resort to arms-length means — exporting and licensing — to supply foreign customers. Preparing for those rude shocks, then, need not result in retrenchment from emerging markets.
Also published on the Harvard Business Review