Although 2019 looks like a year of solid growth and attractive opportunities for MNCs, it’s also full of both short-term and long-term risks, which are not only acute, but also deeply interconnected in a way that is particularly problematic for multinationals with broad geographic exposure. As a result, while we suggest companies should take full advantage of pockets of opportunity in 2019, they also need to be very careful about their risk management strategies and put those in a much more central position than usual as part of their 2019 planning. Ultimately, we’re recommending that companies build additional resilience within their businesses now, before they get hit with significant disruption, and to do so in a way that goes beyond “business as usual” given the severity of potential risks. But what does resilience mean, especially in the current environment? We believe there are eight key ways in which MNCs should approach it in the context of unpredictable trade policies, volatile currencies, changing credit conditions, and disruptions to supply chains.
- Build country portfolio resilience: Pressure test where your investments are concentrated geographically and whether that creates systematic exposure to either risks that are the same (ex. Oil exporting markets only), or risks that are interlinked (heavy exposure in markets that are all at significant risk of currency devaluations that can be triggered by several of them having currency crises). Ensure that you are identifying which markets are insulated from which risks and how strongly, and are building that into your investment plans as well as downside scenario thinking. If some of your core markets do get disrupted, who would pick up the slack? What would they need to make that happen? How quickly would they be able to accelerate performance? Building market portfolio resilience would require knowing not only where the downside risk is, but where you also have the biggest upside opportunity
- Improve cost management: Given the risk of rising operating costs through new taxes across many markets, many price sensitive customer groups, and currency volatility, cost efficiency would need to become an even higher priority in 2019. This is particularly key in countries where shifting dynamics could also create competitive opportunities but require marketing or product investment that needs to be funded. Additionally, helping key distributors improve their own cost management practices and overall financial management savviness can help protect them from volatility and increase their own resilience in turn
- Build resilience into your supply chains: As trade war risks loom, supply chains optimized for efficiency now need to be optimized for resilience. This means not only adjusting them to reflect risks of US tariffs on a range of countries and products, as well as counter-tariffs, but also creating more optionality globally. Eventually, this may spur investment into local manufacturing where that makes sense – a conversation worth having during 2019 planning. It’s essential to understand your exposure even in markets that don’t seem to be obviously linked to trade wars, as well as to think through potential supply chain exposure for key customers whose performance may deteriorate, affecting your business down the line
- Find alternative revenue streams: While demand opportunities are still strong in a range of segments and geographies, that can also change quite quickly. Firms that build resilience are looking at creating alternative revenue streams that can compensate for problems in their core offerings. For example, leading multinationals we work with are investing in monetizing their value-added services and branding them to turn them into independent revenue streams. We also see alternative financing options that are capturing customers that otherwise would not be making purchases because of high up-front costs, for instance by leasing access to expensive capital equipment in novel ways
- Make sure your distributors are fool-proof: Investing in your distributors is always important, and our global benchmarking analysis points to meaningful revenue and profitability increases for firms that systematically build distributor capabilities. But it becomes essential when you have a highly unpredictable, volatile environment. Then you need distributors who excel at financial management, inventory management, demand planning, and are quick to react to changes on the ground, as well as to communicate those back up to you. Investing now in helping partners build these specific capabilities can get you ahead of competitors, and protect you from the risk of disruption caused by distributors struggling or even going bankrupt
- Diversify your customer segments: Over the past few years, we’ve seen companies with product offerings concentrated in mid-priced segments struggle in the context of currency volatility and price sensitivity where aspirational customers traded down. At the same time, we’ve seen fantastic successes for companies that have identified more narrow target segments and gone after them with very tailored offerings. To build resilience within your business, you need to identify whether there are segments of customers who are either untapped or underpenetrated and identify those that are most resilient to external shocks. These of course could be premium customers, but not only – especially if you have a strong, differentiated offering that solves a real problem. These then create buffers against drops in your core markets and while they can’t compensate for broad category declines, they can provide a cushion that’s invaluable in times of demand volatility
- Improve your product portfolio optionality: To be able to go after more diverse customer segments, you need the right product portfolio. We see companies particularly exposed to external risk in 2019 if they have products that are relatively commoditized, and that are shipped from developed markets and have relatively low levels of local tailoring. To the extent that it’s possible to source products that are better tailored to local needs, preferences, and shifting use cases, be that new innovative products, or maybe even older or stripped-down models from other emerging markets, or to complement existing standard products with tailored value-added services, companies should explore these options.
- Strengthen your local teams’ scenario-building skills: To manage disruption on the local level, you need to be able to imagine, anticipate, and manage it. While we see many talented local teams being very flexible in fast-moving environments, they sometimes struggle when they face a crisis that’s novel to their country or their personal experience. Successful businesses we’ve worked with proactively bring expertise from other emerging markets to complement existing skills – for instance bringing managers from South Asia into the GCC as customer demands in the Middle East shift in new ways. But we also see them investing in local teams’ scenario-building capabilities through coaching and simple frameworks that enable local teams to imagine simple alternative scenarios and think through their reactions to those, for instance in terms of pricing, sales management, or distributor management.