Strategy and Geopolitics

Understanding Global Complexity in a Turbulent World

Mike Rosenberg

• Publisher: Emerald Publishing Limited
• Year: 2017
• Print ISBN: 9781800719804, 9781787145689
• eBook ISBN: 9781787149786
• Topic: Business
• Subtopic: Business General
• Index: Business

Large western companies are accelerating their expansion into emerging economies, while relying on oversimplified frameworks to make decisions and complex matrix organizations to make things happen. When critical events do happen (such as terrorist attacks or civil wars), senior executives and the companies they lead are often taken by surprise. As the world shifts to a less stable geopolitical structure, only firms that can acquire a better capability to foresee and prepare for change will prevail over the long term. Strategy and Geopolitics provides a strategic framework that can help senior business executives address the challenges of globalization in this evolving geopolitical landscape. This book underlines the need to go beyond a simplistic understanding of different countries and territories: it discusses the geopolitical issues that can be the cause of success or failure in different markets; and it explores strategies for dealing with global and local complexity, as well as introducing innovative ideas on recruitment and organization.

Taken by Surprise

When extraordinary events occur on the political or geopolitical front which have an enormous impact on an industry or specific business, the reaction of business leaders is too often characterized by surprise and bewilderment. The nature of the event is sometimes so far beyond their planning horizons, or the scenarios they have contemplated, that they may find themselves with essentially no roadmap in place and are therefore forced to react to events on an ad-hoc basis.

Part of the rationale for writing this book is that – in many cases – such events do seem to have a certain inevitability about them, at least when examined with hindsight. The following examples have been chosen to illustrate this idea.

The first example is the outcome of the referendum to leave the European Union realized in the United Kingdom (U.K.), which includes the regions of England, Scotland, Northern Ireland and Wales, on June 23, 2016, which was 52% in favor of what has come to be called “Brexit”. Although polls had predicted that the vote would be close, the actual result came as a surprise to civil society as a whole, as well as the country’s business community, key trading partners, and even leaders of the Leave campaign itself.

The second example involves the tourism industry in the Middle East, and in particular in Tunisia and Egypt, both of which were hit hard by the Arab Spring, and are also under considerable ongoing pressure from Jihadist terror. Egypt, for example, was the location of the brutal killing in 1997 of 62 people at Deir el-Bahri near Luxor. By 2010, however, the tourism sector had moved on and enormous investments had been made in both Luxor itself and also the Red Sea beaches in and around Sharm el-Sheikh – only to see the cycle begin anew.

The third example is from Latin America and focuses on the specific case of the nationalization of Repsol’s 51% or YPF in Argentina. After Hugo Chavez came to power in Venezuela, there was a spate of nationalizations in the energy sector in the region and yet Repsol, to some degree, appeared to be taken by surprise by the actions of Argentina’s government.

The fourth example is Russia’s annexation in 2014 of Crimea and its conflict with Ukraine. What is interesting about this example is that while some international companies had responded to the Russian demand for consumer goods by investing in local production and acquiring local firms, others had not, and relied on importing their products. The renewal of intense geopolitical tension between Russia and the West, coupled with the enactment of international sanctions and Russian countermeasures, have created clear winners and losers.

After looking at the four examples, the last part of this chapter will discuss the common threads that can be seen in these cases, and will return to the question of the role of senior management with respect to such issues.

The idea that this book seeks to put forward is that a deeper understanding of geopolitical risks on the part of a firm’s leadership could have made a difference for some of the companies caught up in these events.

Brexit

The United Kingdom joined the European Union (E.U.) in 1973 some six years after its founding and 16 years after the signing of the Treaty of Rome by other European nations in 1957. A first referendum was held in the United Kingdom in 1975 and 66% of voters chose to remain in what was then called the European Economic Community.

Over the next 40 years, European integration proceeded in fits and starts with the landmark Maastricht Treaty of 1992 bringing a single European market into being and calling for additional integration of the different member countries. This included open immigration, common borders, and a common currency, the Euro, which was introduced in 2002.

The United Kingdom did not participate in the open border policy or the currency union but was bound by a number of the other measures enacted by the European government in Brussels.

From the point of view of business and the economy, most experts agree that being part of the European project has been of tremendous benefit to Britain. The country’s industry and business leaders were overwhelmingly supportive of the Remain campaign. These same leaders, however, appeared to take it for granted that the country would vote to stay in the EU despite opinion polls in the months leading up to the vote indicating it was too close to call.

Big businesses finally took last-minute steps to redouble their efforts in the weeks before the vote to make the positive case for Remain, but by then the messages of the Leave campaign had taken hold in the minds of enough voters to swing the vote toward Leave.

After the vote world stock markets lost an estimated $2 trillion of their value as they reacted to the news. U.K. companies were the hardest hit with Virgen Group, for example, losing a third of its value.¹ The Pound was also affected, dropping to a 31-year low against the U.S. dollar the day after the vote.²

What is striking about the Brexit story, and the belated response in support of Remain by business leaders, is that they did not appear to see it coming and seem to have been very ill-prepared for the result.

In hindsight the possibility that Leave could win seems obvious. For the last few years Nigel Farage, the flamboyant leader of the United Kingdom Independence Party (UKIP), had been constantly attacking Europe from his seat in the European Parliament and was particularly critical of Europe’s handling of the Syrian refugee crisis and the perceived negative impacts of Germany’s initial response to allow a massive influx of refugees for humanitarian reasons.

Another highly entertaining politician, former London Mayor Boris Johnson, was also very active in the Leave campaign and, while much of its claims were highly exaggerated or factually incorrect, they did play on a sense in the electorate that the country was out of control and that the U.K. was rapidly becoming a multicultural entity – a concept with which many people were very uncomfortable.

Deep-rooted attitudes about British sovereignty, and nostalgia for the “lost” Empire, became mixed up with dubious statistics and genuine resistance against immigration to produce the end result. Although it will take years for the details of Europe’s exit to be worked out, the immediate impact on businesses and the business climate has been very negative.

From a deeper perspective, it should come as no surprise that Britain finally decided to leave the E.U. Since Roman times Britain has been separate from the rest of Europe and its governments have resisted many aspects of European integration since the very beginning of the project in the 1950s.

The UKIP was founded in 1991 in response to the Maastricht Treaty which the Party felt was going too far in terms of a potential loss of sovereignty. As integration continued to advance, and the mechanism of the European government became increasingly slow, bureaucratic and complex; a growing number of politicians from the Conservative Party (colloquially known as “Tories”) joined the Eurosceptic camp.

What is interesting is that an eventual exit, in 2016 or whenever, was apparently contemplated seldom, if at all in business circles. If British industry had carried out detailed scenario analysis of what its exit from the European Union would mean, then they would likely have shown more vigorous support for the Remain campaign and, perhaps, the result might have been different.

The Arab Spring and the Tourism Business

Starting in Tunisia at the end of 2010, a series of protests and demonstrations rocked the Arab world, eventually bringing about changes of government in Tunisia, Egypt, and Libya; the civil war in Syria, and different levels of protests and civil unrest in more than a dozen other countries in the region.

When it erupted, the wave of protests caught the international community and business world by surprise, despite the fact that tensions in each of the countries affected were well-documented and had been discussed at length in the press as well as the intelligence community.

In Tunisia, where the initial spark took place, unemployment amongst the country’s youth, many of whom were university graduates, was over 30%³ due to the global economic crisis. In addition, people were angry about the outrageous behavior and corruption of President Ben Ali and his wife’s family.

Tunisia’s founder, Habib Bourguiba, had controlled Islamic fundamentalism and placed economic growth at the center of his agenda for many years, creating one of the most liberal and prosperous Arab countries. His successor, Ben Ali, followed the same path until greed and corruption came to dominate his agenda.

In Egypt, President Hosni Mubarak had become increasingly violent and arbitrary in his decisions over his 30 years in power. With about 25% of the Egyptian population living in poverty,⁴ people who knew the country well such as the English journalist John Bradley⁵ felt it was only a matter of time before the situation blew up.

According to Bradley, authoritarian governments in many countries in the region systematically protected elites and people close to the ruling family, while also supporting radical Islam and ignoring the aspirations of civil society.

When economic problems developed as a result of the worldwide financial crisis and other factors, the situation came to a head, provoking first protests and then upheaval. The wave of unrest that swept the region caused in turn further negative economic impact which hit the bottom lines of many organizations that had invested in these countries.

Egypt’s tourism business, in particular, took an enormous hit with the number of foreign tourists dropping from approximately 15 million per year prior to the revolution to just over 9 million today. International companies such as Hyatt, Accor, The Four Seasons, etc. had spent hundreds of millions on new resort complexes in Luxor and Sharm El Sheikh, only to see occupancy rates drop to single digits in some cases.

Across the region companies which had won contracts with the ruling parties and/or made significant investments were forced to scramble to make sure their expatriates and local people were safe and that their assets would be protected.

In Syria, an unprecedented drought that began in 2006 had impoverished the population and converted much of the country into a dustbowl. As the Arab Spring spread from country to country in 2011, Syrians took to the streets asking for relief. When the government responded with a fierce crackdown, the country eventually descended into a brutal civil war. The war has dragged on for five years, killed approximately 450,000 people,⁶ driven millions more out of the country, and devastated the economy.

In October 2015, a terrorist bomb destroyed a Russian airliner as it left Sharm El Sheikh airport killing all 244 people aboard, allegedly in response to Russia’s active support for the Syrian government. The attack caused international airlines to suspend traffic to Sharm El Sheikh, further damaging the region’s tourist industry, which had only just begun to recover from its collapse in 2011.

The region’s tourist industry had already been affected in 2015 after two attacks targeting tourists occurred in Tunisia. The first was in March when the Bardo National Museum was attacked and 22 people killed, and the second in June 2015, when a lone gunmen spent almost an hour shooting tourists on the beach in Sousse, killing 38.

While the geopolitical fallout from the Arab Spring and ongoing civil war in Syria will be discussed in some depth in Chapter 10, the idea that something was bound to happen in Egypt and other places across the region back in 2010 seemed likely.

What is most striking about this example, however, is that only a few years after the Arab Spring, the industry had gone back to business as usual until the next wave of attacks struck in 2015.

Repsol and YPF

In February, 1999, Hugo Chavez was elected President of Venezuela and his election was followed by the election of Néstor Kirchner in Argentina in May 2003 and Juan Evo Morales Ayma in Bolivia in January 2005.

Echoing past leaders such as Argentina’s Juan Perón, these politicians offered a brand of populist nationalism and personal leadership by appealing directly to the have-nots of Latin American society, and promising them a share in their countries’ mineral wealth.

After 100 days in office, Morales moved to nationalize Bolivia’s oil and gas sector and used increased tax receipts to bolster the country’s social services. In 2007, Chavez followed suit and nationalized majority stakes in the assets of international oil and gas companies including Total, Satoil, ExxonMobile, and ConocoPhillips operating in the Orinoco oil basin after having already nationalized the telecommunications and energy industries.

In Argentina, Néstor Kirchner had inherited a crushing $84 billion debt from his predecessor Carlos Menem. After first failing to reschedule the debt, he went on to unilaterally exchange it for new bonds leaving the country’s creditors with few options. After his death in 2010, Kirchner was succeeded by his wife, Cristina Fernandez de Kirchner, who followed her husband’s populist policies and made a similar bonds for debt exchange during her first year in office.

Repsol was formed in 1997 through the privatization of the energy sector in Spain and moved to increase its international prestige and overall size by the acquisition of three companies ...

Table of contents

• Cover
• Title Page
• 1 Taken by Surprise
• 2 Why Many Businesses Have a Hard Time Internalizing Global Complexity
• 3 A Managerial Framework for Making Sense of a Complex World
• 4 Europe Stumbles Along
• 5 North and South America: Locked in an Awkward Embrace
• 6 China’s Re-Emergence as a Global Power
• 7 Japan, Korea, and South East Asia: The Search for an Identity between two Giants
• 8 India at the Crossroads
• 9 Africa Rising: Will It Be the Next China?
• 10 The Middle East on the Brink of War and Peace
• 11 How to Develop a Resilient Business Strategy and Organization for a Complex World?
• About the Author
• Index