Risk management in normal situations relates to economic or financial change. For companies entering politically unstable markets in the Middle East, the concept gets a little more complex.
Faced with ineffective governance; political interference; pervasive corruption; supply chain disruptions; diminishing markets; uncertain tribal divisions; legal and regulatory inconsistencies and the threat of attack or kidnapping, doing business in some Middle Eastern nations can take Western managers deep into unknown territory.
In the Forbes’ 2013 list of the world’s riskiest countries in which to do business, six Middle Eastern countries – Afghanistan, Syria, Iran, Iraq, Sudan and Yemen – were rated at the most extreme end of the scale. For countries coming out of political turmoil, Libya, Egypt, Algeria, the situation is not much better.
But for businesses that take a risk (and survive), the long-term rewards in this rapidly expanding market can be high.
Working in war zones and politically volatile markets requires flexibility, local knowledge and a great deal of patience, says Armand Phares (MBA’77), Chairman and Managing Director of the Mercuphar Group of Companies, which markets pharmaceutical goods to Lebanon, Syria and Sudan.
Being flexible, innovative and having local partners on the ground is key to survival. People who know the region, the environment, the networks and the culture have more chance of avoiding trouble and are able to navigate through bureaucratic minefields - knowing which government regulations require immediate action and which tacit formalities must be followed.
It’s a matter of arming yourself with as much knowledge about the situation as possible, Phares told INSEAD Knowledge after a panel discussion on the region’s challenges at the 2013 INSEAD Global Business Leaders’ Conference in Abu Dhabi recently. To be able to determine when underlying tensions and conflicts might escalate to violent confrontations between groups or communities; and ensure that their corporations and decisions do not exacerbate them.
“They need to be aware of what is coming, how to avoid risky quarters and at the same time maintain a presence,” says Phares. “Millions of people survive in war conditions, there’s no reason that companies cannot.”
Innovating to survive
Businesses have to become creative in finding new ways to deliver goods and services to market and to manage a business in extreme and changing conditions.
“It’s very frustrating to be innovative in survival conditions - to innovate to maintain standards instead of innovating to improve quality and servicing,” says Phares. “But survival means you have to abide by the same good storage and distribution practices as if you were in a normal country.”
For Sam Barnett (MBA’97J) CEO of MBC Group, the region’s biggest media company, being innovative stretched to a cat and mouse game with former Libyan President Muammar Gaddafi, after the tyrannical leader shot out the company’s transponder to stop transmission of its 24/7 free-to-air news and current affairs satellite outlet, al-Arabiya. “It took down our whole transmission so our business just went dead,” Barnett told the Abu Dhabi conference. “We moved to another transponder and for several weeks we played cat and mouse with the Libyans as they would shoot us down and we’d move on. We only solved this when we put the al-Arabiya channel, which caused the offence, next door to Libya’s state TV, because when you shoot down one (transmission) you shoot down the whole lot.”
The cost to business can’t be exaggerated, Barnett says, noting the company has had to evacuate some of its Beirut operations to Cairo and then from Cairo back to Beirut, according to the political climate.
“There’s considerable cost and effort in trying to figure out what will happen next and making sure we’re not going to lose out business because of political whims. How you deal with this is to make sure you are flexible and nimble enough to change your long-term plans in an instant.”
Human resources is also an issue. MBC has lost 18 staff since launching in London in 1991. (The group moved its headquarters to Dubai in 2002). “Political risk in more developed markets is about tax changes or changes to the environment system; here it is much starker and can be really catastrophic.”
Another challenge is the diversity. The region’s commonality of language creates opportunities. But diversity of culture and thought, while creating a dynamic workplace, is fraught with danger.
“Here, diversity is not just a matter of who you put on the board, it’s at the very core of how every single person operates. We have people from all sides of all conflicts in the Middle East and if you don’t measure that with a degree of high sensitivity (towards both customers and staff) it can be a train crash. If you are over aggressive, I don’t think you’ll work very well in this region.”
Companies prepared to take the risk of moving to conflict areas should carefully assess their goals, notes Phares.
“You need a definite vision of where you want to go. Such a vision should definitely be orientated to long-term return because often, in the short-term, it’s not a good place to be.
“Looking at the future as potential business development and potential profit is a good way of assessing risk.”
After completing his MBA in the early 1970s Phares returned to Lebanon in the midst of civil war to take over the family pharmaceutical company.
“I didn’t go looking for a volatile situation, it wasn’t a choice to operate in a difficult region but managing that volatility became a proficiency which we are now using to move into similar markets. The countries where we go are definitely countries in which it is difficult to operate, where the potential has not yet been deployed, [because] in countries where it’s easy, nobody needs us.”
Working in partnership
Successful businesses are key to putting countries back together after war and contributing to socio-political stability. Both sides of any conflict know this, says Phares, and while there is always the risk of contracts being torn up when a new regime takes over, staying apolitical is relatively easy and the question of ‘taking sides’ is rarely an issue.
The Mercuphar Group works with governments in the countries in which it operates to introduce regulations that will assist in opening up distribution channels to high quality pharmaceuticals and limit the risk of parallel imports of fake, or low quality goods.
But government behaviour can be unpredictable. The United Nations Global Compact platform recommends that businesses looking to operate in countries with new or unstable regimes back up their risk management with statements of values, regular monitoring and reporting and initiatives that demonstrate commitment.
“Companies can act most effectively through partnerships or in coalition with NGOs and consortia of like-minded businesses,” it states, noting, “The key is to create a level playing field within the private sector so companies that fight corruption are not displaced by less ethical competitors.”
Transparency is also an important tool for making corruption more difficult.
“Transparency is not a choice; it really is a precondition to being active in the field and creating sustainable markets,” agrees Phares.
With markets expected to grow at ten percent for the next 12 years, the Middle East is an exciting and potentially profitable place to be. But businesses operating in areas of conflict need to tread carefully; mismanagement in conflict environments can threaten a company’s investment, damage its reputation and place its personnel and facilities at risk.
The important thing for companies is to endure circumstances for as long as possible with the same level of professionalism used in times of peace, notes Phares. “It’s very frustrating… and highly exciting.”