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International Business Risk

The average company invests heavily in risk-management. The multinational company - even more so. Robert S. Kaplan and Annette Mikes suggest that companies face three broad categories of risk: preventable risk, strategic risk, and nonpreventable risk.1

a) This framework suggests that all firms encounter preventable risk, internal factors such as an employees actions that will affect the organization's ability to achieve one or more of its goals.

b) A firm also encounters strategic risk; strategic risks factors are necessary risks that the company takes on in order to pursue new markets or other new strategies. A company may create many new products, most that are flops. They continue innovating, however, knowing that one or new products will become winners. Similarly, a company may encounter a new competitor in the market space. Strategic risks should be managed, but not feared - these are simply part of the risks of doing business.

c) The third category, unpreventable risks, are external risks that the firm has no control over. Firm's can plan for, and mitigate the effects of, these risks. These risks include events such as natural disasters or macroeconomic factors - such as the 2008 financial crises.

A business that competes globally and/or has a global supply chain may encounter risks above and beyond what the average domestic company must contend with. These risks can be classified under these three broad categories as well.

  1. Preventable risks in a global business include factors such as risks that result from international human resource management. This include an inability for the firm to properly manage people in different settings, and an inability for expatriates to learn, and become succesful, in new cultures.
  2. Strategic risks in a global business include business and market factors such as a failure to capture new markets. Businesses can not necessarily copy and paste a succesful business model from home, and expect it to thrive in new markets. Remember how Starbucks struggled, and ultimately failed, in Italy? When looking at the attractivenss of a new market, businesses need to remember to ask important questions such as whether people from different cultures going to want to buy their product. Businesses mitigate these international strategic business risks by taking advantage of a number of different modes of entry into foreign markets.
  3. Unpreventable risks are risks that a firm must try to anticipate, but may not have much control over once they enter a foreign market. Analyzing these risks before entering a foreign market is an important exercise to undertake to have a good sense of the attractiveness of the foreign market and ask the question "do we really want to go there?" Unpreventable risks in international business include things such as political risk (i.e. corruption, political instability, regulatory change, and expropriation risk), environmental risk (do you really want to build your office over a sink hole in Florida, for example?), and macroeconomic risk (things like the strength of the economy, and currency exchange risk).



References:
1. Kaplan, R. S. and Mikes, A. (2012). Managing risk: A new framework. Haravard Business Review

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