Which Strategic Complexities are Associated with Operating in a Global Environment?

1.0 Introduction

The global business environment is characterised by dynamism and uncertainty due to turbulence which brings complexity in strategy development and making strategic decisions. This makes economic activities influenced by forces of globalization and technological advancement that reinforce complexity of the operating environment for strategic managers. This implies that there are risks and challenges that result from such strategic complexity. In this article, PESTEL framework is used to show strategic complexities of operating in a global environment.

Section 2.0 discusses strategic complexities associated with operating in a global environment. From the discussion, conclusion is made in section 3.0. Then references are provided at the end of the article.

2.0 Strategic Complexities When Operating in a Global Environment

Strategy can be defined as the means for facilitating change and achieving long-term goals amidst competitive pressures, complexity and uncertainty. Complexity emanates from unpredictability, uncertainty and difficulties encountered by managers when operating in a global environment.

A business environment is global when barriers to trade across national borders are removed to enable increased integration of production/operation processes and capital markets, and flow of financial resources, technical innovation/technology, knowledge, labour, cultures, goods and services among different nations thus expanding international trade and economic growth. This implies that firms and nations will be interdependent making national borders virtually non-existent. Competition and markets have become global, facilitated by technological advancement, improved transport systems, and regional trade agreements among others. Therefore, firms and nations are interdependent and interconnected thus constituting a complex system. A complex system cannot be easily analysed, understood, influenced and its behaviour predicted. This makes strategic decision making difficult due to turbulence (rapid unpredictable changes) and uncertainty (unpredictability) of the system. Strategic complexities in such a system can be discussed using PESTEL framework as shown in the next.

2.1 Political Complexity

As managers plan to meet long-term goals, they are faced with political challenges. For example, they may not easily know whether the future political environment will remain stable in the long-term; whether tax policies will change and when. Inability to predict changes in such issues makes strategic planning complex due to political uncertainty. Let us take an example of a US firm operating in Syria. How would the managers predict that President Trump was to pull out of the Syrian war? How can the managers know the future direction and consequences of US-Syria relations? This shows that political issues are indeed strategic complexities encountered by managers when operating in a global environment. Similar to the US military withdrawal from Syria, managers may not know whether the US will remain a member of the North American Free Trade Agreement (NAFTA) under the current administration. Such uncertainty makes strategic planning and decision making complex. Similar uncertainty is faced by firms which have operations in developing countries where governments can collapse anytime or be in existence for decades. This is a challenge because the future of foreign trade regulations cannot be predicted since the future of a government, for example, in most African states, is uncertain.

2.2 Economic Complexity

It is difficult to predict the trend of economic factors. This is why economic forecasts are sometimes proven wrong showing that global economic environment involves a high level of uncertainty. For example, with the unsolved issues of Brexit, global firms are wondering whether they will keep operating in the UK past Brexit. This is why some firms have been relocating their headquarters to other European countries while others suspending their operations in the UK. Such strategic decisions are due to uncertainty surrounding the future of the UK, for example, whether interest rates will be favourable or unfavourable; inflation will be contained or will be disastrous; whether the economy will keep growing as predicted or there will be a depression. With such unanswered questions, it becomes very difficult to predict whether the country’s employment and trade policies will be stable and favourable for business in future. This shows that economic issues are among strategic complexities faced by firms when operating in a global environment. Firms that have operations in the UK may be wondering about how the exchange rate will be i.e. will the pound appreciate or depreciate against the dollar? Whichever direction the exchange rate will take after Brexit, there will be an impact on a firm’s financial performance. Since exchange rates can fluctuate rapidly and cause volatility in financial markets depending on news, uncertainty surrounding a country’s currency is a key source of strategic complexity for firms operating in a global environment such as McDonald’s, Toyota, Coca-Cola, etc.

2.3 Social and Cultural Complexity

Strategic complexity arises from sociocultural issues due to changes in lifestyle trends; demographics in different countries; consumer preferences; religious beliefs; and corporate social responsibility awareness. Whereas changes in such issues may not be rapid, changes in consumer preferences can change unpredictably due to fast information flow using social media. Cultural diversity is reducing since cultural values are no longer constrained by national borders. For example, African countries have started being influenced by Western cultural values and beliefs due to flow of information across national borders. This implies that a firm which formulates a strategy targeting African values and beliefs may be surprised to find that the marketed product does not receive customer acceptance as expected. Therefore, firms can make significant losses due to changes in consumer preferences and transfer of cultural values. It is becoming strategically difficult to decide whether a firm should customise or standardise its products due to diversity of consumer preferences within a given cultural group. Such diversity and uncertainty are drivers of strategic complexity faced by firms when operating in a global environment. Firms must plan globally but act locally to meet diverse customer preferences.

2.4 Technological Changes

Countries adopt technological innovations at different rates. This makes the rate of change and impact on firm operations ambiguous and a source of strategic complexity. For example, some countries restrict access to the internet as a way of controlling information flow. This may be for their governments’ political gain though they may claim to be due to security reasons and preserving a country’s cultural values and beliefs. This means that firms must determine whether a country is likely to embrace technological innovations and allow firms to operate normally in future. This can be difficult especially when the country’s political environment is itself unpredictable thus reinforcing uncertainty surrounding strategic decision making and choices.

Technology has facilitated e-commerce. E-commerce firms like Amazon have acquired superior performance and are now acquiring firms that operate using traditional in-shelf business models. This implies that technological changes have increased the intensity of competition in which a new e-commerce firm can become a fierce rival of another firm anywhere in the world. Therefore, strategic competitor analysis has become increasingly complex due to technological changes.

2.5 Environmental Issues

Strategic complexity can arise from environmental issues due to increased awareness about the need for green operations and sustainable production. Environmental activists like Greenpeace can adversely affect a firm’s reputation when it is discovered that its operations are a threat to the environment. Environmental protection, energy consumption and waste disposal laws may be internationally recognised but they are not enforced equally in all countries. This makes firms behave differently depending on a country’s environmental consciousness. Such diversity of environmental/ecological consciousness is a source of strategic complexity since some activists in a country can whistleblow and lead to boycott of a firm’s products/services globally. This is possibly since information can cross national borders in seconds through social media platforms like Facebook and Twitter.

2.6 Legal Complexities—International Trade Law

There are different legal systems operating in different countries. For example, Civil law, Religious law (such as Sharia) and Common law. Such diversity of systems is a source of strategic complexity since it may be difficult to determine which law will be operating in some countries. For example, with the establishment of ISIS in some countries, firms find themselves unable to determine whether either Common law or Religious law will be the country’s legal system in future or a combination of both. This constrains firms’ ability to make appropriate strategic plans, decisions and choices. There are instances when International Criminal Court (ICC) has issued orders that a certain sitting president be arrested and countries ignored them. This shows that firms which operate in a global environment face strategic complexity arising from diversity of international law in terms of enforcement.

2.7 Complexity of Global Supply Chain

This is not under PESTEL framework. However, it is important to note that flow of inputs (materials, information and knowledge) from original supplier through production/transformation process to the final user/consumer is complex. This is because global supply chains involve diverse and dispersed participants who are difficult to manage, coordinate and control in attempts to increase efficiency and lower costs. Firms outsource some inputs from suppliers whose operations are outside the firm’s control and direct influence. This constrains ability of managers to make effective strategic plans, decisions and choices. Therefore, global supply chains are a source of strategic complexity.

3.0 Conclusion

The global business environment is characterised by dynamism and uncertainty due to turbulence which bring complexity in strategy development and making strategic decisions. Strategic complexities that managers face when operating in a global environment are due to PESTEL issues (political issues, economic issues, sociocultural factors, environmental/ecological issues; and legal issues) and complexity of global supply chain.

The above mentioned article is a concise version of the full academic article that is available exclusively to the iQualify UK students in our Teaching Zone.

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