International Diversification - hedging risk & uncertainty

Ed Marsh | Aug 20, 2012

Anticipating "What" & "Where"

If you own a business, you've almost certainly signed personal guarantees.  If you've put your house on the line, my guess is that you don't just float along letting business happen "to you."  (Although sometimes the crush of daily priorities can erode our focus on strategy.)  So if we're tracking each other so far, then I'll go further out on the limb to suggest that you probably spend time mulling over big questions like what events could occur that would either damage your business or open new opportunities, and where (geographical or industry) you should be focused and less active in an effort at positioning according to the events you consider likely and relevant.  Diversification is probably a metric you track.

If not...let's talk strategy.  If so, then hopefully international diversification is an element of that - and as domestic and global markets evolve that could prove to be hugely important.

Anticipating "When"

But knowing what and where is only part of the question.  As the old investing expression goes "It's easy to go broke being absolutely correct, but just early."  Equally important is anticipating "when" and that's the rub.  Accurately predicting when is a fools game.  It's nearly impossible.

Two recent articles (Business Monitor International's @businessmonitor  Risk Watchdog All About Timing: Why It’s So Hard To Predict The Timing Of Future Events and John Mauldin's @JohnFMauldin How Change Happens) are timely reminders of the challenges business executives face in discerning the potential events and consequential impacts their businesses will face.

Risk Watchdog @RiskWatchdog takes a commercial tact, essentially outlining the inherent limitations they face in providing precise forecasts of geopolitical events for their readers and clients.  Big events can occur unpredictably.

Mauldin draws on a scientific approach (with reference to a fascinating book) and reaches similar conclusions - but takes a step further and posits why.  Understood as a physics problem, it becomes clear that complex systems are predictably unpredictable - that increasing complexity leads to instability which is a clear indicator of an impending crisis, but that anticipating the timing or origin of the ultimate trigger is literally impossible.

Both argue that complexity is a reality, and by definition an element which exceeds our analytical ability to overcome.  The bottom line is that we just can't foresee many major events, anticipate their magnitude, forecast the implications or guess the timing.

Risk vs. Uncertainty

Once you accept that ultimately many of the events which will impact your business are beyond both your ability to control or predict, then the next step is to distinguish between "uncertainty" and "risk."  The former is ubiquitous - the latter is where the potential outcomes which are uncertain actually touches you and impacts your world.

You can't control the uncertainty, or the uncertain outcomes.  You can, however, largely control your risk.  You do this not by eliminating risk (of course that's impossible if you don't know precisely what will happen, where or when) but by limiting exposures in areas of particular uncertainty and complexity, and diversifying across other areas - particularly those where bigger trends and themes reasonably assure a prompt reversion to norm after unpredictable deviations.

Implications for your business

Too much theoretical rambling already?  OK.  Then what does this mean for your SMB here in the US?  That's point number one.  Yours is an SMB in the global market, not just in the US.  International diversification is one of the most effective steps you can take to insulate your business from the unpredictable.  

But international diversification doesn't mean simply the US and China, or the US & Mexico - rather it means identifying and actively participating in multiple markets (and increasingly these may be metro areas - details here and here - rather than countries, trading blocs or continents) where compelling trends will prevail long-term.  Reasonably one could participate in Southeast Asian, African, South Asian, Latin American, Eastern European, Middle Eastern and multiple North American markets and simultaneously realize the benefit of vibrant growth AND diversification.

The trends you can bank on (and build a stable business upon!)

This doesn't happen accidentally though.  Functional international diversification requires a strategic approach and a long-term commitment.  And certain trends are appropriate guidelines in creating that strategy.

At a high level these include:
  • demographics
  • US Government geopolitical policy (currently favors ASEAN and Africa)
  • technology which enables enormous consumer growth and affluence
Have you made these central to your market planning?  If not we should talk.  Contact Consilium Global Business Advisors to discuss the strategic international diversification of your business growth plans.

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