When Opportunities Lie in Risky Markets
What if you discovered an outstanding opportunity to create value — but it was in one of the most conflict-driven, corrupt, poverty-stricken countries in the world? Most organizations simply walk away. But Wharton associate professor of management Witold Henisz finds that some companies are managing the risk well, and they have the profits to prove it.
"Chevron is not only working in Angola," says Henisz, "but they're investing billions of dollars in the country. Obviously there are serious downside risks when you're operating in a place with an unstable government. Yet there is an enormous scope of projects that never happen because too much of the focus is on that downside. It is possible to manage the political and social relationships needed to succeed, and the companies that are managing them well, Chevron being a great example, are enjoying the tremendous upside associated with that risk."
Lesson in Real Time
Leaving large value-creating opportunities on the table because the risk seems to outweigh the potential benefit.
Use new, more sophisticated, models to manage that risk and reap sizable rewards.
Chevron's recent 1.5 million dollar agreement with Angola's Ministry of Education to expand a Master Plan for Teacher Training is just the latest investment in the African nation. Over the past two decades, Chevron has spent 37 million dollars in various education projects. But the majority of the company's expenditures are designed to build local capacity that is currently lacking. A short-term financial calculation would indicate bringing in mechanics from the U.S. or South Africa on short-term assignments. But Chevron sees the medium- to long-term benefits of running a mechanics training program to build up local capacity, not just on moral grounds but also to gain political supporters.
As it invests in the country, as Henisz witnessed on a recent trip to Angola, Chevron is also spending billions on an offshore liquid natural gas facility. He notes, "It doesn't matter how good Chevron's engineering plan is and how good their financial plan is for that facility if they don't have and maintain the political and social support of the Angolan government and of the community around the pipeline. If they're on the wrong side of that risk, they could lose billions of dollars in shareholder equity.
"There is greater sophistication in the way companies are modeling these risks. It's easy to say we need to become more culturally sensitive, we need to hire more locals. But showing up and writing a check will only get you so far. To go beyond rhetoric, you need to become deeply integrated, and that takes an understanding of the needs and the aspirations of the people you are working with and what drives those needs and aspirations. Then, those needs must be incorporated into your financial models.
"Chevron now has the support of the Angolan government and NGOs," continues Henisz. "Their operations have been so successful that they've become a blueprint for managing their political and social relationships in other countries. That success can be replicated by other organizations as well. In fact, I'm teaching participants in the Executive Development Program these lessons. We use a strategy simulation to help them think more creatively about current strategic situations, and that involves global challenges. The decisions they make are evaluated in part on this political and social criteria. What they learn is that you can't just pay attention to reputation, and you can't just pay attention to financials. You have to figure out how they come together to influence each other. I share my latest research into what leading companies are doing, and pair that with dynamic practice in the simulation. It's a great way to learn."
But it's not just research and practice. One of the great advantages of the Executive Development Program is the participants, who come from a wide variety of industries around the world. They come away with global business contacts and the knowledge they gain from one another. "Recently," says Henisz, "we had someone from Chevron Nigeria, who discussed the effect the Angolan operations are having on what the company is doing in his country. There is a great synergy between my research and the wealth of experience that is always in the room."
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