With the number of calls I have received recently about the uncertainties of 2019, I can attest that Nigerian CEOs are really worried about known, emerging and unknown risks that might erode their growth and profitability in 2019 and beyond. Not only are they worried because it is an election year, they are concerned that irrespective of whoever wins the presidential election in Nigeria, there are inherent risks that are somehow outside their powers to effectively mitigate or manage.
These are risks that are external to a firm and can be national, regional or global. The global ones are risks that can cause significant negative impacts across countries and industries if it occurs. While the known global risks include failure of climate-change mitigation, complex regulatory demands, data fraud and cyber-attacks, spread of infectious disease, weapons of mass destruction, water crises and profound social instability, the emerging ones include digital readiness and risk digitization, talent deficit and succession challenges, changing customer needs and challenges of retaining customer loyalty. The regional ones peculiar to Africa or West Africa include risks such as rising unemployment, technology importation, voluntary and involuntary migration, lack of very skilled labour force, failure of national governments and fiscal crises etc.
Of these three categories of external risks, the one that gives the CEOs in Nigeria the greatest worry are the national risks and in 2018 KPMG report, the top 10 risks include foreign exchange, fiscal and monetary policy, regulatory risk, crude oil price, brand and reputational risk, customer attrition, political and liquidity risks, insecurity and interest rate risks. As no proper sustainable national mitigation strategies were developed in 2018, almost all or most of the top 2018 risks are still with us and might likely escalate in 2019. Moreover, irrespective of whoever wins the presidential election, there are other macro risks such as rising unsustainable debt, limited government revenue generation, unemployment, inflation and food security that will affect both the country and firms. In addition to the litany of external risks, every firm is also faced with some internal risks such as internal fraud, employment practices and work place safety, damage to physical assets, business disruption and system failure, execution delivery and process management.
With such myriad of risks and challenges, a friend who is a CEO lamented that it is not the best time to be a CEO in Nigeria. It is really a challenging and risky environment which requires a rethink of strategy formulation and execution. While I appreciate the challenges of CEOs in a turbulent environment such as Nigeria, my engagement with many of them reveals a limited appreciation of the risks they face and as such their strategies fail when the risks start to manifest. In many firms, there is no risk unit and where there is, they are normally very separate from the strategy unit and most of the times partially involved in the strategy formulation and execution. They work more as a reactive unit that attends to specific risk failures during the execution of a firm’s strategy and most of the time are more disposed to risk avoidance than risk taking. This approach is wrong and cannot guarantee the sustainable growth and profitability of a firm in a peculiar environment such as ours. In a survey of risk awareness and practice across firms in Nigeria, the employees scored an average of 2.5 out of 5 with a lower score of 2 in the financial sector.
To ensure growth and profitability in 2019 and beyond amidst such innumerable risks, our firms might need to rethink their approach to strategy formulation and execution. As strategy and risks can be argued to be two sides of the same coin, strategy should be developed mainly from a risk orientation approach.Because we are in a high risk environment, the strategy should not be that of risk avoidance, rather it should be one with a risk loving disposition but with a caveat. Recalling that firms are created to take risks and as they say that the riskier it is, the higher the return, succeeding in a risky environment is therefore the ability of firms to take risks but effective in mitigating the negative aspects of the risks.
This approach requires firms to first scan, robustly understand and identify all their possible risks and their sources and then develop strategies (models or options) to mitigate the risks. It is an approach that rewards the firms with the privilege to see different opportunities inherent in the risks and then the insight to develop the appropriate strategic choices to exploit the risks and opportunities. With the innovation of strategic choices and models to manage the risks and opportunities, some firms are able to see blue oceans of profitability while others see only negative risks and failures. Using this approach helps firms to understand the three key risks that can disrupt strategy which are demand risk, competitive risk and capability risk. To be continued.
Franklin Nnaemeka Ngwu (PhD)
Dr. Ngwu is a Senior Lecturer in Strategy, Finance and Risk Management, Lagos Business School and a Member, Expert Network, World Economic Forum.
