Thai enterprises need to approach strategy differently in a turbulent world

Today, economic upheavals are diverse, extensive, global, and unpredictable in their nature, scope and impact. Crisis piles on the crisis. The Covid-19 pandemic and policies addressing it overlapped with the US-China trade war, the Russia-Ukraine conflict and related sanctions, and the challenges of climate change. 

Their cumulative impact in quick succession, is fundamentally altering the global environment for Thai enterprises. This is true for firms competing directly on international markets and for domestic Thai firms linked indirectly as suppliers to such markets.

Corporate strategy is ultimately about leadership. It is essential during periods of transition, and most challenging when past certainties are in question. In times like these, corporate strategy plays an especially important but difficult role. Business leaders are faced with differing and often inconsistent but equally plausible interpretations of possible futures for their enterprises.

Challenges facing Thai firms

Geoeconomics: Governments are displacing firms as main decision-makers in a widening range of product markets. They do this through actions such as sanctions, subsidies, and export controls, from semiconductors to energy, from medical supplies to agriculture. Key drivers include the “hot” war between Russia and Ukraine and the “cold” rivalry between the US and China. 

Thai firms must then consider: What impact will the Russia-Ukraine war and sanctions have on commodity prices, risk premiums and the economic prospects of markets around the world? How will intensifying US-China rivalry affect supply chains and market access?

Supply chains: Disruptions are occurring across diverse supply chains. In automotive, countries such as the US and the Republic of Korea are accelerating electrification but expanding incentives favouring domestic suppliers. Agribusiness firms are facing uncertain and volatile supplies and costs of key inputs such as fertilizer and fuel. A focus on resilience is eclipsing efficiency. 

This raises the following issues: Where are key disruptions to the firm’s supply chains likely to emerge, in what form, and with what likely impacts? How will these work their way through the production cost structure and feed into consumer prices, with what effect on buyers? How will production processes and product markets be affected if there are constraints on logistics – for example, in the operation of key ports, and shipping of goods across borders? 

Monetary and fiscal policy: Surging prices, particularly food and energy, have forced governments to raise interest rates to curb inflation and safeguard financial stability. For Thailand, moves by the US Federal Reserve are especially important. They impact regional capital flows and currency values, especially for borrowers in US dollars. 

This poses the following questions: Will central banks continue to tighten monetary conditions aggressively, increasing the debt burden of firms, households, and governments, and possibly slowing economic growth? Or will they ease up, perhaps risking further price increases now, and harsher restrictions in the future? 

Financial markets: Rising interest rates mark the end of low-cost debt and an increase in the cost of borrowing for firms, households, and governments. Changing risk premiums and uncertain future cash flows of financial assets have led to financial volatility, reflected in widening credit default swap spreads, unstable equity markets, and fluctuating currencies. How should Thai enterprises plan, structure, and finance investments in this uncertain climate? How will households adjust borrowing and spending, with what impacts on different product markets?

The usual methods of risk management, for example assessing political risk in a particular country or geographic region, are no longer sufficient. They do not allow decision-makers to identify and manage uncertainties and risks that are interconnected, cross-border, and global in nature.

Formulating robust strategies for a turbulent world

To paraphrase the Economist, Thai firms need a new approach to a new world. Tools supporting strategic decision-making in times of turbulence must combine analytics with creativity. The challenge is to identify sources of uncertainty and their implications for enterprises. Constructing scenarios that allow testing the resilience of alternative strategies is a key step. 

A scenario combines expectations about disparate factors -- such as supply chain bottlenecks, US-China rivalry, Ukraine war and related sanctions, energy and food inflation, and potential responses of central banks -- into an integrated picture of alternative futures. An optimistic scenario is based on assumptions that such factors, taken together, evolve in a favourable way for the enterprise. In a pessimistic scenario, assumptions about such factors would lead to expectations of further disruptions and constraints, intensifying pressures on the firm. 

In a turbulent world, it is essential to go beyond composite scenarios. Critical, often implicit strategic assumptions need to be explicitly identified about relevant events, issues, and strategic options. Assumptions must be rigorously formulated, so they can be assessed, monitored, and adjusted in response to new information. An example is to specify expectations with respect to sales in key markets if central banks raise interest rates in response to increases in inflation. Higher interest rates are supposed to reduce consumer spending, but surprisingly, in some markets, households are not cutting back the way central banks expected.

Very different reasonable assumptions about the same observed reality can yield disparate but equally plausible futures. For example, there may be agreement on inflation data, but expectations may differ with respect to the likely response of central banks or their effects on the firm’s sales, as they try to balance fighting inflation against constraining economic growth. The structured debate between alternative world views that incorporate very different sets of assumptions challenges decision-makers to formulate more insightful and creative interpretations of alternative futures facing the firm. This can lead to more robust strategies.

Thai enterprises need to be prepared for the turbulent world they are in. For this, the content of business strategies, as well as the process of strategy formulation must adjust to new realities. 

George Abonyi and David Abonyi

George Abonyi is Senior Research Fellow and Visiting Professor with the Sasin School of Management of Chulalongkorn University, and Senior Advisor to the Fiscal Policy Research Institute (FPRI).

David Abonyi is Senior Associate with the Global Enterprise Initiative at the Schulich School of Business at York University, Toronto, and project director of the “Strengthening Thai-Canada Business Linkages” at the Fiscal Policy Research Institute (FPRI).