How Multinationals Should Be Planning for Brexit
The UK will exit the European Union on March 29, 2019, and many companies are struggling to prepare for how it will change doing business there. Only a minority of firms is well ahead in planning and preparing a UK market strategy. At the recent Brexit Workshop we held for clients — in this case, 19 UK heads of some of the world’s largest multinational firms — 10 of them had not started or had only just begun planning for Brexit.
There’s no template for how companies should change in response to Brexit. Information about what it means is limited, and opinions are fast-changing and increasingly contradictory. But that doesn’t mean companies shouldn’t start the work required to come up with a plan. It’s possible to think through the ways your business could change, even without having the perfect information at hand. Below we’ll outline some of the most important questions multinationals should be asking.
We’re noticing that many multinationals are falling into three serious traps when it comes to planning for Brexit: (1) They’re taking a wait-and-see mode until they feel confident that they have enough information to prepare their businesses for the post-Brexit environment; (2) they’re setting targets using historical data that may be irrelevant; and (3) they’re failing to take into account the Brexit spillover effects (for example, on currencies, regulations, and cost increases) that will impact different parts of their businesses.
Waiting for perfect information to start planning is a risky approach because sufficient clarity may come too late, if at all, to take crucial action. The nature of Brexit talks, both within the UK and with the EU, ensures that each side will use time as leverage, dragging issues to the last moment in order to extract concessions. It is possible that we won’t have perfect information by April 2019. Companies risk running out of time to prepare for the changes that will most affect their businesses. For example, adjusting supply chains can take up to nine months or longer depending on internal and external constraints. Internally, several parts of an organization may have to sign off on making such changes; externally, the process of finding new suppliers and contracting can be time-consuming.
Relying on historical data is risky too. For example, a company we work with that supplies appliances to restaurants in the UK is finding itself very minimally affected by Brexit directly, but its customers are already seeing more consumer price sensitivity, labor issues in hiring EU nationals, and rising operating costs — all of which are putting more pressure on them to transfer costs to our client. And this is happening before Brexit has even taken place. If the supplier had used its 2016–2017 sales data, which showed greater demand for its products as a result of the boom in UK tourism, to predict future results and set next year’s strategy, it may have overestimated future performance and ended up with too much inventory, higher costs, and pressure to discount heavily to move product.
Brexit’s complexity can also easily lead to analysis paralysis and a sense that all planning is useless. At our workshop, leaders of 14 client companies said that the biggest Brexit planning challenge they faced was constantly changing information.
But companies risk falling behind better-prepared competitors if they take a wait-and-see approach. Seven participants in our workshop said they are worried about Brexit leading them into a price war with competitors, while six were worried competitors would change their offerings to better fit customer needs, undermining their overall performance and market position. The sooner firms have a Brexit plan, the faster they can focus on managing these competitive dynamics.
How to Plan for Brexit
When it comes to planning, multinationals shouldn’t apply quick fixes to mitigate short-term operational risks (for instance, financial hedging to manage exchange rate fluctuations, or cursory assessment of distributors to evaluate their supply chains). Companies need a working group that regularly assesses Brexit impacts relative to competition, and a strategic plan for their UK business that is straightforward, flexible, and easy to track. We recommend a six-step process:
1. Understand how exposed you are. Companies first have to understand the primary impact of Brexit on their business in terms of key exposure (exchange rate, supply chain, competition, demand dynamics, talent) and their value chain (suppliers, logistics, customers, stakeholders). Broadly, Brexit should be a top strategic concern for firms that:
- export raw materials and/or finished goods or services from Ireland to the UK, from the UK to Ireland, from the UK to Western Europe, or from Western Europe to the UK
- have a direct presence or a manufacturing facility in the UK
- have EU staff as part of their personnel in the UK
- use the same distributors for the UK and Western Europe
- have products that must comply with UK regulations or particular specifications
2. Create a strategic Brexit team. Once a company understands the broad exposure of Brexit on the business, it needs to form a team responsible for its strategic plan. Few companies can afford to dedicate staff full-time to this task, but a cross-functional working group for whom this is a special side project can be sufficient. This group should represent a variety functions within the organization exposed to Brexit: supply chain, channel managers, procurement, marketing, sales, public affairs, governance, and financial controlling, among others.
Individuals on this cross-functional team should work together to thoroughly analyze Brexit’s possible impact on the business. The group should be responsible for aligning the company strategy in terms of priority areas and decisions, as certain parts of the business will be impacted sooner than others.
The company should look to bring in staff from other markets to apply their skill sets and ideas. In some ways, the UK in this Brexit environment resembles the uncertain operating environment of some emerging markets. Thus, the firm can delve into its best practices for emerging markets, where its teams are accustomed to political, regulatory, and demand volatility and unpredictability.
3. Understand possible scenarios. After the Brexit team understands the broader impact of Brexit on the business, it needs to start scenario planning around potential developments of Brexit negotiations and the UK economy. After this, the firm should decide which scenarios it believes are the most likely to occur and are most threatening to the business.
Each Brexit scenario — such as a no-deal Brexit, a free trade agreement, or a “softer” Brexit where the UK maintains many benefits of remaining in the EU — comprises distinct drivers that will determine the progress of Brexit negotiations, as well as signposts that indicate which scenario the UK is moving toward. Drivers include the UK government’s continuous commitment to control migration, the EU’s nonnegotiable condition that the UK cannot restrict migration while maintaining single market access (preserving four EU freedoms: labor, capital, goods, services), and the state of the UK economy. Signposts include the results of key UK-EU meetings, deadlines for votes in the European Parliament on Brexit, and decisions on the Irish-UK border. Each scenario should be assigned a likelihood of occurring and outline the estimated impact on the business.
4. Conduct a thorough impact analysis. After identifying the primary areas of impact from Brexit and creating your Brexit team, it’s time to assess the nature, level, and timing of the impact on your firm’s operations in detail. This analysis will help the firm prioritize what is most at risk and needs to be addressed first. An international fast-moving consumer goods firm we worked with on its Brexit plan established that its supply chain was the most exposed, compelling the organization to take action early. The firm reconsidered the standard level of inventories, shelf life, and conservation process of its products. Other concerns, like staffing of EU nationals or compliance with packaging requirements, were deemed less of a priority but would be addressed in the future.
5. Model demand and costs based on Brexit. While an impact analysis for each scenario looks at what will happen to the company with the UK’s exit from the EU, modeling means quantifying how sales and costs may be affected by these different scenarios. Firms should model how their sales and costs would evolve in each case and incorporate them into their existing strategic plans for the UK. Certain scenarios will incur differing costs from labor, tariff and non-tariff barriers, and regulations. As a base case, suppliers could face cost increases and pass some of this on to customers. For instance, the pound is likely to depreciate from its current point in an FTA-type agreement deal, driving inflation up and making imports more expensive. Companies would instinctively look to increase prices to balance out their costs.
Likewise, demand will differ according to each Brexit scenario, and firms need to model and evaluate how each scenario might affect their current product offerings in the market. Sales volumes are likely to fall across the board, as the UK economy is likely to weaken under every Brexit scenario, but the level of falling sales will vary for each product. Differing economic developments may also change customer preferences and price sensitivity, which would force firms to rethink their target customers and portfolio of goods. We should note, though, that this modeling of future costs and demand using pre-Brexit historical economic and sales data should serve as guidance, not be taken as the final answer.
6. Evaluate your value proposition, act, and monitor. Before making decisions, leaders need to answer: How will your value proposition evolve over the long term to support your market strategy as you adjust to operational disruptions from Brexit? Our clients revealed that they were increasing their focus on innovation to enhance their value proposition. They’re seeking to deliver continued value to customers through more services and technical support.
Once you’ve thought through the impact each scenario could have on your business, as well as your value proposition, your organization is now in a position to start making decisions around pricing, product portfolios, supply chain management, channel management, and people. Your Brexit team should be regularly monitoring economic indicators and key events signaling the course of the negotiations, to see whether your plan is on track or needs adjustment.
Brexit will pose numerous challenges for business as well as some opportunities. Companies with a plan will be better able not only to protect themselves but to identify opportunities to get ahead.
Source: Harvard Business Review