When it comes to global business expansion, why not inject some science into the art of the deal? FM Global's Dr. Louis Gritzo explains in Scientific American.
If a company is expanding into new markets, or around the entire world, where should they put their next plant, office or distribution center? And how should they decide? The first handful of criteria are easy:
- Proximity to customers
- Access to major cities and ports
- Availability of skilled workers
- Real estate costs
But these criteria alone aren't nearly enough to make an optimal decision. Site selection typically gets subjective from here, leaving a staggering amount of a business's fate to chance. Subjectivity is a counterintuitive approach in a world where companies want data to drive their decision-making.
More importantly, subjectivity can introduce a panoply of risks at a time when businesses are coming to appreciate the economic value of resilience, the opposite of risk. I define resilience as the ability to resist disaster and, when necessary, bounce back. I believe that in 2017, scoring resilience in potential new locations of operation can and should be more scientific.
Nature's business risks
Specifically, businesses need to take a closer look at natural hazards. Consider flooding, for example. Among natural disasters, flooding was the costliest overall peril in 2016 for the fourth consecutive year in terms of global economic losses, accounting for USD62 billion in such losses, according to Aon Benfield's 2016 Annual Global Climate and Catastrophe Report. Facilities located within high-hazard or 100-year flood zones have roughly a one in four chance of experiencing a major flood over a 30-year period. (Mapping is improving, but we still need better ones with global coverage and modeling based on physics, not history.)
Flood is inextricably connected to climate science. The effects of climate change on precipitation can be subtle on average but severe in the extremes, and it's extreme events that can disrupt businesses, jobs and economies on a regional or global scale.
In extensive consultation with climate experts, my team has adopted two key principles around precipitation:
- Geographic variability: In general, wet areas of the country will likely become wetter and dry areas drier. Certain regions of the United States are expected to be prone to more intense precipitation events and a potentially increased risk of flooding. Others are prone to less precipitation, prolonged droughts and a potentially increased risk of wildfires. Unfortunately, these anticipated changes are not uniformly distributed geographically, so business and property owners should prepare for the most likely events at their location.
- Bigger rainfall, but maybe not more overall: Although much of the country has gotten wetter in recent decades, long-term precipitation averages will not necessarily change significantly. Rather, rain may be less frequent but more intense.
U.S. businesses, depending on their location, should start preparing now for the increased, extreme rainfall that a changing climate will almost certainly deliver. When companies have a choice, they should site their facilities in nothing less than 500-year flood zones (where there's only a 1-in-500 chance of a flood every year).
Executives should realize that major disasters might have occurred in their locales, just not in recent memory. That would be a strong probability in a 500-year flood zone. Another common issue: Awareness of a risk does not always translate into concern or action, even if that acknowledged risk could devastate the bottom line.
Data can drive decisions
It's important to remember that a region's natural hazard risk (including that of wind and earthquakes) can be mitigated or exacerbated based on how that risk is managed. This variability in management is related to the quality of building codes, if any, and how well they're enforced. Based on these codes, my team has been able to compile data on how much risk improvement different regions of the world have achieved.
With that data in hand, we scored and ranked 130 regions around the world analytically on natural hazards and a broad range of other resilience drivers, including:
- Political risk
- Oil intensity
- Urbanization rate
- Fire risk management
- Inherent cyber risk
- Local suppliers
- Supply chain visibility
The scores are publicly available at no cost
These are a lot of criteria to crunch. The good news, however, is that each criterion can be paired with one or more highly credible data sources. The majority of these data sources are public, including the International Monetary Fund, World Bank, United Nations, World Economic Forum and U.S. Energy Information Administration. (My team uses its own internal data for the natural hazard and fire risk measures).
When science drives business, performance can improve. And when it comes to site selection for global businesses, the data finally exists. So while any site selection deal will always contain a bit of art, make sure you get your hands on the data. Chances are, you'll make better decisions.
As originally published in Scientific American on March 23, 2017