How CEOs Should View Business Climate

The term business climate receives prominent usage as a general indicator of an area’s economic suitability and receptivity for business. Traditional and social media outlets generously cover business climate news; rankings can pose an influential input to CEOs seeking to expand or improve current operations. While it is critical for CEOs to understand how the organization’s footprint is aligned to deliver on enterprise objectives, using business climate alone is not sufficient to develop a nuanced footprint strategy.  To take the next step, CEOs should first move beyond the idea that business climate is a single issue, and instead consider it as the summary of several distinct factors.

So how should organizations define business climate? To use business climate as a reductive measure of geographic suitability, organizations should first define the relevance of each component:

1. Labor Characteristics – How large is the relevant talent pool in our key locations? Does each area have the right types of talent in terms of education / experience? How do talent costs compare to other locations?

2. Industry Cluster / Competitive Environment – How mature / sophisticated is the local sector? Have competitors invested near our flagship sites? Do our locations provide access to relevant suppliers?

3. Regulatory Environment – What are the relevant policies in terms of employment, trade, permitting, etc.? Are there restrictions that impede the business in a meaningful way?

4. Cost of Doing Business – What costs can a business anticipate in terms of startup capital requirements, licenses and registrations, taxation, accessing credit, trade costs, etc.?

5. Supporting Infrastructure – What is the condition and suitability of the supporting infrastructure (road, rail, port, air) near our locations? Are local utilities reliable and of suitable quality?

6. Logistics and Access – How accessible is our footprint to customers and suppliers? Do our sites provide easy access for employees?  How about executives traveling from other locations?

7. Operating Risk – Is the geopolitical situation stable? What is the probability of terrorism / violent conflict? Are organizations likely to directly experience corruption or IP theft?

8. Quality of Life – Will essential employees be willing to move to our main locations? What amenities are available that might be able to attract and retain high-value managerial / technical talent?

A thorough reflection of the importance of each of these categories can help organizations develop an expanded view of business climate.  However, CEOs should also be aware that identifying an “optimal business climate” is a highly relative process. Beauty, after all, is in the eye of the beholder. The importance that firms ultimately place on each category (and each factor within a category) should be based on the nature of the business, its internal characteristics, and its strategic objectives.

How can CEOs ensure that assets are deployed and maintained in areas that meet business climate objectives?  Armed with a more comprehensive definition, organizations should be proactive about evaluating the business climate surrounding each of their major geographical assets.

Business climate evaluations need to be directed from the executive level. In fact, CEOs themselves should be the ones that define what climate factors are most important for an organization’s strategy.  This involvement enables any resulting evaluations to produce a strategically aligned point of view on how well an organization’s geographic footprint is performing.

How can CEOs ensure that the footprint grows in areas with a favorable business climate?  Even the most comprehensive business climate review will still only represent a snapshot.  CEOs should have the expectation that every business climate factor will likely change over time. Labor costs in emerging markets are likely to rise, tax and trade policies are subject to change, and new customers in remote geographies need to be served.

Moreover, as organizations evolve their business process and make strategic transactions, the importance an organization puts on business climate factors will likely change as well.  For example, vertical integration may reduce the importance of being in a strong industry cluster, and outsourcing an IT function may reduce the need to have a high-skilled local labor force.

Ultimately, regardless of organizational size or industry, CEOs need to understand how their footprint is impacted by business climate factors.  Successful CEOs will ensure that they consistently have an updated understanding of the multitude of variables that make up business climate and of how shifts in those factors will affect the growth and efficiency of the business.

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