SRIVIDYA JANDHYALA: Second-order effects of the changing tariff regime

Taking a cold, hard look at how to survive and even thrive in a turbulent environment is necessary for companies. Navigating shifts in their business environment is increasingly a critical part of the job for top managers.

Many companies are looking for creative solutions. Apple airlifted 600 tonnes of iPhones to the US to avoid tariffs. Small Australian mining companies such as Lynas Rare Earths, Northern Minerals and Arafura Rare Earths, sensing an opportunity in China’s export restriction measures, are attempting to break into the rare earths market. Others are setting up war rooms to game out different scenarios. Still others are lobbying for exemptions.

But even rising to the challenges of the job may not be enough to retain their company’s competitiveness. All the effort managers and employees spend on understanding and navigating the geopolitical tensions may result in better information, greater clarity, more exemptions and stronger market positioning — but it comes at the expense of efficiency in their day-to-day functions.

Navigating the new and complex business environment means managerial resources are in short supply elsewhere. The time, attention and managerial expertise devoted to geopolitical issues are being diverted from regular operations of the company. Fortune reported on how companies are setting up teams to watch the news and quickly present leadership with options — but that those team members have dropped their day jobs.

Employees who would have otherwise been working on new product features, promoting products, developing strategies to connect with customers, protecting networks and user information or analysing data to optimise performance, are completing those tasks less effectively.

Research has shown that when managers divide their attention across multiple domains and tasks, the quality and performance of the company’s routine activities often suffers. One study demonstrated how financial institutions faced with infrequent and episodic changes in organisational structure and technology saw an increase in errors such as noncompliance with “know-your-customer” procedures, inadequate encryption of sensitive customer information, significant delays in critical account reconcilements, and failure to test business plan continuity.

The researchers argue that these errors were because of reduced attention and gaps or discontinuities in shared organisational knowledge. Another study of the mutual fund industry similarly noted the problem with firms spreading themselves too thin. Experienced individuals are less effective if their attention is distributed across multiple projects. Thus, introducing new funds in a broad set of categories at the same time decreased the overall returns for new funds.

More aligned with the context of political challenges, Daniel Blake and I examined the operational performance of telecom companies in India after an abrupt licence cancellation. When the Supreme Court of India directed the central government to cancel all 2G licences issued in a particular licensing round, some companies found themselves in a precarious position.

Without the licences they would have to exit the market and forego investments already undertaken or spend more on acquiring new licences. To salvage their operations, companies affected by the licence cancellation spent significant time, expertise and managerial attention on diplomatic, legal and strategic activities.

Some of their market competitors were not affected by the court ruling and continued with their operations as usual. We compared the operational performance of the affected and unaffected firms. While unaffected firms were able to hold on to their strong operational performance, the operational performance of companies whose attention was diverted to containing the fallout of the court ruling saw a relative decline in their operational performance.

What does this mean for companies navigating the changing tariff regime? The unusual, idiosyncratic nature of the shifting geopolitical context means that firms can’t rely on off-the-shelf solutions. They have to develop new routines, assign different responsibilities, and undertake unfamiliar tasks. In the short term, companies will just redirect existing employees and resources to managing the situation, but something has to give.

Jandhyala, associate professor of management at ESSEC Business School, is author of ‘The Great Disruption: How Geopolitics is Changing Companies, Managers and Work’.