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Keeping Up with a Changing World

June 23, 2022

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Both business leaders and consumers are expressing concern, if not outright pessimism, about the future. These brooding feelings are the result of many interlocking factors that have lowered economic growth estimates and spurred inflation. One of those factors is the war in Ukraine. Agence France-Presse recently reported, “The OECD warned that the world economy will pay a ‘hefty price’ for Russia’s invasion of Ukraine as it slashed its 2022 growth forecast and projected higher inflation. The Paris-based organization, which represents 38 mostly developed countries, is the latest institution to predict lower GDP growth due to the conflict, which has sent food and energy prices soaring. In its latest economic outlook, the Organization for Economic Cooperation and Development said global gross domestic product would grow by 3% in 2022 — down sharply from the 4.5% estimated in December. The OECD also doubled its forecast for inflation among its members — which range from the United States to Australia, Japan and Latin American and European nations — to 8.5%, its highest level since 1988.”[1]

 

How the war in Ukraine is changing the world

 

McKinsey & Company analysts note, “The war is devastating lives and roiling markets.”[2] They go on to note that, in addition to the “extraordinary toll on lives and livelihoods” the war has taken, it has resulted in “12 short- and mid-term disruptions” that have the “potential to reshape industries and economies.” And, they insist, “Those disruptions are gathering force.” The twelve disruptions include:

 

1) A massive humanitarian crisis
2) An economic crisis for lower income households, especially in Europe
3) A dramatic change in global energy policy
4) A looming food crisis
5) Shortages of essential resources and parts
6) Rewiring of the global supply chain
7) A breakdown of global technology standards
8) Financial system uncertainties
9) Increases in defense spending
10) Rise of cyber-wars
11) Politicization of corporate behavior
12) Increased volatility

 

The McKinsey analysts conclude, “These disruptions are already affecting people’s lives and livelihoods with potent force and should be part of every company’s scenario planning. And the longer the war lasts, the more powerful and unpredictable these disruptions may become.” Journalist Holly Ellyatt (@HollyEllyatt) adds, “Against an already turbulent backdrop of global inflationary pressures amid rising food and energy prices and disrupted supply chains following the coronavirus pandemic, the war between Russia and Ukraine is exacerbating supply and demand tensions, damaging consumer sentiment and is threatening global economic growth.”[3]

 

Dealing with a changing world

 

A book could be written about how the war in Ukraine is changing the world and what those changes mean for businesses. In this short article, however, I want to address just one of the twelve areas identified by the McKinsey analysts: global energy policy. NPR correspondents note, “Russia is the second-largest producer of natural gas and the third-largest producer of oil. The European Union has particularly depended on Russian energy; it is now preparing to phase in an oil embargo. A historic restructuring is sweeping the global petroleum and gas trade as countries ban or cut Russian energy imports, sanction Russian companies, face Russia’s demands for payments in rubles and search for alternative sources.”[4] Author and columnist Thomas Friedman (@tomfriedman) adds, “All of this is happening at a time when renewable energy, such as solar and wind, have become competitive in price with fossil fuels, and when the auto industry worldwide is significantly scaling up production of electric vehicles and new batteries.”[5] That doesn’t mean isolating Russia won’t cause pain. Friedman observes, “In the short run, none of these can make up for the drop in Russian supplies.”

 

Prior to the outbreak of the war in Ukraine, the two biggest global issues were the pandemic and climate change. People are learning to live with the coronavirus, but we still have to deal with climate change. Tom Burke (@tom_burke_47), director of E3G-Third Generation Environmentalism, told Friedman that if the world suffers through a year or two of astronomical gasoline and heating oil prices because of the Ukraine war, “You are going to see a massive shift in investment by mutual funds and industry into electric vehicles, grid enhancements, transmission lines and long-duration storage that could tip the whole market away from reliance on fossil fuels toward renewables. The Ukraine war is already forcing every country and company to dramatically advance their plans for decarbonization.” Friedman concludes, “Go figure: If this war doesn’t inadvertently blow up the planet, it might inadvertently help sustain it. And, over time, shrink Putin’s primary source of money and power. Now wouldn’t that be ironic.”

 

A lot of companies are touting their plans to become “net zero,” meaning they are trying to reduce greenhouse gas emissions to as close to zero as possible (or somehow offset the emissions they can’t eliminate). Decarbonization is one the tactics they are using. Business leaders know, however, that they can’t simply focus on what happens within the boundaries of the organization. They must take into account their entire value chain in order to make them more sustainable and resilient. To do this, leadership teams must explore multiple strategies to win given business objectives. This, in turn, requires companies to simulate probable scenarios and determine the optimal scenarios and tactics necessary to execute the best business strategy. The best way to explore scenarios is through the use of business war gaming techniques, like those used by the Enterra Global Insights and Decision Superiority System™, powered by the Enterra Autonomous Decision Science™ platform.

 

In a corporate war gaming environment, the Enterra Global Insights and Decision Superiority System helps business leaders rapidly explore the multitude of options and scenarios necessary to drive competitive advantage and build systemic resiliency into the enterprise. ADS isn’t smarter than a human, but it does provide a worthy adversary for testing scenarios and generating insights. For example, if a company desires (or is forced to consider) ways to decarbonize its operations, the Global Insights and Decision Superiority System can explore constraint-based optimization strategies to find the most impactful carbon reduction courses of action.

 

Our technology leverages advanced glass-box mathematical analysis, powerful non-linear optimization, and a human-like reasoning inference-engine that helps our clients make subtle, nuanced decisions and explain, in natural language, why those decisions were made. The Enterra system is always learning from its actions. It can process more data, weigh conflicting evidence, perform optimization, and prescribe an answer that is ‘best’ rather than just ‘right,’ quickly and accurately.

 

Without a tool, like the Enterra Global Insights and Decision Superiority System, business leaders have neither the time nor capability to think through enough relevant scenarios to make the best decision. By leveraging the System’s decision science capability, business leaders can consider a greater range of scenarios more quickly than possible in the past; enabling them to make superior decisions drawn from an array of possibilities. Since business problems are unique to each company, each challenge requires a tailored approach. For every client, Enterra brings together its considerable resources and expertise to provide the correct approach and the right capabilities to explore a multitude of scenarios in a shorter amount of time than it would take to explore the same number of scenarios without cognitive technologies.

 

Concluding Thoughts

 

Decarbonization is only one of many challenges most companies face. McKinsey analysts conclude, “Companies need to think through the various aspects of geopolitical risk and their potential effects — on financing operations, organization, technology, reputation, and the business model itself — and build resilience on all these dimensions.” The best way to deal with the complexity of today’s business landscape is to explore as many scenarios as possible. Only cognitive technologies (aka artificial intelligence solutions) are capable of doing that in a timely fashion.

 

Footnotes
[1] Agence France-Presse, “OECD Sees Lower World Growth Due to Ukraine War’s ‘Hefty Price’,” IndustryWeek, 8 June 2022.
[2] Olivia White, Kevin Buehler, Sven Smit, Ezra Greenberg, Mihir Mysore, Ritesh Jain, Martin Hirt, Arvind Govindarajan, and Eric Chewning, “War in Ukraine: Twelve disruptions changing the world,” McKinsey & Company, 9 May 2022.
[3] Holly Ellyatt, “From soaring food prices to social unrest, the fallout from the Russia-Ukraine war could be immense,” CNBC, 21 April 2022.
[4] Alina Selyukh, Alyson Hurt, Connie Hanzhang, and Nick Underwood, “The ripple effects of Russia’s war in Ukraine are changing the world,” NPR, 10 May 2022. This link provides an excellent interactive overview of the war’s ripple effects.
[5] Thomas Friedman, “The Ukraine War Still Holds Surprises. The Biggest May Be for Putin.” The New York Times, 7 June 2022.

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