“Geopolitical risk is center stage,” declares Ziad Haider, McKinsey & Company’s Global Director of Geopolitical Risk. He adds, “There are the Russia–Ukraine conflict, strenuous relationships among countries across the globe, internet restrictions, and competing interests across Europe. The conflicts themselves are hard enough, but disinformation is another element making it even tougher for companies and organizations to navigate risk successfully.”[1] Because geopolitical risks are center stage, it follows that business leaders must carefully watch that stage. World Economic Forum analysts, Saemoon Yoon and Michelle Mormont, advise, “A series of unprecedented global challenges have underscored the need to think more carefully about how businesses adapt to the changing geopolitical and economic environment. The diverse set of challenges facing the global community can have profound effects on individuals as well, which needs consideration when future-proofing.”[2]
Lindsay Newman, head of geopolitical thought leadership for S&P Global Market Intelligence, agrees that geopolitical matters are now a major concern. She explains, “Where geopolitics would have been reserved for dinner-party conversation or a cocktail-party conversation, clients are coming to us and saying, ‘We need a geopolitical risk management function.’ The post-Cold War era is clearly over, and there are major powers out there looking to shape the future.”[3] She adds, “We see more volatility ahead rather than less.”
China and Russia
People often refer to the “elephant in the room” when discussing obvious challenges that must be faced. Business professionals, however, are more likely to worry about two other metaphorical animals in the room — China’s dragon and Russia’s bear. Those countries are capable of creating supply chain mayhem and destruction.
Concerning the Russian bear, Haider and his colleagues, Andrew Grant and Anke Raufuss, note, “Russia’s invasion of Ukraine in February 2022 triggered more than 1,000 companies to curtail their operations in the world’s 11th biggest economy, revealing an imperative for global firms to bolster their ability to anticipate geopolitical risk and build resilience. The global order still reels from disruptions related to the war in Ukraine, including those in energy, food security, supply chains, and more.”[4] Journalist Richard Vanderford reports, “By June [2022], businesses had racked up more than $59 billion in losses from their Russia operations. U.S., U.K. and other sanctions have frozen tens of billions of dollars in assets.”[5] Russia’s President, Vladimir Putin, has demonstrated a stubborn willingness to carry out his belligerent intentions and has managed to garner some support along the way. Nevertheless, Russia is likely to remain a pariah for many businesses for the foreseeable future.
The Chinese dragon is a bigger challenge. Although there has been a lot of talk about decoupling supply chains from China, business leaders have discovered that course of action is not as easy as some imagined. As a result, the United States and Europe are pursuing a strategy that business leaders should seriously consider: De-risking their supply chains rather than decoupling them from China. Haider reports that companies are now asking questions like: “How do we engage in China? How do we make sure that we’re in a position that, if the US government does take more significant action, we’re protected while also remaining strong and competitive in the China market?”
The Rest of the World
The rest of the world, of course, cannot be ignored. Grant, Haider, and Raufuss explain, “In between navigating the fallout from Europe and unfolding strategic competition in Asia, multinational corporations must also manage a host of long-tail political risks and conflicts across other geographies, including Africa and South Asia.” Taken as a whole, the world’s geopolitical situation can seem overwhelming. You’ve probably talked to people who no longer read or listen to the news because they don’t know how to deal with all the incivility and ugliness. They just want to withdraw into their own little shell. Countries can be that way too. The New York Times editorial board explains, “It is a natural human impulse, and a political one, to turn inward when threatened by a crisis that appears beyond our control. The world is facing several such forces at once: food shortages, inflation, the persistence of Covid-19 and the effects of global warming. Taken together, they threaten the stability and prosperity of nations around the world. That threat could hasten the retreat that many countries are already making away from globalization and international cooperation.”[6] They conclude, however, “This is the wrong lesson to draw.” I agree. The editorial board concludes, “International trust and cooperation are in desperately short supply, but it’s the only way out of any of these intertwined crises.”
The Way Ahead
As business leaders look around the world, they see a dizzying array of potential challenges that could affect operations. The question is: How can a business deal with so many possibilities? Grant, Haider, and Raufuss assert, “The imperative to lift one’s gaze and look around the corner has become key to strategy and performance. Scenario planning is squarely back. In the extensive literature on scenario planning, notably Peter Schwartz’s The Art of the Long View, a core point is the need to develop frameworks, with colorful and gripping language, that help leaders ‘reperceive’ the future and unlock strategic foresight.” For geopolitical scenario planning, Grant and his colleagues categorize geopolitical events as: black swans (i.e., unanticipated, exceptional events), gray rhinos (i.e., obvious dangers), and silver linings (i.e., emerging opportunities). I’m glad they included silver linings. Too many business leaders get so worried about black swans and gray rhinos they never look for silver linings.
I have long been a fan of scenario planning, which is why Enterra Solutions® developed the Enterra Global Insights and Decision Superiority System™ (EGIDS™). Driven by Enterra’s AI engine — the Enterra Autonomous Decision Science™ (ADS®) platform — EGIDS can help business leaders rapidly explore a multitude of options and scenarios. This powerful capability uniquely enables end-to-end value chain optimization and decision-making at scale and allows clients to uncover and understand the inter-relationships that lead to innovative new product development and innovation, heightened consumer understanding and targeted marketing, revenue growth tactics, and intelligent demand and supply-chain planning.
Bruce Andrews, Corporate Vice President and Chief Government Affairs Officer at Intel, insists, ““The world has evolved. It used to be that people only paid attention to the US or a couple of big markets. And I think we now are much more in a multipolar world where what happens in Europe is often a precursor to what may happen in the US or what’s going on in China has to interact with what’s going on in the EU or in the US.”[7] Only good scenario planning efforts can help companies prepare for an always changing world and address risks that continue to emerge. David S. Lee, a principal lecturer at the University of Hong Kong Business School, and Brad Glosserman, Deputy Director of and visiting professor at the Tama University Center for Rule Making Strategies, explain, “The ground has shifted. Many of the key issues that businesses and leaders are grappling with — supply chain obstacles, trade policies, and the competition for access to technology and markets — are often considered individually, but they’re increasingly driven by the new national security economy. Understanding this paradigm is essential to navigating it.” And AI can also help companies understand this new paradigm.
Footnotes
[1] Ziad Haider, “How three global companies navigate geopolitical risk to build resilience,” McKinsey & Company, 2 March 2023.
[2] Saemoon Yoon and Michelle Mormont, “In a time of geopolitical and economic challenges, business leaders explain how to adapt,” World Economic Forum, 11 January 2023.
[3] Richard Vanderford, “Impact of Geopolitical Tumult on Businesses to Continue in 2023, Say Risk Experts,” The Wall Street Journal, 11 January 2023.
[4] Andrew Grant, Ziad Haider, and Anke Raufuss, “Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings),” McKinsey & Company, 24 February 2023.
[5] Vanderford, op. cit.
[6] Editorial Board, “The World Has a Choice: Work Together or Fall Apart,” The New York Times, 18 June 2022.
[7] Haider, op. cit.
[8] David S. Lee and Brad Glosserman, “How Companies Can Navigate Today’s Geopolitical Risks,” Harvard Business Review, 28 November 2022.
