According to the U.S. National Intelligence Council (NIC), the future international stage is likely to be more contested, uncertain, and conflict-prone.[1] NIC analysts explain, “During the next two decades, power in the international system will evolve to include a broader set of sources and features with expanding technological, network, and information power complementing more traditional military, economic, and cultural soft power. No single state is likely to be positioned to dominate across all regions or domains, opening the door for a broader range of actors to advance their interests. … In this more competitive global environment, the risk of interstate conflict is likely to rise because of advances in technology and an expanding range of targets, new frontiers for conflict and a greater variety of actors, more difficult deterrence, and a weakening or a lack of treaties and norms on acceptable use.” If supply chains are to remain resilient, business leaders must successfully walk a tightrope of geopolitical activity over the coming decades.
In Part One of this article, I discussed some of the geopolitical risks business leaders could confront in the coming years. The list was not exhaustive, but it did provide sufficient background to alert business leaders to challenges that lie ahead. In the concluding part of the article, I want to discuss some of the strategies experts suggest businesses follow to mitigate risks associated with geopolitical turmoil.
Mitigating the Risks of Geopolitical Activity
McKinsey & Company analysts Andrew Grant, Ziad Haider, and Jean-Christophe Mieszala discuss six key dimensions to geopolitical resilience.[2] They are:
1. Business model resilience. Grant and his colleagues quote from a book authored by Condoleezza Rice and Amy Zegart entitled Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity. In that book, Rice and Zegart write, “Organizations that take a serious, systematic, and senior-driven approach to political risk management are likely to be surprised less often and recover better.” Grant and his colleagues insist this senior-driven approach starts with the Board of Directors and then must filter down through the organization. They recommend that organizations “take a systematic approach to radiating insights on geopolitical developments and trends. … This may take the form of analytical products, briefings, or scenario exercises — anchored not on the ‘what’ but on the ‘so what’ and ‘now what’.” The Enterra Global Insights and Decision Superiority System™ (EGIDS™) can help organizations do just that by exploring multiple potential scenarios.
2. Reputational resilience. Grant and his colleagues observe, “A first step to building reputational resilience is to strive for internal alignment around operations connected with geopolitically sensitive markets. In short, organizations need to know what they stand for (and what they are against).” To learn how Nestlé has navigated it operations since Russia invaded Ukraine, see my article on the subject.[3]
3. Organizational resilience. From Jesus to Abraham Lincoln, great leaders have noted a house divided against itself cannot stand. McKinsey analysts agree with that aphorism. They note, “The days of the borderless executive are receding. Indeed, nationality and cultural relativism are coming to the fore in discussions around stance, narrative, strategy, and risk appetite. These discussions can take place on multiple levels: between leadership and teams, regional and local offices, or global headquarters.” To foster organizational leadership, they suggest adopting three strategies. “First, organizations need to ensure they have inclusive governance structures, from the board to risk committees. These must reflect diverse geographic viewpoints and nationalities. … Second, leaders, starting with the CEO, need to have open and honest dialogues in appropriate fora. … Finally, organizations need to consider a range of targeted initiatives to promote connectivity and cohesion, from rotating colleagues in and out of geopolitically sensitive markets … ensuring that screening and ‘insider threat’ mechanisms are sufficiently robust.”
4. Operational resilience. McKinsey analysts note, “A priority area of focus has been and must remain protecting and pivoting supply chains. Supply chain operations should consider a range of resilience measures. In the near to medium term, these include creating a nerve center for the supply chain, simulating and planning for extreme disruptions, revaluating just-in-time strategies, and assessing the resilience of one’s suppliers’ suppliers as part of a full look-through approach.” They add, “To achieve long-term structural resilience, organizations should consider measures such as constructing a ‘digital twin’ of the most critical parts of the supply chain, creating and testing what-if scenarios.” Once again, a cognitive solution, like the Enterra Global Insights and Decision Superiority System can help organizations do just that.
5. Technological resilience. According to McKinsey analysts, “Organizations today are confronting the strategic challenge of maintaining the global networks of yesteryear amid geopolitical fragmentation. Building technological resilience in this context requires accelerating planning and taking concrete steps in four key areas.” Those areas are: 1) The “splinternet” (e.g., online oversight in authoritarian countries); 2) international data protection laws; 3) data access; and 4) cybersecurity.
6. Financial resilience. McKinsey analysts note, “At the intersection of geopolitical risk and financial resilience are a number of issues that organizations need to carefully manage on an ongoing basis. These range from long-standing foreign exchange (and expropriation) risks to evolving sanctions risks.” They add, “Compliance with one jurisdiction’s laws can risk running afoul of another’s. Resilience in the face of the growing global weaponization of trade and investment requires not just having a precise understanding of ever-shifting regulatory regimes and a robust compliance capability but also driving a culture of compliance with the organization itself on an issue with no room for error.”
In addition to focusing on those areas of resilience, 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, suggest there are three other steps organizations can take. First, add expertise. They explain, “Companies need to not only build geopolitical expertise internally, but also seek out board members [and employees who] can improve [the organization’s] ability to interpret and navigate how geopolitics intersects with business.”[4] They add, “An additional benefit of this approach is that it can widen the pool of potential candidates for a company as recruiters consider candidates that might not have been targeted traditionally or hire from programs and schools that were not recruited from historically.”
According to Lee and Glosserman, the second thing organizations can do to improve resilience is ask the right questions. The best answers always come from asking the best questions. Finally, they insist companies must accept that politics are inescapable. They write, “Many firms, especially in the West, have historically tried to separate business and politics. This is now a false dichotomy in many situations, especially in international contexts.”
Concluding Thoughts
Mark Dohnalek, President and Chief Executive Officer of Pivot International, writes, “Trade wars. Lockdowns. Production standstills. Cargo backups. Container shortages. Demand surges. Labor disputes. And Russian sanctions. If the last several years have taught companies nothing else, it’s that strategic planning and risk management lie at the intersection of geopolitics and supply chain.”[5] He concludes, “Companies that lack the insight and agility to avoid the worst of it are those most likely to be buried.” Implementing the suggestions and recommendations discussed above can help a company avoid getting buried in a geopolitical morass. Even then, business leaders must demonstrate great deftness as they walk the geopolitical tightrope.
Footnotes
[1] Staff, “Global Trends 2040: A More Contested World,” U.S. National Intelligence Council, March 2021.
[2] Andrew Grant, Ziad Haider, and Jean-Christophe Mieszala, “How to build geopolitical resilience amid a fragmenting global order,” McKinsey & Company, 8 September 2022.
[3] Stephen DeAngelis, “Doing Business in Time of War: Nestlé and Ukraine,” Enterra Insights, 22 December 2022.
[4] David S. Lee and Brad Glosserman, “How Companies Can Navigate Today’s Geopolitical Risks,” Harvard Business Review, 28 November 2022.
[5] Mark Dohnalek, “Three Imminent Threats at the Intersection of Geopolitics and Supply Chain,” SupplyChainBrain, 31 May 2022.
