In today’s volatile global landscape, the ability to discern and adapt to geopolitical shifts has become a business imperative. Now more than ever, companies are affected by geopolitical disruptions, from trade wars to sanctions, customer pressure to reconfigure supply chains, military conflict, and government turnover.
That geopolitics can harm companies with cross-border operations is no longer contested. An April 2024 study by analysts at the Federal Reserve Bank of New York found that US export restrictions on certain technologies wiped $130bn off the stock market valuations of the affected American suppliers. Their employment and profitability also fell, highlighting the increasing necessity for businesses to move from reactive risk management to proactive geopolitical strategies.
The upshot: business leaders must develop sharper agility and foresight. Their ability to make informed decisions in this volatile environment hinges on the strength of their so-called geopolitical radar – their capacity to effectively track and assess these shifting dynamics. This was outlined in our recently published white paper ‘From Blind Spots to Insights: Enhancing Geopolitical Radar to Guide Global Business,’ the second edition of a three-part series published jointly by IMD, Boston Consulting Group, and the World Economic Forum.
Staying on top of shifts in the global business environment always made sense for international business. Intensifying geopolitical rivalry upends parts of that environment and sophisticated firms are revising how they track and evaluate the ensuing threats and opportunities for their business. In short, upgrading their geopolitical radar to provide relevant, up-to-date insights for senior management is at a premium.
Companies sharpen their geopolitical radars by drawing on diverse sources, not only from mainstream English-speaking media but local news outlets, podcasts, and even fiction, to paint a holistic picture of the geopolitical landscape while avoiding selection bias. Several firms interviewed also highlighted the value of local offices as vital intelligence hubs.
Engagement with customers and stakeholders can play a pivotal role too. One participant interviewed for this white paper emphasized tracking consumer sentiment, to identify reputational blowback stemming from geopolitical events. Others said they worked with local consultants to help refine their assessments, as well as engaged with think tanks and policymakers to provide insights into regulatory shifts and industrial policies.
Many executives we spoke to recognized that this was a journey – requiring a fundamental shift in mindset, from relying on a backward-looking, experience-driven approach to embracing a more forward-looking way to track and assess geopolitics.
“Their approaches ranged from establishing dedicated teams or working groups to holding frequent risk committee meetings dedicated to geopolitics.”
Once a sound understanding of geopolitical drivers and events has been established, translating it into the “so what?” for senior executives and board members is a critical part of developing a commercially meaningful geopolitical radar. Today, systematically assessing how a company’s operations are exposed to geopolitical factors should become standard practice – because it reveals in practical terms what’s at stake.
Exposure analysis reveals how external geopolitical events affect current and potential future company performance if management stands pat and lets an external geopolitical event or trend wash over it.
Exposure analysis involves financial estimates, assessment of the impact on other performance metrics, and assessments of the impact on internal capabilities in affected geographies and business units. The purpose here is not an exact prediction. What matters is scaling the impact correctly. Does the fallout from a geopolitical event have a seven-digit, eight-digit, or nine-digit consequence for a business if no mitigating measures are taken?
Some interviewees noted the importance of bringing the relevant people from across the firm together to assess impact. Their approaches ranged from establishing dedicated teams or working groups to holding frequent risk committee meetings dedicated to geopolitics.
Rarely can exposure analysis be done at arms-length – a firm must develop the needed internal capabilities and protocols. There’s no assumption here that there’s a one-size-fits-all solution in terms of how companies implement and operationalize their geopolitical radar.
Several interviewees reported that their companies undertake scenario planning initiatives.
Another way companies are strengthening their geopolitical radars is by adopting methods that governments have employed for years, particularly when it comes to assessing the longer-term implications of geopolitical trends.
Several interviewees reported that their companies also undertake scenario planning initiatives. Some acknowledged that they emulate the better practices of scenario planning employed by governments, international organizations, and leading independent experts in the field.
One interviewee noted that their company deploys an “iceberg model” to differentiate between geopolitical drivers and events to identify possible “no-regret moves,” in addition to informing strategy development.
Another interviewee emphasized the importance of articulating underlying assumptions, thinking through the possible sequences of outcomes and moves and associated feedback loops, and then assessing plausibility. Yet another interviewee called for imagination in identifying scenarios, which should draw from a wide range of sources, including fiction!
In turn, scenario planning initiatives can be augmented by gaming exercises of specific contingencies, most notably assessing the fallout following a potential escalated conflict in the Taiwan Strait.
The interviewed companies varied widely in how they communicated and preserved insights from geopolitical exposure analyses. Effective internal communication is critical for robust risk management. Some organizations rely on regular reporting cycles, such as quarterly updates, to brief senior management on geopolitical issues, while others share insights informally through ad hoc networks of executives with an interest in geopolitics.
These networks, however, tend to be fluid, and some companies have taken steps to integrate longer-term geopolitical scenario planning into their strategic processes. Few have established formal systems to store and track geopolitical developments and related assessments. All too often, whatever institutional memory there is relies heavily on the retention of individual team members, creating key person risks. In short, geopolitical radars require more systematic approaches to knowledge management.
Without a dedicated team, there is a risk that existing practices within a department influence what gets tracked and assessed.
The blurred line between geopolitical factors and general corporate political risks creates challenges in determining who oversees a company’s geopolitical radar. Our interviews revealed a range of approaches, with responsibility spread across compliance, strategy, government affairs, sourcing, legal teams, and sometimes dedicated geopolitical units.
Without a dedicated team, there is a risk that existing practices within a department influence what gets tracked and assessed. For example, compliance teams may focus narrowly on adhering to sanctions and miss nascent geopolitical developments. Meanwhile, strategy teams might lack detailed insights from experts in operational units such as sourcing. Establishing a dedicated team helps centralize efforts but still requires input from across the organization, such as observations CEOs glean from engaging with policymakers and local managers that track on-the-ground developments.
Integrating geopolitical assessments into enterprise risk management (ERM) systems is increasingly common, but many ERM teams struggle with the less quantifiable nature of geopolitical risks compared to financial risks. Addressing this gap requires a collaborative, forward-thinking approach that ensures geopolitical insights are shared and acted upon effectively.
There is considerable interest in how firms with extensive cross-border operations are reacting to intensifying rivalry between governments in a multipolar world. Understanding how international businesses seek to capitalize on opportunities in a global economy shaped by increasing security considerations is of interest not only to corporate executives but also to analysts, officials, and critical stakeholders, such as customers and investors. Developing a robust geopolitical radar is a critical initial step. Ships and airplanes need radars – so do international businesses.
Moving from an experience-driven, backward-looking identification of geopolitical risks to forward-focused tracking of geopolitical dynamics will shift decision-making from a reactive to a proactive posture – and could surface significant opportunities. Achieving this will require a deeper understanding of the drivers of such geopolitical dynamics. Armed with these insights, senior management is better placed to navigate geopolitics.
Ensuring that the internal geopolitical function overcomes legacy attitudes, supports institutional memory, reduces key person risk, and facilitates timely information sharing are part and parcel of effective geopolitical radars. Done right, this critical capability could itself become a source of competitive advantage – and possibly a core competence as well.
Click here to view the related white paper.
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