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The complexity of the global scene has clearly increased in the last years. There are ever growing risks and opportunities for organizations in the face of economic and financial constraints, trade tensions, social instabilities, conflicts, natural disasters, public health emergencies, and climate change. Recent polls by KPMG and McKinsey confirm that geopolitics[1] is a major current concern for leaders[2] and that the uncertainty that comes with it will affect their strategies.[3] For instance, hospital networks need to be prepared for epidemics, humanitarian bodies must be ready to react to calamities, and firms have to look out for the consequences of government policies for their markets, supply chains and industries. This is a brief overview of definition and methods of geopolitical analysis and forecasting, of advice provided by consulting companies and of structural recommendations by experts on how organisations can manage and leverage current and future geopolitical challenges.
Strategy and risk management are central to the role of a board of directors. They must take into account the changing nature of risks in order to adjust the adopted strategy. Risks of a political nature are one of several that need to be monitored. If the circumstances and events under survey are outside the country where the organisation is located, political risk becomes geopolitical risk. Even if an organisation only operates within one country, geopolitical developments can affect its activities. For this reason, boards need to take geopolitical analysis and forecasting into consideration as they monitor, manage and leverage risks.[4]
Geopolitical analysis and forecasting have long since moved beyond government institutions and academia into the world of think tanks, consultancies, non-profits and firms. The task encompasses the identification and interpretation of more or less permanent factors (geography, natural resources) and objective and subjective variables (demography, culture, economic situation, trade relations, domestic and regional institutional and political arrangements) that influence interactions between public and private actors over time and across spaces (either within or between countries, and in virtual areas) and that might affect an organisation.[5]
Retrospectively, in geopolitical analysis, one seeks to understand the past to assess the present, without falling into determinism. Prospectively, in geopolitical forecasting, the most likely developments of a current situation can be outlined. If the environment is of a certain kind of extreme uncertainty[6], it may be effective to build scenarios[7] of several possible outcomes.[8] Ideally, the exercise should enable boards and all levels of management to not only quickly interpret geopolitical developments as they unfold, but also to be prepared with the best plans to mitigate the impact of such events.
For competition and security concerns, most organizations usually do not disclose their own geopolitical analyses, forecasts, and scenarios. In spite of that, methods, approaches and recommendations are in the public domain. Some of the qualitative methods are research of historical and current documents, and interviews with or analysis of the discourse of key stakeholders, including in social media. Quantitative approaches may rely on public opinion polls and on economic, trade, demographic, electoral and defense data. For strategic forecasting, “crowdsourcing” or “collective intelligence” has come to the fore.[9] It was inspired by studies that questioned the ability of individual specialists in anticipating events.[10] The aim is to increase predictive accuracy through the involvement of larger groups, including non-specialists.[11] Recently, “crowdsourcing” has been combined with machine learning.[12]
There are several thematic approaches to geopolitical analysis and strategic forecasting. It is possible to analyse the role of the economy in the interactions between public and private actors at the domestic level of a country. No less important might be to evaluate how government election seasons bring challenges to strategic planning and execution.[13] Another focus can be the intensity of security and defense concerns on the behaviour of States and non-State actors, in line with the offensive realism school of international relations theory.[14] The participation of governments, business associations and civil society networks in multilateral institutions such as the G20, IMF, WTO, FAO, and OECD, and in the Climate Change Conferences can provide insights on the rollout of economic, trade and environment policies.[15] A focus on energy, for example, might suggest that anticipating opportunities in the energetic transition may lead to better results,[16] and that there will be geopolitical consequences from the increasing use of renewable energy, which will reduce the importance of oil transport routes.[17]
A variety of geopolitical analysis and forecasting tools is available. The Strategic Intelligence platform of the World Economic Forum (WEF) offers “transformation maps” on the connections between economies, industries and global issues. McKinsey and the WEF launched a public-private consortium to ensure growth in the face of external shocks.[18] The consulting firm has proposed that, to face geopolitical risks in a world that remains deeply connected, leaders should test the resilience of their organizations in several aspects: business model, reputation, operations, technology, and finance.[19]
In turn, KPMG has developed a “check-list” for the management of geopolitical risks, consisting of thematic leadership, resources and analytical capabilities to act in a crisis; communication channels between different operational levels; contingency plans; and supply chain resilience.[20] PWC has put forth recommendations of how to manage cyber risks related to geopolitical tensions[21] and of exit strategies from markets subject to sanctions.[22] BCG has advised that companies with major foreign trade activity should have a “Chief Trade Officer” who, on the one hand, would anticipate geopolitical changes that generate trade risks, and, on the other hand, would seize opportunities created by future changes in trade flows.[23]
In the sphere of scenario planning, there are several tools available. For instance, Deloitte Deutschland has established a strategic center that associates artificial intelligence with traditional methods of scenario building.[24] A few months ago, EY conducted a scenario study on the future of globalization, using geopolitical relations and public intervention in the economy as variables.[25] Blackrock has updated its quantitative risk forecasting tool based on market signals, with the purpose of supporting investment decisions.[26] KROLL has made projections of probability and impact of geopolitical risks.[27] CGI has predicted macro-trend developments, including the European Union’s positions on disputes between China and the USA.[28]
The question remains of how to integrate those tools into organizational capabilities. One older and three more recent articles provide important suggestions. Didier Cossin and Abraham Lu, writing for IMD in 2021, suggested three steps for oversight of geopolitical risks and opportunities.[29] First, boards need to gain competency, including through continuing education. Second, boards should oversee management in terms of preparedness, with a view to identifying the relevant geopolitical factors, assessing their impact on supply chain, finance, operations and stakeholders, and quantifying their impact under various scenarios. Third, boards should oversee an action framework, which includes prevention, exercise of influence, diversification and use of insurance and hedging.
In a new article at HBR, David Lee and Brad Glosserman allude to a “new national security economy” paradigm, characterised by connectivity, geopolitical competition, technological innovation, and the growing role of the private sector.[30] They propose four lines of action for companies: (i) hire people with interdisciplinary backgrounds and experience with geopolitics; (ii) weigh the geopolitical implications of corporate decisions; (iii) understand possible national identities of partner or competitor companies; and (iv) assess the reputational risks of operations in given circumstances.
Additional advice has been provided by Braz Baracuhy in a text for the WEF. He proposes a process of “corporate geopolitics” for companies to manage and leverage the external geopolitical environment for strategic purposes. His specific suggestions are focused on the role of a “chief geopolitical strategist” within boards, who would coordinate a focused team at headquarters, supported by groups at other sites, and would additionally draw on external insights, to provide geopolitical strategic thinking to the boardroom.[31]
It may also be helpful for boards to heed one of Martin Wolf´s latest advices in the Financial Times. He qualifies the global circumstances as “polycrisis”, in which economic and non-economic shocks are intertwined, and recommends getting out of the silos of isolated analyses and considering the interactions between social, economic, political, geopolitical, health and environmental developments when facing challenges.[32]
Each organization is subject to geopolitical risks in a particular way, depending on the historical moment, the specific type of operations and its countries or regions of focus. It is therefore incumbent on leaders to seek the most appropriate analytical and forecasting resources to ensure that structures, plans and human resources are optimally prepared for the challenges and opportunities arising of geopolitically relevant events. To fulfil this highly sensitive responsibility, leaders need opportunities for capacity building on how to manage and leverage geopolitical risks.
[1] There are several definitions of “geopolitics” in specialised literature. The traditional interpretation focuses on power and the struggle for control of spaces and territories. An alternative approach studies the interactions between different actors pursuing their interests at a regional and/or global level. Cf.: Flin, C.. Introduction to Geopolitics. Routledge, 2011.
[2] McKinsey & Company. Economic Conditions Outlook. September 2022. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/economic-conditions-outlook-2022
[3] KPMG. 2022 CEO Outlook. October 2022. https://assets.kpmg/content/dam/kpmg/xx/pdf/
2022/10/ceo-outlook-report.pdf
[4] Shagrin, D. & Chekroun D., 2022, Legal and practical suggestions for boards as they navigate the crossroads of corporate governance and geopolitics. In Bunkanwanicha, P., Coeurderoy R., Pérez Luque J., Schmid S. and Ben Slimane, S. Editor (Ed.), Geopolitics and Global Business Impact, ESCP Impact Papers.
[5] Csurgai, G.; “The Main Components of Geopolitical Analysis”. In: Criekemans, David (ed.), Geopolitics and International Relations. Brill, 2021.
[6] Augier, M.; Dew, N.; Knudsen, T. & Stieglitz, N. Organizational persistence in the use of war gaming and scenario planning. Long Range Planning, Volume 51, Issue 4, 2018.
[7] For the purposes of this article, “scenario” is a well-supported, trustworthy outline of a possible future state of world affairs affecting a given organization.
[8] Vecchiato, R. Scenario planning, cognition, and strategic investment decisions in a turbulent environment, Long Range Planning, Volume 52, Issue 5, 2019.
[9] Ghezzi, A., Gabelloni, D., Martini, A. & Natalicchio, A. Crowdsourcing. A review and suggestions for future research. Int. J. Manag. Rev. 20, 343–363.
[10] Tetlock, P. E. Expert Political Judgment: How Good Is It? How Can We Know? Princeton University Press, Princeton, 2017.
[11] Tetlock, P & Gardner, D. Superforecasting. The Art and Science of Prediction. Crown, 2015.
[12] Abeliuk, A., Benjamin, D.M., Morstatter, F. et al. Quantifying machine influence over human forecasters. Sci Rep 10, 15940 (2020)
[13] Baker, S., Baksy A., Bloom, N., Davis, S., and Rodden J. Elections, Political Polarization, and Economic Uncertainty. Working paper. No. 2020-145. Becker Friedman Institute. University of Chicago. https://bfi.uchicago.edu/wp-content/uploads/2020/10/BFI_WP_2020145.pdf
[14] Mearsheimer, J. The Tragedy of Great Power Politics. Norton, 2001.
[15] Keohane, R. Understanding Multilateral Institutions in Easy and Hard Times. Annual Review of Political Science. Vol. 23. 2020. pp 1-18.
[16] Propositions for a just energy transition in Brazil. Policy Papers. CEBRI, September 2022. https://cebri.org/en/doc/286/propositions-for-a-just-energy-transition-in-brazil
[17] A New World. The geopolitics of energy transformation. IRENA, 2019. https://www.irena.org/-/media/files/irena/agency/publication/2019/jan/global_commission_geopolitics_new_world_2019.pdf
[18] McKinsey & Company. How to build geopolitical resilience amid a fragmenting global order. September 2022. https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/how-to-build-geopolitical-resilience-amid-a-fragmenting-global-order
[19] McKinsey & Company. Global flows: The ties that bind in an interconnected world. November 2022.
https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/global-flows-the-ties-that-bind-in-an-interconnected-world
[20] KPMG. Signals of change and the risk agenda. July 2022. https://advisory.kpmg.us/articles/2022/cae-signals-geo-politics.html
[21] PWC. Cybersecurity & geopolitical conflict: What boards and CEOs should know and act upon. https://www.pwc.com/us/en/services/consulting/cybersecurity-risk-regulatory/library
/cybersecurity-geopolitical-conflict-board-ceo-response.html
[22] Managing risks from geopolitical crises. PWC. https://www.pwc.com/us/en/services/consulting/cybersecurity-risk-regulatory/library/managing-risks-from-geopolitical-crises.html
[23] BCG. Why Trade Companies Need a Chief Trade Officer. November 2022. https://www.bcg.com/publications/2022/why-international-trade-companies-need-a-chief-trade-officer
[24] Dynamic Strategy Approach. Deloitte Deutschland. https://www2.deloitte.com/de/de/pages/strategy/solutions/scenario-planning-and-ai.html
[25] Geostrategic Business Group. The CEO Imperative: Prepare now for the new era of globalization. EY Global. September 2022. https://www.ey.com/en_gl/geostrategy/future-of-globalization
[26] Geopolitical Risk Dashboard. Blackrock. September 2022. https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/geopolitical-risk-dashboard#risk-summary
[27] 10 of the Biggest Geopolitical Risks by Likelihood and Impact. Kroll, September 2022. https://www.kroll.com/en/insights/publications/10-biggest-geopolitical-risks-by-likelihood-and-impact
[28] The trends shaping our future: A prelude to strategic planning. CGI. https://www.cgi.com/sites/default/files/2022-05/cgi-macro-trends-white-paper-en.pdf
[29] Cossin, D. & Hongze Lu, A. Board Oversight of Geopolitical Risks and Opportunities. May 2021. https://www.imd.org/research-knowledge/articles/board-oversight-geopolitical-risks-opportunities/
[30] Lee, D. & Glosserman, D. How Companies Can Navigate Today’s Geopolitical Risks. Harvard Business Review. November 2022. https://hbr.org/2022/11/how-companies-can-navigate-todays-geopolitical-risks
[31] Baracuhy, B. Corporate geopolitics: How boards navigate a complex and volatile world. World Economic Forum. October 2022. https://www.weforum.org/agenda/2022/10/corporate-geopolitics-how-boards-navigate-a-complex-and-volatile-world/
[32] Wolf, M. How to think about policy in a polycrisis. Financial Times. November 2022. https://on.ft.com/3UwFFSp
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