In this episode of Inside the Strategy Room, we feature a discussion on geopolitical resilience: what it is, why companies need it, and how to build it in your organization. We spoke with Ziad Haider, McKinsey’s global director of geopolitical risk, Leo Geddes, co-lead of our geopolitics client service, and Olivia White, a director of the McKinsey Global Institute, about how to navigate the shifting dynamics. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.
Sean Brown: How are geopolitical dynamics changing?
Olivia White: We are seeing rising geopolitical tension, from the changing role of China to the strained relationship between the US and China to Russia’s invasion of Ukraine. We live in a world of tremendous economic connection but geopolitical fragmentation, and everybody operating in business today has to reckon with those two realities. It’s a multipolar world (Exhibit 1). Since about the end of World War II, U.S.-aligned nations were responsible for most of the world’s material capability alongside a steady rise of the Soviet Union. That changed quite drastically with the dissolution of the Soviet Union. Since then, China has been moving up.
Sean Brown: There’s been talk recently about the end of globalization. Does your research support that view?
Olivia White: The fact is that global trade has been growing for the past ten years at about the pace of GDP. Trade between the US and China over the past year was as significant as it’s ever been. The connections linked to that continued growth of trade are real.
The trade patterns are important for any company thinking about the implications of geopolitical tension on its operations. Asia–Pacific, China, and the EU are highly dependent on other regions for the bulk of their resource needs: minerals, energy, grains. On the other hand, many developing economies are net providers to other regions of such resources. North America is a mixed story—not as dependent on any region for any single thing, but somewhat dependent on everyone for everything. Finally, China and many developing regions are highly dependent on others for IP. The nature of these connections evolves over time but quite slowly. You see only a percentage point or two shift in any given year.
Sean Brown: What vulnerabilities in these economic connections could affect company operations?
Olivia White: Forty percent of global trade is concentrated, meaning that the importing economy depends on three or fewer other economies for supplying its goods or services. Two kinds of concentration make a country—and potentially companies within it—more vulnerable to disruption. The first type is global concentration where most of a particular good is supplied by two or three countries. Soybeans are a great example: most soybean exports come from the United States or Brazil (Exhibit 2). The second type, which accounts for about 30 percent of global trade, is economy-specific concentration where countries buy from only two or three supplier nations despite there being multiple choices. Take wheat: roughly 15 countries supply about 90 percent of global wheat, but Turkey gets almost all its wheat from Russia and Ukraine. Bananas are an interesting one: Russia purchases 95 percent of its bananas from Ecuador even though a number of countries produce bananas. This highlights that companies are dependent on what’s happening in just a few parts of the world.
Sean Brown: Is it easier then, in case of a disruption, to obtain some goods from elsewhere or find substitutes than for others?
Multinationals are at the eye of this storm. They disproportionately provide economic connections across the world, and thus are disproportionately influenced by global fragmentation and the uncertainty that produces.
Olivia White: Absolutely, but the amount of time it takes to shift from using one good to another varies tremendously. For example, the wheat I buy from Russia is largely the same as the wheat I buy from Ukraine, Canada, or Argentina; not so for computer chips. And I might choose to eat or feed my livestock corn or soy instead of wheat in a pinch. I won’t shift from memory chips to diamonds, for example.
Multinationals are at the eye of this storm. They disproportionately provide economic connections across the world, and thus are disproportionately influenced by global fragmentation and the uncertainty that produces (Exhibit 3). Multinationals are responsible for 32 percent of global value-added flows and 64 percent of exports. When it comes to knowledge-intensive goods, such as electronics or pharmaceuticals—things that tend to be least substitutable—that number rises to 82 percent.
Sean Brown: How do these trade dependencies play out for different types of multinationals?
Olivia White: As an example, we ran simulations for automotive companies to see the impact of a disruption to global trade flows, and we found a 40- to 60-percent reduction in enterprise value. Many companies are wondering whether they should shift out of some regions or isolate their operations. We find that depends on the nature of the connections, and that in turn depends in large part on company type. We divide multinationals into four archetypes: makers and deliverers, such as automotive and retail companies; fuelers, such as oil and gas companies; discoverers and technologists, where pharma or semiconductors would sit; and financiers. When a company asks, “How do I think about my China operations?”, the answer is very different if you are selling into China than if you produce in China. It’s important to distinguish between different forms of interdependency and the associated value at stake.
Sean Brown: Ziad, you worked in US national security before joining McKinsey. What’s your take on these geopolitical shifts?
Ziad Haider: As Olivia highlighted, the world has never been more connected from an economic point of view, but we are also experiencing greater fragmentation than ever in our lifetimes. It’s a bit of a global paradox. If you look at the national security strategy that the US administration issued last October, the key phrase was “decisive decade.” The erstwhile hyper-power that led hyper-globalization recognizes that we are in a different era, that the US is competing with other powers now, and that the terms of that competition will be set over the next ten years.
The world has never been more connected from an economic point of view, but we are also experiencing unprecedented fragmentation. It’s a global paradox.
One significant fracture is in Europe amidst Russia’s invasion of Ukraine. The disruption it has caused costs human lives, so we cannot think of it just in commercial terms, but the spillover effect from an energy, defense, and strategic points of view has been a watershed moment. Look no further than Finland and Sweden, which for a long time kept NATO at bay but recently decided to join. Look at the defense budget posture in Germany and the energy posture elsewhere in Europe.
The other major fracture is in the Indo–Pacific, which has had a long period of stability and peace. From a Western point of view, the tagline for China’s relationship with the West is “de-risk, but not de-couple.” There’s a desire to carve out sectors of the economy where there are national security sensitivities, but also a recognition of the flows Olivia illustrated. A US official I spoke with recently said, “It’s very hard to do surgery on conjoined twins.”
The ground underneath all of this is shifting because we are moving from a unipolar to a multipolar world. That element of multipolarity will create more friction points whose impact will trickle down to businesses.
Sean Brown: Are these concerns prominent in top executives’ minds?
Ziad Haider: In our surveys looking at top agenda items for boards and CEOs, it is geopolitics, and it’s moved from being the purview of government relations and chief risk officers to that of CEOs and boards. As one CEO told us, “Geopolitics now trumps capital markets.” Another said, “We have a pretty good understanding now of the problem, but we don’t have great solutions.” The framing we use is geopolitical resilience. It is easy to talk about risks, but within these shifting geopolitical currents, there are also opportunities.
Sean Brown: Before we talk about solutions, could you pinpoint which fractures are most significant for company strategies?
Ziad Haider: One watch point is, of course, trade and the different barriers currently in place. The second is technology. The third one is human rights issues, which are not just about values but have hard business implications for supply chains. The fourth is domestic politics, not just in the US and European capitals but in China too.
Sean Brown: Given their economic influence, are multinationals flexing their muscles to influence their countries’ geopolitical policies?
Ziad Haider: Olivia mentioned the influence of internal forces—your employees expecting you to take a position of principle. Another aspect, however, is that it’s a bit of “shape or be shaped.” Practically, the role of business is to be a bit of a conduit, so what nodal connectivity can businesses provide? For many companies, these external fissures are coming home to roost where colleagues in different markets have different views from headquarters. How are you negotiating those views and maintaining a one-firm dynamic?
Sean Brown: How can companies develop geopolitical resilience and proactively manage these dynamics?
Leo Geddes: We see three buckets of actions. First is the idea of sense and understand. The best organizations are building ways to understand the world around them, for example through AI-backed sentiment analysis or media analysis fused with their own interpretation of what they see at the frontlines. They then present that back to decision makers in an easily digestible way. They also make sure that they have a set of scenarios covering both the extreme eventualities that might come their way and “gray rhinos”—things you can see coming but you need to take action to manage them. The third part of sense and understand is around feedback loops. Given the changing externalities, organizations need to be able to learn and adapt, which requires structures and systems that allow leaders to shift their approach and posture as new information surfaces.
Sean Brown: Aside from gathering and interpreting signals and preparing for different eventualities, what other measures are you seeing?
We have seen time and time again the importance of the board in helping steer the organization as it deals with geopolitical externalities. You can’t have a situation where the first time the board talks about an issue is when it’s already a crisis.
Leo Geddes: This second area is around building capability and organizing. We have seen time and time again the importance of the board in helping steer the organization as it deals with geopolitical externalities. You can’t have a situation where the first time the board talks about an issue is when it’s already a crisis. It’s important to get the board into a mindset that they will be expected to lead on geopolitical topics and need to start discussing how they may react to various circumstances.
You also need to build geopolitics into the heart of your decision making, because these issues can influence decisions across the organization. Finally, companies should establish structures to deliver on those decisions. In practice, it means making sure that, across legal, risk, and communications, your teams are operating as one and hand in glove with business units.
Sean Brown: What’s the third bucket?
Leo Geddes: It’s about acting and communicating. You should think about segmentation and organizational configuration. For example, do you need to have your technology and data in one region versus another? Should you think about approaching capital markets in country X for resources to use in that country? You also need a clear narrative and recognize that it will reach both your external stakeholders—shareholders, regulators, customers—and your internal stakeholders, namely your employees. Workers now have their own voice and companies can be tripped up quickly if they are found to be inauthentic, with one narrative externally and something else internally.
The final point is that while geopolitics happens at a national level, it’s felt deeply personally. Leaders need to hold difficult conversations around geopolitical topics in a way that is genuinely inclusive and allows the development of a shared view, or at least an open discussion. Your employees are looking for those signals to get a sense of, “Do I fit in here? What is our organization about? Does it understand me as an individual and us as a group?” I want to stress that the aspects of resilience in these three buckets are not a menu that you pick from but a comprehensive set of actions that all organizations should take.
Sean Brown: Can you offer some practical tips on how to develop these dimensions of resilience?
Ziad Haider: In the sensing and understanding category, do you have a common baseline of facts? Providing monthly updates can upgrade leadership’s understanding of these topics and separate the noise from the signal in terms of what matters to the organization. You also need to decide who develops and coordinates this content—does it lie with government relations or strategy? Many organizations are standing up dedicated geopolitical risk or policy units.
When we think of oversight, it’s easy to focus on countries that are flashing bright red from a geopolitical risk point of view, but you need to bring a more granular lens to your global footprint. One discipline we have seen clients employ is a mapping exercise that differentiates varying degrees and categories of geopolitical risk. Think also about controls to put in place in each market that help you manage the risk, then every month the leadership team or the board reviews this document. That creates a disciplined way to talk about geopolitical risk versus getting pushed off your beat by the next headline or event.
Sean Brown: How can companies map geopolitical risks that are distant and unlikely, the so-called black swans and other unknown or unexpected events?
Ziad Haider: A lot of what we just discussed was about managing your near term. Equally important, and more so after Russia’s invasion of Ukraine, is the need to look around the corner. One could hypothetically put down some ideas. Is it another pandemic? Is it a climate catastrophe? Are there events that, as with COVID-19, could completely disrupt your supply chains? You also need to think about the gray rhinos that Leo mentioned—the known risks. They are charging at you. How will you get out of the way?