What if, by May 2017, “non-liberal” movements and parties were in power in the U.S. with Donald Trump, France with Marine Le Pen and Austria with Norbert Hofer? The overall geopolitical configuration would most probably greatly change, in areas such as the tensions between “the West” and Russia, the upheavals between the U.S. and Eastern Asia, the European Union’s definition, policies and survival, or the TTIP and more largely the neo-liberal economic approach, without forgetting relations with the Middle-East. Would this impact most businesses? Yes, most probably.
What if the defeated parties, candidates and their supporters, in these three coming presidential elections – whichever they would be – refuse to accept the results? Considering the way some proponents of the “Remain” in the U.K. refused – and still refuse – to accept the democratic vote of the “Brexit”, such reactions, unthinkable a few years ago, have become a very real possibility (e.g. Brendan O’Neill, “The howl against democracy“, 26 June 2016; “Democracy is hanging by a thread in this country“, 6 September 2016, The Spectator; Uri Friedman, “Should the Brexit Vote Have Happened at All?” The Atlantic, 27 June 2016; BBC News, “Brexit case ‘of fundamental constitutional importance’“, 13 Oct 2016), even if likelihood still must be discussed. Would we head towards institutional deadlock, extreme polarisation, or instability, if not civil wars in the U.S., France and Austria? Is the trend towards less democracy to continue? Would this impact most businesses? Yes, most probably.
Should businesses envision such scenarios (even if their likelihood widely varies) coldly, without considering any personal and individual preferences? Should businesses, actually, envision all possible scenarios, not only those outlined above? Yes, they definitely should, because it is only by properly identifying scenarios for the future that correct answers may be designed, and profitability – to say nothing of survival – be ensured. In turn, all staff should also be keen to see their employer properly designing answers, because, at the end of the day, their job is at stake, with overwhelming consequences in all areas of their lives should their company downsize or close down.
The question is: will businesses consider these political and geopolitical risks and uncertainties and how?
Our aim with this series of articles is to understand better the relationship between businesses or the corporate sector and geopolitical and political risks and uncertainties, as well as those actors who are specialised in their study, and to suggest elements of answers and solutions that should help businesses to properly address these “risks”.
We shall first look, with this article, at general trends regarding the way businesses’ executives perceive and deal with geopolitical and political risks and uncertainties, using mainly the results of a survey published by McKinsey in May 2016*. This part will allow us identifying a first series of questions and features.
With forthcoming articles, we shall turn to three main examples where geopolitics and politics impacted businesses: the Brexit (“Lessons from and for the Brexit – Geopolitics, Uncertainties, and Business (2)“), the crisis in Ukraine and impact on some sectors (“Lessons from the conflict in Ukraine – Geopolitics, Uncertainties, and Business (3) and (4)”), the Islamic State’s terrorist attacks (“The Impact of the Islamic State Terrorist Attacks – Geopolitics, Uncertainties, and Business (5)”), and, to which we shall add a couple of emerging new or recent uncertainties. We shall use these examples to point out a few key elements related to geopolitical and domestic instabilities’ risks and uncertainties and what they mean (or should mean) for businesses. Finally, we shall deduce from these cases practical ways forward.
Geopolitical risks, what increasingly keeps executives up at night
Back in May 2016, McKinsey Global Survey on globalisation pointed out that “in two years’ time, the share of respondents [executives across regions, industries and companies’ sizes] identifying geopolitical instability as a very important factor affecting their businesses has doubled” (Drew Erdmann; Ezra Greenberg; and Ryan Harper, “Geostrategic risks on the rise“, McKinsey & Company, 2016). Thus, 84% of executives now consider that these risks will have an impact on their business, and 49% a very important one, besides domestic instability, which is mentioned by approximately 66% of respondents (Ibid.).
Interestingly, what businesses have in mind when they think about “geopolitical instability” and domestic ones, always according to the same study, is mainly “uncertain or restrictive regulatory environment” (from 40% to 54% according to sectors), followed by “political or social instability” (from 27% to 43%) – and “disruption to supply chain” (27%) for the manufacturing sector – “protectionist and trade related policies” (from 17% to 32%), and only far behind “volatile prices of commodities” (from 9% to 33%) or High levels of public debt (from 5% to 24%)(Ibid., exhibit 3).
The answers, logically, differ according to sectors. The manufacturing sector is more concerned about what can disrupt its production and its transportation, compared with financial services, which are obviously not so worried about these risks, indeed quite irrelevant for them, at least directly. The differences in answers thus first point out, as stressed by McKinsey, the need to consider corporate sectors according to type of activities rather than an undifferentiated “businesses”, if we want to deliver useful actionable anticipation.
Finally, businesses, assuming that McKinsey’s survey is representative, understand “geopolitical risks” differently from those who are meant to help them understanding these risks. First, the broad label of geopolitical risk has hardly anything to do with geopolitics, “a method of foreign policy analysis which seeks to understand … international political behaviour in terms of geographical variables…” (Evans and Newnham, The Dictionary of World Politics, 1992). Then, specialists would tend actually to have in mind what is part of their field, mainly international relations – or international politics – and the study of escalation to war or out of war (in a nutshell, the discipline started by Alfred Zimmern right after World War I in Aberystwyth). To accommodate with historical developments, scholars then, in terms of issues, would look at what could impact security, understood as the security of human societies organised as polities. If we use Buzan’s pioneering work, we thus have five main sectors: military, political, economic, societal and environmental, “all woven together in a strong web of linkages” (Buzan, People, States and Fear, 1991: 20).
We thus have quite a strong disconnect between the perception of businesses and the communication of understanding and accumulated knowledge generated by “geopolitical experts”.** When the latter talk about war, be it civil war or interstate ones, at best they directly address, from a business perspective, only “supply chain disruption” (one of the risks deemed as least important, save for the manufacturing industry) and part of “political and social disruption”.
Yet, political and geopolitical scholars could also explain and contribute to monitor, for example, that high levels of public debts (a geopolitical risk which is not deemed as very important for businesses , see above) could have, at second and third order effect a much higher impact on businesses’ operations than thought. Indeed, the capability of a state to maintain a secure enough environment to allow businesses to operate depends also on the level of public debt or more exactly on the resources available to the state (see Seeking Security; Budget Deficit and Liquidity; Public Resources and Lenders in The Chronicles of Everstate, RTAS January/Feb 2012): without resources the state cannot ensure its fundamental missions, and thus essential functions such as police cannot be fulfilled successfully. Infrastructures – if they have not been liberalised (note that their privatisation also faces its own challenges, e.g. water, “Learning from water privatization” in The Chronicles of Everstate, RTAS July 2012) – cannot be maintained. Also public debt and state budgets may imply institutional deadlocks – as has been the case in the U.S. (e.g. Clinton T. Brass, “Shutdown of the Federal Government: Causes, Processes, and Effects“, Congressional Research Service, 2011 ) – with also impacts on businesses’ main concern, regulations. It is thus crucial that political and geopolitical experts make the effort to help executives deciphering their geopolitical environment.
The gap between the two perspectives is not a fatality and only needs to be bridged, while a common vocabulary is developed. Yet, the bridge must be built if hundred of years of efforts are not to be wasted when it could be used by businesses, and if businesses are to improve their odds when facing and dealing with “geopolitical and domestic instabilities”.
A need to change perspective to go beyond negative impacts
Then, businesses estimate the impact of the geopolitical and domestic instabilities to be largely negative: 57% (for geopolitical instabilities) and 58% (for domestic instabilities) (McKinsey, Ibid., exhibit 2).
Yet, and this time placing ourselves from the point of view of strategic foresight and warning, risk management (in its 2009 approach) or more broadly, anticipation, we know that what has a negative impact is not so much “instabilities” but the inability to foresee them properly and thus to answer in a timely way these coming changes. To use the wealth of military and intelligence understanding existing on the topic (see J. Ransom Clark, The Literature of Intelligence: A Bibliography…, “Strategic Warning: Surprise, Intelligence Failures, and Indications and Warning Intelligence“), what must be prevented is surprise.
This was well expressed by Guenter Taus, the head of the European Chamber of Commerce in the Philippines, faced with the rapidly changing situation in the Philippines under the impulse of President Duterte (e.g. Reuters, “China confirms Duterte visit amid strained U.S.-Philippine ties“, 12 October 2016):
“We can all deal with risks. We can put measures in place to provide for risks… But uncertainty is a factor that we do not like in business, and that is exactly what we’re experiencing right now because we don’t know where we are heading.” (Guenter Taus in Associated Press, “Uncertainty over Philippine president alarms investors“, Asahi Shimbun, Oct 3 2016)
By focusing mainly on instabilities, or risks (i.e. most of the time pre-identified probability x impact, which is still how most people understand a risk, despite the new ISO 2009 definition – see H Lavoix, “When Risk Management Meets Strategic Foresight and Warning“, RTAS, 5 May 2014, updated June 2016 ), the corporate sector deprives itself from the capability to, potentially, turn instability into an opportunity, as well as to answer an often inescapable instability better than its competitors, which would then provide a specific company with a definitive advantage.
Moving out of fatality?
Finally, McKinsey’s study stresses that, even though, executives have developed a new awareness of “geopolitical and political risks”, even though they point out the potential negative impact to their businesses, they have not started addressing properly these risks: only 13% have taken steps to address both risks of geopolitical and domestic instabilities (exhibit 4).
Furthermore, and strangely enough, although 58% deemed that “comprehensive scenario methodologies, integrated into a strategic planning process” – of the type we are promoting and doing here at The Red (Team) Analysis Society – are the most efficient way to address these risks, only 18% of executives and their companies use “scenarios”. Meanwhile, the large majority tend to use internal analyses (ad hoc or not) and external think tank resources, such as specialised reports, ad hoc analyses, consultancy and dialogue with external experts, yet executives consider these ways to face geopolitical and domestic risks as less efficient (exhibit 5).
The reason for the lack of efficiency of internal analysis, on the one hand, and of the use of external think tanks and consultants – probably specialised in international relations, on the other hand, lies in what we uncovered in the first part: the difference and discrepancy between languages, center of interests and education, somehow between supply and demand. If two sets of actors do not understand each other, and live on different planets – not to say in different universes – then it is most likely that unsatisfactory relationships will follow.
The more frequent use, nonetheless, of these two “inefficient approaches” most probably comes from the fact that these approaches are what is mainly available.
Furthermore, the absence of training of most international relations specialists in anticipation methodologies, and of “business-related anticipation experts” in international relations, most probably also participate in the generalised use of an expertise considered as inadequate.
Finally, developing scenarios, assuming the right expertise is available, if it is well done is also a relatively long, resource-intensive and thus more expensive and demanding process than buying a generalist subscription to one think-tank or another. This supplementary cost, fundamentally allows for more profit and less losses, but may also be perceived as just a new supplementary cost by companies. As a result, this perception might also be an element in the current lack of use of the methodology deemed most efficient.
Meanwhile, a timeframe issue may also emerge. If a business needs scenarios in the next hours – actually for yesterday because the crisis is now evident, when one month or a couple of months, according to the scope of the issue and level of details, would necessary to obtain proper actionable scenarios, then it may just give up and think it is too late to use scenarios. There are ways to overcome this challenge, including because it is never too late to make scenarios, accepting and taking hold of unfolding crises, within the bounds of possibility and quality.
If businesses are unsure of the way to address geopolitical and political uncertainties, and tend to believe that what is mainly on offer is inefficient for their needs and purpose, then it is not that surprising that they fail to take practical steps forward, and remain caught up in the geopolitical whirlwinds.
This is not, however, a fatality. Using the McKinsey study, we have identified a few crucial yet still general elements that shape the way businesses address – or not – geopolitical and political uncertainties and started thus envisioning ways forward. With the forthcoming articles, using specific cases, we shall look at the way geopolitical and political uncertainties (and crises) impact businesses, so as to refine our understanding of what could be done better.
*Initially, we planned to also use the part of the Global Risk Report 2016 (GRR), published yearly by the World Economic Forum, which is dedicated to businesses and global risks (part 4 for the GRR 2016, pp. 69-78). However, the differences between the McKinsey study and the WEF approaches are so important that comparison and even complementarity, for our specific purpose, are impossible.
The McKinsey’s study concerns risks that will impact “global business and your own business” in the coming years, and more specifically (see exhibit 3) “risks that will most affect organizations in countries where they operate over the next 5 years”. Meanwhile the GRR questions are about “the five global risks that they [business executives] were most concerned about for doing business in their country within the next 10 years” (p.69, see also appendix C, p.90). The way the question is asked (at least as portrayed in the report) tends to rule out foreign operations as well as international trade – surprisingly considering the World Economic Forum outlook.
The GRR survey is thus less relevant to our purpose and will not bring us further insight into the relationship between businesses and “geopolitics”.
Furthermore, the period when the survey were conducted is different too. The McKinsey survey was done between 3 and 13 November 2015, while the GRR was conducted between February and June 2015. Considering the evolution of the war against the Islamic State and its impact notably in Europe, to have a better understanding of the GRR results, we would need to wait for the forthcoming results, corresponding to a survey conducted around Spring 2016.
**Note that the discrepancy most probably comes from the fact that, initially, international relations – and foreign policy – belonged mainly to the state and that it was meant to serve the state and governments by training diplomats, analysts and policy-makers. The discipline thus covers and deals with issues and categories that are relatively congruent with the organisation of the modern state. With the withering away of the state (at least in the liberal world), businesses must face, in a novel way new tasks for which they are not prepared, while “geopolitical specialists” must work with new types of decision-makers, with very different concerns… and education.
About the author: Dr Helene Lavoix, PhD Lond (International Relations), is the Director of The Red (Team) Analysis Society. She is specialised in strategic foresight and warning for national and international security issues.
Featured image by Solomon_Barroa, CC0 Public Domain, via Pixabay.
Barry Buzan, People, States and Fear – 2nd edition: An agenda for international security studies in the post-Cold War era, (New York: Harvester Wheatsheaf, 1st edition 1983, 2nd edition 1991)