Why (and how) companies should better prepare for geopolitical threats

Firms should be prepared for worst-case scenarios and identify important risks to their day-to-day operations

IESE Business School
Published: Oct 17, 2019 01:52:25 PM IST
Updated: Oct 17, 2019 02:12:40 PM IST

g_122441_geopolitical_risk_280x210.jpgImage: Shutterstock

From a geopolitical perspective, we are living in turbulent times. Looking across the large number of crisis and hot spots around the world it is clear that the overall geopolitical situation is much less stable than at any time since the end of World War II. Yet in my view, large multinationals are increasingly vulnerable to, and unprepared for, geopolitical shocks.

The example of India is a case in point. I recently had the pleasure of travelling to New Delhi, Mumbai, and Bangalore in order to speak about geopolitics to members of IESE Business School´s Alumni Association, alongside perspective MBA students, other business leaders, diplomats and educators. What I found striking, was that none of the people I spoke to seemed to be thinking about the possibility of a major geopolitical shock being on the near horizon for India (and thus preparing their companies accordingly.)

What became clear in my talks is that Prime Minister Narendra Modi dominates the political landscape. Although there are differing views concerning the effectiveness of his reform agenda, what does appear to have broad support is the revocation of article 370 of the Indian Constitution and Modi’s move to regularize the situation of Jammu and Kashmir within the Indian union. Pakistan has since responded to the move with political statements by Imran Kahn and threats of war from its military. However, none of the business people I spoke to during my trip seemed to seriously consider the possibility of war with Pakistan (and the implications for their business), despite the difficult history between the two countries.

If war did break out, India’s Information Systems and Business Process Outsourcing sectors would be at risk. These industries account for 8% of the country’s economy and rely on India’s telecommunications and data networks to connect them with their global customers and partners. Many international companies also have significant IT assets in India, which also rely on the same networks to communicate with head office.

These networks are vulnerable to weaponized viruses or even direct sabotage in times of war. While Pakistan may or may not have such capability, there is little doubt that China does possess it. Additionally, many companies have complex supply chains that assume free movement of aircraft and shipping, which is also at risk.

The lack of preparedness for this situation is a good example of how business people choose not to think too much about potential major geopolitical shocks, even though there is a large community of analysts, diplomats, journalists, and military people who are immersed in such issues.

Why the disconnect?
The reasons for this lack of preparedness has to do with the way most large companies are organized. There is a mismatch between the short-term orientation of many managers and the long-term perspective needed to understand geopolitical trends, as well as a number of issues connected with how international managers are recruited, promoted and compensated.

Just one example of the current reality is the emergence of global matrix structures in many large companies, which have largely replaced the role of the old style country managers.

Now, instead of having country managers, many large companies have senior executives who are responsible for large global business groups, as well as other people running different areas of the world, and still others responsible for global corporate functions (such as Finance, Human Resources, Information Systems and Supply Chain.)

The old Country Mangers played a two directional role – both representing the firm within the country, and also explaining the country´s situation to people inside the company. It is difficult today to find any local people in many companies with that degree of insight,  or the ability to sound the alarm based on weak signals of impending problems.

Another reason why business leaders may not always call attention to potential problems is that they are typically not well trained for such analysis. Furthermore, even if they were, our success driven business culture does not reward such behavior. In most companies people are rewarded and promoted for making things happen – and not for expressing doubts and advising caution in the face of slow burning, long term issues.

How companies can be more resilient
The good news is that it is possible to improve the resilience of large multinationals to geopolitical shocks. Concrete steps include actions such as:

  • -    involving the Board of Directors in scenario planning exercises,
  • -    building redundancy and slack into global supply chains and IT systems
  • -    re-thinking aspects of human resources policy.

The essential idea is to recognize that turbulence is the new normal and it is unlikely that a stable, predictable world order will emerge any time soon. This means that firms should think through the worst-case scenarios and identify important risks to their day-to-day operations.

Of course, we hope these worst-case scenarios won´t happen. But for companies which rely on its data connections to the outside world, it makes sense to increase the resilience and security of such systems ´just in case.´

By Mike Rosenberg, Associate Professor of Strategic Management at IESE Business School and author of the book Strategy & Geopolitics

[This article has been reproduced with permission from IESE Business School. www.iese.edu/ Views expressed are personal.]

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