Minding the very visible hand of geopolitics in business

A cargo ship heads into port in Bayonne, New Jersey. As surging inflation and supply chain disruptions are disrupting global economic recovery, the Washington-based IMF has projected that global gross domestic product will grow by 5.9% this year — a 0.1 percentage point lower than its July estimate. The IMF made the lower forecast in its World Economic Outlook.
Photo by Spencer Platt/Getty Images

For most corporate managers, the thrust-and-parry of geopolitics have long made for entertaining water cooler chats at best. These managers leave politics to the politicians while they focus on market fundamentals to run their companies. Politics to them is a case of nice-to-know, as opposed to need-to-know for business operations.

If you are one such manager, it is time to reconsider your worldview. If you are to continue building a business that is constantly competitive, innovative and well-managed,  recognise that political movements that open markets to you and provide fresh business opportunities might, in uncertain times, also shut your operations and cause opportunities to dry up. All activities of your company, from securing supplies, managing a global workforce, and serving customers to growing the business and responding to climate change can be challenged by geopolitical tensions, nationalist rumblings, and even domestic policies of foreign governments. For example, a September 2019 study by financial intelligence firm Moody’s Analytics found that the worsening United States-China trade war has led nearly 300,000 Americans to lose their jobs in just one year, as well as an estimated 0.3 per cent drop in real US GDP. The study also cautioned that this trade war was entering “a dangerous new phase”. Other observers concur that continuing conflict between the US-China might spell economic disaster.

The Covid-19 pandemic, and the pursuant responses, has exacerbated some of these challenges. Supply chain disruptions are affecting a wide range of goods, from computer chips and medicines to meat and lumber. Meanwhile, mandatory telecommuting amid travel bans has worn the world’s workforce down.

There seems little respite because consumer prices are soaring even as policymakers everywhere try to balance the trade-off between spurring economic growth and spiralling inflation. Add to that the increased scrutiny of foreign investments and mergers and acquisitions by market regulators around the world, all of which is complicating the entry and expansion of companies into new markets.

Rarely has Adam Smith’s metaphor of “the invisible hand” been writ so starkly. Smith, the 18th century Scottish political economist and philosopher, referred to self-interested individuals being led, as if by an invisible hand, to generate social benefits and public good . That is, Smith’s “invisible hand” creates a market where firms and consumers choose freely what they buy, produce, or sell or how they operate without the need for explicit government interventions.

While managers can, of course, adapt to factoring geopolitical risks into their decision-making, today’s disruptive business landscape may thwart their efforts. A recent study by EY-Parthenon, the global strategy consulting arm of accounting giant Ernst & Young, found that the confidence of global executives in their ability to manage political risks has plummeted. That likely has a lot to do with how much of their time and energy is soaked up in managing such risks, from figuring out alternative ways to secure market access, pre-empt adverse policy and regulatory actions and helping their business models evolve. Managers are thus left with little time to pursue their bread-and-butter concerns such as market expansion, service improvements and workforce enhancement. Existing research corroborates this notion, showing that managing geopolitical challenges comes at great costs to a business.

How, then, should managers operate in this environment?

First, stay sensitive to changes in politics by proactively scanning the environment in which your business operates so you can best anticipate and identify potential challenges before they become business risks.  Many managers tend to react to specific political events related to an investment or a new project, and consider political risk only when investing in new markets. Such a reactive approach does not make for resilient companies. A proactive approach requires a different outlook. Instead of thinking, for example, that “Singapore is a regional hub for the world’s companies”, ask yourself: “How will my organisation have to respond if Singapore is no longer a hub for the world?” or “How can we best prepare our busines for less porous borders?”

In your proactive endeavour to keep tabs on geopolitical developments, insights from diplomats, business associations, community leaders and leaders of non-governmental organisations often prove helpful. Their perspectives will help you examine whether your assumptions about your business still hold water. You would also do well to invest in scenario analysis as an early warning system for business risks because it helps, identify risk triggers, and monitors trends in real time. Managers might also wish to hold regular forums to highlight, discuss and respond to political risks that might have an impact on their business.

Second, have everyone in your organisation regard the managing of political risks as an opportunity for deeper learning across the board. Most companies simply do not have any bandwidth to dedicate resources to political risk management. Even among those that do, the responsibility for political risk management is typically hived off to  a few individuals, or to a single function, with the Chief Risk Officer typically the most senior manager involved. This siloed approach is not well-suited to manage risks that can challenge the entire business model. A whole-of-organisation threat needs a whole-of-organisation response, integrating responses across functions such as risk, operations, strategy, IT and data, communications, and governance. Such integration, coupled with the presence of strong government affairs team, will enable you to respond to business challenges in much more calibrated and deliberate manner.

Ultimately, as the savvy billionaire hedge fund investor and philanthropist Ray Dalio says, “if you worry, you don’t have to worry”.

 
Srividya Jandhyala is Associate Professor of Management at ESSEC Business School Asia-Pacific