EY-Parthenon Voices in Strategy: navigating sustained geopolitical volatility

CEOs are navigating heightened geopolitical volatility. The war in Ukraine, shifting global alliances and trade disruptions have increased the complexity of strategic planning.

In our latest edition of EY-Parthenon “Voices in Strategy,” EY Global Geostrategic Business Group Insights Leader Courtney Rickert McCaffrey and I discuss the geopolitical landscape and steps CEOs can take to manage risks created by the volatile environment. Courtney brings a wealth of insights to the topic as a recognized thought leader in political risk and global macro trends, with an emphasis on analyzing the strategic implications for companies.

BR: What are the major geopolitical forces affecting CEOs’ strategic decisions today?

CRM: The war in Ukraine and other rising geopolitical tensions have solidified the shift from a unipolar to a multipolar world — or a shift from one global superpower to several great powers. This has essentially put us in a period of what I would call “stabilized geopolitical volatility.” This means the importance of geopolitics to corporate strategies is at its highest level in a generation, affecting decisions on everything from which markets to be in, to where to source products, to where to acquire new companies and capabilities, just to name a few.

The realignment of geopolitical power and alliances is one of the major forces that impacts strategic decisions, especially what many policymakers refer to as the “de-risking” of China and the West. Washington and Brussels, on the one hand, and Beijing, on the other, are implementing policies that separate their economies from one another in a variety of ways. The result is likely to be a steady erosion of economic connectivity.

Meanwhile, geopolitical swing states, such as India, Brazil, Turkey and Saudi Arabia, are gaining more influence. They are seeking to maintain relations with multiple global powers simultaneously, minimizing any potential economic damage associated with picking one side. This often-overlooked factor creates even more complexity for CEOs to navigate. For instance, when trying to diversify production, CEOs may need to consider not only the skills, infrastructure and cost structures in a market but also how the country’s geopolitical positioning may evolve over the life-span of the investment.

These geopolitical shifts also mean many governments are focusing on increasing their countries’ economic self-sufficiency, emphasizing strategic sectors and supply chain resiliency. Importantly, the US, China and EU member states are among the countries framing economic competition in security terms. The result is a trend of policy incentives and trade and investment restrictions that can have profound effects on corporate decision-making.

BR: Are there any sectors that are particularly affected by these forces?

CRM: Sectors that governments view as “strategic” for national security and international competitiveness are the most affected. They are the targets of the policy efforts to achieve self-sufficiency — or at least to “friendshore” supply chains.

At the top of this list are critical digital technologies, such as 5G wireless networks, advanced semiconductors, artificial intelligence and quantum computing. Such technologies will continue to be at the center of geopolitical competition, with governments likely to impose additional export controls and cross-border investment restrictions. Companies likely need to assess how this can affect the markets they can sell in, which countries their employees can come from and whether they can get the key components and technologies they need.

The energy sector — including both traditional and newer energy sources and technologies — has also moved to the top of policymakers’ agendas in the wake of the war in Ukraine. For instance, many countries are racing to secure access to the “green minerals” needed for electric vehicle (EV) batteries — and also to manufacture those batteries and EVs in their home markets. This may open new growth opportunities for some companies while potentially making sourcing decisions more difficult for others.

Other sectors seen as increasingly strategic include advanced manufacturing, particularly the production of aerospace and defense products. Biotechnology is another area where policymakers want to expand their domestic life sciences capabilities to improve resilience for any future health crisis. Agriculture also is getting more attention as climate change and the war in Ukraine are key drivers of global food insecurity.

BR: How can CEOs manage political opportunities and risks when setting strategy?

CRM: Achieving sustained growth in the new multipolar world will require CEOs to adapt their strategies to new geopolitical realities. The most resilient strategies will reflect the increased materiality of geopolitical dynamics, which are likely to impact business decisions as much as economic considerations in the years ahead.

Supply chain strategy is a case in point. Geopolitical tensions and competition among governments to achieve self-sufficiency will continue to complicate existing cross-border supply chains. CEOs may need to evaluate their supplier ecosystems for opportunities to reduce exposure to geopolitical risks and take advantage of new policy incentives to onshore, nearshore and friendshore supply chains.

Companies can also conduct geopolitical due diligence for any transaction they’re considering. Cross-border transactions will be especially scrutinized by regulators in this new geopolitical era. Transactions that expand domestic capabilities in a critical technology will be welcomed, while those that could involve transferring intellectual property to a geostrategic competitor are likely to be blocked.

More broadly, the shift toward greater use of industrial policies and self-sufficiency will challenge traditional global business models. CEOs need to take these dynamics into account when refreshing their strategies for the years ahead.

For more insights on shifting strategies amid the geopolitical landscape, read more at ey.com: https://www.ey.com/en_us/geostrategy/how-to-shift-strategy-for-a-new-geostrategic-era-in-2023

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EY-Parthenon Voices in Strategy is a conversation series hosted by EY-Parthenon Americas Leader Barak Ravid in which he talks with EY-Parthenon professionals from a range of disciplines to help business leaders better understand the forces shaping their strategic decisions.

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.