Are your scenarios bold enough to be geo-proof?

By Falco Weidemeyer, EY Global Turnaround and Restructuring Leader

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Even as the global economic outlook improves, the geopolitical environment remains unstable and volatile. And the geopolitical situation may even darken further.

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There is war on three continents. There are increasing trade tensions, especially in strategically sensitive sectors, with governments using trade as a geopolitical lever. The path forward is not yet certain. We do not know exactly how the future will unfold. There are multiple futures that can play out. Business leaders need to geo-proof their companies as much as they possibly can.

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This highlights the highly volatile and uncertain times we live in. But more than that it shows that CEOs and other business leaders now have to seriously think the unthinkable and plan for its implications. We have seen how quickly tensions in one area can spill over into other sectors. Just consider how the US restrictions on advanced semiconductor equipment and chips has spiraled. Or the emerging tensions between the US and EU and China about electric vehicles and renewables technology. We are in a tit-for-tat world.

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As the EY assessment of the current geopolitical environment and outlook rightly finds, CEOs and boards cannot wait for clarity before setting their future strategy. Rather, they need to act now to make strategic decisions that position their company to flourish during the turbulent times ahead.

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In scenario analysis, companies typically consider factors such as economic conditions, market trends, regulatory changes, technological advancements, competitive landscape, and geopolitical events. They assess how these factors might interact and unfold in different ways, leading to distinct scenarios. By analyzing these scenarios, companies can identify potential threats, opportunities, and strategic implications for their operations, finances, supply chains, and overall business models. This process helps organizations develop contingency plans, mitigate risks, and capitalize on emerging opportunities, enhancing their resilience and agility in an uncertain business environment.

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But, truth be told, most scenario analysis is not prepared to think the unthinkable, to confront those factors that would lead to an existential crisis that may see the business become untenable. But we have been here recently. The war in Ukraine and associated disruption to energy markets caused many energy intensive plants to shut down in Europe , with the resultant loss of output, customers and a likelihood of not being able to reopen. Similarly, with the global pandemic, the disruption to supply chains caused many companies to reconsider their operations and ecosystems .

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However, uncomfortable as it is, it is time for other similar scenarios to be considered. This discomfort is real and can cause significant mental anguish for corporate strategists. While these seem like remote possibilities they are still worth thinking through to build resilience.

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It is time for new thinking and that will involve considerations of what was so very recently unthinkable, painful as it may be. CEOs and business leaders need to embrace discomfort and be bold if they are to plan for the long-term.

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It will be helpful for CEOs to identify the geopolitical risk factors, that affect the company the most, ranging from actual military conflicts to geopolitical tensions, sanctions, trade conflicts, supply chain interruptions and (foreseeable) barriers to market entry. Once these factors have been identified, scenarios need to be built around likely developments and, most importantly, their impact along the company’s value chain/ value network needs to be outlined. Mitigation strategies can then be developed based on the outcome, in order to increase overall geostrategic resilience.

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This does not replace or delay the ongoing transformative work, for example around technology, new work and ESG – it comes on top of the existing managerial agenda, but it is an imperative for strategic sustainability.

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The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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