November 15, 2023
For around three decades, the business world enjoyed relative stability. Geopolitical developments slipped down the management agenda and company leaders profited from a period of "business as usual". Then, the global financial crisis of 2007-09 hit, leading to weaker growth in global trade. Just ten years later, the COVID-19 pandemic wrought havoc on global value chains. Since then, the crises have hardly let up, with souring relations between China and the United States and Russia's invasion of Ukraine the most recent in a series of disruptive global developments. Any worsening of the relationship between the world's three major economic blocs – China, the United States and the European Union – immediately throws a spanner in the wheels of global trade. A new era in global business is dawning, and businesses need to find ways to navigate the uncertainty.
One option for companies is to work with scenarios. Thinking in scenarios helps companies imagine what the future will look like and then take steps to prepare themselves for it –
translating the scenarios into the practicalities of business planning, discussing the potential developments and examining the implications for the firm. The management team then selects the scenario it considers most likely to unfold and builds a strategic approach around it.
We define future geopolitical scenarios along two key dimensions. These, we believe, are the two most important dimensions driving changes in global business, namely geopolitics (from cooperation to confrontation) and world trade (from globalized to localized value chains). On this basis we can derive four distinct future scenarios, each with its own indications that the world is moving in said direction:
- Competitive multilateralism
A return to the situation before the pandemic. Geopolitical cooperation continues and global trade goes on growing, but not as fast as pre-2008. Signs that we are moving in this direction could include the removal of trade tariffs, a Russian withdrawal from Ukraine, or Western companies committing to the Chinese market again.
- Hegemonial rivalry
Global trade continues but increasingly trade barriers arise between major players. Nevertheless, business is still considered more important than geopolitical rivalries. Indicators for this scenario would be the war in Ukraine extending beyond the country's borders but without disrupting international economic relations, say, or an increase in opportunistic trade interventions.
Geopolitics becomes more important than business, the number of international conflicts increases and countries inflict sanctions on each other, resulting in major disruption to value chains. Signs of this scenario developing would be military intervention in Taiwan, for instance, or open Chinese military support for Russia's war in Ukraine.
Companies start "re-shoring" previously offshored business operations, countries reduce their dependence on foreign resources and isolated political blocs develop. There is little confrontation, but also little cooperation. Indications that we are moving in this direction could include Western companies moving their value chains out of China, a reduction in international investments or the emergence of new trade barriers.
Different risk archetypes
Companies first need to decide which scenario they think is the most likely to become reality. Then, they must determine their own risk appetite so that they can translate their chosen scenario into concrete actions. Determining risk appetite is a crucial step, as different companies are prepared to live with different levels of risk in pursuit of their ultimate strategic goals. In our work at Roland Berger supporting companies through this process, we find that companies generally belong to one of five different types or "archetypes" in terms of their risk appetite.
The first is what we call the full-steam ahead archetype. Things have always worked out in the past, so why shouldn't they work out in the future? These companies do not engage in risk mitigation activities but rather carry on just as they have in the past. By contrast, companies of the de-risking archetype tend to build safety buffers for a set period of time, using stocks to bridge supply chain disruptions for a number of weeks or months, say.
Companies of the capsulation archetype take actions to enable a specific regional business to run self-sufficiently after a certain period of time. For example, they set themselves the goal of being able to make the business fully independent within six months if the geopolitical necessity arises. Companies of the de-coupling archetype make the changes needed to run local businesses independently even before the risk arises. Finally, firms of the exit archetype avoid all risk, immediately pulling out of any countries or markets they consider at risk.
The right tools for success
Roland Berger offers a range of tools for supporting businesses as they prepare themselves for the challenges of a new global business era. Our Global Business Configurator, for example, offers a predefined business configuration for each of the five risk archetypes above, which sets the guardrails that guide the different business functions (IT, sales, production, and so on) as they draw up their individual risk mitigation plans. Subsequently, the company synchronizes the various actions into an overall risk mitigation plan at a company level. Even this overall plan is not set in stone, however: In our experience, businesses often need to revisit it once they realize that they cannot cope with its full financial impact.
Download the full article below to find out more about how you can make your company ready for the new era in global business.
Oliver Knapp, Senior Partner