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Strategy & Corporate Finance

How to develop geopolitical

resilience
November 10, 2023 | Podcast

Geopolitical tensions have been rising,

creating signi!cant risks for companies,
especially those operating internationally.
Here is how to plan ahead.

I
n this episode of Inside the Strategy Room, we
feature a discussion on geopolitical resilience: what it
is, why companies need it, and how to build it in your
organization. We spoke with Ziad Haider, McKinsey’s
global director of geopolitical risk, Leo Geddes, co-lead
of our geopolitics client service, and Olivia White, a
director of the McKinsey Global Institute, about how to
navigate the shifting dynamics. This is an edited
transcript of their conversation. For more discussions on

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 the strategy issues that matter, follow the series on your
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Sean Brown: How are geopolitical dynamics changing?

Olivia White: We are seeing rising geopolitical tension,

from the changing role of China to the strained
relationship between the US and China to Russia’s
invasion of Ukraine. We live in a world of tremendous
economic connection but geopolitical fragmentation, and
everybody operating in business today has to reckon
with those two realities. It’s a multipolar world (Exhibit 1).
Since about the end of World War II, U.S.-aligned nations
were responsible for most of the world’s material
capability alongside a steady rise of the Soviet Union.
That changed quite drastically with the dissolution of the
Soviet Union. Since then, China has been moving up.

Exhibit 1

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 Sean Brown: There’s been talk recently about the end of
globalization. Does your research support that view?

Olivia White: The fact is that global trade has been

growing for the past ten years at about the pace of GDP.
Trade between the US and China over the past year was
as signi!cant as it’s ever been. The connections linked to
that continued growth of trade are real.

The trade patterns are important for any company

thinking about the implications of geopolitical tension on
its operations. Asia–Paci!c, China, and the EU are highly
dependent on other regions for the bulk of their resource
needs: minerals, energy, grains. On the other hand, many

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 developing economies are net providers to other regions
of such resources. North America is a mixed story—not
as dependent on any region for any single thing, but
somewhat dependent on everyone for everything. Finally,
China and many developing regions are highly
dependent on others for IP. The nature of these
connections evolves over time but quite slowly. You see
only a percentage point or two shift in any given year.

Sean Brown: What vulnerabilities in these economic

connections could a#ect company operations?

Olivia White: Forty percent of global trade is

concentrated, meaning that the importing economy
depends on three or fewer other economies for
supplying its goods or services. Two kinds of
concentration make a country—and potentially
companies within it—more vulnerable to disruption. The
!rst type is global concentration where most of a
particular good is supplied by two or three countries.
Soybeans are a great example: most soybean exports
come from the United States or Brazil (Exhibit 2). The
second type, which accounts for about 30 percent of
global trade, is economy-speci!c concentration where
countries buy from only two or three supplier nations
despite there being multiple choices. Take wheat:
roughly 15 countries supply about 90 percent of global
wheat, but Turkey gets almost all its wheat from Russia
and Ukraine. Bananas are an interesting one: Russia

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 purchases 95 percent of its bananas from Ecuador even
though a number of countries produce bananas. This
highlights that companies are dependent on what’s
happening in just a few parts of the world.

Exhibit 2

Sean Brown: Is it easier then, in case of a disruption, to

obtain some goods from elsewhere or !nd substitutes
than for others?

“Multinationals are at the eye of this

storm. They disproportionately
provide economic connections across
the world, and thus are
disproportionately influenced by
global fragmentation and the
uncertainty that produces.”

— Olivia White

Olivia White: Absolutely, but the amount of time it takes

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 to shift from using one good to another varies
tremendously. For example, the wheat I buy from Russia
is largely the same as the wheat I buy from Ukraine,
Canada, or Argentina; not so for computer chips. And I
might choose to eat or feed my livestock corn or soy
instead of wheat in a pinch. I won’t shift from memory
chips to diamonds, for example.

Multinationals are at the eye of this storm. They

disproportionately provide economic connections across
the world, and thus are disproportionately in$uenced by
global fragmentation and the uncertainty that produces
(Exhibit 3). Multinationals are responsible for 32 percent
of global value-added $ows and 64 percent of exports.
When it comes to knowledge-intensive goods, such as
electronics or pharmaceuticals—things that tend to be
least substitutable—that number rises to 82 percent.

Exhibit 3

Sean Brown: How do these trade dependencies play out

for di#erent types of multinationals?

Olivia White: As an example, we ran simulations for

automotive companies to see the impact of a disruption
to global trade $ows, and we found a 40- to 60-percent

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 reduction in enterprise value. Many companies are
wondering whether they should shift out of some regions
or isolate their operations. We !nd that depends on the
nature of the connections, and that in turn depends in
large part on company type. We divide multinationals
into four archetypes: makers and deliverers, such as
automotive and retail companies; fuelers, such as oil and
gas companies; discoverers and technologists, where
pharma or semiconductors would sit; and !nanciers.
When a company asks, “How do I think about my China
operations?”, the answer is very di#erent if you are
selling into China than if you produce in China. It’s
important to distinguish between di#erent forms of
interdependency and the associated value at stake.

Sean Brown: Ziad, you worked in US national security

before joining McKinsey. What’s your take on these
geopolitical shifts?

Ziad Haider: As Olivia highlighted, the world has never

been more connected from an economic point of view,
but we are also experiencing greater fragmentation than
ever in our lifetimes. It’s a bit of a global paradox. If you
look at the national security strategy that the US
administration issued last October, the key phrase was
“decisive decade.” The erstwhile hyper-power that led
hyper-globalization recognizes that we are in a di#erent
era, that the US is competing with other powers now,
and that the terms of that competition will be set over

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 the next ten years.

“The world has never been more

connected from an economic point of
view, but we are also experiencing
unprecedented fragmentation. It’s a
global paradox.”

— Ziad Haider

One signi!cant fracture is in Europe amidst Russia’s

invasion of Ukraine. The disruption it has caused costs
human lives, so we cannot think of it just in commercial
terms, but the spillover e#ect from an energy, defense,
and strategic points of view has been a watershed
moment. Look no further than Finland and Sweden,
which for a long time kept NATO at bay but recently
decided to join. Look at the defense budget posture in
Germany and the energy posture elsewhere in Europe.

The other major fracture is in the Indo–Paci!c, which has

had a long period of stability and peace. From a Western
point of view, the tagline for China’s relationship with the
West is “de-risk, but not de-couple.” There’s a desire to
carve out sectors of the economy where there are
national security sensitivities, but also a recognition of

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 the $ows Olivia illustrated. A US o%cial I spoke with
recently said, “It’s very hard to do surgery on conjoined
twins.”

The ground underneath all of this is shifting because we

are moving from a unipolar to a multipolar world. That
element of multipolarity will create more friction points
whose impact will trickle down to businesses.

Sean Brown: Are these concerns prominent in top

executives’ minds?

Ziad Haider: In our surveys looking at top agenda items

for boards and CEOs, it is geopolitics, and it’s moved
from being the purview of government relations and
chief risk o%cers to that of CEOs and boards. As one
CEO told us, “Geopolitics now trumps capital markets.”
Another said, “We have a pretty good understanding now
of the problem, but we don’t have great solutions.” The
framing we use is geopolitical resilience. It is easy to talk
about risks, but within these shifting geopolitical
currents, there are also opportunities.

Sean Brown: Before we talk about solutions, could you

pinpoint which fractures are most signi!cant for
company strategies?

Ziad Haider: One watch point is, of course, trade and the
di#erent barriers currently in place. The second is
technology. The third one is human rights issues, which
are not just about values but have hard business

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 implications for supply chains. The fourth is domestic
politics, not just in the US and European capitals but in
China too.

Sean Brown: Given their economic in$uence, are

multinationals $exing their muscles to in$uence their
countries’ geopolitical policies?

Ziad Haider: Olivia mentioned the in$uence of internal

forces—your employees expecting you to take a position
of principle. Another aspect, however, is that it’s a bit of
“shape or be shaped.” Practically, the role of business is
to be a bit of a conduit, so what nodal connectivity can
businesses provide? For many companies, these external
!ssures are coming home to roost where colleagues in
di#erent markets have di#erent views from
headquarters. How are you negotiating those views and
maintaining a one-!rm dynamic?

Sean Brown: How can companies develop geopolitical

resilience and proactively manage these dynamics?

Leo Geddes: We see three buckets of actions. First is

the idea of sense and understand. The best
organizations are building ways to understand the world
around them, for example through AI-backed sentiment
analysis or media analysis fused with their own
interpretation of what they see at the frontlines. They
then present that back to decision makers in an easily
digestible way. They also make sure that they have a set

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 of scenarios covering both the extreme eventualities that
might come their way and “gray rhinos”—things you can
see coming but you need to take action to manage them.
The third part of sense and understand is around
feedback loops. Given the changing externalities,
organizations need to be able to learn and adapt, which
requires structures and systems that allow leaders to
shift their approach and posture as new information
surfaces.

Sean Brown: Aside from gathering and interpreting

signals and preparing for di#erent eventualities, what
other measures are you seeing?

“We have seen time and time again the

importance of the board in helping
steer the organization as it deals with
geopolitical externalities. You can’t
have a situation where the first time
the board talks about an issue is
when it’s already a crisis.”

— Leo Geddes

Leo Geddes: This second area is around building

capability and organizing. We have seen time and time

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 again the importance of the board in helping steer the
organization as it deals with geopolitical externalities.
You can’t have a situation where the !rst time the board
talks about an issue is when it’s already a crisis. It’s
important to get the board into a mindset that they will
be expected to lead on geopolitical topics and need to
start discussing how they may react to various
circumstances.

You also need to build geopolitics into the heart of your

decision making, because these issues can in$uence
decisions across the organization. Finally, companies
should establish structures to deliver on those decisions.
In practice, it means making sure that, across legal, risk,
and communications, your teams are operating as one
and hand in glove with business units.

Sean Brown: What’s the third bucket?

Leo Geddes: It’s about acting and communicating. You

should think about segmentation and organizational
con!guration. For example, do you need to have your
technology and data in one region versus another?
Should you think about approaching capital markets in
country X for resources to use in that country? You also
need a clear narrative and recognize that it will reach
both your external stakeholders—shareholders,
regulators, customers—and your internal stakeholders,
namely your employees. Workers now have their own
voice and companies can be tripped up quickly if they

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 are found to be inauthentic, with one narrative externally
and something else internally.

The !nal point is that while geopolitics happens at a

national level, it’s felt deeply personally. Leaders need to
hold di%cult conversations around geopolitical topics in
a way that is genuinely inclusive and allows the
development of a shared view, or at least an open
discussion. Your employees are looking for those signals
to get a sense of, “Do I !t in here? What is our
organization about? Does it understand me as an
individual and us as a group?” I want to stress that the
aspects of resilience in these three buckets are not a
menu that you pick from but a comprehensive set of
actions that all organizations should take.

Sean Brown: Can you o#er some practical tips on how to

develop these dimensions of resilience?

Ziad Haider: In the sensing and understanding category,

do you have a common baseline of facts? Providing
monthly updates can upgrade leadership’s
understanding of these topics and separate the noise
from the signal in terms of what matters to the
organization. You also need to decide who develops and
coordinates this content—does it lie with government
relations or strategy? Many organizations are standing up
dedicated geopolitical risk or policy units.

When we think of oversight, it’s easy to focus on

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 countries that are $ashing bright red from a geopolitical
risk point of view, but you need to bring a more granular
lens to your global footprint. One discipline we have seen
clients employ is a mapping exercise that di#erentiates
varying degrees and categories of geopolitical risk. Think
also about controls to put in place in each market that
help you manage the risk, then every month the
leadership team or the board reviews this document.
That creates a disciplined way to talk about geopolitical
risk versus getting pushed o# your beat by the next
headline or event.

Sean Brown: How can companies map geopolitical risks

that are distant and unlikely, the so-called black swans
and other unknown or unexpected events?

Ziad Haider: A lot of what we just discussed was about

managing your near term. Equally important, and more
so after Russia’s invasion of Ukraine, is the need to look
around the corner. One could hypothetically put down
some ideas. Is it another pandemic? Is it a climate
catastrophe? Are there events that, as with COVID-19,
could completely disrupt your supply chains? You also
need to think about the gray rhinos that Leo mentioned
—the known risks. They are charging at you. How will you
get out of the way?

ABOUT THE AUTHOR(S)

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 Leo Geddes is a partner based in McKinsey’s London
o%ce, Ziad Haider is global director of geopolitical risk
based in the Singapore o%ce, and Olivia White is a
senior partner in the Bay Area o%ce. Sean Brown is
global director of communications for the Strategy and
Corporate Finance practice, and is based in Boston.

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