REPORT

Navigating geopolitical
uncertainty
Staying on course in a VUCA world
Management Contents
summary

W Page 4 1 A new era of global business

e live in troubled times. After three decades of relative stability, geopolitical

developments are back at the top of the business agenda, from Russia's war

in Ukraine to the growing tensions between China and the United States. With these

two blocs plus the European Union together responsible for more than half of global 6 2 Future world orders
economic output, any deterioration in the vital relationship between them can have

an immediate disruptive effect on global trade and throw supply chains into disarray.

9 3 From scenarios to business planning

How can businesses cope with this uncertainty? One solution is to work with scenarios,

imagining what the future will look like and taking steps to prepare for it. Companies

should translate these scenarios into the practicalities of business planning, discussing 14 Staying on course
the potential developments and examining the implications for the firm, in particular their

impact on strategy, production, value chains and business functions. The management

should then select the scenario it considers most likely and build its strategic approach

around it, having first determined the company's appetite for risk.

Roland Berger offers a range of tools for supporting businesses through this process,

from our own geopolitical scenarios and risk appetite archetypes to the Roland Berger

Decision Framework and Global Business Configurator. With our help, companies

can make themselves ready for this new era in global business – and become skilled

navigators of geopolitical uncertainty.

Cover: alengo | Getty Images

2 Roland Berger | Navigating geopolitical uncertainty 3 Roland Berger | Navigating geopolitical uncertainty
1
A new era of global business Increasing geopolitical tension, the COVID- To stay on course in a VUCA
19 pandemic, soaring inflation, rising interest world companies need a fully aligned,
The challenges of today's VUCA (volatile, uncertain, complex and ambiguous) world have rates and supply chain disruptions – to name top-down decision framework that
never been greater. External shocks are becoming ever more frequent, upending familiar just a few of the current forces adversely connects the dots when deciding which
patterns and forcing us to reassess our expectations. Geopolitical developments in affecting business – have pushed most way the organization should move."
particular have made it to the top of the many CEO agendas, from Russia's war in Ukraine to companies into crisis mode. Businesses
Oliver Knapp
souring relations between the United States and China. The formation of economic blocs have responded with whatever tools they Senior Partner
around the United States, China and the European Union and the potential for worsening had at their disposal, mostly a multitude of
relations between them is already beginning to disrupt global value chains. What is more, disconnected firefighting initiatives. Usually, these initiatives are developed bottom up,
these three blocs comprise over half of global GDP, so deteriorating trade relations between leading to "management by taskforce" – an approach that is not only inefficient, but also
them also jeopardize global growth. inconsistent and therefore risky: It prevents companies developing an overarching strategic
Recent geopolitical developments follow on closely from the series of shocks that ended approach to crises, leaving them critically unprepared for what lies just around the corner.
the blossoming of global trade after the Second World War. The global financial crisis of What companies require in order to stay on course in a VUCA world is a fully aligned, top-
2007-09 marked a turning point, initiating a prolonged slowdown in global trade, referred to down approach. They need a decision framework, a way of connecting the dots when
by some analysts as slowbalization. Some ten years later, the escalation of the trade war deciding which way the organization should move. At Roland Berger, we have developed a
between China and the United States brought geopolitics into the world of business. Russia's six-layer decision framework that puts geopolitical and economic scenarios at the top,
recent invasion of Ukraine, on our doorstep in Europe, has intensified this development. followed by the implications for the industry and company in question. Based on this,
Everything points to this negative trend continuing in the coming years, potentially becoming companies should define their risk appetite, which then guides their reconfiguration of the
even more severe with time. A business and defines their need for action. Subsequently, they must develop a mitigation
strategy so they are prepared for future geopolitical disruptions. For each of the six layers in
our framework, we offer proprietary tools and methodologies, developed based on our
extensive expertise in each of the areas. B
A  lowbalization – a deepening trend?
S
World trade and trade openness, 1870-2022

B  taying on course
S
70 1870-1914 1914-45 1945-80 1980-2008 Since 2009 Roland Berger Decision Framework and value add
Industrialization Interwar era Postwar Liberalization "Slowbalization"
65
and integration rebound
60 RB DECISION FRAMEWORK RB VALUE ADD
55

1 Geopolitical & economic

50 Top-down RB Institute geopolitical &
alignment scenarios economic scenarios
45

2 Trends & implications for

40
RB view on industry trends
35
the industry

3
30 Implications for the company, risk Joint, impartial discussion
25
appetite & strategic guardrails

4
20 Business reconfiguration & RB Global Business
15 transformation requirements Configurator

5
10 RB functional experience, e.g.
Bottom-up
Functional mitigation IT setup, production footprint
5 development

6
0
Synchronization across Synchronization and business
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
mitigation plans & business case case modeling

Penn World Tables Klasing and Milionis

Source: Our World In Data; University of Groningen; World Bank Source: Roland Berger

4 Roland Berger | Navigating geopolitical uncertainty 5 Roland Berger | Navigating geopolitical uncertainty
2
Future world orders C Four scenarios

As pointed out above, today's economic world order is built around three major blocs – the Potential future world orders
United States, China and the European Union – which together produce more than half of
global economic output. The relationship across the Pacific between China and the United
States has been deteriorating over the last five years at least. And the Russian invasion of
Ukraine has shown that the previous liberal world order on which global integration relied for
a full three decades is no longer a given.
Amid this geopolitical uncertainty, working with scenarios can be a useful tool for trying Localized,
decoupled
to imagine what the future will look like and how you should prepare for it. We define future
value chains
geopolitical scenarios along the two dimensions that have been driving the change within
global business over the past ten years: geopolitics (from peaceful cooperation or at least
coexistence at one extreme to hostile confrontation at the other), and world trade (from
globalized, interdependent value chains to localized, decoupled value chains). C Neo-
Isolationism
Each of our four scenarios represents a new set of circumstances. Specific signposts signal
imperialism
movement towards each scenario.

Competitive multilateralism is a return to the global situation before the COVID-19

World trade
pandemic. In this scenario, geopolitical cooperation and interdependent global value
chains continue to exist. Global trade goes on growing, but not as fast as before 2008. Q1 2022: Russian
invasion of
Possible signposts for this scenario include the removal of existing trade tariffs, a Russian
withdrawal from Ukraine, and Western companies committing to the Chinese market.
Q1 2020:
Ukraine
?
2
COVID-19

Hegemonial rivalry sees the emergence of strong

pandemic
3
Working with political blocs dominated by major players and the Next

scenarios enables continuation of global trade, albeit with increased

trade barriers between the blocs. In this scenario,
1 Today

companies to imagine
Competitive Hegemonial
business remains more important than geopolitics:

what the future Despite geopolitical rivalry, the mutual benefits of

might look like."

globa l trade a nd va lue cha ins a re s till seen a s multilateralism rivalry
paramount. Signals for this scenario include military
Denis Depoux, escalation to areas beyond Ukraine but without
Global Managing Director Until Q1 2020
0
disrupting international economic relations, and an
Globalized, (before COVID-19): globalized,
increase in opportunistic trade intervention, making cooperative world
interdependent
global value chains more vulnerable but again not fully value chains

Geopolitics
disrupting them. Peaceful cooperation/ Hostile
coexistence confrontation

In a scenario of neo-imperialism , geopolitics is more important than business. The level of

international conflicts and reciprocal sanctions increases and value chains are decoupled.
Signals for this scenario include armed conflicts in the South China Sea or a Russian
invasion of a NATO member state.

Finally, in a scenario of isolationism , "re-shoring" – that is, moving business operations

that were previously shifted overseas back to the company's home country – and a desire Source: Roland Berger

for independence from foreign resources leads to the emergence of separate political

6 Roland Berger | Navigating geopolitical uncertainty 7 Roland Berger | Navigating geopolitical uncertainty
 blocs with little trade between them. In this scenario there is little geopolitical confrontation,
but also not much cooperation. Movement towards this scenario is indicated by signposts
such as the increased relocation of value chains and sales markets by Western companies
out of China and its periphery, a decline in cross-border investments, and the extension of
trade barriers between economic blocs and their peripheral states.
REGIONAL IMPACT OF THE SCENARIOS
The impact of these scenarios differs for each of the three major economic regions,
depending on two factors: the region's current level of dependence on global value chains,
and the size and growth potential of its internal market.
Europe
The impact on Europe is likely to be negative in all scenarios except competitive
multilateralism, in which trade would continue with China despite Europe's dependence on
the United States as a military and geopolitical ally. In the isolationism scenario, Europe's
strengthened internal market would not sufficiently compensate for the losses caused by
reduced trade. Hegemonial rivalry would involve Europe strengthening its ties to the United
States but also being hurt economically by US sanctions on China. In the long term, Europe
might achieve geopolitical and military sovereignty, but in the medium term the bloc's
reliance on US military protection would prevent it keeping equal distance from both China
and the United States. Lastly, neo-imperialism would require increased military spending
in Europe, in the context of a global economy heavily damaged by the dual tendencies
towards decoupling and decreased trade.
United States
Isolationism would mean the United States strengthening the US-Mexico-Canada
Agreement (USMCA) and benefiting from its own large internal market, but enjoying less
trade with the European Union and China. Neo-imperialism, on the other hand, would bring
with it higher military spending in the United States and a downturn in trade, only partly
compensated for by the internal market. At the same time, Europe might become more
independent by increasing its military power, but if it failed to do so it would become more
dependent on the United States, benefiting trade in the new US sphere of influence.
Competitive multilateralism and hegemonial rivalry would arguably be even more
favorable for the US economy: Competitive multilateralism would mean a continuation of
the country's role as the guardian of the international rule of law – in its own interests –
while hegemonial rivalry would involve increased sanctions on China and continued trade
with the rest of the world.
China
In an isolationist scenario, China could try to compensate for its losses from trade with
other blocs by relying more strongly on economies in its geographical neighborhood,
where closer ties have already been established through the Belt and Road Initiative and
strong direct investments. In a scenario of neo-imperialism, China would increase its
military presence in the Pacific, and trade with the above-mentioned countries with which
it has strong ties, as its internal market would only partly compensate for its reduced
income from international trade. Similarly, with hegemonial rivalry the country would need
8 Roland Berger | Navigating geopolitical uncertainty
to offset its trade losses with the United States and the The management
European Union by increasing ties with other countries.
should select a scenario
Finally, competitive multilateralism would be positive
fo r C h i n a , th e c o u ntr y c o nti n u i n g to b u i l d i t s it considers most likely
international soft power while strategically investing in as starting point for its
the European Union and emerging countries.
strategic approach."
Rest of the world Oliver Knapp, Senior Partner
Countries in the rest of the world would be able to draw
advantages from both competitive multilateralism and hegemonial rivalry. In competitive
multilateralism, these countries could trade with all three major blocs, with new blocs
emerging around countries such as India. In hegemonial rivalry, the major blocs would
court these countries, which could benefit from stronger military and economic
cooperation with their selected bloc or blocs. By contrast, isolationism and neo-
imperialism would mean countries having to pick sides, and trade losses with former
partners would potentially be inadequately compensated for by trade with new allies.
3
From scenarios to business planning
So much for the theory. How can companies take these geopolitical and economic
scenarios and translate them into the practicalities of business planning? We recommend
the management team first discusses potential developments in trade and the global
political environment, reviewing each of the scenarios in turn. Next, the implications of
each scenario for the company should be investigated and the impact on strategy,
production, value chains and business functions assessed. The management team can
then select the scenario it considers most likely as a starting point for its strategic approach.
Before developing concrete actions, however, companies need to determine their own
risk appetite – that is, the level of risk they are prepared to live with in pursuit of higher
strategic goals.
We identify five different types or "archetypes" of companies in terms of risk appetite.
The full steam ahead archetype is best described by the belief that things have always
worked out in the past, so they will work out in the future. The company continues with
business as is, and does not engage in any risk mitigation activities at all. The de-risking
archetype sets up a safety buffer as a form of temporary risk mitigation, for a defined
period of time – for example, using stocks to bridge a supply chain disruption for a specific
duration (depending on the industry, this can range from several weeks to several months).
The capsulation archetype implies taking certain actions so that the business can be
run self-sufficiently after a predefined time. Some changes are implemented immediately,
while others are prepared for possible implementation. For example, a company might set
the goal of being able to operate independently from its global company infrastructure
and supply chain within six months. In the de-coupling archetype, the company makes
the necessary changes to run local businesses independently in response to the increased
level of international conflict and problems in world trade. Finally, the exit archetype
implies total risk avoidance: The company withdraws entirely from the country or market
that is at risk. D
9 Roland Berger | Navigating geopolitical uncertainty
 D Five risk archetypes

What is your risk appetite?

Responding to
High Low
geopolitical uncertainty:
Full steam De-risking Capsulation Decoupling Exit
Two case studies
ahead
No risk mitigation Temporary Hybrid risk 100% risk 100% risk
– 100% risk risk mitigation – mitigation – mitigation – risks avoidance
risks mitigated some risks permanently

2
for a predefined permanently mitigated before
time mitigated, others they arise Mazda
mitigated for a
Risk archetype:
predefined time
De-risking/capsulation

1
Apple
Risk archetype: Capsulation
Source: Roland Berger The world's largest technology
company by revenue, Apple has
accelerated its plans to shift production
from China to India and Vietnam. Driving this
Based on the company's identified risk appetite, the management team can then derive a change of direction are China's protracted
business configuration. The Roland Berger Global Business Configurator offers a predefined COVID-19 restrictions, more than five years
business configuration for each of the five risk archetypes. These predefined business of heightened US-China military tension, and
configurations need to be adjusted by the management in line with existing company US tariffs on Chinese goods. In the long term,
strategy, the business setup, or the regional footprint. E Apple is expected to supply 40 to 45 percent
of iPhones from its plant in Sriperumbudur,
The business configuration provides the guardrails, so to in the outskirts of Chennai, India, which
Depending on speak, according to which the different business currently accounts for less than ten percent
Japanese multinational
automotive manufacturer Mazda is reducing
its reliance on Chinese suppliers. In reaction
to China's COVID-19 lockdowns, the company
now prioritizes robustness in its supply
chain, with an emphasis on stable supply
rather than cost. In the short term, it has
requested more than 200 suppliers that use
components made in China to stock up on
inventories, preparing themselves for further
disruption. The company itself is aiming to
build up higher domestic inventories. More
long term, Mazda is pursuing a strategy of
diversifying supplier production outside
China, reflected in its supply contracts for

its risk appetite, functions (IT, sales, production, and so on) can draw up of production. Northern Vietnam, which has future car models.
their individual risk mitigation plans. As soon as these attracted significant investment by various
management can derive plans are ready, the company needs to aggregate and electronic giants in recent years, is expected

a business configuration synchronize the actions on a corporate level, prioritizing to shoulder more of the manufacturing of
them in an overall, company-level risk mitigation plan. Apple's other products, such as AirPods,
to set the guardrails The decision about whether or not to implement this smartwatches and laptops. In line with this
for an individual risk overall risk mitigation plan should be based on a financial strategy, Apple has asked its suppliers to

mitigation plan." evaluation of its profitability and investment impact; in build up their industrialization capabilities in
our experience, companies often need to revisit the India and Vietnam, and shifted its supplier
Oliver Knapp, Senior Partner overall plan once they realize that they cannot cope with manufacturing footprint accordingly.
its full financial impact.

10 Roland Berger | Navigating geopolitical uncertainty 11 Roland Berger | Navigating geopolitical uncertainty
 E Roland Berger Global Business Configurator

Sample reconfiguration: Capsulation

Reconfiguration

Market and Sales geography Market and Global Europe USA China India Other Other ROW
product Sales steering Sales geography
product APAC Americas
1 2 3
Product portfolio scope
Product technology

Sales steering Global 1 2 3 By region By product By customer …

Engineering R&D/Engineering

Product portfolio
Procurement Supplier base Global 2 3 Regional Local 1 HCC vs. LCC …
scope
Sourcing strategy

Production Production Product technology Global for global 2 3 Regional Local for local 1 HCC vs. LCC …
Plant scope
Plant setup

Engineering R&D/Engineering Global for global 2 3 Region for region Local for local 1 LCC for region …
SCM Warehouse &
delivery
Stock strategy
Region for Local for
Procurement Supplier base Global for global Region for region 2 3 1 …
region with LCC local

IT IT system setup
Data hosting
Sourcing strategy Multi-source Dual source 1 2 3 Single source … …

HR Management
rotation
Employee profiles Production Production Global for global 2 3 Region for region Local for local 1 LCC for region …

Legal Legal structure Parts production &

Plant scope 2 3 Parts production Assembly … …
assembly

Finance Financial steering

Plant setup Global standard 2 3 Regional standard HCC vs. LCC standard Local …
Treasury Cash pooling

Warehouse & Region for

IP IP steering SCM Global for global 1 2 3 Local for local LCC for region …
delivery region

… …
Stock strategy "Just in case" E.g. 30-day 1 2 3 JIT … …

Source: Roland Berger 1 2 3 Country, region, or geopolitical/economic bloc Chosen configuration for specific country, region, or geopolitical/economic bloc

12 Roland Berger | Navigating geopolitical uncertainty 13 Roland Berger | Navigating geopolitical uncertainty
 Staying on course AUTHORS AND CONTACTS

Jonas Schultz
Denis Depoux
Growing geopolitical uncertainty and a changing, uncertain world Senior Project Manager
Global Managing Director
jonas.schultz@rolandberger.com
order create a major threat to businesses of all shapes and sizes, denis.depoux@rolandberger.com
but especially to those with a global production footprint or serving David Born
Oliver Knapp
international markets. As global value and supply chains are Senior Manager
Senior Partner
increasingly disrupted, companies need a thorough strategy based david.born@rolandberger.com
oliver.knapp@rolandberger.com
on a top-down perspective rather than a series of unconnected Regina Wallis
Norbert Dressler
and bottom-up reactions. Working with scenarios and a clear Project Manager
Global Head of Industrials
decision framework can help them understand the implications regina.wallis@rolandberger.com
norbert.dressler@rolandberger.com
for their business and take appropriate action to reconfigure their Arielle Li
Jan-Oliver Sestak
global footprint – whereby it is fundamental that they first achieve Senior Consultant
Partner
clarity over the company's appetite for risk. arielle.li@rolandberger.com
jan-oliver.sestak@rolandberger.com

Marc Winterhoff
How can Roland Berger help? We offer a range of tried-and-tested
Partner
tools, methodologies and frameworks that are unique to our firm.
marc.winterhoff@rolandberger.com
Above, we introduced the Roland Berger Decision Framework (p. 5),
our geopolitical and economic scenarios (p. 7), the Global Business
Patrick Müller-Sarmiento Torsten Henzelmann
Configurator (pp. 12–13) and our risk archetypes (p. 10). Other
Global Head of Consumer Global Head of Regulated &
unique products include our Challenges Prioritization Matrix and Goods & Retail Infrastructure
our extensive Risk Mitigation Toolbox. Call us to arrange a free online Managing Director Europe
"power hour" to find out how you can best navigate geopolitical Markus Strietzel
Global Head of Financial Services Hani Thome
uncertainty – and stay on course in a new era of global business.
Managing Partner Middle East
Nicolas Teisseyre
Global Head of TMT Santiago Castillo
Managing Partner Middle East
Stephan Keese
Managing Partner United States Damien Dujacquier
Managing Partner Southeast Asia

John Low
Managing Partner Southeast Asia

Further reading
 EXT GENERATION MANUFACTURING
N


E LECTRIFICATION IN THE AGE OF DEGLOBALIZATION


A COMPLETE DECOUPLING IS NEITHER LIKELY NOR DESIRABLE

10.2023
ROLANDBERGER.COM

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14 Roland Berger | Navigating geopolitical uncertainty

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