The CEO Imperative: How will the shifting world order affect your global strategy?

International business models will persist in the emerging multipolar world, but they will need to adapt to new geopolitical realities.

The war in Ukraine heralds the most significant geopolitical shift since the end of the Cold War. The world order has been increasingly volatile since the global financial crisis of 2008-2009, which began a shift from a unipolar to a multipolar world – that is, from one global superpower to several great powers.

Recent events have solidified the multipolar world. They’ve also ended the period of expanding globalization during the past three decades. International commerce will continue, but fundamental changes in the global business environment are likely to shift companies’ operations, their approach to customers and their strategies in the years ahead.

Current geopolitical dynamics are amplifying and accelerating the three themes identified in the EY 2022 Geostrategic Outlook:

• Shifts in geopolitical power
• Climate change and sustainability
• The increasing role of governments in economies

CEOs need a comprehensive understanding of these dynamics to inform a more strategic approach to managing political risk. That’s why this is part of the CEO Imperative Series, which addresses critical issues and actions to help CEOs reframe the future of their organizations.

Shifts in geopolitical power will affect growth and investment opportunities

The war in Ukraine has both accelerated and altered ongoing shifts in geopolitical power. We now live in a multipolar world, comprised of three emerging blocs:

• Developed markets are leading one bloc, with the EU and US having reached new levels of cooperation. Relatedly, the North Atlantic Treaty Organization (NATO) has been reinvigorated.
• Russia is leading a small bloc of countries, including several autocracies.
• A significant number of emerging markets – including China and India – are not aligning with either of these blocs, preferring to pursue a more neutral or transactional stance.

More broadly, a variety of climate policies are likely to prompt a continued reassessment of business models to identify areas to reduce carbon footprints or unleash new revenue streams. Governments are likely to provide sustainability tax incentives, for instance, providing an opportunity for companies to utilize these incentives to help finance green R&D or their own energy transition.

And as newer and more rigorous sustainability reporting mandates are implemented, opportunities could emerge from analyzing these metrics to identify strategy shifts to adapt to a more sustainable economy.

The increasing role of governments in economies will affect supply chain strategies

The war in Ukraine is reinforcing a lesson that many governments took from the pandemic: supply chain resiliency and self-sufficiency in strategic sectors are of critical importance to national security.

Just as the pandemic elevated pharmaceuticals and medical supplies to a strategic sector, the war in Ukraine is elevating agriculture and food. Some governments have already restricted agricultural exports to protect domestic supply. Countries reliant on imported food face the prospect of rising prices, food shortages and social unrest.

The digital technology sector will also continue to be at the forefront of government intervention and geopolitical competition. Export controls on advanced technologies are a key part of the US’s, EU’s and others’ sanctions on Russia. These sanctions will divide the world into two digital technology blocs.

Relatedly, state-sponsored cyber-attacks for espionage, IP theft and disinformation are expected to increase. And as hackers continue to attack commonly used software as a means of gaining access to other organizations, companies across sectors will face heightened cyber risks from within their supply chains.

The push by governments to achieve self-sufficiency in strategic sectors will complicate traditional cross-border supply chains. Technology companies, manufacturers, automakers, life sciences companies, agribusiness and renewable energy companies will be among the most affected by these policy dynamics.

Continued disruptions to operations and logistics – driven by the war, the pandemic, social unrest, cyber attacks and extreme weather events – will further complicate global supply chains. Executives should re-examine their companies’ supply chains for nearshoring, onshoring or friendshoring strategies to improve resilience.

How to manage geopolitical risks

The war in Ukraine is creating challenges for companies around the world. While specific political risk mitigation and geostrategic actions will vary by company, CEOs should have three broad priorities as they seek to adjust to the new geopolitical environment:

1. Assess current and future political risks

Use a structured approach for identifying, monitoring and assessing political risks arising from long-term changes to the world order accelerated by the war in Ukraine, and incorporate these assessments into enterprise risk management (ERM) frameworks.

2. Establish a cross-functional geostrategic team

Include representatives from across the political, operational and financial aspects of political risk management, as well as from both the C-suite and relevant functions or business units, and regularly update the board on these issues.

3. Refine company strategy to match new geopolitical realities

Conduct a global footprint assessment for political risks and adjust accordingly, and proactively include political risk analysis in strategic planning processes, especially supply chain and market entry strategies.