The Merchant of Prato
Francesco di Marco Datini was a fourteen century Italian Merchant who from humble beginnings created a wealthy pan European trading empire over the course of 50 years.
Datini dealt in anything that would make money, from armour and weapons, saffron and jewellery, money lending to art dealing. Key to his success was a network of informants and agents which allowed him to stay abreast of and take advantage of events across a tumultuous era in Europe. The fourteen century had more than its fair share of warfare, plague and religious schism.
Datini’s shrewd management, his access to information and above all his ability to adapt to a changing world were key to his success. This what we now might call successfully managing risk.
War between France and England was an opportunity to sell weapons and armour. While peace and royal weddings were a chance to sell luxury goods like spices and fine cloth. Lending money to monarchs and the nobility were generally avoided thanks their unreliability in repaying loans.
Natural disasters like storms and made hazards like brigands were sometimes unavoidable, but careful diversification ensured they were not calamitous.
Datini understood managing geopolitical risk was key to his Pan-European trading empire. While times have changed since the fourteenth century, geopolitical risk remains a harsh reality for organisations and one which can catch the unprepared unaware time and time again.
In this guide I outline the major global and geopolitical risks faced by international organisations and how they can be successfully managed.
Willis Tower Watson a leading global insurance firm labelled geopolitics the number one risk corporate risk faced by multi-national companies. From war to climate change to failures of national governance, threats to organisations worldwide are diverse and always evolving.
After identifying the risks I provide ideas about how they can be managed and how to develop a resilient enterprise which can handle a rapidly changing world. Lastly I look at how best to spot geopolitical shifts and global trends and turn them to your advantage.
What is Geopolitical Risk?
Geopolitical Risk is messy, hard to define and even more difficult to predict. The Covid-19 pandemic is a great example. Narrowly defined the virus poses a healthcare risk. However, differing government responses and lack of international cooperation and the economic, social and political fallout seen across the world is a geopolitical risk.
Geopolitical risk is the probability of a political action negatively or positively affecting a company. Global Risks mostly overlap with geopolitical risks and include topics such the shadow economy, environmental risks and cyber risks.
Geopolitical risks can be identified but acting on them can be much harder. Even more difficult is proactively managing risks and turning them into opportunities.
Many companies view geopolitical risk as something that happens to them. Often it can feel that geopolitical risks are out of our hands, and we or the organisations we work for are a passive recipients of global events.
But companies can monitor, engage and even shape geopolitical risks and turn them to their advantage. But to do this they need to prepare, monitor and understand risks, but above all be ready to act when they arrive.
Interstate war or internal conflict
Since the dawn of civilisation, countries and empires have gone to war. It is no surprise to us that war and conflict cause misery, death and can make normal life very difficult. Serious widespread conflict or war may seem remote to most people in developed nations. But many parts of particularly the developing world continue to suffer from conflict.
An arc of conflict cuts through through Africa, the Middle East and Asia. Any company considering investing in emerging economies in these regions have to weigh up the likelihood of conflict in their target country.
Many wars rage on for years but are relatively underreported in the international press. For example, the Yemeni conflict which has drawn in Saudi Arabia the Gulf States as well as western states and Iran. Others like Syria remained more in the public eye, perhaps because of the migrant crisis that affected Europe.
While it is difficult to predict wars and conflicts. It is possible to carefully monitor a country’s political climate, relations with its neighbours and crucially its history of violence. This analysis can at least can give an indication of the likelihood of future war and conflict.
War can break out over resources, nationalist sentiment as well as perceived ethnic or ideological differences. Many modern wars are at first glance civil wars. Syria, Sudan and Somalia are all recent examples. But civil conflicts always end up dragging in neighbouring states. Syria has drawn in Turkey, the USA, Russia and France and others into the country. It is always worth taking a regional view of how a conflict can spread.
When a war starts a firm’s assets come under threat. In some cases such as consultancy firm they can easily pull out of a country. Others focused on natural resources or infrastructure cannot easily pull out their mines, roads, tunnels and physical infrastructure.
How staff threatened by war are cared for by the firm is also crucial. Very often staff can be moved out of the country fairly easily before the conflict spreads. However locally hired staff may not want to move from their home, nor is it always possible due to immigration rules.
Conventional wars across land, sea and air are familiar sights across the globe. But the last decade has seen the new theatre of cyber conflict emerge. Cyber conflict has had a low profile but the world is slowly waking up to the reality of cyberwarfare.
The raging global debates over allowing Chinese firm Huawei to develop critical infrastructure in many western states has brought cyber concerns to the top of the security agenda.
The cost of conventional war is high in terms of human life, but also diplomatic and economic fallout.
Cyberwar as an Alternative
Cyberwar offers a powerful alternative. By infiltrating government agencies or critical infrastructure through phishing attacks, systems and networks can be compromised. This can demoralise the enemy and cripple critical infrastructure such as power or water supplies.
Cyber attacks can also be used to steal valuable information. The theft of the US Democratic party emails in 2016 helped changed the result of the US election.
Best of all cyber attacks can be carried out in secret or through proxies. This gives governments valuable cover and plausible deniability. Attacks over the internet are far less obvious than an old fashioned invasion or bombing raid.
Geopolitics and Cyberwar
A shadow cyber war between Iran and Israel has been ongoing for many years involving disruption to water supplies and alleged attacks on nuclear facilities.
Companies are vulnerable to cyberattacks by criminals but also governments if they hold important strategic assets or information. Defence and military contractors, national infrastructure (powerlines, ports, systemic banks, rail & road), shipping and firms in the medical sectors are all potential targets.
Recently Australia has recently been the subject of a wide number of cyber attacks which were blamed on China. Australian government agencies were hacked in a major attack which prompted a rare public warning by the head of the Australian Intelligence agency.
The Attack on Maersk
The Danish Shipping firm Maersk was hit by a ransomware attack in 2017. Experts believe the attack originated from the North Korean government was in fact deployed by accident. The attack shut down all the Maersk IT systems. It took two week for IT systems to be restored and cost the company over 300 million Euros to fix and repair the damage.
This form of warfare is on the rise and companies as well as governments will be in the crosshairs. For some companies and organisations the threats will be obvious. Other companies should consider their vulnerability to cyber attacks with a geopolitical motive by thinking about:
- Are they doing business in countries with a history of using cyber attacks to gain commercial & political advantage such as China
- Do they partner with sensitive government agencies or ministries that might make them a proxy target or hold valuable information.
- Are staff easily able to bypass company security and use personal accounts and devices to store information.
Militant groups continue to plot and carry out violent acts across the world impacting both security forces and civilians. Terrorism is widely feared in Western countries for good reason. But in fact it is developing countries such as Iraq and Afghanistan that suffer the most at the hands of such groups.
Widespread terrorism drives instability in countries, terrifying the people and driving away business. Business people are unwilling to travel to danger zones and require additional protection to operate where terrorism is a risk.
Terror groups are closely linked to poor governance as they undermine legitimate governments through violence and in some cases morph in states of their own. The most notable example of this was the Islamic State in Iraq. Terror groups are also linked to crime as very often they engage in drug smuggling, money laundering or wildlife poaching as way to fund their activities.
The Shadow Economy
Financial crime, drug smuggling, people trafficking, and many other activities earn criminals billions a year globally. One estimate puts the shadow economy at US$870 billion in revenues. But these costs companies, governments and society untold damage. Many of these activities cross borders and can be considered global risks.
Networks like Mexican drug cartels can undermine legitimate governments and provoke something close to a state of civil war in that country. In 2018, 33,341 murders were recorded in Mexico. Other networks make alliances with political networks which results in corruption, the undermining of institutions and markets. In some countries such as Afghanistan the distinction between government and criminal enterprise is almost non-existent.
Criminals can infiltrate supply chains through illegally produced timber, illicitly mined minerals such as blood diamonds, even using slave labour to produce goods. This type of activity feeds corruption and crime but when otherwise legitimate companies are involved it can damage hard won credibility.
Supply chains can be long and opaque with many companies unaware or turning a blind eye to potential criminality. Poor publicity around supply chains can lead to long lasting reputational damage to those involved.
Money laundering is perhaps the biggest element of the shadow economy. In order to legitimatise illicit earnings, criminals need to clean their money. They do this by laundering their gains through legitimate businesses and banks. Some estimates put place illegal earning at 5 percent of the world economy.
New Political Actors
Individuals, NGOs, activist groups thanks to social media and modern campaign techniques can make major political waves. Groups such as Black Lives Matter or Extinction Rebellion have made headlines throughout the globe. These groups have been spurred on by widespread racism and the threat of climate change and their protests have inspired local copycat groups across the world.
The Blackfish documentary exposed cruelty to Orcas at Seaworld Florida. The documentary caught the attention of the public and activists, quickly becoming a viral hit. Eventually it resulted in a major downturn in visitors at the iconic US park. The film cost just US$ 76,000 to make, but made a major dent in Seaworld’s profits with its stock price falling 60% the year it was released.
A small group or individual with the right cause and a savvy media presence can change perceptions and ruin the reputation of a company or institution (like US police forces) and inspire change in companies (witness the promotion of Black Life Matters messages across corporate social media in June 2020).
Climate Risk the impact of Climate change
Human activity has raised the concentration of carbon dioxide to over 400 parts per million. It is no coincidence that nine of the ten hottest years on record have occurred since 2005. The world is heating fast and this brings extreme risk.
Given the rate that Co2 levels are continuing to rise the world is on track to experience a 2 C rise in the next few decades. The world faces drought, extreme weather, water shortages and sea level rise on scale never experienced before. The pace of change will leave traditional infrastructure unable to cope with rising seas and higher temperatures.
Crop yields will decline and vast areas of farmland will dry out and become unusable. Extreme weather events will multiply in number causing businesses billions in damages and ever-increasing insurance costs. At the same time rising sea levels will push seaside dwellers inland putting many of the world’s major cities such as New York and Shanghai at risk.
Climate change is a threat multiplier. Existing risks such as extreme weather, drought and heatwaves will increase in frequency and severity. In the long term and given its global nature climate change represents the biggest threat to humankind.
Climate change will create unprecedented disruption to life in the next decades ahead which can only be partly offset by adaptation measures. All organisations should be considering the risks that climate change present.
Agriculture and ultimately all human activity is dependent on a functioning natural world, insects to pollinate crops, clean water to drink, fertile soil to grow crops as well as countless other natural commodities.
Deforestation, conflict over resources and water and the degradation of the world’s oceans and rivers all pose a threat to our way of life. The world’s oceans are being plundered by fishing legal and illegal, threatened by pollution and acidification and oxygen depletion.
Huge islands of rubbish have formed in the Pacific Ocean. The world’s forests, jungles and wilderness are also under assault by loggers and developers as humans expand farms and settlements. Deforestation threatens a key carbon sink and habitat to much of the world’s animal and plant life.
Environmentalists have been warning the world about these risks for many years and now the threats are materialising.
The Blue Economy
The “blue economy” (economic value of seas and oceans) has been valued at US$ 24 trillion but in reality is incalculable. Protecting oceans just like climate change depends on collective action among nations.
The open nature of the world’s oceans has meant they have been an easy target for exploitation by fishing fleets
Companies that are that damage the environment will see their reputation under threat from activists and eventually the public who increasingly shun goods they believe unethical.
Biodiversity loss is of increasing concern and not just among environmentalists. The 6th mass extinction is accelerating and threats to wipe out not just large charismatic animals like tigers and whales but also insects, plant life and birds.
Climate change, habitat loss, use of pesticides, hunting and poaching have led to spectacular declines in wildlife. Mass die outs of animals can set off catastrophic cascades where entire ecosystems are destroyed. This loss also threatens humans as many indigenous people rely on natural habitats as homes. But those living in the rest of the world will eventually pay for destroying nature.
Farming and is ultimately dependent on healthy ecosystems, clean water and pollinating insects. Depleting farm yields, loss of pollinating insects and loss of natural carbon sinks like forests along with climate change will accelerate a food crisis where previously strong agricultural yields disappear.
A world of declining food yields will create political and economic crisis as more people are pushed into food insecurity and famine. China for example has destroyed much fertile land thanks to pollution and using it for housing and industry. But thanks to its relative wealth is able to import more food to make up the shortfall.
However in the future countries may find it harder to spend their way of food shortages if there are widespread global crop failures and rapidly increasing prices.
Many will wonder if biodiversity loss will really impact on businesses or whether they will care. But there are moves underway to create a global framework for protecting biodiversity in the same way there has been for global emissions and climate risk.
Wars may be driven by water conflicts such as the Ethiopia – Egypt dispute. The Grand Renaissance Dam in Ethiopia threatens to cut the water flow of the river Nile which would devastate Egyptian agriculture, industry and society.
No country is more dependent on a river than the Egypt is on the Nile. Hopefully the dispute can be settled peacefully, but given what is at stake war could become a reality.
“Egypt is the Nile, and the Nile is Egypt”Herodotus
Oil and gas deposits, diamond and other minerals can also attract war and violence. Conflicts driven by resources include:
- Conflict in the Democratic Republic of Congo driven by coltan and other minerals.
- The Gulf Wars in Iraq were driven in part by the desire to control or stabilize a region valued for its oil deposits and strategic significance.
- Rakine Province in Myanmar: armed militias, warlords and individuals battle for control of the jade rich, but lawless province of the South East Asian country.
- Baloch Separatists in Pakistan who claim the central government and now China are benefiting from the region’s resources rather than the locals.
- The Libyan civil war which pits various factions (backed by outside powers such as Turkey and Egypt) the prize being an oil rich country bordering Europe.
In 1914, little over 100 years ago the world was dominated by multi-ethnic European centred empires. The United Kingdom, France, Germany, Austria-Hungary and Russia ruled massive regional and global empires. The decades before 1914 had seen many colonial wars but overall relative geopolitical stability.
This was all punctured by the calamitous events of August of 1914 where events in Europe spun out of control into a global war. Although the causes of the war have been explained in retrospect by historians, at the time it was a major shock.
Now after many years of US dominance there is a feeling the world is moving into a new unpredictable phase – what author Ian Bremmer called G-Zero. A geopolitical landscape where every country are working towards their own interests rather than trying to work together. As a result global public goods (such as security, global warming mitigation & knowledge production) become harder to provide.
A number of trends are pushing global trade wars and economic dislocation:
- Surging global migration
- Fraying international alliances
- Growing competition between state
- The rise of nationalism and populist governments
Trends such as the decline of fossil fuels and the rise of renewable technology could shape geopolitics in new unexpected ways. Could states like Saudi Arabia decline along with oil. But new resource powers based on lithium (a key ingredient in electric car batteries) such as Bolivia rise?
Failure of National Governance
Government regulation, interference, and expropriation pose a major threat to companies, usually in developing countries. While many governments taking a long term view and are keen to provide a stable investment framework.
Others seek to extract value from unwary investors. This can come in the form of nationalisation or favourable treatment to local or well-connected firms. Some governments prefer to heavily tax firms which can make their operations unviable.
Uncertainty in legislation or tax regimes leads to friction between companies and governments. The rise of global nationalism and trade barriers threaten to make governments even more hostile to foreign companies. Outsiders, particularly those involved in the extraction of natural resources are often considered an easy target.
For investors understanding the target country and its government and political reality is key. Without this overseas expansions easily fall apart. Western tech giants Google, Facebook and Twitter have all been blocked in China because their business model clashes with the Chinese government’s plans to develop its own tech champions. Tech companies have a great deal of influence over the flow of information, something the Chinese government is keen to control for itself.
The movement of people is often linked to economic dislocation, climate and environmental issues. Mass migration of people within or across borders can lead to geopolitical risks as governments squabble over the impacts of migration. Global migration is predicted to rise as the impact of climate change increases.
Migration from Syria to Europe was triggered by the long lasting conflict afflicting the country. The prospect of further conflict in Africa and the Middle East, along with widespread youth unemployment and climate change raise the prospect that millions of potential migrants will try and enter Europe.
The political response in Europe to Syrian refugees was largely negative with many European leaders making political capital out of demonising migration. In other words gaining popularity by promising to keep out immigrants.
Religious and Ethnic Persecution
Other migrants like the Royingha people of Myanmar many of which have been forced out of their homes into Bangladesh are subject to ethnic and/or religious persecution.
Global migration may be slow thanks to the Covid-19 pandemic, countries closing borders and implementing stricter immigration regimes. In the longer term this will not deter migrants trying to move nor the anti-immigration sentiment pushing governments to reduce immigration.
Migration is primarily an opportunity for companies. They can pick staff from different countries, widening their talent pool. Migrants often fill jobs which locals cannot or will not do. This can be highly skilled tech work or more routine agricultural work.
The risk around migration is that is sometimes leads to a political backlash which nationalist politicians can take advantage of to take or keep power. In turn extremist politicians create their own uncertainty which can be damaging for the business sector.
The world’s powers and corporations are in a technological arms race to develop the most advanced artificial intelligence, big data applications, the internet of things and cyber capabilities. The advantages in terms of commerce, espionage and military applications are huge.
Countries have always used new technology to gain advantages over their competitors, from using gunpowder weapons in medieval battles, to the 20th Century space race. Now the technologies are different but the competition between states just as real. These areas in tech are the battlegrounds of the present and future.
Weaponization of social media, states use social media to promote propaganda, spread misinformation with the aim of shifting opinion or even winning elections.
Cyber attacks can be used to harvest data (such as the Marriott Hotel data breach) such as the movements of diplomats, military and politicians. Nation states that retain the best techniques for cyber warfare gain a major advantage over rivals.
Artificial Intelligence has become a hot topic, although its yet to realise its potential, becoming a leader in this area will create new opportunities in military and commercial applications. Vladimir Putin said in 2017 the nation that leads in AI ‘will be the ruler of the world”
First mover advantage in technology gives country’s a competitive advantage. The race to build Silicon Valleys full of tech firms has increased as the new products and services created are seen as vital to a modern economy.
The success of major tech firms and their control over the flow of information has gained them enemies. Tech firms monopoly power, dubious data practices and willingness to overlook widespread misinformation on their sites could lead to many protracted legal and political battles.
Global Diplomatic Architecture
The alliances, institutions and governance that have dominated the world in the last 80 years are now under strain. NATO, WHO, IMF have all been heavily criticised by members and outsiders alike in recent years. The roles and usefulness of these institutions have been questioned.
Many have questioned NATO’s role given it was an alliance designed to counter the threat of Communism in Eastern Europe. A threat which is long gone. Meanwhile the rise of China and its financial firepower means it can form its own financial architecture.
New Chinese influenced, some say dominated institutions like the Asian Infrastructure Investment Bank (AIIB) have been set up to emulate or rival traditional relations. At the same time poor relations between the US and European countries have undermined NATO.
Multipolarity – the growing divisions between the world’s powers and the growing strength of rising powers is a major risk. Foremost of these rising powers is China and its flagship foreign policy project the Belt and Road Initiative. The Belt and Road initiative is a label given to China’s outbound investment and trade. It has become a highly visible form of commercial diplomacy with countries queuing up to be a Belt and Road partner.
These shifts in alliance and power projection create uncertainty and change which create risks – such as a trade war between China and the US. It can also be an opportunity – for example Pakistan has seen an influx of Chinese money which has helped boost its economy. Although some say that has come at the price of increased dependence on China.
Nationalism, Populism and Social Cohesion
Fraying social Cohesion driven by narrow political groups, unpopularity with political elites, hate and misinformation spread by social and traditional media along with inequality, unemployment and generational divides has all made the world a more angry, dangerous and harder to govern.
Nationalism and populism are on the rise across the world. The US, India, Hungary, Brazil and the Philippines have all seen the nationalistic leaders rise to power. Populist leaders have tapped into the unpopularity of perceived elites and fear of unemployment, economic uncertainity and migration.
This trend has made it easier for authoritarian states like Russia and China to operate feeling less need to pay lip service to liberal values. The spectre of another recession may make accelerate this trend.
Nationalist leaders also have a tendency towards corruption, nepotism and incompetency – which eventually catches up with them. Nationalist states are also more prone to conflict with its own citizens and other countries. All this helps add to the current feeling of uncertainty, change and pessimism in global politics.
Trade Wars and Economic Nationalism
Many observers see globalisation going in reverse which will disrupt supply chains, create currency disputes and made foreign investment more difficult. The so called weaponization of finance has seen embargos, sanctions and tariffs used in place of warfare.
The most significant examples have been the sanctions on Iran imposed by the USA and others which have put severe pressure on the Iranian economy and made it hard for banks to do business with Iran or face fines enforced by US authorities.
Russia faced similar sanctions following its annexation of Crimea. These sanctions driven by the EU did not have the same impact. Russian gas and oil remain indispensable to Europe. Russia’s economy managed to escape the worst predictions of doom, but undoubtedly suffered. Sanctions are likely to remain a policy of choice for mainly western countries who can punish countries they deemed to have.
Russia and others have criticised sanctions viewing them as hypocritical – pointing out the the US and UK faced none for their invasion of Iraq.
However for a company facing sanctions it is a serious matter, major fines, loss of revenue and markets are a reality for the likes of Societe Generale. The French Bank were hit by US imposed fines (worth US$1.3 billion for dealing with Iranian and Cuban companies.
Supply Chain Risk
Supply chain risk has rapidly increased in recent years. A world economy reliant on international trade routes is one vulnerable to disruption by trade disputes, natural disasters, or reputational issues around the source of manufactured goods or minerals.
Covid-19 has compounded these fears. Many companies are reconsidering supply chains fearful of being left short by factories in China closing or at the mercy of US-China trade wars. Some firms are looking to countries like Vietnam to provide goods, while others may decide to bring manufacturing closer to home
Covid-19 and the Great Reset
Covid-19 is a global health crisis, but the economic and social changes that are still emerging and could create long term risks. While much good can come of a reset, the risks are also apparent.
Economic dislocation and depression, unemployment, rising government debt and in some parts of the world widespread disaffection and anger towards government. To add to that overstrained healthcare systems, disrupted supply chains, corporate and government debt levels and there is a great cause for concern.
For multinationals the geopolitical risks can be clear, but even SMEs and small firms the second order effects can be devastating. For examples see the Covid pandemic or the effect of US-China trade wars on the economies of agricultural states in the US.
How Can My Firm Manage Geopolitical Risk?
Consider the big picture – Scan, Focus and the Act
The first step is understanding the geopolitical risk landscape, and how it applies to your firm.
- Scanning the environment to monitor, identify and assess geopolitical risk.
- What appetite does for Geopolitical Risk does my firm have, are we willing to take big risks if there is an upside.
- What are the firm’s most valuable assets and which are exposed to risk
- Some firms may prefer to use a outside expertise, but using existing internal knowledge is also invaluable.
- Remove institutional blindspots – this is where outside expertise can help.
- Next is to map the company’s profile to the geopolitical risks. This allows focus – which risks are likely to be most important.
- Does the firm have the capability to manage geopolitical risk.
- How can it become proactive – managing political stakeholders for example?
- Does the firm have the right skills/staff to deal with the risk. Can staff be trained or is it preferable to hire outside expertise.
Once Geopolitical Risks have been framed what specific actions can a firm take to develop resilience:
Political Analysis of your firm’s footprint
By analysing and monitoring the countries and regions your firm operate in. Emerging economies which are characterised by unstable politics and seesaw like economic conditions. Analysing, monitoring the country is an obvious action. But more difficult is linking change too how it might affect your firm. If your firm is in a sensitive industry it will be more exposed to political interference.
For example if a new government hostile to foreign companies comes into power in a country you are doing business this should be considered when making investments. Analysis can be done from afar, remotely, but the best information often comes from the ground. Staff and contacts in the country can often give you the best intelligence. This local knowledge combined with a macro view should provide a comprehensive analysis of the target country.
Creating a Resilient Firm
Central to developing a resilient firm is identifying critical functions and activities and how they could be recovered or protected during a crisis. Engaging a business continuity or resilience expert is usually a must, especially for a larger firm. Creating and exercising (see below) crisis plans through simulations or exercises will test their effectiveness. Exercises also help ensure effective communication channels between employees.
Many firms have seen their resilience tested by recent events such as the Covid pandemic. Many companies will not recover from the crisis, most will survive if weakened, a minority will come out stronger. Partly due to luck or government bailouts.
A select few will come back strong thanks to their resilience ability to adapt to new circumstances. Unsurprisingly tech firms have profited from the crisis as people have flocked to social media and ordered more online goods from the likes of Amazon.
Accept that you cannot foresee every risk, but a resilient firm should be able to recover from a major traumatic incidents be it a fire, flood or IT failure. Some of these risks are purely operational in nature (faulty wires leading to a fire). Others disaster such as bombs, wars and some cyber-attacks have a geopolitical element.
Developing a comprehensive disaster recovery plan that will allow for the firm to continue following a disaster is critical. The major features of a disaster recovery plan would be:
- Establishing an IT plan disaster recovery plan (such as data centre separate from the firm’s HQ or main centre).
- Creating disaster recovery plans the entire organisation detailing actions and procedures following an incident. Crucially these plans need to be tested using an exercise (see below).
- Developing an alternative communication system if there is a widespread IT failure and normal communication routes are not available.
- Developing a business impact analysis (BIA). A business impact analysis is a major piece of work which identified each critical activity an organisation undertakes and how important it is following a major incident. A well executed BIA can help an organisation effectively recover from a disaster.
For example a shoe manufacturer may plan that following a major incident shutting down part of its manufacturing that continuing to make its biggest selling shoes is critical. But niche shoes and those lines which are soon to be discontinued could be delayed until fully capacity can be restored.
Red teaming – Table Top Exercises – War Gaming – Simulations
There are many different variants, but a simulation or exercise should confront participants in a realistic scenario. These exercises should usually be based on the disaster recovery plans created. Although exercises can be based on any scenario, not just disasters.
The exercise will also bring together teams, cutting across silos in the organisation. Scenarios can be remote, desktop or a live action. They can be run in real time or can look at events occurring over days, weeks or event years. Acting out a scenario will help uncover your strengths and more importantly your weaknesses.
Only direct confrontation with a political, security situation or and putting executives on the spot will any real knowledge be made. Exercises should generally be run by an outsider to the firm, who will be best placed to challenge the Executives and avoid group think
A crisis response team should be populated by executives. Other staff will provide specific expertise it is unrealistic that the C-Suite would not take charge in a major crisis. However, the CEO of the organisation should not be directly involved in crisis management. As a prolonged crisis will divert their attention from running the business.
A variant on the above is scenario planning which can be done via tabletop. But scenarios can be expanded and transformed into more detailed work which focuses on the response to a realistic scenario. So a firms operating in a conflict zone would develop and workshop plans covering response to attacks on assets, kidnappings, shifts in governments and thousands of other possibilities.
The result of these exercises should be to develop a crisis response team or teams that are well prepared, have strong communication lines, understand their roles clearly and are prepared to act decisively in a crisis.
Horizon scanning is looking at longer term threats to an organisation. Scanning does not attempt to predict the future. Instead horizon scanning considers potential threats and risks and attempts to develop risk scenarios of events that might affect the firm. The power of horizon scanning is making people aware of future possibilities, challenge assumptions and change mind-sets.
There is no set rules or framework for horizon scanning. The key is to focus on the issues that will affect your firm. Market dynamics in your sector, government action or regulation. Information gathering can be done on desktop, but talking to relevant contacts and monitoring social media is also useful.
The idea is to identify trends and issues which may present challenges or opportunities to the organisation. Not everything identified in horizon scanning will be relevant but an organisation can spot trends early and adapt accordingly.
Adopting Climate Risk Analysis
Climate Risk is a new addition to geopolitical risk. This new field looks to analyse the physical risks faced by companies and countries posed by climate risks such as sea level rise, extreme weather and heat waves. Climate risks also include what is called transition risk.
Transition risk is the changes in government policy faced by firms as a result of climate change. This could include governments closing down coal plants to reduce greenhouse gas emissions.
Companies across the world are rushing to adopt the Task Force for Climate Related Financial Disclosures (TCFD) which will identify which projects face the highest climate risks.
Opportunities from Geopolitical Flux
Acting on Geopolitical Risks and turning them into opportunities
While predictions about Geopolitics are a dangerous proposition, the world appears to be heading towards a more unstable chaotic period thanks to divisions between the main powers and the growing effects of Climate change.
Geopolitical Risk is not all bad news. Shrewd observers can take advantage of geopolitical trends by investing in industries and countries that stand to benefit.
Geopolitical analyst Milena Rodban coined the term Geopolitical Flux which to me is more apt description. Another way to benefit from geopolitical change is antifragility: Nassim Nicholas Taleb developed this concept in the book Antifragile.
The thrust of the book is that a truly resilient organisation benefits from change, chaos and flux, even thriving from disorder. An antifragile company can thrive in difficult times while competitors fall away, unable to cope with a new world.
Post Conflict Zones
Post conflict countries or fragile states represent an opportunity. As a war ends and peace returns, a country or region can present new opportunities. Many companies will be fearful, but very often assets are relatively cheap and there is little or no competition. The catch of course is that many conflict die down only to be rekindled a few years later.
The end of the Iraq war attracted many western firms particularly in the oil sector. But the resurgence of violence and the rise of the Islamic state soon made the country a war zone again.
However, Angola ended its long running civil war in the 1990s but the country maintained a no go zone for many companies. Chinese oil firms took a chance and built relations with the political and business elite of the country and Angola soon became a major oil exporter to China.
Boat Spotting: Watching out for new emerging opportunities and risks
The most agile companies can turn geopolitical risk or flux into an advantage. By spotting trends as they take off – such as climate risk reporting and adopting it gaining knowledge and a competitive advantage.
Trade and economic disruption causes pain and those with lengthy supply chains suffer. But those who are more flexible or can see the rise of tariffs and protectionism can act. The onset of a trade war between China and the US has seen many firms move operations or source commodities from different places to avoid the worst effects.
The warning signs of trade war between China and the US were visible early on in Trump’s administration. A geopolitically aware firm that operates between the two countries would be sensibly assessing the situation and identifying how any risks could be mitigated. This could include moving some supply chains to Vietnam or other countries.
At time of writing Disney was struggling with a torrent of bad publicity due to its new live action Mulan movie. Part of the film had been shot in Xinjiang province and Disney thanked the region’s publicity department in the credits.
The region has been troubled by multiple reports of internment or re-education camps. Up to a million ethnic Uyghur citizens are said to be in these camps. Disney were condemned by many commentators for working with officials from the region.
The film failed to make an impression on the Chinese public and the bad publicity has not helped Disney make friends in Beijing. Having strong political capital with the Chinese government is key to gaining further market share in the country.
Its not clear whether Disney failed to spot the dangers of working in Xinjiang. Or if they did spot the dangers they did not act on them or anticipate them. Either way those responsible for their geopolitical risk management failed to protect the firm.
The ethical choices behind wanting to film in Xinjiang were also questionable, but Disney and others would argue that plenty of other firms operate in the region and in China without criticism. But perception is important – Disney has a high profile and a family brand. By appearing to align with a regional government associated with internment camps was a step too far.
Above I have tried to outline the main geopolitical risks facing companies across the world. Of course geopolitical risks are international in nature but they vary in their impact depending which country you are in. The corporate sector is also extremely diverse, so different global risks matter to different firms. For example climate risk is a bigger deal for the infrastructure sector than the media industry.
Once risks are identified the next step for a company is preparing and mitigating these risks. Although some risks cannot be identified in advance (Black Swans). Others can be tackled in advance. Some risks are relatively slow moving and there will be time to prepare and adapt. Others will need a crisis team to respond when time is of the essence.
Geopolitical risk is real, ever changing and often unpredictable. Firms that fail to prepare will face serious consequences in terms of financial, operational and reputational damage.