How to Deal with Geopolitical Risks? Scenario Planning Still Underused by Businesses

Monday, 20. June 2016

In a few days the British people will vote on leaving the European Union. The outcome of the referendum is just as uncertain as the extent of the political and economic consequences for the country itself, for Europe, and the whole world. The “Brexit" is only one of many geopolitical risks, however, that managers and executives are worrying about these days. There is also the unresolved Ukraine conflict and the sanctions against Russia, the ongoing Greek crisis, the refugee crisis and the unstable situation in the Middle East, the latent threat of terrorist attacks, and the growing threat of national bankruptcies in South America.

Recent international studies show that executives are becoming more and more aware of and concerned about geopolitical risks. In a survey conducted by the consulting firm McKinsey, 84 % of the 1,300 executives surveyed believed that geopolitical instability will affect global business in the next five years. That is an increase by 23 % compared to the previous survey from 2013. In addition, more than half of the respondents believed that geopolitical and domestic instability will affect the profitability of their own companies in the next five years.

Yet, businesses haven’t done much to deal with the changing risk landscape. Barely one-third of respondents said an understanding of geopolitical and political risks is extremely or very well integrated into overall strategy. And only 13 % indicated their organizations have taken active steps to address these risks.

The most commonly used methods for addressing geopolitical risks include internal ad hoc analyses, as events occur (e.g., consultations with local business partners), internally generated analyses (eg, country reports, quarterly market reports), ad hoc dialog with external experts or specialized advisory firms, and specialized external resources (e.g., think tank reports). However, only about one-third of respondents rated them to be very effective. Paradoxically, less commonly used methods were rated much higher. These include the integration of risk analysis into formal risk processes and comprehensive scenario methodologies integrated into the strategic planning processes. The latter were used by only 18 % of the companies, but rated by more than half of respondents to be very effective in dealing with geopolitical and political risks.

As the authors of the study point out, “while geostrategic risks are complex issues—and may be outside the comfort zone of many executives—they are not fundamentally unknowable or unmanageable business problems.” To stay ahead of geostrategic uncertainty, they advise businesses to adopt a pro-active approach which includes the following steps:

  • Identifying trends and disruptions that are specific to their organizations and markets,
  • Assessing the potential market impact of risks across a range of scenarios,
  • Developing initiatives to mitigate risks or capture opportunities,
  • Establishing a decision-making process that prioritizes initiatives and ensures executives are aligned on their implementation,
  • Embedding the capabilities for geostrategic analysis into regular decision-making and planning processes, and
  • Ongoing monitoring of trends for new developments and regular reassessment of strategic initiatives.

The Strategic Intelligence Software SOLYP3 supports such a proactive approach in dealing with geopolitical and other risks by enabling businesses to:

  • Centrally collect all relevant hard and soft data across business units and regions,
  • Identify trends,
  • Develop alternative future scenarios and assess them in terms of their probability of occurrence and impact, and
  • Develop strategies to address these scenarios within the overall strategic planning process.

In this way, companies always have a plan B in the drawer allowing them to respond quickly to changes in the risk landscape, which can be a decisive competitive advantage.

To learn more about scenario planning with SOLYP3, click here or contact us directly!