Key Takeaways

  • McKinsey notes that regional wars, trade disputes, and other geopolitical conflicts signal a shift in the global order, presenting both risks and opportunities for CFOs and their executive colleagues.
  • Facing international instability, business leaders often focus on vulnerabilities in their company's products, operations, suppliers, and workforce, yet overlook how to adjust growth strategies, core operations, technology stacks, talent structures, and asset allocation in response to disruptions. McKinsey, ina report,states this.
  • "Executives who think deeply today and act on the changing world order will be tomorrow's market leaders," said Shubham Singhal, senior partner at McKinsey and co-author of the report, in an email response to questions on Tuesday. "Geopolitical turbulence brings significant downside risks to companies, but it also creates new opportunities."

Deep Insights

The financial and political order established after World War II faces challenges from emerging powers this decade, including barriers to the flow of goods, capital, and services, as well as open conflicts in the Middle East and Ukraine.

According to McKinsey, global trade interventions have surged 12-fold since 2010, and US-China trade tariffs have increased six-fold since 2017.

"CEOs and boards understand that the global order is undergoing a transformation," said the global consulting firm McKinsey.

"Even as they improve resilience to shocks, business leaders should focus on opportunities for risk-adjusted value creation," McKinsey urged executives in the report to "aim for prosperity, not just survival."

Singhal stated that companies that fail to take a proactive approach to geopolitical shifts may miss out on new trade corridors and subsidies driven by industrial policy, leading to slower growth. They may also lose competitive advantage in cost structures and face "catastrophic changes," such as being forced to exit markets.

McKinsey points out that business leaders need to consider whether new tariffs and taxes will make their company's products more expensive or cheaper compared to competitors. They should determine how new economic and security alliances can open up growth avenues or reduce costs, and how risk-adjusted capital costs vary across regions.

For example, a North American-based medical device company could leverage trade agreements to reduce operating costs by 15% to 25% by relocating manufacturing from other countries to Mexico, McKinsey said.

"Business leaders overly focused on downside risks may become paralyzed, perpetually vigilant for high-severity but low-probability geopolitical events," McKinsey said.

Instead, senior executives should consider how the company can benefit from changes in economic, industrial, security, and defense policies, McKinsey said. These shifts may lead governments to introduce new initiatives regarding tariffs, trade, capital deployment, and supply chain flows.

McKinsey notes that CFOs and their executive colleagues can adapt to geopolitical disruptions by:

Broadening Corporate Strategic Vision

Companies should monitor economic policies and geopolitical risks as closely as they monitor taxes, regulations, and other impacts on strategy, McKinsey said. They should identify which global economic shifts most significantly affect the company's interests and determine potential harms and growth opportunities.

Business leaders should consider insurance policies that can mitigate risks, as well as investments that enable the company to capitalize on uncertain but potentially significant growth opportunities, McKinsey said.

Senior executives should also plan a range of scenarios and conduct "tabletop exercises" to determine how best to respond to outbreaks of local conflicts, tariff or industrial policy changes, and other potential disruptions, McKinsey said. They can develop "crisis response playbooks" to provide a starting point for adapting to various sudden disruptions.

Guarding Against Trade and Non-Trade Barriers

Companies should anticipate the impact of potential laws, policies, and regulations to avoid financial and reputational costs from being forced to exit markets, McKinsey said.

For example, BP withdrew from Russia three days after the invasion of Ukraine began, leaving behind its stake in Russian oil and gas company Rosneft, according to McKinsey.

"As a result, BP had to bear impairment charges exceeding $24 billion, and its annual earnings decreased by $2 billion," McKinsey said.

Forming a "Geopolitical Task Force"

Companies that respond fastest to geopolitical disruptions typically deploy a team responsible for monitoring geopolitics, assisting in forecasting, planning various scenarios, and keeping senior leadership and the board informed of risks, McKinsey said.

Such teams enable senior executives "to react quickly and, over the long term, build a culture of geopolitical resilience within the organization," McKinsey said.