Geopolitics breaks into businesses

6-10-2022 | News

The growing turbulence in the global context, both strategic and economic, suggests relying on professionals specifically trained to assess the related risks. Especially if unpredictable.

by Marco Valigi

The geopolitical events of recent months, with the mad invasion of Ukraine by Russia and the dramatic consequences for all to see, are rapidly changing the balances international, but also the strategic choices and options available to companies. This is not a recent change. In fact, in the last two decades, the international system and the markets have profoundly changed. From a globalized context with clear US guidance, in which China was a great promise in terms of development and potential customers and Russia the optimal energy partner to balance the blackmail power of Middle Eastern producers, we moved to a scenario characterized by considerable uncertainty.

Beijing and the business model supported by the Chinese Communist Party have for some time aroused ambivalent sentiments, fueling fears that partnerships with the Asian giant, while inevitable, will evolve into possible forms of financial strangulation with evidently harmful effects. As for Russia, although apparently doomed to economic decline, as a political system it is giving the United States and Europe a hard time. Beyond the ongoing conflict, in fact, Moscow not only vigorously defends a model of social organization in which the role of the state challenges the dominant paradigms but, at the expense of costs, is also aiming at territories crucial for access to maritime routes and for the control of some strategic raw materials.

In a highly unstable framework in which political tensions between regimes are reverberating on supply chain, especially on the prices of raw materials and energy sources, references to geopolitics have become frequent and, together with them, the tendency to establish a link between this discipline and the business world. Whether the relationship between geopolitics and business is actually relevant, however, still needs to be established. In short, do entrepreneurs and administrators really need geopolitics? Above all, including it in business management, could in some way contribute to creating value for their businesses?

A useful tool. With caution

The answer, in the first instance, is no. Geopolitics is not a methodology that can be applied directly and immediately to business - at least not in the case of Western liberal democracies. On the other hand, where the relationship between state and business is rigid and the economy subordinated to politics, as happened for the authoritarian and totalitarian regimes of the twentieth century, the international positioning of the regime and its objectives in foreign policy will tend to orient the strategies business. Thus, the picture will tend to be favorable. Similarly, in sectors such as energy, infrastructure and heavy industry and defense, or in cases where the conditioning given by the geographical factor and the impact produced by relations with other countries are more relevant, the link between geopolitics and business strategy instead it will be evident. Furthermore, it must be said that the considerations made just now do not apply to all states, but to countries with real ambitions and capacity for international projection. Consequently, even the use of geopolitics from a business point of view tends to integrate more easily with the objectives and practices of large industrial groups.

The constraints just mentioned, however, must not lead to premature conclusions. Is it therefore out of place to talk about geopolitics applied to business and, perhaps, to the prevailing corporate structures in Italy? Absolutely no. Indeed, it constitutes an indispensable and potentially instrument transformative for national operators who intend to carefully analyze the international context, to make informed and effective decisions. Simply, transferring the categories of geopolitics to the business world is not an immediate thing and implies a certain degree of propensity to receive the change as a potential growth factor. In fact, in order for geopolitics to have positive effects on business practices, its applications must also be harmonized with the structures, organizational models and processes prevailing in a given context. Let's see how. 

Courage and creativity

A first interesting aspect related to geopolitics is that it looks at how i conditioning geographic - or in a broader environmental and contextual sense - influence the behaviors and objectives that can realistically be pursued by a given actor or organization. In particular, in a context in which companies procure or sell almost everywhere, being able to handle with awareness the system of risks and opportunities connected to a certain set of customers and suppliers in various locations impacts, by modifying them, on the assessments concerning the risk of 'business. And the greater the uncertainties linked to the context, the more crucial to one's success or failure will be the way companies and entrepreneurs will evaluate business risk.

An approach that includes geopolitics, in fact, is by definition a method of corporate governance that embraces complexity and approaches the environment not by simplifying it, but by problematizing it. What surrounds the company will be observed as a variegated and heterogeneous complex and not as a smooth surface where the relations between means and ends are declined in a fluid and linear way. In short, the "knots" to be solved will prevail, especially in the decision-making processes. However, they will not be treated as inertial elements in contradiction with the speed and effectiveness of decisions, but as a reservoir of information, data and possible solutions for the business. Not directly, perhaps, but if carried out effectively, this type of policy therefore constitutes a source of value in itself, because it is able to feed within the company innovation and adaptation to the context.

As pointed out by Condoleeza Rice and Amy Zegart, in the company, political risk must be managed, all the more so because identifying it can be complex is counterintuitive (Condoleeza Rice and Amy Zegart, "Managing Political Risk in the 21st Century", Harvard Business Review, May 2018).

Giving the correct weight to the geopolitical variable, looking at the change in the political context as a source of stimuli for companies, allows us to remove risks that, in the first instance, could appear as opportunities and to convert issues that, otherwise, into opportunities for growth and stabilization. , will appear as obstacles only because their resolution implies a revision, based not on mere cost-effectiveness, of the target markets, suppliers and logistics.

Operationally, even without providing for an ad hoc figure as advocated by Chipman when speaking of the need for companies to have their own foreign policy (John Chipman, "Why your company needs a foreign policy", Harvard Business Review, September 2016), places and processes capable of welcoming and integrating the analyzes and metrics of geopolitics into business practices, on the other hand, exist, even in contexts where, as in Italy, medium-sized companies prevail. A CEO or an innovative entrepreneur always has the option of availing themselves of the advice of a political analyst in the development phases of the business strategy or in those preceding it. Similarly, such a figure can be made available to the Boards of Directors, supporting and supplementing the investigations of the risk committees. Finally, on a different level, conceive one training dedicated - more operational - for the foreign commercial network or the purchasing offices it is certainly not science fiction.

Geopolitics is a powerful tool. However, in order for it to be activated and put at the service of companies, courage is needed, to open up to change, and creativity, to imagine how to exploit this resource with respect to one's business: qualities that only true leaders are in a position to possess.

Marco Valigi, Professor of International Relations, Catholic University of the Sacred Heart. Director of the Geopolitics desk of Governance Advisors.

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