Navigating new global risks: strategic imperatives for international companies

In a recent discussion on global risks, several key takeaways emerged that highlight the evolving challenges and strategic responses needed for international companies. The conversation illuminated three primary risks and their corresponding strategic implications that companies must navigate in today's complex geopolitical landscape.

The first risk is related to the changing nature of the global political landscape. Historically, the world was divided into two main blocs during the Cold War. With the advent of globalization, the world became 'flat' and borderless. However, we now observe a complex landscape of shifting geopolitical alliances. Different coalitions of countries form on various issues such as energy, security, and markets. These alliances can be temporary, often dissolving when a dominant power forces others to choose sides. International companies must remain vigilant and adaptable to the fluid nature of geopolitical alliances, as these shifts can have profound impacts on global operations and market strategies.

The second risk stems directly from the evolution of global value chains. The transition to green and digital technologies depends heavily on critical inputs like solar panels, wind turbines, and microchips, which require access to essential commodities. During the peak of globalization, these inputs were readily available from the most efficient producers, leading to a concentration in certain parts of the value chain. This concentration is now at risk of being exploited for political leverage, potentially cutting off countries and corporations from vital resources. Companies should focus on diversifying their supply chains to mitigate the risk of being cut off from essential inputs due to geopolitical tensions.

Does it mean one should pursue ‘strategic autonomy’? Not really. Global trade's share of GDP surged during globalization but has stabilized or even declined in recent years. Interestingly, however, excluding China, trade integration metrics are still stable, if not outright increasing. This indicates the resilience of market integration among countries, excluding China, and thus moves toward autarkic tendencies are likely to be unsustainable or prohibitively costly. Rather, corporations must adapt to the decoupling from China, and realign their trade and financial strategies to capitalize on these new integration patterns. Strategic diversification is essential to mitigate risks associated with over-dependence on any single source or market.

Moreover, the outlined risks related to global value chains can emerge rapidly, interact with other risks, and lead to significant increases in costs and shortages. Consequently, corporations and governments need to develop robust contingency plans and ensure their organizations can implement these plans swiftly. Shifting from a 'just-in-time' to a 'just-in-case' approach is essential for resilience. Preparedness and flexibility in supply chain management are crucial for handling unexpected disruptions.

The third risk has a macro-financial nature. The era of globalization was marked by strong deflationary forces, contributing to prolonged periods of near-zero interest rates, exacerbated by financial crises and the pandemic. However, the need for redundancy in value chains, operational contingency planning, and the inherent frictions in green and digital transitions are inflationary pressures. These factors are likely to drive interest rates to more normal levels, reflecting the new economic realities. Companies should anticipate and prepare for a shift to higher interest rates as part of their long-term financial planning.

These insights underscore the necessity for international companies to adapt their strategies in response to these evolving global risks, ensuring resilience and sustainability in a dynamically changing world. Discover more

SDA Bocconi School of Management