4 Plausible Geopolitical Scenarios CEOs Should Consider When Setting Strategy

They were joined by Jeff Wray, Oliver Jones, and others.

Business has never been so uncertain. Climate change, technological innovation, and demographic shifts are some of the factors that are making the global operating environment different.

There are signs that globalization is changing, but no one knows what will happen. Business leaders are facing a lot of uncertainty. The answer is scenario analysis. This can allow CEOs to plan for the future, but they need to act now.

It's the right strategy for uncertainty.

According to the survey, CEOs named geopolitics as the greatest risk to their growth strategies before the war in Ukraine broke out. The pressure has only increased with faltering economic growth. In order to help CEOs revise their strategies for turbulent times, the most likely globalization scenarios were identified.

In order of the most restrictive policy environments for international business, we found four possibilities.

1. Self-reliance reigns – a rerun of the 1930s. Fraying alliances create a volatile geopolitical environment; economic and security rationales are conflated; nationalism and populism are ascendent; and many national leaders turn away from alliances. Isolationist policies disrupt trade, creating a subdued growth outlook. Nationalist policies, including trade barriers and price controls, further fuel inflation. Protectionism—and the lack of global coordination of climate change—makes cross-border supply chains costlier and more complex.
2. Cold War II – similar to the first Cold War. The hardening of alliances and ideological competition create a world order defined by two distinct blocs—one comprised of the U.S. and its allies, the other led by China. There is also a third bloc of largely non-aligned countries. Geopolitical tensions are high. The division of the global economy into blocs constrains private sector innovation and growth opportunities. Companies adjust their trade and supply chain relationships to operate within their home country’s bloc, leading to increased costs.
3. Friends first – a novel geostrategic environment, reminiscent of the early 1900s. Geopolitics is characterized by a complex set of alliances and affinity groupings, which are sometimes institutionalized by trade and investment agreements. Governments prioritize strategic supply chains within their alliances, but there are few restrictions on cross-border trade. Companies shift toward “friendshoring” key operations and supplies. Technological hubs support productivity growth within regional hubs, but trade barriers limit gains.
4. Globalization lite – a partial return to the 1990s and early 2000s. Low levels of geopolitical friction create a more stable and predictable global operating environment. Ideological blocs fade in significance as trade-driven partnerships become more important. International relations and problem-solving for global issues such as climate change become more multilateral. Stronger globalization reduces trade barriers and revives technological progress, lowering inflation. Liberalization raises investment and productivity growth and improves living standards.

Since the end of the Cold War in the early 1990s, the global operating environment has been in the area around Globalization lite. The Cold War II environment was created by recent shocks. More nationalist policies were created by the government's response to the COVID-19 pandemic. The war in Ukraine led to a shift in policy. This trend is likely to continue. Medium- and near-term events could change the trajectory. A quick end to the war in Ukraine and a strong global economic rebound could push the world back towards the Globalization lite quadrant, while a deterioration in alliances could shift nations towards the Self-reliance reigns quadrant.

There are uncertainties in globalization.

The scenario that emerges will be dependent ongeopolitical relations and national economic policies. There is a question of whether alliances or blocs dominate the international order. The outcome of the war in Ukraine, China's positioning, and the U.S. foreign policies will give the main answer.

Economic policy uncertainty is dependent on whether countries continue to favor nationalist competition or shift to more internationalist liberalization. The amount of industrial policies that governments embrace will determine this.

Building resilience with analysis.

Within five years, all four of the scenarios are possible. In order to prepare for all possible environments, companies need to build agility. Scenario planning should be integrated into the company's strategy to be prepared for globalization.

Monitoring political risks and other megatrends for opportunities and challenges, as well as tracking the geopolitical environment for signs of how globalization might unfold, are some of the things that are involved in implementing ageostrategy. The business implications of each scenario need to be assessed by the CEOs and boards. The bottom-up assessment at the business unit and functional level is what they should do.

10 strategic questions should be asked by CEOs.

• How would our business model be impacted?
• What would be our future corporate structure, and how might the portfolio be reshaped?
• How would capital allocation priorities and the capital structure shift?
• How would changes in customer or consumer demand affect revenue growth?
• How would our M&A strategy be affected?
• How would operational and supplier footprints be affected?
• To what extent would cross-border sharing of technology, customer data, and other IP be curtailed?
• To what extent would talent shortages exist?
• How would access to capital be affected?
• How extensive and complex would the sanctions or tariffs that restrict relationships with individual countries or allied blocs be?

You can change your strategy to reflect the changes in the world.

Once CEOs have the answers to the questions, they need to figure out which strategic actions will allow them to mitigate the challenges and seize the opportunities that each scenario presents.

Some companies may need to change their supply chains. Other companies may need to take political risk into account. Some companies may need to change their business model in order to grow.

The agility and robustness of each scenario should be assessed by the CEOs. They should do those actions immediately.

You can find more about how to prepare for the new era of globalization by visiting ey.com/geostrategy.

Jeff Wray is the leader of the global EY-parthenon group.

Oliver Jones is the leader of global business development.

The leader of the business group and director of the research institute.

The leader of the business group is a woman.