By Courtney Rickert McCaffrey & Oliver Jones

How to shift strategy for a new geostrategic era

Policy volatility will elevate the importance of geopolitics to corporate strategies to its highest level in a generation. 
   
In brief
   - The importance of geopolitics to corporate strategies is at its highest level in a generation; executives need to manage political opportunities and risks.
   - Governments’ pursuit of self-sufficiency will be driven by geopolitical tensions, economic uncertainties and environmental sustainability.
    - Geopolitical developments are likely to continue to influence supply chain strategies, shift investment destinations and push up costs for companies.  

Geopolitics has been increasingly volatile in recent years, with US-China tensions and the growing assertiveness of a variety of middle powers driving a shift from a unipolar to a multipolar world. Rising populism and nationalism have also contributed to a weakening of multilateral institutions as national governments have exerted more control over their economies. These trends were accelerated by the COVID-19 pandemic — and then they have been supercharged by the war in Ukraine.

As a result, the era of relatively liberalized global trade amid ever-increasing globalization has ended (at least for now). In its place is a transformed global operating environment in which geopolitical considerations often outweigh purely economic considerations in business decisions. This has led to a medium-term outlook for globalization that is highly uncertain, as explored in our world-in-five-years scenario analysis.

In the short term, however, the outlook for the course of 2023 is clearer. In the year ahead, the geostrategic environment will be characterized by two overarching themes.

   Stabilized volatility. First, the oxymoron of stabilized volatility. Many of the recent trends in geopolitical tensions and government intervention in economies are likely to persist, perpetuating volatility but likely at a more consistent level than in 2022.

   Policy trade-offs. Second is the prevalence of significant and urgent policy trade-offs. The current geostrategic environment is posing a variety of acute challenges for governments, such as energy security and elevated inflation — with no easy solutions. Governments in different countries will diverge in their trade-off choices, further complicating the operating environment for international companies.

This article highlights findings from the 2023 Geostrategic Outlook (pdf), which presents our view of the most likely and impactful developments in the geopolitical landscape in 2023. It also explores the implications of these developments on different sectors and highlights five no-regrets geostrategic moves executives can implement to help their companies thrive.

Read the rest at EY.