At the end of last June, an important book was released by the American publisher Disruption Books, authored by Witold J. Henisz, Oliver Jones, and Courtney Rickert McCaffrey, titled:
Geostrategy by Design: How to Manage Geopolitical Risk in the New Era of Globalization
The book, written by experts in geostrategy, discusses issues of managing transformation in large corporations in the era of global competition. It raises the following questions:
- How do executives in large companies set their policies when the geopolitical future is uncertain?
- How have events in Ukraine and the Middle East imposed new constraints on international trade and investment?
The book examines the impact of political risks and environmental, social, and governance factors on the broader strategy and evaluation of large global companies. The authors use examples from historical global turning points to recent political upheavals to illustrate the necessity for companies to withstand and confront the next waves of globalization.
As any new era of accelerated globalization emerges, top planners in large companies face the same challenging question: Are we facing a geopolitical change? Are we transitioning from comprehensive integration and cooperation to managing political risks with broader risk, strategy, and governance management?
Previous generations of corporate executives faced similar dilemmas, having to overcome challenges and seize opportunities associated with political risks, albeit in different contexts. Despite the uniqueness of the current geopolitical environment, those past eras of volatility can signal growth and prosperity in the new era of globalization.
The book provides examples of the impact of the geopolitical environment in the late 1980s. As the Cold War was nearing its end, analysts debated what might come next. While some optimistically believed that with the reduction of the nuclear apocalypse threat, the world would become more economically and politically integrated, and companies that were separated by the Iron Curtain would now have access to new markets and could establish new supply chains.
They believed that a resource-rich nation could now provide a new variety of markets, prestigious universities in another country could attract students from around the world, and a company with the best technologies could serve customers globally. The possibilities seemed endlessly enticing.
But in 1992, Harvard Professor Samuel P. Huntington gave a lecture that eventually formed the basis of a widely circulated book titled The Clash of Civilizations and the Remaking of World Order, arguing that cultural divisions were poised to dominate the future.
Despite all the promises of a post-Cold War world, Huntington’s book suggested a new vision for the new world order, one likely to continue its previous conflicts but with the source of these conflicts being between civilizations rather than countries.
The book describes how this shift in conflicts led to new uncertainties, placing global business leaders in an uncomfortable position because, previously, even amidst the specter of danger, the Cold War provided the private sector with a degree of certainty and predictability. But now, with a changing global geopolitical environment, the fate of many companies depends on predicting this future.
Is it wise for major companies to lean into change, or is it better instead to wait until the new geopolitical realities of the new world begin to form?
The global automotive industry provides a compelling example of how geological decisions impact companies. By the late 1980s, the Japanese company Toyota had already established itself as one of the Japanese car manufacturers. However, in many other key markets around the world, this company’s global competitiveness remained limited. For example, Toyota’s production in the large European market barely exceeded 3 percent of its total overseas production. With the onset of globalization, company executives faced new decisions in response to significant geo-strategic shifts in the early 1990s, leading to the formulation of new “guidelines” for Toyota. As articulated by company director Shoichiro Toyoda, Toyota did not want a change that merely kept pace with the times but a set of principles that would guide the times. Toyota’s leadership used geostrategic thinking to plan the way forward, refusing to be deterred by the fear of change.
The company began selling its luxury cars, trucks, and SUVs to American consumers who, until that time, relied on other manufacturers. But the company’s geo-strategic expansion did not end there; its executives moved investment to new locations, undeterred by the significant risk they perceived the company to be in. The Japanese manufacturer began making precise investments in Southeast Asia, Latin America, and Eastern Europe, enabling the company to expand rapidly if a truly global market emerged.
In the three decades following the fall of the Berlin Wall, the global economy became more integrated. Market barriers fell, just-in-time manufacturing flourished, and Toyota’s geo-strategic bets paid off. From 1990 to 2000, Toyota’s annual overseas vehicle production more than doubled, and the share of its car sales in foreign markets exceeded 66 percent in 2000.
The secret of Toyota’s Japanese superiority lies in its geostrategic managers’ understanding and ability to capitalize on emerging circumstances. The wave of globalization that flourished in the following decades brought prosperity to the Japanese company because its planning was based on this change. This clear lesson is something executives need to appreciate today: Amid ongoing geopolitical uncertainty, waiting too long for clarity could expose companies to risk. Executives need to act swiftly to make strategic decisions that set their companies on a path to prosperity in the next era of globalization.
This does not mean companies should be random. In fact, Toyota’s decisions were strategic regarding its various investments, carefully hedging risks to allow for alternative options if new barriers to global trade emerged.
The book illustrates with examples how companies’ readiness to navigate change in the early, uncertain days was the key to their success in the following decades—a consideration executives need to bear in mind now.
Since the end of the Cold War, the structure of the global economy has significantly transformed. The outlines of the new era of globalization are emerging but will be defined by shifts in the global alliance system and the extent to which governments continue to engage in economic policies. What is already clear is that the landmarks, risks, opportunities, and rhythms of trade are being fundamentally raised. This means corporate executives now must face a set of geostrategic concerns that simply did not exist a few years ago.
According to the book, they must develop a better understanding of how the world facilitates evolution. Geopolitical, national, regulatory, and societal concerns will likely impact their businesses and planning. They need to start preparing their companies for a level of geostrategic uncertainty that has not existed over the past three decades.
Much has changed since the fall of the Berlin Wall over three decades ago. New technologies have emerged, leading to new sectors. But the broader geostrategic dynamics that emerged at the end of the Cold War have remained largely stable. Now, they are heading towards the next era of globalization, so what is changing to enable us to build scenes of the ongoing transformation?
First, during the era of globalization, capitalism prevailed as the de facto economic model, and multilateral institutions were given authority in most cases to set the rules of the game.
Second, for the most part of the past three decades, the business world flowed according to international trade rates, as business success largely depended on keeping pace with the efficiency born from exploiting competitive advantages. Global access became the norm.
Third, the global middle class grew, raising new demand for middle-class goods and services. This shift, in turn, created new markets around the world, many of which are now served by an expanding network of global giants resulting from a series of mergers, acquisitions, and technological advancements.
The world’s shift from analog to digital forced companies to reimagine their products and services, requiring them to create an entirely new world of marketable items. This transformation led to a paradigm shift in the thinking and planning of most companies, becoming a “given” for many households and companies worldwide.
Recent events have accelerated a shift towards a multipolar world, currently defined by three emerging blocs. One bloc is led by advanced markets where the European Union and the United States have reached new levels of cooperation. Russia lies at the center of a second smaller bloc of countries, including many autocracies.
A significant number of emerging markets—including notably India—are not strongly linked with any of these blocs, preferring to pursue a more neutral or multi-faceted transactional stance, at least for now.
The geopolitical situation in China remains more complex, and there is no guarantee this path will continue. We do not know exactly how these blocs will evolve—but this is the critical point. While the alliances defined over the past thirty years were relatively stable and straightforward regarding their impact on corporate strategies, today’s environment is more dynamic, making geostrategy a more vital focus for corporate thinking.
