The playbook for seeing around geopolitical corners

0:01Roberta Fusaro: Foresight planning is critical when you're talking and thinking about geopolitics. And AI certainly has a role in that planning, but AI can only get you so far. There is the tremendous power of what we would call human to human intelligence. There is no substitute when you're thinking about developing scenarios, which in itself is an art of kind of creativity and imagination, that you need to be talking to a wide range of individuals, be that policymakers potentially, with think tank experts, be it your peers in other businesses. That's McKinsey partner Ziad Haider. He joins us to talk about five instruments or tools that leaders can use to hedge against geopolitical uncertainty and position their companies for success.

0:45Roberta Fusaro: This is the McKinsey Podcast, where we help you make sense out of the world's toughest business challenges. I'm Roberta Fissaro, your host for today.

1:00Roberta Fusaro: Ziad, thanks so much for joining the podcast today. It's great to be here with you, Roberta. Thank you. So you and your co-authors wrote this really great article for McKinsey.com. It's called The Art, Science, and Technology of Geopolitical Scenario Planning. And there's a really great CEO question at the beginning of that article. Is scenario planning broken? Such a great provocation, Ziad. And so I'm wondering, what's your honest answer to that question? It was an excellent provocation because, you know, where the CEO was coming from was the fact that we just seem to keep getting buffeted by these different strategic surprises, whether it's Russia's invasion of Ukraine or even in the non-geopolitical realm, something like COVID, right?

1:44I think one of my reflections in spending time with clients on this topic is that actually sometimes there is a methodological aspect to this and how you approach it, which probably needs to be strengthened. But equally, it's also about what is your objective in doing this scenario planning exercise? Because if your objective is crystal ball predictive clarity, then that is an unrealistic objective. And so what we try to talk about is the idea that scenario planning itself needs to be demystified and understood as the art of foresight. And there are different tools of foresight you want to use for different objectives.

2:17Lastly, I would just say that even as there's many references to this concept of scenario planning. In one of our latest surveys of CEOs, 53 % of them said that scenario planning is really important, but less than 30 % said that their organizations are actually engaging this tool.

2:32Roberta Fusaro: That gap is really interesting, Zia, that 50 plus to 30 plus. It's a little bit surprising to see and hear that gap. But the article cites five tools to help leaders develop foresight. And I'm going going to list them here. We'll get into each of them. They are horizon planning, scenario planning, contingency planning, simulations, and tabletop exercises. So the first one, horizon scanning, again, starting with what's the objective. The objective of horizon scanning is to look ahead in a more near-term way over the next year and think about what could be the big risks or opportunities. And oftentimes the way to engage leaders is to give them a colorful term to put their mind around that.

3:14So the way I like to think about it is what could be in the year ahead, some of the black swan events, the unknown events of high impact. What could be the gray rhino events? They're kind of charging on the global landscape, but you don't know when they'll hit you and how hard, but they're out there. And then silver linings as opportunities. And the typical way you often see companies think about this is in their annual risk snapshot at the end of the year for the board. There is this perspective on geopolitical risk outlook for the year ahead.

3:40Roberta Fusaro: And so what about scenario planning? What does that look like? So scenario planning is probably the one that's really best understood. And the idea behind scenario planning is to really think about multiple futures, right? Which way could the world go on, say, trade relations on US-China, the conflict in the Middle East? So there are different scenarios that one needs to think about. And then how does one think about one is strategy, one's positioning, one's global footprint in these different scenarios. So you're lifting your gaze compared to, say, the horizon scanning, which is more near-term risks, to thinking about multiple futures strategy and positioning.

4:14Roberta Fusaro: And moving ahead to contingency planning, what can you tell us about that? So in some ways, contingency planning is the cousin of scenario planning, but it's the sharp end of the stick. it's not so much thinking about multiple futures that could play out, but in some ways, it's thinking about the sharpest future that could play out, which might force you to, for example, have to leave a market on short notice and pull out your people and shut down your factories. And so how do you prepare for that? That's a very different end product than what you then need coming out of a contingency planning exercise is what is the exit plan?

4:47What is the phase-down plan? How would we get our people out? And so the mindset over there is much more about resilience and crisis response than, say, with scenario planning, where it's more around strategy and positioning more long-term.

4:59Roberta Fusaro: How can leaders use simulations then to develop foresight? So simulations is an interesting one. And quite strikingly in our same survey, less than 5 % of organizations use some form of a simulation. But the objective of a simulation is to move from just essentially laying out on paper a bunch of scenarios or contingencies and actually making your leadership team live it. So imagine putting them in the room. There is a facilitator. Across the room, you have your head of, say, North America. You have your chief risk officer, the head of a few other key regions, the leadership team. And you're feeding them information about, okay, X has happened.

5:36How would you respond? And it really forces the leadership team to grapple with, well, what would we do? And ultimately, it forces a degree not just of planning that everyone comes together on and how they would respond, but also alignment, because oftentimes leadership teams don't have these discussions in a way that they really truly compare notes on, well, how would you view that threat or action? So it is a role play in effect to make the issue, the sort of vector of shock come to life and work through that together in a live facilitated exercise.

6:07Roberta Fusaro: That's interesting. And then the last one here, tabletop exercises. When I think of tabletops yet. I'm sorry, I think of the Pong game and tabletop gaming. I know that's not what this is. So tell me more about what tabletop exercises look like. Sure. I mean, there's a few different words for this. I like your version. It sounds a lot more cheerier. But, you know, tabletop or wargaming as well as one that's used in the public sector more. But fundamentally, the idea with a tabletop exercise or a wargame is almost a sort of an educating tool for the audience in the room. Typically in this scenario, in around a tabletop exercise, you would be role-playing two sides that are in a conflict.

6:47And the question you'd want to look at is, what would they do? What tools would they reach for? Say sanctions or export controls or blockades. And all of that is to inform the audience, in effect, that is observing this exercise and sometimes participating in it, like in a contingency planning exercise. It's to educate them of, okay, what would be the policy tools that might shape our landscape in if a particular military conflict or trade shock comes to pass. And so that is, again, much more about helping the audience think about state actions that may happen, red, blue team. And again, a lot of this we see in the public sector, but many private companies want to understand in a more contested world how governments, what actions and tools they may use to inform their own planning and position.

7:30Roberta Fusaro: And getting back to the point that you made early on is what are you trying to achieve? I assume that your choice of which of these tools to use, you wouldn't use just one, you might use multiple, but a lot of it really just depends on your objectives. Is that correct? Absolutely. You pick the instrument of foresight based on the objective, and that objective is shaped by a range of factors, including a temporal dimension. Are you looking at near, medium, long? Are you thinking about strategy? Are you thinking about resilience? Are you thinking of it as a way to create alignment in your organization?

8:00And so some of the themes cut across all of them. But I think being quite clear about the objective before you reach the instrument for the instrument is important because oftentimes we jumble all of this into the elastic phrase of scenario planning, whereas I would argue you have a toolkit to choose from.

8:15Roberta Fusaro: So I want to shift a little bit, Ziad. And it seems as though every conversation these days we're having is about AI. and assuming it's no different in the world of geopolitics, how should leaders think about where AI helps with foresight planning and potentially where it can mislead? It's a great question. In an article, we talk about the art and science and technology of geopolitical scenario planning. And the technology portion very much relates to this theme of the role of AI. I think without doubt, this entire discipline of geopolitical assessment and risk management will be disrupted by AI.

8:51But I would argue we're probably still in the foothills of that, and we haven't seen organizations using it at scale. Certainly, even going back to the Russia-Ukraine conflict, there were organizations that would say they were able to leverage AI to, for example, triangulate across social media to map out Russia troop deployments, tank deployments that provided an early warning system. But that still feels somewhat nascent, as I was saying, in terms of at-scale tools. Of course, many organizations, when you think about the overall framing of the problem or some of the watch points that they may need to have to look at which scenario you're in, do leverage tools like AI to synthesize.

9:29But I think there's a lot that we still have to see emerge over here to make these tools that people will use at scale. I'd also just add that particularly in this world, there is the tremendous power of what we would call human or human intelligence. There is no substitute when you're thinking about developing scenarios, which in itself is an art of kind of creativity and imagination that you need to be talking to a wide range of individuals, be that policymakers potentially, be that think tank experts, be it your peers and other businesses. And so AI will have a role and I suspect a growing role, but the richness that needs to come into this will always also need to rely on some component of human intelligence that you gather through those classic methods of information gathering.

10:12Roberta Fusaro: Right. So synthetic personas will have to be complemented with humans. I think that's right. Yeah. That makes sense. So Zied, what separates the organizations that navigate geopolitical uncertainty well from those that might struggle based on your own experiences consulting with organizations worldwide? I think there are two things that come to my mind. One is we used to talk about the word geopolitical risk a lot. You rightly called it geopolitical uncertainty because amidst that uncertainty, there are two branches. There is a risk branch and then there's the opportunity branch. And the organizations that I think are at the cutting edge are quite clear about both aspects.

10:54They're clear about identifying the opportunity set that they have in this volatility, and they're clear about building the muscle that they need to have internally to manage the risk. On the opportunity side, for example, we do see many examples of companies viewing amidst, for example, shifting trade agreements, right? There's a lot of focus on tariffs, but we're also seeing a lot of new trade agreements come online. So they're looking at the new trade corridors that are coming online and how they can surge over there. Think, for example, the India-UK trade agreement that's just come online.

11:24Or they're looking around and seeing the surging defense spending around the world and thinking about how can they be a part of some of those solutions. So that mindset of saying there is opportunity for us, and I use opportunity in quotes because in some instances, these are opportunities that are quite adjacent to very difficult moments of war and peace and humanitarian exigencies. But that mindset is important. I think the second part is the best organizations are also thinking about how do we more systematically understand, monitor, and mitigate the geopolitical risk and these various shocks.

11:58We over here are talking about one of the elements in that capability set that I think is quite important, which is foresight. But there are a few other elements. I think perhaps the most essential one is insight. Where in your organization do you develop an integrated view of what's happening in the world and share that with your leadership? And so for many organizations, they think about this idea of either standing up an internal geopolitics unit or building out a wider ecosystem of insights on geopolitics, a theme we've written and thought extensively about. So there's an insight component of what is your eye in the sky or satellite to guide you, right, organizationally.

12:35There's an oversight component. The board cannot afford anymore to look at these topics once a year with an interesting guest speaker. Many boards that are doing this right have a very structured cadence and way and framework by which they stress test the business on different dimensions in this volatility, whether it's supply chains, capital, tech, R &D, and make choices about how they want to operate. And then just a couple of other tools that I think are really critical in this day and age and this new geoeconomic era on the risk management side is also investing in capabilities like corporate and government affairs.

13:07I think we're in an era where governments are drawing lines in the sand and you have to figure out very quickly how do you manage those. And if you fall on one side or the other, it could be the difference between fortune and an existential threat. And by fortune, I mean industrial policy and new sort of incentives to scale manufacturing. and on the threat side, it could be export controlled sanctions. And so thinking really critically about how you are engaging with your stakeholders and shaping your reality versus being shaped is quite important. So the opportunity side and then the risk or geopolitical resilience capability side are the two sides of the coin that organizations that are thinking about both enacting, I see sort of as surging in this moment.

13:46Roberta Fusaro: Amid all this uncertainty, which of course has to be managed, are there good examples out of companies that are just getting it right and finding opportunities amid disruption? Absolutely. I mean, I think I alluded to a few, for example, in the trade space, which are reorienting. There's a broader theme in the world of today of diversification, having multiple trade partners, multiple trade routes, multiple channels. And so those companies that are actually leveraging these new trade agreements, oftentimes with a lot of momentum from their governments, we see them doing very well as they sort of reposition.

14:20Maybe I can come to the theme of in the Middle East. There's a lot of focus on conflict, and there is, obviously, we're in the middle of a conflict there, but there are a lot of companies we talk to that view over the horizon a real investment and imperative in that region of investing in different forms of resilience, whether it's the hardening of digital infrastructure and data centers, whether it's diversifying pipeline networks and building those out. And so there's a whole kind of investment thesis on the resilience side in the Gulf that we will see play out and where many companies are already mobilized to think about how can they be a partner in that effort and journey of the countries in the GCC.

14:56Roberta Fusaro: That's great. Ziyad, the world's not getting any less complicated and the CEO role is getting more complicated minute by minute. What is one mindset shift that you think every leader could make to be able to thrive amid all this increasing uncertainty? Yeah, that's a great question. And I think the way I think about it is actually to channel a terrific quote that the greatest danger in a time of turbulence is not the turbulence itself. It's to act with yesterday's logic. And I think the biggest mindset shift for many business leaders today is that they have to develop a new logic from the one they perhaps grew up with in their organizations on how they run their business.

15:38They grew up in an era, probably came of age in an era of hyper-globalization and interconnectedness. And we do still remain deeply connected as a global trading system. All of our McKinsey research shows that. But the level of contestation and the fact that you have multiple, going back to my phrase, gray rhinos operating at once, charging at once. For many business leaders today, then the question that they have to really think about is what is today's logic of how to operate my business amidst all this uncertainty? And I think some of the themes that we're trying to discuss here is that you're going to have to get much sharper in understanding the geopolitical landscape and also then investing in the capabilities in your organization to navigate, including using some of these tools that we all appeal to, but our data shows are not really being systematically leveraged.

16:23So the key insight really here is what is today's logic and are you applying it in terms of making sure your business survives and thrives?

16:30Roberta Fusaro: This has been a great conversation, Zia. Thanks for joining the podcast today. Thank you so much for having me, Roberta. Thanks so much for listening to the McKinsey Podcast. I'm Lucia Raheli. And I'm Roberta Fasaro. Find us on McKinsey.com. We'll have a transcript of this episode up shortly. And if you have any questions based on this episode, please email them to us at themckinseypodcast at mckensey.com. If you enjoyed the show, we'd love for you to leave a rating and a review. We'll see you next time.

17:11Thank you.