Geostrategy by Design | Witold Henisz

Why Business Leaders Need to Pay Attention to Geostrategy Today

Dan Loney: We’re talking with Witold Henisz about his co-authored book, Geostrategy By Design: How to Manage Geopolitical Risk in the New Era of Globalization. It’s guide for executives seeking to thrive and create long-term value in the next global competition. With the growing concerns over geopolitical risk, it’s becoming more evident that companies need to have a strategy to deal with the impacts.

Vit is a management professor as well as vice dean and faculty director of the ESG Initiative here at the Wharton School.

Vit, the concept of a geostrategy feels like it’s becoming a must-have for a lot of business leaders right now.

Witold Henisz: I think business leaders are increasingly aware that the system we’ve built up over the last 30 years, this efficiency-first global system of supply chains, sourcing anything from anywhere that’s at low cost, is at risk and maybe even becoming unraveled. And politics is ramping up, whether at the geopolitical level, U.S. versus China, or whether we’re looking within the United States, rural versus urban class, one social class against another. And they’re struggling for the tools to figure out how to adapt, how to change. In the same way we built global supply chains, global order, what does the new order look like? We’re trying to figure that out right now.

Loney: A lot of these elements have been around for a while, but with everything that is kind of in our laps at this moment, it’s become much a greater focus, hasn’t it?

Henisz: Yeah, the things we’re talking about in the book we’ve been talking about for 25 or 30 years. We were pushing back against The World is Flat when Tom Friedman put out that book. We were just like, “No, it’s not.” You can regulate, you can tax, you can make choices as a nation, and not every country is the same. We’ve been saying that for a long time. But I think it wasn’t understood.

And I think now everyone gets it. Everyone sees that the world is fundamentally changing, and it’s not moving towards globalization. The question is, how far will it unravel? Is this just a period of flux? Or is this the beginning of a new era of globalization, something that looks really different from what we’ve had? Everyone’s asking that question.

Loney: Take us through some of the components you think are important for companies to understand as we move forward.

Henisz: We’ve talked for many years about the importance of scanning your environment for new technology, for digital disruption, for what is AI going to do to you. You’ve got to start scanning the environment for what politics is going to do to you. Now, that’s not new, just understanding the political environment, but you’ve got to do much more to connect it to the P&L (profit and loss). You’ve got to find a way to connect what’s happening in the political discourse to revenues, costs, the KPIs (key performance indicators), the dashboards, that financial modeling of political risk.

This isn’t just something that could rise up after an election or after a crisis. This isn’t just some sort of tail risk. This is a day-to-day driver of financial performance. You’ve got to build systems and build politics into those systems so that you can scan and monitor what’s happening in real time. And then you start assessing strategies to deal with this. What’s the right approach? How are you going to adapt your sourcing? How are you going to adapt your hiring? How are you going to adapt your operations? What are you going to source in China? What are you going to source somewhere else? How much of your sourcing in China are you going to shift? How much of your manufacturing is going to occur back in the U.S. or Mexico?

These are questions that you have to ask, but not just from an efficiency standpoint, also thinking from a political standpoint. You have to manage the political risks and start doing scenario analysis, stress testing, simulations, because we’re not quite sure how much of an unraveling is going to occur over the next five or 10 years, and you want to have some hedges and some pivot points. The biggest challenge is setting up an organizational structure, a governance system that can allow this to happen. Each of these pieces — the scanning, the financial modeling, the management — isn’t new or hard. But putting it all together for political risk is.

Loney: Does it change the framework of how companies think about their setup and operations?

Henisz: I think it brings politics in in a way that it’s often been left out. We’ve just focused on what’s cost efficient — low cost, global sourcing, just-in-time sourcing. And now, it’s really clear that that presents risks. There’s a risk of a greater U.S.-China trade war. There’s a risk of a greater resurgence of something like the Cold War, where we can’t be sourcing certain products. We’re concerned about the ownership of who owns what company, whether it be TikTok or whether it be semiconductors. National identity really matters, and that’s got to be part of the equation. It’s not a new system, but it’s a new set of questions that are going to affect the system in every aspect of global companies’ operations.

Understanding How Political Data Can Inform Decision-making

Loney: One of the segments of the book is about focus. How does it change as we deal with geopolitical risk?

Henisz: Focus is really important. There’s all sorts of information you can gather on the political environment, right? You can read the newspapers, you can read social media, you can read speeches. You can build all sorts of data on what political actors want and social actors demand. The hard part is connecting it to the P&L. The idea of focus is taking that political information and making it real to the CFO or the chief risk officer or the chief marketing officer or the chief operations officer. It’s connecting it to the dashboards that they have, and showing that politics isn’t just something for external affairs or for the C-suite to deal with, but that it’s operationally, financially brand relevant.

That requires a new incorporation of political identity into what will customers buy. Will they shy away from my product because it’s American or because it has a Chinese component to it? What about the operations? How much more am I willing to pay for a product that’s reliably sourced in the United States, or to manufacture something in the United States?

It used to be the answer was nothing. Then we started bringing in supply costs and the cost of gasoline, and maybe there’ll be a supply chain disruption, so we started doing supply chain resilience. Now we’ve got to start doing political resilience. What if somebody turns the taps off? What if countries start shifting more into the Chinese orbit as opposed to the American orbit? We’ve got to start doing that political resilience modeling into our supply chain strategy and sourcing and manufacturing strategy. The questions, again, are similar, but we’re bringing politics in, and we’re connecting the political data to many more elements of decision-making than we used to.

Loney: It feels like a lot of these elements are ones that companies in other countries probably dealt with going back a ways. But the focus has increased in the last few years, right?

Henisz: Yeah, it’s a good point. I think there was much more attentiveness or awareness of the political environment in some countries where there was more flux or more uncertainty. Not always. What’s interesting is, if we look at Chinese corporations, they’re actually not that good at doing this kind of work, because they defer to the Chinese Communist Party officials or to the government, and they assume the government is going to take care of politics. Both the U.S. and Chinese companies kind of didn’t do this, but maybe for different reasons. Places that are coming out of, say, Brazil or India are much more in tune with the need to be aware of the political system and think about it as a component of their strategy.

Loney: How do you manage all of these new components in the best way possible?

Henisz: That is the real challenge. That’s one of the things we spent a lot of time in the book looking at — the governance of political risk management or of geostrategy. Each of the pieces themselves aren’t that hard. Scan, focus, manage, strategize. We know how to do this. But connecting it all around politics is really hard. Unfortunately, it involves cross-functional teams, kind of matrix organizations where you’re bringing people together. That’s always hard, right? You’ve got different voices in the room with different opinions, different backgrounds.

You need to have some clear leadership, so someone’s got to be in charge. We find the companies often tasked different people with that. It might be the chief risk officer. It might be the general counsel. It might be head of strategy or head of business development. But without a leader, you just have a bunch of bickering or arguing. Someone needs to be appointed, but that person has to have respect of all the functions and the buy-in that they’re all actually going to collaborate on this. They have to work from the same data structure. That’s why focus is so important. If they all have their own data systems, if they all have their own political data, then they’re working off different playbooks.

You’ve got to build a data structure that they can all agree to. They’ve got to come together and start assessing what are the biggest risks and what are the biggest opportunities. But they have to do that in a collaborative, ongoing way. Essentially, you’re looking at enterprise risk management that, again, brings politics in. As ERM systems have developed, we’re developing these kinds of governance structures, but they haven’t typically thought of political risk as part of the equation. They’ve been focused on safety, on operations, and again, supply chain. I think enterprise risk management is the best template for how to achieve this kind of cross-functional integration. We draw a lot in that in the book.

Loney: That puts even more pressure on the strategy that you build.

Henisz: Right. And the strategy isn’t just a single leap. We don’t know what’s going to happen to the U.S.-China relationship today, so it’s not like pull everything out of China. First of all, you probably can’t. Second of all, you’ve got to do it in small steps. You don’t want to offend China. It’s not easy to move all of that supply somewhere else. You’re talking about moving 5% or 10% at the time and experimenting. Should it be in India? Should it be in Ethiopia? Should it be in Brazil? Where are you going to put the supply where can you build up reliable capacity, and how do you do that incrementally, so you might be able to expand or slow down if things stabilize?

In the early period of globalization, say in the early 1990s, companies weren’t making huge leaps. They were making small steps and getting ready for this new era. We’re in that same kind of period now, where we’ve got to start making the steps, not just waiting, not just kicking the can down the road. But not making leaps, having the opportunity to pivot, the opportunity to be flexible, and adapt as the system continues to evolve.

Building the Right Cross-functional Team for Geostrategy

Loney: Can you talk more about the importance of building the right cross-functional team?

Henisz: A lot of companies used to depend in their external affairs strategy on someone who used to be in government. That kind of revolving door. You bring in an ex-minister, or you bring in an ex-government official who’s now a lobbyist, and they’ll run your show for a while. But what do they know about your company? What do they know about operations? What do they know about supply chain? They know how to call someone up from the government. They know how to put out a fire. They know how to make a compromise. But they don’t know how to drive strategic change.

Instead of just hiring people who know government well, we need to start having the same kind of rotations within companies, where people who want to get into the C-suite have had to rotate through government affairs. Same person who used to run operations now runs government affairs for a while, and back and forth. This needs to be a core capacity or capability of senior management, which means we really need to change the kind of high potential process of evolving management skills to include political risk management and geostrategy. It really is a fundamental shift in the way we’re thinking about management and skill development. We’re not siloing, we’re not segmenting political affairs; we’re putting it right in the center of strategy.

When I’m in the executive classroom, I often ask, “What percentage of your time would you like to spend dealing with government officials?” And the answer is usually zero. Sometimes people will be like, “Well, I’m going to regulate an industry 5% or 10%. But really, I’m an engineer, or I’m a finance, or, you know, I’m something else, and that that government stuff, I’d rather just keep it over there.” It’s unrealistic. It’s always been unrealistic. But again, the thing that’s changed now is people are accepting of that. When I put that argument out, no one’s pushing back anymore. They’re like, “Yeah, I probably have to spend more time on that.” They’re acknowledging it. They don’t know what it means yet, but they’re no longer resisting the idea that they’re spending too little time on it. That is a really fundamental change.

Loney: One of the things we talked about before we started is how digital impacts the decision process and what people say about different issues.

Henisz: Right, we no longer have the presumption that anything you say anywhere is just between two people. We have to assume that it could be broadcast, it could be captured. And information we share on social media, information we share anywhere, we also assume it could be broadcast. And that some of these actors, I mean, think about TikTok and the debates today, may have political ties political affiliations. That information could be used, could be weaponized.

We’re seeing that on both sides of this. When we think about the drivers of political instability, the lack of trust between groups, the polarization, some of that is being augmented by social media, and the way firms are engaging with stakeholders, with their communities, with the countries in which they’re operated. Social media, digital information can be a weapon used against them, or a tool used for them. We’re in a really different era, both in terms of the type of information we can gather, the tools we can use to present our point of view. And again, that adds a layer of skills and a layer of information that we didn’t have before.

Loney: Knowing how important this topic is right now, especially with all that’s going on in the world, what do you hope is the message of the book?

Henisz: I think there are two. One is that companies should have a geostrategy. If your company doesn’t have one, it’s time to develop it. We can’t just think of this as an add-on or a nice to have or something you need in a crisis. This needs to be a core component of your strategy. But the second part is the second half of the title. It’s Geostrategy By Design, right? And you have to think carefully about the governance and the design of the way you navigate political risk or geostrategy.

It’s not as simple as just having the right people doing this on the side. It really has to be carefully integrated into all of your decisions. Business expansion, supply chain, sourcing, selling, marketing. This has to be touching every aspect of the business, and you have to design a way of sharing the information, coming together, talking about it, making decisions, that brings politics and almost every aspect of global business.