By Jeff Wray, Oliver Jones, Courtney Rickert McCaffrey, and Famke Krumbmüller
The future for business has rarely been so uncertain. The war in Ukraine, climate change, technological innovation, and demographic shifts are just some of the factors remaking the global operating environment.
The signs are that globalization is changing dramatically, but no one knows for sure how it will play out. Facing such volatility, how can business leaders plan for the future? The answer is scenario analysis—the systematic exploration of multiple plausible futures. This can enable CEOs to prepare their companies for whatever happens next—but they must act now.
The right strategy for uncertainty
Even before the war in Ukraine sparked the most significant geopolitical rupture since the end of the Cold War, CEOs named geopolitical tensions as the greatest risk to future growth strategies, according to the EY CEO Survey 2022. With faltering economic growth, surging inflation, and continuing geopolitical strains, the pressure has only increased. To help CEOs revise their strategies for turbulent times, EY teams analyzed geopolitical conditions to identify the most likely globalization scenarios for 2027.
We found four plausible options, listed below in order of the most to the least restrictive policy environments for international business.
- 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.
- 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.
- 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.
- 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.
The global operating environment has been in the quadrant surrounding our Globalization lite scenario since the end of the Cold War in the early 1990s. But recent systemic shocks created momentum toward a Cold War II environment and away from more open globalization. Government responses to the COVID-19 pandemic led toward more nationalist policies. The war in Ukraine produced a dramatic shift toward distinct geopolitical blocs and statist economic policies. Currently, this trend seems set to persist. However, near- and medium-term events could shift the trajectory toward another scenario. For example, a deterioration in alliances could shift nations toward the Self-reliance reigns quadrant, while at the other extreme, a quick end to the war in Ukraine and a strong global economic rebound could push the world back toward the Globalization lite quadrant.
The uncertainties shaping globalization
The scenario that emerges will depend on how two key uncertainties play out—geopolitical relations and national economic policies. The geopolitical relations question pivots on whether loose alliances or distinct blocs dominate the international order. The outcome of the war in Ukraine, China’s geopolitical positioning, and U.S. foreign policies will provide the main answer, with the strength and cohesiveness of transatlantic relations also playing a crucial role.
Economic policy uncertainty hinges on whether countries continue to favor nationalist competition or shift toward more internationalist liberalization in their economic policies. This will be determined by how much governments embrace industrial policies and expand the number of sectors they deem nationally strategic.
Building resilient strategies with geopolitical scenario analysis
All four of the scenarios above—and, of course, many others—are plausible within five years. Companies therefore need to build agility into their operations and strategy, so they can prepare for all potential environments. To be ready for whichever way globalization evolves, CEOs and boards should integrate scenario planning into their company strategy.
Implementing such a geostrategy involves monitoring political risks and other megatrends for opportunities and challenges and tracking the geopolitical environment for signs of how globalization might unfold. CEOs and boards also need to assess the business implications of each scenario now to prepare for divergent scenarios in the next five years. They should do so through both a bottom-up assessment at the business unit and functional level and a top-down assessment at the corporate level.
CEOs should ask themselves and their teams 10 key strategic questions:
- 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?
Transform your strategy to reflect the changing world
Once CEOs have the answers to such questions, they need to determine which potential strategic actions would enable their company to mitigate the challenges and seize the opportunities that each scenario presents.
In some cases, companies may need to transform supply chains to match evolving geopolitical realities. Other companies may need to better incorporate political risk into their acquisition and divestment strategies. And some companies may need to change their entire business model to position themselves for growth in an uncertain geopolitical environment.
CEOs should assess which strategic actions would build the most agility and robustness across all four scenarios. They should then prioritize and implement those actions—immediately.
Jeff Wray: Global EY-Parthenon Leader
Oliver Jones: EY Global SaT Sustainability Leader; Global Business Development, Markets and Insights Leader
Courtney Rickert McCaffrey: EY Global Geostrategic Business Group Insights Leader; EY Global Research Institute Director – EY Knowledge
Famke Krumbmüller: EY EMEIA Leader, Geostrategic Business Group