This is our final article in a series of three, where we argued that deglobalization was a simplistic and inaccurate way to describe the current trajectory of trade and investment, and we looked ahead at challenges and opportunities for major businesses in a reglobalizing world. While we are optimistic about reglobalization, it will be disruptive to businesses in the near term. This discussion explores what senior executives in multinational corporations (MNC) face in terms of change forces and options, along with examples from actual change programs underway.
Large global businesses are not passive or reactive players in the emerging reglobalized world. Businesses expand and consolidate through organic growth and mergers and acquisitions (M&A) activity, often crossing many borders in the process. Their financial scale, internal trade (with each other and amongst their own subsidiaries), and investments are themselves among the most powerful change agents shaping the future of world trade and investment.
The era of supply chain and market growth concentration has come to an end, and with it, the singular focus on cost efficiency at the expense of risk management. How C-suites approach key strategic planning choices will be ever more challenging as scale, complexity, and enabling technologies such as AI evolve, not to mention geopolitical, climate, economic, and consumer developments.
Thinking in terms of ‘world states’
Reglobalization is going to be turbulent and non-linear in its progression. When working with executives, we encourage the development of a mutually exclusive, completely exhaustive (MECE) set of scenarios on a spectrum that ranges from everyone all over the world holding hands to a major regional war. The more probable scenarios are in the middle. In developing the scenarios, three or four realistic ones are sufficient.
Admittedly, it is impossible to predict the future. Scenarios before 2020 did not identify the gross disruptions that occurred with COVID-19, climate events, and geopolitical shifts. However, the actions to mitigate different scenarios, even accommodating for known unknowns, are typically similar. Useful scenarios look in sufficient detail at both triggering events and the specific impacts/manifestations that are likely to occur (a lost supplier, a burned-down factory, shipping disruptions, supply chain blockage, abrupt currency, regulatory, or cyber events, etc.) and can be quantified.
It helps to focus the attention and strengthen the alignment of executive management and the board on the likely impact on the business and the costs of mitigating actions. Setting out this spectrum is the starting point for enabling board-level discussion (and informed decisions) of the cost vs benefit trade-off in different situations likely to face the business as reglobalization progresses. It also begins the dialogue to level-set and harmonize a split board over contentious topics such as risk-reward prospects in China, India, or Saudi Arabia, as well as other major forces, including geopolitics, tariffs, and the evolution of global rule-based economic organizations.
Building a foundation of trust across geographies
In a world where nationalism is resurgent, the most critical element that will be tested inside most organizations will be trust. Large organizational centers outside headquarters will expand their roles while diversifying manufacturing (or other production) footprint will weaken some subsidiaries or local teams as investments are redistributed. The assumption of trust—in subsidiary/business unit management, HQ, and colleagues—is essential to move forward with decisions.
However, in our discussions with executives in China, the U.S., and Europe, we are almost universally hearing that there are serious trust issues. As a matter of urgency, these need to be resolved. In many cases, this means accelerating activities that were disrupted during the pandemic: travel, dinners, team building, executive education programs, expatriates in the market, changes of leadership… whatever it takes.
The creation and effective sharing of data books, government relationships, new system designs, changing research and development, talent assignments, etc. that we discuss below are part of a larger strategy to improve communications and rebuild trust. In our trade amongst MNCs framework, we increasingly see a web-connected world where subsidiaries trade directly amongst themselves with little or no HQ involvement. Without a foundation of trust, every step toward reglobalizing will be fraught.
A path paved with high-stakes decisions
Once the world states are defined and the board has aligned on the specific challenges facing the business, the roadmap for the journey can be developed. Moving forward requires a new equilibrium between optimal cost benefits and resiliency that will mitigate the severe damages experienced during and in the wake of the pandemic, global military conflagrations, and stark political shifts.
We propose that this equilibrium requires three discernible decision points: no-regret decisions, preparation, and execution.
No-regret decisions can immediately address urgent risk issues, including many communications-related ones. These include: Improving inputs and sharing processes for critical information, including data and plans to broaden the ownership of decisions and build trust, improving coordination, cybersecurity, consistency, and discipline in external communications, especially in highly flammable political and public environments such as the U.S. and China, and implementing strong, updated employee training bearing on ascertaining reliable and relevant information, responding to potential crises such as whistleblowers, PR attacks, or actual raids by authorities. These issues have become increasingly common across Asia—and in many large organizations, responsive preparations lag far behind.
Preparation decisions are lower-risk moves to be ready for the changing world states and their impacts on supply chains and markets. This includes steps toward moving people (between HQ and end markets and between various markets), expanding the supply base, increasing inventory levels, and ensuring ESG (and other reporting metrics) are fit for in for the changing world. Preparation also includes longer-term plans that enable effective decisions during a crisis and address simmering issues (such as cross-border data transfers and demands for country-specific solutions) during IT refresh cycles.
Execution decisions change the very fabric of a business and are high-stakes by definition. These include changes in the governance model, financial structures, executive portfolios, entity structures, new manufacturing sites and suppliers, and the implementation of the steps planned at the preparation stage.
The changes being discussed at the execution stage are more extensive, holistic, and consequential than in the past when evaluating a specific opportunity in a market-by-market process. For example, the discussion on governance models is about more "centralize" or ‘decentralize.’ In the web-like corporate structure where HQ is not at the center of everything, the pendulum is no longer merely on a two-dimensional axis. In addition to increased direct communication and trade between subsidiaries, the governance changes increasingly include disposal, partial or full joint ventures of geographies or business units, consideration of local listings, debt raising, and more. Any of these changes requires having full trust in local teams and extreme clarity in responsibilities and authorities.
Understanding the cost of resiliency
One of the more useful frameworks that executives have been using to discuss the cost of reglobalization has been to think of it as an insurance cost. What is resiliency worth? How much EBITDA should be spent to build a more resilient organization? Using the insurance costs framework, along with the world states analysis from above, it is possible to quantify the costs of the steps needed (and over what timeline the organization needs to take them). It is also possible to estimate the likely financial (and other) impacts of a world state change that impacts business due to a lack of preparedness.
The action steps are the “insurance premium” while the changes in world states are the potential “loss events.” The more “premiums” bought, the lower the impact on the business in all cases when these events occur. Think of it like installing fire sprinklers in stages. If a fire breaks out, maybe you only lose half of the building—so your loss event becomes smaller over time. Future adverse events are a certainty. The goal is to minimize their “uninsured” costs.
Many boards are split on what the best strategy could be in a changing world. For example, many boards have experienced unresolvable differences of perspective on China. Armed with a clear roadmap of decisions and quantified costs and benefits under an agreed set of world states with defined manifestations, a fact-based—if still judgment-driven—discussion becomes feasible at the board level.
In these environments, the CEO’s political capital is a jealously guarded commodity—and rightly so. To make high-impact decisions, start with alignment on the vision and relevant scenarios, and then work backward through the practical implications to keep the political capital expenditure affordable.
In our experience, the challenges a reglobalized world presents expand the portfolios and burden of almost all C-suite executives, and among those expansions is more cross-functional coordination. Yet increased scale and complexity could adversely drive more siloed C-suite behaviors. All of the key playbook frameworks we identify have a cross-functional impact on sustained performance. And that may reveal the most critical key to success.
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The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
