Geopolitics makes mincemeat of strategy

In the words of strategy guru Peter Drucker, ‘culture eats strategy for breakfast’.

After believing that they were living through the end of history, marked by a capitalist globalisation pacified by law and trade (and by the canons of Uncle Sam), Europeans are beginning to adapt reluctantly to the current reality, made up of geopolitical risk, i.e. relations of force and conflicts between powers. According to Fitch Ratings‘ Global Commodities Dashboard and Goldman Sachs’ Client Survey, economic leaders see this risk prevailing at the start of 2024.

Their judgement is well-founded. In 2022, economists Dario Caldara and Matteo Iacoviello published a geopolitical risk index (GPR), based on the frequency of articles in the main Anglo-Saxon newspapers about unfavourable geopolitical events. A high value for the indicator is correlated with a higher intensity of negative events. For some years now, we have been returning to the GPR levels of the 1950-1980 period – marked by numerous military crises, the threat of nuclear conflict and rivalry between the USSR and the USA – after a series of low points in the 1990s. Russia’s invasion of Ukraine led to a peak of around 170, compared with September 1939 (480), September 11 (300), the war in Iraq (240) and the Bataclan bombing (120). Caldara and Iacoviello show that this increase in risk has negative consequences for economic activity: investment falls more in sectors or companies exposed to global geopolitical risk. Others have calculated that a high GPR is associated with a worsening economic situation: higher oil prices and inflation, lower innovation and trade flows.

While military power does count (high-intensity warfare), this new risk context is structured more by economic and technological conflict, which means that new micro- and macro-economic strategies have to be devised. In particular, governments are increasingly imposing short-term decisions on companies that interfere with their long-term decisions: accelerated withdrawal from Russia, a ban on the sale of equipment to China, incentives to use renewable energies or invest in advanced technologies, sanctions, filtering of investments, and so on. This dependence requires greater adaptability and the ability to predict, understand and negotiate between governments and companies. But what about a company that finds itself caught between two constraints? The most powerful states are capable of creating ‘armed interdependencies’, as Abraham Newman and Henry Farrell put it: American government debt depends on the Chinese treasury, which in turn depends on Chinese exports to the United States. In this game of reciprocal financial, legal, contractual and commercial threats, each company must be able to calculate its trade-offs, taking into account the reputational risk as well: should we stay in Russia a little, a lot or not at all? Sell to both the United States and China, to one or to neither? Finally, business leaders are increasingly having to decide on their dependencies: American and Chinese ‘decoupling’ and ‘derisking’ are being countered by strategies of sovereignty, diversification and resilience, at the level of individual companies or states.

Geopolitics is eating strategy for dinner. This means that managers, advisers and researchers need to develop new approaches adapted to the context of heightened geopolitical risk.

By Xavier Desmaison
Article in the latest issue of Choiseul Magazine on newsstands 17 April