Brief
At a Glance
- Business leaders grappling with the humanitarian horrors of Russia’s Ukraine invasion also face an increasingly unstable business environment.
- To navigate this environment, they must respond with immediate action while readying their organizations for continued instability ahead.
- Each company faces different scenarios and brings varying powers of adaptability, prediction, and resilience, but a common set of principles can help them move from responding today to repositioning for the crises of tomorrow.
As the senseless invasion of Ukraine continues, a horrified world watches the humanitarian crisis deepen by the day. Already more than 3,500 civilians have been killed or injured and more than 4 million refugees have fled the country, where damage to infrastructure and buildings exceeds $100 billion.
Business leaders have rightly focused first on this human tragedy, taking immediate actions to ensure the safety and well-being of their people and leaning in to help however they can. Airbnb has offered free temporary housing for 100,000 refugees; companies such as GSK and Roche have donated antibiotics and painkillers; many others are donating millions of dollars in aid. Hundreds of companies, including ours, have suspended operations in Russia or exited the country entirely.
Uncertainty ahead
The war also has created a high level of uncertainty in the global business environment, despite the fact that Russia, Belarus, and Ukraine are not major global end markets. With a gross domestic product of $1.8 trillion, Russia’s economy is roughly one-tenth the size of China’s. Ukraine and Belarus are even smaller, with $0.2 trillion and $0.1 trillion in GDP, respectively.
However, these countries are critical sources of supply for a variety of global commodities. Russia accounts for 25% of the world’s natural gas exports. Continental Europe is particularly reliant on this supply. Russia is also a major source of metals such as nickel and palladium and fertilizers such as ammonia and potash. Meanwhile, Ukraine is an essential global supplier of agricultural commodities including sunflower oil, wheat, corn, and barley. Prices for these commodities have soared since the invasion, and concerns are mounting about how long stockpiles will last as new supply dries up.
This disruption is hitting the global economy hard already. Several other commodities have seen significant price hikes. Oil prices have gyrated significantly. Inflation is continuing to rise, and most leading forecasters have lowered their 2022 growth projections for the global economy.
The global economy is highly interdependent, and isolated shocks—particularly when they affect the geopolitical landscape—can set off chain reactions. Understanding the full spectrum of those effects is critical in navigating any crisis. We have developed a set of eight potential vectors of disruption through which the current crisis could impact the global business environment, loosely ordered from the most certain and immediate to the most uncertain and more likely to play out over time (see interactive below).
Respond and reposition
The companies that successfully navigate this crisis will be the ones that act immediately while also readying themselves now for continued instability ahead. We describe this posture as “respond and reposition.”
The near term demands that companies take decisive actions (“respond”), continuously recalibrated for the evolving situation, with a careful eye to possible second-order effects on their business. Crisis management often happens within functional silos, which is useful in ensuring clear ownership, but in times like these, leadership teams must work together to avoid gaps and ensure swift and coordinated responses. After all, a company is only as resilient as its weakest link.
In the medium to long term, companies need to prepare and strengthen their organizations for growing turbulence (“reposition”). This starts with a focus on the current crisis. We have identified the key areas where companies will need to respond and reposition, and have developed an initial action plan that companies can deploy (see interactive below).
Of course, every company is unique: The war and its global effects pose widely different challenges for, say, a US-based software company than they do for an energy provider in Europe. There are no one-size-fits-all scenarios. We recommend that each company construct its own integrated scenarios that offer broad coverage across the full spectrum of disruption vectors introduced above.
Those vectors of disruption will differ in intensity and significance by company. Likewise, as we have described previously, each company’s ability to respond to turbulence will depend on its ability to combine better prediction with greater adaptability and a renewed focus on resilience. In moments of crisis, “respond” is the first step in adaptability, while scenarios allow companies to create evolving predictions to help guide them toward greater adaptability and resilience.
In developing and using scenarios, companies should keep the following principles in mind:
- Focus on the business environment. The overall contours of the conflict—its severity, scope, and duration—will shape the nature of the disruption in the business environment, but avoid focusing too heavily on the geopolitical specifics.
- Remember that everything is connected. The vectors of disruption are interconnected. More disruptive outcomes on one dimension will lead to more disruptive outcomes on others. Don’t build scenarios in silos.
- Factor in responses. Shocks to the business environment trigger responses from companies, governments, and individuals. These can dampen, amplify, or redirect the impact of the shock, and companies should account for the ways those responses will shift predicted outcomes.
- Keep scenarios live. There remain many “unknown unknowns” about how the current crisis will play out. Monitor the situation carefully and be willing to update scenarios as previously hidden factors emerge.
- Balance scenario planning investments in adaptability and resilience. Even the best forecasting will get things wrong; the ability to adjust quickly and to bounce back from shocks is vital.
Preparing for the new reality
It is clear that we have entered a period of greater structural instability in the business environment. Recent years have felt like one crisis rolling into another: trade wars, natural disasters, pandemics, and geopolitical clashes.
Although Covid-19 offered a valuable lesson in agility for leadership teams, many continued to be stuck in a reactive response mode and even now are just keeping their heads above water. This suggests there is much more to be done in terms of anticipating potential crises, building response plans, and triggering these plans in a timely manner.
Some companies were faster to mobilize in response to Russia’s invasion of Ukraine—perhaps a result of pandemic lessons learned. The war and the pandemic share many similarities for business leaders: an urgent focus on protecting people combined with a need to rapidly resolve supply chain issues. Yet future crises, such as a catastrophic cyberattack, will look very different, as will the capabilities required to respond.
We recommend companies take three steps as they look to ensure they are best positioned to weather this crisis—and those yet to come:
- Assess exposures with an investor mindset. Any company can be thought of as a portfolio of long and short bets, but often these are implicit. Many companies lack good visibility into their actual exposures, particularly when it comes to the second-order effects of shocks in the business environment. The first step in preparing for the new reality of greater turbulence is to fully understand these exposures.
- Rebalance toward your best bets. As visibility improves on these implicit bets, many companies are likely to find they are overexposed—whether in their revenue base, their operations, their supply chain, or elsewhere—to a handful of risks. They may also be underexposed in a few key areas where the business environment may surprise to the upside. Leading companies will do the hard, analytical work needed to understand how their business would perform under different scenarios and portfolio configurations, and use this to inform how they rebalance their exposures going forward.
- Invest to create resilience in your chosen positions. No matter how well companies design their portfolio, they will remain exposed to unanticipated shocks. The last step is therefore to undertake targeted investments in redundancy, hedges, and optionality. Redundancy includes operational redundancy, such as spare operational capacity or split suppliers, as well as financial redundancy in terms of liquidity and leverage choices. Companies should also be sure they’re hedged appropriately, both through financial hedges and in their revenue base. And finally, they need to continue to invest in a portfolio of new growth engines for their business that provide options for the future.
What is happening in Ukraine is a tragedy. For business leaders, the challenge of helping their companies navigate the resulting global shocks demands strong and steady thinking—and a recognition that there will be more crises to come. Responding now while repositioning to absorb future shocks will ensure that their organizations don’t simply survive each crisis but grow ever more resilient.
First published in April 2022