Scenarios for managing geopolitical risk.
In this week’s edition of Not in Dispatches, we look at one of the most powerful tools for understanding and mitigating geopolitical risk: scenario planning.
The folly of forecasting.
No one can predict the future. Most governments and businesses have been blindsided by the major geopolitical shocks. Very few predicted the fall of the Soviet Union, 9/11, the 2008 financial crisis, or Brexit, or Trump’s election.
More recently, even most well-resourced intelligence agencies did not anticipate Russia’s invasion of Ukraine. The head of the French intelligence agency lost his job over it. His German counterpart was meanwhile caught unawares – he was in Kyiv on 24 February and had to be evacuated.
As Yogi Berra said, “It’s tough to make predictions, especially about the future.”
And the big, unexpected events that shape the world – what the risk analyst, statistician, trader, and aphorist Nassim Taleb called “Black Swans” – are inherently unpredictable. The world is simply too complex and messy to forecast geopolitical events with any certainty.
But if trying to predict the future is a waste of time, thinking about different scenarios and preparing for them holds real commercial and strategic value.
Scenario planning for geopolitical events – imagining plausible future situations and their outcomes – can help businesses test their risk exposure and develop robust strategies to manage risk, seize opportunities, and shape a favourable operating environment.
Alongside structured analytic techniques – which we wrote about in July – scenario planning is an essential tool of government intelligence analysis that is readily applicable to business and investing.
One company already using scenario planning is Shell, which has been using the methodology for over fifty years to help leaders make decisions. As Jeremy Bentham, Head of Scenarios, Strategy and Business Development at Shell put it:
The purpose of scenarios is to help people make better strategic choices. In this process, there needs to be a special relationship between decision-makers and scenario developers.
Discussions about alternative scenarios for the future are one of the ways decision-makers are exposed to different possibilities, helping them to move the furniture around mentally. They relax prejudices and advocacy, embracing ambiguity to form practical and pragmatic insights. It can be a subtle, even quiet and stealthy process, over a long period.
Scenarios give us lenses that help us see future prospects more clearly, make richer judgments and be more sensitive to uncertainties.
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By Shell’s own account, its scenario planning helped it anticipate, adapt, and respond to major geopolitical events including the 1973 and 1979 oil shocks, the decline and fall of the Soviet Union, and the Arab Spring.
Shell is not the only company to use scenarios to plan for geopolitical risks.
Total, the French energy giant, uses scenarios to anticipate potential geopolitical disruptions, such as nationalization of assets or regional conflicts, especially in politically volatile areas like the Middle East.
Unilever, the global consumer goods company, has used geopolitical scenarios to examine potential trade and tariff implications and diversify its supply chains.
Maersk, one of the world’s largest shipping companies, employs scenarios to anticipate disruptions to shipping - such as port closures and shutdowns of maritime chokepoints - driven by geopolitical factors.
Over the last decades of the 20th century, scenarios became routine in intelligence services. Some governments, like Singapore, comprehensively use scenario planning across all levels of government.
And today many consulting firms recommend using geopolitical scenario planning to (as EY puts it) “strategically position companies to flourish during the turbulent times ahead.”
Getting value out of scenarios requires smart design.
Scenarios should have a clearly defined goal, audience, and purpose. Hypothetical futures should be creative but based on actual trends and realistic theories of how the world works. And argumentation should be logical, even if various potential outcomes may be surprising.
Geopolitical scenarios can be done on a global, regional, or national level. And they can adopt shorter or longer time horizons.
For example, EY partners in the Harvard Business Review implored CEOs to consider four plausible macro futures by 2027:
Self-reliance reigns (fraying alliances and protectionist economic policies);
Cold War 2.0 (hardening alliances and countries trading in economic blocs);
Friends First (complex alliances and friend-shoring economically);
Globalisation Lite (low geopolitical friction and economic liberalisation)
Equally useful are more specific scenarios about important bilateral relationships. Take US-China, where companies could imagine the following four scenarios based on economic cooperation and political relations:
Diplomatic détente (limited economic ties, open channels of communication, and joint efforts on global challenges like climate change);
Strategic Partnership (strong economic ties, strong trade relations and collaboration on global challenges);
Cold War 2.0 (limited economic ties, bifurcation in global alliances with nations forced to choose sides);
Economic Entanglement (strong economic ties, significant political tensions).
With the brevity of a media digest, but the depth of an intelligence assessment, Daily Assessment goes beyond the news to outline the implications.
Companies would also benefit from thinking through scenarios for particular countries. For example, a very basic framework for thinking about a post-Putin future could be plotted on a matrix of its political governance (more authoritarian or democratic) and economic orientation (more westward or more eastward).
Whatever scenarios are imagined, as the EY partners rightly note, a second crucial step for businesses is to determine what each would mean for the organisation - for example, how they would impact its business model, corporate structure, portfolio of investments, capital allocation priorities, consumer demand, supply chains, M&A strategy, intellectual property, and access to talent.
Effective scenario planning therefore requires both imagination and creativity. Imagination to conceive scenarios and think through their consequences – mostly by asking ‘what if’, ‘why’, and ‘how’. And creativity to make them tangible and action-based.
Both traits demand a baseline of geopolitical knowledge. Envisioning geopolitical scenarios and their outcomes is best done by people (and, ideally, a multidisciplinary team of diverse people) with a broad worldview and a deep understanding of both history and the classical dynamics of international relations.
Choose your own adventure.
Geopolitics may be a serious business, but imagining alternative futures requires a decent dose of play.
And over the next few weeks, we will play with some geopolitical futures that are – or should be – on the minds of businesses.
We would love to hear from you about what scenarios you would like us to explore.
How will the war in Ukraine end? What future for Taiwan? US-China relations? How will AI affect great power relations? What happens when Putin dies?
Be imaginative. Be creative. And let us know how you would like us to cover. We would like Geopolitical Dispatch readers to choose their own adventure. Our email address is firstname.lastname@example.org, or you can leave a comment below.
Michael, Cameron, Damien, Yuen Yi, Andrea, and Kim.
Emailed each weekday at 5am Eastern (9am GMT), Daily Assessment gives you the strategic framing and situational awareness to stay ahead in a changing world.