00:00:00
Vit Henisz: Companies need a
geostrategy more than ever today
00:00:02
because they acknowledge that
economic efficiency alone
00:00:05
doesn't drive global operations
and global strategy. It could be a
00:00:08
lesson from COVID. It could be a
lesson from supply chain
00:00:10
disruptions that have occurred.
But they know that other factors
00:00:13
come in. One of those factors
clearly is the increase in
00:00:17
populism and nationalism.
00:00:18
Dan Loney: And welcome to a special edition
of Ripple Effect: Meet the Authors.
00:00:21
I'm your host, Dan Loney. In
each episode this month, the
00:00:25
podcast will feature Wharton
faculty authors in lively, fast-
00:00:28
moving conversations about their
latest books and research. We're
00:00:33
going to be covering a diverse
range of topics, bringing you
00:00:36
the latest insights and
knowledge that you can apply to
00:00:39
your life and to work. Today
we're talking with Vic Henisz
00:00:42
about his new book <i>Geostrategy
By Design</i>, which book. Vit's about
00:00:47
how to manage geopolitical risks
in a new era of globalization,
00:00:51
and a guide for executives
seeking to thrive and create
00:00:54
long term value in the next
global competition. - Loney: Geostrategy
00:00:59
is a word that many business
leaders aren't going to hear
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now, but also going to hear into
the future. With the growing
00:01:06
concerns over geopolitical risk,
it's becoming more evident than
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ever that companies need to
have a strategy to deal with the
00:01:14
impact from everything that is
kind of coming at us in our
00:01:18
world these days. And that topic
is the focus of a new book
00:01:22
titled <i>Geostrategy By Design:
How To Manage Geopolitical Risks</i>
00:01:26
<i>in the New Era of Globalization</i>.
One of the authors of that book
00:01:30
joins us here to discuss it. Vit
Henisz, who is a Management
00:01:34
Professor as well as Vice Dean
and Faculty Director of the
00:01:38
ESG initiative here at the
Wharton School. Great to see again.
00:01:41
. - Great seeing you, Dan. Great
being here. - So the concept
00:01:44
of geostrategy, it almost feels
like it's becoming a must have,
00:01:49
in terms of the mindset of a lot
of business leaders right now.
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- I think business leaders are
increasingly aware that
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kind of the system we've built
up over the last 30 years, this
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efficiency first global system
of supply chains, sourcing
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anything from anywhere that's at
low cost is at risk, and maybe
00:02:08
even becoming unraveled. And
that politics is ramping up in
00:02:12
its importance, whether at the
geopolitical level, US versus
00:02:15
China, or whether we're looking
within the United States, rural
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versus urban class versus, you
know, one social class against
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another. And they're struggling
for the tools to figure out how
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to adapt, how to change. In the
same way we built global supply
00:02:27
chains, global order, what does
the new order look like? We're
00:02:31
trying to figure that out right
now.
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- So probably a lot of these
elements are ones that have been
00:02:35
around for a while, but in kind
of everything that is kind of in
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our laps at this moment, it's
become a much greater focus, hasn't
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it? - Yeah, in some ways, the
00:02:44
things we're talking about in
the book we've been talking
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about for 25 or 30 years. You
know, we were pushing back
00:02:49
against the world is flat when
Tom Friedman put out that book.
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You know, we're just like, no,
it's not. Like, come on, you can regulate,
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you can tax, you can make choices
as a nation, and not every
00:02:57
country is the same. We've been
saying that for a long time. But
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I think was it really? You know,
was it absorbed? Was it
00:03:04
understood? And I think now
everyone gets it, everyone sees
00:03:07
that the world is fundamentally
changing, and it's not moving
00:03:09
towards globalization. The
question is, how far will it
00:03:12
unravel? Is this just a period
of flux? Or is this the
00:03:16
beginning of a new era of
globalization, something that
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looks really different from what
we've had? And everyone's asking
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that question. - So
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take us through some of the
components you think are
00:03:26
important for companies to
really understand. And to be
00:03:29
able to parse this in a much
better fashion as we move
00:03:32
forward here. - Well,
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we've talked for many years
about the importance of scanning
00:03:36
your environment for new
technology, for digital
00:03:38
disruption, for what is AI going
to do to you. We've got to start scanning
00:03:41
the environment for what
politics is going to do to you. Now,
00:03:43
that's not new, just
understanding the political
00:03:46
environment, but you've got to
do much more to connect it to
00:03:48
the P&L. You've got to find a
way to connect what's happening
00:03:52
in the political discourse to
revenues, costs, the KPIs, the
00:03:56
dashboards, that financial
modeling of political risk.
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This isn't just something that
could rise up after an election
00:04:03
or after a crisis. This isn't
just some sort of tail risk.
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This is a day to day driver of
financial performance. So you've
00:04:10
got to build systems and build
politics into those systems so
00:04:14
you can scan and monitor what's
happening in real time. And then
00:04:17
you start kind of assessing
strategies to deal with this.
00:04:21
What's the right approach? How
are you going to adapt your
00:04:23
sourcing? How are you going to
adapt your hiring? How are you
00:04:26
going to adapt your operations?
What are you going to source in
00:04:29
China? What are you going to
source somewhere else? How much
00:04:32
of your sourcing in China are
you going to shift? How much of
00:04:34
your manufacturing is going to
occur back in the US or Mexico?
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These are questions that you
have to ask, but not just from
00:04:40
an efficiency standpoint, also
thinking from a political
00:04:43
standpoint. And so you have to
manage the political risks and
00:04:47
start doing scenario analysis,
stress testing, simulations,
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because we're not quite sure how
much of an unraveling is going
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to occur over the next five or
ten years. And you want to have some
00:04:56
hedges and some pivot points.
And the biggest challenge is
00:05:00
setting up an organizational
structure, a governance system
00:05:03
that can allow this to happen.
Because it's each of these
00:05:07
pieces, the scanning, the
financial modeling, the
00:05:09
management, isn't new or hard.
But putting it all together for
00:05:13
political risk is.
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- Does it have a component to it
that really kind of changes the
00:05:18
framework of how companies have
to think about their setup and
00:05:22
their day to day operations?
- Well,
00:05:24
I think it brings politics in, in
a way that it's so often been left
00:05:27
out. We've just focused on
what's cost efficient, you know,
00:05:30
low cost global sourcing, just
in time sourcing. And now, it's
00:05:34
really clear that that presents
risks. And, you know, there's a
00:05:38
risk of a greater US-China trade
war, there's a risk of a greater
00:05:42
sort of resurgence of something
like the Cold War, where we
00:05:46
can't be sourcing certain
products. We're concerned
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about the ownership of who owns
what company, whether it be TikTok
00:05:51
or whether it be
semiconductors and fabs. And so
00:05:54
identity, national identity
really matters. And that's got
00:05:59
to be part of the equation. So I
don't think it's -- it's not a new
00:06:01
system. But it's a new set of
questions that are going to
00:06:04
affect the system in every
aspect of global companies'
00:06:08
operations,
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- One of the segments of the book
is about focus. And so companies
00:06:12
obviously have focused on a lot
of the things that are out there
00:06:15
in general. How does that focus
potentially -- how is it impacted?
00:06:20
How does it change as we move
forward, dealing with the
00:06:22
concept of geopolitical risk?
- Yeah,
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the focus is really
important. There's all sorts of
00:06:26
information you can gather on
the political environment,
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right? You can read the
newspapers, you can read social
00:06:30
media, you can read speeches.
You can build all sorts of data
00:06:33
on what political actors want
and social actors demand. The
00:06:38
hard part is connecting it to
the P&L. And the focus chapter,
00:06:41
and the idea of focus is taking
that political information and
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making it real to the CFO or the
Chief Risk Officer or the Chief
00:06:49
Marketing Officer, or the Chief
Operations Officer. Connecting
00:06:52
it to the dashboards that they
have, and showing that politics
00:06:55
isn't just something for
external affairs, or for the c-
00:06:57
suite to deal with, but that
it's operationally, financially,
00:07:01
brand relevant. And that
requires the kind of, you know,
00:07:06
new incorporation of political
identity into what will
00:07:10
customers buy. You know, will
they shy away from my product
00:07:13
because it's American, or
because it has a Chinese
00:07:15
component to it? You know, what
about the operations? How much
00:07:20
more am I willing to pay for a
product that's reliably sourced
00:07:23
in the United States, or to
manufacture something in the
00:07:25
United States? It used to be the
answer was nothing. Then we
00:07:29
started bringing in supply costs,
and the cost of gasoline, and
00:07:32
maybe there'll be a supply chain
disruption. So we started doing
00:07:35
supply chain resilience. Now we've
got to start doing political
00:07:37
resilience. You know, what if
somebody turns the taps off?
00:07:40
What if somebody -- what if -- you
know, what if countries start
00:07:43
shifting more into the Chinese
orbit as opposed to the American
00:07:46
orbit? We've got to start doing
that political resilience
00:07:49
modeling into our supply chain
strategy, and sourcing, and
00:07:51
manufacturing strategy? So it's
really, you know, the questions,
00:07:55
again, are similar, but we're
bringing politics in. And we're
00:07:59
connecting the political data
to many more elements of
00:08:01
decision making than we used to.
00:08:02
- It feels like that a lot
of these elements are ones that
00:08:07
companies in other countries
probably dealt with going back
00:08:10
a ways. But realistically, this
is something that the US,
00:08:14
Europe, Australia, some of those
regions of the world, it's these
00:08:20
are components that are there,
but really, the focus has
00:08:23
increased in the last few years,
right?
00:08:25
- Yeah, it's a good point. I mean,
I think there was much more
00:08:27
attentiveness or awareness of
the political environment in
00:08:30
some countries where there was
more flux or more uncertainty.
00:08:34
Not always. I mean, what's
interesting is, if we look at
00:08:36
Chinese corporations, they're
actually not that good at doing
00:08:40
this kind of work, because they
defer to the Chinese Communist
00:08:43
Party officials or to the
government, and they assume the
00:08:45
government is going to take care
of politics, I don't have to.
00:08:48
And so both the US and Chinese
companies kind of didn't do
00:08:51
this, but maybe for different
reasons, as you're alluding to.
00:08:54
And places that are coming out
of, say, Brazil or India are much
00:08:57
more in tune with the need to be
aware of the political system
00:09:00
and think about it as a
component of their strategy. - How
00:09:02
do you manage then all of these
new components in the best way
00:09:07
possible to be able to move the
business forward? - That
00:09:10
is the real challenge. And I
think that's one of the things
00:09:12
we've spent a lot of time in the
book, looking at the sort of -- the
00:09:15
governance of political risk
management or of geostrategy.
00:09:19
Each of the pieces themselves
aren't that hard. You know,
00:09:22
scan, focus, manage,
strategize. Like, we know how to
00:09:25
do this. But connecting it all
around politics is really hard.
00:09:29
Unfortunately, it involves cross-
functional teams, kind of matrix
00:09:32
organizations, where you're
bringing people together. That's
00:09:34
always hard, right? You've got
different voices in the room
00:09:36
with different opinions,
different backgrounds. You need
00:09:39
to have some clear leadership,
so someone's got to be in
00:09:42
charge. We find the companies
often tasked different people
00:09:45
with that. It might be the Chief
Risk Officer, it might be the
00:09:47
General Counsel. It might be
Head of Strategy or Head of
00:09:51
Business Development. But
without a leader, you just have
00:09:55
a bunch of bickering or a bunch
of arguing. So if someone needs
00:09:58
to be appointed, but that person
has to have respect of all the
00:10:00
functions and the buy-in that
they're all actually going to
00:10:03
collaborate on this. They have
to work from the same data
00:10:05
structure. That's why focus that
you brought up earlier is so
00:10:08
important. If they all have their
own data systems, if they all
00:10:11
have their own political data,
then they're working off
00:10:13
different playbooks. So you've got
to build a data structure that
00:10:16
they can all agree to. They've
got to come together and start
00:10:19
assessing what are the biggest
risks, and what are the biggest
00:10:22
opportunities we have to deal
with them. But they have to do
00:10:24
that in a collaborative, ongoing
way. Essentially, you're looking
00:10:28
at enterprise risk management
that, again, brings politics in.
00:10:32
As ERM systems have developed,
we're developing these kind of
00:10:35
governance structures. But they
haven't typically thought of
00:10:38
political risk as part of the
equation. They've been focused
00:10:40
on safety, on operations, and
again, supply chain. I
00:10:44
think supply chain risk
management is probably the best
00:10:47
template that we can look to, or
enterprise risk management is
00:10:50
the best template, for how to
achieve this kind of cross-
00:10:53
functional integration. And we
draw a lot in that in the book.
00:10:56
- And
00:10:56
- And so that then puts even more
pressure on the strategy that
00:10:59
you build out, and how you go
about that, that strategizing of
00:11:03
building it out, so you can have
as much of the information
00:11:07
involved in the process and
being able to get on the right
00:11:09
path as you move forward with
your company.
00:11:11
- Right. And the strategy isn't
just a single leap, right? We
00:11:14
don't know what's going to
happen to the US-China
00:11:16
relationship today. So it's not
like pull everything out of
00:11:18
China. First of all, you
probably can't. Second of
00:11:20
all, you've got to do it in small
steps. You don't want to offend
00:11:23
China. It's not easy to move all
of that supply somewhere else.
00:11:26
So you're talking about moving
five or ten percent at the time and
00:11:29
experimenting. Should it be in
India? Should it be in Ethiopia?
00:11:32
Should it be in Brazil? Where
are you going to put the supply?
00:11:35
Where can you build up reliable
capacity? And how do you do that
00:11:38
incrementally? So as things go,
you might be able to expand more
00:11:42
or slow things down if things
stabilize. And so in the same
00:11:46
way that in the early period of
globalization, say in the early
00:11:49
1990s, companies weren't making
huge leaps, they were making
00:11:52
small steps and getting ready
for this new era. We're in that
00:11:55
same kind of period now, where
we've got to start making the
00:11:57
steps, not just waiting, not
just kicking the can down the
00:12:00
road. But not making leaps,
having an opportunity to pivot,
00:12:04
the opportunity to be flexible,
and adapt as the system
00:12:07
continues to evolve.
00:12:08
- So you talked about cross-
functional. The importance then
00:12:12
of being able to build the right
team to be able to kind of bring
00:12:16
all these ideas together and
chart that path becomes that
00:12:19
much more important. - Right
00:12:20
A lot of companies used to
depend in their external
00:12:24
affairs strategy on someone who
used to be in government, right?
00:12:26
That kind of revolving door. You
bring in an ex-minister, you
00:12:28
bring in an ex-government
official who's now a lobbyist,
00:12:31
and they'll run your show for a
while. But what do they know
00:12:34
about your company? What do they
know about operations? What do
00:12:36
they know about supply chain?
They know how to call someone up
00:12:38
from the government. They know
how to put out a fire. They know
00:12:41
how to make a compromise. But
they don't know how to drive
00:12:43
strategic change. And so instead
of just hiring people who know
00:12:47
government well, we need to
start having the same kind of
00:12:50
rotations within companies, where
people who want to get into the
00:12:53
c-suite have had to rotate
through government affairs. Same
00:12:56
person who used to run
operations now runs government
00:12:59
affairs for a while, and back
and forth. This needs to be a
00:13:02
core capacity or capability of
senior management, which means
00:13:06
we really need to change the
kind of, you know, high
00:13:09
potential process of evolving
management skills to include
00:13:15
political risk management and
geostrategy. So it really is a
00:13:18
fundamental shift in the way
we're thinking about management
00:13:21
and skill development. We're not
siloing, we're not segmenting
00:13:24
political affairs. We're putting
it right in the center of
00:13:26
strategy. - How new is that
concept,
00:13:29
to truly kind of building up
what eventually will be your c-suite,
00:13:33
is adding in that component
of government to the
00:13:36
thought process of people who
probably, in many cases, never
00:13:39
thought that way before?
00:13:40
- Yeah, no, it's -- you know, when
I'm in the executive classroom,
00:13:43
I often ask, what percentage
of your time would you like to
00:13:46
spend dealing with government
officials? And the answer is like --
00:13:49
- Zero. - Yeah, zero. I mean, it's usually
zero. Sometimes people are like,
00:13:53
"Well, you know, I'm going to
regulate industry, five or
00:13:55
ten percent. But really, I'm an
engineer, or I'm a finance, or,
00:13:58
you know, I'm something else. And
that government stuff, I'd
00:14:02
rather just keep it over there."
And it's like, it's
00:14:04
unrealistic. It's always been
unrealistic. But again, the
00:14:07
thing that's changed now is
people are accepting of that.
00:14:10
When I put that argument out, no
one's pushing back anymore. They're
00:14:13
like, "Yeah, I probably have to
spend more time on that." They're
00:14:15
acknowledging it. They don't
know what it means yet, but
00:14:18
they're no longer
resisting the idea that they're
00:14:22
spending too little time on it.
And yeah, that is a really
00:14:26
fundamental change. - One of
00:14:27
the things we talked about
before we started this is the
00:14:29
component of digital in all of
this, and how that kind of
00:14:32
impacts the decision process and
what people say about different
00:14:36
issues, different elements as
well.
00:14:38
- Right. We no longer have the
presumption that anything you
00:14:41
say anywhere is just between two
people. You know, we sort of
00:14:44
have to assume that it could be
broadcast, it could be captured.
00:14:48
And information we share on
social media, information we
00:14:51
share anywhere, we also assume it
could be broadcast, and that
00:14:55
some of these actors, I mean,
think about TikTok and the
00:14:57
debates today, may have political
ties, political affiliations.
00:15:01
And that information could be
used, could be weaponized. And so
00:15:04
we're seeing that on both sides
of this. When we think about the
00:15:06
drivers of political
instability, the lack of
00:15:11
trust between groups, the
polarization, some of that is
00:15:14
being augmented by social media.
And the way firms are engaging
00:15:18
with stakeholders, with their
communities, with the countries
00:15:20
in which they're operating.
Social media, digital
00:15:23
information, can be a weapon
used against them, or a tool
00:15:28
used for them. So we're in a
really different era, both in
00:15:31
terms of the type of information
we can gather, the tools we can
00:15:35
use to present our point of
view. And again, that adds a
00:15:38
layer of skills and a layer of
information that we didn't have
00:15:41
before.
00:15:41
- Knowing how important this topic
is right now, especially with
00:15:45
all that's going on in the
world, what do you hope is kind
00:15:48
of the message that this book
will hopefully bring forward? - I
00:15:52
think there
00:15:52
are two. One is that companies
should have a geostrategy. If
00:15:56
your company doesn't have one,
it's time to develop it. We
00:15:59
can't just think of this as an
add-on or a nice to have or
00:16:02
something you need in a crisis.
This needs to be a core
00:16:04
component of your strategy. But
the second part is the second
00:16:06
half of the title. It's <i>Geo-
strategy By Design</i>, right? And
00:16:11
you have to think carefully
about the governance and the
00:16:13
design of the way you navigate
political risk or geostrategy.
00:16:17
It's not as simple as just
having the right people doing
00:16:20
this on the side. It really has
to be carefully integrated into
00:16:23
all of your decisions. Business
expansion, supply chain
00:16:27
sourcing, selling, marketing.
This has to be touching every
00:16:32
aspect of the business, and you
have to design a way of sharing
00:16:37
the information, coming together,
talking about it, making
00:16:39
decisions, that brings politics
into almost every aspect of
00:16:43
global business. - Vit, great
00:16:44
to see again, thanks very much.
- Thank you, Dan. - Vit Henisz, who
00:16:47
is Management Professor and
Vice Dean here at the Wharton
00:16:50
School. The book again is
titled, <i>Geostrategy By Design</i>.
00:16:54
- Thank you for listening to the
Ripple Effect. We hope you found
00:16:57
this episode informative and
engaging. Don't forget to
00:17:00
subscribe and leave us a review
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00:17:03
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