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