contributor perspectives

Closing the Gap Between Business and Geopolitics

Mike Rosenberg
Board of Contributors
8 MINS READApr 10, 2017 | 20:12 GMT
Closing the Gap Between Business and Geopolitics
In today's ever-changing world, it's time for senior management to better understand the geopolitical environment around it.
(CANCAN CHU/Getty Images)
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As Stratfor's readers are well aware, we are living in turbulent times. Looking out across the many different crises and hot spots around the globe, it seems as if the world's geopolitical situation is the least stable it has been since the end of World War II. But as a professor of business strategy, it appears to me that the men and women running many of the world's large and medium-sized businesses are either unaware of these threats or simply choose to ignore them.

Consider our supply chains. We have developed incredibly complex supply chains that span the Earth, involve dozens of countries and assume that free passage of the seas is a given. We have positioned many back and front office functions in faraway places connected to us only by telecommunications networks that could be interrupted by conflict. We have even housed many of our companies' most precious technological capabilities in distant corners of the world where, in times of war, governments could expropriate them, our intellectual capital, and even our engineers.

What strikes me is that the worlds of geopolitical analysis and business rarely interact with each other. Before we can search for a solution to this problem, however, we have to understand why it arose in the first place.

The Death of the Country Manager

The first factor to drive a wedge between the two was a decision by many international corporations to adopt a matrix structure in their global business operations. Though there are many advantages to this type of organization, it also has a serious setback: the elimination of the country manager.

Not long ago, most international companies had people in place to oversee operations at the national level. These country managers, who in turn reported to geographic chiefs at the regional and global levels, were typically only two or three ranks removed from the CEO. They were widely respected in their firms for their local knowledge, and they would often meet the CEO personally on in-country visits and in regular meetings at company headquarters. Much like ambassadors, country managers played a two-way role, representing their firm in the country while also explaining the nation's environment to their organization's personnel. And in many cases, executives from the country itself filled the country manager role, further cementing the flow of information in both directions. If a firm was particularly large or important, country managers even became part of the nation's business elite and were invited to events that gave them access to other business leaders, government ministers and representatives of civil society.

But starting in the late 1980s, this classic structure of business was gradually replaced by the matrix structure, which typically comprises global business units, global corporate functions and giant geographical areas of responsibility. Senior executives, in turn, became responsible for expansive international business groups, managers overseeing multiple parts of the world, and still others operating global corporate functions such as finance, human resources, information systems and supply chains. Some companies even have the added dimensions of global customers, practice areas and technologies to take into account.

Under this new model, a local manufacturing plant, for example, now has a general manager who might report to the global operations or supply chain teams. National sales teams, meanwhile, report to the regional sales directors of their companies' different business units. When firms need someone to serve as their legal representative in a specific country, they task one of these people with that role in addition to his or her primary duties.

The problem with this approach is that these people normally don't have the same level of seniority that country managers once did, whether in the nations themselves or inside their own firms. This has considerably weakened the ability of large corporations to foresee and deal with major disruptions to day-to-day operations on the ground. For instance, general managers may lack the political access needed to stay aware of critical issues. Even more concerning, they may not have the clout within their company to alert the CEO and board members of the risks on the horizon that they do manage to get wind of. To make matters more complicated, the people who are of a high enough rank to call attention to such threats are now responsible for overseeing enormous geographic areas, such as the EMEA region — Europe, the Middle East and Africa combined. Expecting one person to be up to speed on so many countries, scattered across several time zones, is simply unrealistic.

One consequence of this matrix model is clear: The warnings that reach regional executives have grown weaker, so much so that they can easily be drowned out by more pressing concerns elsewhere. In order for local plant managers or national sales directors to break through the noise, they have to shout as loudly as they can — and risk gaining a reputation as the proverbial boy who cried wolf if they misread the signs in front of them.

A Shortsighted View

The corporate emphasis on thinking about the short term hasn't helped, either. Sure, by necessity many companies need to produce quarterly reports and consider the time value of money. Most managers also serve short tenures, at least compared with the lifespans of their companies. But from a geopolitical standpoint, taking such a narrow view of the future makes it extremely difficult to think about the long-term trends that can eventually lead to important changes in the global business landscape.

Many despots, for example, begin as patriots hoping to lead their countries to a better future. Only after 10, 20 or even 30 years in power do some succumb to their own cults of personality, or allow their family members to enrich themselves at the nation's expense. Fascist and xenophobic political movements likewise take time to move from the fringe to the mainstream, and it often takes a savvy observer to distinguish between an extremist fanatic and a visionary leader with the potential to alter national politics a decade or two down the line. The ability to notice these trends in the making requires a long-term perspective, which, with a few exceptions, is sorely lacking in today's business environment.

Not Trained for This

Part of the problem is that many business leaders simply aren't trained to read the geopolitical landscape. The vast majority of MBA students have undergraduate backgrounds in engineering, science, finance or business — only a handful come from political science or history programs. In the former fields, the deep contemplation of unfortunate or catastrophic scenarios is often discouraged. Trained to look at events through modern decision analysis and financial modeling techniques, many managers tend to discount the negative value of an unlikely crisis outcome far in the future.

The corporate emphasis on thinking about the short term hasn't helped, either. Sure, by necessity many companies need to produce quarterly reports and consider the time value of money. Most managers also serve short tenures, at least compared with the lifespans of their companies. But from a geopolitical standpoint, taking such a narrow view of the future makes it extremely difficult to think about the long-term trends that can eventually lead to important changes in the global business landscape.

These leaders, who are comfortable with hard numbers and facts, rise through the ranks of their organizations because of their analytical abilities and leadership skills. Though they may be well informed about the events taking place in their countries, many find complex historical and cultural analysis to be tedious at best. Instead they prefer more pragmatic and action-oriented strategies, rather than a reflective and diplomatic approach, which routinely leaves them without the deep understanding required to interpret political developments within and across societies. In fact, the only executive on a typical management team who is trained in politics to some degree tends to be in corporate affairs, a department that can have global responsibilities in today's matrix business structure. And more often than not, these executives are paid to make the case for the company's presence in a particular country or region — not to bring bad news back home.

Fortune Favors the Bold

To be fair, the success-driven business culture of the West hasn't exactly encouraged executives to learn the nuances of geopolitical forecasting. In most companies, people are rewarded and promoted for making things happen, not for expressing doubt and advising caution in the face of slow-burning threats. The way this plays out in moments of crisis is that, should companies find themselves on the wrong side of history, business leaders' reputations and positions normally don't suffer. For example, if a company spends years investing in a country and maintains close ties with its dictatorial government, only to then lose everything in a revolution, the managers involved in that decision-making process are rarely held accountable for what is viewed as a political problem instead of a business choice. By contrast, managers who argue against investing in a country when it is fashionable to do so or advocate pulling out of that country long before a crisis erupts often suffer immediate consequences.

In his extensive writing on World War I, Harvard history professor Niall Ferguson made the case that in July 1914, bond markets in London were still acting as if war was not imminent. His point was to show how tough it is for companies to plan on the unthinkable when "business as usual" is the safest professional bet one can make. But in today's ever-changing world, it's time for senior management to break the habit and better understand the geopolitical environment around it.

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