McKinsey: Geopolitical risks expected to impact profits globally

Executives are increasingly concerned about geopolitical instability, globally and domestically, on their profitability – however, few are deploying strategies that deal with the associated problems effectively.

In a new study from McKinsey & Company, the global advisory firm considers the risks to global businesses that are perceived by the minds of 1,300+ executive respondents representing the full range of regions, industries, company sizes, functional specialties, and tenures. To adjust for differences in response rates, the data was weighted by the contribution of each respondent’s nation to global GDP.

Business risks
Risks from geopolitical instability on global business have risen markedly over the past three years. Last year 84% of respondents expected trends within the geopolitical sphere to impact global business in the next five years, while in 2013 this expectation was shared by 61% of respondents.

While geopolitical instability is the headline result of the study, respondents also rate trends relating to the development of new technologies empowering consumers and communities as important to very important, at 84% in 2015, up from 78% in 2013. Cybersecurity risks and challenges are also trending higher, at 81% of respondents from 69% in 2013, as well as the adoption of big data and other data-driven management techniques, up from 65% to 79%.

Geopolitical risks
The research further finds that the negative outlook on global geopolitical instability has been trending up since 2009, when 10% were very negative while 28% were somewhat negative. By 2015, 57% in total held a negative stance, with 17% reaching very negative. Domestic political instability or gridlock has also seen an increase in recent years, up from 51% in 2013 to 58% last year.

Unprepared
In terms of dealing with the geopolitical risks, few companies have taken steps. Less than one-third of executives say an understanding of these factors is extremely or very well integrated into overall strategy – and only 13% say their companies have taken active steps to address the risks from either geopolitical or domestic political instability.

Companies have stepped up their capabilities to adopt big data and other data-driven management techniques, at 54% of respondents, as well as developing technologies that empower consumers and communities, at 53% of respondents. Companies are also taking steps to address greater cybersecurity risks and challenges.

Grappling instability
The report also considers the kinds of strategies companies are using to deal with geopolitical threats, in light of their respective effectiveness. The method most commonly used by respondents is an ad hoc internal analyses as events occur, which was cited by 43% of respondents – only 29% of respondents rate the method as very effective. Specialised external resources, such as think-tanks, were cited by 40% as important – while 29% said the measure was very effective.

The methods least used, such as established communication or engagement with external experts or advisory firms (eg, annual board presentations), were used by 30% - although deemed effective by 39%. The integration of risk analysis into formal risk processes was cited by 24% as used – while 45% said it was very effective. The most effective methods, Comprehensive scenario methodologies, which are integrated into strategic-planning process, was said to be used by 18% - and was cited as very effective by 52% of users.

Cyber risks 
Although political and geopolitical issues now take precedence, they’re not the only trends that have risen in importance in the past two years. Executives are increasingly aware, too, of the impact that technological developments could have on global business and on their companies’ profitability. There are two sides to these technology trends, which represent both challenges and opportunities for companies in the years ahead.

Cybersecurity threats are set to create the most harm in the financial services industry, at 17% citing a very negative impact on profitability, while 36% cite somewhat negative. Manufacturing too, is expecting to be hit, at 11% seeing a very negative impact on profitability while 31% cite a significant impact. By contrast, in the high tech/telecom industry, 16% see the trend as very positive on profit and 19% somewhat profitable.

According to the consultants, “Cybersecurity’s effects also vary across sectors, but its prominence in the latest survey underscores that security must be a default mind-set for all executives, regardless of what business they’re in. While companies tend to guard their technological expertise (and their vulnerabilities in particular), an important way to confront the cybersecurity challenge is collaborating with other companies—even their competitors—by reporting breaches, identifying common trends and technological weaknesses, and sharing best practices on how to address them.”