The volatile state of the world makes it seem like there are too many disruptions to track. As a result, companies take inconsistent approaches to managing risk or ignore global disruption risks altogether. Many leaders subsequently experience more interruptions, higher costs, and more time fighting fires.
To make tracking risk more manageable, PRISM gives companies a framework to understand risk in a complex world. We split risks across three time horizons: near, medium, and long term. Each time horizon merits different approaches and techniques.
Near-term (0-2 years): Risks are foreseeable or already playing out, so you must track and respond.
Medium-term (2-5 years): Risks are emerging and uncertain, so you have to simulate and plan.
Long-term (5-10 years): Trends are building that will change the environment entirely, so you have to position yourself for multiple futures.
In this series of articles, we’ll explore the top three global risks for business on our clients' radars for each time horizon and how we make sense of them. This first piece looks at the top three near-term risks for business: US-China, the global economic outlook, and the Russia-Ukraine conflict.
Near-term global risk for business: US-China
Whether the US and China are “decoupling” or “de-risking,” companies question how to manage this tension. Here’s how we break it down.
First, disaggregate the multiple ways China affects your business:
It’s essential to gauge your business’ direct presence in China. Are you selling or buying? From here, you can determine how exposed you are to various market risks from either your consumers or suppliers. By separating different parties' risk levels, you can put them in categories and reveal how this affects various inputs and outputs of your business.
It is also important to ask higher-level questions such as: What actions from US-China tensions could impact you in third countries (e.g., spillover economic effects, secondary sanctions, growing Chinese influence, etc.)?
Second, break down the types of challenges these impacts present:
The most critical aspects to analyze here are cost inflation, tariff risk, financial risk, human rights, ESG, and reputation.
Third, track risks and answer questions:
To do this, you must determine whether political signals suggest that we’re headed for increased or decreased tensions and what potential economic measures (e.g., tariffs, sanctions) could soon impact your business. You must also look for any military signals that may warn of major escalation and project which sectors and categories are most at risk.
Near-term global risk for business: Global economic outlook
The global economic outlook remains uncertain. Here’s how we think about it.
Inflation is falling in the US but remains stubborn in Europe (especially the UK). Interest rates are at decades-long highs but have yet to take a major bite out of growth. Employment and wage growth remain robust. We don’t yet know if we’ve pulled off a soft landing or will soon dive into recession (or even see inflation reaccelerate).
The alternative potential scenarios will drive vastly different business decisions. Every leader needs to answer three key questions:
Are you ready for the next stage of volatility? Most businesses are now adapted to inflation and are expecting it to reduce, but may not be ready for the wide range of scenarios for inflation, interest rates, growth, and financial stability.
Are you prepared for the new economic paradigm? The current volatility is part of a larger shift from an era of free money, cheap labor, and growth at all costs to one of tight money, scarce resources, and margin optimization. This requires more than just tactical thinking on inflation, but rather a strategy for a new economy.
How does the outlook differ across your key countries? The US is still growing strongly, with inflation coming down. Europe’s growth is weakening, with inflation more sticky. China is growing faster than both, with less inflation, but is decelerating rapidly and entering a new development phase. India is soon expected to be the new engine of global growth. Your business footprint will require different decisions country by country.
Near-term global risk for business: Russia-Ukraine
While most businesses adjusted to the initial economic and supply chain shocks of the Russia-Ukraine conflict, it remains a key driver of the geopolitical future.
For businesses, the shape of the conflict has two key implications:
First, the scope of disruptions to areas affected by the war (how long, which categories, and which countries are affected by the war and its related supply disruptions).
Second, the potential for even greater disruption through an escalation that pulls NATO into the war or a rapid Russian collapse that drives civil war in the country with the world’s largest nuclear arsenal.
Beyond the conflict are the economic measures. Sanctions and other measures like the rerouting of energy supplies have driven most global economic impact thus far and are continuing to shape business outcomes. The longer the war continues, the more likely we will see even further tightening economic screws.
At such uncertain times, preparedness is critical. To be prepared, you must know what sanctions will come next and what impact this will have on different sectors. Additionally, you must know the impact of such sanctions. For example, how the measures will expand to other countries (e.g., China) and which sanctions could be removed if the conflict ends sooner than expected.
The combination of an uncertain outlook for the war and an escalating range of measures the longer it continues creates the need to continue tracking developments closely.
Partner with PRISM for Political Risk Management
How do we tackle near-term global risks? PRISM's approach to tackling near-term risks focuses on 1) developing awareness and 2) narrowing the uncertainty gap.
Awareness
Information and insights are only useful if they’re easily accessible and engaging. PRISM feeds global risk perspectives into the organization in a way that works for professionals from individual contributors to executives.
Clients use PRISM’s NextRisk Tracker platform to get data, analysis, and direct access to our experts for Q&A. NextRisk Tracker delivers regular updates to clients' specific business decisions, highlighting changing risk levels, likelihood, and impact on countries and categories.
Foresight
Instead of attempting to create a crystal ball, PRISM focuses on narrowing the uncertainty gap and gaining new perspectives on threats to supply chains and business operations.
For example, during the semiconductor crunch, our clients in procurement needed to project supplies of this critical input. PRISM developed a proprietary Semiconductor Shortage Index to forecast the trajectory of the global semiconductor shortage.
Our index tracked two metrics: the median date the shortage is expected to ease and the level of uncertainty (quantified by the range of expectations). By analyzing stakeholder statements and layering additional insights, PRISM successfully projected whether shortages were worsening or improving, along with end dates.
This approach also applies to other risks like sourcing from China, inflation, and commodities. PRISM's early warnings, such as predicting Russia's invasion of Ukraine and China's 2022 COVID-19 lockdowns, demonstrate our proactive foresight capabilities.
Near-term global risks are manageable with PRISM’s tracking system.
Stay tuned for our next series on mid-term risks.