In this blog we explain how geopolitical events affect global businesses through direct and indirect impacts
In a globalized world, geopolitical events have far-reaching consequences that transcend borders and greatly influence how international businesses operate.
The analysis of geopolitical risks has become inevitable for companies striving to maintain stability, enhance resilience, and stay competitive in the global market. To thrive in the web of geopolitics, businesses must proactively position themselves to navigate increasing uncertainty.
Therefore, awareness of geopolitical dynamics is not enough. In a constantly evolving global environment, monitoring these dynamics is vital to effectively predict and mitigate operational risks, capitalize on opportunities, and adjust commercial strategies accordingly.
What constitutes geopolitics and how does it affect businesses?
Geopolitics is politics that usually take place in an international stage and in inter-state relations, and is influenced by, for example, geographical, economic and security factors. Developments between and by non-state actors and within domestic settings can be of geopolitical importance, too.
Geopolitical events are political, security and economic affairs that influence relations between countries, actors and regions. These events–or hotspots–can range from military confrontations, economic sanctions, trade agreements, and territorial disputes to political elections and regulatory changes. Numerous geopolitical events are currently shaping the world, such as the war in Ukraine, the Israel-Hamas war, and the trade war between the United States and China.
For businesses, geopolitical events are not just headlines – they are factors that can reshape markets, disrupt supply chains, and redefine the competitive landscape. Companies that fail to anticipate and respond to geopolitical shifts risk encountering disruptions that may harm profitability, market share, and reputation. On the other hand, businesses actively managing geopolitical risks can identify lucrative opportunities, safeguard their operations, and position themselves for long-term success and operational stability.
Two types of business impacts
Geopolitical shocks have ripple effects on global businesses, impacting them both directly and indirectly. When an event occurs, it sets off a series of wider, often unforeseen consequences. To weather the storm, companies must be quick to react and adapt to challenges. These effects cut across all aspects of an organization ranging from daily operations to long-term corporate strategies.
Direct business impacts
Political instability, conflicts, and trade barriers are some of the aspects that affect the flow of commerce in supply chains, hindering businesses’ ability to source raw materials, manufacture goods, or deliver products to end customers. Inventory shortages, security threats, and disruptions in production and trade are immediate and visible consequences, and therefore, are great examples of direct business impacts.
The Red Sea, for example, is a critical artery in global logistics operations and trade. Since the end of 2023, Houthi attacks on cargo vessels and oil tankers have turned this vital route into a high-risk zone, forcing companies that once relied on sailing through the Suez Canal to confront serious logistical challenges. Due to the disruption, diverting two-thirds of normal container vessel traffic around Africa has increased transit time and raised the cost of freight on the Asia-Europe trade route. This shows that mitigating the direct impacts of geopolitical events requires companies to develop risk management practices and adopt swift response strategies. The companies that are aware of possible chokepoints and able to plan for contingencies are also in a better position to maneuver in an uncertain environment, which may be a source of competitive advantage.
Indirect business impacts
On the other hand, the indirect impacts of geopolitical events can be just as significant as the direct ones, often manifesting in ways that sweep through the broader economy. Geopolitical tensions can bring about sanctions and tariffs between actors, causing economic instability that results in fluctuating currency values and unstable commodity prices. These changes can then, for example, influence consumer behavior as people might spend less if they are uncertain about the economy, or cause fluctuations in the cost of raw materials, affecting companies’ profitability.
For instance, the ongoing war in Ukraine has triggered significant economic volatility, particularly in the global energy markets. The conflict has caused fluctuations in oil prices, driving up costs for businesses, mainly in Europe, from transportation and logistics to manufacturing. These rising costs have led to changes in consumer behavior, with people cutting back on spending due to higher prices, ultimately affecting demand across various industries.
Moreover, the sudden halt of Russian crude oil forced many companies to rethink their entire value chains. Businesses that relied on petrochemicals, like those in plastics and fertilizers, faced disruptions as they sought new suppliers and adjusted logistics. Others were forced out of previously well-established markets as a result of the European Union’s sanctions on Russia. These indirect impacts of the war highlight how geopolitical tensions can set off a chain reaction across industries, and severe commercial relations between economic actors.
Overall, staying ahead of the geopolitical curve is not just an advantage–it is a necessity. Geopolitics has moved to the top of the priority lists of companies that operate in global markets. Thus, geopolitical intelligence and business impact analysis are becoming integral parts of organizational risk management, strategic decision-making, and resilience.
Proactive risk management and resilience
Viewing geopolitics from a business lens allows companies to identify risks and threats before they emerge. Systematically monitoring emerging and active hotspots enables businesses to better implement risk management strategies that protect their interests. One example of such a strategy is the diversification of supply chain networks, as it minimizes over-reliance on a single region or a supplier. For instance, Apple has been gradually shifting its manufacturing base from China to other Asian countries, such as India and Vietnam, due to the current trade war between the United States and China. By spreading its operations across multiple regions, Apple reduces exposure to tariffs, sanctions, or emerging political instability in a specific country. The envisioned resilience is better materialized when the company is able to bounce back from disruptions along the already diversified supply chain without major setbacks to overall operations.
Strategic decision-making
When geopolitics affect important markets, strategic decision-making becomes essential, especially when considering a new market entry or growing market share in an existing one. A prime example is the shifting dynamics in Eastern Europe due to increased Russian military threats and Western sanctions. In response, many European energy and logistics companies have strategically redirected their investments and expansion efforts to other regions that offer a more stable regulatory environment and are less vulnerable to geopolitical shifts. For instance, in 2022, following the escalation of the Russia-Ukraine conflict, Shell announced its withdrawal from the Sakhalin-2 liquefied natural gas project in Russia. Nevertheless, without reliable strategic geopolitical intelligence tools and strategic foresight, corporate decisions defining long-term strategies could lead to major financial losses and competitive disadvantages.
In conclusion, managing geopolitical risks is crucial for sustained business success
As the global, interconnected landscape continues to evolve, understanding and managing geopolitical risks is no longer optional for businesses. Companies, therefore, must remain vigilant and adaptable, constantly monitor global affairs, and proactively adjust their strategies to be prepared for all scenarios.
By staying informed about geopolitical events and their business impacts, and integrating geopolitical intelligence into decision-making processes, companies can navigate uncertainty with greater confidence.