When uncertainty increases and unprecedented conditions arise, companies can struggle to adapt. Often, their strategy practices can be rooted in calmer times, slowing reaction times and limiting adaptability. In this episode of the Inside the Strategy Room podcast, we speak with an expert on geopolitical risk about ways for companies to improve their reactions. Michèle Flournoy is the cofounder and managing partner of WestExec Advisors, a strategic advisory firm that helps CEOs and investors navigate geopolitical risks and opportunities. She previously served the US government as undersecretary of defense for policy and was the principal adviser to the secretary of defense. She is also cofounder of the Center for a New American Security—a bipartisan think tank dedicated to developing strong, pragmatic, and principled national security policies. She spoke with Andy West, a McKinsey senior partner and the global coleader of our Strategy and Corporate Finance Practice. This is an edited transcript of their conversation. For more discussions on the strategy issues that matter, follow the series on your preferred podcast platform.
Andy West, McKinsey: Just about everybody is talking about recent events in the world of geopolitics and risk. What is on the minds of executives, given the breadth of topics that are coming at them today?
Michèle Flournoy, WestExec Advisors: The questions really range from the immediate and tactical to the very long-term and strategic: How long will this last? How will it change their trade relationships and alliances, and money flows around the world? They want to know if this is temporary or if we’re moving toward a different kind of world order. They’re trying to manage their way through geopolitical risk and opportunity.
Andy West: One thing I’ve observed with my own clients is that when they’re going through the strategy process, there is so much more information that could be relevant to future scenarios than anyone has had to comprehend before. How are you seeing executives digest all of this in a way that helps inform existing processes? Will companies need to fundamentally change their traditional operating models, or even just how they make decisions in order to compensate for all of this variability, all of these questions, and all of this new information?
Michèle Flournoy: The companies I see that are navigating the uncertainty and change best are those that have a very clear-eyed assessment of their risk exposure, and ask, “Where are my vulnerabilities?” You could be overwhelmed by the news every day, but what matters to your company and its future in a material way? They’re also taking a hard look at their internal risk management processes. This is a full-team endeavor, with the CEO, the entire executive team, the board, and sometimes external experts really diving into core questions about how to manage, allocate, and buy down risk.
They are also testing themselves. We see a number of companies going through scenario-based tabletop exercises that pressure-test vulnerabilities. They have the leadership team work through the problems, see where they feel prepared and not, and where they need to do some additional work to create better options or to reduce risk further. You want to put that process on repeat, so that it’s iterative and you’re buying down risk and coming up with contingency plans so that when the crisis actually happens, you’re not the deer in the headlights. You have a starting point and a playbook, and a sense of the right questions to ask, the timelines, and what to watch out for. You want your team to feel that this is not the first time they’re going through this.
The companies I see that are navigating the uncertainty and change best are those that have a very clear-eyed assessment of their risk exposure, and ask, “Where are my vulnerabilities?”
Michèle Flournoy
Andy West: What are some of the skills you think executives need to hone, refine, or learn in order to be more engaged?
Michèle Flournoy: Leaders need to understand that they have to make more time for this now than they’re used to. In normal circumstances, crisis management is in the back of your mind, but right now, you actually have to make some investment up front if you want to buy down risk in case something becomes a crisis for your company. As chaotic as today’s challenges may seem, you have to make room for the future to have a seat at the table.
Also, companies need to recognize that in a crisis that reaches a level of materiality for a company, you may have the best chief risk officer and so forth, but at a certain level, a situation can be beyond what those experts can handle by themselves. You don’t want to be in a situation where you’re figuring out the governance for a crisis for the first time while in a crisis. So, it’s a matter of recognizing that it’s a full team response and really working on whether your whole team understands what they would be responsible for in a crisis, and whether they are prepared for those roles.
Andy West: It’s hard, though, when companies and leadership teams are used to working a certain way, and they know what they know. They have to broaden their perspectives, don’t they?
Michèle Flournoy: I do think it’s critical to get outside support to help you move from a very reactive posture into a more proactive one where you’re looking over the horizon and seeing around the corner. I would wager that most CEOs and executive teams have not gone through a tabletop exercise. In my firm, many of us come from the national security community, where the notion of going into an operation without rehearsing it first is considered deadly, and so what we’ve tried to do is take a simplified version of that national security methodology and tailor it to companies for running scenarios.
One example of the things that come up most often is how you communicate in a crisis—what you communicate, how, and when. If you leave people to their own devices, inevitably the takeaway at the end of the exercise is, “We waited too long and we didn’t say enough.” You need to be aligned on what you will say to your investors, your workforce, and your customers. This is something you need to prepare for. What you say or don’t could become public. This is consistently one of the hardest aspects of going through these exercises, and also one of the key areas where people learn a lot, and then have a lot of follow-up work to make sure they’re prepared.
Andy West: You mentioned the role of boards in this. I imagine a lot of executives are getting inquiries from their board members right now, asking, “How are we handling this?” What are some good practices from boards that you’ve seen? How should a board member think about the role they’re playing in enabling the executive team and acting as a partner in ensuring real readiness?
Michèle Flournoy: A lot of boards relegate this to the audit committee, which has a stoplight chart of risk. The best practice that I’m seeing is boards getting involved at least at the level of being briefed on the scenario-based exercises, and in some cases, participating in aspects of them. You want the board to understand what their roles and responsibilities would be in a crisis, and what kinds of decisions they’d have to make on what timelines. And if they don’t like their options coming out of a tabletop exercise, then there’s an opportunity to do a lot of work to give them better options before the crisis happens.
This is really important. I can give you multiple examples of this in the defense and national security space, where literally going through a tabletop exercise with a president fundamentally changed an approach to a problem because it took the experience of the exercise to get people to realize, “We don’t like these options, so we have to now invest in developing other options before we have a crisis.”
Andy West: Often when companies fail to act, it’s not because they haven’t discussed the topic—it’s because they’re not truly aligned. And today, executives are having to make decisions with information they’re not used to digesting, and which may spill over into their own political views. How much do these types of exercises and the conversations they raise help to make sure companies can continue to move forward?
Michèle Flournoy: I think they’re invaluable to driving alignment. Again, drawing from my experience in government, we would often do tabletop exercises with an inter-agency team specifically to “norm and form” the team on how we would work together, and to understand in advance what the different perspectives were going to be on the kinds of issues that would come up.
We find that there’s a lot of mutual education across stovepipes of information, and that is true across companies, too. Things that happen in the outreach to customers will also impact something else that’s happening on the operations side or on the communications side, for example. A lot of it is getting people out of their stovepipes to realize that they are empowered to take care of the problem and to coordinate across the group and up with the CEO and even the board.
Andy West: A lot of corporate governance is based on the last 80 years, and on a previous era of stability and globalization, and less variability. That can make for an inflexible process. Do you see a reckoning coming for the way we do corporate planning and governance? Or is what we’re going through today something that’s just additive to these processes, and not a wholesale change?
Michèle Flournoy: I think we’re going to be in a period of volatility for some time. It’s the new norm, and adaptability and agility will be critical. Introducing more dynamism into the strategy development and refinement process would be very helpful. And tabletops are just one tool, but I think they can be very useful in introducing that greater dynamism. I want to emphasize that this is not a one-and-done type of exercise. The best companies that we’re working with do this on an iterative basis. Every time you do a tabletop, you come away with a to-do list of, “Boy, we did not have our act together on communications.” Or, “We did not have a clear answer on whether an [SEC Form] 8-K would be needed in this situation or not.” Or, “We did not have the ability to communicate in the kind of timelines that we needed to across the organization in a seamless manner.” And then these takeaways become a work plan, and six months later, you come back and you do it again. And you assess whether you did better the next time.
Andy West: All of this can be overwhelming. Are there any good practices you can share to separate the signal from the noise and help people better understand the world?
Michèle Flournoy: That is a challenge. I think we have to identify the people whose knowledge and judgment we trust will help us interpret the news. For example, we put out tailored notes to individual clients based on their geographies, their business, and their interests. We share what we think is important to them. People also need to know what won’t hurt them so they can know what to ignore.
Andy West: I have found that in some strategy conversations, when you really get down to the heart of a company’s strategy, even some of the pretty profound things that are happening on the world stage today actually don’t change the strategy that much, or the essence of the organization. But you have to be very self-aware and locked in to what differentiates your organization to know that.
Michèle Flournoy: And again, borrowing from my government experience with the intelligence community, there’s always this discussion of indications and warnings. So, if you’ve done the analysis of “Here’s my strategy. Here are the assumptions on which it’s built,” the next step is to determine the indications that one of those assumptions is about to change or be undermined. And consciously knowing, “What am I looking for? I don’t have to watch everything, but these are the things that, if I see a change in X, Y, or Z, that tells me I’ve got to go back to my strategy and ask myself, do I need to make an adjustment or a refinement?”
Andy West: Are you seeing companies use AI to do scenario testing yet? This is something that I’ve been encouraged by. The role that AI can play in managing variables and helping you see when and how your strategy needs to change can be quite profound. I am seeing some clients really on the edge of scenario testing, using AI broadly speaking, and also analytical AI and generative AI, to see those signals earlier and faster in the market.
Michèle Flournoy: I haven’t seen it with many private sector clients, but I’m definitely seeing it in the US government, which is awash in data, but it’s often stovepiped data. If you can allow AI to access multiple databases and work across them, you can start to discern patterns of behavior that give you much earlier indications and warnings. Something that traditional methods would give you, maybe a day or two of advance notice, can now be foreseen with several weeks of notice and high confidence. AI is able to pull more information of different types from different sources and see patterns of behavior that it would just take hundreds or thousands of hours for a human analyst to comb through and put together.
Andy West: Does it seem that we’re close to having to operate differently, inside the executive suite, inside the boardroom? Is the pace of change and the degree of uncertainty forcing us to change the way we do strategy and plan for geopolitical risk?
Michèle Flournoy: I think that is true for the companies that have the greatest exposure to geopolitical externalities. There are companies that the current changes will not have a huge impact on. But I think those that are dependent on international markets and supply chains need to understand their exposure. Companies are going to have to develop some new tools, practices, and habits to protect themselves, and also to be in a position to do more than just react to the waterfall of things coming at them. They need to find opportunities in the chaos and ways of actually repositioning themselves to grow their business.
Andy West: I love the idea that there is always opportunity in any moment, whether it’s a downturn or any other type of change. What kinds of opportunities do you see coming out of the recent environment or the current environment?
Michèle Flournoy: There are always opportunities associated with technological disruption, of course. In addition to the international volatility in a period of profound disruption, which will create new winners and losers, those who lean into the opportunities are more likely to win. Especially those companies that move into the adjacencies in their broader ecosystem and expand or shift their focus as dynamics change around them. Having that kind of agility will really matter.
There will be geographic shifts that happen, depending on how some of the current policies ultimately shake out. When there is enough external uncertainty, it forces you to reevaluate and ask, “Am I really in the right business? Am I really pursuing the right opportunities and offerings? Is there enough change so that I could actually make a big move and leap into something new that will be even more powerful than what I’ve traditionally been focused on?”
Andy West: We’re here in the US, but how much do you think this is true of the rest of the world? The uncertainty today extends well beyond US borders. Do companies in Europe and Asia, for example, also need to think in terms of this kind of agility?
Michèle Flournoy: I think these are fairly universal best practices. They may be a little new or counter-cultural in terms of not something that folks have done a lot before, but in terms of the methodologies, they absolutely apply. Some of our clients are quite global in nature, and it’s been interesting to take people through the tabletop exercises, because you get beyond a singularly US perspective to a much more global perspective. And sometimes that is very enriching and, you know, raises new issues that might not come out in a purely US exercise.
Andy West: Michèle, there is so much going on right now in the news, and we could have this conversation for hours. Thank you for spending time with us to share your views on what’s happening in the US and more broadly.
Michèle Flournoy: Great to be with you, thank you.
