Learning to govern the unpredictable: strategies for companies in a changing world

Published on Mit Sloan Management Review Italy, May/June/July 2025.

In recent years, corporate strategies have been repeatedly disrupted by major shocks such as the covid-19 pandemic, the outbreak of wars in Ukraine and the Middle East and the progress of Generative AI. In early 2025, a stream of political surprises have impacted corporate agendas and further upheavals appear likely.

This turbulence is having a real impact on businesses: our analysis of almost 7,000 organizations over a 20-year period shows that variation in company profitability can increasingly be attributed to factors that go beyond the company and its sector (Chart 1). Contextual factors, such as geopolitics, technology and climate, now account for 43% of the variation in public company net profit margins.

More and more often, politics is the generator of surprises that reverberate in boardrooms around the world. After World War II, countries in most of the Western world adopted economic growth as a primary goal, which went hand in hand with national government support for entrepreneurial activities. Today, with increasing social and political divisions within many countries and growing geopolitical tensions between them, this support can no longer be taken for granted.

How can CEOs and their teams navigate the current era of political upheaval? They must understand and strategize political risk. Let's see how.

Because the current political risk is different

Political risk is fundamentally different from other risk factors in several important ways.

High frequency.Unlike pandemics or economic shocks, political influence can create significant disruption on a regular basis. In the digital age, new policies can be announced, changed and reversed every day, forcing companies to bring war rooms together and react in real time.

Multidimensional.Political changes can affect companies across multiple dimensions. For example, the U.S. executive orders in January and February have economic implications (such as introducing tariffs on countries and products), workforce implications (such as curtailing Diversity, Equity and Inclusion, DE&I initiatives), sustainability implications (such as withdrawing the United States from the Paris Agreement on climate action), and more. Furthermore, these influences manifest themselves at different times: some require an immediate response, while others require long-term adjustments.

Surprising.Some recent political interventions appear to have gone out of left field (such as the United States stopping enforcement of laws prohibiting bribery of foreign officials). Even those that have been reported in advance are often ambiguous in their details: for example, the introduction of tariffs on imports into the United States was foreseeable, but it is not yet known when they will be applied, which countries and products they will affect, and how long they will remain in place. This uncertainty is accentuated by the fact that policies are blocked, modified or reversed within days of their introduction, both by the US executive itself and by judicial decisions.

Less controllable.Contextual surprises, such as climate disasters or the explosion of armed conflicts, are true black swans, phenomena that are difficult to predict or control. Political factors have historically been more predictable in recent decades, thanks to the broad alignment between politics and economics, with companies able to exert influence on regulations through lobbying. Now, with political priorities increasingly driven by party politics and the protection of national security, the political landscape has become less moldable by companies.

Addiction to commitment.Many types of business risks, such as demographic changes, must be addressed by all actors. But political risk is different because its impact on an individual company depends on whether and how a company chooses to interact with it. Policy decisions can be made differently, depending on whether the business community as a whole decides to engage or not.

In light of these considerations, how can companies reflect political risk in their strategies?

The six strategic steps for political risk

We have developed a political risk strategization process that can be divided into two phases: awareness and response.

AWARENESS RAISING

1. Observe the political landscape.To develop a political risk strategy, executives must first accept the idea that focusing only on the company and its market environment is no longer sufficient: the political section of the newspaper has become as important as the economic and financial sections.

Companies need to build the capacity to sense political trends, for example by engaging with elected representatives and participating in political conferences or delegations. Another pragmatic move is participating in industry coalitions, which support their corporate members (Dunkley, 2024) by monitoring relevant regulations and facilitating interactions with policy makers.

Based on an understanding of relevant political developments, companies can define and monitor relevant KPIs to quickly identify signs that issues are rising in salience. For example, European food processing and packaging giant Tetra Pak tracks and interprets more than 40 global indicators (Mankins and Gottfredson, 2022), including packaging and waste regulations and investments in recycling infrastructure. Companies could also try to collect and interpret weak signals that indicate future policies, for example by inferring public sentiment on relevant issues. Researchers from MIT and Microsoft have demonstrated that social media interactions can be used to predict (Zhang and Counts, 2015) the outcomes of political changes with high accuracy.

2. Anticipate the impact of political moves.To prepare for the potential effects of political decisions, companies need to think in terms of scenarios. By extrapolating or combining current political trends – or even, as suggested by the World Economic Forum (2024), drawing inspiration from science fiction descriptions of alternative realities – strategists can elaborate possible future states of the political landscape to better understand the associated opportunities and risks.

Since the late 1990s, the United States Coast Guard has been conducting scenario planning exercises (Scoblic, 2020) to anticipate unlikely events and build the capabilities needed to deal with them. For example, scenarios developed after the 9/11 terrorist attacks made it clear to Coast Guard leaders that, in any plausible future, they would want the ability to identify and track every vessel in U.S. waters.

After outlining a series of relevant scenarios, organizational strategists can identify the associated early warning indicators, i.e. signals that indicate that a scenario is approaching reality and that the capabilities to deal with it are becoming increasingly relevant.

Loscenario thinkingdoes not only require skills in identifying, recombining and extrapolating relevant trends. Equally fundamental is the willingness of leaders to confront unlikely but potentially significant future scenarios and abandon their current mental models of the world.

3. Choose your own battles.Since political risks can have different consequences depending on how the company interacts with them, executives must also include an explicit selection phase to decide whether and how to engage.

In general, companies should try to avoid unnecessary involvement in political debates (Martinez, Michael, & Reeves, 2023), which can easily result in public or political backlash. Participation should be focused on political issues directly related to the company's core economic activity, making the involvement legitimate and the company a competent contributor to the discussion. For example, car manufacturers should intervene on vehicle safety regulations or emission standards.

Furthermore, when they choose to be involved, companies must calibrate the intensity of their response. In a fast-moving news cycle, issues are often overshadowed by the next headline or policy changes, so companies shouldn't overreact. Some of the companies that have been among the most active supporters of DE&I initiatives have also been the quickest to completely reverse course, calling into question their consistency and credibility.

In recent years, many companies have come under enormous pressure from their stakeholders to 'speak up' or 'take a stand'. To reduce this pressure it will be necessary to reset expectations towards non-involvement, adopting institutional neutrality as an explicit policy and maintaining it over a long period of time. The University of Chicago's official position of being the 'home and sponsor of critics', but not itself a critic – a position the university has held since 1967 – is a good example of this. This position has helped the university handle recent political issues better than other academic institutions. For example, recent US campus protests against the war in the Middle East extended to the University of Chicago, but did not result in high-level resignations or summonings of leaders to US House of Representatives hearings.

Among businesses, such neutrality is rare. Berkshire Hathaway is an example of a company that does not take public positions on social issues (Lowenstein, 2023). Although Chairman and CEO Warren Buffett is outspoken on political issues, he refuses to use the company as a vehicle for social change (Armstrong, 2019).

RESPLY

4. Invest in preparation.Given the unpredictability and multidimensional nature of political risk, it is more important than ever for companies to invest to be better prepared to deal with the often rapid impact of political surprises. This resilience can take different forms (Reeveset al., 2020): for example, ensuring the flexibility to rapidly recover critical operations (for example, by investing in a diversified supply chain, so that inputs or suppliers can be quickly changed if tariffs are introduced); create reserves against potential shocks (for example, by diversifying the product portfolio or accumulating liquidity); or create a modular supply chain (so as to contain the impact of shocks).

Think, for example, of Ikea's activities in Russia: following Russia's annexation of Crimea in 2014, Ikea made significant efforts to localize production and disconnect Russia from the rest of its global supply chain, so that it could better contain the effects of a shock that could result from a further escalation of the conflict. When Russia began a war with Ukraine in 2022, Ikea's exit from the country was easier than that of other competitors whose local businesses remained deeply tied to their global operations.

Making these moves requires adopting a mindset that balances efficiency with long-term considerations of creating value through differentiated preparation.

5. Adapt to the new normal.Although good preparation can help companies survive turbulence, mere survival is necessary, but not sufficient. We often think of shocks as temporary when, in reality, they often create a new normal. By adapting more quickly than industry peers, or even pivoting to new end states proactively, companies can gain an advantage. For example, in anticipation of the introduction of a tax on sugary drinks in the UK, Coca-Cola reformulated its sugar-free offering (Smithers, 2016), Coca-Cola Zero Sugar, to make it more similar to classic Coca-Cola, while also launching its biggest marketing campaign in a decade (Talking Retail, 2016) in the country to promote the drink. This has enabled Zero Sugar to become one of the UK's top five soft drinks (Ridder, 2025) in terms of sales by 2024.

We often think that shocks are temporary, when in reality they often create a 'new normal'.

One way to improve adaptability is to avoid occupying a specific position in a market. By developing a platform and promoting a business ecosystem, tech giants have achieved this: Airbnb, for example, outpaced the hotel industry (Reeves and Candelon, 2021) during the pandemic because it offered a wider range of rental options and was able to quickly pivot to promoting rural listings alongside a work-from-anywhere marketing campaign.

Success in this case can involve a bet on the future conditions of the world. From a business model perspective, Munich RE's (2024) adoption of climate change modeling as early as the 1970s – decades before fellow insurers adopted this practice – is a case in point. This move established the company as a leader in climate risk modeling, resulting in its commercial success when the issue of climate change became public knowledge.

6. Model selectively.Although political issues are difficult to control, this does not mean that businesses should always be passive. Rather, they should be selective in attempting to influence policy, focusing their efforts on issues related to core business and where corporate influence can make a difference – in other words, not on matters of party politics or national security.

In addition to deciding when to engage, companies must also consider how to exert their influence, especially if they are not the largest or most influential company in their sector. Often, cooperation, such as standard setting within an industry coalition, is needed to influence decision making. Classic examples of self-regulation are the rating systems that US film studios and, subsequently, video game producers adopted to inform consumers about the suitability of content for different audiences. Both systems were launched in anticipation of regulatory intervention and ended up anticipating regulations and guiding consumer behavior.

Prerequisites for political risk management

To develop strategies that systematically address political risk, three prerequisites are essential.

Expand the horizon.Executives must accept the idea that focusing only on the company and its market environment is no longer sufficient for defining strategy. This is counterintuitive to many executives because, in the post-Cold War era, broader contextual factors could be assumed to be constant and effectively ignored. Now, the strategy must explicitly take into account factors that go beyond the company and its market.

Build political risk analysis and triage capabilities.To understand the probability and impact of political interventions (Lang, 2024), as well as the potential reaction to the company's actions (or inactions), new functional skills in the field of politics are needed. This means hiring people who are experts in sensing political developments and inferring potential future scenarios. This new functional expertise should be placed at the intersection of policy, strategy and communications, ensuring that political considerations are incorporated into daily decision-making. This aspect is more crucial than ever, since digital technology drastically increases the amount of controls on any corporate action and communication.

Adopt stable positions based on values.Engaging in political and social issues often makes things worse, especially if companies are unable to explain their positions or change them often. However, this doesn't mean that companies should completely give up on engaging or having a positive social impact. To act as a common thread, companies should articulate principles (Martin and Reeves, 2022) that address ethical, social and political issues. These principles must be specific enough to guide choices, applicable to multiple plausible situations, and broad enough to remain stable over time, even if political circumstances change. Examples are principles such as “never engage in or tolerate corruption,” “advance technology broadly through open-sourcing of patents,” or “minimize environmental impact and adopt regenerative practices.”

In a time of political upheaval, it's understandable that business leaders feel overwhelmed and helpless. While political risk is inherently less controllable than traditional business issues, new ways of thinking and acting can reduce negative impacts. This requires recognizing the differences between political risks, developing new perception skills, and being selective about when to engage, adapt, or try to shape the context.

Note:This chart breaks down the variance in net profit margin into its components using a linear mixed effects model, controlling for factors such as sales growth, market capitalization, and total shareholder return, as well as random effects at the company, industry, and country levels.

The term “Context” represents the residual variance of this specification (i.e., the variance that remains unexplained after considering company-, industry-, and country-level variables).

This shows the impact of factors external to the company (such as geopolitics, technology and climate) on profitability.

The sample includes approximately 78 thousand observations relating to 6,800 companies, in the period 2004–2024.

Source:BCG Henderson Institute

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