Doing Business in a Fragmenting World

Finding differentiated advantage in sovereign fragmentation

Delphi is a wonderful place for thinking about the power and failure of prediction. For perhaps a thousand years, travelers came from across the Mediterranean world to seek advice and wisdom. This advice was, necessarily, couched in an understanding of the reality of the world, in a model of how the world would likely change, and in a set of predictions about the connections between actions and outcomes. And these supplicants came with sacrificial offerings: Good, actionable information and predictions were, and are, expensive.

As I sat this morning in the Delphi Forum, one of the keynote speakers observed - I’m paraphrasing - that the dramatic events of the last few weeks could not have been predicted.

Really?

Is it such a shock that the Trump administration is implementing extensive tariffs? Is it a surprise that this administration is interested in bilateral transactions that, from their view, benefit the United States? Is it shocking that they are insisting that the European powers pick up the bill for the defense of Ukraine, while the United States prioritizes the Middle East and China? All of this is consistent with what Trump said he would do on the campaign trail, and with what his supporters explicitly elected him to do.

Another speaker said: “We cannot predict where we are going right now.” Everyone seems to be unprepared to make predictions - they seem to find this new world we’re in to be so unfamiliar that they don’t know how to process it.

So, in the spirit of Delphi, I have a prediction to share with you:

Companies that consistently generate differentiated advantage from anticipating and acting on geopolitical factors will be successful over the coming decade. Others will blame external factors for their failure.

If you’re an investor, or an employee - pay attention to how your executives behave with regard to geopolitical events. Are they the victim of events, or are they taking actions to put the organization in a position to anticipate changes and generate advantage?

The liberal international order is breaking down, and is going to continue to do so. This is going to play out over the next decade or more. There is no longer a ‘world market’ in most industries, and that’s going to become clearer and clearer over the coming months and years. There will be a variety of different markets, with barriers between them: Some will be regional blocs, others will be great powers engaging in free trade with their client states, and still others will be markets defined by treaties among maritime powers. What happens at a border will be increasingly specific to goods, to allies, and to power and economic differentials. Some states will make economic sacrifices to achieve autarchy in specific industries. Others will create government-backed monopolies, in a bid to generate power and prosperity from control of a key or strategic good.

Over the next couple of years, nearly every business problem will be blamed on the disruptions associated with these proposed tariffs. During and after Covid, it was natural for business leaders to blame the supply chain and personnel disruptions from Covid for every business problem. Covid was, in effect, a ‘get out of jail free’ card that allowed executives and managers to take any significant problem and blame an exogenous factor beyond their control. Of course, at a company level, this played out as well: Companies that were not resilient to the disruptions of Covid demanded and got extensive government bailouts. And some went out of business.

Some of what’s going to be blamed on these new tariffs and other geopolitical disruptions will legitimately be caused by these issues. Some won’t. Discerning which is which will be a challenge.

Pay very close attention to the companies that actually do well in this new, more turbulent environment - not just out of one-time luck, but consistently. This turbulence isn’t a one-time thing. States are reasserting their primacy, and we’re seeing a process of decoupling play out: Leaders are figuring out that being dependent on adversary regimes for critical commodities, and for key and strategic goods, undermines their own sovereignty.

We’re going to see more of this kind of turbulence over the coming decade. This is going to produce winners and losers. The fragmentation of the world market into many smaller, more Balkanized markets will reward companies which can adapt quickly, who have strong local knowledge, and who can operate successfully in this new environment.

So watch closely: Some companies are going to get very lucky, and will do well out of the ongoing realignment and fragmentation without having planned for it. Some companies will blame their dire problems on factors beyond their control.

Some companies will prosper in this new world. These are the companies that pay close attention across the organization to geopolitics, that make decisions that allow them to get out ahead of geopolitical events, and that allocate capital and attention to mitigating sovereign and geopolitical risk, and creating differentiated advantage out of geopolitical opportunity and dynamic change. These organizations are special. They’re unusual. And they’re going to outperform their competitors in the coming years.