Staying resilient in high-impact scenarios

29 March, 2023

Around the one-year mark of Russia invading Ukraine, geopolitical threats have been high on the risk agenda of many business leaders. China attacking Taiwan is one of the most prominent fears – along with other high-impact scenarios relating to the People’s Republic.

These include a projection of Chinese power in the South-East Asian seas and on maritime trade routes, and increasing competition with western countries in Africa and South America. As with the shifts resulting from the Russian invasion, these threats could lead to significant disruptions for businesses worldwide.

Despite these scenarios, the German economy’s dependency on China has reached record levels, with a trade deficit of €84 billion. This dependency is present across all sectors, but becomes especially evident in the area of industrial services and goods and in the information and telecommunication sector. Due to these dependencies, the impact that a geopolitical risk scenario would have if it materializes is significant. At the same time, strategic moves, such as diversification, cannot be implemented easily, as they require major effort. This shifts the focus to operational aspects of doing business with China – and how to make them more resilient.

€84 bn: Germany’s record trade
deficit with China

Reflecting on lessons learned from the Russia-Ukraine war, it becomes clear that there is more to an escalating geopolitical risk scenario than short-term operational disruptions. Long-term effects that could occur with minimal warning are hard to forecast and highlight the need for strategic foresight. International sanctions are possible, as are efforts to nationalize assets and intellectual property. Significant reputational risks lurk in these scenarios as well. Sanctioning mechanisms such as the “Yale List” which calls out organizations continuing to do business with Russia are likely to reappear. However, the biggest challenge for many organizations after the onset of the Russia-Ukraine war has been to disentangle their operations with minimal losses.

How organizations can become crisis-proof

Businesses that have successfully navigated the war in Ukraine have used the crisis to revisit business processes, relocate, and diversify their network of experts around the globe. This requires having an agile corporate culture, enabling adaptiveness and maintaining a data-driven risk model. It also means being robustly resilient in order to withstand the initial turmoil and win time for an integrated response. Key decisions, such as exiting a market or disconnecting IT infrastructure, necessarily have a strategic impact on organizations, and operational functions should be re-aligned following such decisions. By aligning key resilience functions, such as task forces, crisis management and business continuity management, and integrating them with physical and cyber security, an organization can significantly strengthen its overall operational resilience – and gain a competitive advantage in crisis situations.

Below are the five core elements of such a realignment:

  1. Identify critical business processes (often referred to as important business services in the financial sector).
  2. Map dependencies between the identified processes.
  3. Define impact tolerances, i.e., what level of disruption is acceptable for the identified processes.
  4. Build detection capabilities to know when a critical business process – or a process it depends on directly or indirectly – is affected by an incident.
  5. Establish a central governance structure, ideally one sponsored by the board, to ensure coordination of and accountability for the individual resilience functions.

Six steps to increase operational resilience

Undertaking the realignment process can be a complex task and therefore requires a structured approach. If the operational resilience program is to succeed, embedding a resilience mindset in the organization’s culture is key, and adopting a strategy-based approach with a long-term goal is therefore recommended. To boost the journey to operational resilience, organizations should:

  1. Start with a health check of their resilience functions.
  2. Conduct maturity assessments of the degree to which these functions are integrated and coordinated.
  3. Analyze the business impact for the high-impact scenarios that are most relevant and most likely – and engage in dependency mapping and continuity planning.
  4. Develop an operational resilience governance by integrating existing resilience capabilities, such as crisis, risk and business continuity management.
  5. Select and implement digital resilience tools to increase the effectiveness and efficiency of the operational resilience program.
  6. Train and exercise frequently on both the strategic and operational decision-making levels.

The operational risks stemming from increasing dependencies between the German and Chinese markets are manifold and the likelihood of their materialization cannot easily be quantified, given the geopolitical uncertainties. Many organizations have already used the past year to re-assess their response plans to these risks. Due to the high degree of uncertainty, mitigating the risks individually can be costly. Building a culture of adaptiveness and integrated business resilience can offer a higher return on investment instead – and not only for high-impact scenarios related to China.

Jane He

Jane He

Jane He is a director at PwC (Advisory) in Frankfurt. She has over 12 years of experience helping clients emerge stronger from crisis situations. She has a global background: born in China, she was educated in Australia where she began her career. She now co-leads crisis management and resilience services at PwC Germany. Jane is a qualified chartered accountant, qualified CBI, and completed a bachelor’s degree at Sydney’s Macquarie University, graduating with first-class honors in professional accounting.

Tel: +49 1512 2898663

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Thomas Heck

Thomas Heck

Partner, PwC USA Business Group Leader & China Business Group, PwC United States

Dr. Katja Banik

Dr. Katja Banik

Redaktionsleitung, PwC Germany

Tel: +49 151 14262429