Absent a crystal ball, companies need to be prepared for multiple scenarios and to make and execute decisions quickly when opportunities arise.
In the wake of recent tariff announcements, the US weighted average tariff rate jumped from about 2 percent in January to roughly 14 percent. How tariffs and trade policies will continue to evolve is uncertain, but their impact on business cost structures, business and consumer demand, and companies’ competitive advantages is bound to be substantial.
The potential new bilateral trade agreements have introduced further complexity. So have US Department of Commerce investigations into the national-security effects of imports of goods ranging from semiconductors to pharmaceuticals. Given the web of interdependencies governing global trade and the tariffs’ varying impact on different sectors and countries, it’s clear that businesses can’t define and prepare for the future using traditional forecasting and planning methods. During a recent McKinsey Live, senior partners Cindy Levy and Shubham Singhal discussed how business leaders can gain an edge by identifying near-term, medium-term, and long-term strategic actions amidst rapidly changing trade policies.
Strategy is back
In the short term, mitigate the downside. Companies must mitigate geopolitical risks by crafting risk and response plans. Those plans might include tactics such as revamping supply chains, changing ownership structure, or reallocating capital. There’s also an opportunity for companies to address operational efficiency, clean up balance sheets, confirm compliance, and identify possible growth areas. Leaders must develop a profound understanding of how changes—to trade patterns, access to markets and suppliers, demand and margins, and growth prospects—are likely to affect not only their companies but their competitors as well.
In the medium-term, prepare for action by using scenario planning. There are five potential macroeconomic scenarios that could shape the future course of today’s uncertain environment. Macroeconomic scenario modeling takes into account not only tariff trajectories but also the implications of fiscal policy changes, central-bank rate hikes, and generative AI and other technologies. For each scenario, a company needs to make plans based on demand, cost structure, and relative competitive advantage. With an action plan in place for each principal combination of product and geography, a company will be ready to move quickly when a specific scenario (or part of a scenario) comes to pass.
In the long term, maneuver to win. By searching for investment and capital spending opportunities, prepared businesses will be able to turn the challenges of tariff and trade shifts into growth and value creation.
Nerve centers
Charting a course through the prevailing uncertainty and moving from a focus on immediate tactical responses to longer-term plans for action requires a nerve center. An effective nerve center:
- comprises cross-functional initiative teams that tackle the full range of potential tariff impacts on different parts of the company
- covers immediate, medium-term, and long-term planning horizons and time frames
- has a planning team, led by a full-time executive, that provides distinctive analytics, coordinates the initiative teams, and enables fast decision making
Q&A from the session
1. How can companies effectively plan for growth, investment, and R&D in today’s uncertain economic and geopolitical climate? What best practices should they follow?
The idea behind a geopolitical nerve center is to bring together and break siloes between existing teams (e.g., trade compliance, legal, supply chain, procurement), not to create new teams. The nerve center ensures that these cross-functional teams are effectively collaborating to drive insights and implementation.
2. What are the potential impacts of tariffs on service sectors, particularly in offshore business process outsourcing (BPO) areas such as call centers and back-office operations?
The currently announced tariffs do not directly affect services, and tariffs have historically never been applied to services due to the difficulty of tracking their cross-border flow. Nevertheless, tariffs may still indirectly impact the service sector in two ways. First, as consumer and business confidence remain volatile, consumers and businesses alike may reduce spending on non-essential services, leading to declining demand and revenues in the services sector. Second, countries may use retaliatory mechanisms like Digital Services Taxes (DST), which levy a tax on the revenues of a foreign company selling digital services within a specific jurisdiction, to respond to Washington’s trade actions. DSTs could be expected to largely impact the US economy due to the large volume of digital services exports from the US.
3. Given the need to establish multiple new teams within the geopolitical nerve center, how can organizations ensure that this strategic thinking is integrated across the broader organization?
Leading companies are increasingly using complex, highly researched geo-economic scenario planning exercises and stress tests to make long-term growth and investment decisions. If such decisions make sense under all potential future-state scenarios (or in other words, are “no regrets”), companies are typically proceeding with these moves. Decisions with more variability may be shelved for the time being.
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For more on this topic, see the articles “Tariffs and global trade: The economic impact on business,” “In a moment of tariffs, can the world find balance and trust to survive?,” and “Navigating tariffs with a geopolitical nerve center,” all on McKinsey.com.