The True Nature of Geopolitical Risk (What Are Companies Dependent On?)
The True Nature of Geopolitical Risk (What Are Companies Dependent On?)
Author: Yasunori Nakano
Field: Management Strategy
Classification: Free Version
Created: 2026/3/10
Revised:
◆ Theme
ISO 9001:2015 requirements include "4.1 Understanding the organization and its context," which serves as a guideline for "6.1 Actions to address risks and opportunities." However, if SWOT analysis is performed too casually, the content becomes general and abstract, failing to address risks specific to the organization.
This document examines the nature of the most abstract of these, "geopolitical risk," and what it means to address such risks.
◆ Handling the term "risk"
The term "risk" appears throughout the standard, but its definition is merely "the effect of uncertainty," and even looking at the notes, one can only say that the ambiguity increases further.
I explain it as "business prerequisites for conducting operations" and "events that influence the future." Naturally, "the fact that parts are imported from overseas," "production by personnel skilled in handling the latest equipment," and "a specific customer accounting for 80% of our sales" are all prerequisites, and the loss of such things would "influence the future."
However, I am often surprised when I give this explanation. On the front lines, the focus is on accidents, disasters, and injuries (falls, fires, safety management) or inconvenient problems (delivery delays, quality defects), and eyes are not turned toward the factors that prevent the achievement of objectives (one-person operations, insufficient training periods, equipment defects, etc.).
Do not write about events inside or outside the organization, but rather your company's dependency structure.
If this is not satisfied, the aforementioned mismatch will occur.
◆ The danger of the term "geopolitical risk"
There are two dangers in grouping things under "geopolitical risk."
The first is that "geopolitical risk," which deals with world events in the first place, cannot have its occurrence controlled. Wars, regime changes, pandemics, and large-scale disasters cannot be stopped. Therefore, if it is simply labeled as "geopolitical risk," countermeasures are limited to the level of "gathering information" or "being careful," losing their effectiveness.
The other is that "geopolitical risk," which groups risks by "events," causes one to be distracted by the occurrence of various factors (politics, military, etc.) and lose sight of the impact they have on one's own company. The term "geopolitical risk" cannot clarify the "risk" itself.
Now, let's explore what these geopolitical risks look like when viewed structurally.
◆ The Trump administration's invasion of Iran
The Trump administration's invasion of Iran shocked the world. Furthermore, the closure of the Strait of Hormuz, a key chokepoint, has had a major impact on the economy. This has resulted in high crude oil prices and turmoil in the stock market.
As stated in this article, "Expectations have risen that if crude oil prices remain high, it will be a blow to the economies of regions with high dependence on energy imports, such as Japan and Europe," showing that the impact is significant.
However, it is not appropriate to view this simply as "geopolitical risk" using the simplified term of Middle Eastern conflict. It is necessary to clarify your company's dependency structure based on what is actually happening. In other words.
What is happening: Blockade of the Strait of Hormuz
Dependency structure: Dependence on Middle Eastern raw materials
If you focus on the structure, the countermeasures would be
Diversification of suppliers
Inventory strategy
Alternative materials
Domestic procurement
and so on. By translating this into strategic issues, you can respond to the risks.
◆ China Risk
Recent measures taken by China against Japan include
Export restrictions on rare earths, etc.
Travel bans to Japan
Suspension of imports of marine products
and so on.
These are often collectively referred to as "China risk," and the logic that countermeasures are important is frequently discussed.
Tokyo Shoko Research conducted a survey on the "impact of and countermeasures for deteriorating Japan-China relations" just before the House of Representatives election on February 8. In response to the question, "Tensions between Japan and China are rising; is your order volume (sales) being affected by this?", 7.6% (368 companies) answered that "orders have already decreased," and 19.0% (923 companies) answered that "orders are likely to decrease in the future." A total of 26.6% (1,291 companies) responded that there is a negative impact, revealing that one in four companies expects a decline in sales.
However, this too must be structured and organized.
First, there is the overall dependency structure.
1. Procurement dependency
We procure specific raw materials (because they are cheap) from China, such as parts, raw materials, rare metals, and electronic components. This is the source of our price competitiveness.
2. Production dependency
We have established production bases in China based on the premise of cheap labor and are dependent on them. Any change in regulations will cause a lack of operational stability.
3. Market dependency
If sales in the Chinese market account for the majority, we will be significantly affected by boycotts against Japan, import restrictions, etc.
Are these the main dependency relationships?
Therefore, if your company's dependency structure is
Procuring 80% of electronic components from Chinese manufacturers
orFor products manufactured at Chinese OEM factories,
Procurement dependency → Supplier diversification
Production dependency → Production base diversification
Market dependency → Reconfiguration of sales portfolio
are examples of countermeasures.
◆ The Global Problem of Declining Birthrates
I came across some rather provocative news.
Of course, this does not immediately dictate the future of the country, but such a rapid decline is symbolic. The rapid aging of the population in China has already been covered in the news many times, and it is said that South Korea's low birth rate is a figure that will determine the country's future. Although they are holding steady, even Eastern Europe and Southeast Asia are said to be entering a slowdown.
About 50 years ago, the 'population explosion' was seen as a problem and was taken up in the Club of Rome's 'Limits to Growth,' but now it is considered that we have reached a turning point called 'population decline.'
While declining birthrates are different from war or diplomacy, they represent a 'change in global structure' just like geopolitical risk, in the sense that they alter the fundamental conditions for businesses. Therefore, it is necessary to clarify and structure our company's dependencies regarding this as well.
1. Relocating factories to low-wage regions: The population explosion in so-called developing countries often results in low wages due to low national power, and relocating factories there was a way to increase price competitiveness. This is the cornerstone of the strategy for many global companies.
2. Market strategy based on local production for local consumption: Another reason for placing factories in developing countries is the massive consumer market. If population growth can be expected, there is a growing market there, and by deploying products that local companies cannot provide, exclusive business can be developed.
If the dependency on low-wage labor, the dependency on markets premised on population growth, and the dependency on volume expansion in response to the 'trend of declining birthrates' occurring worldwide are structural, then the countermeasures for them are
Redesigning labor structure: Promoting automation and the use of AI + robotics
Transformation of market structure: Shifting to high-value-added services and expanding customization services
Redefining demand: Responding to the elderly market and shifting focus to labor-saving businesses
and so on.
◆ A Shift from Concentration and Selection
A recent characteristic of 'global events,' including geopolitical risks, is the unpredictability and the resulting lack of stability. Business models that assume stability must also be reviewed.
Even if "selection and concentration" and "economies of scale" are not wrong, they cannot cope with changes in the situation where dependencies are missing as they are. The solutions are the following three points.
1. Multiplexing: Originally, it is impossible to cover the entire value chain in-house. Therefore, the decentralization of functions is generally carried out. If outsourcing, prepare alternative suppliers instead of just one company. Similarly, do not depend on a single customer, and have multiple procurement routes (suppliers, transit points, etc.). As shown in "Ambidextrous Management," explore existing businesses and new businesses that will replace them in parallel. It is about ensuring that the business does not stop due to a single disconnection.
2. Strengthening Mutual Functional Networks: Each multiplexed entity must function as an independent module. Instead of one company acting as the protagonist to control other modules, they must be given the authority to act on their own will. Otherwise, dependence on other companies becomes a structural risk. On the other hand, a network design where mutual assistance functions naturally is necessary. Sharing philosophy, strengthening communication, and building insurance mechanisms are also possible.
3. Internalization of Margin: Such decentralization and networking of modularized corporate functions are not compatible with "efficiency" to the limit. Inevitably, duplication occurs. Also, research-based elements and proactive investment initiatives do not lead to immediate fruits. And if efficiency is emphasized, 100% operation is always required, resulting in a loss of resilience. I recommend the idea of running the business at 80%, using the remaining 20% for investment in the future, and preparing it as a buffer for response capability in emergencies.
This will be the strategy for the literal VUCA era. Please think about it.
Digression