Leading Off: A leader’s guide to the business impact of tariffs

ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Brought to you by Alex Panas, global leader of industries, & Axel Karlsson, global leader of functional practices and growth platforms

Welcome to the latest edition of Leading Off. We hope you find our insights useful. Let us know what you think at Alex_Panas@McKinsey.com and Axel_Karlsson@McKinsey.com.

—Alex and Axel

Volatility and caution remain high as business leaders continue to evaluate the potential impacts of tariffs and trade controls on their organizations and on the global economy. Last week, we highlighted one move that companies can make to navigate the situation: creating a geopolitical nerve center to track developments in global trade and coordinate their responses. This week, we consider the actions that leaders can take to put their companies in a strong position for the long term, even in an evolving economic landscape.

AN IDEA

An image linking to the web page “Tariffs and global trade: The economic impact on business” on McKinsey.com.

Assess your position

While business leaders are hoping for clarity on the global tariff situation, they cannot simply take a wait-and-see approach—or focus only on more tactical, short-term responses. McKinsey’s Cindy Levy, Shubham Singhal, and Zoe Fox suggest that leaders take three steps to position their companies to thrive in this challenging environment. First, they can assess how tariffs will affect their competitive advantages and growth prospects. Second, organizations can define both their strategic postures and the actions that could help them seize the business opportunities that trade-related changes may present. Finally, leaders can analyze multiple potential scenarios and pressure test different strategic moves they may need to make. “With this view, a company’s leadership team can make proactive decisions to navigate tariff uncertainty while sustaining their company’s resilience and growth,” the authors say .

A BIG NUMBER

That’s how many value drivers corporate leaders should continually evaluate as part of a proactive approach to navigating geopolitics, according to McKinsey’s Cindy Levy, Shubham Singhal, and Matt Watters. These include tariffs, subsidies in support of national industrial policies, and potential government investments in geopolitical allies across various business domains.

A QUOTE

“The premise of a fully globalized world … is now in question, and companies should respond.”

That’s McKinsey’s Andrew Grant, Michael Birshan, Olivia White, and Ziad Haider on the challenges of being a global company in today’s uncertain environment. The authors suggest that organizations can build resilience by conducting geopolitical-scenario planning and upgrading their boards’ capabilities around geopolitical risks. They also can pursue “structural segmentation,” or “a cluster of moves that global corporations are considering to mitigate geopolitical exposure, to enable locally informed decision-making, and to clear a pathway to safe, stable growth.” Structural segmentation can involve coordinated actions across six domains: operations, R&D, technology and data, legal entity structure, capital, and people.

A SPOTLIGHT INTERVIEW

Business leaders who may feel overwhelmed by the degree of constant global change have good reason. “This is probably the most complex international environment in 80 years,” says Council on Foreign Relations President Michael Froman. In an interview with McKinsey’s Shubham Singhal, Froman adds, “We live in a fragmented world, and it’s likely to become more fragmented.” He says that leaders should consider several key issues in this evolving environment, including their dependencies on certain markets, the impact of government protectionism on supply chains, and the interplay between national security and economic concerns. The long-held view of a strong economy as an enabler of national security is “a little bit flipped on its head,” Froman observes. “Increasingly, we’re looking to economic tools as tools of national security—for example, export controls to keep the most advanced chips out of the hands of our competitors and adversaries so that we can maintain an advantage and a lead on artificial intelligence,” he says. “That could have military and intelligence implications as well as foreign investment restraints.”

TAKE COURAGE

An image linking to the web page “Strategic courage in an age of volatility” on McKinsey.com.

The influx of recent global challenges that organizations have faced—from the COVID-19 pandemic to armed conflicts to rising inflation—has shown that leaders can take myriad approaches to dealing with uncertainty. Leaders who demonstrate strategic courage—meaning, a combination of prudence and boldness—are best positioned for success, according to McKinsey Global Managing Partner Bob Sternfels and Senior Partners Ishaan Seth and Michael Birshan. Previous McKinsey research shows that defense-focused organizations tend to perform in the middle of the pack, while offense-minded companies often wind up with a mix of big wins and losses. The authors say that courageous leaders blend both approaches. “As they start to create value from volatility, we see the ambidextrous management teams thriving rather than merely surviving in this environment,” they note.

Lead by being proactive.

— Edited by Eric Quiñones, senior editor, New York

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