Navigating complexity

Global trade flows and investment patterns are shifting and national security priorities are impacting supply chains and economic relationships. Meanwhile the global regulatory environment for emerging technology is growing more complex and fragmented.

CEOs are spending more time having to consider the implications of change beyond their marketplace. As political leaders show an increased appetite for policy interventions, global security arrangements are changing as many conventional political certainties evaporate. Conflict escalation is on the rise as long standing security arrangements are disrupted.

In addition, emerging technology such as AI is subject to a complex and fragmented regulatory environment evolving in a highly inconsistent manner with related additional costs and uncertainty for business. Notwithstanding a reduction in inflation worldwide, complexity has had the effect of making inflationary pressures stickier and more structural than markets had expected.

A recent KPMG Eurasia group risks report considers that geopolitical developments are likely to continue to influence supply chain strategies and shift investment destinations. It describes a world where no single country or group of countries is able to provide global leadership and generate consensus on how the rules of the international order should work. Business leaders are having to act in an environment hampered by weaknesses in global governance, a rise of conflict, and challenges to multilateralism and free trade. 

Against this backdrop and in terms of the likely risks to company growth over the next three years, supply chain issues rank in the top three risk concerns for CEOs globally and both the Republic of Ireland (ROI) and Northern Ireland (NI). It is the one risk topic where there is a strong degree of consistency.

Worldwide, CEOs are most concerned about operational risk, with supply chain issues their second greatest concern followed by cyber security. In ROI and perhaps reflecting the globally traded nature of the economy, supply chain risk ranks as the biggest single issue, followed by operational risk and reputational risk. Meanwhile CEOs in NI rank emerging and disruptive technology, regulatory concerns and supply chain matters as their greatest risks.

The consistency of supply chain risk as a universal issue is highlighted by the fact that since 2019, almost 3,000 additional global trade restrictions have been imposed, almost tripling in the past four years alone. Swedish retail giant IKEA provides just one example of shifting perspectives as it is reported to be investing in its North American manufacturing capacity to mitigate against continued global shipping disruption in areas such as the Red Sea.

For businesses on the island of Ireland, managing supply chain risk means staying aware not just of the potential of post-Brexit related issues, but highlights the need to upgrade information required to navigate trade policy restrictions elsewhere and consider alternative strategies to prevent potential disruption.

For Colm O’Neill, Head of Energy, Utilities and Telecoms at KPMG in Ireland, the implications for Ireland in the context of supply chain challenges are most acute when you consider that we still import over 80% of our energy requirements. We have the potential to be energy independent and to turn Ireland into a 21st century industrial powerhouse as we develop the full potential of our offshore wind capacity.

O’Neill says that “The energy transition for example provides the exciting prospect of energy independence, mitigating supply chain risk and the potential to transform our industrial base while creating new jobs.”

At the macro level, KPMG has identified three major trends likely to impact business operations in the medium- to long-term: the complexification of international trade, the rise of global conflict and the growing gap between technological developments in artificial intelligence and its regulation.

Our research shows that globally and based on interrelated challenges, 69 percent of CEOs have already started to adapt their growth strategies over the next three years up from 64 percent in 2023. In ROI the corresponding figure is up to 63 percent from just over half (53 percent) in 2023. Meanwhile we have seen the greatest shift in NI where the level of action already taken has gone from 63 percent to 93 percent in the last twelve months.

Looking at these areas in more detail, we see a world where global trade and investment patterns are shifting. The future of supply chains and economic integration is becoming more dependent on national security priorities and increased policy interventions. Business leaders are also having to deal with the impact of conflict escalation, protectionism and disruption. Despite this reality, relatively few corporations have implemented resilience strategies.

Meanwhile AI is likely to remain a board priority for the foreseeable future. However, the absence of a universal global regulatory framework for AI remains a challenge for business. Major jurisdictions are developing their own regulatory framework with little global consistency.

For example, the EU has introduced the first comprehensive AI legislation, the EU AI Act. This leaves companies having to build internal safeguards against possible external threats and disruptors, whilst leveraging the significant potential benefits AI can deliver. Moreover, maintaining a human-centric view of AI whereby employees and customers feel safe engaging with a business will be essential to long term adaptation.

In parallel, the changing nature of cyber risk remains a continued threat with no absolute immunity as an increasing number of local and international businesses can testify.

We asked CEOs about their top operational priority to achieve growth objectives over the next three years. Understanding and implementing generative AI across the business including upskilling of workforce and streamlining processes was cited as the number one focus by CEOs in both ROI and NI (27 percent in both jurisdictions) as compared with only 13 percent worldwide.

However, the related ambition of advancing digitisation and connectivity across the business was the number one priority worldwide and the second most important priority in ROI where improving the customer experience ranked third. Meanwhile in NI the other top-ranking issues were reconfiguring supply chains and pursuing inorganic growth both tied as the second greatest priorities.

Is it possible that the ability of CEOs to have sufficient insight across the business agenda is being overstretched? Niall Savage, Head of Audit Markets at KPMG in Ireland, cautions against generating a long list of growth initiatives. He notes that no different to recent new or emerging issues like cyber, ESG and post pandemic supply chain disruption business leaders are unlikely to have personal experience of AI or indeed have the necessary skills in-house.

The time needed to get up the curve may divert focus from the business while not fully meeting the enormous AI challenge in a timely manner. Savage says, “if you’re not already both excited and worried by AI then you urgently need to develop an understanding of the opportunities and threats it presents, by upskilling your people and bringing in third party insight and expertise”.

Meanwhile, one Harvard Business School Review suggests that as an executive team’s priority list grows, revenue growth declines relative to its peers. On a positive note studies suggest that the reverse is also true: executives with the most focused set of strategic priorities (one to three priorities) were most likely to say they had achieved above-average revenue growth.

CEO growth expectations for their own businesses are high. In fact 97 percent of our ROI respondents and 70 percent of our NI respondents (54 percent worldwide) expect three year earnings growth of 2.5 percent and more. So what of the role of the board in helping propel those expectations into reality while dealing with complexity?

Ryan McCarthy leads the Board Leadership Centre (BLC) in Ireland in addition to his role as an audit partner at KPMG. McCarthy says board effectiveness has come under scrutiny like never before. “Two issues keep coming up in our conversations with members and senior board members. One is that of board effectiveness or performance, and the other is of board composition and they are directly related to each other.”

According to McCarthy, “Companies have become more sophisticated in how they think about boards, how they think about the balance of skills, and critically - how they think about diversity, and especially diversity of thought.”

McCarthy says that for good reason boards have been under understandable pressure to become much more diverse. “Conventional wisdom has considered gender and ethnicity for example. We’re now also seeing growing emphasis on diversity of thought. Not for its own sake, but because genuinely diverse perspectives can make a board more considered and help it perform better.”

When it comes to how well equipped the board is for leading on risk, Ryan McCarthy also cautions on board composition. “Just because someone has had a successful career in a previous life doesn't necessarily mean they’re best qualified to deal with a crisis that might hit the company whose board they serve on.”

McCarthy also believes boards need to assess if they need deeper support and, in the case of businesses from this island operating internationally, to consider the value of having overseas perspectives, "particularly in light of continually evolving global complexity and risk".

Actions to consider
 

CEOs are dealing with issues often beyond their core competencies. Reflect on what you are unsure of and get support and insight where you need it.

Consider adjusting your view of perceived geopolitical risks - however unlikely some possible outcomes may seem today. For example, assess the impact of potential tariffs to stress test the robustness of your plans.