Two companies. One geopolitical moment. Two very different outcomes.
After Russia invaded Ukraine in 2022, the European energy company Equinor saw opportunity in Europe’s scramble for non-Russian gas and moved fast, driving their revenue up more than 60% in 2022 alone. A leading U.S. semiconductor company had no such visibility: It didn’t see an export license revocation coming and took a significant hit to its revenue outlook.
What made the difference was preparation; specifically, whether the company had quantified what its geopolitical exposure was actually worth.
Most companies haven’t made this calculation. In a recent series of interviews with more than 15 CEOs of multinational corporations, we found leaders who were alert to geopolitical risk but uncertain how to act on it. For example, 62% of these company leaders consider U.S.-China trade tensions a material threat to their business, but only 29% have quantified the potential impact.
The default response—monitor, convene a task force, wait for conditions to stabilize—is understandable. But conditions aren’t going to stabilize. Geopolitical volatility is no longer a disruption to the operating environment. It is the operating environment.
What’s been missing is a formula to help leaders begin to form a picture of their value at stake. At McKinsey, we’ve developed one:
Each input requires deliberate analysis.
Magnitude of corporate value captures the total value of your business activity tied to a given geography. This is the sum of the organization’s revenues, assets (such as offices, production facilities, and intellectual property), and operational dependencies (such as revenue and value of products dependent on suppliers).
Geopolitical distance is a quantification McKinsey developed to express how politically aligned a market is with your home government, so leaders can understand the likelihood of disruption. High geopolitical distance raises the likelihood of trade barriers, regulatory divergence, and competitive disadvantage—any of which can inhibit revenue, drive up costs, or in extreme cases force an exit. McKinsey’s calculation is based on voting records at the UN General Assembly, and while there are other ways to quantify this relationship (such as treaty membership or international organization membership), we believe this is the richest dataset available for this purpose. Our analysis scores geopolitical distance on a 0 to 10 scale, so in this context we divide by 10 to achieve a scaling factor.
If you were to approximate this measure on your own, we recommend tracking voting alignment at the UN General Assembly as a starting point—it is publicly available and updated annually. Commercial political risk indices, such as those published by the World Bank or the International Country Risk Guide, can serve as useful supplements.
McKinsey research shows that more than 90% of multinationals are exposed to countries whose positions diverge significantly from those of their home government.
Severity adjustment captures whether shock absorbers—free trade agreements, tariff preferences, licensing carve-outs, existing supply optionality in other markets—are in place that could dampen the impact of a sudden policy shift.For example, this calculation could include components such as the share of trade between two markets that is covered by a free-trade agreement, the difference in preferential tariff rates, or the depth of critical product trade between two markets.
Not all geopolitically distant markets are equally risky; this adjustment allows leaders to distinguish between stability and volatility in distant markets. The calculation varies by market, based on the types of trade policies that exist between countries and resilience measures the company already has in place, but the result is always a score from 0 to 1, with 0 representing systems that fully absorb the geopolitical shock, and 1 representing no dampening mechanisms.
The formula has proven its value across a range of client engagements. Two examples stand out.
For a leading EU aerospace and defense company, we used the formula to assess value at stake across the geopolitical scenarios most relevant to their footprint. In most scenarios, the impact to corporate value was limited—which is useful intelligence in itself, cutting through the noise of geopolitical headlines. Where exposure was significant, we used the formula to prioritize contingency planning and identify the specific triggers that would require action.
For a semiconductor client, the formula identified significant downside risk in its concentration of operations in China—and significant upside in industrial policy incentives available in other markets. The company redirected accordingly.
The formula produces a directional sense of enterprise value at risk. That number is only a starting point. Three steps turn it into a strategy.
Run the Analysis by Function, Not Just by Region
Most companies think about geopolitical exposure at the market level. That’s not granular enough.
Technology illustrates what function-level analysis can reveal. As markets have fragmented, companies are increasingly maintaining separate technology stacks to comply with local data localization and privacy laws. For some multinationals, diverging market standards have doubled or tripled technology costs—a consequence that would not appear in a market-level risk assessment.
The same principle holds across manufacturing, workforce, and supply chain—though what counts as acceptable distance looks very different in each. A company may be comfortable with high geopolitical distance in its sales operations, where pivoting is relatively straightforward. The same distance in a manufacturing footprint, where assets are difficult to relocate and capital is at risk of becoming stranded, is a different calculation entirely.
Set a Tolerance Threshold
With an exposure figure for each market and function, leaders can define how much geopolitical exposure is acceptable—and where to reduce it. Several questions can guide this decision:
- How agile are my operations in a given geography?
- How critical are these operations to my overall business continuity?
- How fixed are my assets in this geography?
- How much growth opportunity exists here?
- Is any growth opportunity sufficient to outweigh the risk?
- What options exist to reduce exposure, and what would they cost to implement?
The answers transform geopolitical risk from a source of anxiety into a set of actionable decisions. Tesla, for example, mandated that suppliers exclude China-made materials from vehicles destined for the U.S. market. That is a hard line drawn from exactly this kind of analysis: a company that understood its exposure, set a threshold, and enforced it.
Identify Where to Act
Not all exposure needs to be reduced—geopolitical shift creates opportunity as much as it creates risk.
Emerging markets represent genuine growth opportunities—though operating there is rarely straightforward. Divergent data localization rules, unpredictable regulatory environments, and limited operational control are real costs that don’t show up in a standard market-attractiveness analysis. For companies with asset-light operations—digital services, software, customer support—the barriers to entry and exit are low enough that higher geopolitical distance may be worth tolerating. For those with capital-intensive operations in politically sensitive sectors, the calculus is different.
Industrial policy is another form of geopolitical exposure worth mapping. Global industrial policy has grown by nearly 400% in recent years—as governments offer subsidies, tax incentives, and grants to compete for strategic industries. Most companies are leaving significant upside on the table. The formula tells you where the opportunities are, where to double down, what to keep, what to hedge, and what to restructure.
A number is only useful if an organization can act on it—which requires a different kind of organizational muscle than most companies have built.
In practice, that means having:
- A live picture of where exposure stands, through dashboards that track geopolitical distance and flag automatically when thresholds are breached, fed by regional teams with intelligence about what is changing on the ground.
- A gameboard of planned actions tied to specific trigger events. Say a treaty opens a new market: the company already knows whether and how fast to enter. Or say an export control tightens: the sourcing alternative is already qualified.
- The ability to centralize decision-making rapidly when something material happens, then delegate execution just as quickly. The goal is not to predict every shock, but to have already decided what you’ll do when one arrives.
The difference between the companies that prioritize these capabilities and their competitors isn’t just what they are able to measure. It’s that they built agile organizations capable of moving on the results.
The companies that get this right don’t just measure their exposure once—they treat it as a continuously updated picture of where the world is shifting and what that means for their business. The companies that skip this step will find themselves reacting to shocks their competitors saw coming. The ones that do the math—on every market and every function—will already be several moves ahead.
This article originally appeared in Harvard Business Review.