Five priorities for
competing in an era of digital globalization
As digital flows command a
growing share of trade and economic growth, executives must answer new
questions.
Globalization, once measured largely by
trade in goods and cross-border finance, is now converging with digitization.
Enormous streams of data and information are transmitted every
minute—circulating ideas and innovations around the world via email, social
media, e-commerce, video, and more. As these sprawling digital networks connect
everything, everyplace, and everyone, companies must rethink what it means to
be global. Our latest research quantifies the economic impact of this shift and
suggests five critical areas of focus for executives and top teams.
The new trade in bits
To measure the economic impact of
digital globalization, we built an econometric model based on the inflows and
outflows of goods, services, finance, people, and data for 97 countries around
the world. We found that over a decade, such flows have increased current
global GDP by roughly 10 percent over what it would have been in a world
without them. This added value reached $7.8 trillion in 2014 alone. Data
flows directly accounted for $2.2 trillion, or nearly
one-third, of this effect—more than foreign direct investment. In their indirect role
enabling other types of cross-border exchanges, they added $2.8 trillion to the
world economy. These combined effects of data flows on GDP exceeded the impact
of global trade in goods. That’s a striking development: cross-border data
flows were negligible just 15 years ago. Over the past decade, the used
bandwidth that undergirds this swelling economic activity has grown 45-fold,
and it is projected to increase by a factor of nine over the next five years.
Beyond creating value in their own
right, digital flows are transforming more traditional ones. Some 50 percent of
the world’s traded services are already digitized and that share is growing.
About 12 percent of the global trade in goods is conducted via international
e-commerce.3Digitization is facilitating flows
of people too, as AirBnB, TripAdvisor, and other websites provide information
that enables travel.
Meanwhile, the growth of trade in
goods has flattened. That’s a stark reversal from previous decades, which saw
it rise from 13.8 percent ($2 trillion) of world GDP in 1985 to 26.6 percent
($16 trillion) of world GDP on the eve of the Great Recession. Weak demand and
plummeting commodity prices account for a large part of this recent
deceleration, though trade in both finished and intermediate manufactured goods
has also stalled since the crisis. In parallel, many companies are
reconsidering the risks and complexity of managing long supply chains—and
placing greater importance on speed to market and other costs of doing business
and less on labor costs. As a result, more production is occurring in countries
where goods are consumed. Looking forward, 3-D technology could further erode
international trade as some goods are printed at their point of consumption.
These shifts make it unlikely that global trade in goods will resume its
previous brisk growth.
Open platforms, virtual goods, and ‘digital wrappers’
Behind the scenes, the largest
corporations have been building platforms to manage suppliers, connect to
customers, and enable internal communication and data sharing. While many
platforms are internal, the biggest and best known are more open: spanning
e-commerce marketplaces, social networks, and digital-media platforms, they
connect hundreds of millions of global users.
These open platforms give businesses
enormous built-in customer bases and ways to interact with customers directly.
They also create markets with global scale and transparency: with a few clicks,
customers can get details on products, services, prices, and alternative
suppliers from anywhere in the world. That makes markets function more
efficiently, disrupting some intermediaries in the process. What’s more,
digital platforms are helping companies that deliver digital goods and services
to enter new international markets without establishing a physical presence
there. They also give millions of small and midsize businesses global exposure
and an export infrastructure. On eBay’s platform, anywhere from 88 to 100
percent of these relatively modest companies export—compared with less than 25
percent of traditional ones in the 18 countries the company analyzed.
Also growing rapidly is trade in
virtual goods, such as e-books, apps, online games, and music downloads, as
well as streaming services, software, and cloud-computing services. As the cost
of 3-D printing declines, this trade could expand to new categories—for
instance, companies could send digital files to output goods locally. A lot of
companies already use 3-D printing for replacement parts and supplies in
far-flung locations.
Many companies are adding digital
wrappers to raise the value of their offerings. Logistics firms, for example,
use sensors, data, and software to track physical shipments. One study found
that radio-frequency-identification (RFID) technology can help to reduce
inventory costs by up to 70 percent while improving efficiency. Case studies in
Germany, including the logistics centers of BMW and Hewlett-Packard, found that
the technology reduced losses in transit by 11 to 14 percent.
Grounding the digital dialogue
Business models built for
20th-century globalization may not hold up as digitization gains ground. As
leaders take stock of the opportunities and threats, five questions can help
ground the discussion:
1. Do we have a clear view of the competitive landscape?
Competition is intensifying as
digital platforms allow companies of any size, anywhere, to roll out products
quickly and deliver them to new markets. Amazon now hosts two million
third-party sellers, while some ten million small businesses have become merchants
on Alibaba platforms. The growing trend toward “micromultinationals” is seen
most clearly in the United States, where the share of exports by large
multinational corporations dropped from 84 percent in 1977 to 50 percent in
2013. New digital competitors from all over the world are unleashing pricing
pressures and speeding up product cycles.
2. Do we have the right assets and capabilities to
compete?
Building digital platforms, online
customer relationships, and data centers is not just for the Internet giants
anymore. GE, for example, is transforming its core manufacturing capabilities
to establish itself as a global leader in Internet of Things technology.
Businesses in all industries need to take a fresh look at their assets,
including customer relationships and market data, and consider whether there
are new ways to make money from them. To do so, they will need advanced digital
capabilities, a major source of competitive advantage, and workers with
cutting-edge skills are in short supply. Online talent platforms can help
companies navigate a more global labor market and find the people they need in
far-flung places.
3. Can we simplify our product strategy?
Digitization can simplify the
tailoring of products, brands, and pricing for companies that sell into
multiple global markets. But there’s a parallel trend toward more streamlined
global product portfolios. Several automakers have moved in this direction.
Apple offers only a limited number of its iPhone and iPad models, all with
consistent design and branding wherever they are sold. Airbnb, Facebook, and
Uber have simply scaled up their digital platforms in country after country,
with limited customization. The media and consumer-technology industries are
shifting to simultaneous global product launches, since social and other
digital platforms enable consumers around the world to see, instantaneously,
what’s on offer in other countries. This development creates opportunities for
products to go viral on an unprecedented scale. Making smart customization
trade-offs, in short, is becoming an increasingly important top-management
priority.
4. Should we retool our organization and supply chain?
Digital tools for remote
collaboration and instant communication make it possible to centralize some
global functions (such as back-office operations or R&D), to create virtual
global teams that span borders, or even to forgo having one global headquarters
location. Unilever, for example, used technology solutions to streamline some
40 global service lines and create virtual-delivery organizations with team
members around the world who meet via videoconference.
Digital technologies are also
reshaping supply chains. Digital “control towers” that offer up-to-the-minute
visibility into complex supply chains, for instance, can coordinate global
vendors in real time. Since speed to market matters more than ever in a digital
world, many companies are reevaluating the merits of lengthy and complex supply
chains; logistics costs, lead times, productivity, and proximity to other
company operations now have a higher priority. According to a recent UPS
survey, approximately one-third of high-tech companies are moving their
manufacturing or assembly closer to end-user markets.6The wider adoption of 3-D printing
technologies could lead more companies to reconsider where to base production,
potentially reshaping the world’s manufacturing value chains in the process.
5. What are the new risks?
Maintaining data security has to be
a top priority for companies in every industry. It’s difficult to stay ahead of
increasingly sophisticated hackers, but companies can prioritize their
information assets, test continually, and work with frontline employees to
emphasize basic protective measures. In addition, the Internet and
international competition have cut into the window of exclusivity that
companies once enjoyed for new products and services; copycat versions can be
launched in new markets even before the originators have time to scale up.
The economic impact of digitization
is growing, and digital competition often spans borders. As digital tools
create new possibilities for building and managing a global presence, business
leaders must challenge long-held assumptions about the international
competitiveness of their companies.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-priorities-for-competing-in-an-era-of-digital-globalization?cid=digistrat-eml-alt-mkq-mck-oth-1605
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