Globalization is not what it was even a decade ago. What links the world together has changed fundamentally—and for many companies, succeeding in this new operating environment will require rethinking many past decisions and assumptions.
The 20th-century version of globalization was defined by rapidly growing trade in goods, as major multinationals created supply chains that spanned the world. Today growth in global trade has flattened, and it looks unlikely to regain its previous peak relative to world GDP anytime soon. The same is true for cross-border financial flows.
But globalization hasn’t gone into reverse. It’s gone digital. Cross-border data flows have grown by a factor of 45 over the past decade, and they’re projected to post another ninefold increase by 2020.
Recent research from the McKinsey Global Institute explores this new era of digital globalization. We find that over the last decade, global flows of goods, services, finance, people, and data have contributed at least 10% of world GDP, adding $7.8 trillion in 2014 alone. Perhaps most striking is the fact that data flows already accounted for $2.8 trillion of this value—exerting a larger economic impact than the global trade in physical goods. This is a watershed moment, given that the world’s trade networks formed over the course of centuries, while cross-border digital flows barely registered just 15 years ago.
What exactly makes up these cross-border digital flows? Corporations generate a large share of internet traffic through private networks used to share information and manage their international operations. And consumers generate a significant portion as they communicate, search, shop, watch videos, and post their own content on social networks, online marketplaces, and digital media platforms. The biggest of these platforms can support hundreds of millions of users; in fact, Facebook users now outnumber the population of China. MGI estimates that 914 million people have at least one international connection on social media, and 360 million take part in cross-border e-commerce. For businesses, these open platforms create efficient global markets with a huge base of potential customers and built-in ways to reach them. Already 12% of the global goods trade is cross-border e-commerce, and half of the world’s traded services are delivered digitally. These transformations enable small and medium-sized enterprises around the world to compete head to head with larger industry incumbents.
Companies now have unprecedented opportunities to achieve both global scale and efficiency. But to realize them, many will have to shed old assumptions, particularly in the five areas outlined below.
Rethink your global footprint and organizational structures. Multinationals once expanded by building a replica of their entire firm in each country where they operated. The result was often a global organization bogged down with redundancy, additional costs, and a fragmented corporate culture. But now digital technologies allow companies to globalize in a leaner and less capital-intensive way. By creating virtual teams that collaborate remotely, companies can expand into new markets without losing agility. They have greater flexibility to hire specialized talent and follow pockets of demand growth wherever they find them. Functions such as human resources can use self-service digital platforms and intranets to provide consistency on overarching issues while regional managers control decisions such as hiring. One option is to establish global hubs for some backbone operations in combination with smaller sales and marketing teams around the world. Companies that deliver digital goods and services can go even further, entering new international markets without establishing a physical presence at all. When Netflix created a subscription model for online streaming, it was able to add customers in 190 countries by using the public cloud.
Consider how global value chains are evolving. Companies have an opportunity to redraw supply chains and customer channels as digital globalization redraws industry value chains. Massive global platforms open up new possibilities for procurement, allowing a manufacturer in Tennessee to find the best deal on components from a small supplier in Thailand. For the biggest multinationals, digital tools can orchestrate a multitude of vendors stretching around the globe. Some use control towers that look straight out of NASA mission control; these systems synthesize information from sensors, actuators, RFID tags, GPS tracking, and other sources into dynamic models that help managers work around bottlenecks. But some companies are emphasizing speed to market and are moving away from the complexity of long global supply chains altogether—and if 3D printing is adopted more widely, it could change the very definition of what constitutes an intermediate good.
Sharpen product strategies for a more digitally connected world. Some companies that sell into a range of global markets have deep product portfolios with tailored offerings that appeal to local consumer preferences and are sensitive to their price points. Digital tools can provide the kind of granular market insights needed to make this approach successful and manage the resulting operational complexity. But many companies, particularly in tech, take the one-world, one-product approach. Apple offers just three models of its iPhone and iPad, all with consistent design and branding no matter where they are sold. Google has search, mapping, and email products that are not designed with any particular set of regional customers in mind. Facebook, Uber, Airbnb, and various e-commerce marketplaces have simply scaled up their digital platforms in country after country with limited customization.
Go big. This is now the era of global product launches, and Hollywood is at the forefront. For many years, studios waited until after a movie’s U.S. run to release it overseas, where the foreign box office could still compensate for domestic disappointments. The highest-grossing movie of 1995, Die Hard: With a Vengeance, was screening in only three countries within ten days of its U.S. release date. In 2015, Star Wars: The Force Awakens launched in 80 countries during its first week, and more than half of its record-breaking debut weekend box office came from overseas. The information transparency offered by the internet also means that consumers around the world can see reviews immediately. There is no longer an opportunity to tweak and remarket; if a movie bombs in one place, it will be a global bomb. This kind of strategy increasingly applies beyond the multiplex. Companies in media, fashion, and trend-driven consumer industries are willing to bet big because the flip side of the risk is the ultimate prize: the chance for products to go viral on a global scale.
Understand the new competitive landscape. The competitive landscape is growing more unpredictable as digital platforms such as Amazon, Alibaba, and eBay are empowering companies of any size, from anywhere on earth, to roll out products quickly and deliver them to new markets. The internet is ramping up pricing pressures, shortening product cycles, and creating a more global labor market in which companies have to compete for scarce technical and managerial talent. The battle for market share increasingly boils down to which company has the most sophisticated digital assets and capabilities. These digital leaders are using technology to capture global economies of scale and spot international market opportunities before anyone else.
This article originally ran in Harvard Business Review.