For hundreds of years, globalization was primarily characterized by cross-border finance and the international trade of goods. Today, globalization and digitization are merging as vast amounts of information and data are rapidly transmitted around the world thorough e-commerce, social media, e-mail, and other digital networks.
According to a report from McKinsey & Company, companies must work to stay competitive as digital networks account for an increasingly large portion of the economic growth around the world. The McKinsey report explores the economic effects of digital globalization and identifies some key areas companies need to focus on for success in the age of digital globalization. This article discusses many of the main ideas from the report.
Understanding the Economic Impact of Digital Globalization
In order to determine the economic effect of digital globalization, McKinsey developed an econometric model using the outflow and inflow of finances, services, goods, data, and people for 97 nations worldwide. The analysis showed that these flows have amplified the global GDP by approximately 10 percent over the last decade compared to projected growth without the flows.
While the added value exceeded $7.8 trillion just in 2014, data flows directly produced almost one-third of this growth, which accounts for more than foreign direct investment. Indirectly, data flows introduced $2.8 trillion to the global economy by facilitating additional forms of cross-border exchanges. The report emphasizes that cross-border data flows were negligible as little as 15 years ago.
As the market for traded goods has flattened, digitization has enabled growing amounts of international e-commerce, travel, and online services. Companies are increasingly looking to eliminate long supply chains in favor of reduced labor costs and the ability to get products and services to market faster. Therefore, production is occurring more frequently in nations where buyers reside, and it’s unlikely that the international trade in goods will ever rebound to former growth rates.
Reviewing Successful Digital Strategies
With the rise of digital globalization, many of the most prominent corporations in the world have focused on developing digital platforms to connect with consumers, manage suppliers, support data sharing, and empower internal communication. Open platforms have been especially useful for connecting companies with customers and generating markets with international scale because customers can easily access goods and information from anywhere in the world. By establishing digital platforms, companies can also access new global markets without the cost of establishing on-site infrastructure.
Companies are additionally benefiting from the growing trade of virtual goods and the use of 3-D printing, which decreases dependence on widespread suppliers. Using digital wrappers, companies are even able to increase the worth of their goods. In one study, researchers found that radio-frequency identification (RFID) technology can both improve efficiency and help decrease inventory expenses by as much as 70 percent.
Analyzing the Competition
Based on the extensive impact of digital globalization, McKinsey identified five areas of focus for leaders engaged in digital dialogue, including the analysis of competition. Competition has increased with the advent of digital platforms because companies can now quickly introduce new products and services to the market, regardless of their size and location. As such, new digital enterprises worldwide are accelerating product cycles and creating pricing pressures. In the United States, digitization played a major role in the drop of exports by big multinational firms, from 84 percent to 50 percent between 1977 and 2013.
Companies also need to realize that digital platforms, data centers, and online customer resources are tools that can be applied in a wide range of industries. For instance, one of the top manufacturing companies in the United States is reinventing its primary manufacturing capabilities in order to become a global frontrunner in Internet of Things equipment. According to the McKinsey report, businesses in every sector can reevaluate their assets to determine areas of opportunity.
Simplifying the Product Strategy
Although digitization facilitates easier product and pricing customization, some well-known companies are moving towards simplified global product portfolios. The consumer technology and media industries, for example, are moving towards simultaneous international product releases because digital platforms allow consumers worldwide to immediately view offerings in other countries. In its report, McKinsey explains that strategic customization trade-offs can help offerings go viral at unprecedented levels.
In a global and digital economy, efficiency and speed to market can greatly impact business success, a fact that companies are recognizing in greater numbers. A UPS survey found that more than 30 percent of high-tech businesses are transferring their assembly and manufacturing operations closer to consumer markets so goods reach consumers faster. Companies are using digital technologies, such as digital control towers that manage global vendors in real time, to further transform supply chains.
By enabling instant communication and long-distance collaboration, digital tools give companies the power to establish virtual global teams, centralize operations, and minimize global infrastructure.
Addressing New Risks
Along with increased competition and market disruption, data security has become one of the most significant challenges associated with digitization. Companies in every industry are finding it difficult to stay ahead of hackers, so extensive protective measures are a must in the digital era. To further ensure data security, companies can test frequently and focus on priority information assets.