A new globalization calculus has been saved
Cover image by: Sylvia Chang
With apologies to Mark Twain, the reports of globalization’s death are greatly exaggerated. Despite recent and seemingly seismic disruptions—a global pandemic, geopolitical hostilities, and whatever comes next—it’s unlikely that most companies will retreat from the world. However, the nature of globalization has changed, and with it, the nature of leaders’ strategic decision-making.
We asked Deloitte specialists, researchers and economists, and academics at US business schools to assess the future of globalization and ponder what leading in this new era might entail. They told us that today’s unpredictable world requires a new calculus. Rather than making decisions based primarily on cost, efficiency, and speed, executives now have to give more consideration to risk and resilience. Following years of strategic decision-making focused on “just in time” delivery, the aim right now is “just in case” preparedness.
While world events might have prompted some vacillations over the years, the overall trajectory of globalization has held relatively steady. “Globalization is a big concept that is hard to measure,” says Steven Altman, a professor at New York University’s Stern School of Business and director of its Center for the Future of Management. “People tend to have perceptions of globalization that are pretty far from reality.”1
Often, people overestimate just how globalized the world is, he says. For example, surveys from the Center for the Future of Management’s DHL Global Connectedness Index show that people think countries export more than 40% of what they produce, while the index finds that less than 30% of global output is exported. And survey respondents estimate that 30% of people live outside of the countries where they were born, but in reality, only 3.6% do.2
The center’s index has measured globalization for the last decade by tracking flows of international trade, capital, information, and people, and “we don’t usually see real dramatic swings like some of the rhetoric would suggest,” Altman says.3
Decisions around globalization often have positioned cost and efficiency as paramount. Executives may change their short-term plan in the midst of a crisis but tend to revert to their old thinking once it has passed. When the pandemic looked like it was waning in late 2021, “discussions at top levels of companies focused once again on cost management,” says Jim Kilpatrick, global supply chain and network operations leader for Deloitte Consulting LLP. As inflation increased labor, transport, commodity, and other costs, “executives went back to the old playbook,” he says. “The prior two years of focus on resilience quickly took a back seat.”4
This shift is understandable because some of the problems prompted by the pandemic seemed to be easing, with conditions returning to normal. At the beginning of the pandemic, for example, global trade plummeted. “Then we saw the fastest rebound of world trade on record,” Altman says. However, it’s worth noting that some geopolitical events, such as Russia’s invasion of Ukraine, could certainly have longer-lasting effects.
So what will the new era of globalization look like? Organizations now need a new calculus, and a company’s dependencies are an important variable. The calculus should factor in increasing geopolitical tension that heightens risks across all business areas of any organizations that do business with or source from other countries. It will likely require a granular, almost microscopic examination to identify specific risks in specific operations in specific regions—and to quickly mitigate them. It should require strategically planning for and investing in resilience.
The equation of “lowest costs plus greatest efficiencies” may no longer produce the best outcome. “Moving to lower costs was the single operating rule we all had,” says Bill Marquard, a managing director in Deloitte Consulting LLP’s Strategy & Analytics practice. “Our priority was to take as much cost out as possible. We are now in environment where the trade-off changes. Rather than just shift to lowest costs, we now have to ask, ‘Where do we need to build higher-cost resilience into the market, into our network, into our operating model?’”5
For example, if you’re building furniture in the United States for the US market—a geopolitically stable region with strong rule of law—you probably don’t need manufacturing redundancy. On the other hand, your North Carolina factory may depend on lumber from Asia or Canada. Let’s say that lumber supply is disrupted by the pandemic (Asia) or tariffs (Canada)—and then the shortage of truck drivers in the United States adds another wrinkle. All of this could mean that your customer waits 10 months for the delivery of their dining room chairs.
These are the issues many leaders should be laser-focused on, looking for ways to back-stop their vulnerabilities—for example, by lining up other potential sources for key materials or production expertise, and ensuring they have the cash or lines of credit in place to weather a geopolitical shock. “Increasingly, it makes sense for companies to buy an insurance policy against the risk of catastrophic or even not-so-catastrophic events,” says Ira Kalish, chief global economist of Deloitte Touche Tohmatsu Ltd. “And they do that by diversifying their supply chains and building more redundancy throughout their organizations.”6
Adds David Barnes, the UK-based global regulatory and public policy leader for Deloitte LLP: “This is not about making wholesale changes. It requires focus and the precision to see beyond the obvious. Focus on secondary and tertiary effects. Think through the knock-on consequences.”7
Many companies have poor visibility into these types of interdependencies. Consider supply chains: In Deloitte’s latest survey of chief procurement officers, only 15% said they could see into their second- and third-tier suppliers. Even in the first tier, only 70% of procurement officers reported they had good visibility, and only 26% felt they could predict risks in the first tier.8 (According to Dun & Bradstreet, there are some 7.6 million second-tier suppliers in Russia.9)
It goes without saying that supply chain digitization comes in key when disruptions occur, offering enhanced visibility into the issue and data-enabled approaches to address it. When the Ever Given, one of the largest container ships in the world, got stuck in the Suez Canal, holding up an estimated US$400 million an hour in trade,10 multinationals with the right technology avoided the worst impacts because they could quickly reroute supplies, Kilpatrick notes.11
But supply chain digitization also highlights the ripple effect of risks that leaders need to contend with in the new era of globalization—in this case, increasing cyber risk. Digital connectivity and value chains merit the same careful examination and added redundancy as physical ones. Today, the flow of data across borders is growing faster than the flow of physical goods across borders, according to Satish Nambisan, professor of technology management at Case Western Reserve University’s Weatherhead School of Management and coauthor of The Digital Multinational: Navigating the New Normal in Global Business.12 The World Economic Forum has projected that 60% of global GDP is likely to be digitized this year, and that 70% of new value created over the next decade will be based on digitally enabled platform business models.13
Such ripple effects show just how far into the list of dependencies leaders now need to go. As geopolitical events and other disruptions prompt more vacillations in the globalization trajectory and introduce more challenges to strategic decision-making from supply chain management to operations and beyond, investing the effort into creating redundancies and increasing visibility is time well spent. “This is not going to be quick,” Kilpatrick says. “The supply chains—the ones that really matter—will take a long time to reshape.”14 But once reshaped, they can enable you to take less time to respond when global events threaten to disrupt your business’s trajectory of success.
Lori Ann LaRocco, “Suez Canal blockage is delaying an estimated $400 million an hour in goods,” CNBC, March 25, 2021.View in Article
Cover image by: Sylvia Chang