Three main global strategic challenges facing companies
The future of multinational companies depends on their ability to cope with three main forces affecting globalization today: geopolitical tensions, sustainability and digital transformation. It is not surprising that these challenges are also on the agenda of the World Economic Forum Annual Meeting in Davos this year.
Until recently, multinational corporations have adapted their global strategies in response to changing consumer preferences, competitive landscapes and economic conditions. As I explain in the fifth edition of Global strategic management, all companies currently operating in different countries now need to place geopolitical issues, sustainability and digitization at the heart of their strategies to be globally competitive.
The Covid-19 pandemic and Russia’s invasion of Ukraine further accelerated these pressures, forcing multinationals to review their global strategies.
Geopolitical issues affect more industries than ever
Recent geopolitical problems, translated into trade wars, affect the process of globalization. The constraints imposed on Huawei’s development of its 5G network, the ban on exports to Iran enacted by the United States and the economic and financial sanctions imposed on Russia are just three examples.
While geopolitical issues are certainly not a new phenomenon, they have become increasingly prevalent and relevant to many different industries.
Governments, in the interest of national sovereignty, are intervening more than before. As a result, companies are changing tack and considering “friendshoring” or “ally shoring” – relocate supply chains to trusted countries with shared values.
One company that has made great strides in diversifying geopolitical risk is Taiwan Semiconductor Manufacturing Company (TSMC). As the world’s largest contract chipmaker, it manufactures chips for tech giants like Apple and Alibaba. In response to Sino-Taiwanese tensions and the US-China trade dispute, TSMC began building factories in the United States and Japan. He recently described a $40 billion plan to expand the US production center it is building in Arizona, and is in advanced talks with suppliers on setting up its first European factory in Germany, according to media reports.
Considering geopolitical concerns, TSMC recognized the need to be present in several key regions to mitigate political risk and increase supply chain resilience. Indeed, when it comes to developing and implementing a global strategy, geopolitical tensions can be as important as cost considerations and customer demand.
But it’s not just sensitive industries such as chip manufacturing that are under geopolitical tension. In the wine industry, for example, Studies show recent trade disputes between the United States and the European Union, as well as between China and Australia threatened to reduce the wine trade by nearly $340 million a year. Another clear example is how the impact of the war in Ukraine on energy prices is felt by companies in several different sectors.
Global companies need to move from a one-size-fits-all strategy to more regional strategies that are better equipped to deal with the local impact of political tensions. This does not mean that multinationals need individual strategies for each country in which they operate, but rather that different ecosystems may be needed for certain regions that simply cannot be replicated in others.
Sustainability considerations should drive strategy
Multinationals have taken different approaches to solving pressing sustainability issues. While some are content to comply with individual country regulations and standards, others recognize the need to fully integrate sustainability into their overall strategy. Forward-looking companies demonstrate their commitment to sustainability by aiming to set the highest standards everywhere, even when governments and regulators don’t push them to do so.
Energy giant Enel, for example, has made sustainability a pillar of growth and aligned its strategic plans with the United Nations Sustainable Development Goals (SDGs). As stated in the book and my case studyEnel’s objective was to create long-term sustainable value for all its stakeholders by adhering to the SDGs in its investment decisions.
The multinational used open innovation to incorporate new products and ideas from outside its own business units. “Innovation teams” – which combine innovation and sustainability – have been integrated into each business. The company then began to attract external innovation into the company with a crowdsourcing platform where thousands of “solvers” were able to provide solutions to important challenges.
Multinationals have a huge advantage when it comes to identifying and scaling sustainable solutions. An idea well anchored in the management of multinationals is that certain foreign subsidiaries become “centers of excellence” with actionable capabilities and expertise. By identifying subsidiaries that could become centers of excellence for sustainable solutions – like European countries – multinationals can develop sophisticated local solutions and scale them.
Multinationals have the potential to advance sustainability through their operations and their influence on the wider business community. By learning what works and what doesn’t in different parts of the world, these companies can come up with tailored and deployable global solutions to global problems.
Digital transformation has disrupted traditional business models
On the technological level, the world has entered fully into a digital era that permeates almost all segments of human activities: health, industrial production, entertainment, communication, research, development, etc. Digital technologies have revolutionized consumer behaviors, impacted core business models and blurred the boundaries between industries and sectors.
Digital technologies have brought major structural changes to the way business is conducted and how global companies operate. The Covid-19 pandemic has further accelerated digital transformation, forcing multinationals to quickly move their operations online and implement digital strategies.
For example, FC Barcelona relied on their digital presence through their Barca Innovation Hub to help generate revenue when Covid-19 hit. The club launched the Hub in 2017 with the aim of attracting companies, research institutes and entrepreneurs to develop innovative technologies to increase the visibility and impact of the Barça brand and create new sources of income. Hub key areas include healthcare and wellness, sports performance, big data and fan engagement, smart facilities and social impact.
My recent case study details how FC Barcelona accelerated their content sharing strategies and training platform during the pandemic in a bid to become even richer digitally. For example, the club launched a freemium TV streaming service, a film studio, a digital magazine and entered into a strategic partnership with Spotify.
A truly digital global business has a competitive advantage through the data it collects. Multinationals can use data to better understand their customers, identify trends, identify market gaps, and assess the potential for new products or services.
Digitization has also paved the way for “born global” companies – like Airbnb, Netflix, Spotify and Uber – which become multinational very soon after their creation. In order to stay competitive, traditional global companies are feeling the pressure to adapt and innovate.
In today’s uncertain environment, I hope my book can help business leaders understand and respond to the new pressures global businesses are facing. In the past 15 years that I have taught global strategic management, much of the conversation has focused on executing global strategy. Now he has turned to revising and redesigning those strategies. Businesses looking to compete globally need to tear up the rulebook and go back to the drawing board.