Getting to Global

Over the next 30 years, geographic and regulatory barriers will fall, electronic distribution will start to parallel and even to bypass physical distribution, installed capacity will become obsolete before it is depreciated, and focused competitors will attack like piranhas. Companies will have to restructure or die. Truly global markets now produce and consume about 20 percent of world output--about $6 trillion of the planet's $28 trillion gross domestic product. Within 30 years, as that GDP expands to $91 trillion (assuming an overall real growth rate of 4 percent), global markets could multiply 12-fold, reaching about $73 trillion, more than 80 percent of world output (Exhibit 1, on the next spread). Economic integration, the force driving this expansion, will promote the formation of global markets in accounting, chemicals, food, health care, the mass media, pulp and paper, telecommunications, and many other industries. Indeed, more integration will take place in the next 30 years than occurred in the previous 10,000 or more. Companies operating in these future global markets will have profit opportunities worth hundreds of billions of dollars. The annual pretax earnings of, for example, the global personal financial services (PFS) industry, now standing at some $300 billion, will double within a decade. [2] At the same time, the world's PFS markets, until recently segmented by regulation and technological limitations, so that no single participant captures more than 3 percent, or $9 billion, of the global profit pool--will integrate and become accessible to all. Thus any company that can capture 10 percent of the global PFS market can look forward to annual profits of $60 billion. [3] In a world without economically significant geographic boundaries, the rules are going to change. The good news is that companies will have access to the world's finest resources: the most talented labor, the largest markets, the most advanced technologies, and the cheapest and best suppliers of goods and services. The bad news is that the risks will be high because every business will have to compete against the world's best, and integrating markets are volatile and uncertain. When companies that now dominate their national and local markets face white-hot competition, they will have to realize that their so-called global strategies have really been mere international expansion tactics. In the coming transitional decades, the geographically constrained economies familiar to us today will coexist with the emerging global economy. Although the picture will be confusing, confusion creates opportunity. To understand its nature, it is necessary first to grasp the way geographic barriers have influenced the character of industries and markets, as well as why and how these barriers are falling. The power of geography In Guns, Germs, and Steel: The Fates of Human Societies, [4] the physiologist Jared Diamond argues that geography is the key to the evolution of human societies. Diamond's theory prompted us to think about the influence of geographic constraints on the development of different industries and on competitors within them. We mean not just physical obstacles but also symbolic barriers, such as constraints on interaction (differences in language, standards, and cultural norms) and legal and regulatory obstacles (tariffs, capital controls, and restrictions on products, markets, and labor). In a world constrained by geography, successful businesses obtain privileged access to markets. Different companies, like different societies, have natural advantages derived from their geographic starting points-in particular, differences of access (determined by the size of the markets that companies can access for technology, suppliers, and labor), opportunities to specialize, and the ability to achieve scale. Greater access means greater specialization (the organization of work so that those most skilled at each activity undertake it) and greater scale (spreading fixed costs over a wider base). …