How COVID-19 Will Change the

Geography of Competition
Three trends are reshaping global strategy and operations for the world’s largest companies.
Niccolò PisaniMay 13, 2021Reading Time: 8 min
Topics

For any business leader, decisions about their company’s geographic footprint
are crucial. Entering a foreign market requires major resources and a strong
commitment to succeed. Similarly, deciding to locate a manufacturing plant
overseas entails the careful selection of an offshore destination. A
multinational footprint also has fundamental implications for the overall
structure of a company.

Leaders are exposed to two significant errors of judgment when they

misunderstand the geography of competition. First, they escalate commitment
to geographic markets they should be retreating from; and second, they miss
out on novel opportunities to create value across borders in different areas of
the world. By getting their geographic footprint wrong, they make the
company less resilient and unfit for future global challenges.
Throughout 2020, leaders were exposed to radically divergent views on the
future of globalization and the shifting geography of competition post-
pandemic.

Beware Two Common Fallacies

Fallacy 1: The COVID-19 pandemic has caused companies to localize. The

business press tends to associate the past two decades with rampant
globalization. However, when we look closer, we find that a large number of
economic activities have continued to take place within a company’s home
country. COVID-19 has not caused companies to localize; the majority already
had a local focus before the pandemic hit.

What COVID-19 has done is cause a mindset shift about globalization. To

continue to overestimate the global nature of companies’ footprints would
contribute to a misunderstanding of the geography of competition. The home
country already played a crucial role before the pandemic, and this is set to
continue. Take the example of U.K.-based grocery retailer Tesco. In 2015, the
company sold its South Korean business, and in early 2020, it finalized its
complete exit from Asia to reinforce its focus on markets in the U.K. and
Ireland. The localization process in Tesco started well before the onset of the
pandemic. This pattern also emerges from macro indicators. For
instance, trade intensity — the ratio of gross exports to gross outputs — was
already falling in nearly all goods-producing value chains before COVID-19 hit.

Three Trends Reshaping Your Company’s Geographic Footprint

Trend 1: The home region will become even more crucial. Intraregional
trade was already on the rise before the onset of COVID-19. A data-driven
assessment of the changing footprints of the world’s largest corporations
suggests that this trend will accelerate.

My multiyear analysis of Fortune Global 500 companies finds that they have
maintained a marked regional focus on the location of their affiliates that
started in the years preceding the COVID-19 pandemic — with, on average,
roughly 70% of their affiliates located either domestically or within their
home regions. The pronounced home-region orientation emerges just as
strongly when considering where Fortune Global 500 companies generated
their sales. Comparing the sales distribution of Fortune Global 500 companies
in 2002, 2013, and 2017, it is clear that most companies remain home-region
oriented. In 2002, 88% of companies generated at least 50% of sales in their
home region — compared with 69% of companies in 2013 and 74% in 2017.2

With rising geopolitical tensions, stronger pressures from local governments,

and the necessity to pay more attention to local stakeholders’ needs and
expectations, we can expect companies to prioritize their home regions to an
even larger extent. Consider the pharmaceutical industry and how Europe’s
heavy dependence on supplies sourced from countries like China has recently
come under public scrutiny. In January 2021, France-based multinational
Sanofi completed the spinoff of six European factories into a newly listed
entity named EuroAPI — with over 1 billion euros ($1.2 billion) in annual
revenues — that will precisely focus on attracting companies that want to
increase their pharmaceutical production within the European Union. This is a
trend that we can expect to see materialize in other sectors as well.

Trend 2: Global expansion will remain an option for very few

companies.
Hardly any companies, even those among the world’s largest corporations,
were global before the pandemic hit.
A truly global reach will continue to be an option for very few companies in
the post-pandemic era. We can expect the winners from COVID-19 — many of
which are asset-light companies that effectively leverage digital platforms —
to be among the rare companies that seize opportunities for global growth.
They have the financial resources to invest on their global footprints — like
Sweden-based Spotify, a clear beneficiary of the pandemic. Spotify has taken
advantage of the growth momentum of paid-for streaming music
services triggered by COVID-19 and managed to add a record 30 million
subscribers, reaching 155 million paying customers by the end of 2020. This
was also achieved via changes to its geographic footprint. In June 2020, the
company entered Russia — the world’s fastest-growing recorded-music
market in 2019 — and 13 other countries simultaneously. That represents a
strong push to meet the company’s global ambitions, right in the middle of the
pandemic.
Trend 3: Digital technologies will drive globalization’s next phase. Pre-
COVID-19, digital technologies were already important drivers of
globalization, enabling innovation, providing access to information, and
connecting consumers and suppliers. The pandemic has further accelerated
this trend.

Focusing on e-commerce will not be enough to succeed post-COVID-19. Digital

technologies will drive globalization’s next phase and therefore determine
how companies organize their cross-border activities. For example, Germany-
based Adidas saw its e-commerce business boom, with a 50% year-on-year
uplift in online sales in 2020 because of COVID-19. Yet its digital acceleration
plan goes way beyond ramping up its online sales channel and includes
developing new digital capabilities to interact with consumers worldwide and
digitalizing its entire supply chain, from the design to the distribution of its
products. Adidas recently unveiled an ambitious digitalization plan driven by
investments of more than 1 billion euros until 2025, focusing on 3D design
and printing capabilities, computerized knitting, and robotic cutting directly
driven by data on specific user profiles. On the customer side, the company
will make further investments to equip its own retail stores with omnichannel
digital capabilities to create a seamless consumer experience across all touch
points. It is focusing on stores in a few key cities identified as strategic,
including Mexico City and Seoul, to drive superior customer engagement.

Data on the world’s largest companies confirms the dominant role the home
region played for companies pre-pandemic as well as the scarcity of true
global reach. Before deciding on their companies’ geographic footprint for the
post-pandemic future, leaders must consider the data — and not be misled by
false causalities.

QUESTION:
How has the pandemic s accelerated the adoption and
created new opportunities for companies to expand their
reach and connect with customers around the world. What
trends did you observe?
NEW OPPORTUNITIES TRENDS