Can your company remain global and if so, how?

Rising geopolitical tensions are testing the resilience of global organisations and challenging existing growth strategies. Global conflicts and escalating US–China competition have the attention of the executive suite and the boardroom. Global business leaders are asking, “What is the future of the global corporation? Do we need to fundamentally shift strategies and structure?”

One emerging aspect of geopolitical resilience that increasingly arises in our conversations with business leaders is one that we refer to as “structural segmentation.” Structural segmentation describes a cluster of moves that global corporations are considering to mitigate geopolitical exposure, to enable locally informed decision making, and to clear a pathway to safe, stable growth.

Structural segmentation for geopolitical resilience

Structural segmentation can take several forms across a continuum. Full structural segmentation involves localising parallel activities in multiple locations across the world. Factories, for example, may produce only for the regions in which they are located (often in a region or regions that have higher “geopolitical distance” from the company’s home market).

As an alternative, some companies are relocating toward home or geopolitically aligned countries, at least in select domains. In general, this involves preserving global connections—for example, housing most technologies in a home country, while creating a minimal viable footprint in geopolitically distant countries. In some cases, however, this might include a major move, such as housing all R&D in the home market.

The intent is to respond to geopolitical realities while preserving the benefits of global reach and seizing opportunities for resilient growth. Just as scenario planning is not a crystal ball, so structural segmentation is not a magic wand. It is, however, a strategic and operational choice that companies may contemplate to survive and thrive in a new era. Although there is a range of ways multinationals can employ segmentation, there are six main areas:

Reshaping production and supply chains for resilience

Multinational companies that opt for structural segmentation in operations seek to make sure that production and supply could survive if one region were to be cut off. Escalating geopolitical competition and disruptions induced by COVID-19, weather, and conflict have made supply chains a top priority issue for C-suites and boardrooms. Organisations are deploying or exploring a variety of segmentation strategies, considering both geopolitical exposures and concentrated production or supply chain footprints.

Ring-fencing research and development

With technology top of mind for business and world leaders, multinationals are having to adapt their R&D footprints. They can no longer rely on open access to talent and should balance geopolitical, regulatory, reputational, and commercial factors. Organisations may wrestle with questions such as where they should conduct R&D, who is conducting it, and with whom they should share it.

Derisking technology stacks and data lakes

Increasingly, other companies are structurally segmenting their enterprise technology stacks in various forms. Collectively, the moves seek to adapt technology and data location to geopolitical and regulatory demands. Many are shifting toward structural segmentation not just to accommodate individual geographies but also to take a holistic approach to managing broader geopolitical risks, including those related to intellectual property theft and data appropriation.

Creating decision-making distance through legal entities

Organisations are rethinking the role of legal entities and the part they play in navigating geopolitical challenges. Business leaders who have revisited their entity structures cite diverging regulatory requirements, increased in-market risk, and the intent to be seen as a local player.

Safeguarding capital invested in geopolitically distant regions

Geopolitical shifts affect capital flows. In this environment, many global companies are selecting some form of structural segmentation, strengthening the geopolitical lens through which they examine capital decisions—be it the capital intensity of their business models or the capital structures by which they are financed.

Securing people and connections

Business leaders know that healthy organisations that are inclusive and deeply connected can better deal with external change and crises. The challenge today, however, is fostering that sense of inclusivity and connection when geopolitical risk mitigation can demand segmenting the organisation’s global operating model in ways that create purposeful distance.

Broadly, we find that businesses typically adopt one of two postures—recommitting to a single global strategy or moving toward structural segmentation—and use it to guide decision making across each of the six dimensions. That said, companies do have the flexibility to follow a singular approach across all areas or otherwise adopt a more mixed set of tactics.

Structural segmentation is today’s logic, one that business leaders are exploring both to navigate geopolitical headwinds and to potentially secure growth. Indeed, navigating the new geopolitics and geometry of global trade requires business leaders to conduct multifactorial calculus and at times develop market-differentiated approaches to structural segmentation. What structural segmentation is not, however, is a magic formula to eliminate all risk. Geopolitically distant regions by their nature present risk, as well as opportunity. Multinational companies must be prepared for greater scrutiny of their operating models globally, no matter how thoughtful a segmentation approach they may employ.

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This article is a summary of the May 17, 2024 article published by McKinsey Quarterly, “Can your company remain global and if so, how?”