The Great Fragmentation

European Straights, 2020-06-10

  • While many people think we live in a globalized world, their actions state the opposite

  • Globalization is not global, really. “Globaloney”

Globaloney

  • People severely misjudge [overstate] the globalization numbers (social connection, GDP % export, immigration, phone calls, etc.)

  • Peer pressure to become global from day one à many businesses are better off being #1 in their market (country, continent) than being a global nobody. But such companies never make it to the press. (example: Aviasales)

  • Techno-trances: exaggerated conceptions that technology is going to overpower in the very immediate term all cultural, political and economic barriers.

Why global?

  • Economies of scale and returns to scale the larger the business becomes.

  • Many successful tech companies are intangible (asset-light), so it’s logical to scale globally

  • Even super-huge domestic businesses (Amazon, Uber, Alibaba) seem to be global as they are well known outside their key market.

  • Global world != same apps everywhere. Different market leaders everywhere

  • However, tech adoption is overrated: Uber, etc. are not as ubiquitous as it looks as there are company cars and contracted limo services.

  • Also, it’s believed that technology can erase borders, but this hasn’t been proven.

Thoughts

  • Consumer markets are driving the growth of tech companies

o   Don’t use yourself as an example if you’re not the target of a service

o   Consumption varies between countries, and there’s no one-size-fits-all

  • A tech business is rarely more global than the users it is able to attract © Seth Godin

o   There’s nothing wrong about a domestic market where all your users are

  • A framework to reflect on the fragmented world

o   Returns: more competition in a regulated space à smaller returns

o   Divergence: local incumbents can beat multinationals locally

o   Dynamics: the rise of the local players attracts funding for the market [MK: I don’t exactly believe this if one looks at Russia]

  • Software eating the world: startups are being launched in areas where it’s hard to generate increasing returns to scale.

o   The more progress with the startups à the lower the returns

o   Diversification is essential, and EU startups with lower returns may be a safe haven for investors (not 100% of the portfolio, of course)

  • Divergence

o   Some founders prefer a global type company (media, advertising, music) as there’s little regulation (which would make scaling harder) and few assets;

o   Some founders prefer a bottom-up approach with their locally challenged businesses and penetrate local markets based on their vast expertise.

  • Growth via economies of scope [a broader value proposition]

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