Business model transformation on the road to Global Business

Any entrepreneur looking to promote their business will sooner or later come to understanding that operations exclusively in the local market will not suffice, even if this local market is as vast as China. Going beyond the limits of the domestic market is both a challenge and gateway to exponential business growth. The worst nightmare for an entrepreneur seeking to enter the international market is to fail, to be unsuccessful in other markets.

 But this happens all the time. Companies enter international markets, but not many succeed. Why is this happening? What prevents a generally successful local company from being triumphant in new markets?

 It seems to me that one reason is the failure of top officials to comprehend that entering any new market entails mandatory transformation of their company’s business model and envisages the formation of de facto new strong business models in each foreign market. You cannot enter other markets without changing the business model, no matter how successful it may be locally, at least because this business model will work differently in a changed market and competitive environment.

 What is a business model?

A business model is essentially a way to create value for consumers that a company follows in order to make a profit. A business model inherently answers the question “How can we sustainably deliver a product (service) to our customers?”, “sustainably” meaning a way of producing and spreading value that will keep the business sound for a long time.

 In order to provide a schematic yet detailed description of a business model, it is enough to answer the eight key questions.

 1. Who are your key customers? How can you describe their needs and what drives their purchases?

2. What are the key contact points with your key customers?  Contact points are understood as numerous and diverse situations, locations and interfaces where customers come into contact with the company, the key ones being those where customers make up their mind to cooperate. These may include packaging of goods, active and passive sales teams, Instagram feed, or the cigar club that a company owner frequents and where he receives orders for his business from his club mates.

3. Which key partners strengthen your business and are indispensible for you to be successful? Partners are individuals and legal entities that you may need to reduce business risks, gain access to key customers, provide customers with additional services and values, have access to know-how and technologies, ensure greater control over the quality of a product or service.

4. How do you make money in your business? It is not really a simple question, although most people will have a ready answer — for example, in the retail business they will say “It is all about trade mark-up.” But “how” implies something different here. For example, all restaurants make money on the difference between the price of purchased groceries and the price of sold dishes, bearing certain costs associated with cooking and providing services to their customers. However, McDonald’s gets its profit from the high turnover at the restaurant; therefore, the sooner a visitor leaves the table, the better. On the other hand, a beer restaurant aiming to attract companies will seek to earn a high average corporate guest check and will do everything possible to keep its customers at the table.

5. What are your competitive advantages?  Why do key customers choose you over your competitors?

6. What key business processes form your value chain and are instrumental in the formation of competitive advantages, engagement with your customers and partners and on which your cash flow depends?

7. What key resources do you require for your business to operate? Any business can operate 4 main types of resources — physical objects (buildings, constructions, equipment, etc.), intellectual objects (software, technologies, patents, databases, etc.), people (personnel with specific competences necessary for the implementation of this model), and finance.

8. What are the key investment costs, fixed and variable costs that your business bears?

 What are the elements where the business model changes as a company enters the international market?

 1. In another market, we work with a different customer — with a different background, habits, and values that are shaped by the environment, in which the customer lives and grows up. Even if their needs are similar, it is more likely that their market behavior will be different — up to the point where the degree of their need for your product can be extremely low. For a customer in your market, your product is a vital necessity, whereas for a customer in a foreign market, it is an unnecessary oddity. For example, baked turkey is a traditional Thanksgiving meal in the U.S., and a supplier of turkey meat can always count on stable demand for its products in this market during Christmas time, while in Belarus there is no such tradition. Turkey is rather a product for those who look after themselves, or those with health problems. And turkey is definitely not a holiday dish.

2. In another market, there may be no contact points that are habitual locally, but new ones may be available, with which we cannot work, and moreover, the significance of contact points may be completely different. For example, if you are not on WeChat, you are not in the Chinese market; it is next to impossible to make B2B sales through LinkedIn in Russia — this network is not officially present in the market and has failed to comply with requirements of the local supervisory body, Roscomnadzor, with respect to data storage in the territory of the country; whereas Belarus has placed a ban on sales of alcohol, medications, and dietary supplements via online stores, which prevents full-scale operation of some business models that depend on such distribution channels.

3. Your partners may not be so strong or useful in foreign markets.

4. Your revenue model may be unacceptable in another local market because of administrative or legal restrictions, or — in addition to localizing the price level — you will need to reconsider the fundamentals of our income-generation model, because in the new reality, they will not work. Again, the period of receiving income from customers may be significantly longer than you are used to. For example, in Belarus, food retail chains may enjoy a respite to pay their supplies of up to nine months.

5. You can lose all your competitive advantages as you leave the local market, because you will face new competitors, which may be much stronger or will have similar competitive advantages. And even if you offer the same terms as a local player who has been in the market for some time, customers will choose someone they have already worked with and ignore you.

6. Your key processes may undergo significant changes to meet the customs, realities, customer requirements and legislation of the new local market, and you may need to put in place new key processes that are needed in that market.

7. You may not find local resources needed to keep your business running in the new territory, and redistributing resources from your successful marketplace may ultimately weaken your position there, causing some risks to your business.

8. You may have new costs that can significantly reduce your profits and may eventually make your business model unprofitable in the new territory.

 A recap: almost everything changes and may change in a business model, and most importantly, your customer and your competitive advantages will not be the same. I offer you two examples of globally leading companies that failed in foreign markets because they ignored the rule “transform your business model in new markets.”

 Walmart did not succeed as it attempted to enter the German market, although America and Europe seem to have similar traditions. What were the problems? We will list some of them:

 1. The environment-concerned Germans were not ready to see the abundance of plastic bags and plastic packaging in Walmart stores;

2. In Germany, people prefer smaller shops locally than impersonal large chains;

3. The corporate culture of the network was not clear to the Germans. For example, every business day started with group exercises and “Walmart! Walmart! Walmart!” chanting. This might help to boost morale and loyalty in the U.S., whereas in Germany, this behavior was considered strange and inappropriate. Also inappropriate was the company’s demand for cashiers and consultants in stores to apply their broadest smiles and friendly tone — Germans were not used to smiling at strangers. Buyers felt very uncomfortable with this behavior.

 4. The company’s code of ethics ran counter to German laws and was eventually banned. It demanded that employees monitor their colleagues and report any violations to the management.

 Another example is the failure of Coca-Cola's highly successful international Share the Coke campaign in Israel. The essence of the campaign was that 150 most common local names were taken and printed on Coca-Cola bottles, and the campaign was built around this sort of personalization. In Israel, the company did the same, but failed to account for the cultural identity of the region, the fact that the country is home to many ethnic groups, and that the relationships between them can be extremely tense.

 Problems emerged almost immediately. At first, an Arab-Israeli citizen sued the company, calling the advertising campaign discriminatory, as there was not a single Arab name on cans. Subsequently, claims were filed by members of the Russian immigrant community and a minority from Ethiopia. This caused Coca-Cola to equip major stores with printers so that customers could print their names on cans.

 What should we do to be successful in new markets?

 There are two ways:

 1. To analyze very thoroughly your business model when entering a new market and make necessary changes from the start, thus increasing the likelihood of success without making obvious mistakes. Naturally, this implies elaborate preparations before entering a new market and in-depth studies.

2. Or to initially create such a business model that will operate globally. That is, a business model without borders, which is equally successful in any part of the world and is aimed at a global customer in general. At least such are the cases we most often refer to as examples of successful businesses, such as Airbnb, booking.com, Uber, etc. Therefore, in the current reality, the creation of a Global business is key to exponential business growth. As a rule, the basis of such businesses is deep digitalization and focus on the customer that can change their place of residence at any time and is a true citizen of the world. These companies and business models will be hyper-successful in the near future.