When building a business, the crucial first step is to develop a strategy that aligns with your market. But what does it take once you have developed this success strategy to successfully translate it into new markets?
When companies expand abroad, they often assume that the competitive advantages that have made them successful in their home countries will be seamlessly transferred to new global markets. And indeed sometimes this can be the case. For example, Sequoia’s existing brand resonated well with Indian entrepreneurs, so their expansion into the Indian market required minimal adjustments. Similarly, Intel has made lucrative profits selling semiconductors to customers in China because its chip design and manufacturing technology is difficult for competitors to replicate.
However, not all competitive advantages can be transferred so smoothly. In more than 100 in-depth interviews with executives of multinational companies around the world, my team and I have found that there are three main factors that determine whether a competitive advantage will be transferred to new markets: the local competitive landscape, local customer preferences, and the extent to which a company willing and able to adapt to these local requirements.
1. Local competitive landscape
The first common hurdle we identified was differences in the competitive landscape. You may have successfully beaten competitors in your home market, but that victory doesn’t necessarily translate to other markets, which may be home to other competitors with different strengths and weaknesses.
For example, despite its success in many global markets, Starbucks lost $143 million in Australia in its first seven years of operation, ultimately forcing the company to close 61 of its 84 Australian stores. What happened? Several factors came into play, but a major flaw in Starbucks’ strategy was its underestimation of Australia’s rich coffee culture. Unlike other markets where coffee was less well known as a ‘lifestyle experience’, Italian and Greek immigrants had already developed a vibrant coffee scene in Australia in the 1940s and 1950s. When Starbucks launched, it competed with a variety of independent coffeeshops that offered more flavors at lower prices and that already had strong brand loyalty among Australian customers — a vastly different landscape than what the company was used to at home.
2. Local Customer Preferences
Differences in the competitive landscape often go hand-in-hand with differences in customer preferences, as competitors respond to (and in some cases create) demand that differs from a company’s home market. As a result, a product that appeals to consumers in one market may be completely irrelevant in another.
Walmart encountered this problem when trying to expand into Brazil. The retail giant has been successful in the US primarily because it offers its customers the convenience of a single shopping destination for a wide range of low-cost products. However, Brazilian customers were more willing to actively seek out coupons, discounts and other promotions, and they were used to visiting multiple stores to get the best deals. As a result, Walmart’s value proposition was less relevant to them, and the company struggled to get a foothold in the market.
3. Willingness and ability to adapt
Of course, neither differences in the competitive landscape nor in consumer preferences are insurmountable challenges – but a company’s willingness and ability to adapt to these differences will determine its success in a new market. In some cases, a company may be interested in changing aspects of its product or business model, but is struggling to implement it. In other cases, a company may not be willing to make these changes, whether for moral reasons, cultural factors, or other concerns.
For example, Amazon executives we interviewed described a deep-rooted corporate value of always putting the customer first. This has propelled the company to massive success in many markets — but it’s also made Amazon extremely resilient to changes to elements of its product that could impact the customer experience.
Specifically, for each product listed on its platform, Amazon uses a complex algorithm to select only one vendor to appear in that product’s “Buy Box” (i.e., the box on the right-hand side of the product page where buyers click “Add to “Cart” or “Buy Now”), with all other providers being banished to a list below the Buy Box. US sellers were used to dealing with such opaque algorithms and they were willing to put up with it for the smooth user experience they offered buyers. However, Chinese sellers found the buy box concept complicated and inaccessible, so instead they chose to sell on local e-commerce platforms without such restrictive systems as Taobao or JD.com. Amazon received this feedback and certainly had the technical ability to remove the buy box or give other vendors more prominence. But due to its core principle of “customer obsession,” the company was unwilling to make these changes, as leadership firmly believed that offering only one vendor was best for buyers. This ultimately limited its ability to attract sellers (and therefore buyers) in the Chinese market.
So how should leaders respond when a strategy fails to execute in any of these three ways? The first step is always to acknowledge the problem. That’s often easier said than done, especially if your company is betting on a product or business model that’s been hugely successful in your home market – but you can’t improve your globalization strategy if you don’t first identify its shortcomings.
Once you’ve confirmed that something isn’t working, you can next respond in one of three ways:
Adjust existing offers
In some cases, it is possible to make minor adjustments to an existing strategy to bridge the gap between your home market and local realities. Starbucks, for example, eventually accepted the reality that its typical business model didn’t work in Australia. Instead of continuing to fight a losing battle with its direct competitors (popular coffee shops targeting local customers), Starbucks turned around and began targeting international tourists in Sydney, Melbourne and other popular vacation spots. These tourists were already familiar with the Starbucks brand, and prior to the pandemic, they made up more than a third of Australia’s population – making them a sizable and much more promising customer base.
Similarly, Chinese smartphone maker Xiaomi had found success in its home market primarily by selling through online channels. But as the company expanded into Europe, it hit a wall as the majority of European customers were used to buying cell phones in person. When Xiaomi realized that its online sales model wasn’t working, it partnered with carriers and retailers, and even opened its own physical stores to build sales channels that would be more effective in the new market. And this approach worked: Today, Xiaomi is the third largest smartphone provider in Europe.
Develop new competitive advantages
In other cases, a small adjustment is not enough. When a particular competitive advantage just doesn’t translate to a new market, it may require a completely new approach. Executives at Indian mobile advertising company InMobi, for example, shared how they have relied on its technological superiority as a key competitive advantage in its home market – but in China, internet giants with far more technical resources made it impossible to compete on the tech front. Realizing this, InMobi decided to change gears and instead focus on leveraging its strong global reputation to build a massive network of partner apps and advertisers. Although local competitors quickly matched InMobi’s technical prowess, InMobi was subsequently able to establish partnerships with more than 30,000 local apps and eventually become the largest independent mobile advertising company in China.
Korean automaker Hyundai encountered a similar problem and took a similar approach to addressing it: the company found that Chinese automakers were able to create products with a similar level of quality to Hyundai and at a lower cost. No longer able to rely on price or quality as a key competitive advantage, Hyundai began investing heavily in branding and working to elevate its brand among Chinese consumers, who still perceived Chinese-made cars as less premium.
Exit the market
Finally, in some cases, cutting your losses and exiting the market entirely is the best decision. Especially if you’ve already found a business model that works well in other markets, you might be better off focusing your efforts on that rather than endlessly trying to expand into markets that just aren’t thriving.
Amazon, for example, recognized that conquering the Chinese market would require both enormous resources and changes to its core product that it simply wasn’t ready to make. At the same time, it was already enjoying stunning returns in many other markets in which it operated. As a result, Amazon’s final decision to exit China was probably the right move. Similarly, Walmart’s annual sales in Brazil accounted for just 1.4% of its total global sales — so after seven straight years of net losses, Walmart made the decision to exit Brazil and focus its resources on more promising markets.
Developing a competitive advantage that is effective even in just one market is no small feat. Unfortunately, local success is still not a golden ticket to global dominance. Even if you have developed a business model that works at home, there is no guarantee that it will transfer to other markets as differences in local competition and customer preferences can all affect your own organization’s willingness and ability to adapt Your chances for a successful international expansion. The good news is that once you spot the problem, it’s possible to make adjustments, big or small. And if all else fails, remember that leaving and finding opportunities elsewhere isn’t necessarily a bad choice. Different markets pose very different challenges, and it’s up to each individual market leader to identify the potential obstacles associated with a new market – and determine the best path to overcome them.