When building a business, the critical first step is to develop a strategy that resonates with your market. But once you’ve crafted that winning strategy, what does it take to successfully translate it into new markets?
When companies expand overseas, they often assume the competitive advantages that have made them successful in their home countries will seamlessly transfer into new global markets. And indeed, this can sometimes be the case. For example, Sequoia’s existing brand resonated well with Indian entrepreneurs, and so its expansion into the Indian market required minimal adaption. Similarly, Intel has achieved lucrative returns selling semiconductors to customers in China because its chip design and manufacturing technology is hard for competitors to replicate.
However, not all competitive advantages translate quite so smoothly. Through more than 100 in-depth interviews with executives at multinational corporations based all around the world, my team and I found that there are three primary factors that determine whether a competitive advantage will transfer into new markets: the local competitive landscape, local customer preferences, and the extent to which a company is willing and able to adapt to meet those local demands.
1. Local competitive landscape
The first common hurdle we identified was differences in competitive landscape. You may have successfully beat out the 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 the first seven years of operations in Australia, ultimately forcing the company to close 61 of its 84 Australian stores. What happened? There were several factors at play, but a major flaw in Starbucks’ strategy was its underestimation of Australia’s rich coffee culture. In contrast to other markets in which customers were less familiar with coffee as a “lifestyle experience,” Italian and Greek immigrants had developed a vibrant coffee scene in Australia dating as far back as the 1940s and ‘50s. By the time Starbucks entered the market, it was competing with a wide variety of independently owned coffee shops 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 accustomed to at home.
2. Local customer preferences
Differences in competitive landscape often go hand in hand with differences in customer preferences, as competitors respond to (and in some cases, create) demand that diverges from a company’s home market. As a result, a product that’s appealing to consumers in one market may be utterly irrelevant in another.
Walmart ran into this issue when attempting to expand into Brazil. The retail giant had been successful in the U.S. largely because it offered customers the convenience of a single shopping destination for a broad array of low-cost products. But Brazilian customers were more willing to spend time actively looking for coupons, discounts, and other promotions, and they were accustomed to going to multiple stores to get the best deals. As a result, Walmart’s value proposition was less relevant for them, and so the company struggled to gain traction in the market.
3. Willingness and ability to adapt
Of course, neither differences in competitive landscape nor in consumer preferences are insurmountable challenges — but a company’s willingness and ability to adapt to those differences will make or break its success in a new market. In some cases, a company may be interested in changing aspects of its product or business model, but struggle with implementation. In others, a company may be unwilling to make those changes at all, whether for moral reasons, cultural factors, or other concerns.
Amazon executives we interviewed, for instance, described a deeply ingrained company value of always putting the customer first. This has helped the company achieve massive success in many markets — but it has also made Amazon extremely resistant to changing elements of its product in ways that might harm customer experience.
Specifically, for each product listed on its platform, Amazon uses a complex algorithm to choose just one vendor to feature on that product’s “Buy Box” (that is, the box on the right side of the product page where buyers can click “Add to Cart” or “Buy Now”), with all other vendors relegated to a list below the Buy Box. U.S. sellers were accustomed to dealing with opaque algorithms like this, and they were willing to put up with it because of the smooth user experience it offered buyers. But Chinese sellers found the Buy Box concept complicated and inaccessible, and so they chose instead to sell on local ecommerce platforms without such restrictive systems, such as Taobao or JD.com. Amazon received this feedback, and it certainly had the technical capability to remove the Buy Box or feature other vendors more prominently. But because of its core principle of “obsession with the customer,” the company was unwilling to make those changes, since leadership felt strongly that featuring just one vendor was best for buyers. This ultimately limited its ability to attract sellers (and in turn, buyers) in the Chinese market.
So, how should leaders react when a strategy fails to translate in one 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 committed to a product or business model that has been extremely successful in your home market — but you can’t improve your globalization strategy if you don’t first recognize its shortcomings.
Next, once you’ve acknowledged that something isn’t working, you can respond in one of three ways:
Adjust existing offerings
In some cases, it’s possible to make minor adjustments to an existing strategy to bridge the gap between your home market and local conditions. Starbucks, for example, eventually accepted the reality that its typical business model wasn’t working in Australia. Instead of continuing to fight a losing battle with its direct competitors (well-loved coffee shops that targeted local customers), Starbucks pivoted and began targeting international tourists in Sydney, Melbourne, and other popular vacation spots. These tourists were already familiar with the Starbucks brand, and before the pandemic, they accounted for more than one third of Australia’s population — making them a sizeable and much more promising customer base.
Similarly, Chinese smartphone maker Xiaomi had achieved success in its home market largely by selling via online channels. But when the company expanded into Europe, it hit a wall, since the majority of European customers were used to buying cell phones in person. Once Xiaomi realized its online sales model wasn’t working, it partnered with cell phone 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 vendor in Europe.
Develop new competitive advantages
In other cases, a small adjustment won’t quite cut it. When a given competitive advantage simply won’t transfer to a new market, it may be necessary to develop an entirely new approach. For instance, executives at Indian mobile ad company InMobi shared how they relied on its technological superiority as its 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. Once InMobi saw this, it decided to shift gears and instead focus on leveraging its strong global reputation to develop a vast network of partner apps and advertisers. As a result, although local competitors quickly matched InMobi’s technical capabilities, InMobi was able to build partnerships with more than 30,000 local apps and eventually become the largest independent mobile ad 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 design products of a similar quality level as Hyundai, and at a lower cost. Since it was no longer able to rely on price or quality as a core competitive advantage, Hyundai began investing heavily in branding, working to elevate its brand among Chinese consumers who still perceived Chinese-made cars as less premium.
Leave the market
Finally, in some cases, the best decision is to cut your losses and leave the market entirely. Especially if you’ve already found a business model that works well in other markets, you might be better off focusing your efforts there, rather than endlessly attempting to expand into markets that just aren’t panning out.
Amazon, for instance, realized that winning the Chinese market would require both enormous resources and changes to its core product that it simply wasn’t willing to make. At the same time, it was already enjoying jaw-dropping returns in the many of the other markets in which it operated. As a result, Amazon’s ultimate decision to leave China was probably the right move. Similarly, Walmart’s annual revenue in Brazil accounted for only 1.4% of its total global revenue — so after seven straight years of net losses, Walmart made the decision to leave Brazil and focus its resources on more-promising markets.
Developing a competitive advantage that’s 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’ve come up with a business model that works at home, there’s no guarantee it will translate into other markets, as differences in local competition and customer preferences, as well as your own organization’s willingness and ability to adapt, can all influence your chances of a successful international expansion. The good news is, if you acknowledge the problem, it’s possible to make large or small adjustments to address it. And if all else fails, remember that leaving and finding opportunities elsewhere is not necessarily a bad choice. Different markets pose vastly different challenges, and it’s up to each individual leader to identify the potential obstacles associated with a new market — and chart the best course to overcome them.
This content was originally published here.