Understanding internationalization & business model decisions: a review

Transcription

1 Understanding internationalization & business model decisions: a review Abstract By combining two strands of literature, this paper sets out to demonstrate that the internationalization process brings about certain changes in the business model and that being aware of these changes can help organisations make the necessary adjustments to remain competitive at each stage of their internationalization process. Key words: Internationalisation, change, business model thinking Introduction It is generally acknowledged that as a business internationalizes, its strategy evolves. The Uppsala model describes a common approach to internationalization (Johanson et Valhne, 1977, 2009) in which the choice of markets, entry modes and the level of commitment of resources on foreign markets. However there is a gap in knowledge since the model fails to broach the central question of how the firm can remain profitable throughout these changes. In short, what are the characteristics of its business model at each step of its internationalization process? The gradual internationalization process For over 40 years, much attention has focused on the topic of international expansion as a gradual process (Johanson et Valhne, 1977, 2009; Craig and Douglas, 1989; Contractor, 2003; Lemaire, 2013). This process is not gradual for all companies ( born globals are an exception) and some SMEs prefer to stop internationalizing somewhere along the way (Boutary, 2009). However its validity has been confirmed by in various studies, involving for example the internationalization of American service companies (Contractor, 2003). The template (below) synthesizes the Uppsala concept which advocates that companies, as they gradually gain a better understanding of international operations, tend to approach markets which they perceive as distant (Evans and Mavondo, 2002) and commit an increasing level of 1

2 resources to their development. Craig and Douglas (1989:50) put forward names for each phase and strategic focus. Four internationalization phases Phases/characteristics STRATEGIC FOCUS INTERNATIONAL COMMITTMENT Psychic of penetrated markets Allocation of resources to international PRE- INTERNATIONAL Internationalization path development National market None INITIAL ENTRY Choice of markets and entry modes Limited psychic distance (concentric development) Development of an export department and selection of low cost entry modes. LOCAL MARKET EXPANSION Adaptation strategy in order to develop the local potential of markets Strong psychic distance Development of an international structure overlooking a network of subsidiaries. GLOBAL RATIONALIZATION Rationalization and coordination of efforts Economies of scale Limited psychic distance most markets are already penetrated. Development of regional headquarters overlooking several local business units. The normative approach of the business model Existing literature on business models (Zott, Amitt and Massa, 2010) can be divided into three dominant perspectives based on the authors predisposition. For Osterwalder, Pigneur and Tucci (2005) and Teece (2010), the focus is on concepts. The work of Osterwalder (2004) and Johnson, Christensen and Kagermann (2008) adopts a normative approach. Lastly, Afuah and Tucci (2001) and Casadesus-Masanell and Ricart (2010) concentrate on the specific application of the business model. Our purpose being rather operational, we select the clear and actionable vision of Johnson, Christensen and Kagermann (2008) who define the business model as four interlocking 2

3 elements that, taken together, create and deliver value. (Johnson, Christensen and Kagermann, 2008:52). These authors, whose aim is to help managers reinvent their business models, suggest a model based on a value proposition and a profit formula, delivered through a unique combination of resources and processes. THE FOUR INTERLOCKING ELEMENTS OF AN EFFICIENT BUSINESS MODEL Source: Adapted from Johnson, Christensen and Kagerman (2008) How does the internationalization process affect a firm s business model? Considering the business model at each stage of the internationalization process, it can be seen that the pre-international phase is defined by its absence of knowledge of international operational operations and resources dedicated to international expansion. At this stage, the business model is of course unchanged. However it is a time of questioning to define the proper internationalization path of the company and to do so, new processes are initiated to research new markets and answer sporadic consumer orders, which implies becoming familiar with legal barriers, payment risk coverage techniques, transport, etc. The profit formula is unchanged, but the cost structure has to be revised because of export costs related to legal barriers, logistics and the cost of intermediaries. The national business model, very often implicit is dependent on local, non-transferable variable and bears high commercial and financial risks. This is what explains the U curves highlighted by Zaheer and Mosakowski (1997) suggesting that export beginners have a limited performance due to additional costs. The initial entry phase is defined by expansion into neighbouring markets through low investment entry modes such as agents of importers/distributors. The animation and control of this network is performed by a new key resource: the export manager. Adjustments to the consumer value proposition are minor since markets penetrated are quite similar to the home 3

4 market. However, the collaboration with local intermediaries makes it essential to develop value proposition targeted to the trade, such as sales supports or speedy delivery. The development of this network of intermediaries also brings about new processes, such as collecting information in order to identify and select them, drafting distribution contracts, adjusting the offer to suit the partner s marketing strategy, and so on. The profit formula is based on the evaluation of the export cost and of the local psychological price, the latter being often inferior to the former. As a result of the acquisition of new resources, the development of a new value proposition and new processes, Contractor (2007) points to negative profits at this stage, raising the question of whether it is possible to develop a balanced business model at this stage. During the local market expansion stage, the value proposition must adapt to the specific needs and tastes of the consumers of distant markets. The company invests in subsidiaries in order to get a better feel for market conditions and adjust to them. Key processes are developed to organize product, financial and information flows between headquarters and affiliates. The profit formula is unique to each affiliate: profit sources and cost structures vary across markets. Transfer prices negotiated with each affiliate by the home office are the key to the profitability of the organization. At this stage there could be as many business models as there are affiliates. However, economies of scale can be achieved if affiliates work together to amortize the costs associated with research and development, corporate management, and other fixed costs. During the global rationalization stage, the value proposition gradually becomes global as a result of the development of synergies between markets. The volume of the standardization process depends on the nature of the markets and the competitive strategies (Porter, 1986). At this stage, the organization rationalizes and coordinates its resources: multinationals innovate, create transnational brands, and develop an organization structure that combines global thinking and local adaptation (Prime and Usunier, 2011). Key processes are formalized and standardized. The multinational also seeks to define a global profit formula, based on a harmonized offer and shared economies of scale. The cost structure is globalized. There is however a limit to a profitable internationalization. If pushed too far, direct investment on high entry barriers markets can increase information, control and adaptation costs and decrease the profitability of the company (Hitt et al., 1990). 4

5 Discussion & conclusion Building on the doctoral investigation of Gervais (2011), the literature discussed above underscores the extent to which each stage of the internationalization process can be described in terms of a particular business model and a specific challenge, as summarized below: Summary of how internationalization impacts upon a firm s business model Internationalizat ion stage BUSINESS MODEL MAJOR CHALLENGE Preinternational Initial entry Local market expansion Global rationalization National Adaptation of Development of Emergence of a business model national local business supra national business model models model To become To make the To initiate a To keep a aware of the transitional global business balanced global national business model model business model business model profitable A review of the literature on internationalization and business model decisions serves a dual purpose. It furthers our understanding of the business model concept, a relatively new (yet somewhat vague) phenomenon, and it highlights the need to adapt business models to the changes taking place in the business environment in particular during the internationalization process when there is a need to change the existing approach by developing or modifying processes, profit formula, cost structure and value proposition. It is recognised that business models form the core of competitiveness, and as such they must be the focus of decision-making in order to create efficient firms that foster sustainable competitive advantage. Managers therefore need to anticipate and identify the various changes happening at each stage of the internationalization process and to adapt each element of the business model accordingly, taking into consideration various factors especially the characteristics of the target market, and international resources and competencies that affect the value proposition and profit formula. The business model approach described in this paper enriches the current debate on the internationalization process by focusing the changes a firm can experience at each stage of the process. Certainly, more research is needed to provide insight into the ongoing changes in today s global online business environment. 5

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