Internationalization through business model innovation:In search of relevant design dimensions and elements

Morten Rask

# Springer Science+Business Media New York 2014

Abstract Internationalization through business model innovation involves the crea-tion, or reinvention, of the business itself. This paper aims to integrate basic insightfrom the literature on business model innovation, internationalization of the firm,international entrepreneurship, and global marketing into a conceptual model. Ourmodel illustrates that internationalization through business model innovation includesdesign dimensions, which are domestic or globalized in upstream production as well asin downstream markets. The outcome of this paper is four international business modeltypes each with a specific resource allocation for dealing with differences acrossgeographical locations and entry mode elements. We address the interrelation of thesedimensions and elements in firms’ international activities.

Keywords Businessmodel innovation . Internationalization of the firm . Internationalentrepreneurship . International businessmodels . Entry modes . Resource allocation todeal with differences among geographical locations

Introduction

This paper aims to expand our understanding of business models, business modelinnovation, and the internationalization of a firm’s nexus. Moreover, in order to createmodels that provide managers and researchers with terminology to describe interna-tionalization through business model innovation, as well as a language that fostersdialog and promotes a common understanding, this paper discusses the development ofbusiness activities spanning multiple national contexts.

Innovation is vital in a world characterized by globalized competition (Tidd 2006).We see business model innovation as more than a question of technological innovation

J Int EntrepDOI 10.1007/s10843-014-0127-3

M. Rask (*)Department of Business Administration, School of Business and Social Sciences, Aarhus University,Bartholins Allé 10, Building 1327, room 128, Aarhus, Denmarke-mail: mra@asb.dk

M. Raske-mail: mr@morten-rask.dk

(Chesbrough 2007), rather as the creation, or reinvention, of the business itself. When afirm decides to internationalize its activities, its focus is on business model innovation.It leads to globalized competition not only in the value proposition of offerings in adomestic context but also in the global sourcing and allocation of resources andactivities. Also, the firm’s enhancement of its value proposition and creation of newmarket channels and segments will be impacted. This is in-line with the traditionalunderstanding of internationalization of the firm, namely the process of adaptation,change, and development of a firm’s fundamental functions, systems, and structuresthrough successive transformations, as a consequence of interaction with its multina-tional and transnational environment (Rask et al. 2008).

Globalization can be understood as a process leading to greater interdependence andmutual awareness among economic, political, and social units in the world (Guillen2001). The meaning and significance of localization have developed through anextensive use of information and communication technologies, creating new forms ofglobal market presence, management, and organization. Companies like eBay,Starbucks, IKEA, 7-Eleven, and McDonald’s have developed business models andsuccessfully applied them to international expansion. While their operations mayrevolve around the export (or import) of products, it is really the models they use thatoffer them competitive advantage. Often, business models that are successful on thedomestic market require adjustment to fit an economic, political, legal, or culturalenvironment abroad (Albaum et al. 2005). However, we still live in a world where“semi-globalization characterizes the true state of cross-border integration: borders stillmatter a great deal, but so do flows across them” (Ghemawat 2007b, 2011). Semi-globalization, understood as incomplete cross-border integration, is also the setting forfirms like McDonald’s; they find that the most successful business strategy is anadaptive approach that combines the standardization of certain core elements with thelocalization of others (Ghemawat 2007b, 2011).

The purpose of this paper is to construct a theoretical framework to understandinternational business models where locational aspects are integrated. Some scholarsargue that business models must include geographical location (Yip 2004; Onetti et al.2012b) because understanding the local context is vital in international business (Meyer2013). More research on location and its impact on business models has been called for(Cannone et al. 2012); also, more knowledge on business models that facilitates earlyand rapid internationalization is needed (Onetti et al. 2012a). Our search for literature inrelation to the internationalization of the firm found that it lacks integration withbusiness model literature. Therefore, this paper aims to answer the research question:What are the relevant design dimensions and elements for internationalization throughbusiness model innovation and how do these dimensions and elements relate to thefirm’s international activities?

Our point of departure is the work of Onetti et al. (2012b), which is seen as being thefirst to criticize the business model literature for overlooking the geographical dimen-sion (Cannone et al. 2012; Cortili and Menegotto 2010; Grønning 2013). Onetti et al.(2012b) sought to create theories reflecting actual practice, namely the ever-increasingintertwinement of internationalization and innovation (Halilem et al. 2013; Glavas andMathews 2014). Furthermore, it is argued that business models and strategies areconcepts that must be considered separately (Burkhart et al. 2011; Balboni et al.2013; Cortili and Menegotto 2010; Grønning 2013). Therefore, facilitating

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internationalization through business model innovation requires an understanding ofthe differences between business model innovation and international strategy. Businessmodel innovation is the generic term for the creation, or reinvention, of the businessitself, whereas international strategy guides business model innovation in terms ofmanagerial choices for positioning the firm in the global market (Zott and Amit 2008).Onetti et al. (2012b) suggest relevant strategic questions such as the following: (1)What is the focus of the firm? i.e., resource allocation to processes and activities thatsupport value proposition, (2) the modus, i.e., who manages activities and how? andfinally, (3) the locus, where do the activities take place?

In this paper, we address these questions after first explaining the following. First isthe link between the field of internationalization of the firm and that of business modelinnovation. Next, we look at the locus strategic question about the internationalbusiness model’s design dimensions including the spatial geographical as well as thepositional value chain dimensions. These design dimensions will be addressed bycombining the well-known business model building block canvas with literature onnew international ventures. Then, we concentrate on the modus strategic questionencompassing the design elements for resource allocation. The literature examinesthe international entry mode elements that facilitate domestic and international marketopportunities for downstream markets and upstream production. After this, we discussthe focus strategic question of the design elements dealing with differences acrossgeographical locations when allocating resources to activities worldwide. The presen-tation of the resulting conceptual model is discussed, and the final part of the paperoffers concluding remarks.

Business model innovation and the firm’s internationalization process

According to Markides (2006), “Business-model innovation is the discovery of afundamentally different business model in an existing business,” meaning that businessmodels can be innovated. This definition is similar to the understanding of internation-alization of the firm as an innovation decision process (Andersen 1993; Rogers 1962).In this paper, business model innovation draws on the research stream that focuses onelements and processes where other research streams focus on the prerequisites forgenerating an effect from business model innovation (Schneider and Spieth 2012). Ourreview of the business model innovation research literature, which focuses on elementsand processes, reveals that very few authors (Onetti et al. 2012b) focus on internation-alization. However, there are a number of exceptions with some indirect relation tointernationalization.

Casadesus-Masanell and Ricart (2010) used a global strategy case (Ryanair) withoutaddressing the internationalization aspect. Demil and Lecocq (2010), inspired by thePenrosian view of the firm, understood business model innovation from a dynamicperspective (Penrose 1959), which originally was as strong inspiration for the creatorsof the Uppsala internationalization process model (Johanson and Vahlne 1977, 1990,2009; Johanson and Wiedersheim-Paul 1975). Furthermore, this Penrosian dynamicview of the firm dominates two other pieces of literature, however, with two differentoutcomes. Smith, Binns, and Tushman (2010) suggest an explorative strategy when theintroduction of products and services on new (and foreign) markets involves risk-taking

Internationalization through business model innovation

and variance-increasing activities. Sosna, Trevinyo-Rodríguez, and Velamuri (2010)focus on internationalizing not in the exploration but in the exploitation phase wherebusiness model replication is applied to similar foreign markets and adaptation indissimilar foreign markets. Later in this paper, design elements in dealing with differentcontexts will be addressed together with entry modes that facilitate internationalactivities as the other important design element. Before addressing these elements,we will discuss the dimensions for internationalization through business model inno-vation illustrated in the business model innovation canvas (Osterwalder et al. 2010) andthe resulting types of international business models.

International business model design dimensions

In this study, a “model” is understood as an ideal to follow (Rask et al. 2008). Itspurpose is to reduce the complexity of target phenomena in a systematic inquiry (Seelos2010). More precisely, a model is a simplified image—an abstraction—of an actual orimagined reality in the form of relationships between studied factors. In this paper, wefocus on explanatory schematic models (Aronsson et al. 1973) understood as idealtypes (Weber 1948). In other words, what is important is not the realism of a model’sassumptions but how to apply the model, that is, the predictions that the model permitsa firm to make (Ghemawat 2007b, 2011).

A common sense definition of a business model as a model of how a firm doesbusiness must be given to uncover the relevant design dimensions and elements.According to Baden-Fuller and Morgan (2010), business models have many labels:Business models can be understood as classifications, role, and scale models andprocedures to follow and replicate, etc. A business model can be seen as a structuraltemplate that outlines a firm’s interaction with all external upstream and downstreampartners in the value chain (Sainio et al. 2011). Also, a business model can beunderstood as a new unit of analysis that explains how a firm does business, concep-tualizes how its organizational activities play a role, and explains which value iscaptured by the firm and how it is created (Zott et al. 2010). These structural designdimensions and elements should be underpinned by the contents of the business modelin terms of which activities to perform and in what way; also, governance with a focuson responsibility for activities and where these activities should be performed should beincluded (Zott and Amit 2010). This is in-line with the lotus, modus, focus frameworkfor strategic design where the components and building blocks articulate the definitionof a business model (Onetti et al. 2012b). The business model canvas (Osterwalderet al. 2010) facilitates a process where the business model building blocks are used forstrategic positioning in a global value creation perspective. This canvas “is a prominentexample…that is often used in businesses” (Eppler et al. 2011). Peter Dicken’s bookGlobal Shift (1986) enabled a reader to follow not only the globalization of downstreammarkets but also to focus on the upstream globalization of production (Ghemawat2007b, 2010). His work suggests that business model building blocks cannot be seen inisolation, but rather must be discussed in their mutual context. Businesses, not markets,mediate most international exchange (Ghemawat 2007b, 2011). The business modelcanvas raises questions that may propel the internationalization of the firm. In strategicinnovation, it is important to raise these classic questions (Markides 1997):

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“What products are on offer?How do we create value related to the product?Whoare our customers, which needs do we fulfil, and who are the suppliers who assistin this value creation process?”

Since business model innovation is not about product innovation (Markides 2006),we are left with the two basic how and who questions. Key activities and resources inthe upstream part and customer relationships and channels in the downstream partanswer how product-related value creation is handled. Key partners and customersegments answer the following: who are our customers, which needs do we fulfil,who are our suppliers and who assisted in this value creation process?

Figure 1 illustrates the business model canvas from a global value creation chainperspective. Globalization of markets deals with downstream customer activities, andglobalization of production deals with upstream activities. As regards to the globaliza-tion of markets, recent decades have witnessed a global homogenization where culturalbarriers, to some extent, have faded but nevertheless are still extremely important andwill remain being so. Also, the globalization of production reflects the recent develop-ment where firms exploit differences—by buying low in one country and selling highin another. This also remains important because of the large, persisting differencesbetween countries along with the general pressure to reduce costs (Ghemawat 2007b,2011).

Most business model thinking and theorizing came out of the dot.com age (Amit andZott 2001; Zott and Amit 2010; Zott et al. 2010; Osterwalder et al. 2005; Chesbrough2006; Onetti et al. 2012b) because the World Wide Web created a situation of global(e-)business by default, serving a homogeneous market place. In this semi-global world(Ghemawat 2007b, 2011), it is important to distinguish between domestic and interna-tional markets. As in the international new ventures literature (Di Gregorio et al. 2008;Oviatt and McDougall 1994b), domestic and international market opportunities fordownstream as well as upstream activities can be distinguished. Figure 2 illustrates thatthis simple distinction results in four types of business models.

Domestic-based business models are used by domestic ventures only. Even thoughthe firm acts in a domestic context, its products and services can be sold internationallythrough other firms such as export houses and similar indirect sales channels. The samegoes for local production: some supplies are imports bought from local distributors.Domestic-based business models are often in play when local food producers sell their

Value Proposi�onCost Revenue

Key Partnerships

Customer Segments

Key Ac�vi�es

Key Resources

Customer Rela�onships

Distribu�on Channels

Upstream Activities

Globalization of Production

Downstream Activities

Globalization of Markets

Fig. 1 Business model building blocks in a global value creation perspective. Sources: Inspiration fromOsterwalder (2005), Osterwalder et al. (2010, 2005), Fritscher and Pigneur (2010), and Ghemawat (2007a, 2010)

Internationalization through business model innovation

products to global food companies like Uhrenholt A/S that exports the productsunder a common brand name. Firms with an import-based business model seeksales opportunities in the domestic market and rely on the global supply market,which, for example, is often the case for domestic supermarket chains. The export-based business model is the inverse of the import-based business model. Exportfirms concentrate their resources locally, exporting their goods to internationalmarkets where they can earn a higher profit than by selling them on the domesticmarket. Like importers, exporters’ demand and supply market knowledge offersthem competitive advantages through their ability to spot and act on emergingopportunities. The export-based business model is a business model that most of theexport marketing literature focuses on. Finally, the semi-global business modelfeatures the characteristics of both the import and the export-based business models.The semi-global business model is the most radical expansion model because itderives competitive advantage from international sales as well as internationalsourcing activities and related knowledge. This is particularly important in globalindustries “in which a firm’s position in one country is significantly affected by itsposition in other countries or vice versa” (Porter 1986). These opportunities arecreated by locating sources, assembly, distribution, and sale activities where thebest cost/value ratio is found (Mudambi 2008), thus reflecting both globalization ofproduction and markets (Ghemawat 2007b, 2011). The text on all Apple iPhonesphrases the semi-global business model nicely: “Designed by Apple in California.Assembled in China.”

International business model design elements

From the previous section, we know that internationalization through business modelinnovation should reflect upstream as well as downstream dimensions of the domestic-based, export-based, import-based, and semi-global business models.

In the next section, our focus is on who deals with the activities or what are theinternational business literature terms entry modes. The various entry modes facilitatingthe international business model innovation reflect upstream and downstream as well asdomestic and international context dimensions. A discussion of global strategic deci-sions in various business model contexts will follow, the purpose being to answer thequestion: how is business model innovation handled. The final part of this sectionsummarizes the tentative framework toward the final model, illustrating international-ization through business model innovation.

Downstream

Domestic Markets Globalized Markets

Upstream

Domestic

Production

Domestic-based

Business Models

Export-based Business

Models

Globalized

Production

Import-based Business

Models

Semi-global Business

Models

Fig. 2 Business models reflecting geographical and other differences/distances that affect the cross-borderflow of goods and services. Sources: Inspiration from Di Gregorio, Musteen and Thomas (2008), andGhemawat (2011)

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Entry modes that facilitate business model innovation activities in different contexts

Within international business, the discussion about foreign market entry modes con-cerns who deals with downstream and upstream value creation activities. An entrymode is commonly defined as an institutional setup with the purpose of facilitating thetransfer of goods and services from one market context to the marketing channel ofanother (Root 1987; Andersen 2005), i.e. the form and nature of international activitiesconcerning the commitment of resources for international activities and the activitiesand resources that are transferred to or duplicated in foreign market contexts(Strandskov 1995).

Selection of entry modes are both what Onetti et al. (2012b) frame as the modusdecision (activities handled in-house or by third parties) and also the locus decision (thelocation of activities). The modus decision is found to be a part of almost half of thebusiness model literature that the authors reviewed, whereas the locus dimension in theexisting business model literature was harder to find (Onetti et al. 2012b).

The choice of entry mode in the international business literature is traditionallyapproached from a modus view. It involves a trade-off by the firm between the desireddegree of control, resource commitment, and willingness to take risks. This trade-offleads to entry modes being sorted into three groups: export, hierarchical, and contrac-tual modes. Export modes (indirect sales through domestic export houses or direct salesthrough agents, distributors, and importers) involve a low degree of resource commit-ment and risk-taking, and consequently very little control. Oppositely, hierarchicalmodes (founding of foreign sales or production subsidiaries) are characterized by highcontrol, risk and resource commitment, while contractual modes (licensing, franchising,and joint ventures) are between the other modes (Douglas and Craig 1989; Hill 2007;Hollensen 2012, 2014; Root 1987). The trade-off between a desired degree of control,resource commitment, and risk-taking has been the classic scenario for the firm whenchoosing entry modes.

However, the locus decision is important because entry modes also facilitate geo-graphical expansion, that is “where do we place our activities, and where do we locateor company” (Onetti et al. 2012b). This means that often, the global value chain is splitas a result of the location’s ability to create value depending on cost and availableresources needed for a given activity (Mudambi 2008). Figure 3 illustrates how entrymodes facilitate business model innovation in domestic and/or international marketcontexts in an upstream as well as in a downstream value creation perspective. Today,facilitating the transfer of goods and services from the exporter’s domestic context tothe marketing channel of the target country (Root 1987; Andersen 2005) also includesupstream activities where goods and services are transferred from the internationalcontext to the importing firm’s domestic context. According to Hollensen’s popularglobal marketing textbooks (Hollensen 2012, 2014), the various entry modes split valuecreation activities across borders. The entry modes classified in the figure are notmutually exclusive. There is no ideal entry mode (Hollensen 2012), and firms oftencombine modes (Petersen and Welch 2002) to orchestrate their market entry (Freemanet al. 2006). In other words, the starting point of the classification in Fig. 3 is thatbusiness model innovation activities are facilitated in four different settings withdifferent participants. Here, the dimensions (downstream domestic/globalized marketsand upstream domestic/globalized production) refer to the locus decision:Where should

Internationalization through business model innovation

the various activities be located? And the elements (domestic sales, importing, etc.)regard to the modus decision: Who manages activities and how are they carried out?(Onetti et al. 2012b). In the following section, we will discuss selection of entry modesdescribed in the traditional international business textbooks and relate these differentmodes to internationalization through business model innovation.

The first quadrant comprises modes of operation where upstream value creationactivities such as production, resources, and partnerships are all located domestically(Hollensen 2012, 2014). Domestic sales imply that customer relationships, channels,and segments are all in the firm’s home country. Indirect export is when the manufac-turer uses a domestically located independent organization to handle foreign customerrelationships, channels, and segments (Root 1987). Finally, local production is whenimports are bought from local distributors. In other words, internationalization throughbusiness model innovation is only about new domestic activities solely driven bydomestic actors.

In the direct international sales, export and sales subsidiaries quadrant, all valuecreation activities are domestic, but sales and service take place in foreign markets.Direct international sales involve either a sales representative occasionally travelling toforeign markets (Hollensen 2012, 2014; Root 1987) or offering the firm’s productsthrough an Internet-based export channel (Andersen 2005). The difference betweenexport and sales subsidiaries is ownership. In direct export, activities abroad areexternalized to an agent, importer, or distributor, whereas in sales subsidiary, it isinternalized as a part of the firm’s existing structure (Root 1987). Internationalizationthrough business model innovation is broader because people with inside knowledge ofinternational downstream markets participate in order to discover new downstreamopportunities. With agents, distributors and importers participating, business modelinnovation is more collaborative (Eppler et al. 2011), whereas with wholly owned salessubsidiaries, it is an internal activity.

In the lower left quadrant we have entry modes where the upstream value creationactivities as production, resources and partnerships all take place abroad. Importing is aquestion of the buyer who is searching for products on the international market to sellon the domestic market through domestic customer relationships, channels, and seg-ments (Oviatt and McDougall 1994a). In contract manufacturing, also known as

Downstream

Domestic markets Globalized markets

Upstream

Domestic

production

Domestic sales

Indirect export through

domestic agents

Local production

Direct international sales

Direct export through

foreign agents

Sales subsidiaries abroad

Globalized

production

Importing

Contract manufacturing/

Out-sourcing

Production subsidiaries

abroad

Licensing

Franchising

Joint Ventures

Sales and production

abroad

Fig. 3 Entry modes to facilitate internationalization of the firm

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outsourcing, the firm sources its upstream value creation, such as production andresource activities, from foreign partners as an alternative to its own foreign productionsubsidiaries where upstream value creation, as production and resource activities, takesplace abroad (Hollensen 2012, 2014). Here, internationalization through businessmodel innovation, as the identification of a fundamentally different business modelin an existing business, focuses on the identification of new upstream activities and isdriven by external actors with particular capabilities.

The last quadrant covers entry modes often mentioned as elements of a globalbusiness model (Osterwalder et al. 2010), such as joint ventures, franchising, andlicensing. These modes of operation, similar to collaborative business model innovation(Eppler et al. 2011), are the so-called contract or cooperation modes where firms splitthe ownership of value creation activities (Hollensen 2012, 2014). In licensing, thelicensor grants a foreign licensee a contract against revenue. The licensee handles theupstream value creation activities such as production, etc., and often also some of thedownstream activities such as the foreign customer channels, segments, and relation-ships (Hollensen 2012, 2014; Root 1987). Sometimes, the licensor establishes a directcustomer relation through branding. Franchising refers to the franchisee buying theright to use the franchisor’s business concept primarily for handling downstream valuecreation activities such as customer channels, relationships, and segments. Often,upstream value creation activities, such as production and resources, are handledinternationally by the franchisor (Hollensen 2012, 2014; Root 1987). In joint ventures,firms have an equity partnership with their foreign partner, who may be a downstreamspecialist handling foreign customer channels, relations, and segments or an upstreamspecialist handling production and resources (Hollensen 2012, 2014; Root 1987).Finally, we have sales and production subsidiaries where all the upstream and down-stream value creation activities are located abroad (Hollensen 2012, 2014; Root 1987).

Strategic decisions for resource allocation to deal with differences in internationalbusiness models

Global strategies, like standardization versus local responsiveness through allocatingresources to adaptation of offerings (Theodosiou and Leonidou 2003; Ryans et al.2003; Levitt 1983; Yip 1989; Hollensen 2012, 2014; Bartlett and Ghoshal 1989), touchon resource allocation in relation to the locus strategic question: meaning where shouldactivities be located (Onetti et al. 2012b). Findings have shown that the firm’s perfor-mance depends on its present context (Levitt 1983; Theodosiou and Leonidou 2003).According to Ghemawat (2003a), firms addressing the globalization of markets, seeit as a matter of taking a superior business model and extending it geographically byapplying the necessary modifications to maximize its economies of scale. From thisperspective, the key strategic challenge is simply to determine the resources thatshould be allocated to the adaptation of the business model, i.e., the degree ofstandardization across countries versus the degree of localization with a view toresponding to local differences. However, strategic decisions for allocating re-sources to deal with the differences do not pertain to the global market contextonly. Specialization in the globalization of production context involves exploitingdifferences between national or regional markets. That is done by locating parts ofthe supply chain in different geographical places.

Internationalization through business model innovation

Standardized scale economies gained through internal production are not the mainconcern, but coordination of external partners’ activities is, and specialization is drivenby a range of opportunities resulting from cultural, administrative, geographical, andeconomic differences (Ghemawat 2007a, 2008, 2010).

Figure 4 illustrates four strategies for allocation of resources to deal with differencesin the context of international business model innovation. International business modelsdeal with differences in various ways. A standardized business model in a global settingis designed to handle market differences, enabling geographical extension withoutmodifications, to maximize economies of scale, thereby limiting the allocation of extraresources, whereas an adapted business model is about adjusting to local marketdifferences; this requires allocation of extra resources. The key strategic decision issimply to determine the degree of business model adaptation in response to localdifferences. When the main issue is the exploitation of differences between nationalor regional markets by locating parts of the supply chain in different geographicalplaces, we are dealing with a specialized business model (Ghemawat 2003a). Finally,coordinated business models combine such differences by allocating resources topursue extensive cross-border sales opportunities with extensive cross-border sourcingof resources and individuals (Di Gregorio et al. 2008). This is done by splitting theactivities and locating them where the best cost/value ratio is found (Mudambi 2008).

If the differences regarding both supply and demand can be overcome, and/or ifthere are no differences across the different local contexts, the result of business modelinnovation activities is standardization, as we know it from the traditional internationalbusiness and global marketing literature (Levitt 1983; Theodosiou and Leonidou 2003;Hollensen 2012, 2014; Bartlett and Ghoshal 1989). Often, the result will be the mostoverall efficient business model, and to achieve scale/scope economies that extendacross national borders, the same business model can be used on a global scale(Ghemawat 2007b, 2011). However, adaptation as the focus of business modelinnovation reflects the need for responsiveness to local conditions in terms of customersegments, relationships and/or channels to enable the highest revenue possible(Theodosiou and Leonidou 2003; Hollensen 2012, 2014; Bartlett and Ghoshal 1989).Not only does smart adaptation involve decisions about the extent of variation, it alsoaims at reducing the cost of variation (Ghemawat 2007b, 2011). Here, the adaptedbusiness model creates differentiated downstream activities. Business model innovationresulting in specialization relies on exploiting the differences in upstream activitiesaimed at selecting partners with low-cost activity resources. This is important due to thecontinuous pressure to reduce costs (Ghemawat 2007b, 2011). Often, a cost advantageon a downstream activity will create opportunities for new revenue streams and viceversa. Opportunities are captured through coordination by dynamically combining and

Downstream

Same context Different context

Upstream

Same context Standardization Adaptation

Different context Specialization Coordination

Fig. 4 Strategic decisions for resource allocation to deal with differences in the context of internationalbusiness model innovation

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integrating new value chain activities (Di Gregorio et al. 2008) to increase the firm’srevenue and decrease its cost level on a continual basis (Mudambi 2008).

Internationalization through business model innovation

In the following section, the ideal process for innovating the global business model isoutlined. We take a holistic perspective (Onetti et al. 2012b) integrating all previousdiscussions into one conceptual model integrating the design elements of focus, i.e., thestrategic decisions for resource allocation to deal with differences across geographicallocations, and the design elements of modus, i.e., the entry modes that manage theactivities in the different geographical locations. The entry mode–resource allocationstrategy relationship that deals with differences is the locus that regards the interna-tional business model’s design dimensions including the spatial geographical as well asthe positional value chain dimensions: globalization of markets and globalization ofproduction (Ghemawat 2007b, 2010, 2011). Figure 5 illustrates four types of interna-tional business models with specific strategic and entry mode elements. In the follow-ing, we will address how these dimensions and elements relate to the firm’s interna-tionalization process.

In the figure above, the arrows illustrate possible paths in the process of interna-tionalization through business model innovation. One path goes from domestic toexport-based business models followed by one from export to semi-global businessmodels. Another path goes from domestic through import-based business modelsending in semi-global business models. In other words, the firm is expected to

Fig. 5 Internationalization through business model innovation: in search of relevant design dimensions andelements

Internationalization through business model innovation

standardize as much as possible as well as having some local production and/ordomestic sales (Ghemawat 2003a).

First of all, domestic-based business models should be seen from an internationalperspective. Even though the firm acts in a domestic context, its products and servicescan be sold internationally through other firms, e.g., export houses. The same goes forlocal production: some supplies are imported but are bought from local distributors(Hollensen 2012, 2014). The way these firms deal with differences is standardized inthe sense that they relate to one (demand as well as supply market) context (Levitt1983; Theodosiou and Leonidou 2003; Hollensen 2012, 2014; Bartlett and Ghoshal1989). When the internationalization speeds up, the firm follows the path of market orproduction globalization. Going from domestic to export-based business models in-volves standardization in areas where no differences are found (Ghemawat 2003a).However, adaptation to small but important differences (Ghemawat 2003b), regardingcustomer relationships, channels, segments, and the creation of revenue are facilitatedby entry modes that mediate the international exchange of goods, services, information,and capital. Entry modes include direct international sales, direct export through agents,and/or wholly owned sales subsidiaries abroad (Hollensen 2012, 2014). Domestic toimport-based business models is another path; this also involves standardization inareas with no differences. However, specialization aiming to achieve cost reduction byutilizing differences (Ghemawat 2007b, 2011) among partners’ key activities andresources will be carried out in collaboration. These partners will facilitate imports,outsourcing through contract manufacturing and/or offshoring production activitiesthrough wholly owned production subsidiaries abroad (Hollensen 2012, 2014). Focuswill be on efficiency; so, a firm specialized in certain core activities will let other firmstake over activities where they are more efficient. Finally, the semi-global businessmodel draws on experience from other business models where importing and exportingactivities and the ensuing cross-country flow of finances, products, and information arecoordinated and, where it proves to be most efficient, localized. These flows arefacilitated through licensing, franchising, joint ventures, and/or wholly owned salesand production subsidiaries abroad (Hollensen 2012, 2014; Root 1987). As part of thiscoordination strategy and depending on the nature of the differences, the firm’s strategicdecision will be a combination of standardization, adaptation, and/or specialization.

Conclusion and implications

The research questions addressed the search for relevant design dimensions andelements for internationalization through business model innovation and also focusedon the interrelation between these dimensions and elements. The result is a conceptualmodel illustrating that in internationalization through business model innovation, thedesign dimensions are domestic versus globalized in both an upstream production and amarket perspective. The outcome is four types of international business models withspecific resource allocation elements equipped to deal with differences among geo-graphical locations and entry modes. (1) The domestic-based business models try toovercome differences by taking a standardized strategic approach to domestic demandand supply markets through domestic sales, indirect export, and local productionactivities. (2) The export-based business models also rely on domestic production

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and focus on an adaptive strategic approach to globalized markets by means of directinternational sales, direct export through agents, and sales subsidiaries abroad. (3) Theimport-based business models focus on domestic markets with a specialized strategicapproach through import, contract manufacturing/outsourcing, and production subsid-iaries abroad. (4) The semi-global business models rely on the globalization of marketsand production with coordination as the strategic approach to utilize licensing, fran-chising, joint ventures, and sales and production subsidiaries abroad.

As mentioned in the “Introduction,” the concept of international business models is awidely but not substantially used concept. Likewise, the international perspective onbusiness model innovation is rare in the literature but a common phenomenon inbusiness. This paper thus contributes to the business model innovation literature byusing theoretical constructions from the international business field to extend theresearch stream of business model innovation by focusing on elements and processes(Schneider and Spieth 2012; Onetti et al. 2012b). In other words, business modelinnovation in a global setting has to take domestic and global downstream markets andupstream production into account when designing international business models. Thesubstance of these international business models encompasses resource allocation fordealing with differences among geographical locations as well as entry mode elements.

This paper makes three important theoretical implications to the field of the follow-ing: (1) international entrepreneurship, (2) business model innovation, and (3) thedirections for empirical research in internationalization and innovation. First, thepresented conceptual model illustrates possible paths in internationalization throughbusiness model innovation, which is in-line with internationalization of the firmunderstood as an innovation-decision process (Andersen 1993; Rogers 1962). Thispaper enhances the literature on international entrepreneurship. It offers a conceptualmodel for understanding how international market opportunities can be achievedthrough business model innovation, which can supplement the usual focus on speed,scope, and extent of internationalization processes. Second, this paper contributes to thebusiness model innovation literature by using theoretical constructions from the inter-national business field in order to extend the business model innovation research streamthat essentially focuses on elements and processes (Schneider and Spieth 2012; Onettiet al. 2012b). An international perspective on business model innovation is rare in theliterature but is a common phenomenon in business. In other words, business modelinnovation in a global setting has to take domestic and global downstream markets andupstream production into account when designing international business models. Thesubstance of these international business models encompasses resource allocation fordealing with differences among geographical locations as well as entry mode elements.Finally, our findings also have implication toward the directions for future empiricalresearch. Empirical surveys could be carried out by using our conceptual model as thetheoretical framework for investigating business model innovation in a global setting.This could be done in order to test the conceptual model. Additionally, the conceptualmodel could be used as inspiration for the assessment of both international andinnovation performance in international new ventures. Also, case studies of businessmodel innovation processes in an international setting would be very appropriate tofine-tune and evaluate the conceptual model and to exemplify the conceptual throughreal firm examples. Our model will offer a more holistic understanding (Onetti et al.2012b), opening up new avenues of research where business model innovation will be

Internationalization through business model innovation

a valuable approach to clarify firms’ internationalization processes and where thelocation dimension will be an important ingredient in innovating business models.

Furthermore, our paper also makes important managerial implications in relation tobusiness model innovation and the internationalization processes. The conceptualmodel can be used to design appropriate international business models giving manage-ment an idea of which processes and elements will be involved. Additionally, theconceptual model illustrates possible paths of internationalization through businessmodel innovation.

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