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Opportunities and pitfalls in digital platforms’ geographic expansion: strategic implications for Kazakhstani platforms

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Opportunities and pitfalls in digital platforms’ geographic expansion: strategic implications for Kazakhstani platforms

Assistant Professor of Entrepreneurship at NUGSB, Dr. Jiyang Dong shared his opinion on opportunities and pitfalls in digital platforms' geographic expansion.

Prevalence of Digital Platforms and Variance in Their Geographic Expansion Success

Digital platforms, such as Yandex Taxi, Kaspi, and Naimi.kz, are increasingly common and critical to economies and societies around the world, and Kazakhstan is no exception. On almost everyday basis, we use the service of Yandex Taxi, Didi, or Uber, which are platforms that connect drivers with passengers. We may also outsource household chores through Naimi.kz, a Kazakhstani digital platform that connects a wide range of service providers with the households in need of such service. Moreover, many of us have been relying on food delivery companies such as Wolt, which are platforms that link restaurants with diners at home. Digital platforms are everywhere in our lives.

Different from traditional companies, digital platforms are usually not much concerned with the production and distribution of physical goods, accordingly they can scale up and expand their user base to other geographic locations relatively easily, which perfectly explains the sweeping success of local platforms such as Kaspi, as well as the constant attempts of international platforms to enter Kazakhstan, including companies like Didi and Bolt in the ride matching business and Glovo and Wolt in the food delivery business, just to name a few.

Despite the relative easiness of their geographic expansion, not all digital platforms succeed in their expansion efforts, even including the well-funded ones. For example, Uber bled billions of dollars in its attempt to establish a foothold in Europe and China, and its valuation plunged to $50 billion at the end of 2019 (losing more than half of its $120 billion pre-IPO valuation). In contrast, Airbnb, Uber’s well-known Silicon Valley sibling, was able to make profits in as early as 2018 amid its global expansion efforts.

How Is the Concept of Network Bridging Valuable for Kazakhstani Digital Platforms?

Why do some digital platforms succeed to expand their user base geographically while others fail dramatically? This is a critical question facing digital platforms in Kazakhstan (such as Chocofamily, Naimi.kz, Kaspi, and Kolesa.kz) for two important reasons.

First, no matter how successful a local digital platform is at the current moment in Kazakhstan, it is likely to encounter formidable international competitors in Kazakhstan at some point. Therefore, it is invaluable to analyze to what extent potential international competitors can pose a real challenge.

Second, given the limited size of Kazakhstani domestic market, successful local platforms led by ambitious entrepreneurs will be motivated to expand their business abroad. Naturally, they should be analytically prepared to decide the locale of expansion in a strategic manner.

The analytical needs mentioned above can all be greatly assisted by the conceptual tool of network bridging. Upon understanding what network bridging is, one can easily form a structured analysis of why Didi and Bolt struggled so much in penetrating the Kazakhstani market, and which countries should local platforms (Kaspi, Kolesa, Naimi, etc.) choose if they find their domestic growth bottlenecked and intend to explore international expansion opportunities.

So, what is network bridging? By network bridging, I am referring to an approach where a platform firm scales its business by leveraging at least one side of its existing user base and connecting it with other synergistic platform networks. Since a platform company provides value by connecting different types of users (e.g., drivers and passengers in the context of ride matching platforms), when it enters a new country, typically it runs into the daunting tasks of attracting and retaining those distinct types of users.

For instance, when Didi and Bolt entered Kazakhstan, they had to recruit local drivers, and they also needed to influence local passengers to install and to get familiar with their apps. However, the drivers dislike working with a new platform that has few passengers onboard, neither are the passengers drawn to a platform with only a handful of drivers. Similarly, try to imagine what might happen if a Kazakhstani platform such as Kolesa entered the US market. No matter how successful the platform is in Kazakhstan, the American car buyers will wait until there are a large number of American sellers on the platform, and the sellers will behave in the same way, and meanwhile the expanding platform will be bleeding cash just as Didi recently experienced in Kazakhstan.

The expansion examples mentioned above share one commonality, that the expanding platforms had to build multiple sides of their user base in a new country from scratch. This is the case when the expanding platform has few network bridging opportunity. When this happens, the expanding platform barely poses any serious threat to the existing local platforms. In contrast, sometimes international platforms can indeed enter a new country with considerable network bridging opportunities, and predictably the impact on local platforms will be overwhelming. I will use the following example to illustrate this possibility.

As Alibaba tries to expand its payment platform Alipay globally, it does struggle in many places but has also achieved some notable progress in the countries that are popular destinations for Chinese tourists. Why? Overseas Chinese tourists are already used to make payment through Alipay on daily basis, so that Alibaba can leverage this existing side of its user base and focus on influencing just the other side of the platform – the foreign merchants with whom the overseas Chinese tourists will have transactions with. It is relatively easy for Alibaba because the foreign merchants are strongly incentivized to adopt a new payment platform favored by many Chinese tourists. As a result, the expanding platform can grow at an exponential rate in some foreign countries.

Key Implications of Network Bridging For Kazakhstani Digital Platforms

What are the implications of network bridging for digital platforms in Kazakhstan? I believe there are at least the two following points worth taking note of.

International platforms are not always formidable competitors for local Kazakhstani platforms.

Some international platforms have already entered Kazakhstan, and many others may attempt the same in the future. Despite their deep pockets and established reputation outside Kazakhstan, many of these platforms do not have network bridging opportunities in Kazakhstan and they will have to build multiple sides of user base in Kazakhstan from scratch if they choose to enter. As demonstrated earlier, this will make the life of certain international platforms very difficult in Kazakhstan (just refresh your memory of the ambitious entries of Didi and Bolt in Kazakhstan and their awkward disappearance).

Nevertheless, truly competitive international platforms may still show up in Kazakhstan. When a well-funded international firm finds ways to bridge its existing user base on one side of the platform with Kazakhstani users on the side of it, its strategic advantage over local platforms becomes too overwhelming to overlook. For instance, as a platform connecting online shoppers with E-merchants, AliExpress could pose some existential challenges to local platforms in overlapping business sector, because AliExpress has access to perhaps the largest assembly of producers and merchants in China (one side of the e-commerce platform) and can offer those products to Kazakhstani online shoppers (the other synergistic side of the platform) at a price few local platforms can match, as long as the cross-border logistics are properly handled by AliExpress.

Kazakhstani platforms can strategically plan their overseas expansion by analyzing and exploiting network bridging opportunities proactively.

As mentioned above, given the limited size of Kazakhstani domestic market, successful local platforms led by ambitious entrepreneurs will be motivated to expand their business abroad. Quite often, entrepreneurs aspire to enter a certain overseas market (such as an EU country) to impress their investors or current users. Although such ambition-driven plan is commendable, unfortunately it lacks strategic consideration of whether the Kazakhstani platform has any strategic advantage in the foreign market, accordingly its prospect of success is highly uncertain.

What can Kazakhstani platforms do to identify network bridging opportunities abroad? The concept of network bridging may seem deceptively simple, but innovative analysts can make good use of it across a variety of analytical contexts. In the end of the day, this requires the analyst to combine the conceptual tool of network bridging with solid understanding of specific digital platforms. Once you start to play with the ideas discussed in this article in conjunction with your entrepreneurial passion and deep understanding of a specific local platform, you will ultimately arrive at the pertinent strategic insights on how the platform can exploit network bridging opportunities in its geographic expansion.

Summary

Many successful Kazakhstani digital platforms has emerged during the past decade and continued to contribute to the social and economic development in Kazakhstan. These platforms face some unique pitfalls and opportunities that require specific analytical frameworks to assess appropriately. This article touches on one of such analytical tools, the concept of network bridging, and discusses its implications on how local platforms can evaluate the extent of threat posed by international platforms entering Kazakhstan and how local platforms may choose the destination of overseas expansion strategically.

Key Takeaways

- Some digital platforms succeed to expand their user base geographically while others fail, and network bridging is a critical conceptual tool that sheds light on the scaling strategy of digital platforms.

- Network bridging is an approach where a platform firm scales its business by leveraging at least one side of its existing user base and connecting it with other synergistic platform networks.

- International platforms are not always formidable competitors for local Kazakhstani platforms, as many of them do not have network bridging opportunities in Kazakhstan and they will have to start from scratch by building multiple sides of user base in Kazakhstan if they choose to enter.

- Kazakhstani digital platforms can strategically plan their overseas expansion by analyzing and exploiting network bridging opportunities proactively.