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Entering Foreign Markets in the Software Industry

Whitepaper from TBK Consult

Author Hans Peter Bech, M.Sc. (econ)


© Hans Peter Bech 2014 First edition Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights reserved. No part of these pages, either text or images may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission. The Business Model Canvas Framework is made available by Business Model Foundry GmbH, Kalkbreitestrasse 71, 8003 Zürich, Switzerland The copyright of other frameworks and information sources mentioned on this whitepaper belong to the proprietor. Published by TBK Publishing® (a division of TBK Consult Holding ApS) Denmark
 CVR: DK31935741 www.tbkpublishing.com ISBN: 978-87-93116-10-8


Entering Foreign Markets in the Software Industry

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Table of contents:

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Targeted audience

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Abstract

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Author

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Acknowledgements

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A Global Industry

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What is different abroad?

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Customers Value Propositions Customer Relationships The Channels Revenue Key Activities Key Resources Key Partnerships Cost

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The Business Model Environment

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Key Trends Market Forces Industry Forces Macro-economic Forces

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About the author

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Entering Foreign Markets in the Software Industry

Targeted audience

The target audience for this whitepaper is the board of directors, the CEO and the sales and marketing executives of software driven companies1 with ambitions for achieving global market leadership. The whitepaper primarily addresses the challenges of software companies with long value chains.

Abstract

This whitepaper discusses how to manage the business model when planning to enter foreign markets in the software industry. The whitepaper exclusively deals with B2B software business models requiring sales and support people in the field and thus some sort of local operation in the individual markets. The whitepaper recommends changing as little as possible in the fundamental business model architecture. Changing the business model architecture and moving into new markets at the same time will typically be very difficult to manage for most software companies. By using the business model environment framework we can identify those changes to the tactical implementation of our business model, which are required for successful foreign market entry.

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The whitepaper recommends being careful when using macroeconomic trends for choosing new markets. As macro-economic trends change much faster than the perspective needed for entering new markets, we may be caught up in a gold-rush type situation with other insurgents. In addition B2B software solutions are often anti-cyclical making macro-economic peaks less attractive.

Author

Hans Peter Bech, M.Sc. (econ.)

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia, www.flier.ee Proof reading: Emma Crabtree, ecr@tbkconsult.com Independent Software Vendors (ISVs)

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Entering Foreign Markets in the Software Industry

A Global Industry

The software industry is by nature a global industry. As the software industry is blessed with low cost of entry and simple value chains international growth comes much easier in the software industry than in most other industries.

Starting a software company can be done with very little investment. Bringing software to international markets requires no investments in factories and logistics infrastructure. A software business model is primarily dominated by development and sales. This structure enjoys tremendous economy of scale benefits motivating software companies to grow globally as fast as possible. As the mainstream customers always favour the market leaders, those software companies that do not make it in global market leadership are severely penalized. The global market leaders such as Microsoft, Oracle, AutoDesk, Adobe and SAP have made it virtually impossible to run a local business competing with them. Customers prefer to be served by the globally recognized brands rather than by the smaller local brands irrespective of whether their products are on par with those of the giants. Thus, the rule of thumb in the software industry seems to be “grow globally or die.�

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Although growing a software company globally is easier than for most other types of companies, many still fall flat on their faces when trying. This whitepaper provides some guidelines, which should help software companies become more successful with their international growth activities.

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Entering Foreign Markets in the Software Industry

What is different abroad?

Software companies who are successful in their domestic markets should take a close look at their business model and ask:

“What changes when we go global?” The answer should be: “As little as possible!” Let’s take a look at each of the business model building blocks.

Customers

Will the ideal customer profile change as we enter foreign markets? Hopefully not. Changes to the customer segments we choose to address globally as opposed to locally may require reengineering the entire business model. That is a huge endeavour and introduces increased uncertainty and risk. Entering foreign markets may require that we become even more specific in our ideal customer profile definition and start out with a more narrow focus on just the best-validated customer segments.

Value Propositions

Will the value propositions change as we enter foreign markets?

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Hopefully not. Changing the value propositions will also require complete reengineering of the entire business model. Again we may be even more specific in spelling out how we provide value to the best-validated customer segments.

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Entering Foreign Markets in the Software Industry

Customer Relationships

Will the customer relationships change as we go global? Hopefully not. Why should we change the way we find, win, make, keep and grow customers in Germany from the way we do it the Netherlands? By all means Germany is not the Netherlands, but the generic approach should remain the same for all markets.

The Channels

Will the channels change as we go global? Hopefully not. However, this is where many software companies make their first and biggest mistake. Most software companies have built a successful business domestically by serving their customers directly. As they go global they change the channel from direct to indirect.

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The issue is that they don’t realize the requirements for fundamental changes in the business models and they don’t realize that independent channel partners cannot be treated like their own sales force. Please see our whitepaper “The Software Partner Channel in a Business Model Context2” and “The Software Partner Channel and the Customer Value Propositions3” for a full explanation of

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Entering Foreign Markets in the Software Industry

the issues arising from using independent channel partners as your Go-to-Market approach. This whitepaper assumes that we use the same channel approach globally as we use domestically.

Revenue

Will the revenue streams change as we enter foreign markets? Hopefully not! Unless we change the business model (the channel, the value proposition and the customer relationships) we should maintain the same types of revenue streams we enjoy domestically in new foreign markets. Forces outside our business model may provide us with opportunities for asking higher prices or force us to accept lower prices, but the revenue architecture should remain the same.

Key Activities

Will the key activities change as we enter foreign markets? In principle no, but we will have to deal with longer chains of commands and different market requirements, competitive challenges and languages. Localization issues will need to be included in our product management, planning and development activities. I will get back to this later in the whitepaper.

Key Resources

Will the key resources change as we go global?

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In principle no, but again we need to have the resources to deal with a larger market and a bigger variety in market requirements, competitive challenges and languages. Mastering the English language will become a requirement in all corners of the organization as we shift our internal language to English. The more markets we have to serve and the longer the command lines are the more we need structure and well defined processes. We have to shift the balance from rapid agility towards reliable structures and processes.

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Entering Foreign Markets in the Software Industry

Key Partnerships

Will the key partners change as we go global? In principle no, but we may need to replicate some of our key partnerships in the markets where we choose to operate. As we expand globally it becomes important to show up on the radar of the industry analysts. We may need new sources for market intelligence and we may need new partners for certification purposes. We will most like have such key partners in our domestic market, but they may not extend into the new markets where we choose to operate.

Cost

Will the cost change as we go global? Yes. Entering new markets requires changes in our tactical organization and investments in building a presence in the new market. Serving foreign markets requires staff with different

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qualifications, additions to all our organizational units and budgets for travelling. Some of these changes and investments must be made up front and equity funded, as it is highly uncertain when revenue will begin to flow. For most B2B software companies requiring people in the field, the time to first revenue is typically no less than 1218 months.

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Entering Foreign Markets in the Software Industry

Many software companies grossly underestimate the magnitude of investments required and are also completely unprepared for the unpredictability associated with entering new markets. It always amazes me that software companies, having spent 10-15 years getting a reasonable market share domestically, embark on entering 5 new markets simultaneously with a different business model and with a half hearted commitment. No wonder they fall flat on their face.

The Business Model Environment

Alexander Osterwalder, who gave us the business model framework, also introduced the business model environment. While the business model represents those elements of our business that we can control, the business model environment represents all those elements that we cannot control. The business model environment is divided into four areas (the four forces): xx

Key Trends

xx

Market Forces

xx

Industry Forces

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Macro-economic Forces

As we move into a new foreign market we also move into a new business model environment. The business model environment framework offers an excellent approach to learn what the differences are and which tactical adjustments we should make to our business model and organization to become successful in this new environment.

Key Trends

The Key Trends cover such areas as: xx Societal and cultural circumstances and trends xx Regulatory circumstances and trends

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xx Technological circumstances and trends xx Socioeconomic circumstances and trends Societal and cultural circumstances and trends certainly come

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Entering Foreign Markets in the Software Industry

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Turkey

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Denmark Power Distance

Individualism Masculinity

Uncertainly Avoidance

Pragmatism

Indulgence

in many forms and shapes. That language is one of the most “visual” differences is, however, only the tip of the iceberg. The World Values Survey Association4 maintains a map of the world based on a few cultural parameters, which makes it completely different from the geographic world map. The Hofstede Centre5 provides insight into differences in cultural issues such as the power distance, individualism, masculinity, uncertainty avoidance, pragmatism and indulgence. While most software business model architectures will work in most countries the tactical implementation and execution must respect the cultural differences - or they will fail. Legislation differs from country to country. Even the EU countries have substantial differences in legislation. If our software requires compliance with local legislation then we must add key partners to provide advice and organizational resources to manage the relationships and processes.

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Other sources for information on society, culture, regulatory and technology circumstances and trends are available from The CIA FactBook, The World Economic Forum, OECD and the local Statistical Departments. Dealing with cultural differences from the outside is extremely risky. Nevertheless this is what most software companies do when making the first steps into a foreign market. I would recommend getting a “mahout” who can help you navigate and help make the right connections.

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http://www.worldvaluessurvey.org http://geert-hofstede.com

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Entering Foreign Markets in the Software Industry

Market Forces

The market force represents the demand side of our business: our customers. It includes such areas as: xx Markets Segments xx Market Needs and Demands xx Market Issues xx Switching Cost xx Revenue Attractiveness We obviously need to know how many potential customers there are in a foreign market and who they are, but also how they are organized, what specific requirements they have (which may be dictated by legislation and by our competition), where they meet, which media they use and who they take advice from. Insight to the specific issues and challenges of the market in a foreign country can be critical for the tactical implementation of our business model. As most B2B software represents an opportunity for process and workflow improvement, foreign markets with expensive cost structures are in general more attractive than countries with inexpensive cost structures. The Annual Competitiveness Index 6 published by the World Economic Forum provides an excellent indicator of which markets may be most receptive to software based productivity improvement solutions.

Industry Forces

The industry force represents the supply side of our business: our competitors. It includes such areas as: xx Competitors xx Other Value Chain Actors (independent channel partners) xx Substitute products and services

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With low barriers of entry and industry growth in general, the competitive landscape in each country on the globe is very different. The current incumbents, who enjoy the “home� advantage, make entering new markets very difficult.

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http://www.weforum.org/reports/global-competitiveness-report-20132014 6


Entering Foreign Markets in the Software Industry

Unless our value propositions offer some key differentiators and there is some awareness and demand in the market generated by “spill over” from other markets, then it may be very difficult and it may take a long time to break the ice unless we allocate massive resources to the endeavour. Most English-speaking software companies enjoy “spill over” externalities. They show up in Internet searches, when Englishspeaking people all over the globe are using search phrases corresponding to their activities. Software companies that participate in global industry exhibitions and conferences can also generate positive “spill over” effects, which can generate opportunities for new market entry. Software companies operating locally and using local language only will obviously not enjoy positive “spill over” externalities. The English speaking population7 on the globe is 1.5 billion compared to 400 million Spanish, 220 million French and 100 million German speaking. Chinese is also a major language, but the demand for B2B software from this group is negligible compared to the demand from the 1.5 billion English-speaking population.

Macro-economic Forces

Although macro-economic forces are very well documented8 they are probably also the less interesting for our market entry considerations. Macro-economic forces change much faster than our perspectives for market penetration. We will typically apply a long-term9 perspective on a new market and in that time frame it is impossible to foresee the development in the macro-economic circumstances. Especially in the developing world, these circumstances may change rapidly. The most important issue however, may be that the sales of our software can be anti-cyclical. Cost reduction and productivity improvement may be more critical in times of sluggish macroeconomic times, while less critical when the economy is booming. While some of the smaller markets (Scandinavia and Benelux) will accept B2B software products operating in English only, most markets will only accept products that are available in the local language. 8 Key macro-economic figures for all countries in the world are published by the CIA in the World Fact Book: https://www.cia.gov/ library/publications/the-world-factbook/ 9 At least 10 years

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Entering Foreign Markets in the Software Industry

Macro-economic forces normally affect big companies, while smaller companies may experience the exact opposite.

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Booming markets, which are easy to identify due the statistics available, stimulate “gold-rushes�. This means that in boom times insurgents rush into the markets building up capacity expecting to enjoy surfing the growth wave. Entering strategic markets when they are at the bottom of a macro-economic cycle may actually makes more sense.

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Entering Foreign Markets in the Software Industry

About the author Hans Peter Bech has been engaged with international sales and marketing operations in the software industry for more than 30 years. Hans Peter was instrumental in building the international business platforms for companies such as Dataco (now Intel), Mercante, Dansk Data Elektronik (now CSC), RE Technology (now Barco), and Damgaard/Navision (now Microsoft). As a management consultant Hans Peter has been consulting on internationalization to companies Microsoft, Danfoss, Proekspert, Jeeves Information eMailSignature, SoftScan (now Symatec), Netop, EG Scandihealth and Secunia.

providing such as Systems, A/S, CSC

Hans Peter is an advisor to IMMIB, the Turkish ICT Exporters Association. He also lectures in internationalization at the Sabanci University in Istanbul, Turkey. Hans Peter is the author of several whitepapers on internationalization in the software industry and he frequently writes articles on the subject. He started his career as a management consultant in 2003 and founded TBK Consult in 2007. Since then he has built the company to its present position with 25 senior consultants in 16 countries. Hans Peter oversees the development of TBK Consult as well as performs management consulting assignments for selected clients. Hans Peter holds a M.Sc. in macroeconomics and political science from the University of Copenhagen. He speaks Danish, English and German and is a certified ValuePerform, ValuePartner and Business Model Generation consultant.

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More about Hans Peter Bech

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Entering Foreign Markets in the Software Industry