Choosing Foreign Markets in the Software Industry – 6
This series of posts discusses how to choose foreign markets in the software industry. Entering a foreign market in the software industry is a very strategic decision. Finding, winning, making, keeping and growing customers in foreign countries requires establishing infrastructures, which can drive the marketing and sales processes as well as the implementation and support activities. Customers in foreign markets will be reluctant to do business with us unless we can demonstrate a solid commitment for the long haul.
A competitive product is not enough.
The Long List
Based on the approached explained in the previous five posts you should now be able to pick a long list of potential markets that you could consider approaching.
The long list should include no more than 10 countries. As soon as you have decided to enter a new market you can review the list and add more countries.
A Market Report is a fast desktop research survey aimed at identifying issues that may make market entry risky or attractive. We need to know more about the specific business model environment in the market especially the following issues:
- Market potential
- Market requirements
- The competitive situation
Estimating the market potential will help us answer three critical questions:
- Is there a significant market matching our key market segments?
- What market penetration investments are required to make it to the 20% market share?
Entering foreign markets must have the objective of achieving market leadership. The first milestone is the 20% market share is also called the tipping point. Passing the tipping point will change market dynamics in our favour. The market will start pulling and our cost of sales will decrease, our margins will increase, economy of scale will kick in, profitability will increase and our barriers against competition will improve.
Before entering the market we must invest in meeting threshold market requirements. Most markets have certain local requirements that we must meet to comply with the legislation and be considered by potential clients. These requirements can be based on language, [slider title=”locale”]Locale is a set of parameters that defines the user’s language, country and any special variant preferences that the user wants to see in their user interface. Usually a locale identifier consists of at least a language identifier and a region identifier. http://en.wikipedia.org/wiki/Locale [/slider], local legislation, market traditions or by the competitive alternatives available.
The Market Report should help us estimate the investments required to meet the thresholds.
The Competitive Situation
The most determining opposition against market entry is the competitive situation.
In general, the B2B software industry does not allow for [slider title=”brutal force market entry.”] “Brutal force” is the situation where market entry is made through massive investments in marketing and sales against competitors with products of equal value [/slider] Market entry requires that we have significant competitive advantages justifying the switching cost for the customers. In addition our approach and behaviour must convince the customers that we are a better alternative in the long term and that the risk of engaging with us is low.
The Market Report must give us a first picture of the competitive situation allowing us to qualify the market for further analysis.
The Short List
The Market Reports will help us reduce the long list to 3-5 markets.
Before we can make the final selection we need to perform a Market Assessment.
The objective of the Market Assessment is to assess if we can define a position in the market where we can compete successfully. Particularly important are the interviews with a significant number of potential customers showing if there is sufficient movement in the market and if our value proposition is strong enough to compete against the incumbents as well as other potential insurgents.
With 3-5 Market Assessments we should now be able to make the final priority, define the Go-to-Market strategy, develop the action plan, allocate the budget and start the work.
The path to success is not linear and we will have to adjust the course as we learn more about how the market embraces our value proposition.
Industry Analyst Reports
You may have noticed that I haven’t mentioned Industry Analyst reports from companies such as IDC and the Gartner Group. Industry Reports may give us some indication of market trends, forecasts and market shares on a global or national scale, but they are mostly not detailed enough to serve us with data for decision making when entering foreign markets.
Any B2B software company should invest time and effort in being included in the analysts’ report. It is especially important to be included in Gartner’s Magic Quadrants. Customers look to the analyst’s reports and those software companies appearing in the reports and use the information against the competitors that are not included.
However, for making decisions on entering specific geographic markets, Industry Analyst reports are mostly of little value.
It occasionally happens that a market finds us and not vice-versa. We stumble upon an opportunity that seems to open a market for us with little investment required and a promise of a very short time to revenue. Such opportunities come to us when we attend exhibitions and conferences, show up as unsolicited inquiries on our web site, may come through our personal networks or may be initiated by a government sponsored incentive program.
How do we handle such opportunities?
From my own experience with more than 30 years in international software operations I will give opportunities a 10% success rate. 90% of the opportunities will turn out to take much more time than anticipated, requiring much more investment than anticipated and end up as a dead end.
The only way you can increase the success rate of opportunities is to disqualify most of them as early as possible.
My recommendation is to formulate a firm set of criteria against which you qualify all inbound and unsolicited opportunities. The best approach is to add the opportunities from such markets to your list of potential markets and take them through the exact same process as you perform on those markets you select yourself.
Remember that the biggest cost of opportunities turning sour is not the loss of the opportunity, but the suffering of those strategic alternatives that you consciously or unconsciously decided to re-prioritize in the mean time.
A Final Note
Your country of origin obviously makes a very big difference. A software company in Estonia has a domestic market representing 0,03% of the global demand for software and software related services. A software company in the USA has a domestic market representing 35,41% of the global demand. Although the US market is spread over a much larger territory, moving from one town to the next or from one state to the next is much easier than moving from Estonia to Latvia, Finland or Poland.
The determining factor in this context is the resources a software company can invest in the internationalization effort. In general US software companies can gain substantial momentum domestically allowing them to invest at a much higher level than their competitors originating from the smaller countries. These posts were written for [slider title=”SMB software companies”] The SMB definition from the European Union includes companies with up to 250 employees[/slider] with limited resources and who are thus much more vulnerable when making even small mistakes.
With smaller budgets you have to be smarter. However, you don’t have to be big to be smart.
Other Posts in This Series
Choosing Foreign Markets in the Software Industry – 5