Entering a Foreign Market – The 9 Steps to Success for Software Companies
We at TBK Consult help software companies become global market leaders. 50% of our clients seek our assistance before they venture out from their domestic markets, and the other 50% come to us when their global growth doesn’t meet their ambitions or expectations.
In both situations the two big questions we always get are:
1. Which market should we pursue first?
2. What must we do to become successful?
In this post I will give the short recipe for addressing these two questions. I will conclude with the 9 steps that will make you successful.
Although we get the two questions in the sequence mentioned above they should actually be reversed. You may do things a little different on the tactical level in the individual market, but your business model must remain the same for all markets. This will be clear when you have read the full post.
What must we do to become successful?
You are already successful in your domestic market (I hope), and the reason you want to move to foreign markets is most likely because you have saturated your domestic market. It may no longer hold enough potential required to satisfy your ambitions.
If your motivation for moving to foreign markets is based on difficulties running your business at home, then you are in a very unfortunate situation. Without a solid position in your domestic market generating cash for your foreign ventures, you may risk the life of your company. Focus on fixing your business model first before trying to repeat it elsewhere. If your current location is not appropriate for your business model, then change you location to a more friendly one.[important]You should not attempt to repeat and scale unsuccessful business models. You should repair and fix them first.[/important]
A successful business model
To become successful abroad you must have a solid business model working at “home”. There is no way you can invent and manage different business models for different markets. 99,9% of the worlds software companies are simply not big enough to manage more than one business model globally.
I will recommend any software company to think global from day one. The software industry has so many “winner takes all” characteristics that you must develop your business model with the opportunity for global leadership in mind. This is probably easy to grasp for a Finnish, Danish, Norwegian, Estonian or Israeli software company that is facing domestic markets representing less that 0,5% of world demand.
German software companies having access to 7% of world demand and US based companies with a domestic market representing 38% of world demand often ignore the global perspective until forced to face the challenge. That’s very fortunate for the smaller companies from the smaller countries!
What is a business model?
I strongly recommend using the business model definitions provided by Alexander Osterwalder. It takes the business model discussion from the “blah, blah” level to something concrete and specific.
The business model is operating in an environment. Distinguishing between the business model itself and the business model environment is extremely helpful when designing international Go-to-Market approaches.
Document your business model
Invest time in documenting your business model. It will serve you well as you move out in the world trying to explain to people (customers, consultants, partners, staff, investors etc.) why you are worth their time, attention and money.
Which market should we pursue first?
The business model environment consists of four areas:
- Industry Forces (primarily your competitors)
- Market Forces (primarily your potential customers)
- Key Trends (regulatory and culture)
- Macro Economic Forces (economy and infrastructure)
You would prefer to choose markets where the environment is as close to your current market as possible. Major differences in the business model environments may require changes to your business model, which is associated with considerable investment and risk.
Explore which business model environment elements are crucial for making your business model work.
Web based – “no touch”
You don’t care much about the “local” business model environments when you are running a web-based no-touch business model. You rely on customers finding you.
There are approximately 1.5 billion people on the globe who are prepared to do business with you in English. The purchasing power of these 1.5 billion represents the largest web-based market on the globe. Since your business model relies entirely on reaching people through the web you are best served by the social media and search engines used by this English speaking world.
Yes, it is also the most competitive market, but if you have ambitions of becoming a global market leader you must get a lead on the English speaking segment first. Getting a solid market share on the English speaking segment of the web will automatically bring you into almost any country on the globe. The spillover from English is phenomenal. Only 360 million have English as their native language. The remaining > 1 billion have English as a second language and are living in non-native English speaking countries. No other language enjoys such spillover effects.
Human touch required
If your business model requires reaching out to potential clients through a personal contact, then the answer is a little less straight forward.
There is not a big market for fishing boats in Austria or ski lifts in the Netherlands. Some markets simply have little need for your product. You can tick those off your list.
Some markets may require substantial investments in product features before the customers will even consider the product. Some requirements are set by legislation and some by the market.
How do you check for market compliance?
A: You engage a local consulting company to perform a compliance study. Together with the consulting company you develop an elaborate questionnaire, which the consulting company takes to 100 companies in the market. We call this a market analysis. It comes as a 100-200 page report. It is mostly a waste of money.
B: You visit twenty potential customers matching your ideal customer profile at the highest possible executive level. We call this a lean market assessment. These twenty meetings will yield 20 meeting reports and generate 20 new relationships. Maybe even a couple of hot leads.
We recommend B. You’ll hear the story from the horse’s mouth, you will build relationships and you may even stumble across a potential project.
Don’t be afraid a skipping a market based on the findings. You can always choose to “fight another day” when you have more capacity.
The Competitive Situation
All markets have competitors. If there are no competitors then there is no market and then we face a completely different situation. Some markets have very strong competitors. Even if your solution is somehow “better”, local competitors are always hard to beat.
How do you check the competitive situation?
You will not really learn the nature of the competition before you face them in the field. We therefore recommend to include questions about competitors when you are making the twenty visits mentioned above.
Local Value Chain Game Rules
At least in B2B markets, business decisions all over the world are justified by some sort of rational commercial considerations. However, businesses don’t purchase the “best” solution in fair public tenders. How to get to the decision makers and how to manage the sales process (or facilitate the purchase process) is very different from market to market.
The more different the culture is the more you have to rely on local people. It takes a Mahout to ride an elephant. If you prefer to go places very different from your home turf then you better get a Mahout . Your ability to judge if your Mahouts are good or bad is limited, so be prepared for the gamble or go with Mahouts recommended to you by people you trust.
Cost of Sales (Bech’s 1st Law)
The level of investment required to enter a new market is not easy to predict. I have been through this process over 50 times. Not even once have we been on budget. It always took longer and required more investments than originally “planned”.
Cost of sales increases exponentially with the distance to the foreign market. If no one else have made that observation before me I will claim it as “Bech’s 1st Law.”
“Bech’s 1st Law” speaks in favor of social physics and also explains why all nations on the globe have their neighbors as their largest trading partners. It is simply easier to do business with your neighbors than with someone ten thousand miles away. If you are not competitive in your neighboring markets, then you may have some fundamental issues to address.
Bigger Markets are More Difficult Than Smaller Markets (Bech’s 2nd Law)
I admit that my perspective is biased by my experience. My operational experience has mainly been gained taking software companies from tiny domestic markets to bigger international markets. That’s going global on a shoe string. Getting 5% market share in Norway comes faster than the 5% in Germany, unless there is a Norwegian competitor blocking the market. However, my advice remains to build considerable strength in smaller markets before going for the big ones.
If you are short on funds and resources you will prefer a small market with an immediate fit as opposed to a large market with a poor fit. You will dream of the large market with the perfect fit, but with limited funds big markets are always tough to conquer irrespective of how good you believe the fit is.
More markets at the same time?
Can you enter several markets at the same time?
Of course you can – if you have the resources.
Each new market requires management attention and money. If you have that in abundance there is no reason for not entering several new markets simultaneously. Be aware of the raspberry jam phenomenon. If you only have so mush raspberry jam then spreading it thin across too much toast may cause the taste to vanish.
Caution: The Opportunity in “Brazil”
You meet someone in a lift and start chatting. She’s from Brazil (one of the BRIC countries!!). At a nearby cafe over a café latte you tell her about your company (which is based in Helsinki) and she tells you that she is finishing her studies here and will move back to Brazil soon. She comes from a good family and is well connected.
A month later she calls you after having made some local research. She believes there is a market for your product in Brazil. She has even identified a potential customer who is very interested in a demo of your product. She is prepared to work for you if you want to pursue this opportunity.
You have no plans for Brazil. It wasn’t even on your strategy map. Should you go for this opportunity?
No, never in a life time.
Such opportunities are taking your eyes off the ball. Such opportunities will be pulling you around by your nose. While you are flying back and forth between Helsinki and Rio de Janeiro, you competitors are rumbling around in Sweden, Norway, Denmark, The Netherlands, the UK etc. All markets that you can reach in less than two hours. All markets that will do business with you in English and where the culture is very close to yours.
I have seen so many disasters resulting from jumping on opportunities. Disasters that have caused major set backs and some that have been life threatening to companies. Not all opportunities turn sour, but I guess that more than 90% do. The choice is yours, but the odds will never be in your favor.
Follow these simple guidelines and I can assure you global success:
- Build a solid business model that works and scales well in your local market. Hold on to this business model.
- Identify the most critical business model environment circumstances required for your business model to thrive.
- Start checking if the business model environment circumstances are favorable in your nearest markets and move there first.
- Adjust your business model only to accommodate changes in the global business model environment, and don’t operate more business models simultaneously (until you are a very big company).
- Get to customers fast. Listen to them and work with them meeting local market requirements within your business model. Don’t waste time and money on 3rd party market analysis and reports (unless required by potential customers).
- Don’t bet the farm. Think big, but don’t take bigger steps than you can afford (to lose).
- Focus your resources to make the biggest possible impact in each new market you address.
- Ignore “opportunities” unless they support or reinforce your strategy
- Be patient. Rome wasn’t build in a day.