Baltic Rim Economies - Baltic Port List

Expert article 917 Baltic Rim Economies, 21.12.2011 Quarterly Review 5�2011
How to select international distribution channels for business software
products?
By Esa Sallinen
Internationalization of the Finnish software industry
The total size of the Finnish software industry grew by 5 percent in
2010 to approximately 3.2 billion euros. Roughly 45 percent of the
software firms received some international revenue, but only one
fifth generated over 20 percent of their total revenue from
international markets. About 40 percent of the firms with no
international revenue were planning to internationalize.
Yet, improvements on the internationalization front are
required because the foundations for the global competitiveness
are in good shape, and the small domestic market does not
provide enough potential for growth. Finland has a skillful
workforce, a good international reputation, technological knowhow,
and an abundance of small flourishing software firms with
substantial growth potential. In developing industry-specific
software, Finland is one of the most competent countries in the
world. The software industry in Finland has been characterized as
the most probable growing ground for the ‘next Nokia’, and the
country as the second most favorable environment for the
development of software businesses after the U.S.
Although large software product firms and some game
companies typically receive the most media coverage, small and
medium-sized firms, which serve the business and public sector
customers, are more typical in Finland. Unfortunately, the business
models of these firms do not internationalize as easily as the ones
based on standardized consumer software. Furthermore,
business-to-business software firms tend to be technologicallyoriented
and lack marketing skills, especially in an international
context.
Selecting suitable channels for sales, promotion and delivery is
one of the key areas of improvement for the internationalization of
Finnish software firms. These are the most critical functions in
distributing software to foreign countries.
What are the characteristics specific to business software
products?
A thorough understanding of the characteristics of a particular
software product is the starting point for distribution arrangements.
The intangibility enables online delivery and provides many
opportunities, but the knowledge and service characteristics of
business software products often complicate the distribution.
Firstly, core software usually cannot be delivered unchanged
to all customers, but requires some modifications. Often business
software products have to be localized to foreign conditions or
customized to meet the needs of different industries or individual
customers. Moreover, the implementation projects of business
software often take time, and intensive after-sales services are
frequently required. Often a software product only forms the core
of the total customer offering which includes a wide variety of
services, as well.
Secondly, software is always based on knowledge, which may
be technical or functional knowledge about software itself or about
the business processes of customer industries. Possessing such
information may be required during the sales process and the
service delivery (e.g., consulting, installation, support).
How to consider these characteristics when selecting
international distribution channels?
No universal solution to channel selections exists, even though the
characteristics are known. In the early stages of
internationalization, online deliveries directly from the headquarters
are often sufficient as they can be mostly conducted online. Sales
can be operated from the headquarters or can be contracted out to
foreign sales partners. At some point however, if the sales volume
in a particular market grows enough, a shift to channels that are
locally present and provide the delivery of services will become an
issue. The presence in foreign markets can be achieved by
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establishing foreign units, alone or together with partners, or by
cooperating with independent intermediaries.
The Internet can be utilized as the main channel of promotion and
delivery, but sales negotiations usually require a sit-down with the
customer, as the software product is only one part of the
negotiable solution and the price may be quite high. The Internet is
more suitable sales channel for highly standardized software.
The extent to which the aforementioned characteristics occur
in a certain software product partially determines which channel
arrangements would be most suitable. In general, high serviceand
knowledge requirements favor integrated channels. Simple
and standardized products with low service content, as well as
general applications used across various industries can be more
easily distributed through independent intermediaries.
This is due to the fact that transferring software-related
knowledge to outside entities can be a demanding task. It may
become too costly to carry out, particularly in the case of highly
complex and firm-specific knowledge. Intermediaries that are able
to absorb such knowledge at a reasonable cost may be hard to
find. If taking care of the distribution requires both, knowledge on
the processes of a specific industry and technical competence,
then finding suitable intermediaries becomes especially
problematic. If appropriate intermediaries can be found, tighter
cooperation is needed than in cases of simple software products.
High service requirements may call for physical presence in
foreign markets. Often software and service deliveries do not
require physical interaction and can be conducted via electronic
interfaces, but if the quick delivery of service is crucial and the
market is distant, a service provider should locate at least in a
nearby time zone. If the necessary services are complex to deliver,
they often complicate the use of intermediaries. For example, a
complicated installation process may discourage the producer from
using intermediaries and the intermediaries from distributing the
software. However, if the delivery can be supplemented with valueadding
services, this can become a source of extra revenues and
thus an incentive for intermediaries.
Some customer industries are extremely global, whereas
others apply mostly local standards, which affect the level of
localization required. The need for extensive localization favors the
use of foreign partners because they possess first-hand
knowledge on local conditions.
It is strongly recommended to take into account the specific
characteristics of a particular business software product when
selecting international distribution channels. By carefully evaluating
the characteristics of its software product, a producer can avoid
extra costs and lost opportunities caused by unsuitable channel
selections.
Esa Sallinen
Independent researcher
Turku School of Economics
Finland
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