Expert article 917 <strong>Baltic</strong> <strong>Rim</strong> <strong>Economies</strong>, 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 82 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 � Pan-European Institute � To receive a free copy please register at www.tse.fi/pei � Pan-European Institute is not responsible for opinions expressed in the expert articles and they do not represent institute’s official opinions.
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