Achieving Scale Through International Expansion, Part 2: Where Should a Microsoft Dynamics ISV Look?

If your company develops, sells and supports packaged software on a Microsoft Dynamics platform, then the challenge of achieving real scale will depend on expanding internationally. But knowing when, where, and how to expand can mean the difference between success and failure.

This three part series of articles examines:

• When is a software company ready to expand internationally?
• Where should it expand to maximize near and long term success?
• How should it undertake its new market entry and expansion?

Consider the following questions when deciding where to expand internationally.

Which country should you expand into?

Two strategies for deciding which country to expand into are:

1. Start with a smaller market to pilot and refine your go-to-market approach
   If your financial resources are particularly limited and your company has had limited experience in selling outside its domestic market, then a short term strategy may well be to begin in a smaller test market. This offers the combined benefits of a smaller investment and lower risk. For example, if your software is in English, the US and UK are large markets with vast opportunities, however, they are also the most competitive and costly to penetrate. Whereas, Australia or New Zealand are much smaller but equally developed English speaking countries. The market is concentrated in just two cities. Here, customers and partners are more easily identifiable and the competition may not be as intense. If your go-to-market approach stumbles or fails, the cost will be much lower than in the US. From this learning, you would be better positioned for success in large countries.
2. Select a large market where all the investment can be applied towards a bigger opportunity
   An alternative strategy is to take the long term approach and commit to the largest packaged software markets from the beginning. These are: the US, Germany, UK, France, Japan, and China.

What is the addressable market opportunity?

The United States is the world’s largest packaged software market with about 50% share. About 30% is in Western Europe led by Germany, UK, and France. About 15% is in Asia-Pacific – mainly in Japan, China and South Korea. The remaining 5% is in the rest of the world.

In part one, When to Expand Internationally, a simple method of estimating the market opportunity by country was described. It takes into account your software’s vertical specialization and works well for countries where company data is available.

How competitive is the market?

Competitor presence should be strongly considered when assessing a new country for entry. Countries that are dominated by one or two credible, well established competitors often have loyal customers and an ecosystem of partners that have built their businesses around these vendors. Two examples are Microsoft Dynamics NAV in Denmark and SAP in Germany. For customers and partners, the cost of changing to another vendor may be so high and/or so disruptive as to be prohibitive.

In fragmented markets, where there are many active competitors, each with less than 25% market share, customers and partners are often much more open to switching to best-of-breed solutions and are not as committed to a single vendor. This can be an opportunity for a new software company that has meaningful differentiation. The US, UK, Canada and Australia are some of the most open markets to best-of-breed solutions.

A note about the UK: for a majority of software companies, the UK is the gateway to Europe and the Middle East. This distorts the UK market greatly and makes it ultra-competitive because all these software companies expanding into EMEA use the UK as their base.

What is the cost of doing business?

People and premises: If you are expanding into a developing country, then you can expect the cost of labor to be lower. You can also expect the professionals in a developing country to be equally skilled to their peers anywhere in the world. For example, in India, very highly educated professionals are paid a fraction of their peers in the US or Europe. In other countries, the currency exchange rate plays a part. For example, Australian professionals are paid about the same as their US counterparts – in Australian dollars. Since AUS$1 = US$0.77 the wages are lower for US companies operating in Australia.

Even in developing countries, rents can be as high as in developed countries for prime locations. However, rents do vary city to city. For example, in the US, New York can be a lot more expensive than Houston or Atlanta. In Asia-Pacific, Singapore is where most foreign companies set up and therefore it has higher rents and wages. A lower cost alternative is Kuala Lumpur which is only a few hours’ drive away in Malaysia. Another consideration is public transport. If it is good, then locating further out to reduce rent costs and rely on public transport may be an option. While private cars are the norm in the US, in much of Europe public transport is a practical option.

Government policies: Government policies vary from country to country as do the incentives to either attract foreign software companies or protect the local ones. For example, the French government actively supports home grown software companies. Other countries provide tax breaks (e.g. Singapore) and even facilities (e.g. China) that encourage foreign software companies to come in and transfer knowledge to locals. They may also require foreign companies to work in joint-venture with local companies which can limit go-to-market options. Since the policies are as diverse as the countries, it’s difficult to generalize so individual research is advised.

“Gifts”: In some countries, particularly the developing ones, individuals in positions of influence and power may put their own interest over those of their employer and expect “gifts” in return for access. Many developed counties have specific laws and policies that specifically prohibit anything that could be considered as bribery. If this is the expected way of doing business in the target country then you may have to reassess its fit for doing business there.

Doing business with foreigners: In many countries locals prefer to do business with locals. This is particularly so in Asia. Too often, companies establish subsidiaries in foreign countries with expatriates from home. This doesn’t always work well because doing business in a foreign county is different than at home. Foreign content experts are almost always welcome, particularly in developing countries; however, because of familiarity, trust and reputation, business is best left to be done between locals. A good approach is to set up a local subsidiary with locally hired management and have an expatriate executive, such as one of the company founders, spend six to twelve months in the new country transferring expertise to the local team.

In-person or online: The cost of doing business can also be impacted by the cultural expectations of doing business in-person or on-line. For example, in the US, it is quite acceptable to contact customers and partners through a combination of telephone calls and emails and have virtual meetings (via Skype or similar) while both parties are qualifying each other to decide if there is common ground for a purchase or a partnership. This may extend all the way to doing online product demonstrations and evaluations. A face to face meeting is expected once there is agreement in principle – essentially to dive into details. In the US, customers and partners are less likely to invest time in face to face meetings until there is high likelihood that it will lead to an agreement.

In many European countries and Australia, business is still expected to be done face to face. Initial phone calls or emails are used to schedule a face to face meeting at which the offer would be presented. Typically, demonstrations and evaluations would also require face to face meetings.

Benefits vs Technology: In many European countries and especially in Germany, engineers and scientists hold senior sales and marketing positions. Therefore, the sales approach is led with a product’s technical excellence. In the US, where sales and marketing executives are more likely to have business degrees, customers and partners expect the sales approach to be led by the business value proposition – preferably related to the ROI. Frequently, European software companies preparing to enter the US market have to rewrite all their marketing brochures and website to be effective in the US market.

In the US, if you send a new product manual to a prospective partner, chances are they wouldn’t read it at all. In Germany, if you send it to a prospective partner, chances are that they would read it in detail, have a whole list of questions and come back to you with suggestions on how to improve your product!

Localization: In some countries where English is non-native, such as in the Nordics and Singapore, English is the business language and it is acceptable to offer an English version application. In many non-English native counties such as Germany, France, Japan and China, even though English is generally understood, the software has to be localized – which can add considerable cost.

How should the product be priced?

Before entering a new market, it is important to assess the local pricing expectations. Generally there are two views on pricing:

1. The lowest price is the deciding factor – this is particularly so in developing countries such as throughout South Asia, the Middle East, Eastern Europe, and Latin America.
2. Fair price for fair value – this is particularly so in developed countries such as the US, Canada, Western Europe, Japan, and Australia.

In countries where price is the deciding factor, deep discounts are expected and this can have a significant impact on margins. Margins can be further eroded if the market has either a large number of competitors or if your product’s differentiation is not important to buyers.

If you find that the street price of your product is expected to be 20% lower than in your domestic market, you also risk your product being grey-marketed i.e. being bought in a lower priced market and deployed in a higher priced one. Pricing should be a major consideration in where to expand.

Are there enough partners?

If your go-to-market model is through partners, then your target country ought to have a sufficient number of partners with expertise in your target verticals and the platform technologies your software integrates with. While this is not a concern in large markets in Western Europe or the US, it may be in the smaller ones. For example, Australia has relatively few Dynamics ERP partners and some industries, such as manufacturing, are not as prevalent as in other countries.

How will technical support be delivered?

Winning and keeping reference customers in a new market is one of the keys to success. To do this well, technical support needs to be responsive to customers’ and partners’ needs. Technical support is provided with on-site, online, and telephone based experts. If your go-to-market model is through partners, then the partners are the first level of support so you can keep your experts in your home country as long as there is a guaranteed 24-hour response time via telephone or online.

If your go-to-market model is direct you need to have level 1 expertise online and level 2 expertise available to be on site. If you are expanding between European countries, then time coverage is not a major issue. However, if you are expanding from Europe to the US or Australia or vice versa, there will be additional cost and resources required to provide support during business hours.

The most important thing to do is to set the appropriate expectations with customers and partners. If the expectation is set that telephone support is available between 8am-5pm and online support response is next day then it needs to be. Unless there is an emergency, customers and partners will accept these terms.

What is the risk of piracy?

For any software company, piracy is a concern, and choosing to do business in a country which has high piracy rates presents added risk. Even if your software has elaborate serial number activation or persistent online validation, there is still a risk of reverse engineering. This risk comes not only from end users but also from partners.

According to a Software Business Alliance 2013 study the countries with 60% or more piracy rate include: China, Russia, India, and several in Eastern Europe, South Asia, and Latin America.

In conclusion

If you have a particularly limited budget and little experience in international expansion, consider starting with a smaller, developed market like Australia. If you have the time and resources to invest in a large market like the US, start with one vertical and one state at a time. We will discuss how to expand internationally in the next article.

Additional resources:

• The CIA World Fact Book is a good free resource to find information on specific countries.
• Email Paul Solski to receive the International Expansion Readiness Self-Assessment: paulsolski@aimcorpinternational.com
• Attend Paul Solski’s WPC 2015 session: Strategies for Successfully Entering the US Market.