Choosing Foreign Markets in the

Software Industry

Whitepaper from TBK Consult

Author
Hans Peter Bech, M.Sc. (econ)

 Hans Peter Bech 2014

First edition
Unless otherwise indicated, Hans Peter Bech copyrights all materials on these pages. All rights
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personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal
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The Business Model Canvas Framework is made available by The Business Model Foundry GmbH,
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The copyright of other frameworks and information sources mentioned in this whitepaper belongs
to the proprietor quoted.
All TBK Consult documents referred to in this publication are available from the TBK Publishing
website.
Published by TBK Publishing (a division of TBK Consult Holding ApS)
Denmark
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ISBN: 978-87-93116-11-5

Choosing Foreign Markets in the Software Industry

Table of contents:
Targeted audience

Abstract

Author

Acknowledgements

In Which Sequence?

The Level of Touch

What is Different in Foreign Markets?

The Ideal Market Profile

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Macro Criteria

Bechs 1st Law

Bechs 2st Law
Culture

The World Value Survey
The Hofstede Centre
Other Generic Information Sources

9
9
10
11
12
12

The Long List

15

Market Reports

15

Market Potential
Market Requirements
The Competitive Situation

15
15
16

The Short List

16

Market Assessment

16

Market Selection

17

Industry Analyst Reports

17

Opportunities

17

A Final Note

18

About the author

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Choosing Foreign Markets in the Software Industry

Targeted audience

The target audience for this whitepaper is the board of directors,

the CEO, the business development and the sales and marketing
executives of software driven companies1 with ambitions for
achieving global market leadership. The whitepaper primarily
addresses the challenges of B2B software companies with long
value chains.

Abstract

This whitepaper discusses how to choose foreign markets.

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.
A B2B software company with small market share in many
countries will suffer from economy of scale disadvantages until
they have grown these market shares past the 20% mark in
each market. The lions share of the value generation of B2B
software takes place inside the foreign markets and not where
the programmers of the software core are located.
This whitepaper provides an introduction to the selection process
and to those sources of information, which can help software
companies make informed decisions for entering foreign markets
and thus prevent very expensive and sometimes deadly
failures.

Author

Hans Peter Bech, M.Sc. (econ.)

Acknowledgements

Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,

www.flier.ee

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Proof reading: Emma Crabtree, ecr@tbkconsult.com

Independent Software Vendors (ISVs)

Choosing Foreign Markets in the Software Industry

In Which
Sequence?

The software industry is by nature a global industry.

Just make an inventory of the software you use personally and
in your business. You will see that it comes from all over the
world. If you look closely you will realize that a lot of the
software products you use are based on other software products,
which have even many more countries of origin. Hidden in the
small

print in the about note or the Software License Agreement

(that none of us reads) we find the nationality of the people
who actually wrote some or all of that software and the list of
countries grows.
However, a Finnish software company using Estonian
programmers or a piece of code written in New Zealand doesnt
make the Finnish company an international company.
Selling the software or the services that the software enable as
an independent brand in foreign markets is what we consider
internationalization.
In our whitepaper Entering Foreign Markets in the Software
Industry2 we explain why the software industry is global and
why software companies in the long run cannot survive serving
a local market only. Most software companies are fully aware of
this fact and one of the first questions we get in our consulting
work for software companies is:

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Which markets should I choose?

This whitepaper will provide the framework for identifying and
ranking those markets that most likely will provide the best
profit/investment ratio in a 10-15 year perspective.

TBK-WIPA-018

Choosing Foreign Markets in the Software Industry

What about the short term?

Entering foreign markets is not a strategy for short-term growth.
Entering foreign markets to stimulate short-term growth is
bound to fail. As we describe below any ambition behind a
global expansion strategy must be based by achieving market
leadership.
Be systematic and patient: Rome wasnt build in a day.

The Level of
Touch

The software industry makes it possible to run business models

with no or very low touch customer relationships. No or low
touch refers to the absence of individual and physical contact
with the customer3. No or low touch software (and Internet) based
business models may not be concerned with internationalization
in the traditional sense until they have saturated their English

(or Chinese or Spanish) speaking markets. Having done so they

have normally gained enough momentum and cash to take on
other markets. This whitepaper is not about these business
models that are representing only a small fraction of the software
industry.

www.tbkconsult.com

This whitepaper is about high and very high touch business

models, where engaging with customers requires localized
products, local marketing, sales and support infrastructure.
Please note that customers and users are not the same. Customers
always pay for a service, while users may not pay. Facebook have 1.2B
users not paying for the service they receive. Facebooks customers are
primarily advertisers and Facebook must have local offices servicing
these advertisers.
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Choosing Foreign Markets in the Software Industry

Such business models have long sales cycles (>6 months) and the
whole product4 is a typically a combination of our software, of
other (software) products and of customer specific services. Such
business models represent the vast majority of companies in the
software industry.

What is Different
in Foreign
Markets?

In our whitepaper Entering Foreign Markets in the Software

Industry we present a framework for identifying those
characteristics that may change as we move into foreign
markets. We introduced Alexander Osterwalders business
model environment framework for identifying those issues that
have an impact on our business model.

The Ideal
Market Profile

If we had 100% visibility into all markets then how would we

rank them?
To answer the question which markets should I choose? we
must first explore which market properties we should add to the
equation.

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Just as we define ideal customer profiles (and ideal partner

profiles) we must also define ideal market profiles. We cannot
find and prioritize markets unless we know what we are looking
for and how we should value or rank the various characteristics.

A term invented by Regis McKenna: A whole product is a generic

product (or core product) augmented by everything that is needed
for the customer to have a compelling reason to buy. Source: http://
en.wikipedia.org/wiki/Whole_product
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Choosing Foreign Markets in the Software Industry

TBK Consult has developed an approach5 that recommends

identifying 10-20 key characteristics for measuring market
attractiveness. Such characteristics can be anything including
size of key market segments, available channels, competitive
situation, market requirement characteristics, etc.
While these characteristics can be used in benchmarking
potential markets against each other they do not answer the
question of which markets to consider in the first place. Bringing
the number of potential markets down from the theoretical 220
countries available to a more manageable list must be based on
some high level considerations.
Gaining market insight is costly and time consuming, thus we
need to qualify markets on a few readily available
characteristics narrowing down the list to 5-10 countries where
we can invest in Market Reports and Market Assessments
before making the final investment decisions.
The process of reducing the options from the 220 countries
available to the best few has six simple steps.

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Macro Criteria

Macro Criteria

Long List

Market Reports

Short List

Market Assessment

Market Selection

Our business model and our business model environment will

provide us with some high level criteria which will help us in
qualifying markets and will produce the long list of countries
that could be potential markets.
I recommend starting the process by applying Bechs 1st Law and
Bechs 2nd Law.

Please see the factsheet Ideal Market Profile TBK-PFFS-007

Choosing Foreign Markets in the Software Industry

Bechs 1st Law

Having worked and sold software in most corners of the world I

have come to realize what I now call Bechs 1st Law6.

The cost of sales increases exponentially

with the distance to the foreign market.
This phenomenon complies with the economic principles of social
physics, which explains why most countries in the world have
their immediate neighbours as their most important trading
partners.
A software company located in Copenhagen can reach the Nordics
and most of the Central European markets within 2 hours. There
is a maximum 1-hour time difference in each direction making
communication convenient.
23% of the global demand for software and software related
services is represented within 2 hours flight from Copenhagen.
However, it is spread across 24 countries with 22 different
languages.
The advantage that software companies from smaller countries
enjoy is their experience with operating in market environments
substantially different from their own home turf. Combining
this experience with business acumen can outsmart even the
large investment budgets that software companies from bigger
markets enjoy.
Social physics remains a good guideline for short-listing foreign
markets in the early days of internationalization even when the
neighbouring countries are small markets.

Bechs 2st Law

Bigger markets are more difficult than smaller markets

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I admit that my perspective is biased by my experience. My

operational experience has mainly been gained taking software
companies from small domestic markets to bigger international
markets.
Thats going global on a shoestring.

http://tbkconsultblog.com/2013/09/05/entering-a-foreign-market-therecipe-for-sucess/
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Choosing Foreign Markets in the Software Industry

Getting 20% market share7 in Norway comes much faster

than the 20% in Germany or France8 (not to speak of the
USA).
With unlimited resources any software company would
choose the bigger markets first and then move to new
markets determined by market size.
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 tougher to conquer irrespective of how good
you believe the fit is.
Table 1 lists the 25 biggest markets for software and
software related services in world9.
A strategy based on taking the markets according to their
generic potential would direct all the software companies
in the world to the USA first. The reason this is not
happening is exactly due to Bechs 1st and 2nd Laws.

Table 1: The 25 biggest

software markets in the world

The history of the software industry is full of horror

tales of companies losing massive amounts of money
attempting to capture the US market. One of the most
prominent examples is Swedish Intentias attempt at
the end of the last century. In spite of investing heavily
for more than 5 years Intentia never managed to grow
the share of revenue in the US to more than 4% of total
revenue before Lawson acquired it in 2005.
Big markets look tempting from the outside, but are very difficult
to penetrate.

Culture

The top 25 markets are spread all over the world, represent at
least 15 different languages and are located in very different
cultures.

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Measuring culture characteristics and assessing which

challenges they will represent are obviously very difficult.
20% market share is considered the tipping point where market
dynamics change in our favour and an increasing pull effect is created.
8
Unless there is a dominating Norwegian competitor blocking the
market!!
9
Source: http://www.tbkconsult.com/services/bech-index-2012/
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Choosing Foreign Markets in the Software Industry

Figure 1: World Value Survey

Culture plays an important role in how we can undertake the

tactical implementation of our business models. The further
away from our cultural origin we come the more we will have
to listen to and rely on local people or people who have specific
cultural insight.
There are two sources for cultural insight that I will mention
here.

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The World Value

Survey

The World Value Survey10 measures, monitors and analyzes:

Support for democracy, tolerance of foreigners and ethnic
minorities, support for gender equality, the role of religion
and changing levels of religiosity, the impact of globalization,
attitudes toward the environment, work, family, politics,
national identity, culture, diversity, insecurity, and subjective
well-being11.
The World Value Survey produces the map shown in Figure 1.

11

10
11

http://www.worldvaluessurvey.org
http://en.wikipedia.org/wiki/World_Value_Survey

Choosing Foreign Markets in the Software Industry

The Hofstede Centre

The Hofstede Centre provides a very practical service comparing

various cultures and countries with each other on the following
dimensions:
xx Power distance
xx Individualism
xx Masculinity
xx Uncertainty avoidance
xx Pragmatism
xx Indulgence
An example of a Hofstede comparison is illustrated in Figure 2.
80
70

65

62

59
50

49
38

Brazil

34
12

14

Denmark
Power
Distance

Individualism Masculinity

Uncertainly
Avoidance

Pragmatism

Indulgence

Figure 2: Hofstede Cultural Comparison

The differences between cultures are substantial and values can

be directly reversed from one culture to another.
Although most business models will work in most cultures
(business is business) the tactical implementation can be
very different. Ignoring cultural differences in the tactical
implementation can make business models that are successful in
one country fail completely in another country.

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Other Generic
Information Sources

12

There are several readily available sources of information for

comparing the countries in the world. Most of these sources are
available free of charge and can be very useful when preparing
for strategic globalization decision-making.

Choosing Foreign Markets in the Software Industry

The CIA World Fact Book

The CIA maintains and publishes an impressive almanac12 with

detailed information on each country in the world.
The CIA World Fact Book is updated regularly and is an
excellent source of information on even the smallest countries in
the world.
The CIA database is also available as an app for smart phones
and tablets.
Kudos to the CIA and the US government for making this service
available to all of us.

The World Economic

Forum

The World Economic Forum is mostly known for its Davos

summit meeting in January attracting top decision makers
from government, business and NGOs all over the
world. However, the organization also provides a
rich repository of reports valuable for market entry
considerations.
The Global Competitiveness Index is a relevant
source of input for choosing foreign markets.
High touch and very high touch software is mostly
focused on optimizing business processes or personal
productivity. The incentive to invest in improved
productivity is affected by the competitive pressure
and the cost of labour. The demand for B2B software
is therefore much higher in countries with a high cost
of operation, especially high labour costs.

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As you can see from the Global Competitiveness Index

there is a very strong positive correlation between a
nations competitiveness and the cost of operations in
that country.
As a rule of thumb competitive countries are more
attractive markets for high touch and very high touch
B2B software. Companies operating in countries with
high operating costs are constantly on the outlook
for, and thus much more receptive to, productivity
improvement investments than companies operating
in low cost environments.

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https://www.cia.gov/library/publications/the-world-factbook/

Choosing Foreign Markets in the Software Industry

Another benefit of high cost and high competitiveness countries

is the prices we can charge for our products. While the focus of
low cost and low competitiveness countries is on low absolute
prices13, the focus in high cost and high competitiveness countries
is on price/performance, stability and quality.

OECD

The Organization for Economic Co-operation and Development

(OECD) is an international economic organization of 34 countries
founded in 1961 to stimulate economic progress and world trade.
The OECD publishes a vast amount of reports and statistics,
which can be very useful in market entry considerations. All
titles and databases published since 1998 can be accessed via
OECD iLibrary14.
The country reports, especially, provide detailed insight and
forecast on all macro economic parameters including rich
commentary on issues that may be important for assessing a
foreign market.

National Statistical Bureaus Each nation in the world has a statistical bureau. They produce

vast amounts of data. Some of it may be very relevant for our

market entry decision-making. The statistics often include the
number and size of companies in various industries according to
NACE or SIC codes. Such data may give us a good indication of
the market potential.

Export Associations and

Investment Attraction
Organizations

Most governments15 in the world allocate funding that supports

export activities and attracting foreign investors. These
organizations, which are typically organized under the Foreign
Service Administration and The Ministries of Economy and
Economic Development, also produce vast amounts of reports.
It is highly recommended to get in touch with the Investment
Attraction Organization in the countries considered, as they
This is reflected in the Big Mac index published by The Economist
http://www.economist.com/content/big-mac-index
14
http://www.oecd-ilibrary.org
15
On the federal, national and even the local level

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Choosing Foreign Markets in the Software Industry

will normally be very motivated in helping finding relevant

information about their region.

The Long List

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.

Market Reports

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:
x Market potential
x Market requirements
x The competitive situation

Market Potential

Estimating the market potential will help us answer three

critical questions:
x Is there a significant market matching our key market
segments?
x 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
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.

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Market Requirements

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, locale16, local legislation, market traditions
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

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Choosing Foreign Markets in the Software Industry

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 brutal
force market entry17. 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.

Market
Assessment

Before we can make the final selection we need to perform a

Market Assessment.
The Market Assessment is based on in-market interviews with
potential customers and market stakeholders such as analysts
and consultants.

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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.
Brutal force is the situation where market entry is made through
massive investments in marketing and sales against competitors with
products of equal value.

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Choosing Foreign Markets in the Software Industry

Market Selection

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 havent 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
entering foreign markets decision-making.
Any B2B software company should invest time and effort in being
included in the analysts report. It is especially important to be
included in Gartners Magic Quadrants. Customers look to the
analysts reports and those software companies appearing in the
reports use them against the competitors that are not included.
However, for making decisions on entering specific geographic
markets, Industry Analyst reports are mostly of little value.

Opportunities

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?

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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 in a dead end.
The only way you can increase the success rate of opportunities
is to disqualify most of them as early as possible.

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Choosing Foreign Markets in the Software Industry

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
deprioritize 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.
This whitepaper was written for SMB software companies18 with
limited resources and who are thus much more vulnerable when
making even small mistakes.

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With smaller budgets you have to be smarter. You dont have to

be big to be smart.

18

The SMB definition of the European Union includes companies with

up to 250 employees.

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Choosing Foreign Markets in the Software Industry

About the author

Hans Peter Bech has been engaged with international sales and
marketing operations in the software industry for more than 30
years.
Hans Peter was instrumental in building the international
business platforms for companies such as Dataco (now Intel),
Mercante, Dansk Data Elektronik (now CSC), RE Technology
(now Barco), and Damgaard/Navision (now Microsoft).
As a management consultant Hans Peter has been
consulting on internationalization to companies
Microsoft, Danfoss, Proekspert, Jeeves Information
eMailSignature, SoftScan (now Symatec), Netop, EG
Scandihealth and Secunia.

providing
such as
Systems,
A/S, CSC

Hans Peter is an advisor to IMMIB, the Turkish ICT Exporters

Association. He also lectures in internationalization at the
Sabanci University in Istanbul, Turkey.
Hans Peter is the author of several whitepapers on
internationalization in the software industry and he frequently
writes articles on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 25 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performs management consulting assignments for selected
clients.
Hans Peter holds a M.Sc. in macroeconomics and political science
from the University of Copenhagen. He speaks Danish, English
and German and is a certified ValuePerform, ValuePartner and
Business Model Generation consultant.

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