Customer relationships and the small software ®rm
A framework for understanding challenges faced in marketing
$Dr. Kimmo AlajoutsijaÈrvi (Professor of Marketing)
a,*, Dr. Kari Mannermaa (Research
Professor)
a, Dr. Henrikki Tikkanen (Professor of Entrepreneurship & Management)
baBusiness School, University of Oulu, Oulu, Finland bUniversity of Kuopio, Kuopio, Finland
Received 10 December 1998; received in revised form 3 March 1999; accepted 9 August 1999
Abstract
This paper identi®es the major marketing challenges small software ®rms face during their growth and internationalization processes. It starts with an analysis of small software company activities along a continuum from `project business' to `product business.' This is followed by a brief analysis of the two major schools of thought in marketing, in which there is a paradigm shift from the traditional notion of marketing-mix management towards `relationship marketing' is discernible. Finally, the discussion is summarized in a framework for identifying the major marketing challenges facing software company managers at the beginning of the next millenium.#2000 Elsevier Science B.V. All rights reserved.
Keywords:Marketing; Customer relationships; SMEs; Software industry; Internationalization
1. The managerial challenge of growth and internationalization for small software firms
During the 1990s, the software industry has grown and internationalized. At the end of the decade, we are facing a situation in which there is a large and growing international market worth over 100 billion US$ per annum for different software products, including embedded software, packaged software and tailored systems [28]. However, the rapid growth of the indus-try has not been generally recognized. For instance, it is little known that the software industry in the US
nowadays ranks third among its largest industries, and amounts for approximately 75 percent of the world software market.
The dominance of large US software companies, such as Microsoft and Oracle, is so evident that one seldom thinks that the global market share of Eur-opean software producers is currently ca. 20 percent and that it is growing steadily. Most European soft-ware ®rms are relatively small and concentrated almost solely on serving their home markets. For instance, there are approximately 2000 software com-panies in Finland and only 10 percent have regular export activities. However, today software is increas-ingly needed, both for new products as well as in various development and manufacturing processes. Smaller ®rms can also bene®t from the growth of the industry through increased internationalization:
$
(Briefing) Editing by E.H. Sibley
*Corresponding author. Tel.:358-553-2929; fax: 358-553-2906.
E-mail address: [email protected] (K. AlajoutsijaÈrvi).
for example, Finnish software producers have increased their exports by more than 40 percent annually since the mid-1990s [17]. Internationaliza-tion and `productizaInternationaliza-tion' can be seen as the key prerequisites for continued growth in the software business. In the context of the software industry, productization typically includes a shift from unique service-intensive customer projects towards tangible standardized products aimed at international mass markets. We argue that this shift from local to inter-national product business calls for a major mindset change in understanding and managing growing soft-ware companies. This is especially relevant for small Nordic software ®rms, because of the openness and small size of their home markets. On the other hand, the Nordic countries are at the forefront of IT devel-opment and use, which offers sofware ®rms a unique opportunity to gain competitive advantage in interna-tional markets. For instance, the penetration rate of cellular phones and the use of the Internet per house-hold in Finland are the highest in the world.
The purpose of this paper is to identify the major marketing challenges that small software ®rms face during their growth and internationalization. It has been argued that managerial competence, especially in marketing, currently remains at a rather premature stage in many software companies where technology development has traditionally been the central area of interest among managers [12,24]. Furthermore, prob-ably due to the newness of the industry, academic discussion on the management of the software busi-ness has been scarce: only a few contributions exist that speci®cally tackle the management of small soft-ware companies [4,5,6,7]. One of the main conclu-sions in these studies is the ever-growing importance of marketing in the development of software ®rms. We would argue that there is currently a clear need for software industry-sensitive management and market-ing concepts. On the other hand, the software industry also offers an interesting arena for the development of management theory in a dynamic setting.
Firstly, we analyse small software company activ-ities along a continuum from `project business' to `product business.' Secondly, we brie¯y analyse the two major traditions or schools of thought in market-ing in which a paradigm shift from the traditional notion of marketing mix management towards `rela-tionship marketing' is discernible. Finally, we
sum-marize our discussion in a framework for identifying the major managerial challenges faced by software company managers at the beginning of the next mil-lenium.
We have cooperated extensively with dozens of small Finnish software ®rms in the collection of information for the study reported here. Numerous qualitative in-depth interviews were conducted, com-plemented by several group discussions with man-agers during seminars arranged by the University of Oulu, etc. Thus, the arguments represent our under-standing of the typical situation faced by small ®rms in the software industry.
2. Software business in the late 1990s Ð from tailored systems to packaged products?
We are a small company concentrated heavily on tailored software systems. Our customer relationships are long-term oriented and based on mutual trust. Actually, we do not perform any specific marketing activities, and thus we do not have much professional marketing experience either.
Senior Executive, Small Software Firm in the Oulu Region
As this quotation highlights, small European soft-ware producers generally do business in the tailored software segment in their own home country within established customer relationships, without perform-ing activities that resemble those described as market-ing in well-known, traditionally oriented textbooks. However, many small software companies nowadays intend to enter the international packaged software market, which naturally functions in accordance with a business logic very different from the familiar local context.
Table 1 compares tailored software-systems busi-ness with packaged-software busibusi-ness, along the key dimensions differentiating these two areas. Despite the dichotomized presentation in our table, we see `project business' and `product business' as the extreme polar opposites along a continuum highlight-ing changes in business logic when movhighlight-ing from tailored systems towards increased productization.
transactional logic labelled `product business'. On the other hand, small and locally operating companies typically follow the relational logic connected to more or less unique project deliveries, the `project busi-ness'. The objective of many small companies to enter the more transactional product business can be seen as paradoxical from the marketing theory point of view that currently puts emphasis on the development of intensive long-term customer relationships. From an entrepreneurial viewpoint, however, this desire is not surprising. Bill Gates did not get rich through selling tailor-made, labour-intensive systems; he productized his expertise in operating systems and eventually achieved a huge world-wide mass-marketing success.
3. Marketing thinking in the late 1990s
There has been constant discussion on the differ-ences and similarities of different research traditions or schools-of-thought in marketing since the early 1970s. For instance, Hunt [14] and Sheth et al. [26], have presented their widely-known typologies. Furthermore, MoÈller [19] and GroÈnroos [9] have identi®ed slightly different traditions, based on a European perspective. In the late 1990s, however, there seemed to be widespread consensus that the traditional marketing mix management paradigm
and different relational approaches form the basic two alternative approaches to marketing [22,27].
Several authors (e.g. [30]) have also proposed that different business relationships vary along a `market-ing-strategy continuum' or a `range of marketing relationships.' At one end of the continuum is the purely transactional relationship, in which the custo-mer and the seller focus on the short-term exchange of basic products in a highly competitive market. This approach is identical to the traditional notion of marketing mix management. At the other end is the purely collaborative relationship, or even a hierarchy in the form of vertical integration, in which the customer and the supplier organizations form strong social, economic, technical, and legal bonds over time in order to achieve mutual bene®t. The second approach has its primary theoretical underpinnings in International Marketing and Purchasing Group (IMP) interaction/network research [8,15,16] and the so-called Nordic School of Services and Relation-ship Marketing [10].
The emergence of the marketing mix approach dates back to the late 1940s, when the marketer was conceptualized as a `mixer of ingredients'. Since then the managerial school of thought has virtually become the universal model for marketing among both academicians and practitioners. The marketing mix management approach can be characterized as tack-ling the following problem: How to develop an opti-Table 1
Tailored systems business versus packaged software business
Project business: tailored systems Product business: packaged software
Central capabilities Project marketing and management Productization, channel management, alliance building strategic partners in the industry Object of Exchange Unique project designed and implemented in
cooperation with the customer; designed for a certain hardware environment, service content high
Standard and/or modular products, designed for several different operating systems and hardware environments, service content low
Production Activities within projects, production `after sales,' connections between all functions of the company, discontinuity between projects, deadlines crucial
Duplication, the production of updates or `versions,' production `before sales,' production function rather independent of other company functions Customer base Narrow, well-known customers Broad, faceless end-customers
Nature of markets Familiar local/domestic, closed and networked Distant international, open, competitive Branding Not important, market assets concentrated on key
individuals
Central area of interest
Nature of exchange Interactive, mutual, multi-faceted, long-term oriented, project-related exchange
Opportunistic, simple, short-term oriented, product-related exchange
mal marketing mix consisting of product, price, place and promotion decisions for competing for the pre-ferences of the chosen target segment of consumers or organizational buyers.
Much research has been conducted on business relationships and networks. The earliest studies con-centrated mostly on understanding the nature of dya-dic relationships based on the observation that both customer and supplier are active [29]. In the next phase, the focus changed towards understanding the dynamic development of dyadic relationships. One of the main conclusions of the IMP Group studies was that a dyadic relationship has to be concidered in the context of a larger set of inter-®rm relationships forming the business context of the focal dyad. The underlying rationale was to understand the actions of the buyer and seller, and the longitudinal development of their relationship. This network perspective has recently attracted considerable. [1,3,21,30].
Table 2 compares the central tenets of the two polar opposites along a continuum from transaction to relationship marketing. However, it should be remem-bered that we have summarized the two approaches in a somewhat pointed way in order clarify their major philosophical differences.
It could be argued that many small software com-panies seem to perceive marketing mix management as the `true' way of doing marketing. Thus, they may
regard its adoption as the key for entering the inter-national market for packaged software: they do not consider the development of their present long-term customer relationships as `marketing.' The manage-ment of an internationalizing software company may believe that it is facing a completely new phenom-enon, requiring the adoption of more `professional' marketing techniques such as the 4Ps. Some recent academic contributions that argue that the marketing mix approach is best suited for getting new customers and that relationship marketing is best for the retention of existing customers might even give theoretical support to this idea [18].
4. A framework for identifying major managerial challenges in the software business
It is now possible to sketch the framework that is illustrated in Table 3. Through positioning themselves in accordance with their dominant business logic on the one hand and their primary marketing approaches on the other, companies can identify managerial chal-lenges during their growth and internationalization processes. The matrix describes four different situa-tions companies may face. Cell (1) depicts the typical situation, in which a company operates in project business within established customer relationships
Table 2
A comparison of the major theoretical approaches to marketing
The marketing mix approach The relational marketing approach
World view Managing a company's product portfolio, setting and modifying marketing mix-parameters to achieve optimal 4P configuration
Managing a company's customer portfolio, building long-term business relationships
Key concepts 4 Ps, segmentation, branding etc. Interaction, relationships and networks Foreign market entry The choice of a product/market, defining the goals
in the target market, the choice of entry mode, developing the marketing plan for penetration, the creation of control systems for monitoring
Focuses on the character and number of business relationships developed with other firms in the foreign network as well as with the actors that are active in the development of these relationships
Market interaction One-way communication, formal market studies, the seller is the active counterpart
Interactive communication, mutual learning and adap-tations, all interaction parties active
Differentiation Product differentiation Relationship differentiation
Negotiations Not seen as important Crucial
Promotion Non-personal advertising, brand and image management
Through personal interaction, developing identity as a reliable supplier in a network
Mutuality Not seen as important, own short-term goals and market opportunism are the central focus
with a relational marketing approach. On the other hand, Cell (4) depicts the objective of many software companies in internationalization: following the mar-keting mix approach. Cell (2) depicts some kind of intermediate form between `pure' relational project and international mass-product business. It is ques-tionable whether Cell (3) Ð project business in accordance with the marketing mix approach Ð will ever be a feasible alternative.
While moving from Cell (1) to cells (2) and (4), an important issue is managing the risk perceived by small software companies' foreign partners and cus-tomers. Risks related to the acquisition of software can generally be divided into the following components: those related to the unfamiliar product and those related to an unknown supplier (cf. [25]). Productiza-tion reduces the risk related to the product, since the buyer can test its functionality before the purchase decision is made; this is not possible when buying tailored systems. On the other hand, small software companies must establish credibility as reliable sup-pliers when entering foreign markets. This cannot be done without developing mutually oriented relation-ships with cooperative partners in target markets.
Thus, productization combined with internationa-lization does not necessarily imply unilateral move-ment from relationship development to more traditional marketing mix-based product marketing. The internationalization process essentially involves the incremental creation of personal relationships with foreign customers, that is, building a basis of trust. This is directly connected to the reduction of the uncertainty and risk perceived by the customers. Moreover, brand building basically aims at the same objective. In fact, branding is close to the long-term
development of customer relationships, since it can be seen as an important element in building customer loyalty.
This might lead us to conclude that the critical question in the internationalization of a small software company is not whether to adopt the 4Ps/marketing mix approach or whether to rely solely on relationship marketing (cf. [20]), but to identify actions which decrease the uncertainty and risks perceived by for-eign customers. This typically calls for the simulta-neous adoption of some features from both marketing approaches. The desire expressed by numerous entre-preneurs to shift from Cell (1) to Cell (4) is, therefore, seen to be overly simplistic. On the other hand, the recent determination of marketing academics to emphasize relational concepts in almost all business settings also proves to be unrealistic in the setting that small software companies face when growing and internationalizing.
We argue that the most important managerial challenges that small software companies are facing involve how to `enter' cells (2) and (4), which demand a new business logic, while maintaining traditional way of doing business. The most important managerial questions will then probably revolve around the questions:
1. How can we develop strategic and operational capabilities in product business to complement capabilities in the traditional project business? 2. How can we simultaneously manage several
businesses with differing logics, for example, cells (1), (2) and (4)?
3. How can we form and simultaneously manage profitable product and customer portfolios? Table 3
A framework for identifying major managerial challenges in the software business
The relational marketing approach The marketing mix approach
Project business (1) The typical situation faced by most small software companies: unique tailored projects within long-term customer relationships
(3) An impossible situation. Tailoring is not currently possible without cooperation with the customer
Product business (2) Product business within long-term -oriented customer relationships. Productization of learning from projects.
5. Conclusions
In the near future, the emerging phenomena of Electronic Commerce and Internet Marketing should also be added to our framework. Electronic Commerce as a form of doing software business on the Internet will clearly involve a new business logic Ð different from the more traditional project and product busi-nesses. Furthermore, parallel `Internet Marketing' will also require a restructuring of marketing practice and theory. Since software products and support services can now easily be offered through the Internet, sig-ni®cant changes are already occurring in business practices in many industries [2,13]. In this sense, it is legitimate to ask whether the slow, evolutionary, and incremental view of SME internationalization remains valid when Internet technology provides small soft-ware companies with a rapid, low-cost gateway to foreign markets (cf. [11,23]).
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Kimmo AlajoutsijaÈrviis a Professor of Industrial Marketing at the University of Oulu. He holds an M.Sc. in Accounting and Ph.D. in Marketing from the Uni-versity of JyvaÈskylaÈ. He has published articles in marketing and management on many topics including the manage-ment of customers relationships and industrial networks, core competence, business cycles and sponsorship in journals such as European Journal of Marketing, Journal of Business-to-Business Marketing,Advances in Business Marketing and Purchasing, Journal of International Selling and Sales Management,Journal of International Marketing and Marketing Research,Corporate Communications ± An International Journal, andPulp and Paper International. He is also author and co-author of several research monographs on marketing and management.
Henrikki Tikkanen is a Professor of Entrepreneurship and Management at the University of Kuopio, Finland. He holds an M. Sc. and a Ph.D. in
interna-tional marketing from the Turku School of Economics and Business Administration, Finland. He has published articles and monographs in marketing and international business on topics such as industrial networks and business relationships, business processes and core competencies and international project market-ing. His articles appear in journals such asJournal of Business & Industrial Marketing,Advances in Business Marketing & Purchas-ing,Journal of International Marketing & Marketing Research, Journal of International Selling and Sales Management,Finnish Journal of Business Economics, and Business Processes Re-engineering and Management Journal.
