Internationalisation of the software industry

INTRODUCTION
This part of the report will discuss the international strategies employed by software firms globally. A discussion will follow explaining why several international business strategies are prevalent in the software industry. A preliminary assessment of the software industry will be conducted to find the extent of internationalisation and the history of internationalisation within the industry. Geographical characteristics, foreign market entry modes and enterprises structures for software firms will also be discussed. Finally, an explanation will be given for presence of the above mentioned factors.

AN ASSESSMENT OF THE INTERNATIONALISATION OF THE INDUSTRY
The computer software industry showed significant growth in the 1970’s due to IBM’s unbundling decision and the emergence of the personal computer (Campbell-Kelly, 1995). However, it wasn’t until the 1980’s that the industry began to internationalise. According to Kozul-Wright and Howells (2002) the major industrialised economies have dominated the international expansion in the industry both in terms of supply and demand.

Crick and Jones (2000) in their research discovered that high-technology firms tend to internationalise rapidly. This view is backed Moen, Gavlen & Endersen, (2004) who in their research found that the internationalisation process of computer software firms was rapid and usually started a year after the firms inception and took about three to four years for a firm to develop formal and informal relationships in order to start a process of continued growth and international market development. Coviello and Munro (1997) also ended up with similar results in their research of internationalisation of software firms concluding that firms showed “committed involvement across numerous markets, with international sales dominating their growth” in as little as three years.

Overall, the software industry is heavily internationalised with larger companies such as Microsoft and IBM operating in over 100 different countries. Smaller and medium sized firms also need to have an international or global focus from inception due to limited domestic demands in smaller countries or because of their “niche” offerings (Spence and Crick, 2006).

AN ASSESSMENT OF GEOGRAPHICAL CHARACTERISTICS OF INTERNATIONALISATION
McManus J. and Floyd D. (2005) estimate the world software industry to be worth about US$1300 billion and assert that 90% of the world’s exports in software is from the US and Europe. Kozul-Wright and Howells (2002) point out that the major players in the industry internationalised by expanding aggressively across Europe and North America. Bell (1995) found that many software firms were expanding into countries such as such as Germany, the UK or the USA, which were not only heavy consumers of software, but were also experiencing rapid growth. Ojala’s (2008) research indicated that firms originating from Finland and the U.S preferred to internationalise in countries with large software markets such as those mentioned above.

Source: Kooten (2009)

Outside of the US, UK, Germany and Japan and emerging countries such as India, China, Singapore and Malaysia account for around 6% of the global export markets (McManus and Floyd, 2005). Kozul-Wright and Howells (2002) insist that in recent years developing countries have become the focal point of relocation and new investment in the industry and cite India’s software industry as an example of this. They claim that traditionally, motivation for internationalisation was close proximity to prime users however, now this factor is decreasing in importance and according to McManus and Floyd (2005) most US companies cite cost savings as their primary reason for internationalisation.

Bell (1995) found that around 50-70% of the software firms he studied entered “close” markets in the initial stages of internationalisation. Bell asserted that initially firms targeted countries which were geographically and culturally close such as Finnish firms targeting Sweden, Norway and the former USSR and Irish firms targeting the UK.

Ojala’s (2008) Findings indicated that even though Japan had one of the world’s largest markets for software products there are a limited number of foreign firms operating within the country. China has similar issues and even though it has one of the world’s largest software industries it is mainly oriented to the domestic market (Nollen, 2007).

An important geographical cluster of the software industry exists in Bangalore, India. This cluster exists mainly due to the advanced infrastructure of the city (Heeks, 1999) and due to the fact that India being a former colony of the UK benefits from its links with the English language – an advantage not available to China, Russia or Japan (McManus and Floyd, 2004). Other clusters include the Northern Ireland software cluster in the UK, dubbed Europe’s offshore “silicon valley” by the Irish Times in December 1994 (O Riain, 1997), Finland with over 1,050 software companies operating in the country at the end of 2007 (BuyUSA.gov) and the Silicon Valley in California.

FOREIGN ENTRY MODES EMPLOYED BY FIRMS IN THE INDUSTRY
Bell (1997) found that entry into foreign markets by software firms was heavily influenced by networks and discovered that the most commonly used mode of foreign market entry by software firms was through the use of agents and distributors. Interviews conducted by Bell (1997) showed that through extant relationships between hardware manufacturers and software producers, software firms chose to enter export markets via the established distribution networks of the former.

Earlier research by Bell (1995) provided similar conclusions where he found that exporting was the mode of foreign market entry adopted by most computer software firms. He found that Finnish and Norwegian firms were more likely to appoint agents or distributors, whereas Irish firms tended to utilise their own export sales staff more extensively.

Crick, D. & Jones, M.V. (2000) revealed that most software firms tended to internationalise by either “solely exporting through agents based overseas or undertaking exporting with a combination of other expansion strategies”.

Lindqvist (1991) found that a firm’s network relations were the most important factor in determining its mode of entry and choice of market. Moen, Gavlen and Endersen. (2004) assert that a firm based its mode of entry depending on existing network relations and that there is a “limited correlation between the firms’ international experience and their foreign entry form.”

Bell (1995) revealed that only a few instances of firms internationalising via licensing, joint ventures or establishing overseas subsidiaries existed. The reason for this was due to the high level of “intellectual property” inherent in the industry which resulted in firms being reluctant to share this information. Firms used more direct modes of entry due to the nature of the software industry and the need for buyer seller interaction in order to provide the client with the necessary support and demonstrate capability of the software. Furthermore, due to the narrow product scope and fast obsolescence of software direct exporting was considered the most effective way of internationalising.

OVERVIEW OF ENTERPRISE STRUCTURES USED BY FIRMS WITHIN THE INDUSTRY
The structure developed by Microsoft includes the president and COO of the company overseeing the business operations, including sales and marketing and business development. The business divisions of the organisation are managed by group vice presidents, whereas the operations and sales and marketing divisions are overseen by senior vice presidents who are directly reportable to the president. Regional vice presidents follow the various senior vice presidents of each business division and the county-wise vice presidents appear below the regional vice presidents in the organisational hierarchy (Microsoft, 2001).

EA recently restructured itself as well focusing on its ‘titles’ by organising itself into “four distinct ‘labels’ to operate with dedicated studio and publishing teams, to streamline decision-making, improve global focus and speed new ideas to the market.” (Boyer, 2007). IBM initially had a functional structure; however it changed this and adopted a divisional business structure with each of its divisions responsible for one product.

Most software firms follow a divisional structure, as can be seen from the organisational structures of the companies mentioned above, with each product or division of the company responsible for one product or label of the organisation. However, most of the organisational structures that were looked at had the marketing and sales department of the organisation centralised.

OVERVIEW OF CONTROLS USED BY FIRMS WITHIN THE INDUSTRY
Kirsch (1996) in her research found four types of control mechanisms prevalent in the software industry. These controls were classified as behaviour, outcome, clan and self-controls.

Behaviour based controls are defined as organisational controls whereby a firm mandates certain kinds of behaviour and processes of its international sub-units (Gosain and Gopall, 2003). Examples of behaviour based controls include documentation-related behaviour controls (Kirsch, 1997), designing walk-throughs and development methodology specifications (Alvai 1984, Necco et al 1987). These controls help an organisation maintain quality control by observing behaviour of sub-units. Kirch (1996) points out that in software development organisations, there may be a diversion of preferences between software project participants and the firm’s management and thus these controls are required in order to make sure preferences of the firm are prevalent throughout its sub-units.

Outcome or output controls involve specifying desired goals and sub-units and evaluation managers based upon these predefined goals (Gosain and Gopal, 2003). Examples of such controls can be profitability, productivity, growth, market share and quality. An example of an industry specific output goal could be software defect rates (Gosain and Gopal, 2003). Jaworski (1998) found that outcome controls motivate sub-units to take corrective actions if they fail in achieving specified targets.

Clan-Based controls “operate through social norms and values such that the controlled entities internalise organisational goals and act in a manner consistent with the controlling entities expectations” (Gosain and Gopal, 2003). Gosain and Gopal (2003) cited learning orientation and quality orientation as examples of Clan-Based controls. Hurley and Hult (1998) found that organisations with learning orientations are innovative and according to Ravichandran and Rai (2000) those with a quality orientation produce higher quality software.

Self-control or personal controls are defined as controls enforced through personal contacts with subordinates. Since most small and medium sized software firms internationalise based on network relations and existing links, these types of controls are more prevalent in such software firms.

EXPLANATION OF INTERNATIONAL PATTERNS, LOCATION CHOICES, MARKET ENTRY MODES, STRUCTURES AND CONTROLS PREVALENT WITHIN THE INDUSTRY
Spence, Martine and Dave Crick (2006) claim that software firms operate in what Jaworski and Kohli (1993) defined as “market turbulence” where demand and competition are both high and the technology is in a state of flux. In cases like this, firms need to react rapidly to opportunities and situations rather than develop an incremental approach in their firms’ internationalisation processes (Crick and Jones, 2000). Spence, Martine and Dave Crick (2006) found that due to the narrow product scope and fast obsolescence of their products, software firms needed to internationalise rapidly. Thus it has been found that most software firms look towards internationalisation in the first couple of years of business.

Bell (1997) discovered that “many software firms concentrate on key markets and tend to pursue multi-domestic, rather than global strategies, because of their “niche” offerings and client’s very specific requirements”. Thus it was found that most software firms chose to internationalise in regions with large software markets such as UK, USA, Germany and India. Furthermore, developing countries such as Singapore, China, India and Malaysia were selected for internationalise mainly due to cost savings as pointed out by McManus and Floyd (2005).

Most software firms internationalised using direct modes of entry such as exporting or use of agents or distributors. The reason for this, as explained by Bell (1995) was because firms wanted to protect their intellectual property and due to the fast obsolescence of their products firms needed to internationalise quickly and found exporting as the most effective way of doing so.

The explanation for types of controls prevalent in the software industry is due to the fact that quality and innovation are the main focus of such firms and thus require controls such as output, clan-based, and behaviour controls in order to make sure the expectations set by the firm are met by its international sub-units. Many small and medium sized software firms use personal controls mainly due to the fact that they internationalise via established links and use such controls in order to influence their sub-units. The type of enterprise structure adopted by the firms in the industry allows them to focus on specific customers based on each of its different business divisions. Microsoft (2001) claim that this type of enterprise structure allows them to move towards a services-oriented future for their customers; whereas EA (Boyer, 2007) claimed that adoption of a divisional organisational structure allows them to focus on the operational efficiency of each of its ‘labels’.

CONCLUSION
In conclusion, after studying the internationalisation of software firms, it can be asserted that most software firms tend to internationalise rapidly. The mode of entry adopted by firms is usually direct or indirect exports. Mainly due to the need to internationalise quickly firms considered exporting as an effective way of exploring foreign markets. Choice of foreign markets mostly depended on existing links of these companies however; in some instances client followership has also been observed. Most companies expanded to regions with large software markets. Software firms adopted various types of controls including personal, clan and behavioural controls and the enterprise structure of most software companies is a divisional structure with a centralised sales and marketing department.

CRITICAL REVIEW OF THE UPPSALA STAGES MODEL
The following part of this report will critically review the Uppsala Stages model based on the internationalisation of software firms. It will start of by first introducing the concept proposed by the Uppsala model and then go on to show how the process of internationalisation adopted by most software firms does not follow the aforementioned model pointing out various contradictions in the process.

The internationalisation model was introduced by studies conducted by Johanson and Vahlne (1977) and Johanson and Wiedersheim-Paul (1975). The model describes the internationalisation process of firms and claims that firms internationalise by first moving into “closer” countries and then later expanding into countries with greater psychic distance. The model explains that firms being their internationalisation process by entering countries with low psychic distance because these countries share similar culture, political system, language, level of industrial development and literacy. Once a firm has acquired knowledge of how to operate internationally it moves on to countries with a great psychic distance.

The Uppsala model (Johanson and Wiedersheim-Paul, 1975) describes the stages of internationalisation and claim that firms gradually increase the resource commitment in each of its location moving onto more direct entry modes once it has the requisite knowledge of the market. The stages of internationalisation according to the Uppsala model are:

1. No regular export activities
2. Export via independent representatives (agent)
3. Sales subsidiary, and
4. Production/manufacturing

Studies conducted by the likes of Bell (1995), Spence and Crick (2006), Coviello and Munro (1997), Lindqvist (1988) and Moen, Ø., Gavlen, M. and Endersen, I. (2004) have found that software firms do not generally follow the Uppsala model of internationalisation.

Even though a lot of software firms enter first into ‘closer’ countries however, the reason for this is not due to the psychic distance between the two countries as claimed by the Uppsala model. In his research, Bell (1995), pointed out the following factors affecting foreign market selection decisions of software firms:

Client followership: Firms enter new export markets as a result of the international strategies of their domestic clients or begin exporting as a result of an unsolicited orders or enquiries from abroad. An example of this provided by Bell (1995) is an Irish firm producing airport management software moving to Mexico because the first export orders were received from Mexican airlines.
Sectoral Targeting: Firms tend to target and enter markets which are experiencing growth in their specialized niches. Such as Norwegian firms producing application for the oil industry selecting Indonesia, Venezuela or other oil-producing countries as their choice of foreign market.
Computer Industry Trends: The fact that design and development, and much of the production, of both hardware and software is concentrated in locations such as Germany, UK and USA is also a significant factor towards the decision of choice of market.

Lindqvist (1988) found that selection of foreign market for software firms was based upon the cooperation requirements with advanced customers in a target country. Research by Coviello and Munro (1997) concluded that entry mode and market choice of software firms depended more on formal and informal network relationships rather than the psychic distance between two countries.

Furthermore, Ojala (2008) found that most software firms did not follow the traditional stepwise model of internationalisation. His research pointed out that most software firms started their international operations using direct modes of market entry as opposed to indirect ones.

Bell (1995) found similar results in terms of market entry. His research pointed out that most software firms started their internationalisation process through direct exporting via its own export sales staff or via agents and distributors. Moreover, he pointed out that most software firms based their internationalisation decision and choice of market and mode of entry on existing relationships thus implying that psychic distance was not an important factor in this regard.
Studying the subsequent international development of software firms, Bell (1995) claimed that most small and medium sized software firms did not change their mode of entry. The principal method of internationalisation for most software firms was exporting either directly or indirectly.

Bell’s (1995) research indicated that the software firms studied had not switched from one entry mode to another in any international market and the entry mode remained constant even when the firm had been present in the international market for a long time thereby contradicting the theory proposed by Uppsala model regarding the stages of internationalisation. Bell (1995) found that instead of higher levels of investment in exiting international markets, software firms chose to expand into newer export markets.

Findings by Spence, Martine and Dave Crick (2006) indicated that the “international expansion of software firms was based upon “an entrepreneurial culture, opportunistic strategies and short-term goals, almost the opposite of what was suggested by the ‘stage’ models of internationalisation.” Kozul-Wright and Howells (2002) studied the motivation for international expansion of software firms and cited cost-savings as the primary reason for internationalisation of a firm explaining the existence of a software industry cluster in Bangalore, India.

Hence, by looking at the internationalisation process of software firms it can be concluded that this process does not follow the Uppsala model. As pointed out by Moen, Gavlen, and Endersen (2004) there is “limited correlation between the firms’ international experience and their foreign entry form”. Furthermore, the internationalisation of software firms does not follow the stages model either. As can be seen most firms internationalise quickly using direct methods of foreign market entry and usually continue with this mode of entry.

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