The Secrets of Software Success

FRAMINGHAM (04/03/2000) - Entrepreneurs and managers who want to create a software company or expand their operations and sales overseas need to understand what they're facing in different countries.

I'm often asked why so many U.S. companies are world-class players in the software market. Yes, there are excellent software producers overseas. Hitachi, Fujitsu and NEC usually rank among the top 10 in revenue. Europe has SAP AG, Business Objects and Baan. Israel has many small software companies. India has a vibrant programming services industry. But only the U.S. has produced scores of companies that create standardized, packaged software for global mass markets. Why?

The answer lies in understanding the supply side - the infrastructure and intellectual capital needed to create global software companies - and the demand side - local and historical factors that have shaped customer preferences and scale economies.

A supply-side view reveals very different kinds of markets. In some countries, university education in computer science and the number of software developers and entrepreneurs are very good, like in the U.S., Israel and India. In others, education is strong and programmer availability ample. But entrepreneur support mechanisms, such as a vibrant venture-capital industry, are weak in places like China and many European countries. In a third type of market, both education and entrepreneur support are weak, as in Japan - which is changing, but slowly.

The first type is the best base for creating global software companies or expanding a company's operations overseas.

A look at the demand side reveals other market characteristics. One type is global, which demands standardized software products in both "horizontal" segments, such as for basic operating systems or database products, and "vertical" segments, such as for industry-specific computer-aided design software. A second type needs standardized software, but only for local vertical or horizontal markets - for example, Japanese or Chinese word processing (useful only in Japan or China) or tax preparation software useful only in a particular country. A third type looks for customized products like online banking or factory automation systems.

Not surprisingly, U.S. companies have benefited from favorable supply and demand factors. Government has played a big role; lots of defense spending drove university research and the computer hardware and software industries during the 1950s, '60s and '70s. But to become a global software company, you must write the equivalent of a best-seller or establish a monopoly that's the bridge everyone needs to cross. This kind of market requires scale economies and the ability to set global standards. Microsoft has mastered this like no other company. But, as we see in Europe and Asia, the other two types of markets are easier to play in. They require mastery of only one local market or application domain or a close relationship with only a few customers.

Supply and demand factors have also contributed to different environments for entrepreneurship. In Europe, software has traditionally been more of a science.

There is excellent education in computer science and mathematics, and a few local entrepreneurs and computer scientists have exploited concepts such as formal methods and object-oriented designs. But programming "elegance" often dominates, and few companies have understood global customer needs well enough to create standardized products that dominate international markets.

In contrast, many Japanese programmers have treated software development more like a production problem. The domestic market is large - second only to the U.S. - but customers usually want tailored products. In response, companies have emphasized customization and the precision engineering of basic applications. So we have software "factories" and production dominated by companies that are mainly hardware producers and systems engineering firms.

U.S. programmers and entrepreneurs are probably unique. Whether the company is Microsoft, Oracle, Novell or Intuit, software is a business to a U.S. firm, not an art or science. Understanding this distinction is the first requirement for building a world-class software company. But understanding the structure of supply and demand in specific foreign markets is equally important for U.S. firms to take their business overseas.

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