Information & Management 37 (2000) 153±159

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)b
a
Business School, University of Oulu, Oulu, Finland
b
University 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
$ ingly needed, both for new products as well as in
(Briefing) Editing by E.H. Sibley
*
Corresponding author. Tel.:‡358-553-2929; fax:‡358-553-
2906.
E-mail address: kimmo.alajoutsijarvi@oulu.fi (K. AlajoutsijaÈrvi).
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-
various development and manufacturing processes.
Smaller ®rms can also bene®t from the growth of
the industry through increased internationalization:

0378-7206/00/$ ± see front matter # 2000 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 7 2 0 6 ( 9 9 ) 0 0 0 3 9 - 7
154 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159
for example, Finnish software producers have
increased their exports by more than 40 percent
annually since the mid-1990s [17]. Internationaliza-
tion and `productization' 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 business, 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 moving from
tailored systems towards increased productization.
Larger players in the international market for pack-
aged software already act in accordance with the
 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159 155

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 Standard and/or modular products, designed for
cooperation with the customer; designed for a several different operating systems and hardware
certain hardware environment, service content high environments, service content low
Production Activities within projects, production `after sales,' Duplication, the production of updates or `versions,'
connections between all functions of the company, production `before sales,' production function
discontinuity between projects, deadlines crucial 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 Central area of interest
individuals
Nature of exchange Interactive, mutual, multi-faceted, long-term oriented, Opportunistic, simple, short-term oriented,
project-related exchange product-related exchange
Type of organization Ad hoc project organizations Market, product, or matrix organization

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-
156 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159

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
Key concepts 4 Ps, segmentation, branding etc.
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
Market interaction One-way communication, formal market studies,
the seller is the active counterpart
Differentiation Product differentiation
Negotiations Not seen as important
Promotion Non-personal advertising, brand and image
management
Mutuality Not seen as important, own short-term goals and
market opportunism are the central focus
Managing a company's customer portfolio, building
long-term business relationships
Interaction, relationships and networks
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
Interactive communication, mutual learning and adap-
tations, all interaction parties active
Relationship differentiation
Crucial
Through personal interaction, developing identity as a
reliable supplier in a network
Seen as very important, own long-term goals are
achieved through concessions in short-term goals
 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159
Table 3
A framework for identifying major managerial challenges in the software business
The relational marketing approach
Project business (1) The typical situation faced by most small
software companies: unique tailored projects
within long-term customer relationships
Product business (2) Product business within long-term -oriented
customer relationships. Productization of learning
from projects.
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
157
The marketing mix approach
(3) An impossible situation. Tailoring is not currently
possible without cooperation with the customer
(4) Traditional mass marketer functioning in atomistic,
competitive markets. Product development mainly
through formal market research and immediate
sales response.
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?
158 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159
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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 K. AlajoutsijaÈrvi et al. / Information & Management 37 (2000) 153±159
Kimmo AlajoutsijaÈrvi is 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,
and Pulp 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-
159
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 as Journal 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.
Kari Mannermaa holds a doctorate in
marketing and is a Research Professor at
the University of Oulu, Finland. His
special field is network management and
marketing channels. He is author of
numerous marketing textbooks for uni-
versity use and contributor to many
leading business journals. He is also a
network strategy consultant for Fin-
land's largest retailer group.