Individual firm level

4.2.1. New segments and geographical markets

Corresponding element (s) of the diamond: Industry structure and rivalry

As it has been noted before, software industry remains an attractive destination to enter, however, the competition is strong too. In order to maintain and improve their position on global market, Russian software firms should choose whether to provide better customer value in the “hot” segments and markets where many countries compete (“red ocean”) or to develop those new segments and markets that have been neglected or not yet entered by competitors from other countries but have a strong demand (“blue ocean”).

New segments. There’s a breakdown on the most popular fields of activity between

174  “Cross‐industry” means that efforts from multiple related and supporting industries is required to  address the issue 

Russian software companies provided in Appendix G, however, it’s questionable if we can make any conclusions from it here as:

a. The sample size is limited: only 130 among more than three thousand companies have been interviewed which can’t give us a complete picture;

b. Most of the firms don’t limit themselves to only one segment or model, combining them to avoid the risks;

c. There have been in total 37% firms that have answered “Other” or “Difficult to say”

when asked about the segment that is a top priority for them. It’s unclear whether it has been caused by the wide definition and complex nature of software industry or merely by an incorrect design of the questionnaire.

Our vision on the development of the Russian software industry includes more firms exploring new segments such as big data analysis, cloud technologies, software for IoT and wearable devices etc. The large and medium firms should be able to assess their product and service portfolio, limiting their investment into the areas where the potential for growth is becoming low due to maturity of the market, large presence of competitors or both. The firms that get most revenue from the selling of ready-made products should also consider new trends in software distribution. As physical retail gets abandoned in more and more segments, buyers’ switching costs are reducing

dramatically, so that new ways to create customer value and retain users should be developed (which also implies changes in marketing strategy that will be noted later).

Among the segments which, in our opinion, may be a good option for the Russian firms to enter, we can name enterprise and B2B solutions (including ready-made ones as well as individual solutions tailored to clients’ information systems) as well as built-in software (firmware) for complex hardware-software solutions (including IoT devices) in cooperation with other countries’ electronic device manufacturers. However, a firm should not blindly follow these recommendations but rather perform a thorough

assessment of its own strengths and weaknesses, trends in the markets and competitors’

behavior in order to identify the sectors which are the best match for the firm’s core

competences.

New markets: Focusing on the overseas markets that have limited potential for growth (such as U.S. or Western Europe) is another mistake made by Russian “product” firms, as suggested by RUSSOFT (however, expanding to emerging markets may be

considered by service firms too)¹⁷⁵. It notices that there have been cases with Russian companies trying to enter such markets as Asia or Middle East, though currently it’s rather an exception than a trend. The data on a presence of Russian software firms on overseas markets is presented in Appendix K.

The worsening relations between Russia and major Western countries in theory can encourage more Russian firms to search for new clients in Asian markets. However, in practice such option is limited mostly to big companies as only they can afford it. Due to large cultural distance, Asian markets have always been quite difficult for Western firms to enter, and even more difficult to form a significant presence there. Entering these markets requires a significant expertise and a large marketing budget, also, there’s no guarantees that the first attempt will be successful. Looking at the current situation in the Russian software industry, we should conclude that refocusing to new markets will be gradual and will start mostly from big companies that possess enough funds to use a trial and error approach for entering Asia. We will return to the question of financing for international marketing later.

4.2.2. Giving more attention to the business and marketing strategy

Corresponding element(s) of the diamond: Firm strategy, structure and rivalry Another common pitfall for IT firms, especially those who are in early stage of their development, is focusing only on the technical part of the project, completely ignoring the “business” one, lacking a clear development and marketing strategy. As report by Vimpelcom suggests, “recent graduates with strong IT skills but little        

175  Russoft (2016), pg. 59 

understanding of market dynamics [and] limited focus on implementation…”¹⁷⁶ represent quite a large group of startup founders in Russia. This situation results in many startups whether develop a product that is wrong initially (for example, one that is outstanding from technical point of view but lacks market demand) or develop a good product but market it incorrectly (for example, focusing only on domestic market that is

“easier” without thinking about expanding globally and thus limiting their future growth opportunities). On the one hand, this problem is closely related to the education system (this will be discussed later), but, on the other hand, companies can also address this problem by not forming a team only from technical specialists, but also adding someone who has enough knowledge in business administration and market dynamics. Hiring advisors may also be an option. The Global Startup Ecosystem Report suggests that

“[Russian] startups count the lowest number of advisors in the world and give 49% less equity to their employees compared to startups in the rest of Europe.”¹⁷⁷ – however, it requires costs so that a careful process of selection based not on how renowned is the candidate but on his or her real skills and achievements is necessary.

4.2.3. Exploring talent pools in nearby countries and establish R&D centers abroad

Corresponding element(s) of the diamond: Supply conditions

Another consideration for individual software firms is to pay more attention to attracting and hiring talents from nearby ex-USSR countries. An example of the latter may be Belarus. Though being much smaller than Russia, it has a large pool of skilled IT labor, also, due to historical reasons, there is little or no language (Russian is widespread in Belarus and is native for large part of the population) and cultural barriers, which makes hiring developers from there quite attractive. The situation is quite similar for Ukraine, however, due to the political conflict that has started in 2014, it may be more complicated for Russian firms to use the talent pool of this country.

176  Vimpelcom, AT Kearney, Digital Entrepreneurship In Russia, 2016, accessed May 20, 2017,  https://www.vimpelcom.com/Global/Files/Responsibility/Digital‐Entrepreneurship‐in‐Russia.pdf 

177  Compass Co. (2015) 

Besides hiring developers, Russian firms may also consider establishing R&D centers in the neighboring countries and moving one step closer towards becoming multinational enterprises.

Summary for individual firms: Pay more attention to business and marketing strategy (or hire professionals); choose correct product/service segments and geographical markets and make use of talent pools in neighboring countries.