TEACHING NOTES: DNA MEDIA AND PROSPECTS FOR THE SOFTWARE LOCALIZATION INDUSTRY (Theme 4, Part 1)

Transcription

1 TEACHING NOTES: DNA MEDIA AND PROSPECTS FOR THE SOFTWARE LOCALIZATION INDUSTRY (Theme 4, Part 1) A. SUMMARY OF THE CASE This case involves the evolution of a business strategy for the localization software industry from the point of view of a small firm operating on the cusp of profitability. The timing of the case revolves around the technology sector meltdown in the North American stock market in mid-tolate The meltdown has implications on the company s plan to obtain equity financing and to invest in new information technologies to be used in the development and marketing of an entirely new training product and service. Issues surrounding the development of a new strategy include making an accurate assessment of the company s internal capabilities, the market conditions, and the market positioning of the company. Also of interest are the financial viability of the various options considered, and the choice of options for expanding the company s business. B. TEACHING OBJECTIVES AND TARGET AUDIENCE This case can be used for advanced undergraduate courses, graduate courses, and executive seminars. This case is based on a real company, with real business issues that need to be resolved. Students will gain an appreciation of issues related to localization, including the competitiveness of the industry. There are a variety of options for expansion and growth as mentioned in the case, but other creative alternatives might also be available. The key teaching objective of this case is to assist the student to think along business strategy lines, and to be aware of limitations in technology, know-how, human resources, time, and finances in the context of the relatively new localization industry. 1

2 C. TEACHING APPROACH AND STRATEGY One way to start the class discussion is to list the key success factors for DNA Media. This will likely generate a split in the class between the traditional software localization business, and the direction being initiated with the radical new Global Training Solutions product. Of course there is no right answer. As a CEO, what are the criteria used in making a strategic decision for how to proceed? What facts would you draw from the case that would lead you to the best decision? D. ANALYSIS To provide additional background for the case, the following information is provided. Technology and Legislation Technology has the potential to disrupt the industry. Translation software and technology developments will affect how the localization process takes place in the future. "Open" standards are an increasingly critical factor that can move the industry away from proprietary translation technologies that some industry insiders have suggested are hurting the growth of the industry. DNA Media is a strong supporter of open standards. By moving toward open standards, translation costs may be reduced by decreasing reliance on expensive proprietary software solutions, making services more affordable, and growing a localization market for small- to medium-sized enterprises. Legislation can be a strong driver for localization services. In Canada, official bilingualism has been an important driver for English and French translation services, particularly for the government-related market. Such legislation has helped grow a number of 2

3 localization companies in Eastern Canada. Similar laws are being pondered in other parts of the world. In 1997, the European Union (EU) countries were discussing the adoption of directives requiring translation of product information according to EU standards. Limitations in the Industry The market will only grow as fast as the available services meet the demand. Because insiders know there is a shortage of skilled personnel who can not be replaced with a software solution, the growth in demand outstrips the supply of people available to do projects. This will limit how fast the industry can grow. Secondly, the power of the buyer is very strong. The top ten industry leaders like IBM, Microsoft, Hewlett Packard, and Oracle make up about 50 percent of the market for localization services. Although revenues from services appear significant, large clients have the power to squeeze the margins of localization service companies. Some companies have not been able to make any profit upon completion of projects for these large clients. This revelation has significant implications for DNA Media, who not only faces the same business problems as the larger players, but must also have a survival plan as a small fish in what now appears to be a smaller pond. Consolidation Issues Consolidation was a strategy to increase the profitability of a fragmented industry. The first wave of consolidation (starting in 1996) involved Silicon Valley computer translation companies merging localization services with technical communications. These types of large, consolidated, IT-based localization companies initially tried to commoditize translation services through computerized translation. The complexity and dynamic nature of language has limited the 3

4 overall success of this strategy. In 1999, some of the large consolidated companies shifted gears and began a more focused full-service marketing strategy. Consolidators have attempted to develop worldwide networks to service global software developers. Basically, the consolidators took one of two approaches: 1. "One Stop Shopping. Localization companies target international global software developers like Microsoft, Lotus, Oracle, SAP, and IBM that require translations in 20 or more languages. These localization companies became known as Multiple Language Vendors (MLV) with offices around the world. Even though small localization shops can promise better expertise and higher quality of work, large client companies will have a difficult time managing the project if work is contracted to over 20 different independent language vendors. The key added-value component of the MLV s is project management. 2. Provide service for specific software applications. For example, Alpnet targets Enterprise Resource Planning, Computer-based Training, and the global automotive sector, while Lionbridge targets Financial Applications, Operating Systems, and Web Technologies. Lionbridge recognized the need to improve content and project management of localization services, and focused on developing and selling tools for managing client and vendor workflow. This technology has helped smaller firms win contracts with large companies willing to outsource to more than one vendor. As the industry matures, consolidation is expected to continue during 2001 as well-financed larger companies target the buyout of financially troubled smaller companies with valuable assets and skilled workers. The partnering of translation technology (globalization) with content management companies will be a natural fit. It is expected that these types of alliances and mergers will drive the localization industry during the new millennium. 4

5 Although DNA Media competes with the large consolidators for contracts, the consolidators are also DNA's clients. Larger companies have outsourced jobs to DNA Media where the smaller company can perform more efficiently or has special language or technical expertise. The large consolidated companies do not see DNA Media as an immediate threat, but this may change in the future if DNA Media grows. DNA Media s direct small- to medium-sized competitors are facing the same challenges in growing their businesses. DNA Media, however, has a good reputation with SE Asian languages and has expertise in multimedia and software engineering technologies. Traditional translation companies who invested too heavily in technologies like computerized translations without clearly thinking about their business needs would be hard hit by the downturn in the stock market. Even though DNA Media has invested heavily over the last few years to increase its technological capabilities and to improve its profit margin, the investments were on project management and content management tools designed to complement and improve the operational efficiency of DNA's staff. From this point of view, DNA Media has the internal technical infrastructure for its next growth period. The class should generate ideas involving the following three key issues in this case. Business Strategy 1. Diversification strategy. What localization markets are most appealing for expansion by DNA? 2. Geographical expansion strategy. If DNA were to expand geographically, which countries would you recommend? Is the establishment of a physical presence to augment 5

6 its geographic expansion strategy even necessary given the significant improvements in global communications and operations? 3. Primary business. What is DNA s main business and what is its growth potential? 4. Secondary business. What is DNA s secondary business? Does DNA have the technical and human resources available to grow its secondary business? Is the market potential worth the effort? 5. New business development. How long do you think it will take to develop and to grow the market for the new online training product? 6. Market research. What evidence it there that the ASP model for online training has a market? Should a marketing study be done considering the time and money constraints? 7. Increasing bargaining power. How can DNA build switching costs into its current service and its new Global Training Solutions product? What are the advantages and disadvantages of adopting an open standards for this product? 8. Is the old four-year plan outdated? Has the Internet changed the basic assumptions in the four-year plan? Financing Options 1. Equity financing options. Given the details in the case, how would you rate the company s attractiveness for equity financing by venture capitalists? 2. Debt financing. As CEO, should more debt financing be arranged if efforts to obtain equity financing fail? What types of financial metrics would you use to determine a healthy debt level for the corporation? 6

7 3. Controlling operating costs. Aside from new management control systems, can you think of any other ways to control operating costs? Alliance Building 1. Geographic expansion. How would an alliance permit DNA to expand geographically into other markets? 2. Technology transfer. What are the issues for the effective transfer of technology? 3. Risk Sharing. How could risks be shared through alliance formation? 4. Bargaining power. How can a small company like DNA Media ensure that a much larger partner does not gobble it up? How might DNA sustain its bargaining power? E. ADDITIONAL READING OR REFERENCES Business Strategy Brown, S. & Eisenhardt, K. (1998). Competing on the edge: Strategy as structured chaos. Boston: Harvard Business School Press. Franson, P. (1998). High tech, high hope: Turning your vision of technology into business success. New York: Wiley. De Mente, B. L. (1993). How to do business with the Japanese: A complete guide to Japanese customs and business practice. NTC Publishing Group. Howard, T. J. (1995). Global expansion in the information age: Big planet, small world. New York: Van Nostrand Reinhold. Lamont, D. (1996). Global marketing. Cambridge, MA: Blackwell Publishers. 7

8 Moore, G. (1995). Crossing the chasm: Marketing and selling high tech products to mainstream customers. New York: HarperCollins. Financing Options Kolb, R. W. & Rodriguez, R. J. (1996). Financial management, (2 nd ed.). Cambridge, MA: Blackwell Publishers. Diener, R. (1995). How to finance a growing business: An insider s guide to negotiating the capital markets. Berkeley, CA: Nolo Press. Garner, D. (1991). The Ernst & Young guide to raising capital. New York: John Wiley & Son. Alliance Options Cyr, D. (1999). High tech, high impact: Creating Canada s competitive advantage through technology alliances. Academy of Management Executive, 13(2), Dyer, J., Kale, P. & Singh, H. (2001). How to make strategic alliances work. Sloan Management Review, Summer, Das, T.K. & Teng, B. (2001). Trust, control, and risk in strategic alliances: An integrated framework. Organization Studies, 22(2), Doz, Y. L. & Hamel, G. (1998). Alliance advantage: The art of creating value through partnering. Boston: Harvard Business School Press. Spekman, R.E., Isabella, L.A., & MacAvoy, T. (2000). Alliance competence: Maximizing the value of your partnerships. New York: Wiley. 8