Constructing the first customerreference to support the growth

of a start-up softwaretechnology company

Jari RuokolainenDepartment of Industrial Engineering and Management,

Helsinki University of Technology, Finland

Abstract

Purpose – The purpose of this paper is to explore the important and distinctly under-researchedtopic of first customer references, for which a basic descriptive framework is created. The paper alsotests the framework, validating it by means of new insights obtained from a longitudinal case study.

Design/methodology/approach – The present work is an embedded single longitudinal case studywith two levels of analysis units: the company and its customers. Pattern-matching logic andtime-series analyses are used. The idea is to compare the observed patterns with those introducedthrough the basic descriptive framework. Each case is analyzed, after which a cross-case analysis isconducted over the specified time horizon. Programming theory is used to describe the iterative natureof the phenomenon of market entry, although natural language is used instead of formal notation.

Findings – The longitudinal case study demonstrates various operational aspects of the frameworkin practice. The study indicates the correct business operations setup model after each customer case.The case study generally reveals, from the perspective of competence marketing, that there are nofailed customer cases if experimental knowledge has been gained.

Practical implications – In order to evaluate capabilities of start-up technology companies to enterthe market, all customer cases should be evaluated, even the failed ones. Successful customerreferences may provide only a partial picture of the gained capabilities.

Originality/value – This paper explores the important and distinctly under-researched topic of firstcustomer references, for which a basic descriptive framework is created and will be of interest tocompanies trying to enter the very competitive business-to-business market for complex products.

Keywords Referencing, Customers, Business-to-business marketing, Computer software,Communication technologies

Paper type Research paper

IntroductionThe first customer reference is especially important for companies trying to enter thevery competitive business-to-business market for complex products. Without proof offunctionality in the real world and a customer reference from a third party, it is difficultor even impossible to convince the next potential customer. The case company,

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The author gratefully acknowledges the financial support of the Finnish Foundation ofEconomic Education and the Jenny and Antti Wihuri Fund. He would also like to thank AsianInstitute of Technology for its important support. Especially, gratitude is expressed to Dr PimpaKanarksunti, the managing director of T.J.S. Consultants Co., Ltd, for her support. Finally,thanks are extended to Dr Brian Bloch for his editing of the English.

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European Journal of InnovationManagementVol. 11 No. 2, 2008pp. 282-305q Emerald Group Publishing Limited1460-1060DOI 10.1108/14601060810869893

T.J.S. Consultants Co., Ltd, is an example of such circumstances in the softwareindustry.

The importance of the first customer reference is reflected in many aspects ofbusiness activity. A customer reference is assumed to reduce the perceived risk in aventure (Bauer, 1967; Hutt and Speh, 1992), to increase the suppliers’ credibility(Blomqvist, 1997; Levitt, 1967) and to enhance the supplier’s reputation (Herbig andMilewicz, 1993; Doney and Cannon, 1997). Accordingly, customer references can beexpected to help start-up technology companies enter markets. The next potentialcustomer may appreciate the credibility gained from the first customer reference morethan the innovativeness or low price of the new product. The importance of the firstcustomer reference is undeniable. Especially in the marketing of complex andsoftware-intensive products, experimental knowledge is crucial (Johanson and Vahlne,1977). However, being successful in delivering the first customer reference is asignificant challenge. When the product and supplier are previously unknown to theseller, the chances of failure are high.

The use of a customer reference by start-up technology companies is distinctlyunder-researched. Salminen (1997) states that using an industrial reference has not yetbeen studied in the scientific literature. Beard and Easingwood (1996) write that thecommercialization process is often neglected in the literature on new productdevelopment, innovation and high technology marketing. According to the QuarterlyBulletin of the Bank of England (Bank of England, 2001), there are only a few, quiterecent studies that have dealt with the issues that are important for the success ofstart-up technology companies. Earlier research on start-up technology companiesfocused mostly on the characteristics of the entrepreneur and his or her teams. Despitethe dearth of literature on the present topic, the studies of company entry into foreignmarkets (for example Johanson and Vahlne, 1977) could provide some useful andinteresting points to consider.

T.J.S. Consultants Co., Ltd has required first customer references several times, as ithas been forced to change the focus of its products and customers during the start-upphase before the business took off. Each new start with a new software product wastargeted at a new industrial field and a new group of customers. Within each customergroup, a first customer reference was needed in order to enter the market. Thesequential trials for building the first customer reference provide an opportunity tostudy the iterations of the factors from one customer case to another.

A basic descriptive framework based on Ruokolainen and Igel (2004) andRuokolainen (2005) explain the factors which seem to affect the development of asuccessful first customer reference. However, these studies did not take into accountthe consequence of sequential cases. The objective of the present paper is to test thebasic descriptive framework of the use of the first customer reference by investigatingthe effect of sequential customer cases. The research question of the present article iswhether market entry through sequential cases is supported by the basic descriptiveframework.

The Uppsala model (Johanson and Vahlne, 1977), which highlights the meaning offactors similar to those in the proposed basic descriptive framework, emphasizes thedynamic side of building the business: “We can say that the present state ofinternationalization is one important factor explaining the course of subsequentinternationalization.” This indicates that internationalization is an iterative

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phenomenon. It can be proposed that start-up technology companies’ entry into amarket is also similarly iterative.

The present work is an embedded case study (Yin, 1994), with two levels of analysisunits: the company and its customer cases. The three sequential customer cases, twofailures and one success, are presented. In the next section, the basic descriptiveframework on the use of the first customer reference and the related factors arepresented in the light of the literature. In the case section, the history of the company isintroduced briefly and the three customer cases are presented. In the following section,the lessons learned and the variable patterns are cross-analyzed over time. Theiterative nature of the start-up technology company’s market entry is also discussed. Inthe discussion and conclusion section, suggestions for developing the frameworkfurther are made. Managerial implications are also considered.

Descriptive frameworkThere has been much skepticism on the high-technology market (Moriarty and Kosnik,1989; Beard and Easingwood, 1992), especially after the IT bubble burst at thebeginning of the new millennium. Theoharakis and Wong (2002) argue that the hightechnology market is overloaded with hype and can be perceived by the market playersas chaotic. Jae and Jung (2006) even state that where a dominant technology emerges,switching costs may make the new entrant’s position unassailable, unless there is afundamental shift in the technology paradigm. New high-technology products andcompanies are appropriately considered as sources of high risk (Shanklin and Ryann,1987). Investments are made only when the start-up technology company is able tobuild sufficient credibility, regardless of expectations of fast growth and high returns.The first customer reference is essential in attaining the necessary credibility to conveytrustworthy market messages. This statement is also supported by the fact that theincreasing complexity of products creates barriers to customer adaptation of the newtechnology (Sheth and Ram, 1987).

The partnership theory emphasizes the role of long-term cooperation, open andhonest relationships, and mutual commitment (Keough, 1993; Spekman, 1988; Asmusand Griffin, 1993). If the seller is able to build and cultivate such partnership-basedrelationships with customers, the chances of success with the first customer referenceare enhanced. If the existing cooperation is deep and long, it is more difficult forexternal forces or other players to disrupt it. Thus, the tendency towards longer-termcooperation, especially in high-technology industries, can hinder competition. Newplayers might find it difficult to sever the existing relationships.

Many managers of start-up technology companies tend to concentrate on solvingtechnological problems at the expense of product commercialization (Freel, 1998). Asuccessful first customer reference requires well-balanced management within thecompany. Prospective customer cases may not be identified, if managers focusexcessively on technical issues. In addition, according to a recent study, almost half ofstart-up companies report that they have problems with marketing (Huang and Brown,1999). It has been reported that the failure rate of start-up companies often exceeds 50percent in the first eight years of business existence (Bygrave, 1997). In addition,Leonidoy and Katsikeas (1996) argue that the necessary market information can beaccessed neither easily nor cheaply.

The basic descriptive framework deals with the entry of start-up technologycompanies into the market, as illustrated above by means of the first customer

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reference. The basic descriptive framework is formed from a process and relatedfactors. The conceptual description thereof is shown in Figure 1 and Table I. Theprocess that leads to utilization of the customer reference for the benefit of business canbe divided into three main periods. The first entails finding the first customerreference, the second involves implementing the start-up technology company’sproduct for the first reference customer, and the third period entails using the firstcustomer reference for building the business. This “periodization” (Jessop, 1990) wasconducted to determine the independent factors, that is, the outputs, which are: findinga first customer reference, successfully exploiting it and expanding the businessthrough its good offers.

The basic descriptive framework on “the use of the first customer reference”consists of five factors, which affect different periods. The factors can be found inTable I.

The phenomena surrounding the use of the first customer reference form amultivariate system. In empirical research, these variables represent the operationalmeasurement of real-world system concepts. An appropriate management of thedifferent variables at different times is required in order to build the first customerreference from a customer case. The basic descriptive framework was created andtested with a limited number of samples from previous studies. One of the researchstudies showed that the select variables explained 70 percent of the growth in Thaisoftware technology companies (Ruokolainen, 2004).

Overview of variables of the basic descriptive frameworkSocial capital in finding the first customer reference. One way for a start-up technologycompany to “open customers’ doors” is to use existing contacts and other associationsbetween people and organizations i.e. social capital. Several researchers have identifiedthe role of social capital in setting up a start-up company (Aldrich and Zimmer, 1986;

Factors Function Period

Social capital Needed to find the first customerreference

Period 1

Entrepreneur’s background Needed to implement the product forthe first reference customer

Period 2

Reference customer’scommitment

Needed to enter the market and toimplement the product

Period 2 and Period 3

Learning the experimentalknowledge

Needed to enter the market Period 3

Marketing values of the firstreference customer

Needed to enter the market Period 3Table I.

Factors, their functionand the related period

Figure 1.The process for the use of

the first customerreference

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Otsgaard and Birley, 1994). Start-up companies can use the existing contacts of ownersin order to find customers or acquire venture capital (Birley, 1995; Eisenhardt andSchoonhoven, 1996). In this context, Granovetter (1985) and Block (1990) argue thatmarket activities are embedded in social relationships. Institutional theory seems toemphasize the role of trust as an essential part of social capital (e.g. Fukuyama, 1995;Putnam, 1993). It can also be assumed that those companies which have a relationshipof trust with a customer, may have a better chance of succeeding in entering a market.Despite extensive research on social capital Davidsson and Honig (2003) still remarkthat knowledge on the processes of exploiting social capital is somewhat limited.

Social capital, which includes the informal contacts of the new entrepreneur, seemsto be an important asset in establishing a start-up technology company. Firstcustomers are typically found through old friends, friends of friends, family ties,colleagues, ex-employers, and other informal social channels (Ruokolainen, 2005).Granovetter (1973) illustrates this by identifying a similar role played by informalcontacts in the US labour market. The next job is not usually found directly throughclose friends or family ties, but rather through the friends of friends and colleagues ofcolleagues etc. Existing social contacts also seem essential in building and preservingthe success of the first customer reference.

The technology market seldom pulls the products of start-up technology companiesitself, and technology entrepreneurs rarely know how to push their products into theopen market. Almost half of the small enterprises investigated, report major problemswith marketing (Huang and Brown, 1999) including how to carry out promotions andhow to execute market research. Dodge et al. (1994) also reports that start-upcompanies frequently encounter problems with financing and financial management.This can also be partly the result of sales and marketing difficulties. Ruokolainen andIgel (2004) argue that start-up technology companies have problems in finding the firstcustomer reference in the open market. This statement is supported by Shanklin andRyann (1987), who report skepticism in the technology market. This means that it isdifficult for new players to enter the market. The remaining option for entrepreneurs isto use their previous contacts with potential customers. Many Thai start-up softwaretechnology companies seem to overcome such problems by using their social capital:70 percent of the start-up companies have had previous contacts with their firstreference customers (Ruokolainen, 2005).

Experimental knowledge gained and developed from the first customer reference. Thefirst customer reference can provide a remarkable learning opportunity. A start-uptechnology company can learn essential knowledge from the first customer referencewith regard to the development of the business. Start-up technology companies havereported that they use the first customer reference to develop the product further, findarguments for sales and marketing purposes, learn project skills, and study thebusiness logic in their industry (Ruokolainen and Igel, 2004). Johanson and Vahlne(1977) investigated companies entering a foreign market. They, too, emphasize the roleof experimental knowledge gained through practical cases in setting-up operations.Building the first customer reference is a good example of a practical case.

Nearly half of the start-up software companies studied in Thailand had used thefirst reference to test their technology (Ruokolainen, 2005). However, such companieshad a lower growth rate than other start-up software technology companies. Using thefirst customer reference as the basis for a sales argument seems to be infrequent.However, when this strategy was used by start-up software technology companies in

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the Thai sample, it turned out to be successful. Learning the project skills and businesslogic, which are needed for building a software package, did not correlate statisticallysignificantly with growth. The first customer reference is important, not only fortesting the product technology, but also for verifying the business case. Such a conceptincludes understanding the business case behind the product, including salesarguments, support functions and the readiness to solve customer problems. Thisapproach is supported by Gummesson’s (1987) multi-headed customer and sellerconcept, which emphasizes multi-level contacts between sellers and buyers. Theinteraction approach (Hakansson, 1982) also highlights the importance of relationshipsbetween companies, instead of focusing on single transactions.

First reference customer’s commitment to the business of the start-up technologycompany. Traditionally, it is believed that competition and the principle of arm’s-lengthdistance in buyer-seller relationships help acquire the lowest possible price, as well asthe best delivery and quality terms for the buyer (Spekman, 1988). However, with hightechnologies and complex product systems, long-term cooperation between the buyerand seller is necessary. Intensive cooperation and open knowledge sharing are oftenrequired right from the research and development phase. The buyer needs thecontinuous cooperation of the seller in installing, operating, and maintaining a complexhigh-technology product. Partnership theory (Keough, 1993; Spekman, 1988; Asmusand Griffin, 1993) emphasizes the importance of long-term cooperation, an openrelationship and mutual commitment. The consequences of not having these have beenaddressed in the literature in several ways:

. Disputes over intellectual property rights of the first reference are not uncommon(Bruce et al., 1995). Smaller companies have gone bankrupt through losing theintellectual property rights to their new products or new technologies. Thefinancial resources of a small company can be drained if the company is forced todefend these rights in legal proceedings, regardless of which party is legally inthe right. An essential precondition for a successful first customer reference isthat the intellectual property rights are properly managed.

. There are also partly contradictory research results on the impact of customerinvolvement in company research and development processes. Companies canbenefit from the lead user methodology (Herstatt and von Hippel, 1992), in whichresearch and development are conducted in close cooperation with a lead user.The term “lead user” refers to the pilot customer for the new product or service.However, it has been noted that in research and development, that heavycustomer involvement entails the risk of reducing the innovativeness of researchand development (Bidault and Cummings, 1994). In some cases, a companydeveloping a new product has ultimately lost its independence and ended upbeing, in effect, a research and development subcontractor to its customers.

According to Johanson and Vahlne (1977), a company’s commitment to the foreignmarket is dependent on two factors, the amount of resources and the degree ofcommitment dependent on specializing in a specific market. The start-up technologycompanies’ commitment to the local market in terms of resources may be limited.However, the degree of commitment may be high, due to the need to specialize in anarrow market sector. Johanson’s and Vahlne’s view of the commitment is one-sided:

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they do not take into account customer commitment to the business of the supplier, asindicated by partnership theory.

The anticipated benefits of a first customer reference can be attained only if thecustomer is willing to invest in the cooperation and demonstrates sufficiently strongcommitment. In practice, it seems that building the necessary commitment entails thecustomer paying for part of the development costs. On the other hand, the need forclear contracts must be emphasized when the costs of product development are shared.An agreement on the ownership of the intellectual property rights should be drawn upby the partners in advance, when a common understanding prevails – not whenconflicting perceptions of the ownership rights have already started to emerge.

Background of the entrepreneur. The background of the start-up entrepreneur is afactor which is assumed to have an effect on the company’s success. The implicationsof various types of entrepreneurial backgrounds have been widely investigated in theliterature. For example, Freeser and Willard (1990) state that those start-up companieswhose products are related to the last company for which an entrepreneur workedbefore starting up his or her present company, tend to grow faster.

In the case of start-up software technology companies in Thailand, most newentrepreneurs have a deep understanding of the technology of their company, based ontheir previous work experience. They usually have less experience in management andmarketing. Freel (1998) states that technical entrepreneurs tend to concentrate ontechnical aspects at the expense of commercialization. It can be argued that thebackground of an entrepreneur may either help or hinder implementation of the firstcustomer reference. Some Thai entrepreneurs of start-up technology companies hadgained international experience from Siemens, IBM, and Microsoft. However,Ruokolainen (2005) was unable to find support for the notion that work experiencein large international enterprises led to success for their start-up companies.

The findings from Thailand support the hypothesis that the more educated theentrepreneur, the more substantial the growth of his or her start-up software company(Ruokolainen, 2005). Contradictory results have also been reported in research studies(Maes, 2001). Johanson and Vahlne (1977) refer to the knowledge gained througheducation as “objective knowledge”. They consider the knowledge gained throughexperimentation as more important in the internationalisation process than objectiveknowledge.

The market value of the first reference customer. Beard and Easingwood (1996)prefer large companies to small ones as reference customers. The assumption is thatpotential customers find large companies more convincing as reference customers thansmall ones. This credibility of the reference customer can be referred to as “the marketvalue of the reference customer”. Other features, such as age or business sector, mightalso increase the market value of the reference customer. It was assumed that if thefirst reference customer operates in the key industrial cluster of the country, thestart-up technology company providing the product would grow faster. According torecent research on Thai start-up software technology companies, the market value ofthe first reference customer does not correlate with the growth of a start-up softwaretechnology company (Ruokolainen, 2005). According to the same study, together withthe other variables in a regression analysis, the key industrial cluster explains nearly70 percent (adjusted R square) of growth.

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MethodologyYin (1994) and Eisenhardt (1989) describe in detail the use of case study research inmanagement inquiry. The present work is an embedded case study (Yin, 1994), with twolevels of analysis units: the company and its customer cases. Yin introduced threedifferent dominant modes of analysis for case studies. In the present research,pattern-matching logic and time-series analyses were used. The idea is to compare theobserved patterns with those introduced by the basic descriptive framework. Each casewas analyzed and a cross-case analysis then carried out over the time horizon.

The longitudinal single case study is also used to study the iterative phenomena ofthe start-up technology companies’ entry into the market by following-up the iterationof the factors in the time horizon from one case to another. The nature of thephenomenon in the present research is contingent teleological. Unbounded design orcontingent teleology occurs when the end-state is not predetermined specifically, but isthe result of selecting of one of several available alternatives (Ayla, 1970). Theconstruction of a customer reference aims at market entry, which can either fail orsucceed. Holmlund (1977) writes that relationship management during building acustomer reference can be divided into sequences and broken down further intoepisodes and acts. As in the Uppsala Model (Johansson and Valhne, 1977), the presentstate of acts, episodes and sequences affects the course of subsequent acts, episodesand sequences. In addition to the current state of the system investigated in the presentresearch, company goals affect the actions planned in order to reach these goals. Thegoal can be described by a set of postconditions and the starting state can be describedby a set of preconditions. The time span of the longitudinal case allows the realsequence of events to be followed in order to find out how the variables iterate fromcase-to-case toward the goal.

The above approach can be formalized by using programming theory (Gries, 1983).According to this theory, programs can be presented by using the following notation{Q}S{R}, where Q and R are predicates and S is a program. The notation has thefollowing interpretation: “Completion of S starts by satisfying Q and ends bysatisfying R in a finite amount of time.” Q represents a precondition for starting theprogram, and R a post-condition that must be satisfied in order to exit the program. Inthe present research, S can entail completing one or more customer cases, where eachcustomer case represents one iteration step, S’. During the completion of S’, the relatedfactors might be altered, so that the state of the system also changes during eachiteration step. It can be proposed that the notation {Q}S{R} provides a structure forpresenting the results of an iterative phenomenon. The notation does not indicatewhether the iteration is deterministic or heuristic.

The case company was chosen, because it changed its business direction three timesbefore the business took off. For each new start, it needed a new first customerreference. From the longitudinal case study point of view, the sequential changes inbusiness direction provide a useful opportunity to follow the evolution of the variablesfrom case to case. The collected information contributes to the present research byproviding an overview of the events relating to three different customer cases, and howthe company has grown since. Each of the three sequential customer cases representsan attempt to build the first customer reference.

The history of the case company includes information dating from its birth in themid-1980s until 2004. Researchers from an Asian and a European university firstgathered information relating to the company, T.J.S. Consultants Co., Ltd, in the

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mid-1990s as part of a large survey on Thai technology companies. A follow-up studywas conducted in the late 1990s.

The author of the present study interviewed the entrepreneur for the first time in 2000in the premises of the Software Park, Thailand. In order to complete the history of eventsleading up to obtaining the first customer reference, the entrepreneur was interviewedseveral times during 2003 and 2004 (see Table II). The entrepreneur also lectured on thehistory of her company in a course at an Asian university in 2002. She talked openlyabout the difficulties and problems she had faced as an entrepreneur. In the interviewswith the entrepreneur, the constructed story of the case company was reviewed in orderto complete the picture. The entrepreneur was also approached by email to answercertain questions that occurred while writing up the research. In order to gain a betterunderstanding of the meaning of the customer reference, one of the potential customerswas also interviewed. In addition, the case-company-specific reports from the earliersurveys were available for the present research. All the material collected, such asmarketing brochures, pages from the internet and reference customer lists were also veryhelpful for tracking the events of the company and their sequence.

Material was collected for writing a teaching case study (Ruokolainen et al., 2005)including recent balance sheets, status of current competitors, staff interviews, and thepotential next customer. The teaching case material was tested in several courses withtechnology entrepreneurs and MBA students from an Asian university. The studentsused the material in several lessons to evaluate the story from the venture capitalist’sperspective. The questions asked by students were discussed first in lessons and thenin meetings with the entrepreneur. The case study material, as well as the earlierversion of the present paper, was checked by the entrepreneur. The present researchstudy focuses only on obtaining the first customer reference. Therefore, not all thecollected materials are relevant from the perspective of this case study.

It is believed that going through the history of the case company in differentsituations and points of time with the help of the previous research records did much toprevent a one-sided perception. The entrepreneur of the case company did not regardher business as successful at the time of the interviews. However, she preferred herentrepreneurial independence to working in an enterprise as an employee. Based on theprevious facts, the data collected from the case company for the present singlelongitudinal research were considered useful and rather unique.

Case dataBackground of the case companyThe case company, T.J.S. Consultants Co., Ltd, was founded in the mid-1980s inThailand. It has produced complex software systems for human resource management

Interviewee Date Place

Managing Director 19.7.2000 In the premises of software parkManaging Director 16.7.2001 At Asian Institute of TechnologyHuman resource manager of the potential customer 3.1.2002 At the customer’s officesManaging Director 7.6.2002 At the offices of the case companyManaging Director 7.1.2003 At the offices of the case companyManaging Director 28.9.2004 At the offices of the case company

Table II.Date and place of theinterviews

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for companies operating in Thailand since the beginning of the 1990s. In the start-upphase, the company was seeking a focus in its business by carrying out three different“first customer reference cases”, one after the other, before the business took off. Inother words, three cases of trying to build the first customer reference are studied inthis single longitudinal case study. The case company spent more than five yearsgetting started. These three cases are introduced in the following sections.

The entrepreneur has a doctoral degree in mechanical engineering from the USA.She worked as a programmer and software designer for an international oil companyand subsequently, as the head of department in another company, after which, she setup her own business.

The first customer caseThe first customer of the case company was one of the largest pig farms in Thailand,owned by a good friend of entrepreneur with whom she had often been in contact sincetheir school days. This friend and customer had connections with major players in thepig-rearing industry. From the entrepreneur’s point of view, the case seemed a goodopportunity for developing a software product for managing pig farms and fordevising feeding plans for pigs.

The idea of the software package was conceived and developed together with thefirst reference customer. The focus of the joint development was on determining thespecifications and determining the business logic for the pig feeding system andimplementing it. The first customer was willing to act as a test site, thus helping toverify the functionality of the new software. The entrepreneur contacted a professor ata local university in order to obtain a better understanding of the optimum feedingprocess. The software package was finalized with contributions from all the partiesinvolved, without considering the question of ownership of the intellectual propertyrights. The entrepreneur commented that her team learned much about how to buildsoftware systems.

The case company, T.J.S. Consultants Co., Ltd, together with a local university,arranged a seminar and exhibition for pig farmers, at which they introduced theopportunities offered by the new technology. In the seminar, the new software packageand the first reference customer’s experiences with the new system were presented tothe pig rearing industry as a success (case) story. Potential customers considered theprice of the package to be modest. The development cost of the software product waspaid by the case company.

It soon turned out that only large pig farms wanted to use the software productoffered by the case company. Small and medium-sized farms preferred to use softwarepackages distributed free of charge by pharmaceutical companies. The latter deliveredtheir software products to farms to support their sales. However, large pig farms didnot want to become dependent on one pharmaceutical supplier. Therefore, they wereinterested in using software products provided by an independent software company.Taking into account the modest price of the new software package and the low numberof large pig farms in Thailand, it was clear that the anticipated business would not beprofitable.

Because the home market could not generate enough revenue, the case companyattempted to export the software product to a neighboring country. An agent, a localsoftware company, was found to help in this endeavour and six software packages

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were sold, after which the agent suddenly disappeared. All subsequent efforts tocontact his firm failed.

Although the software product was developed and implemented successfully,attempts to earn revenue from selling the software to pig farms ended in failure. Theentrepreneur felt afterwards that the work done at that time was valuable, although theproject itself failed. During this initial business stage, the entrepreneur and her teamgained valuable experience about markets.

The second customer caseAfter the first case, which failed to introduce a new product to the market, the businessconcept of the case company, T.J.S. Consultants Co., Ltd, was to provide customizedsoftware development services for mainframe computers. One of the ideas of theentrepreneur was to become a subcontractor for a large local company via IBM. Thefirst contact with IBM was established earlier through the entrepreneur’s studentcolleague, who asked her to make a presentation of the case company, T.J.S. Consulting,for IBM in Thailand.

One of the major Thai car part manufacturers had contacted IBM to obtain aquotation for a management information software system. IBM asked the casecompany, among other potential providers, to tender for a Human ResourceManagement System, which was part of the total delivery package. IBM had foundthat standard overseas software packages were not compliant with the complex Thailabor and tax legislation. The Human Resource Management System would be a largesoftware package, including modules for managing recruitment, payroll, appraisal,and many other functions of the company.

The entrepreneur gained invaluable assistance from a friend who joined hercompany to prepare the offer. This friend had experience preparing proposals for largeprojects in an international accounting company. The case company won the contractto produce the Human Resource Management System as a subcontractor to IBM at afixed price. Although IBM subcontracted the systems from the case company, IBM’srole was more or less that of an intermediary. The case company was responsible fordelivering the required system to the customer and dealt directly with the customerconcerning the system’s delivery and development. Thus, the primary customer fromthe case company’s perspective was the car part manufacturer, although some of therequirements came from IBM.

Developing the software package turned out to be more difficult than anticipated.The entrepreneur had no prior experience in managing software development and withprojects of this size. In addition, IBM required the case company to use documentationand project management practices, with which the entrepreneur and her team wereunfamiliar. As a result, the project was delayed by about one year.

The end customer, the car part manufacturing company, also introducedrequirements which had not been included in the original specification. According tothe entrepreneur, another reason for the delay was that the project was over-staffedand employees of the case company did not have sufficient experience with thetechnology. The company had hired six new employees just before the project. Theentrepreneur was busy managing the projects and teaching new employees and,therefore, did not have much time to spend on commercial aspects.

Despite the delays, the case company was able to develop the software productsuccessfully. The end customer applied the new software in its operations for four

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years and was satisfied with the performance. The entrepreneur commented: “Youcould say that the company was my first reference customer in software developmentservice for a large computer system.” The entrepreneur felt that it proved her ability tobuild large computer systems for customers, at least to herself.

Despite the customer’s satisfaction, T.J.S. Consultants Co., Ltd had lost about 5million baht on the project. This sum was more than twice the initial capital of thecompany. After intense negotiations with the entrepreneur, IBM agreed to cover part ofthe losses arising from implementation of the additional requirements demanded bythe end customer. IBM paid 1.2 million baht on top of the original contract. The casecompany was saved from bankruptcy by M-Group Holding Company, which wasco-opted and invested 10 million baht.

The third customer caseThe M-Group investment enabled the case company, T.J.S. Consultants Co., Ltd, todevelop a new product. This was a commercial software package, based on thesoftware delivered to the car part manufacturer as an outcome of the joint project withIBM.

When this first customer found out that the case company was developing acommercial software package from the original software, it contacted the entrepreneurthrough IBM and accused it of violating its intellectual property rights. However, theCOBOL programming language used in the original software had been replaced by anewer software package, Progress, a 4th generation programming language. Adifferent platform and a different database were used. Therefore, it was not easy toprove the allegations.

This first reference customer, the car part manufacturer, stopped all cooperationwith the case company and started buying maintenance services from anothercompany. The case company ended up not only losing its first customer, but also itsfirst customer reference, even though the customer was using the product successfully.The case company again needed a first customer reference.

In the research archives at an Asian university, there is a record of an interviewwith an entrepreneur made at the beginning of the 1990s. The entrepreneur told ofhaving major problems with marketing and in finding customers. She had just lost herfirst customer reference, the customer of the second case, and was searching for a newcustomer reference in the open market. Even in 2003, the entrepreneur can recall that itwas very difficult to find a new first customer reference for the revised HumanResource Management System software. She had a tough time convincing potentialcustomers of the ability of her team to implement and maintain the revised HumanResource Management System and the advantages of this system. She also haddifficulties persuading potential customers that the system was really worth the price.In other words, she had to devote considerable effort to developing sales arguments toconvince customers of the benefits of her system, while she was not able to use thereference openly.

Eventually, a large, well-known Thai construction company was found after anextensive search. They were interested in the Human Resource Management System,but the price of the software package had to be cut by about 50 percent, before the casecompany was able to secure the sale. The customer project went quite smoothlywithout major snags, with the help of the knowledge gained from the previouscustomer project with the car part manufacturing company in the second case, and the

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time spent in becoming familiar with the new technology. The construction companywas ready to act as the first reference customer. The entrepreneur explained: “After wegot the first reference customer, we were able to sell our package to other customersmore easily.” She felt that the first customer reference had given credibility to hercompany and that the trust of potential customers in her team had increased.

Growth after gaining the first customer referenceSince finalizing the first real customer reference in 1993, the company has grownsteadily, as Figure 2 demonstrates.

The number of customers for the Human Resource Management System softwareproduct of the case company increased steadily to 20 in 1996. At the beginning,customers required many system modifications to conform to their specific needs.Later, the system was developed as a set of standard modules to minimize the need forcustomer-specific modifications. The company has since concentrated on providingthis software product and on offering implementation services. In 2004, the sales of thecase company, T.J.S. Consultants Co., Ltd, reached 30 million baht, about 0.6 millioneuros.

The rapid development of computers and software technology enabled the casecompany to introduce new versions of its software product. The old version of theproduct, relying on a character-based user interface, was reprogrammed in 1996 inorder to implement a graphic user interface. The latest version, introduced in 2003,included a www support feature based on Oracle technology.

Currently, the case company uses its customer references extensively. For example,customer comments are included in the company’s marketing material. According toits marketing material, the case company has around 50 important referencecustomers. The list includes companies that have been customers since the poststart-up phase.

The important thing about customer references is that they add credibility to thecompany as a whole, not just to a specific product of the company. This was illustratedby one of the potential customers. This potential customer evaluated the vendors of anew human resource management system. Selection criteria were classified intocategories relating to product and price, experience and skills, and customer references.

Figure 2.Number of customers ofT.J.S. Consultants Co., Ltdsince 1993

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The case company and its rivals used their customer references, not only tosubstantiate the functionality and business benefits of their products, but also toprovide evidence of their experience, skills and ability to take care of relationships. Thenumber and size of the completed projects were also used for comparing vendors. Thesize of the reference customer was not highlighted. Since the products of the companieswere similar, the real criteria for selecting a vendor were not product-related.

The case company also uses existing reference customers to promote newerversions of the product in order to be short-listed by potential customers, as the aboveexample shows, and as a way of keeping in touch with them. Customer references arecollected to support the marketing effort. Their objective is quite clear, considering thenumber of customer testimonials on the company web site, as the following quotationillustrates: “Judging by the number of customer references on the web site, which areall from large companies, the company must be quite something.”

Lessons learnedAll three cases demonstrate the use of factors relating to the basic descriptiveframework. The benefit of the longitudinal approach is that the iteration of relatedvariables can be followed over a long period. The development of the following factors,in particular, is evaluated from case-to-case:

. how social capital helps secure the first customer reference;

. how the focus of learning in the customer cases developed;

. how the entrepreneur’s experience, skills and background evolved; and

. how customer commitment changed.

The market value of the reference customer is also discussed. The case-variable matrixin Table III gives the overview of the evolvement of the variables over the time horizon.

The meaning of social capital according to the longitudinal case studyIn the first two cases, the initial contacts with customers were created through differentsocial channels. In the first case, the contact was an old school friend. This contact wasessential in obtaining this customer case. In the second case, a student colleague helpedthe entrepreneur establish the business contact. It can be assumed that this contact wasalso critical. The two cases clearly demonstrate the benefit of social capital, ashighlighted by several researchers including Birley (1995) and Eisenhardt andSchoonhoven (1996). The meaning of social capital is also well demonstrated in thethird case. The first customer reference in the second case was lost and the firstcustomer reference had to be found again in the open market, which turned out to bedifficult, as reported in a survey conducted by researchers from an Asian and aEuropean university at the beginning of the 1990s. The entrepreneur also confirmedthat finding the new first customer reference was difficult: she did not have the rightcontacts for a customer reference.

After a successful implementation of the third case, the next customers were foundmore easily. The entrepreneur also stated that customer confidence in her team hadincreased. The history of the case company clearly demonstrates the importance ofsocial capital in acquiring customers in the initial phase of the start-up technologycompany, and it also demonstrates the decreasing need for previous contacts for nextpotential customers, after securing the first reference customer. The reason why social

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capital is relatively unimportant for securing customers during the later phases couldbe that the work done for the first customer reference starts to “speak for itself”. Thatis, the potential customers can visit the reference site and listen to the referencecustomers’ experiences (Salminen and Moller, 2004).

Maturing through learning – objective versus experimental knowledgeNone of the three first customer reference cases include elements in which theentrepreneur could have used her primary objective knowledge in mechanicalengineering. It can be argued that in this respect, none of the cases represented anoptimal first customer reference. The entrepreneur had a product developmentbackground and understood how to work systematically towards a complex objective.The knowledge and experience gained from working for an oil company as aprogrammer had helped her produce and implement the software packages in all threecases.

The entrepreneur felt that the first case demonstrated that she knew little aboutmarketing and selling. She did not know how to develop effective sales arguments.These should have been tested early on in the development phase, in order to find thesales arguments which would have made sense to the next potential customers. Thecustomer in the third embedded case was found in the open market after devotingconsiderable effort to sales activities. The company learned sales arguments and howto use them to look for a new potential customer.

The second case showed her that, before the case, she had not known enough aboutmanaging large projects and product management. She learnt the necessary projectmanagement skills while carrying out the projects. The entrepreneur also felt that thecase company did not have sufficient technical knowledge. She had to hire newinexperienced staff for the second case. The first two cases were used by the companyto learn major skills relating to technology including system-definition skills. Theproject in the second case was delayed, because of the lack of requisite skills mentionedpreviously. It can be assumed that, if the case company had few technical skills and theproject was delayed, customer dissatisfaction increased.

The most remarkable aspect, from the case company point of view, was that theentrepreneur learnt, with the help of the first two cases, how to transform the casecompany into one which could develop and deliver human resource managementsystems. This longitudinal case study shows how the entrepreneur succeeded inaccumulating knowledge from the cases over the follow-up period.

The basic descriptive framework states that start-up companies should focus ondeveloping sales arguments and avoid testing technologies with the help of the firstcustomer reference. All three cases demonstrate the combined effects of these twovariables. In the third case, the focus was on finding the sales arguments in a situationwhere the technology expertise was at a sufficiently advanced level, so that it causedno major problems. In the previous two cases, one or both of these factors weremissing. Johansson and Valhne (1977) emphasize the importance of experimentalmarket knowledge which can be used to perceive specific opportunities. They alsostate that “especially in the marketing of complex and software-intensive products,experimental knowledge is crucial”.

The present case study also demonstrates how the business knowledge of theentrepreneur developed since starting the company. The case also demonstrates therole of objective and experimental knowledge, both of which are needed. Objective

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knowledge and previous work experience are required before entering the market. Theexperimental knowledge learned through customer cases is essential in order to gainthe market-specific knowledge relating to the product.

The commitment of the first reference customerThe commitment of the customers varied from case to case. In the first and third cases,the customers were committed to the success of the case company in different ways. Inthe first case, the commitment was established mainly through friendship, but alsothrough paying part of the development cost, and in the third case, mutualcommitment was achieved by sharing the costs. In the second case, the customer’scommitment was lacking: the development costs were paid by the customer and thecustomer might have felt that it owned the intellectual property rights of the product,and that this was surely not in the interests of the case company. The case companyhad no close working contact with the customer, that is, no one who would defend theinterests of the case company. The three cases demonstrate on the one hand, theconsequence of the iron-hand approach of the customer, but on the other hand, theimportance of customer commitment from the perspective of the start-up company.Similar consequences to those reported in this study, with respect to both approaches,are considered in the literature (Spekman, 1988; Keough, 1993).

In the second case, the approach of the customer nearly caused the project to fail andthe case company to go insolvent. The customer approached the case company in thetraditional way in order to gain various significant benefits. The customer had nointerest in helping the case company survive. This was evident when the customerstated that it owned the intellectual property rights.

The market value of the reference customerIn all three embedded cases, the customers were large, established enterprises. In thefirst two cases, the customers belonged to the key industrial cluster of Thailand. In thethird case, the first real customer reference did not come from the key Thai industrialcluster as the framework proposes. It was thought that those customers operating inkey industrial clusters of the country might have valuable and competitive businesspractices that they could teach the start-up technology company. However, thisresearch did not clearly support the proposition relating to the importance of themarket value of the reference customer.

Having a large enterprise as a first reference customer did not necessarily make iteasier to acquire additional customers, as recommended by Beard and Easingwood(1992). On the contrary, large enterprises are capable of ruining the business of thestart-up technology company if they so desire, as the second customer case with the carpart manufacturing company clearly demonstrated. One of the entrepreneurs inThailand reported that it is sufficient, if the first reference customer is a small ormedium-sized company with a good reputation. According to Wilkinson et al. (2005),companies seek business partners similar to themselves. There is a tendency for largecompanies to select other large companies as their partners, rather then small ones.Wilkinson and Bernett (1987) illustrate this well, by referring to a small Australianexporter who stated that the company deliberately sought smaller companies asdistributors, because they “stayed on the same wavelength”.

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Describing iteration of the multivariate systemThe purpose of the current research was to test the basic descriptive framework in thelight of the sequential cases. The longitudinal case study demonstrates how thevariables iterated from case-to-case towards the state in which the business eventuallytook off. Both, the present research and the Uppsala Model (Johanson and Vahlne,1977), emphasize the iterative nature of the companies’ entry to new markets. Aspostulated earlier, the description of the iteration can be developed by using followingthe notation {Q}S{R}. In the present research, each customer case represents oneiteration step, S’, and S, the ability to enter the market through one or more sequentialcustomer cases, in other words, one or more iteration steps. Q represents aprecondition, which must be satisfied before starting the iteration. R represents thepost-condition, which must be satisfied in order to exit the iteration. When carrying outS, the related variables and resources can be altered as the end result of each iterationstep, S’. In other words, the completion of a customer case can change the state of thesystem in question. Using the classification as proposed, the key results of the presentresearch are as follows:

. The precondition, Q, for starting the iteration process for building the firstcustomer references to support growth through one or several customer cases,consists of the following elements: previous work experience and education,which are needed to build the customer reference and redevelop of the product ifnecessary. Previous work experience and education are static variables. Theywere unchanged during the realization of S. Previous contacts to customers areemphasized by the present research. The contacts were needed to obtain thepotential first customer reference.

. The necessary post-condition, R, for exiting the iterative process, consists of thefollowing items: solid marketing and sales arguments are needed in order toacquire subsequent customers; the focus should not be on testing the producttechnology while building the first customer reference; and the commitment ofthis customer to the start-up technology company is also necessary. Other exitcriteria may be related to the exhaustion of resources such as financial and socialcapital. If no resources are available, in most cases, the specified goals cannot beachieved.

. Each iteration step, S’, can change the variables and state of the system, because,in each iteration round, during the completion of a customer case, start-uptechnology companies can gain experimental knowledge, such as salesarguments and technology-related issues, from the customer cases. Resourcesare either gained or lost, and, therefore, before completing a new customer case,for example, both social, and financial capital must usually be checked before anew iteration step.

The precondition and post-condition concretize the meaning and role of the variablesfor basic descriptive framework. Some of the variables are needed to fulfill theprecondition for carrying out S, while the others are needed to fulfill the post-conditionin order to stop carrying out S. Table III illustrates the business taking off after all thepost-conditions were satisfied. Gries (1983) promotes using the weakest precondition inorder to prove the rationale. Other preconditions might ensure the success of theprogram, S, but the rationale behind the program might be difficult to validate.

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Conclusion and discussionWhile the external validity of any case study research may be limited due to the limitedsample size, the cases introduced here clearly yield valuable conclusions and usefulfuture research topics. The company case and the three embedded cases demonstratethe basic descriptive framework in practice. Previous contacts with the customer areoften needed in order to convince the first reference customer. It is proposed that thefocus should not be on testing technology, if the primary intent is to use the firstcustomer reference to support the growth of the start-up company. Concentrating ondeveloping sales arguments, which often relate to the proven benefits of the customerreference, can help obtain further business. The start-up technology company shouldalso ensure the commitment of the customer to its business, for example, that there areno problems with intellectual property rights. Objective knowledge and previous workexperience are usually needed for creating the customer reference. The successful useof the first customer reference forms a multivariate system, the practices of which weredescribed in the basic descriptive framework. There may be other variables that affectbusiness success, but the present research proposes that, in combination, the variableswhich have been studied, can affect success in entering the market.

However, it can be concluded that the basic descriptive framework only provides alimited view of the start-up technology companies’ market entry. The researchindicates that market entry can also occur iteratively by completing sequentialcustomer cases. In practice, this means that the identified factors and variables shouldbe divided into post-conditions and preconditions as shown in Table III. Preconditionsshould be met before starting the iteration and post-conditions need to be fulfilledbefore ceasing the iteration. In order to improve the basic descriptive framework, thefollowing proposition could be made:

P1. The entry of the start-up technology company into the market is a stochasticiterative process, S, which satisfies preconditions, Q, and post-conditions, R, andconsists of one or more iteration steps, S’. The activities within an iteration stepcan change the current state, and the next state depends on the current state.

One problem with the basic descriptive framework is that it does not clearly highlight theiterative accumulation of knowledge. For example, the basic descriptive frameworkproposes that the business knowledge provided by key industrial clusters within thecountry could be useful. The present research shows that the first two cases could haveprovided this knowledge, but not the third case. If the prediction had been based on thethird case, it could have yielded false results. This means that the status of the variablesshould be followed up over the iteration steps. This is important, because it means that theentire history of the start-up technology company should be considered. Each customercase, even failed ones, should be studied in order to determine whether a start-uptechnologycompanyhasacquiredthenecessary competencies.Buildingthemarketentrycould be analogous to solving a jigsaw puzzle: pieces need to be in place before the pictureis complete, but some can be put in a place in a different order and at different points intime. In order to enlarge the basic descriptive framework so that is more dynamic thisfactor should be taken into account. The following proposition can be formulated:

P2. In order to evaluate a start-up technology company’s capability to deliver, itsentire customer history should be studied, including failed cases. This canmean that from the competence-marketing point-of-view, there are no failedcustomer cases, if experimental knowledge has been gained.

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The problem with the iterative market entry is that it can take a long time. Each stepcan last several years and consume resources that may be scarce to the start-uptechnology company. Further development could aim at minimizing the number ofiterations needed to find the right set-up for the various factors. It seems that if thecompany’s technological base is broad and solid enough to support the customers’problem solving, the implementation focus could be on the generation of marketingand sales arguments. It is also assumed that there would be customer commitment inplace. In order to promote research, the following proposition is made:

P3. The number of iterations can be reduced by building a solid and broadfoundation of technological know-how into a start-up technology company,before commencing the customer cases and obtaining customer commitmentto the business of the start-up technology company.

An interesting market-entry-design perspective is that an entrepreneur could plan inadvanced how many steps he or she might need. One of the design parameters could bethe amount of social capital owned by the entrepreneur. The other design parametercould be the knowledge needed. A good example of the exhaustion of social capital wasthe case in which the company had no suitable previous contacts remaining to securethe next customer after the second customer case. A good example of using up thestock of financial capital, which nearly caused the company’s insolvency, occurred inthe second case. The problem with designing market entry is that a customer canseldom be chosen. It can be a major effort for a start-up technology company even tosell its product to one customer.

The basic descriptive framework has been developed and tested by the past cases.In constructing software or other high technology business based on the use of firstreference customers, several aspects must be taken into account beforehand. Forexample, the lack of technological expertise can easily be verified afterwards, but theproblem is how to measure adequacy in advance. Another key question forentrepreneurs is how to determine whether their social capital supports them wellenough to start their own business, for example, if it helps them to find their potentialfirst customer references. Potential avenues for future research include testing andfurther developing the basic descriptive framework, with a view to finding out how thefirst customer reference cases should be designed and selected beforehand, so as toachieve a successful outcome.

The idea of using an approach based on programming science in order to studytopic-related business can be considered as the construction of a business program. Thecycle time of an iteration step in a business program can last years or even decades. Forexample, learning to use new sales arguments can take years. It should also beemphasized that a business program is stochastic by nature, rather than deterministic.

Managerial implicationsThe first implication is that an awareness of the topics presented in this paper shouldbe increased among software, and other start-up technology companies, and especiallyamong those that can be identified as reference-driven. Awareness can be developedthrough education. Huang and Brown (1999) write that there are clearly opportunitiesfor market programs and courses to educate the entrepreneurs of small enterprises.The author of the present study supports this proposal.

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Another key implication is that software and other start-up technology companiesshould focus on solid technological expertise, before starting with the first customerreference, in order to be able to respond to problems raised by the customer. This andearlier research (Ruokolainen, 2005) demonstrate the effect of neglecting thedevelopment of sales arguments and placing too much effort on learning and testingtechnology in customer cases.

Not all possible problems concerning initial commercial products can be predictedand they can be hard to avoid. The recommendation is that venture capital financingshould be employed to increase the technology maturity of start-up technologycompanies, instead of forcing them to design commercial products hastily. The fundingcan also be used to boost social capital, the relationship-building capabilities of theentrepreneurs and to improve the entrepreneurs’ knowledge of commercial andmarketing skills. The recommendation is to assess the maturity of the technologicalknowledge, the strength of social capital, and usability of the sales and marketingarguments from time-to-time.

According to Johanson and Vahlne (1977), lack of knowledge is one of the mainobstacles to internalization. Knowledge can be divided into two classes, objective andexperimental knowledge. Objective knowledge is gained through education, andexperimental knowledge through personal experience. Johanson and Vahlne state thatmarket-specific knowledge can be gained mainly through experience in the market,and therefore, this experimental knowledge is not generally easily available. Based onthis research, the same can be said for the market entry of start-up technologycompanies. Without learning, that is, without gaining experimental knowledge, theiteration towards market breakthrough might never reach a successful conclusion.Therefore, start-up technology companies should use their first customer cases tolearning about market-related issues.

One interesting observation was that in several cases, the Thai entrepreneursemphasized the role of their software start-up company in developing and bringingtechnology-related new business practices to their customers in the long run. At thebeginning, small start-up companies acquire business knowledge from their customersthrough the customer cases. The start-up company can be seen as a centre forgathering, developing, and accumulating knowledge from different sources, includingcustomers, and then transferring the knowledge to sellable systems or products. In thelong run, start-up companies can also disseminate new business knowledge back to theindustry. This role change can be referred to as a “marketing and selling maturation ofthe start-up company”. Customers should regard partnerships with small start-upcompanies as a long-term investment, which may guarantee their own businesssuccess. Such an approach is supported by partnership theory.

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Further reading

Ford, D., Hakansson, H., Gadde, L. and Snehota, I. (2003), Managing Business Relationship, 2nded., John Wiley & Sons, Chichester.

Ford, D. and Redwood, M. (2005), “Making sense of network dynamics through network pictures:a longitudinal case study”, Industrial Marketing Management, Vol. 34, pp. 648-57.

Hakansson, H. and Snehota, I. (1995), Developing Relationships in Business Networks, Routledge,London.

About the authorJari Ruokolainen received his Master of Science in Engineering (1989) and Licentiate inTechnology (1997) from Helsinki University of Technology. In recent years, he has researchedThai software companies. Jari Ruokolainen can be contacted at jari.ruokolainen@pp1.inet.fi

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