Global Business 3rd Edition by Mike Peng

Exercise 88

From its humble roots in Slovakia, ESET has become a leading player in the global antivirus software industry. How did it accomplish such amazing growth? How did it successfully market around the world mission-critical software that was originally developed in Slovakia?
ESET, spol. s.r.o. is a global vendor of security software for companies of all sizes and households. Its software solutions deliver instant, comprehensive protection against evolving computer security threats. The company pioneered and continues to lead the industry in proactive threat detection. Six private Slovak IT specialists own the company that was founded 20 years ago in Bratislava, the capital of Slovakia. Today, ESET is one of the top five global players in the antivirus software market.
The Beginning Behind the Iron Curtain and After the Velvet Revolution
During the Cold War (1945-1989), Czechoslovakia was a country run by a communist regime and part of the Eastern Bloc. The economy was closed and strictly regulated. Running a private business was heavily restricted but allowed as a small scale operation. Personal computer penetration was low and the country was isolated from Western IT markets. Two young Slovak programming enthusiasts, Peter Pasko and Miroslav Trnka, were asked to help sort out a virus problem at a Slovak nuclear power plant. They were indeed able to discover the virus, one of the world's first computer viruses. They dubbed it "Vienna" and wrote a program for its detection and elimination that formed the basis for their first antivirus product named NOD. NOD stood for "Nemocnica Na Okraji Disku" or "Hospital on the Edge of the Disk." Inspired by a popular Slovak TV series with the same title, NOD was the first antivirus software with graphical user interface and an integration of detection, fixing, and prevention. The whole production process of NOD-recording, labeling, and packaging of diskettes-took place in the living room. They distributed their program mostly for free to a small network of friends and IT enthusiasts. Selling to state-owned companies was complex and difficult due to a bureaucratic sourcing process. Exporting was impossible. Thus, the two inventors faced the situation of having a brilliant product with limited potential for commercialization under the given political conditions.
In 1989 the communist regime in Czechoslovakia ended in a non-violent revolution, which was called the Velvet Revolution. After 42 years under communist rule, the country became a democracy and opened up to the Western world. The new government started the transformation of a (mostly) state-owned and centrally planned economy into a market-based economy with private entrepreneurship as a key element. The transformation process was accompanied by a re-orientation of exports from former Eastern Bloc countries toward Western markets. At this time, many Czechoslovak products were of mediocre quality, selling at a discount and with some difficulty in the West. The GDP per capita was about 25% of that of neighboring Austria. The first years after the system change were chaotic. Private businesses were expanding quickly in Czechoslovakia but legislation and administration were lagging behind.
Because the Internet was not developed yet, software sales relied on physical distribution. Computer viruses had a limited spread and the security software industry was in its infancy. NOD was still a side business for the founders whose company was run out of an apartment in Bratislava. Domestic sales grew slowly but continually. In 1990, they started selling NOD in Austria under the name "Stopvir" via a local distributor. Although the export business was not very successful at the beginning, in 1991 the first million in local currency (about US$36,000) in revenues was earned.
Establishment of ESET and Its First Years
In 1992 ESET, spol. s.r.o. was founded by Rudolf Hruby, Peter Pasko, and Miroslav Trnka in Bratislava in the Slovak part of the former Czechoslovakia as a privately owned limited liability company (LLC). At this time, the founders did not focus on antivirus software alone. They also saw a good business opportunity in developing book keeping software. In the early years of the transition process, thanks to the enormous pent-up demand, almost any business was offering attractive growth to entrepreneurs. Although computer usage was still in its infancy, the demand for applications in all types of functional and sectoral areas was growing. Then came the break-up of Czechoslovakia in 1993 into two independent countries, the Czech Republic and the Slovak Republic.
Suddenly, ESET lost a large part of the former home market, which forced the founders to look for new export markets. In the same year, Trnka began contributing to the column "Virus Radar" in the leading Slovak periodical PC Revue, which helped build ESET's reputation as an antivirus specialist. In the following years, improved versions of NOD were launched. A turning point was winning the first Virus Bulletin award in 1998. Virus Bulletin is a British magazine dedicated to providing PC users with regular information about the prevention, detection, and removal of computer malware. When this renowned magazine praised ESET for its quality, international users became aware of the company and foreign distributors started to ask for sales agreements.
However, the Slovak origin of the company still posed a psychological barrier to prospective foreign buyers and, as a consequence, restrained the growth of sales in foreign markets. Software originating from a relatively unknown, former Eastern bloc country was not perceived as a reliable high-performance product. Management discussed how they could counter this negative country-of-origin effect. In 1999 ESET LLC was established in San Diego, California, in the United States, with the help of Anton Zajac. This subsidiary was upgraded to be the international business center for ESET, responsible for all foreign markets. By selling its software through the US subsidiary, ESET got rid of the negative country-of-origin associations and international revenues began to rise. This dual structure was terminated 10 years later through a merger of the US subsidiary with its parent ESET, spol. s.r.o. In the meantime, ESET had itself established as a leading player in the industry and was valued above all for its competence and not its country of origin anymore. The choice of the United States as a location for the international business center was also driven by the fact that it was the largest and leading IT market of the world, with a progressive IT industry and demanding customers who would stimulate ESET's innovation efforts.
Era of Rapid International Expansion and Growth
From the year 2000 on, the company showed remarkable growth. In 2002 the global auditing and consulting company Deloitte added ESET to its rankings of fastest growing companies, namely "Deloitte Technology Fast 50 in Central Europe" and "Fast 500 in EMEA" (Europe, Middle East, and Africa). This growth of sales was driven, on the one hand, by demand as viruses became a widespread threat through the fast evolution of the Internet and, on the other hand, by the improved international presence. In 1990 estimates of new and different computer viruses ranged from 200 to 500. In 2000 the number was 50,000. In 2008 another leading antivirus company Symantec claimed that the firm's antivirus programs detected 1.1 million viruses. In 2010 the estimate was 2 million viruses. All statistics show that the number is constantly growing. A higher penetration of computers, new devices such as smartphones and tablets, widely available mobile broadband technology, cloud computing, and intensified usage have increased the exposure of computer users to malware. The need to protect against these cyber threats has fuelled the sales of ESET: sales volume in local currency grew from 2000 to 2010 by a factor of 150 (!). While foreign sales accounted for less than 30% of overall sales in 2003, this share grew to 90% in 2010.
In the first 15 years the company grew organically. That changed in the last few years. In 2008 and 2010 two companies in the field of information security services and antispam systems were acquired. In 2008 ESET bought the Czech security company Setrenet in order to expand its offering to information security services. Two years later, ESET acquired Comdom Software, a Slovak software company acclaimed for antispam solutions. By acquiring Comdom, ESET increased its capacity for developing advanced security solutions. "ESET is a research and development-oriented company that is going to benefit from this merger by tapping into the potential of this manufacturer of advanced antispam solutions. Building on the team of skilled programmers and researchers, we envision introducing new activities, along with injecting new potential into the development of security software," noted Miroslav Trnka, ESET's then CEO.
People and Culture as a Basis of Success
Highly talented and motivated employees are central to ESET's success. Andrew Lee, CEO of ESET North America, emphasizes this aspect:
Great software is the product of great people. ESET seeks to recruit people who are not only some of the brightest and best at what they do, but who also fit the positive culture of trust, integrity, innovation, effectiveness, and cheerfulness that drives everything that we do as a company. Throughout our organization, each employee is a carefully selected fit for the role, and as such is a key to our success.
This attitude is also expressed in the mission statement: "Intelligent people develop intelligent products for intelligent customers." In order to attract and retain this type of employee ESET has to pay salaries according to West European standards. Team building events, skill trainings, language courses, pension schemes, and health insurance contribute to a high level of employee satisfaction and low employee turnover. Owners and management cultivate an informal and personal style in the interaction with their employees and try to not only know their skills and strengths, but also their personal lives.
Due to the fast growth of the company, it became more difficult to find excellent software programmers in Slovakia alone, a country of five million inhabitants. Therefore, ESET opened a new R D center in Krakow, Poland, in 2008. The purpose was to strengthen its research base and to be better able to deliver innovation in countering the growing volumes and sophistication of cyber threats. Krakow is a major center of education in Poland and Central Europe with around 210,000 students and well-known technical universities. It is a place where the IT community is very strong and well organized (with about 320 IT firms). Krakow is even dubbed by some folks as "Europe's Silicon Valley."
Today, ESET offers a portfolio of products for all types of users-home users, small- and medium-sized companies, and large corporate and institutional customers. NOD32 Antivirus is the flagship product for homes and businesses. ESET Mobile Security protects smartphones. ESET Smart Security provides a comprehensive protection combining antivirus, firewall, and antispam. Cybersecurity for Macs was developed for Apple users. The superior antivirus performance of ESET is documented in several tests by industry magazines. The NOD32 Antivirus program holds the world record for the largest consecutive number of the Virus Bulletin "VB100%" Awards since 1998 and has never missed a single "In-the-Wild" worm or virus since the launch of the test. A vast distribution network of partners and resellers parallel to sales offices in all major markets guarantee a presence in more than 180 countries worldwide. The almost 800 employees generated a turnover of 140 million euros in 2010. The company grew by more than 500% in the last five years. According to OPSWAT, ESET in 2012 held the fifth rank in the global antivirus market based on applications installed on endpoint computers running on Windows systems (Exhibit 1).
The foundations of ESET's strategy have not changed markedly since the inception. Despite its growth from a "living-room" company to a global player, this firm is still driven by an entrepreneurial spirit and built on excellent technological competence. The goal is to develop high-performance, mission-critical security solutions for private and business users to keep out all known and emerging forms of malware. The focus on research and continuous product development is key for the superior performance of its NOD product. Top management

and employees are living these values, creating a culture that is characterized by responsibility, reliability, and innovativeness. Antivirus business is built on the user's trust and this is mirrored in the culture of ESET. What changed over the last 20 years is the scope of operations. A broader range of solutions is offered today to home users, companies of all sizes, and mobile phone users worldwide. The higher degree of internationalization of its business is not only reflected in a larger volume and share of foreign sales but also in the presence of its R D centers on all continents. The latest one to open in 2012 is the technological hub in Montreal, Canada, with offices directly on the campus of the highly recognized Ecole Polytechnique Montreal.
ESET currently runs R D centers in Europe (Bratislava, Kosice, Krakow, Moscow, Prague, and Warsaw), the Americas (Buenos Aires, Montreal, and San Diego), and Asia (Singapore). Spreading its malware research centers over many time zones allows ESET to respond effectively to the rise of cyber threats and technological challenges. This is the only way to learn quickly about new cyber threats and monitor trends. It also gives access to programming talent and knowledge hubs that are located all over the world.
Case Discussion Questions
From a resource-based view, what are ESET?s sources of competitive advantage?