Wednesday, April 2, 2008

SAP and the Evolving Web Software ERP Market

International University of Japan, June 2006

Company Overview

SAP, established in 1972 by a group of five German software engineers, has emerged as the third world-largest software provider in collaborative business solutions for all types of industries and for every major market. SAP began with P/1, software of accounting transaction processing program, is now call Enterprise Resource Planning System or ERP. Before 1999, it focused of developing a powerful ERP system for the largest multinational companies and outsourced consulting service to external consultants for marketing, installation and implementation. It used to sell the whole ERP package and wanted to provide a superior software system. However, under the threats of changing technology and intense competition, SAP changed its business model and strategy in 1999 to become more responsive to customers’ needs by creating new business solutions to large, medium and small firms, breaking ERP package into separate modules and making them easier to use and maintain. The strategy move and organizational restructure, together with mySAP solution, have marked a great leap forward in SAP’s growth journey. Now SAP continues to add new solutions and customize mySAP to meet the needs of every customer in all industries.

By applying Five-force model and PEST, I analyze the external environment and determine threats and opportunities that SAP is and will face. Going deeply inside the company, I analyze SAP’s business model, strategies at all levels, resources, capabilities and value chain to determine SAP’s strengths and weaknesses. Then, I come to the conclusion with problems that SAP is and will face. Finally, I suggest some alternatives, analyze the costs and benefits of these alternatives and come up with some recommendations and their implementation plans. I suggest the use of Balanced Scorecard to measure our solution with described criteria.

I. Situational Analysis and Problems Identification

A. External Analysis

1. Five Forces (Appendix 1)

· Potential Competitor – High. Microsoft is now focusing on PC software but may become competitor in ERP software market because it has bought 2 companies that compete with SAP in small and medium size markets and it has competencies in a wide range of software products and resources and capacity to develop quickly and easily an ERP system with web-based solution.

· Power of Supplier – High but decreasing. Before 1999 SAP depended heavily of consulting companies to market and promote its ERP system to both local and overseas markets. After changing strategy in 1999, SAP focused more on developing in-house consultants and has became stronger in consulting service related to ERP solutions.

· Power of Buyer – Low because the switching cost is very high but this power is increasing due to complementors.

· Power of Substitute – High. Here substitute means modules or parts of ERP package because customers do not usually buy the whole ERP package but tend to buy some modules of ERP that fit exactly their needs.

· Rivalry – High because: 1) competitors catch up SAP technology in developing ERP by exploiting weaknesses of SAP software; 2) Oracle has became main competitor who can offer product nearly the same as SAP products; 3) Niche players (Siebel, Ariba, Marcum…) emerge as main players; 4) Competition in niche market is very intense; 5) IMB has changed its strategy to provide customized software that customers want.

· Threat of Complement – High. Sun has provided Java Platform and Free Linux Platform that enable computers to work with any software systems. This will decrease switching costs and buyers can buy ERP modules from any providers to run in their current system. Therefore, the power of buyers will increase.

  1. Environment Analysis

· Political, demographic, social environment is favorable.

· Macroeconomic environment: in early 2000s, firms tend to spend less on IT system due to economic downturns in 1990s.

· Technology environment: fats growing web and internet technologies and software development capacity in the U.S and abroad may become a threat to SAP if it can not change its technology ahead of time.

  1. Threats

· Oracle developed its own ERP that have features that SAP does not have.

· Competitors exploit weakness of SAP software and offer products more customized and less expensive.

· Development of the internet and broadband technology may make SAP’s P/3 be outdated.

· Development of new web-based software technology puts SAP under the threat of losing product advantages.

· Threat from compilementors like products of Sun.

· Niche competitors get stronger and more aggressive in competing with SAP.

· Microsoft may become a competitor in the future.

  1. Opportunities

· Large market segments of small and medium-sized firms.

· Large untapped overseas markets.

· Large market segments for new industries such as insurance, food, logistics, public sector.

· Opportunities in current markets if SAP can customize ERP to customers’ needs and make it easier to implement and use.

· Large market segments for new solutions in ERP package that SAP has not yet develop like corporate governance, risk management, finance, compliance.

· Opportunities for consulting and maintenance service that comes along with ERP solutions.

5. Conclusion

SAP is vulnerable and risks losing market shares due to intense competition from Oracle and niche players and threats from fast changing technology and complimentors. Potential competitors might come from both red and blue oceans to challenge SAP technology. But SAP has many opportunities in all markets and industries. The question is that how SAP uses its competencies to develop its technology and create new solutions to offer such large markets.

B. Internal Analysis

1. Business model (Appendix 2)

Before 1999, old model

After 1999, new model

- Applied focused strategy to largest international firms

- Focused only on software development

- Outsourced marketing, installation, implementation and software maintenance

- Pursued differentiation strategy to serve all customers

- Focused on software development, consulting service and software maintenance

- Outsourced implementation and maintenance

- Developed consulting and maintenance capabilities to reduce outsource

The old business model worked well because customers do not require sophisticated and customized products and competition was very low. However, this model was not sufficient for the new environment where there are many threats from competition and changing technology. The new model is a good and timely response to such new market environment and it helped SAP generate revenues and growth.

2. Resources

· Brand name and brand recognition

· State-of-the-art ERP system

· High skilled software programmers, talented and professional staff

· Control and reward system that motivate and retain employees

· Cross-functional teams focusing on customizing products

· Loose matrix structure that allows maximum capacity and competencies

3. Capabilities

· Management team with long term vision

· Culture of value and norms that emphasizes technical innovation

· Capability to innovate and develop technology

· In-house training and consulting capabilities

· Decentralized control that allows flexibility in work

SAP’s distinctive competency is product innovation.

  1. Value chain (Appendix 3)

Before 1999, SAP had many weaknesses in its value chain because it ignored marketing & sales, outsourced customer service, human resource management and related consulting service. Its flat structure caused the loss of control over marketing, sale, installation and relationships with external consultants and its product-oriented culture made it less responsive to customers. The weak value chain did not allow SAP to transfer its competencies into value to customers and caused implementation problems.

Together with the change of strategy, SAP has strengthened its value chain through series of activities such as building its own HRM, centralizing marketing & sales, developing consulting capabilities, changing organizational structure from divisional to matrix structure, building a new corporate culture based on customer-oriented concept. The new value chain allows SAP to implement the new strategy. Please refer to Appendix 4 for further information about how corporate infrastructure affects SAP’s implementation plan.

  1. Competitive advantages (Appendix 5)

· Quality: High. ERP system is highly reliable and added more attributes

· Superior innovation: High. SAP continuously add new solutions to its ERP system

· Customer responsiveness: low before 1999 but high from the introduction of mySAP

· Durability of competitive advantage: SAP’s high quality, superior innovation and high customer responsiveness competitive advantages are vulnerable because: 1) the barrier to imitation is high due to fast changing technology; 2) competitors such as Oracle and potential competitor such as Microsoft have capabilities to develop ERP system which has nearly the same features ad SAP’s ERP system. 3) companies in software industry are dynamic to changing technology and business environment.

  1. Value discipline (Appendix 6)

· SAP focused on product leadership before 1999 because it believed that technical advances were competitive advantages and allowed it to charge premium prices. However, SAP changed the strategy to pursue both product leadership and customer intimacy and gradually achieve cost reduction.

  1. Global strategy (Appendix 7)

Before 1999, SAP pursued international strategy because it was not under the pressure of cost reduction and was not well locally responsive. However, in response to intense competition and threats of changing technology and customer needs, SAP changed this strategy in 1999 to a transnational strategy to have more local responsiveness and cost reduction.

I think that the new global strategy is a timely and effective response to the fast change of business environment and will be successful in the future: 1) SAP will have deep understanding customers’ needs and therefore it can use its competencies to develop and current products and create new solutions to them; 2) SAP will enter new potential markets in terms of locations, industries and business processes before its competitors; 3) SAP can gradually reduce costs to offer cheaper products because premium prices will be eliminated by competition; 4) Through customization, SAP can build brand loyalty, increase brand awareness in every market and all industries; 5) SAP can surpass its competitors in technology, solutions, customer base. However, SAP needs to be able to change its strategy in response to changing environment.

8. Corporate level strategy

- Outsource strategy: SAP’s outsource strategy before 1999 allowed it to penetrate overseas market quickly while eliminating huge capital investment but brought it serious problems: 1) losses of high revenues from consulting service; 2) losses of contacts with customers so SAP did not have knowledge of its customers and understanding of changing needs of its customers; 3) less customer responsiveness because SAP did not contact directly its customers; 4) increasing complaints from customers regarding consulting service; 5) external consultants became more expert in installation, implementation and software service; 6) SAP became much more dependent on those consultants. However, SAP limited outsourced activities to implementation and service after 1999 to solve the above problems.

- Horizontal integration: SAP considers small acquisitions as important parts of its strategy to reduce costs, enhance functionality of its products and build its customer base. SAP also builds strategic partnerships with its niche and potential competitors to exploit competencies that it does not have and synergies across partner companies.

- Vertical integration: SAP builds strategic partnerships with external consultants to promote its products. This strategy is necessary since SAP still needs to expand market quickly with little capital investment, especially in overseas markets.

- Strategic partnerships: SAP not only builds partnerships with its competitors and suppliers but also builds partnerships with companies who provide complimentors such as Netscape and Sun to develop its products. The partnership strategy helps SAP reduce competition, increase market shares and develop its products. But there is a risk that SAP will lose its technology to its partners if it does not have effective control methods.

9. Business level strategy

Before 1999

After 1999

Focused differentiation strategy

Differentiation strategy but attempting to reduce cost

This strategy is suitable for the market situation at that time because technology was not changing fast and competition was not yet intense.

This strategy move was to respond to threats of changing technology, intense and new competition and is consistent with its global strategy.

10. Functional level strategy

Categories

Before 1999

After 1999

Efficiency

Short time-to-market

Short time-to-market; Cost reduction

Innovation

Create new solutions to ERP system up to industry level

Develop ERP that covers more business processes

Create new solutions to ERP system up to industry level

Develop web-based ERP that covers more business processes; break it into modules; make it easier to use and maintain

Customer Responsiveness

Low customer responsiveness

High customer responsiveness

Product customization and development

Quality

High product reliability

Add-in attributes

High product reliability

Add-in attributes

The change of functional strategy is effective. SAP moved this strategy to the way that it can respond more effectively to the change of its customers’ needs. This strategy fits with the new global strategy.

11. Strengths and weaknesses

Strengths:

· Superior product innovation and development capabilities

· State-of-the-art ERP system

· Skilled, talented and professional employees

· Cross-functional product development teams

· Brand name and reputation

· In-house training & consulting service

· Loose matrix structure that allows SAP to be very responsive to customers’ needs

Weaknesses:

· Cooperation between subunits

· Control over external consultants

C. Problems Identification

· Coordination between and among subunits

· Control partner consultants

· Vulnerability of business model in intense competition and changing technology

II. Alternatives, Cost/Benefit Analysis

Alternatives

Costs

Benefits

Build corporate culture

Time consuming

Expenses; difficult to assess

Increase cooperation between and among subunits to increase customer responsiveness

Share learning, knowledge, experience

Selective Acquisitions

Expensive

Risk to fail

Horizontal acquisition will help SAP decrease competition

Acquire competencies and synergies

Diversification: consulting and maintenance as main business

Need time and capital

Generate more revenues

Less dependant on external consultants

Respond more to customers’ needs

Understand more changes in customers’ need

Strategic alliances, network and partnership with external consultants and other software firms

Risk to lose fist-knowledge of customers’ needs and technology

Develop fast markets with less capital

Acquire competencies and synergies to strengthen R&D and develop technology

Reduce costs of a complex organizational structure

Non-price competitive strategy

Capital in product development

Expenses

Seize opportunities & manage rivalry

Prevent entry especially Microsoft

III. Recommendations and Implementation

A. Recommendations

I recommend SAP to choose all the above alternatives.

B. Implementation Plan

1. Build corporate culture to enhance cooperation between subunits and implement strategies in the entire company

- Hiring & Training: hire qualified people who fits SAP’s culture; create and maintain: learning corporation; environment of trust and nurture unconventional thinking and creativity; share values and behavior norms in the entire corporation; customer and service-oriented, performance-enhancing, unified, open and diverse culture. To do so, SAP needs to have in-house professional training centers to design and conduct training programs, good managers at all levels who can tell stories, become models, transfer the corporate mission, inspire passion, promote team-work spirit and experience sharing.

- Reward system: offer equal career opportunities to all employees; set up performance-related pay system; reward individual efforts; offer bonus plans, annual profit-sharing programs, stock options, equity saving package, capital saving programs, retirement and pension program; welcome package to welcome foreign nationals to work at SAP Germany and foreign subsidiaries.

- Organizational structure: flat and flexible structure.

2. Selective acquisitions (Appendix 8)

3. Develop consulting and maintenance as a main business

- Hiring: increase number of qualified consultants and software engineers

- Training: develop training packages for newly recruited consultants and software engineers; create training programs to upgrade consulting skills and maintenance capabilities

- Reward: reward systems to motivate, retain and develop staff in these two areas

4. Strategic alliances, network and partnership with external consultants and other software firms

- Choose strategic partners carefully. Partners may include niche competitors, potential competitors, external consultants and complement providers who have competencies and technology that SAP does not have or wants to improve.

- Create a learning environment to learn competencies from the partners while working with them

- Create an implementation plan so that SAP can acquire synergies of the network to reduce costs and develop its technology and service capabilities.

5. Non-competitive strategy to prevent new entrants, manage rivalry and seize opportunities

- Product development strategy: create new solutions to add in mySAP such as corporate governance, risk management, IT management, customer profitability analysis; develop mySAP solutions for new usage such as internet, mobile business, ebiz, on-line, broadband; increase consulting services to all business processes such as finance, strategy, risk management, corporate governance.

- Market development strategy: customize mySAP to new market segments such as insurance, public sector, food, textiles; customize mySAP for all size foreign customers; enter more foreign markets.

IV. Balanced Scorecard (Appendix 9)

SAP should use Balanced Scorecard as a measure of business performance. The Balanced Scorecard starts from SAP’s vision, mission statement and goes to four specific perspectives. Here I recommend only measures of the above recommendations and implementation plan.

Learning and growth: build a unique and open corporate culture that fosters a willingness to take responsibilities, help others and seize opportunities.

Internal process: reduce cost, develop products, service and technology, innovate new products.

Customer: help all customers win in every business environment.

Financial: satisfy investors’ expectations in terms of returns and sustained growth.

Please refer to the appendix for detailed measures.

Appendix 1: Five force analysis

Appendix 2: Business Model

Old model:

Marketing  Software Sales Installation Implementation Maintenance

External Consultants SAP External Consultants

New model:

Marketing Software Sales Installation Implementation Maintenance

External Consultants SAP External Consultants

SAP is strengthening its consulting and maintenance capabilities to reduce outsource in these two areas.

Appendix 3: Value chain

Categories

Before 1999

After 1999

R&D

Product innovation and development

Technical innovation

Qualified programmers

Expertise in developing ERP software

Product innovation and development

Technical innovation

Qualified programmers

Expertise in developing ERP software

Production

State-of-the-art ERP software system

Product standardization

State-of-the-art ERP software system

Product customization

Cost reduction

Marketing & sales

Ignored

Decentralized control to subsidiaries

Outsourced to external consultants

Focused

Centralized control

In-house

Customer Service

Little responsive to customers’ preferences

Decentralized installation to subsidiaries

Outsourced maintenance to external consultants

Customer dissatisfaction with consultants

Very responsive to customers’ needs

Product customization to all customers

Outsourced maintenance to external consultants but SAP is increasing in-house maintenance capability

More in-house consulting service

Customer-based solutions

Infrastructure

Flat organizational structure

Lack of effective control and incentive system

Inexperienced top management in managing fast growing company

Culture of technical innovation. This culture formed product leadership strategy

Matrix organizational structure with more centralization and hierarchy

Effective control and reward system

Top management with long term vision

Culture of technical innovation and customer-oriented corporation. This new culture was changed in response to the change of corporate and global strategy

IT system

Good IT system

Good IT system

Materials

Outsourced marketing, installation, implementation and software service

Built strategic alliances with major global consulting firms

Reduced outsource items to implementation and software service

Built strategic alliances with major global consulting firms and close relations with external independent consultants

Human Resource

Outsourced HR management

Did not have incentive system to reward employees

High turnover rate

Built is own HRM

Built reward system such as stock options

Recruited outstanding people who fit the corporate culture

Increase consultant employees

Encourage learning and sharing of its best implementation practices

Appendix 4: Corporate infrastructure

Before 1999

After 1999

Multidivisional Structure

Product-oriented culture

Loose matrix structure with product groups and cross-functional teams focusing on customization

Customer and service-oriented culture

Decentralized control

Decentralized marketing & sales

No link between subunits thus SAP was not able to response quickly to customers’ needs

Employees only paid attention to product development and ignored customers’ needs

Increase internal flexibility and responsiveness to customers

Decentralize authority to employees

Centralize engineering, marketing, training functions

Flexible and close linking between product groups and subunits thus SAP is able to respond to customers’ needs and customization

Employees are customer and service-oriented. They respond more and understand more customers’ needs

Product groups are independent profit centers so they work hard and always try to maximize their profits thus increase profits for SAP

The later organizational structure and new corporate culture are appropriate for SAP to implement its strategies at all level and achieve its strategic goals. With such alignment between strategy, culture and structure, SAP could implement smoothly its new strategies.

Appendix 5: Competitive advantages


Appendix 6: Value preposition

Appendix 7: Global strategy


Appendix 8: Acquisition implementation plan

Acquisitions: Select acquisitions that would bring SAP benefits through the following steps:

- Analyze the needs and right time

- Search for target companies

- Evaluate acquisitions in considering synergies, NPV, acquisition value

- Negotiation, deal execution

- Post acquisition restructuring

After restructuring and taking possible acquisition, Viacom will have better access to maintain a mixed strategy (combination of cost and differentiation strategy in the future

Appendix 9: Balanced Scorecard

Perspectives

Measures

Finance

Net incomes; Net sales growth; Country and region profitability analysis; Financial ratios (ROI, ROE, EVA)

Customer

Customer base; Response time; Number of responses; Customer satisfaction index; Market share; Number of new customers; Number of new seized opportunities.

Internal Process

Time-to-market; Number of product development; Number of product improvement; Cost reduction; Number of new solutions; Number of customization; Installation time;

Learning & Growth

Employee satisfaction index; Turnover rate; Hours of training; Number of suggestion by employee; Number of initiatives; Number of promotions

1 comment:

Yana Olson said...

Some observers might even consider individual vendor ecosystems to be sub-markets, or other specific sub-sets like hosted ERP software to be their own market segments.



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