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
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
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.
ERP Market in India
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