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 marketsmarkets
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 marketsmarkets.
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) NicheNiche 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 broadbandbroadband 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.
· NicheNiche 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 marketsmarkets.
· Large market segments for new industries such as insurance, food, logistics, public sector.
· Opportunities in current marketsmarkets 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 managementrisk 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 nicheniche
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 marketsmarkets
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
- Applied focused strategy to largest international firms
- Focused only on software development
- Outsourced marketing, installation, implementation and software maintenance
After1999, new model
- 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 managementhuman 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 marketsmarkets
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 nicheniche 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 marketsmarkets.
- 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
Focused differentiation strategy
This
strategy is suitable for the market situation at that time because
technology was not changing fast and competition was not yet intense.
After 1999
Differentiation strategy but attempting to reduce cost
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
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
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 bonusbonus
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 managementrisk 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 marketsmarkets.
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.
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