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SAP and the Evolving Enterprise Resource Planning Software Industry Case Study

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Updated: Jul 2nd, 2019

System application and product (SAP) was founded in 1972 by five German IBM computer analysts who had left Company. SAP mission is to design software programs for central coordination and processing of information on cross functional and cross divisional financial transactions in a company’s value chain.

It is focused on developing enterprise resource planning system (ERP); a multi module applications software that allow companies to manage set of activities and transaction necessary to manage business processes, moving of products from the input stage along the value chain to the final customer.

SAP is focused on making a system that can recognize, monitor , measure, and evaluate all the transactions involved in a business process such as product planning, purchasing of input from supplier, manufacturing process, inventory and order processing, and customer self service.

SAP goals are to come up with EPR system that provides companies with a standardized information technology platform giving complete information about all aspects of its business process and divisions. This is to allow business to constantly search for ways to perform these process more efficiently and lower its cost structure, improve its services and products in order to raise their value to customer.

It aims at coming up with software that can provide information that allows for the design of product that match customer needs and lead to superior responsiveness to customer. It also, aims at making software that portrayed companies on the performance of their products and goods in various markets.

Additionally, SAP intends to make software that can compare and measure company’s transactions in all divisions and reveal any problems a company is experiencing. For instance it can detect company’s unwanted expenditures.

SAP’s strategy led invention of R/1, its first EPR software in 1973. SAP focused on influential niche of companies and helped in developing a global base of leading companies. It strategized to create a global industry standard for EPR through providing the best business application software infrastructure.

To increase its customers, SAP switched strategies in 1980. It decided to focus primarily on outsourcing, external consulting, and implementation of services needed to install and service its software on site in a particular company. It formed alliance series with major global consulting companies like IBM, Accenture, and Cap Gemini to install R/1 system in its growing base of global customers.

In its U.S subsidiary, each regional SAP division started developing its own procedure for pricing SAP software, offering discounts, dealing with customer complaints, and even rewarding its employees and consultants. To solve problem of competition SAP sought a quick fix by releasing new R/3 solution for ERP internet enabled SCM and CRM solution which converted its internal ERP system into an externally based network platform.

By providing a simpler and cheaper version of its application software coupled with the introduction of the many mySAP business solution packages, SAP broadened its offering targeted market not only to large corporation but also to small medium seized companies.

To support its mySAP initiative, SAP continued to build in house training and consulting capabilities to increase its share of revenue from service side its business. It increased web software which paid off because the company was now better able to recognize the problems experienced by customer.

Also, SAP was seeking to establish R/3 as new ERP market standard and lock in customer before competitors could offer viable alternatives. This strategy was vital for its future success, given the way an ERP system changes the nature of customer’s business process once it is installed and running due to high switching costs involved in moving to another ERP product, and the involved costs that customer warrants void.

SAP standardized the way each subsidiary or division operated across the company, thus making it easier to transfer people and knowledge where they were needed most. It also developed a large global training function to provide the extensive ERP training that consultants needed and charged both individuals and consulting company’s high fees for attending this course so that they would be able work with the SAP platform.

SAP’s strength includes developing an EPR system which can provide a company with the information needed to achieve the best industry practices across its operations. SAP earns more revenues from training consultants in the intricacies of installing and maintaining SAP’s ERP system.

It depends much on consulting companies and on becoming the expert in the installation / customization. Introduction of SAP’s R/3 outperformed its competitor product in a technical sense and once again allowed it to charge premium price for its new software.

SAP’s weaknesses are that its R/1 software installation process was long and complicated. For a company to adapt its information systems to fit the SAP’s software; it must use consultants to rework the way it performs and its values chain activities so that its business process and information system can become compatible with SAP’s software.

SAP relying much on consulting and becoming expert in installation/customization brought problems later since it lost first hand knowledge of its customer’ problem and an understanding of the changing needs of its customer’ especially when the internet and cross company integration became a major competitive factor in ERP industry.

SAP ignored marketing and sales competency and focused on developing its technical competency. Its top managers were not experienced business managers who understood the problem of implementing a rapidly growing company’s strategy on a global basis. It lacked standardization and integration inside America and indeed between many foreign subsidiaries and their headquarters in Germany.

It did not have a monitoring or coordination mechanism in place to share own best practices between its consultants and division, and organizing by region in the United States was doing little to build core competences.

SAP’s R/3 was also criticized for being too standardized because it forced all companies to adapt what SAP had decided were best industry practices. Reconfiguring the software to fit certain companies’ needs took along time and sometimes did not perform as well as expected.

SAP’s opportunities included updating of its basic ERP platform to accommodate the needs of companies in different kinds of industries. It registered in Frankfurt stock exchange 1988 to raise cash for its development after which it dominated ERP software sales.

Because of R/3 growing popularity SAP decentralized and controlled marketing, sale, and installation of its software on global basis but its research and development remained in Germany. Developing of internet and broadband technology become important force in shaping a company’s business model and process in future.

The internet was changing the way in which the company viewed its boundaries; through the emergence of global ecommerce and online cross company’s business process both at the input and output sides. Developing web software was also made it easier for the company to cooperate and work with supplier and manufacturing company and to outsource activities to specialists.

Oracle began its own EPR software which posed a threat to SAP since it did not develop its own database management software package; its system was designed to be compatible with Oracle’s data base management software. SAP decentralization faced a problem since it could not provide thorough training on consultants needed to perform the installation of its software.

Some of consultants would leave after training to join other company or start an industry specific SAP consulting practice. People had notion that SAP software are difficult and expensive to implement which hurt its reputation and sales. SAP was involved in disputes with other companies over the R/3 software.

For instance, Chevron major creditors sued SAP in court alleging that the company had promised that R/3 would do more than it could. SAP decentralization mission to supply software that linked functions and divisions did not come true; it separated them and characteristic problem of too much decentralization of authority soon became evident in SAP.

Internet development also posed a severe threat to SAP’s management who had been proud of the fact that until now they had developed every thing internally. Rivalry among major software makers in the new web based software market became more intense and SAP had to deal with competition from large and small software companies that were breaking into the new web based ERP environment.

Oracle emerged as its major competitor; it had taken its core data base management software used by large companies and overlaid it.

New companies like Siebel system, Commerce one, Ariba, and Marcum which emerged as niche players in some software application such as SCM, CRM, internet, or website development and hosting also began to build and expand their product offering so that they now posed ERP modules that competed with some of SAP’s most lucrative R/3 modules.

In its implementation, SAP culture was built on values and norms that emphasized technical innovation, and the development of leading ERP software.

SAP invested most of its money into research and development to fund projects that would add to its platform’s capabilities. SAP was product focused company and believed research and development would produce technical advances that would be the source of its competitive advantage.

It ventured in ERP in1973 through introducing R/1 and 1981 SAP introduced its second generation ERP software, R/2. In 1992 SAP introduced R/3 which offered seamless, real time integration for over 80% of a company’s business process. It embedded in the platform hundreds and then thousands of industry best practices solution or templates that customer could use to improve their operation and processes.

In the first years SAP did not only developed EPR software but it used its own internal consultants to install it physically on site to its customers, corporation, and IT centers. It also emphasized on innovation. SAP decentralized control of its marketing, sales, and installation to its subsidiaries.

Its top managers operated from the beginning by creating a flat hierarchy to create an internal environment where people could take risks and try new ideas of their own choosing. If mistakes occurred or projects did not work out, employees were given the freedom to try a different approach. Hard work, teamwork, openness, and speed were the norms of their culture.

Required meeting were rare and offices were frequently empty because most of the employees were concentrating on research and development. SAP established human resource management in 1997 to build a more formal organization. Its goal was to standardize the way each subsidiary or division operated across the company, thus making it easier to transfer people and knowledge where they were needed most.

It also developed a large global training function to provide the extensive ERP training that consultants needed and charged both individuals and consulting company’s high fees for attending this course so that they would be able work with the SAP platform.

In 1998 SAP followed industry solution maps, business technology maps, and service maps, all of which were aimed at making its R/3 system dynamic and responsive to changes in industry conditions.

SAP’s business model and strategies became clear when it introduced its mySAP.com (mySAP) initiative to gain control of the web based ERP, SCM and CRM market; to extend its research into any ecommerce or internet based software application.

SAP’s software would no longer force the customer to adapt to SAP’s standardized architecture; mySAP software was adapted to facilitate company’s transition into a business. MySAP provided the platform that would allow SAP’S product offering to expand broaden overtime; important feature because web based software was evolving to ever more varied application.

SAP focused on making mySAP more affordable by breaking up its modules and business solutions into smaller, separate products. Customer could choose which particular solution best met their specific needs; they no longer had to buy the whole package.

Given existing resources constraints and time pressure and the need to create a more profitable business model, in the 2000 SAP realized that it needed to partner with companies that now dominated in various niches of the software market. By utilizing already developed best of breed software, SAP would have to deploy the capital necessary if it were to go it alone.

In addition, synergies across partner companies might allow future development to be accomplished more efficiently and enable it to bring new mySAP products to the market more quickly. It also used acquisition to drive its entry into new segment of the acquisition to drive its entry into new segment of the web software. It started SAP hosting to provide hosting and web maintenance services.

The recession that started in 2000 and increased competition in the ERP industry, SAP and Oracle in particular battled to protect and increase their market share. Implementing mySAP, SAP had begun to centralize authority and control in order to standardize its own business processes and manage knowledge effectively across organizational subunits.

To respond to changing customer needs for product customization, SAP now moved to decentralize control to programmers and its sales force to manage problems where and when they arose. SAP’s managers felt that in an environment where market were saturated with ERP vendor and where customer wanted services and system that are to use, it was important to get close to the customer.

SAP put in place its own application software for integrating across its operating division and subsidiaries allowing them to share best practices and new development and thus avoid problem that come with too much decentralization of authority.

To speed the software development process, SAP divided its central German software development group into three teams in 2000. One team works on the development of new product and feature, the second refines and updates functions in its existing products, and third works on making SAP products easier to install.

After 2001 once again to speed up the implementation of the mySAP initiative, SAP folded the market and SAP portals subsidiaries into SAP’s other operation and split the SAP product line into distinct but related mySAP product group each of which was to be treated as an independent profit center, with the head of each product group reporting directly to SAP’s chairperson.

SAP also changed the way the three German engineering groups worked with the different mySAP products groups.

The software engineer at its German headquarter beside conducting basic research and development would be responsible for coordinating the efforts of different mySAP engineering groups, sharing new software developments among groups, providing expert solutions, and ensuring all different mySAP applications worked together.

SAP opened the development process to its competitor and allowed them to work with SAP team to make their products compatible with SAP’s product and with the computer platform or legacy system already installed in their customers operation. The company also instituted stricter training and certification method for consultants to improve the level of quality control and protect its reputation.

At global level, SAP grouped is national subsidiaries into three main world regions: Europe, the America, and Asia/Pacific. This grouping made it easier to transfer knowledge and information between countries and serve the specific demands of national market inside each region.

Also this global structure made it easier to manage relationship with consulting companies and to coordinate regional marketing and training effort, both under the jurisdiction of the centralized marketing and training operations.

In 2002 SAP introduced R/3 enterprise which targeted at customer not yet ready to make the leap to mySAP. It was a collection of web software that can be added easily to the R/3 platform to provide a company with the ability to network with other companies and perform many ecommerce operations.

They also developed a new business computing solution called SAP NetWeaver; a web based open integration and application platform that serves as foundation for enterprise serve as the foundation for enterprise service oriented architecture and allows the integration and alignment of people, information, and business processes across business and technology boundaries.

To control SAP’s operations, it introduced human resource management. It developed job description and job title, and put in place a career structure that would motivate employees and keep them loyal to the company.

SAP put in place reward system which included stock option to increase the loyalty of their technicians, who were being attracted away by their competitor or had started their business because SAP did not offer a future career path. It operated formally, and centralized to encourage organizational learning and promote sharing of own best implementation practices across division and subsidiaries.

To improve the cost effectiveness of mySAP installation, SAP sought a better way to manage its relationship with consulting companies. It moved to a parallel sourcing policy in which several consulting firms competed for a customer’s business and it made sure a SAP consultant was always involved in the installation and service effort to monitor external consultant’s performance. This helped keep service cost under control for customers.

Because customers’ needs changed so quickly in this fast paced market and SAP continually improved its products with incremental innovation and additional capabilities, it also insisted that consultants undertake continual training to update their skills, training for which it charged high fees. SAP adopted a stock option program to retain valuable employees after losing many key employees to competitor.

It increasingly embraced the concept of open architecture and its mySAP offerings are compatible with the products of most other software makers. It had already ensured that its mySAP platform worked with operating system such as Microsoft NT, Sun’s Java, and UNIX.

To reduce cost, SAP began to outsource its routine future programming development work overseas to low cost countries such as India. SAP also began to use its expanding Indian research center to develop new ERP modules to serve new customer in a more industries or vertical markets.

In evaluation SAP has drastically made innovations on EPR which has made it to survive and thrive well in global software market. It has over years experienced growth in software sales, consulting, maintenance and training. Its maintenance service has provided continuous improvement, quality management, and problem solution so that client stays up to date with the best business practice that the company embeds to its software.

It has continued to experience increase in net income. It has worked hard to compete with other competitor companies and build up its customer base in order to increase its profit margin

In recommendation SAP should search out new ways to increase growth and generate revenues because the market is getting saturated now that most large companies have adopted best practice ERP software. To generate increased revenue SAP should increase involvement in service training activities, which will put it in direct competition with IT consulting companies such as IBM and Cap Gemini.

It should also broaden the range of products it offers to the SME business segment in order to compete with Oracle, Microsoft and New internet companies. To survive in future, SAP should focus on making investors believe in future growth potential of acquisition and business model.

It should focus on increasing profitability by improving productivity, to better serve its users with new products and expand to new industries, help customers transition and gain benefits from enterprise SOA, which using netweaver allows customer to seamlessly integrate the software of different vendors into a whole and links it to the internet, making possible real time upgrades and improvements.

SAP should continuously embark on strength in developing an EPR system which can provide a company with the information needed to achieve the best industry practices across its operations. It should work to become expert in the installation / customization and outperformed its competitor product in a technical sense. It should ensure that its R/1 software installation process brief and easy.

SAP should also focus on marketing and sales competency. It should employ top managers who are experienced for them to understand the problem of implementing a rapidly growing company’s strategy on a global basis.

It should have standardization and integration inside America and indeed between many foreign subsidiaries and their headquarters in Germany. It should embrace internet and broadband technology to Shape Company’s business model and process in future.

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