Sap’s Platform Strategy In 2006

Transcript

rP os t HKU564 ALI F. FARHOOMAND SAP’s PLATFORM STRATEGY IN 2006 tC op yo In face of globalisation, outsourcing, changing regulations and rapid technological innovations, companies in 2000s were increasingly challenged to devise and implement adaptable business models. This entailed putting in place enterprise applications that were open-source, simple to implement and easy to integrate within and without the organizational bounds. Because traditional enterprise resource planning (ERP) systems were generally complex, proprietary and difficult to install, ERP systems providers had to reposition themselves strategically. SAP, the leading company in this space, faced this challenge by transforming itself from a closed source software developer to an open source software integrator. By opening up its proprietary software products as an open development and integration platform, SAP would allow its customers to modify their ERPs to suit their specific needs. This new strategy, however, would fundamentally affect the Company’s business architecture. In other words, SAP had to rethink the totality of how it would define its value proposition, identify and target its customers, deploy its resources, configure its business processes, manage its alliances, and develop and maintain its profit and growth engines. How could the Company pull off this repositioning initiative? Would it be able to attract the global army of independent developers in supporting its new software platform strategy? How would the ongoing consolidation in software industry affect the Company’s new strategy? What would be the reaction of the main competitors such as Oracle, IBM, Microsoft, and a host of companies emerging in India? Brief History of SAP Do No SAP was founded in 1972 by several former IBM software engineers. Led by Hasso Plattner, the company started its business in Walldorf, a small town outside Frankfurt, Germany. SAP was the vanguard of developing application systems which aimed to automate the entire enterprise operations rather than focusing on individual business functions. Such application packages were later referred to as enterprise resource planning (ERP) systems in the software market. Many large businesses were changed by this new breed of software that seamlessly integrated all the vital information flowing through companies. Samuel Tsang prepared this case under the supervision of Dr. Ali F. Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 06/278C 1 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t In 1973, SAP launched its first major product, R/1, a instantaneous accounting transactions processing system. Six years later, SAP successfully developed R/2, the successor to R/1. The mainframe software package was able to link external databases and communications systems. In the late 1980s, SAP went public. Around the same time, Plattner began to create the next version of the software package that would be able to work in the decentralised computing environment. In 1992, as sales of its R/2 mainframe software began to slow down, SAP introduced R/3, the client/server–based ERP system. In 1998, SAP was listed on the New York Stock Exchange (NYSE). In the same year, Henning Kagermann, a former academic in theoretical physics and a veteran executive of the software company, was named co-chairman along with Plattner. This also marked the pinnacle of the German software company in the 1990s, as it was considered by many as a second Microsoft.1 The Revolution in the Back-Office op yo Before ERP, companies spent a fortune on tailor-made application systems to support their back-office functions such as distribution, accounting, human resources (HR) and manufacturing. These companies, however, continued to struggle in linking together their incompatible systems. Companies spent millions of dollars to integrate their systems, eg, building highly customised interfaces between application systems and their individual databases, and frequent patching and data cleanup to ensure data integrity and consistency. It was ERP that came to change how large companies’ business operated in the 1990s. tC ERP was a successor to materials requirement planning (MRP) systems, which were designed to automate and manage production scheduling, including ordering the appropriate materials. In the 1980s, with the introduction of ERPs, separate MRP systems were no longer required, as their main features and functions were incorporated in this new breed of enterprise application. ERP could support a broad range of activities in businesses, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service and tracking orders. ERP could also include application modules for the finance and HR aspects of a business. No Building a single software program that served the multiple needs of various departments was a tremendous challenge, as each department often had its own IT system designed specifically to address its needs. ERP did just that—it combined all the diverse needs of an enterprise’s departments together into a single, integrated software program that operated on a single database. Thus, the various departments could share information and communicate with each other more easily. Such an integrated approach could yield a tremendous payback if the software was correctly installed. In the pre-ERP era, after a customer issued an order, the details of an order were often entered and re-entered into different departmental IT systems. As there were multiple data entry and re-entry steps required to capture an order’s details into different IT systems, errors were often rife. Meanwhile, it was difficult to truly know what the status of the order was at any given point in time. For instance, the finance department could not get into the warehouse’s IT systems to see whether the item had been shipped or not. Do With ERP, there was no longer a need for stand-alone systems in finance, HR, manufacturing and warehousing. Now a single unified application made up of various modules could replace all the old stand-alone systems. The modules were tightly integrated and finance could now look into the warehouse to check if an order had been shipped. 1 Lower. J. (2005) “SAP Aktiengesellschaft”, Hoover’s Company Information, Hoover’s Inc: Austin TX. 2 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t Many companies would need months, or even years, to implement the entire ERP package with a process that often involved five to six times the original cost of the software. These often included the costs of hiring external consultants to conduct large scale reengineering in a number of business processes and organisation structures, and to facilitate the implementation of such changes within an enterprise. According to AMR Research, an industry analyst, the ecosystem of ERP – consulting, new hardware, software (eg, database software), networking and other complementary components were estimated at around US$35 billion in 1998. Impact of ERP on Enterprises op yo BASF Aktiengesellschaft was one of the success SAP implementation stories. A Germanbased chemical company and a long-time customer of SAP since the 1980s, the company had more than 82,000 employees worldwide and sales of US$45 billion in 2004. The chemical company leveraged SAP to form a core platform to link up various functions of the company, from finance to procurement, and from production to warehousing and inventory. After more than two decades, with substantial savings and added values, BASF continued to invest in SAP to standardise the processes of all divisions within the enterprise.2 Although an ERP system was designed to be an off-the-shelf package, companies often found the system overly complex to install and run. In particular, ERPs often changed how people worked and how businesses were run. For instance, Dell Computer attempted to implement the SAP R/3 system to support its manufacturing operations in 1994. However, the computer maker abandoned the project two years later in 1996. According to Terry Kelley, Chief Information Officer at Dell, the company experienced tremendous difficulty in installing the SAP system: SAP was too monolithic to be altered for changing business needs … Over the two years we were working with SAP, our business model changed from a worldwide focus to a segmented regional focus. tC - Terry Kelly, Chief Information Officer, Dell Computer3 There were many other leading corporations besides Dell that also took on SAP projects and quit in the middle of their implementation phase. Some were able to exit without much financial setback. Others were not so lucky. For instance, Kmart attempted to implement a SAP system in the 1990s, but it had to write off the US$130 million project that never got off the ground, according to Forrester Research, an industry analyst.4 Do No In addition to the overall impact to a company’s business model, overlooking its process and people aspects in implementing a SAP project could also be devastating. In 1997, Nestle USA, the US$8.1 billion subsidiary of the Swiss consumer goods giant, embarked on a project to install SAP’s ERP system. The company intended to leverage the system to centralise several of its divisions. Nestle USA rushed to install the software to meet the Y2K deadline, ignoring those that were affected by the new processes as well as the organisational structures embedded in the SAP system. Subsequently, users rebelled, morale sank and employee turnover increased. In June 2000, Nestle USA halted the project and restarted from scratch. By the time it was completed in 2003, the total time the project took was six years and the 2 Sullivan, L. “ERPzilla”, InformationWeek, July 11th 2005, [www document] http://www.informationweek.com/showArticle.jhtml?articleID=165700832 (accessed September 8th 2005). 3 Stein, T. “Dell Takes ‘Best-Of-Breed’ Approach In ERP Strategy”, InformationWeek, May 11th 1998. 4 Worthen, B. “Nestlé’s ERP Odyssey”, CIO Magazine, May 15th 2002, [www document] http://www.cio.com/archive/051502/nestle.html (accessed September 13th 2005). 3 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t cost had escalated to US$210 million. Nestle USA claimed, however, that the project was worth the effort, as it saved the company US$325 million. Based on their implementation experiences, a number of consultants suggested that the only way to reap full benefits of the software was to submit to SAP by making minimal changes on the software. Nonetheless, Thomas Davenport, a professor at Boston University, warned that companies might lose their distinct characters and competitive advantages by moulding themselves into the models defined by SAP. 5 To address such issues, some companies adopted a hybrid strategy by customising the ERP software at the code level. However, such an approach often posed a high risk to maintaining and upgrading the modifications, particularly while incorporating the changes with new releases of the software packages. op yo Alternatively, instead of taking an ERP package in its entirety, some companies adopted a best-of-breed approach, in which separate software packages (modules from major ERP vendors or products from niche software makers) were selected for each process or function and then pieced together using custom-built interfaces. According to a survey conducted by Harvard Business School (HBS), 60% of the respondents indicated their companies had adopted this particular approach. A case in point was Dell Computer. In 1997, a year after abandoning the SAP project, Dell assembled its own ERP system by selecting specific functionalities from a wide range of packages, including i2 Technologies (for materials management), Oracle (for order management), and Glovia (for manufacturing such as inventory control and warehouse management). According to the testimony given by the computer maker, the result was highly positive: We keep carving out pieces of the puzzle and delivering quicker value than if we were putting in one huge ERP system. - Terry Kelly, Chief Information Officer, Dell Computer6 tC Downfall of the ERP Market No By 1999, the ERP market was losing its glamour. SAP’s major competitors, such as PeopleSoft, were in disarray. SAP’s share price plummeted for the first time since its initial public offering in the US in 1998. This was partly owing to the high failure rate (over 50%) in ERP implementations, according to a survey conducted by HBS. Although the definition of failure was arguable, it mainly referred to the user acceptance of process and organisation changes, projects going over budget, time delays, lack of appropriate skills, and technical failure. Do Besides the negative implementation experiences, customers found that most ERP vendors (and their products) were misaligned with the new technical and business requirements under the networked environment based on the internet. In terms of the technical requirements, SAP was slow to make its software web enabled. The company was confident that its R/3 product could cope with any form of distributed computing introduced by the internet and hence it (and many other ERP vendors) was reluctant to adapt the web-based computing architecture. Moreover, as the original design of ERP systems was aimed to improve only the internal operations of an enterprise, typical ERP software lacked the capabilities to link up companies, suppliers and customers operating in an inter-connected environment. In terms of the business requirements, the changing model of the business of enterprise applications software was challenged by an alternative offered by web computing. Traditionally, ERP vendors assumed 5 6 “SAP’s Rising in New York”, The Economist, June 30th 1998. Stein (1998) op. cit. 4 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t that a small proportion of the workforce (around 10% of the workforce in a large global company) would access the application. Hence, the licence fees were often set at a high level. With the arrival of the internet and web computing, however, a different approach was made possible. Applications could reside on servers and be accessible to anyone through a browser running on any web-enabled device. In light of this change, a volume pricing model was now preferable to the high licence fee model. op yo For these reasons, traditional ERP players were inadequate to help companies become ebusinesses. Customers were forced to source various components from a number of software players, integrate the disparate software products and form links to the ERP systems. These component software makers included Ariba and Commerce One for procurement; IBM for ecommerce platform; and Siebel and Onyx for sales and front-office functions. As some industry analysts described, this was almost like having a second “backbone” on top of the current ERP system and IT infrastructure. This so-called enterprise application integration (EAI) took up half of the time and resources of many corporate IT departments.7 In the view of all the changes in the e-business era, SAP decided to catch up. In late 1999, the company launched a web-based version of its flagship product, called mySAP.com. This version of the software package was aimed at becoming a full-fledged, business-to-business portal that would support online transactions and other services arising in the networked economy. In order to strengthen its e-business capabilities, SAP invested in Commerce One through its US subsidiary, SAP Markets, to obtain a minority stake of the e-procurement software company. In 2001, SAP acquired enterprise portal software provider Top Tier Software, and renamed it SAP Portals. Moreover, the company also made additional investments in Commerce One, and raised its ownership stake to about 20%. tC Nonetheless, the IT industry experienced the worst economic downturn in history triggered by the burst of the dotcom bubble in the early 2000s. Although its revenues grew remarkably from 1997 to 2000, SAP began to suffer from a lack of revenue gain and a decrease in net income in 2001 and 2002 [see Exhibit 1 and 2]. Facing these industry-wide difficulties, SAP improved its products by integrating key offerings from its subsidiaries, SAP Portals and SAP Markets, into its mySAP product. As a number of newly founded software companies collapsed during the economic downturn, customers once again turned to established software vendors that offered integrated and sustainable products. These new requirements certainly played to SAP’s traditional strengths. In 2003, Plattner stepped down, leaving Kagermann in sole control of the chairman and CEO positions. No Industry Dynamics after the Dotcom Crash Do After three years of declining technology sales [see Exhibit 3], the global IT industry returned to growth in 2003 and the outlook seemed positive. According to a study conducted by McKinsey & Co. in 2004 on IT spending trends, chief information officers (CIOs) from the Fortune 500 companies said they would increase their IT budgets. Nonetheless, they would spend money quite differently. In particular, CIOs expected to get more out of their technology investments. Companies were more concerned about the value of IT and enforced stringent rules and guidelines for IT spending. For instance, procurement departments became more involved in the IT purchasing process, and, in particular, in the commodity products. Many were applying formal bidding mechanisms that required vendors to go through a competitive process in getting the complex deals. In addition, CEOs became more demanding in the return on investment (ROI) on new technology spending. As such, CIOs were now required to develop stronger business cases to support their investments, and to tie the overall 7 “ERP RIP?”, The Economist, June 24th 1999. 5 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t performance of IT to their personal performance measures. Subsequently, the growth of overall IT spending was expected to be more modest from 2003 onwards (around 4% to 6%). This was far below the double-digit figures of the heydays in the 1990s.8 op yo The IT industry was also considered to be in the middle of an eight-year period of “technology digestion”, explained below. Hence, senior managers were reluctant to make any major technology investment. According to Forrester Research Inc., an industry analyst, investment in IT had continued to increase in the 60 years since 1956. In the US, the ratio of IT investment to gross domestic product (GDP) increased from 1% in the mid-20th century to more than 4% at the beginning of the 21st century. However, such growth was not always constant. In fact, it was characterised by periods (eight to ten years) of fast growth followed by equally long periods of slow or negative growth. Based on previous historical data, there were three growth periods identified in the IT industry corresponding to the introduction of new technologies [see Exhibit 3]. The first period saw the introduction of mainframe computing between the mid-1950s and mid-1960s. The second period introduced personal computing from the mid-1970s to the mid-1980s. The third period introduced network computing between the early 1990s and the early 2000s. In these periods, companies invested in new technologies often on faith and without strong links to ROI measurements. Consequently, companies went many years before fully exploiting the technologies. During these “technology digestion” periods, companies often focused on changing the relevant business processes as well as the corresponding organisational structures. Therefore, this often led to lower spending on new technologies. These spending lags were also noted by researchers from MIT’s Centre for eBusiness. Based on large-scale statistical results, they cited that companies often implemented new technologies years before they could get value from them. This was particularly true in terms of infrastructural investments.9 New Trends and Structural Changes in the Software Industry tC Software spending was expected to recover and reach US$325 billion by 2008. The growth rate of the market was expected to be between 3% and 7% annually. In general, the software market was categorised into the following two groups: system software (a layer of software that operated between IT hardware and application software and accessed only by IT staff such as system administrators) and application software (operated by business users in their respective functions or processes).10 No In the short term, software spending would be driven by systems software (eg, systems management, storage, database and security). Systems management software would mainly be purchased to monitor and manage distributed computing resources such as PCs. The purchase of storage and database software was driven by the increasing demand for data storage capacity owing to Sarbanes-Oxley11 compliance and increasing needs of customer data. Lastly, security applications would aim to mitigate risks such as data leakage in the networked environment.12 With regard to the spending on application software, companies were expected to look for specific point solutions (eg, business intelligence, portals, enterprise content management and 8 Do Davis, K.B., Rath, A.S. and Scanlon, B.L. (2004) “How IT Spending Is Changing”, McKinsey Quarterly, 2004 Special Edition; “IT Spending Growth to Slow”, Red Herring, August 1st 2005; Nystedt, D. “IDC Lowers 2005 Global IT Spending Growth Forecasts”, Computerworld, May 4th 2005; Bartels, A. (2004) “IT Spending Outlook: 2004 to 2008 and Beyond”, Forrester Research Inc.: Cambridge MA. 9 Brynjolfsson, E. and Hitt, L. (1998) “Beyond the Productivity Paradox”, Centre for eBusiness, MIT: Cambridge MA. 10 Davis, Rath and Scanlon (2004) op. cit.; Bartels (2004) op. cit.; The Economist, July 16th 2005, op. cit.; “Software: Expect the Giants to Stay Sluggish”, Business Week, January 10th 2005. 11 The Sarbanes-Oxley (SOX) Act administered by the Securities and Exchange Commission in the US was devised to regulate corporate financial records by defining the type of financial information that must be recorded and reported. 12 “The Leaky Corporation”, The Economist, June 23rd 2005. 6 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t collaboration) to enhance the effectiveness of their business processes. Consequently, the sale of traditional enterprise application packages (eg, customer relationship management (CRM), enterprise resource planning (ERP) and supply chain management (SCM) systems developed by players such as SAP and Oracle) was expected to be slow. This slowing down would be a result of the massive organisational impact that the implementation of these enterprise software packages had in the 1990s and early 2000s. Moreover, CRM, ERP and SCM applications were challenged by increasingly complex integration issues. Historically, these enterprise applications were stitched together via some loose interfaces. As many of these enterprise software packages were developed by using proprietary codes, they became highly incompatible with each other if developed by different vendors. Companies were therefore not able to leverage these application packages as a holistic solution for their enterprises. op yo As a result, purchases in relation to the integration of the various enterprise applications were expected to rise. In particular, as the concept of service-oriented architecture (SOA) – an approach that emphasised code reuse and business modelling – would take hold in enterprise computing in the long term, associated technologies such as Web services would become the main drivers of software spending. As Web services would form an open-system platform, it would enable the diverse application software systems to be melded into a holistic solution. This new trend would then allow enterprise software vendors to adopt a more integrated approach and would give them an extended scope of offerings. In turn, these vendors were expected to transform themselves from mere product vendors to comprehensive solution providers.13 tC Besides building software that would be easily integrated with other vendors’ products, industry players were expected to introduce software-as-a-service, particularly for the smalland medium-sized businesses. Under this new arrangement, end users would not have to deal with the complexities and costs of on-site implementation of the enterprise software packages. All the technologies would be run off-site by the vendors and the end user would only need to pay as they used. As users would no longer own the software, software companies would be impacted by the reduction in sales of their software licenses. Service-Oriented Architecture and Web Services No Customers constantly looked for ways to modify and upgrade their enterprise applications to complement their changing business needs. To address this issue, the concept of serviceoriented architecture (SOA) began to take hold. One of the hottest topics in the software industry, SOA was a conceptual framework to develop and integrate applications. The concept was an evolution of distributed computing based on the loosely coupled design paradigm. With this architecture (ie, its specification), developers could package business logics and functions as Web services consumable across different environments. All Web services could then be connected with each other through the internet (the common communication backbone). Developers could then build applications by coupling one or more of these services without knowing the underlying implementation details of the services. For instance, a service could be implemented in .Net (from Microsoft) or Java (from Sun Microsystems), the lingua franca of the internet, and the applications consuming the same service could be on different platforms (eg, legacy mainframes or PCs). Do Computing environments were increasingly heterogeneous across diverse operating systems, applications and infrastructure. In addition, many applications were tightly integrated with business processes. Hence, it would be close to impossible to build a new homogenous infrastructure from scratch in an enterprise. By leveraging SOA and Web services, companies 13 Heng, S. (2005) “Software Houses: Changing from Product Vendors into Solution Providers“, Deutsche Bank Research: Frankfurt. 7 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t could develop new applications (without concerning the selected platforms as long as they met the pre-defined SOA and Web services specifications) to address new business requirements, and could thereby continue to leverage their current investments in applications and infrastructure. Through this new development approach, companies could develop and modify their application systems within a much shorter timeframe since companies would no longer need to hard code links and interfaces between the new and old functions. Moreover, a number of Web services modules were expected to be pre-packaged so that companies could purchase them off the shelf in order to reduce their internal coding efforts. Major IT players including Microsoft, IBM, SAP and Oracle had already jumped onto the SOA and Web services bandwagon. op yo Although SOA and Web services were taking hold rapidly, there was no universal starting point for implementing the architecture and technology. Hence, companies would need to carefully consider their initial needs as well as future potentials, in order to determine the appropriate SOA and Web services platforms to avoid a lock-in. Pay-As-You-Go Application Services Because of the over-purchase of IT during the dotcom boom, companies now wanted to access the latest software packages without large up-front capital investments. In addition, small and mid-size businesses often wanted to acquire world-class application packages without the high investments in hardware, software and supporting staff. In view of these new customer requirements, a number of industry players were expected to introduce a new payas-you-use model by delivering software as services. This approach was based on the concept of utility computing, which was defined as the provision of services wherein a service provider made computing resources (eg, applications) and infrastructure management available to the customers on need basis. This service provisioning approach was analogous to other utility services (eg, electrical power, water) that aimed to meet the fluctuating needs of customers, and charged for the resources based on usage. Do No tC Software-based services were first introduced in the dotcom boom through the application services providers (ASPs). These providers managed and distributed application services to customers across a wide area network from a central data centre. In essence, ASPs were a way for companies to outsource some or all aspects of their application needs. However, the ASP model was not fully exploited. In 2002, with the introduction of utility computing, software companies re-explored the potential of this service provisioning model. Pay-as-you-go computing services could be broadly categorised as “hosted” and “on-demand” services. Hosted services indicated an arrangement wherein customers outsourced their hardware but purchased licences from the software vendors. In this case, customers would pay for the usage of their hardware on a need basis. With on-demand services, on the other hand, customers outsourced both their hardware and software to a third party. Customers would therefore pay for both application services and hardware usage on a need basis. Players such as Siebel and Salesforce.com Inc. were actively promoting their sales force automation and customer relationship management (CRM) products, delivered as on-demand service offerings, by providing the application service through the internet with monthly billing cycles. Traditional ERP vendors such as Oracle were beginning to sell their products as hosted service offerings by selling the software licence on a one-off arrangement, but charging the hardware usage on a need basis. Enterprise applications delivered as pay-as-you-go services were attractive alternatives. This model allowed customers to significantly reduce the total cost of ownership of enterprise applications (ie, the up-front investment in hardware, software, services and supporting staff, and ongoing maintenance costs), to increase flexibility and responsiveness to the changes in their business models, to switch easily to other vendors without significant attachment, and to 8 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t provide updates centrally without deploying an army of consultants to install new releases periodically. Nonetheless, in order to deliver such services, enterprise applications vendors would need to either partner with someone who could provide scalable hardware and network connections, or invest in building their own supporting infrastructure. Moreover, as companies were not required to buy the licences of the applications software under this service provisioning model, the sales of software would likely be impacted. Hence, software vendors would need to carefully calculate the pricing models and ensure the sustainability of the services. SAP’s New Strategic Position and Business Design op yo With globalisation, outsourcing, changing regulations and rapid technological innovations, customers were required to embrace more agile business models. So as companies modified and upgraded their enterprise applications more frequently, the software had to be simple to implement. Additionally, customers could no longer wait for software updates available only in a rigid schedule, ie, every few months or years. Besides the changing market conditions and customer requirements, the growth rates of the enterprise applications market had been saturated, particularly among large multinational companies. Major vendors were consolidated into a handful of players. Moreover, the market growth had significantly decreased since the end of the dotcom boom. Enterprise applications players were required to expand into new functional areas and industries. To anticipate the shifts in industry dynamics in the 21st century, Chairman and CEO of SAP, Henning Kagermann, led the company to pursue a new business strategy. This strategy had fundamentally altered SAP’s existing business design, ie, the totality of how SAP would define its functional coverage; select its industry focuses and market segments; develop targeted product offerings; and configure its resources to support the new design.14 Expansion of Functional Coverage No tC As the market leader (with 75% market share) in the fast-saturating ERP market, SAP enjoyed a steady stream of recurring licensing and service revenue provided by its huge installed base. The company had, however, come under increasing pressure from its investors to pursue new areas of growth. As such, SAP leveraged its prominent position in the traditional ERP market, and expanded into related fields. These new areas included customer relationship management (CRM), product lifecycle management (PLM), supplier relationship management and supply chain management (SCM). The expansion of the product lines had particularly intensified the competition between SAP and its archrival Oracle. Deepening Industry Knowledge Do Following Oracle’s acquisition of its ERP rival PeopleSoft, SAP acquired TomorrowNow, a PeopleSoft support firm, in an effort to lure customers away from Oracle. In early 2005, SAP agreed to acquire retail software specialist Retek, but it was eventually outbid by Oracle. In mid-2005, SAP acquired Lighthammer Software Development Corp., a manufacturing software maker, to bridge the gap between its back-office applications and shop-floor production systems. Although the costs associated with these acquisitions were relatively small, such moves symbolised the growth challenges facing global enterprise applications companies. As the market of enterprise applications was saturated, the players began to look for ways to attract new customers. In order to penetrate various niche markets and meet the specific needs of these smaller customers, enterprise applications vendors needed to source 14 Adopted from Adrian Slywotzky’s definition of business design: Slywortzky, A.J. (1996) Value Migration, Harvard Business School Press: Boston. 9 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t niche software products in more targeted segments, such as retailing or banking, to complement their existing cross-industry products. By providing customers with functionality specific to their industry, SAP hoped to lure new customers and get them locked into the SAP product family. Penetration of Mid-Market op yo Although SAP’s reputation was based on serving the world’s largest enterprises in the Fortune Global 100 list, in actuality two-thirds of the software company’s business was contributed by small and mid-size customers (defined as those with annual revenues of US$600 million or less).15 To strengthen its position in this mid-market, SAP released two scaled-down versions of its ERP product designed specifically for small and mid-sized businesses, as well as the complementary software development tools and services. These two solutions were mySAP All-in-One and SAP Business One. Besides the lower-priced products, SAP was in the process of rolling out pay-as-you-go offerings in 2005. The first of such offerings would be a CRM offering combining elements of both hosted and on-demand computing. Such a product would rival similar offerings provided by Siebel Systems Inc. and Salesforce.com Inc., and aimed to win small and mid-size customers with an attractive pricing model.16 Development of New Flagship Product Offering In 2001, SAP acquired a technology start-up in Silicon Valley called TopTier Software and hired its CEO, Shai Agassi, as the chief of corporate product development. The dynamic executive subsequently led one of the most daring corporate campaigns in SAP’s 33-year-old history—to open up the proprietary software through its new technology, namely NetWeaver. No tC In view of the increasingly heterogeneous nature of the computing environment, SAP determined to address the IT industry integration issue. After putting in more than US$1 billion in research and development, SAP introduced NetWeaver—an open platform that allowed applications to be developed and accessed as Web services. This new technology was designed to link up various applications (packaged as Web services) running on different systems, from legacy mainframes to internet-enabled devices and enterprise applications. By leveraging NetWeaver, SAP was able to break up its software products into open and modular pieces. Customers could then pick and choose the specific SAP Web services modules that met their own needs. Moreover, customers could add in modules developed by other companies as long as these products met the specifications of the NetWeaver framework. As a result, customers could more rapidly create and modify their own applications, improve the overall fit of the applications, and reduce the associated development costs incurred. Since the software products would be broken into smaller chunks, SAP could change the mode of delivering new features and functions for their products. Rather than waiting for massive releases to take place periodically (minor releases could take months and major releases years), the Web services approach would allow constant updates of the software products. Do With this new engineering approach, SAP had solicited tremendous customer support. In 2003, SAP began to release the early version of NetWeaver as free bundled software, which was aimed at bridging SAP and non-SAP software programs by reducing the need for building customised links. The full version of the software was scheduled to be launched in 2007. By mid-2005, more than 1,300 customers had already tested NetWeaver and some of 15 16 SAP (2005) op. cit. Blau, J. “SAP Promises New Type of Hosted CRM Service”, Computerworld, August 12th 2005. 10 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t them were highly satisfied with the product and would welcome the opportunity to recommend the product to future buyers. Although NetWeaver had not contributed to SAP’s revenues yet, if it were able to maintain this momentum and succeed, the technology could transform the development approach of business applications in the coming future. By leveraging the universally accepted platform, thousands of individual developers could develop specialised modules that would serve highly targeted industry segments, traditionally too fragmented to be addressed with the old one-size-fits-all approach. This was particularly important for SAP in penetrating the millions of new small- and medium-sized enterprise customers around the world. Configuration of Resources op yo In order to realise its platform strategy based on NetWeaver, SAP was required to foster a new ecosystem. In the past, SAP mainly relied on its internal programmers (mostly residing in Walldorf, Germany) to develop its products. With the new NetWeaver platform, the software company would need to change from being an industry introvert that focused on its supreme engineering capabilities to an extrovert that could attract tens of thousands of individual developers in joining the virtual development network. To address such dramatic shifts, SAP lured George Paolini in early 2005. Paolini was the executive who successfully marketed the Java programming language for Sun Microsystems Inc., and who was brought in build the developer networks and communities. As of mid-2005, there were already 132,000 individuals who formed part of the online network. Besides building the virtual taskforce, SAP also recruited about 200 top managers from competitors such as Oracle, BEA Systems and Siebel Systems to join the company. Key Competitors tC Established Enterprise Software Producers No Besides SAP, other well-established enterprise applications and software makers focusing on the same market segments were Oracle, Microsoft and IBM. Among the three players, Oracle had the clearest position. As SAP’s archrival, its goal was to win over the software company from Germany. Nonetheless, the relationship between SAP and the other two players would be more complicated. Traditionally, Microsoft and IBM had been partners to SAP rather than its competitors. For instance, Microsoft and SAP were in the process of developing a joint product that would link Microsoft Office Applications to the SAP products. Historically, IBM was one of SAP’s key implementation service providers in the market. In addition, the computer service giant also provided middleware and database software to complement implementations of typical SAP products. However, in the war over SOA platforms and Web services technologies, friction was bound to arise as Microsoft and IBM possessed their own approaches. As the competition would become fierce, the long-term partnerships among Microsoft, IBM and SAP would be jeopardised.17 [For SAP’s and selected competitors’ recent performance details, refer to Exhibits 5 to 8.] Oracle Do SAP and Oracle both dominated the enterprise applications software market but in different parts of it. SAP was the pioneer and the world’s largest vendor in the enterprise applications market, whereas Oracle was the world’s largest database maker that sold enterprise applications (including financials, supply chain management, human resource management 17 Reinhardt, A. “SAP: A Sea Change in Software”, BusinessWeek, July 11th 2005; Evers, J. and Blau, J. “Microsoft and SAP to Link Office with ERP”, Computerworld, April 26th 2005. 11 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t and customer relationship management modules) operating on top of its own database software products. Besides business applications and database management software, Oracle also offered a range of products that were designed to facilitate collaboration and application development. In 2003, Oracle launched a hostile takeover bid for PeopleSoft, which had just disclosed its own plans to acquire a mid-market rival, JD Edwards. Initially, PeopleSoft’s board rejected the offer of $5.1 billion in cash, considering the bid inadequate and the associated antitrust concerns. After several rounds of negotiations and offers, Oracle finally reached an agreement to acquire PeopleSoft for $10.3 billion in December 2004. Subsequently, Oracle cut the newly combined workforce by 9%. Although the layoff mostly affected former PeopleSoft employees, Oracle retained the majority of PeopleSoft’s development and support teams. op yo In 2004, Oracle continued to pursue its acquisition-driven growth in order to strengthen its presence in the market. When SAP announced its plan to acquire Retek, a retail software developer, for about $500 million, Oracle immediately acquired 10% of Retek and offered to buy the remaining shares. After a short bidding battle, Oracle purchased Retek for $670 million and formed a new business unit called Oracle Retail Global. In addition, Oracle also acquired Oblix, an identity management software developer, TimesTen, a data management software developer, and ProfitLogic, a retail inventory management software developer. In September 2005, nine months after closing the acquisition deal with PeopleSoft, Oracle announced its purchase of Siebel Systems Inc., the leading customer relationship management software maker in the world, for US$5.8 billion. The deal was expected to close in early 2006. No tC Through these aggressive acquisitions, Oracle not only upset its archrival SAP in the enterprise applications market, but also posed serious threats to its archrival IBM in the database market. Historically, Oracle and IBM were fierce competitors. Both of them leveraged third-party enterprise application vendors to help drive their sales of database software. Application vendors were critical to database software makers because customers often chose a particular application first (eg, PeopleSoft’s human resource management system, Retek’s retail system), and then went to select a database software to go with the selected application. In other words, the purchase decision of the database software could be partly influenced by the partnerships of the application vendors and the database makers. Since quitting the application market more than a decade ago, IBM had relied heavily on partnering with Retek, PeopleSoft, JD Edwards and Siebel Systems to compete with Oracle in selling database and other software. As these long-term allies were now bought out by Oracle, the sales channels of IBM’s software products were significantly impacted. Some observers had, however, predicted that such a change in the competitive landscape would foster even closer ties between IBM and other application vendors such as SAP.18 Do In order to solidify its position in the enterprise software market after a series of strategic acquisitions, Oracle announced Project Fusion in early 2005. This new strategic initiative aimed to create a comprehensive platform of its next-generation enterprise technologies, applications and services. The core of this vision was to unite all of Oracle’s software products (from enterprise applications to database software) with the best functionality from the product lines of PeopleSoft, JD Edwards, Retek, Siebel and other newly acquired companies, through the Web services technologies. Through this strategic initiative, Oracle emphasised it would create the most integrated and complete enterprise solution in the market to operate business processes for their customers. Oracle also promised to ensure continuity of the existing Siebel, PeopleSoft and JD Edwards’ product lines, to provide customers options of staying with their existing technology platforms created by rivals (eg, IBM’s DB2 18 Forelle, C. “Can Oracle Leave IBM in Dust?”, Asian Wall Street Journal, September 20th 2005. 12 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t database management products, BEA’s middleware products), to offer customers more flexibility in creating their own upgrade schedules, and to reduce the total cost of ownership of the enterprise software.19 Besides building the most comprehensive development and integration platform for large customers, Oracle continued to equip itself to offer enterprise software as a service by hosting and running the enterprise applications at Oracle’s premises. The focus of this service was the small- and medium-sized customers, which would not have the resources and capabilities to deal with the complexities and cost of on-site implementation of their enterprise application software.20 Microsoft op yo Microsoft, the world’s largest software company, offered a variety of products and services. Its leading products included its Windows operating systems and Office software suite. As the desktop software market matured, the company continued to diversify. Microsoft expanded its product lines into other consumer markets such as video game consoles (ie, Xbox), computer peripherals and software development tools. tC Moreover, the software giant also ventured into the enterprise software market. Rather than competing with leading enterprise applications providers such as SAP and Oracle for large multinational companies, Microsoft aggressively pursued opportunities in the market for small- and mid-sized enterprises. In 2001, after acquiring Great Plains Software, a long-time partner and a specialist in accounting applications for small- and mid-sized businesses, for US$1.1 billion, Microsoft Business Solutions was formed. The new division combined the expertise of Great Plains with its existing small business software operations, including the bCentral small business services unit. The division grew substantially in 2002, when Microsoft acquired Navision, a Denmark-based enterprise software maker for about US$1.5 billion. Focusing on small- and mid-sized businesses, Microsoft Business Solutions offered a wide range of software applications including accounting, customer relationship management, supply chain management, analytics and reporting, e-commerce, business portals and online business services, human resources, manufacturing and retail management, field services management, and project management. Do No Besides developing its small- and mid-sized enterprise applications, Microsoft continued to strengthen its existing product lines for all enterprises. In 2005, the company acquired Groove Networks (founded by Lotus Notes developer Ray Ozzie), a collaboration software maker, Sybari Software, an anti-virus security provider, and FrontBridge Technologies, an email security developer in 2005. In addition to the product markets, Microsoft had been venturing into the services market, hoping to generate new growth. One of its key initiatives was to transform its software applications into web-based services for consumers and enterprises, for instance, internet services (eg, Expedia, an online travel site launched in 1995) and interactive television (eg, WebTV Networks, purchased by Microsoft in 1997). In addition to application products and internet services, Microsoft was keen to establish itself in the Web services market. Based on the .Net technology, which was originally developed to compete with the Java technology created by Sun Microsystems, Microsoft had developed a number of essential tools that would help customers build the key elements in the SOA platforms, and develop specific Web service–based modules and solutions. 21 19 Lower, J. (2005) “Oracle Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX; Reinhardt (2005) op. cit.; Mirani, J. and Ozzimo, A. (2005) “Oracle Applications: Committed to Your Success”, Oracle’s White Paper, Oracle Corporation: Redwood. 20 Perez, B. “Oracle Unveils On-Demand Future”, South China Morning Post, September 27th 2005. 21 Lower, J. (2005) “Microsoft Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 13 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t While Microsoft continued to dominate the desktop software market and expanded aggressively into other industry sectors, its greatest fear remained losing its near-monopoly on PC operating systems and basic office software. As its nimbler competitors, such as Google and Apple Computer, continued to churn out popular programs such as email, desktop search engines and instant messaging over the internet faster than Microsoft, its ultimate fear could easily become reality. op yo The inefficiency in introducing new products was mainly because of Microsoft’s development approach, particularly for its flagship product—Windows. Because it was designed as a massive program that stitched together into one gigantic computer program, the code base of Windows had grown so complex that it became extremely difficult to build and test. In fact, the next generation of Windows (namely Vista) scheduled to be rolled out in late 2006 in a scaled-down fashion, was already two years behind its original schedule. This also marked the longest interval between the various versions of Windows. In view of this crisis, Microsoft adopted the modular or Lego-like development approach, which was already favoured by Google and others, in late 2004. By first developing a core for Windows, the engineers of Microsoft could gradually add new features to the program. Through this new approach, Microsoft could easily plug in and pull out new features without disrupting the entire Windows program. IBM tC In September 2005, Microsoft also announced a major restructuring, which would reorganise the company into three business units. The new Microsoft’s strategy was to streamline decision-making and further realign the company to become more nimble in producing software. The first unit was the Platform Products and Services Division, which was a merger between the Windows group and the MSN online business that aimed to leverage Microsoft’s MSN success in the development of Windows. The second unit was the Business Division, which would oversee Office and Microsoft’s enterprise application software products. The third group was the Entertainment and Devices Division, which would oversee the Xbox video game and consumer businesses that aimed to compete with Apple Computers. Ozzie, the highly regarded guru from Groove Networks, would assist the three units in adopting the network-based development approach.22 No In anticipation of a shift in industry dynamics in the 21st century, IBM decided to pursue a new corporate strategy that centred on the concept of “on demand business”. Through this new vision, IBM attempted to provide the industry a new agenda by describing how business was supposed to evolve and be structured after the e-business era. Do The concept of “on demand business” was driven by three historic developments. Firstly, in just a decade, those who participated in the internet had reached 800 million people. Industry analysts forecast that this number would rise to 1 billion by 2007.23 The internet had become the operational infrastructure of the world. It linked people, businesses and governments, and transformed all imaginable commercial transactions and public services from banking and manufacturing to education and health care. Secondly, open standards in the IT industry had finally taken hold. These significantly increased inter-operability and changed the way computing devices were operated; software applications were developed; and digital content was produced, processed, distributed and stored. Thirdly, the emergence of a networked economy and the establishment of open standards enabled new business designs. New options were introduced to senior managers from both public and private sectors. In particular, 22 Guth, R. “Microsoft Sets Big Restructuring Plan”, The Wall Street Journal, September 21st 2005; Guth, R. “Microsoft Changes How it Builds Software”, The Wall Street Journal Europe, September 27th 2005. 23 IBM (2005) op. cit. 14 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t businesses and governments would become far more responsive and flexible to social, political and economic changes. Managers were able to anticipate the needs and wants of their customers (or citizens) because business operations were connected to customers through extended networks. Businesses were therefore able to capture all the information associated with the behavioural changes of customers or citizens. Businesses and governments were then able to anticipate changes on a real-time basis or, in IBM speak, “on demand”. op yo To most IT companies, these three major developments merely meant new opportunities in selling hardware and software based on open standards supporting highly flexible network infrastructures; and services aiming to transform business operations to achieve competitive advantages. Nonetheless, to IBM, the essence was the convergence of these developments, which essentially drove the concept of “on demand business”. More specifically, IBM saw great opportunities lying in customers’ business processes (eg, supply chain management, design services, human resource management and customer services) that were beyond the traditional IT industry. These business operations and processes often shared the following common characteristics: they were highly dependent on IT, could be transformed or improved through the application of IT and even outsourced to external process operators. IBM reckoned a new type of services, called Business Performance Transformation Services (BPTS), was emerging. This service (more specifically, the business process solutions) would leverage its deep business expertise (through its newly acquired business consulting capability from PricewaterhouseCoopers Consulting), broad process and IT outsourcing resources, coupled with advanced software developed by IBM Software Group.24 tC As software was considered a key component of its new strategy, IBM had acquired a number of companies to strengthen its software capability. As a leader in the software industry, IBM Software Group offered a wide range of products, particularly in the areas of database and systems management, and application integration and development platforms. The division was also a leader in collaboration and communication applications through its Lotus product line. In addition, the division’s Tivoli product lines were well established in the storage and security software markets. The global strength of IBM’s massive hardware and services businesses continued to sustain the growth of its software products, which accounted for 17% of IBM’s total sales. No In order to streamline its diverse product lines, IBM Software Group consolidated its disparate software products into five major sub-groups: ie, information management software (DB2); collaboration software (Lotus); systems development software (Rational); systems management software (Tivoli); and application server and integration software (WebSphere). WebSphere, in particular, was the centrepiece of IBM’s software development and integration strategies. This piece of software was considered to be the platform for building a basic but robust Web services environment. Although Microsoft and others offered similar products, WebSphere contained most of the basic components and tools required, and a number of extensions that would help customers integrate systems and applications with Web services applications, present data on various devices, deploy applications, and secure and manage Web services application environments. Do With WebSphere IBM could retaliate to its rivals’ threats, eg, SAP’s NetWeaver. To further strengthen its WebSphere product line, IBM made a number of strategic acquisitions in 2005. These included Gluecode Software (an open-source application server developer), PureEdge 24 IBM (2005) op. cit. 15 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t Solutions (an electronic forms developer) and Ascential Software (a leading provider of data integration software for $1.1 billion).25 Emerging Competitors from the East—Indian Software Service Providers op yo Since the 1990s, India had emerged as a major exporter of software in the global economy. Unlike other emerging software export countries such as Ireland or Israel, the software industry growth in India was fuelled by the high demand of outsourced software services (for major enterprises such as banks, financial institutions and multinational IT companies from the West) rather than packaged software products. These services were often labour intensive and added low value, eg, coding and maintenance services for ERP and legacy systems. However, Indian software service producers had not yet created major branded products that could compete with established players such as SAP or Oracle. But with their continuous growth in capabilities and sophistication, Indian software service providers could one day become a threat to the major enterprise software vendors. [For performance details of select Indian competitors, refer to Exhibits 9 to 11.] Tata Consultancy Services tC Formerly a division of textiles and manufacturing conglomerate Tata Group originating from India, Tata Consultancy Services (TCS) was an emerging global leader in consulting and software outsourcing services. The company offered a range of business and IT services, including systems installation, offshore software development, systems integration, business process outsourcing (BPO), product and industrial process engineering services as well as strategic consulting and project management services. TCS expanded rapidly in 2004 through a number of acquisitions. The company bought Singapore Airlines’ share in Aviation Software Development Consultancy, a joint venture focused on providing travel-related BPO services. In addition, TCS acquired Phoenix Global Solutions, an insurance consulting practice of the Phoenix Companies, and formed TCS Business Transformation Solutions. The company also acquired a majority stake in computer hardware and software supplier CMC Limited. In the same year, TCS was spun off as part of a restructuring effort at Tata Group. In 2005, TCS acquired Tata Infotech, another technology services unit of Tata Group to solidify its overall presence in the industry.26 Wipro Technologies No Wipro Technologies, the global technology and consulting services division of Indian conglomerate Wipro Limited, was fast becoming a world leading provider of systems integration and outsourcing services. The division offered a range of business and technology services including application development, systems implementation, network infrastructure design and implementation, business process outsourcing, management consulting, as well as product design and engineering outsourcing services. Wipro Technologies grew rapidly, particularly in the US market. The global services division became a major contributor to Wipro’s business, accounting for about 75% of its total revenues and close to 90% of its operating income.27 Infosys Technologies Do Infosys Technologies was a leading technology consulting company in India with sizeable global operations. The company offered software development and engineering services through development centres in Asia and North America. Moreover, the company also provided services in the areas of data management, systems integration, project management, 25 Lower. J. (2005) “International Business Machine Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. Bramhall, J. (2005) “Tata Consultancy Services Limited”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 27 Bramhall, J. (2005) “Wipro Technologies”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 26 16 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 Looking Ahead rP os t and systems support and maintenance. Progeon, a subsidiary of Infosys, focused on providing business process outsourcing services. Infosys Consulting, a US-based subsidiary, also provided strategic consulting services. The company rapidly expanded internationally. In particular, North America accounted for about 65% of Infosys’ sales. In 2004, with the launch of Infosys Consulting, the company was more equipped to capture the high-end services business in the US. The company also added operations in China and Australia, and continued to eye opportunities in Asia, Africa and Latin America.28 op yo With NetWeaver as the centre of SAP’s new strategy, the software giant was ready to leverage its engineering excellence and to embark on a new path of growth. Nonetheless, the new pricing structure of SAP’s products based on the NetWeaver technology was yet to be disclosed to the public. Besides, the entirely revamped product line would not be available until 2007. Potentially, with the new modular approach, customers would source less from SAP and increase purchases from other players as long as these products were able to connect with the NetWeaver platform. Moreover, as many existing partners were also developing their own rival programs on Web services, NetWeaver would take SAP into new battlegrounds and force the company to compete with some of its most trusted partners including IBM and Microsoft. Consequently, this could jeopardise the existing relationships and reduce future business opportunities brought by these partners. The most prominent threat to SAP would be from its archrival Oracle. Following its shopping spree in company acquisitions, including PeopleSoft and Siebel Systems, Oracle was in a much better position to put SAP on the defensive. In particular, if its existing applications and database software would successfully combine with the features and functions brought by the newly acquired companies, Oracle could offer the most comprehensive and integrated enterprise computing platform to be found in the industry. Do No tC Battles over acquisitions and invasions of new markets made by SAP, Oracle, Microsoft and IBM marked the dawn of the platform war in the enterprise software industry. Most customers would likely switch to (or remain with) one of the four platforms provided by these major software makers. For SAP, however, the immediate challenge was to convince the software developers and systems integrators around the world to work on its NetWeaver platform. As of mid-2005, there were 150 third-party programs already built for NetWeaver, and the number would exceed 500 in 2006, according to SAP. Nonetheless, the strengths of the German software company had been in its hardcore engineering. The question remained whether SAP would have the charm to attract the global army of independent developers in supporting its platform strategy. 28 Bramhall, J. (2005) “Infosys Technologies Limited”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 17 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 1: SAP’S REVENUE FROM 1997–2002 (EURO MILLION) 8000 7000 6000 5000 Revenue 3000 2000 1000 0 1997 op yo 4000 1998 1999 2000 2001 2002 Do No tC Source: Adopted from SAP’s Annual Reports from 2001 to 2002. 18 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 2: SAP’S NET INCOME FROM 1997–2002 (EURO MILLION) 700 600 500 400 Net Income 200 100 0 1997 op yo 300 1998 1999 2000 2001 2002 Do No tC Source: Adopted from SAP’s Annual Reports from 2001 to 2002. 19 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 3: AGGREGATE CAPITAL EXPENDITURE OF US COMPANIES ON IT (US$ BILLION) First annual decline since 1958 1997 166 159 op yo 130 147 188 1998 1999 2000 2001 154 2002 Do No tC Source: Adopted from Davis, K.B., Rath, A.S. and Scanlon, B.L. (2004) “How IT Spending Is Changing”, McKinsey Quarterly, 2004 Special Edition. 20 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 1966-1976 Refinement & digestion Mainframe Computing 5.8% 1976-1984 Innovation & growth 1984-1992 Refinement & digestion 1992-2000 Innovation & growth op yo IT Investment to GDP ratio 1956-1966 Innovation & growth rP os t EXHIBIT 4: STAGES OF TECHNOLOGY INNOVATION AND DIGESTION 2.9% Personal Computing 7.1% 0.3% 2000-2008 Refinement & digestion Networked computing 5.3% - 0.3% Compound annual growth rate for period in IT investment to GDP ratio Do No tC Source: Adopted from Bartels, A. (2004) “IT Spending Outlook: 2004 to 2008 and Beyond”, Forrester Research Inc.: Cambridge MA. 21 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 5: SAP’S INCOME STATEMENT FROM 2002 TO 2004 (US$ MILLION) Income Statement Revenue Cost of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Depreciation & Amortization Operating Income Operating Margin Nonoperating Income Nonoperating Expenses Income Before Taxes Dec 2004 10,179.10 Dec 2003 8,831.30 Dec 2002 7,785.70 3,221.40 2,913.70 2,725.50 6,957.70 5,917.60 5,060.20 68.40% 67.00% 65.00% 3,942.00 3,479.30 3,083.50 284 270.9 232.3 2,731.70 2,167.40 1,744.40 26.80% 24.50% 22.40% 96.4 71.2 -518.3 11 5 14.2 2,807.60 2,233.60 1,169.50 870.8 628.8 Net Income After Taxes 1,025.80 1,781.80 1,362.80 540.7 Continuing Operations 1,775.20 1,354.10 534.2 0 0 0 1,775.20 1,354.10 534.2 1,775.20 1,354.10 534.2 17.40% 15.30% 6.90% 1.42 1.09 0.43 0 0 0 Diluted EPS from Total Operations ($) 1.42 1.09 0.43 Diluted EPS from Total Net Income ($) 1.42 1.09 0.43 0 0.13 0.13 op yo Income Taxes Discontinued Operations Total Operations Total Net Income Net Profit Margin Diluted EPS from Continuing Operations ($) Diluted EPS from Discontinued Operations ($) Dividends per Share Do No tC Source: Adopted from Lower, J. (2005) “SAP Aktiengesellschaft”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 22 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 6: ORACLE’S INCOME STATEMENT FROM 2003 TO 2005 (US$ MILLION) Income Statement May 2005 11,799.00 May 2004 10,156.00 May 2003 9,475.00 Cost of Goods Sold 2,445.00 2,083.00 2,015.00 Gross Profit 9,354.00 8,073.00 7,460.00 79.30% 79.50% 78.70% 4,552.00 3,975.00 3,693.00 Revenue Gross Profit Margin SG&A Expense 425 234 327 Operating Income 4,377.00 3,864.00 3,440.00 Operating Margin 37.10% 38.00% 36.30% 164 102 1 135 21 16 Income Before Taxes 4,051.00 3,945.00 3,425.00 Income Taxes 1,165.00 1,264.00 1,118.00 Depreciation & Amortization Nonoperating Income op yo Nonoperating Expenses 2,886.00 2,681.00 2,307.00 2,886.00 2,681.00 2,307.00 0 0 0 2,886.00 2,681.00 2,307.00 2,886.00 2,681.00 2,307.00 24.50% 26.40% 24.30% 0.55 0.5 0.43 0 0 0 Diluted EPS from Total Operations ($) 0.55 0.5 0.43 Diluted EPS from Total Net Income ($) 0.55 0.5 0.43 0 0 0 Net Income After Taxes Continuing Operations Discontinued Operations Total Operations Total Net Income Net Profit Margin Diluted EPS from Continuing Operations ($) Diluted EPS from Discontinued Operations ($) Dividends per Share Do No tC Source: Adopted from Lower, J. (2005) “Oracle Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 23 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 7: MICROSOFT’S INCOME STATEMENT FROM 2003 TO 2005 (US$ MILLION) Income Statement Jun 2005 39,788.00 Revenue Cost of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Depreciation & Amortization Operating Income Operating Margin Nonoperating Income Nonoperating Expenses Income Before Taxes Jun 2003 32,187.00 5,345.00 5,530.00 4,247.00 34,443.00 31,305.00 27,940.00 86.60% 85.00% 86.80% 19,027.00 21,085.00 13,284.00 855 1,186.00 1,439.00 14,561.00 9,034.00 13,217.00 36.60% 24.50% 41.10% 2,067.00 3,162.00 1,509.00 0 0 0 16,628.00 12,196.00 14,726.00 4,374.00 4,028.00 4,733.00 op yo Income Taxes Jun 2004 36,835.00 Net Income After Taxes 12,254.00 8,168.00 9,993.00 Continuing Operations 12,254.00 8,168.00 9,993.00 0 0 0 12,254.00 8,168.00 9,993.00 12,254.00 8,168.00 9,993.00 30.80% 22.20% 31.00% 1.12 0.75 0.92 0 0 0 Diluted EPS from Total Operations ($) 1.12 0.75 0.92 Diluted EPS from Total Net Income ($) 1.12 0.75 0.92 3.4 0.16 0.08 Discontinued Operations Total Operations Total Net Income Net Profit Margin Diluted EPS from Continuing Operations ($) Diluted EPS from Discontinued Operations ($) Dividends per Share Do No tC Source: Adopted from Lower, J. (2005) “Microsoft Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 24 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 8: IBM’S INCOME STATEMENT FROM 2002 TO 2004 (US$ MILLION) Revenue Income Statement Dec 2004 96,293.00 Dec 2003 89,131.00 Dec 2002 81,186.00 Cost of Goods Sold 55,346.00 51,412.00 46,523.00 Gross Profit 40,947.00 37,719.00 34,663.00 42.50% 42.30% 42.70% 25,057.00 22,929.00 23,488.00 Gross Profit Margin SG&A Expense Depreciation & Amortization Operating Income Operating Margin Nonoperating Income Nonoperating Expenses Income Before Taxes Net Income After Taxes Continuing Operations Discontinued Operations Total Operations Total Net Income Net Profit Margin 4,701.00 4,379.00 10,089.00 6,796.00 11.40% 11.30% 8.40% 1,192.00 930 873 139 145 145 12,028.00 10,874.00 7,524.00 3,580.00 3,261.00 2,190.00 8,448.00 7,613.00 5,334.00 8,448.00 7,613.00 5,334.00 -18 -30 -1,755.00 8,430.00 7,583.00 3,579.00 8,430.00 7,583.00 3,579.00 8.80% 8.50% 4.40% op yo Income Taxes 4,915.00 10,975.00 4.94 4.34 3.07 -0.01 -0.02 -1.01 Diluted EPS from Total Operations ($) 4.93 4.32 2.06 Diluted EPS from Total Net Income ($) 4.93 4.32 2.06 0.7 0.63 0.59 Diluted EPS from Continuing Operations ($) Diluted EPS from Discontinued Operations ($) Dividends per Share Do No tC Source: Adopted from Lower, J. (2005) “International Business Machines Corporation”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 25 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 9: TATA CONSULTANCY SERVICES’ INCOME STATEMENT FROM 2004 TO 2005 (US$ MILLION) Income Statement Mar 2005 2228.29 Revenue Cost of Goods Sold 1235.00 888.58 993.29 752.75 44.58% 45.86% 456.76 325.37 Gross Profit Gross Profit Margin S&GA Expense R&D Expense Other Income Operating Income Income Tax Minority Interests Equity in Net Earnings of Affiliates 7.44 6.92 47.63 22.77 529.09 420.45 106.35 66.81 1.81 2.89 0.41 3.68 1.12 NA op yo Extradinary Gain Net Income Mar 2004 1,641.32 470.10 377.20 Note: Tata Consultancy Services was listed in 2004 Source: Adopted from Tata Consultancy Services’ Annual Report 2005. EXHIBIT 10: WIPRO TECHNOLOGIES’ FINANCIAL INFORMATION FROM 2003 TO 2005 (US$ MILLION) Revenue Mar 2005 1697.29 Mar 2004 1,226.39 Mar 2003 890.37 1122.81 811.93 553.60 574.48 414.46 336.77 33.85% 33.80% 37.82% 180.98 171.08 125.42 R&D Expense 6.27 5.35 6.00 Amortization of Intangible Assets 2.79 6.90 3.83 Other Income 0.50 0.73 1.73 384.73 231.85 203.24 Cost of Goods Sold Gross Profit Gross Profit Margin tC S&GA Expense Operating Income Do No Source: Adopted from the 2004 and 2005 Annual Reports of Wipro Limited, the parent company of Wipro Technologies. 26 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/278C SAP’s Platform Strategy in 2006 rP os t EXHIBIT 11: INFOSYS TECHNOLOGIES’ INCOME STATEMENT FROM 2003 TO 2005 (US$ MILLION) Income Statement Revenue Cost of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Depreciation & Amortization Operating Income Operating Margin Nonoperating Income Nonoperating Expenses Income Before Taxes Discontinued Operations Total Operations Total Net Income Net Profit Margin Mar 2003 753.8 840 555.3 377.5 752 507.3 376.3 47.20% 47.70% 49.90% 230 159 113.5 66 55.1 44.2 456 293.2 218.6 28.60% 27.60% 29.00% 35 28 18 0 0 0 491 321.2 236.6 50.8 41.8 419 270.4 194.8 419 270.3 194.9 0 0 0 419 270.3 194.9 op yo Continuing Operations Mar 2004 1,062.60 72 Income Taxes Net Income After Taxes Mar 2005 1,592.00 Diluted EPS from Continuing Operations ($) Diluted EPS from Discontinued Operations ($) 419 270.3 194.9 26.30% 25.40% 25.90% 1.52 1.01 0.73 0 0 0 Diluted EPS from Total Operations ($) 1.52 1.01 0.73 Diluted EPS from Total Net Income ($) 1.52 1.01 0.73 0 0.16 0.13 Dividends per Share Do No tC Source: Adopted from Bramhall, J. (2005) “Infosys Technologies Limited”, Hoover’s Company Information, Hoover’s Inc.: Austin TX. 27 This document is authorized for use only by Judd Bradbury until July 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.