SAP was the market leader in ERP market with a 76% market share. But changes in the environment created a situation in which SAP had to change the way it worked. The following factors in one way or the other contributed to SAP's decision to adopt a new strategy:
Declining Popularity of ERP
A combination of a lot of factors contributed to the downfall of ERP systems. ERP systems were designed to integrate only the internal processes of the organization and did not provide for links with external suppliers, customers and other companies, which was essential in the new environment. The advent of the internet meant that everybody had access to applications and the licensing based pricing model was proving to be very costly. These shortcomings of ERP systems led to customers purchasing different components from vendors and then trying to link them to the ERP system. The need was to clearly move away from being a mere software provider to an infrastructure and solution provider. SAP did catch up in 1999, when it launched the web based version of mySAP called my SAP.com.
The Dotcom crash of the early 2000s had an impact on the revenues and net income of SAP also. To combat the situation, SAP improved its product offerings by integrating SAP Portals and SAP Markets into mySAP. Many newly formed software companies disappeared after the crash and companies once again turned to established players like SAP for their technological needs. But clearly growth had slowed down.
By 2003, CIOs were willing to increase their IT budgets but this time they wanted greater returns on their investments. So this growth in IT budgets was expected to be modest. Also, at this time, the industry was in the middle of an eight year long period of "technology digestion". The IT industry had witnessed three periods of growth in which companies had made huge investments in technology without witnessing matching returns. The "technology digestion" period was the time to align organizational structures, systems and processes to the new technology and hence this period was characterized by low IT spending.
Changes in Software Industry
In the short term, the growth in this industry was expected to be primarily driven by systems software, especially since data storage requirements had seen a drastic increase. Also, companies had had a bad experience while trying to implement enterprise software packages like ERP and CRM. These systems were built on proprietary code and this led to incompatibility issues between applications developed by different vendors. Also, integrating them with the existing systems in the organization was a complex process. Dell abandoned its SAP implementation effort in 1996 after trying to implement SAP R/3 system for 2 years. He felt that SAP was not a good fit and would kill innovation at Dell. Nestle too had faced its share of problems with SAP implementation since its employees were not ready to move to the system and their buy in was not taken. Emergence of Service Oriented Architecture (SOA) and associated technologies like Web Services meant that these vendors would now have to be solution providers and not product vendors. This also led to introduction of the concept of software as a service.
Changes in Customer Requirements
Due to globalization and technological improvements customers were moving to more agile business models and they demanded speed. The rate at which technology changed meant customers wanted to upgrade their software more quickly as compared to the past. But they did not want to be bound to tight schedules and looked for greater freedom and choice.
SAP'S NEW STRATEGIC POSITION
Expansion Into Newer areas
SAP was the market leader in the ERP segment but this was a fast saturating market. Pressure from investors had been increasing to explore newer areas of growth like customer relationship management (CRM), product lifecycle management (PLM) and supply chain management (SCM).
Move to Niche Markets
Players in the industry were looking to move into niche markets due to saturation in the ERP market. To satisfy the demands of customers in the niche markets, who were usually small players, companies need to build niche software products. The aim was to provide the customers with industry specific functionality to lure them. SAP had tried to acquire Retek, a retail software specialist but was outbid by Oracle. It then went on to acquire Lighthammer Software Development Corporation, a manufacturing software maker. SAP had also acquired TomorrowNow, a PeopleSoft support firm after PeopleSoft had been acquired Oracle.
Focus on Mid-Market
The goals of mid-size companies were the same as large enterprises but they had fewer resources to attain them. They had to innovate faster wanted software which offered simplicity. SAP introduced two scaled down versions of its ERP product to meet the demands of mid and small size businesses. It also prepared itself to launch its first pay-as-you-go service, a CRM offering, in 2005 to compete with Siebel Systems Inc. and Salesforce.com Inc.
New Product Offering
NetWeaver, the open platform introduced by SAP, allowed applications to be built and accessed as Web Services. This technology would allow linkages with applications running on systems ranging from mainframes to internet enabled devices. All that was required was that these applications had to be packaged as Web Services. Using NetWeaver, SAP could now provide its huge software products as smaller modular pieces and customers could choose the module they wanted. NetWeaver also allowed for addition of modules developed by other companies. Customers who had already invested a lot of money in IT found it very difficult to keep up with technological change because change usually meant replacing the entire system and therefore huge investments. NetWeaver would reduce the costs of change since it provided for integration of a SAP and a non SAP system and hence the entire system would not have to be replaced.
This technology would also help reduce the waiting time for releases. NetWeaver was released as a free bundled software in 2003. If it were to be accepted as a common platform SAP hoped that developers would create specialized industry specific modules and SAP would be able to penetrate the small and mid-sized enterprises market.
The introduction of NetWeaver marked the transition of SAP from 'a closed source software developer to an open source software integrator'. For the purpose of this transition SAP needed to acquire additional resources:
Build virtual workforce: To contribute to this platform, SAP needed to attract individual developers. In fact, SAP poached George Paolini from Sun Microsystems to help build developer communities. Today SAP has created a SAP Developer Network (SDN), Business Process Expert Community, Industry Value Networks and Enterprise Services Community.
Build governance expertise: SAP would need to build knowledge related to issues like how licensing related to its open source projects will be handled, process to select which open source software can be used within the organization, how community contributions to their project will be managed. SAP was one of the founding members of the Eclipse foundation and is its third largest corporate contributor.
Developers' knowledge: Developers working on open source projects or using open source projects need to be aware of the legal aspects involved.
Partnerships with customers: Under this new approach, it was possible that customers would decrease purchases from SAP and start buying from other vendors as long as the module could be plugged into NetWeaver. It was important for SAP to keep its customers engaged and offer them the right value proposition. To reach out to its customers SAP has formed relationships with channel partners, service partners, software solution partners and technology partners. SAP's channel partners help it to reach out to small and mid-sized companies, the software solution partners design and build complementary software solutions based on SAP technology and service partners provide services but use the SAP platform for their operations and the technology partners collaborate with SAP on technology. SAP has the SAP PartnerEdge, SAP Extended Business Program, SAP Referral Program and the Global SAP Co-Innovation Lab (COIL) network to connect with its various partners.
Ecosystems to protect existing alliances: By the introduction of NetWeaver, SAP's alliance with some of its long trusted partners like Microsoft and Dell was threatened as they could now come into direct competition. IBM is SAP technology, service, and software partner and several IBM service subsidiaries are SAP's channel partners. In 2007, SAP and IBM signed an agreement to develop their first joint product and in 2009, Alloy software, which combines Lotus Notes with SAP Business Suite was released. Dell is SAP's global technology partner and runs SAP Customer Competence Centers which act as points of contact for SAP application benchmarking on Dell equipment. In fact there exist SAP certified Dell PowerEdge servers.
NetWeaver could never really compete with IBM, Microsoft or Oracle in the middleware market. Some critics have stated that the technology behind was not strong enough. The year 2009, was one of the worst times for SAP. The employee engagement survey had shown that the employee morale was very low and that they did not trust the management, the customers too did not have much trust in SAP, the launch of the Business by Design was delayed till 2010 and the revenues, market share and reputation had taken a hit. To make matters worse, SAP announced that it would cut 3000 jobs globally by the end of 2009. This had come as a shock to most people in the industry. In March 2010, CEO Leo Apotheker's contract was not renewed and he stepped down. Analysts believe this had happened because the company did not have a strategy. After this, SAP went back to its policy of joint CEOs and Bill McDermott and Jim Hagemann Snabe were appointed as co-chief executives of SAP.
McDermott and Snabe have scripted what is being labeled as a dramatic turnaround. They have reduced the bureaucracy in the organization and provided a strategy to an organization which had become extremely 'inward looking'. In 2005, SAP had set a target of attaining 100,000 by 2010 and they have achieved this goal. Today 74% of SAP's business comes from small and mid-sized enterprises. Business by Design has also finally managed to see the light of the day. The focus is back on the customer again.