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ExHlBlT

17

GOAL

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFIRMS

Organizational

Structure,

2OO5'

t

I

79

Benelits of the Realignment

I

Clearhandoffsfrom one group to the next

r

Consolidationof industries

r

Consolidationof the businesssuite

Source:SAPCorporateStralegyGroup.

r

Singlefaceto the market

r

SAPLabs responsibilityin one organization

I

Strongownershipto developand manageecosystems

try to pleasethe [SVs. and the applicationsguy hatesthe ISVs becausehe partlycompeteswith them.So Shaiowns both.Similarlv.in services,if you haveonepersonowning customdevelopmentandanotherpersonwho is supposedto build morc productizedservices,it createsfriction.And in termsof salesandnrarketing,Leocannow implement,very quickly. u'orlclu'idestructuresand programstargeting the midmarket. We are in a big transition with the Enterprise ServicesArchitecture.and the hope is that GOAL offers lessfrictionrnd rnore:oeedwithin eachunit.52

rDENTtFytNG TRANSFORMATTON

CHALLENGES

IN 2OO5

Although he believed that GOAL would help the com- pany increase alignment and execution efficiency,

Kagermann knew that executing on the new growth strategy posed severalchallengesthat he could not solve with organizational restructuring alone.

Clarification

of the

Strategy

and

Motivation

of Employees

Kagermann needed SAP employees to understand and embrace the grorvth initiatives, and especially the vision

srlnterview. I l/l l/100.5

of the EnterpriseServicesArchitecture.The new growth strategyinvolved uncertainty,change,and the sacrifice of clear short-termopportunities,and he knew that not all employeeswould agreewith his decisionand timing to pursueit. Kagermannand Heinrich wereparticularly concerned with keeping veteran employeesengaged. "The veteranshave 10, 15 years of deep integration knowledge," statedHeinrich. "They are not the people who instigatechange,but they make successhappenif you can align them in the right direction. It's interesting from an HR perspective.You haveto tell the peoplewho aretoo aggressive, 'This is an evolution,' andthe people who aretoo slow, 'This is a revolution."'53 Kagermann was cognizant that thousandsof lower level implementation issues lurked beneath the sur- face of the three growth initiatives,and that he needed strong commitment from all of his employeesin order for SAP to have any chanceat achievingits goals. As HerbertHeitmann,SeniorVice President,Global Com- munications,remarked, "At the board level, it is often easyto achieveanagreement.The toughpartstartswhen you are in the implementationprocessand nobody has told the rest of the organizationthat thereis a needfor changemanagement.Why arewe doing this andwhy are

s3lnterview. ll/2212005.

I

178

pART FIVE:coNCLUSToN:rNNovATroNCHALLENGESrNESTABLTsHEDFrRMS

EXHf BIT l6

SCORE Organizationat

Office of

the CEO

GlobalComm.

Corp.Consulting

lnlernalAudit

GloballP

Finance&

Admini-

stration

Manulacturing

Industries

r

Solution

Management

Appllcation

Development

r

Strucrure,2OO4

Global Field Organization

Global Service and Support

Service

Industries

r

Solution

uanagement

Application

Development

r

Financlal &

Publlc Services

Solution

Management

Appllcatlon

r

r

Development

ApplicationPlafform& Architecture

Human

Resources

TechnologyPlatform

SolutionManagement

SAP

Gonsulting

Global

Marketing

Applicatlon'Development

Industry-Specific Development Cross-industryDevelopment

Source;SAPCorporateCommunicationsTeam.

Solution

includescapabilityfor both industryspecificsolutionsand

cross-industrysolutions

Management

r

IndustryBusinessUnit (lBU)

r

ApplicationSolution

Management(ASM)

Application Deyelopment combinesthe development executioncapabilityof boththe industriesand the cross- industrysolutions

Global ilarketing and Global Communications will provide sharedservicesto the SolutionManagement functionof the BSGs (format/ deliverymechanism)

EXHIBIT

l5

PARTFIVE:CONCLUSION: INNOVATION CHALLENGES IN ESTABLISHED FIRMS

Best-Run

SAP

Six-Tier

Vision

Schematic

+ lT "embedded" in business

 

SAP Sttategy

Structure

Policies

Gors Values

&

New Requiremonts

* " ESA" - the next big thing

KPIS

{ Theorganizational framework

9

Thewinningculture

1177

Source:SAP CEO BriefingPresentation,July21, 2005'London'

manydifferentSAP product,industry,andsupportteams to Zencke's group in order to acceleratemomentum on

theseinitiatives.Kagermannhad statedpublicly thatthe BPP would be made accessibleto ISVs by the end of

2006, and the

critical role in achievingthis milestone.

KagermannnamedAgassiastheleaderof theProducts group. In his new role Agassimaintainedsoleresponsi-

bility for

took over leadership of all of SAP's product teams, industry teams, and existing applications' Kagermann charged Agassi with continuing to improve Netweaver, expanding the product partner ecosystem,andmaking all existing SAP applications interoperablewith the BPP' The Products group was SAP's largest organizational unit, and by late 2005, Agassi's NetWeaver team alone had grown from 1,500membersin 2OO2into a 2,500- persongroup."' Apotheker was namedheadof the Customer Solutions and Operationsunit, and was chargedwith transforming SAP'ssalesfunction into a more volume-driven model that supportedthe company's goal of acquiring tens of thou- sandsof ne* midmarketcustomersin thenext five years'In

Breakthrough Innovation group played a

the NetWeavertechnology platform, and also

srlnterview with ShaiAgassi,10/31/2005

-$ GlobalManagement& LeadershiP; TalentManagement

I CascadingStrategyand Goals

thisposition,Apothekerwould playa criticalrolein defin-

ing

in

compelling. Kagermann was also relying upon Apotheker andhis teamto convincecustomersto adoptSAP solutions in broader internal usagescenarios.Together.Apotheker

and Agassi

Agassi led

the Product Leadership Team (PLT)' a group

served as co-presidents under Kagermann'

the value proposition of the business processplatform sucha way that both large and SME customers found it

oisenior development executives, and Apotheker led the Field Leadership Team (FLT)' the PLT's counterparton

the customer-facing end of the business'

Claus Heinrich, who previously led

Board member

the Manufacturing Industries BSG under the SCORE

structure.took over the Production group andthe Human Resourcesand Processes group. Gerd Oswald, another

key player in

ownership of Global Service and Support, and CFO WernerBrandtheadedFinanceandAdministration'

changes' Kagermann

the development of SAP R/3, assumed

implemented the

After

he

describedsomeof his reasoningbehindGOAL:

In theoldstructure,it wasextremelychallenging toachieve alignmentacrossproductgroups,supportgroups'andfield units.Now,withineachboxeachleadercanreallyoptirnize' Forexample,wewouldnotbeabletoexecuteontheBPPif onepersonmanagedapplications andanotherpersonman-

agedISV

partnersandtheplatform'Theplatformguywill

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFIRMS 1175

EXHIBIT

14

SAP Roadmap

and

Goals,

February

2OO5

 

SAP will launch the lirst Business Process Platform to lhe market

I by enriching the SAP NetWeaver composition platform with ready-to-run business processes

I accessible through

Enterprise Services

 

Connectivity

BusinessInnovation

100.,,"

Eusiness Mix "lnnovation"

"lnnovation"

.'

MySAP

Appi,

(scM, cRM,

PLM,SBM)

:50%

1999 2004/2005

Business Mix

2004/200s

2010

I

Today, SAP generates -50o/o ol ils business with

solutions which

were launched to the market 5 years ago

r

In 5 years from now, continuous innovaiion will allow SAP to generate -50% ol its business with new solutions

Source:SAP CorporateStrategyGroup,SAP InvestorRelations.

1172 PARrFrvECONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFIRMS

EXHIBIT

13

Example

of

ESA Ecosystem

W I

FT

8fJ5INESSO6f€CI9

ModelI\

'rlivendaw

CI'C'GE

Drru,'rNo-rr<:

,t':i'':i:

IBtrt

w

fttr

ffi

/r\

ldoh

(if,A,D

\--.;

+#w

Source:SAP Corporate StrategyGroup.

thoughtprocesses."One of therealitiesof asoftwarecom- pany is that whateverwe deliveris neverexactlywhat all of our customerswant or expect,"he commented."Our largercustomersapply immensepressureon us to close this gap as soon as possible, and they have more money. So guesswhat? We listen more carefully when they ask us something. We always get pulled in the direction of large customers, so we need to counteract this force in order to be acceptedin the lower end."3l

SAP's traditional focus

on large enterprises also led

it to define the SME segment more broadly than many analystsand competitorsdid. SAP included companies up to $1.5 billion in revenuein this customersegment.I Consequently, a company such as Harley-Davidson,

which reported $1.34 billion in revenue in 2005 and had nearly 10,000 employees working in more than 20

"Interview, r2SAP 2l312006.

CorporateStrategyGroup.

Partners

by Category

Deloitte"

karingfuint

mceilarc

lltnt!

5[lE"

btrl

lttt--

IETtrI'I

aohrl|on.

7;$lurE*gg

countries, was considereda midmarket customer by SAP.33This approachcausedsomeoutsidersto question SAP's true performance in meeting the unique needsof smaller firms. "Microsoft considersany company with more than 500 PCs or 1,000 employeesto be an Enter- prise company,not an SME," said Anthony Cross,a Lead

Product Manager for Microsoft.

rize a billion dollar companyas 'small' or

"I would hardly catego-

'midsize."'34

In addition,SAP'sdirect salesforce still servedasthe primary channelfor acquiring midmarket customers- especially the larger SME customers that substantiated

the company's claim of being the market leader in the segment (seeExhibit 7). To increasethe volumeof SME sales.SAP needed to move further down-market, where channels,customers,and competitors were quite dif- ferent. Although a huge growth opportunity for SAR

'rHarley-Davidson Web site (http://www.harley-davidson.com).

"lnterview. I 0/I 5/2005.

ExHlBlT

l2

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFIRMS

Schematic

of

Business

Process

Platform

'^S*@

Is&

RenderingDevices

Office

+

t t

RFID

1171

Home

GrownI

lsv

Source:SAPCorporateStrategyGroup.

vendorssuch as Intel and EMC could design products and servicesthat f'eatured "plug and play" integration with SAP solutions.Finally,systemsintegratorssuchas Accentureand IBM r.r'ouldcontinueto play a corerole in SAP'sstrategyby usingtheBPPto composeapplications for customers.All of thesepartnersalso could serveas costeffectivechannelpartnersfor SAP,especiallyin the SMEcustomersegment. (SeeExhibit l3 for examplesof ESAecosystempartners.)

The Dual Business Model: Application Platform

Provider and

intend to abandon its legacy applicationsbusiness,at leastin the short term. in order to becomea pure plat- form vendor.The company'ssizeabledirect salesforce wouldcontinueto sell SAP applicationsevenas other

ISVsbeganto build theirown applicationson top of the BPP.JustasMicrosoftsoldbothoperatingsystems(e.g. Windows)and applications (e.g.Word) in the desktop softwarespace.SAP rvould sell both a platform and

Application

Provider

SAP did not

applicationsin the enterprisesoftware space.Nothing would prevent an ISV from using the BPP to build a solutionthatcompetedwith a similarapplicationalready being soldby the SAP salesforce.

Growth

lnitiative

Two: Building

Mafl(et

shal€

in the Midmarfiet

SAP had competedin the SME segmentfor years,but its successdependedupon what measureone used.On the one hand, as Leo Apotheker,SAP ExecutiveBoard

member and Presidentof the Customer Solutions and

Operationsgroup,wasfond of

customers.How many companiesare there in the For- tune 1,000?"30On the other hand, HassoPlattner,who had becomeChairman of the SAP Supervisory Board after retiring as Co-CEO, explainedhow largecustom- ers exerteda gravitationalpull on SAP's resourcesand

saying, "SAP has32,000

rolnterview, | | /22 12005

117O

pART FrVE:coNCLUSIoN:rNNovATloNcHALLENGEStN ESTABLISHEDFIRMS

ExHlBlT

I

l

Examptes

of

Enterprise

Services

(HR & Finance)

CreditCommitmentNotification Serviceupdatingthe creditexposureol a customerlroman

internalsource(e.9.,salesdepartment).

CreditWorthinessChan gelnformation Serviceupdatingthe creditworthinessof a customer.The informationis retrievedfroman internalsource(e.9.the credit managementdepartment).

CustomerBankAccountchangeRequestconf irmation Thisservicechangesthe bankaccountdetailsthatare maintainedin thecustomermasterdata.

CustomerlnvoiceAccountingCheckQueryResponse This servicecheckswhetherbillingdocumentsresultingfrom transactionsin logisticscan be lransferredintothe accounting system

CandidateResumeQueryResponse

Sendunstructuredresumetext and candidatedata.

CreditAgencyReportQueryResponse Thisserviceenablesthe applicationto receivean external creditratingreportvia the Internet.The creditreportis attachedto the customermasterdata.

CustomerBankAccountListQueryResponse This serviceorovidesa listof bankaccountsthat are maintainedin the customermasterdata.The service expectsa customernumberas inputparameter.

receivebackstructured

CustomerAccountPaymentAdviceDeleteRequestConf irmation This servicedeletesalreadycreatedpaymentadvicesfor a given cuslomer.

CustomerAccountPaymentAdviceRequestConf irmation This serviceassignsopen itemsto payments.The assignmentis

doneon a customeraccountlevelandit is usedwhenthe clearing

of thecorrespondingitemsis donein a followingstep.

CustomerlnvoiceListQueryResponse This serviceprovidesa listol invoicesfor a givenpayer.Further selectivecriteriaare: date rangefor invoices,all open invoices.

CandidateCreateRequestResponse This inboundservicereceivesresume-typeinformationand generatesa candidate.Detailederrordata is requiredin the response.

BankAccountstatementNotification Serviceto obtainthe statementol accountfrom your bankfor all yourbankaccounts.

CustomerlnvoiceDetailsQueryResponse This servicewill provide a listof lineitemsthat belongsto a giveninvoice.ltsoutputcontainsa headerlineforthe invoiceand

a listof items.

CustomerAccountPeriodBalancesQueryResponse Servicereadingthe periodbalanceof a customeraccount.The balanceis the amountresultingfrom the differencebetweenthe debitand creditsideof the account.

source:Adaptedfrom sAP Producland TechnologyGroupPresentation,SAPPHIREMay 2005.

The

Ecosystem SAP hoped to attracta largeecosystemof productpartnersto build innovativenew solutionson top of the BPP.As Kagermannput it, "We want to encour- ageco-innovationon theplatform."z7With its Enterprise Services Architecture strategy, SAP was pursuing a model similar to the one Google had developedwith its "Google Maps" servicein the consumerInternet space. By defining simple interface standardsand allowing external programmersto accessits geographicalmap- ping technologyvia the Internet,Googlehadsparkedthe

independentcreation of hundreds of new, specialized Web sitesthat featuredembeddedGoogle Maps.28 With the BPP, Kagermann hoped that hundredsof independentsoftwarevendors(ISVs) would build new, highly specializedbusinessapplicationsby leveraging technology and functionality from the BPP. "We will do the big headof businessprocessesand ISVs will do

Enterprise

Services

Architecture

Partner

2Tlnterview. |

:8See http://www.housingmaps.com/or http://www.chicagocrime.org/ for examoles

|122/2005.

the long tail," summarizedShai Agassi,SAP Executive Boardmemberandpresidentof theProductandTechnol- ogy group.2eJim HagemannSnabe,General Manager, Industry Solutions,liked to bring up the caseof KMD' a firm that developed software that the governmentsof smalltownsin Denmarkusedto managetheir day-to-day operations.Using the BPP,a company like KMD could focus solely on building functionality uniquely relevant to small town governmentsin Denmark, and outsource the developmentof more generic businessapplication functionality (e.g.employeetime tracking) to SAP. ISVs, however,constituted just one part of the part- ner ecosystemthat SAP looked to cultivate aroundthe sharedstandardsof theESA. Kagermannenvisionedper- sonalproductivityvendorssuchasMicrosoft developing widely usedtools by integratingtheir desktopproducts with SAP solutions.Supplierslower in the technology stack,suchasnetworkinggiant Cisco,could embedSAP functionality directly into their offerings, and major IT

rolnterview. lOl3ll2005.

I 168

pART FIVE:CONCLUSTON: INNoVATIONCHALLENGES lN ESTABLISHED FIRMS

EXHIB|T a

SAP Deal Size Tlends,

2OO2-2OO4

l st Quarter 2002 2003 2004

2nd Quarter 2002 2003 2004

3rd Quarter 2002 2003 2004

4th Quarter 2002 2003 2004

I

Oeats>5mill.EUR

I

Source; SAP Investor Relations.

oeatsl-5mill.EUR

I

oeats< 1mill'EUR

EXHIBIT9

#comoanies

SAp Gtobat 5OOGustomer Penetration by Industry. February 2OO5

70

60 ----------

I

----------

!

50

-----

40

30-

20-

10:

snecustomer

etouat5oocomPanY

CP / Retail

#1

s€9

Discrete

#1

E =

6

3

=

Process

#1

EE

v#

t o

6 -

Fin.

Services

#1

E;

E5

Services

#1

Notes:

CP = ConsumerProducts,A&D = Aerospaceand

HT = HighTech,Chem = Chemicals,tttiti = P = Service Providers,Util = Utilities

Source.'SAP InvestorRelations.

Defense,ME&C = Machinery,Engineering& Construction'

UittProducts,O&G = Oil &Gas,Pharma = Pharmaceulicals' Serv'

PARTFlvE: CONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFIRMS

I

167

EXHIBIT 7

SAP Sales model,

April

2OO6

CHANNEL

SEGMENT

REPORTING

Direcl

lndirect

Sourcei

SAP.

If Kagerrnann's corporate analysts were correct, executingon this three-proneedgrowth strategywould resultin thereturnof sustaineddouble-digitsalesgrowth and net marginsof more than 30 percent.l8However, Kagermannbelievedthat it rvould take until 2010 or 2011 before the BPP and other productsof the new growth strategyachievedbroadadoptionacrossthe SAP customerbase.reDefendingthe legacyenterpriseappli- cationsbusinesswascriticalin theinterim.

Growth Initiative One:

The Business Pnocess Platform

Kagermannpositionedthe BPP as an extensionof an existing set of integration technologiescollectively calledSAP NetWeaver.The main purposeof NetWeaver wasto helpSAP customersintegratedisparateSAP and non-SAPapplicationsso that they interoperatedseam- lessly.Forexample,if asalesrcpresentativeattheFender Con.rpanyenteredan order for 300 Stratocasterguitars

rsSAP

rehttp://www.eweek.com /article2/0.I 895.I 8I 8485,00.asp

InvestorRelationspresentation.February2005.

into mySAP CRM, NetWeaverautomaticallytriggered an inventoryreplenishmentorder within Fender'ssup- ply chain managementapplication.Additionally, the order data also incrementedFender'saccountsreceiv- able,which weretrackedwithin a third system,mySAP Financials.20Customersthencouldview dataflromthese threeapplicationsand from othernon-SAPsystemsall on one screenusing NetWeaver'senterpriseWeb portal

technology.2r

NetWeaveralso servedas the technologyfoundation for a new classof applicationscalled xApps, the first of whichSAPreleasedin late2002.12xAppswerecompos- ite applicationsthat leveragedNetWeaverto integrate functionality acrossmultiple SAP (and potentially non- SAP) products.23In addition to developingxApps, SAP also launcheda program to certify third party software partnersto build novelxAppsandsellthemto joint cus- tomers.2aAs of April 2006,SAPhaddeveloped7 xApps, andpartnershaddevelopedan additional20. Despitethe flexibility of NetWeaverand xApps, the factthatdistinct SAP applicationseachaddresseddiffer- ent businessprocesseshinderedoverallextensibilityand innovation.For instance,if a potentialcustomerneeded a solutionthat integrated20 percentof the functionality containedwithin three different SAP applications,that customerneededto buy all three of thoseapplications and then use NetWeaverto integratethem. The license fees, technological complexity, implementation time, andsupportcostsfor suchan initiative could be prohibi- tive,especiailyfor a smallerbusiness.Kagermannques- tioned the continuedviability of this model:

We haveall thesedifferentproducts-ERP,CRM, SCM, andsoon-and theyarenot verytightlyintegrated.Why

do we needthesecategories?Companiesdon'twantterms like ERPandCRM.They just wantproductivityandinno- vation.If youbelievethis,youaskyourself, 'What should thearchitectureof theproductof thefuturelook like?' And if youthinkaboutit a littlebit,youcometo theideaof the EnterpriseServicesArchitecture-somethingthatisstable, pre-integrated,easierto support,andsimplertoextendand

innovatearound.Butcenteredaroundapplicationfunction-

alitv.becausethatiswhatdifferentiatesSAP2s

2%ttp://www.sap.com/company/press /press.epx?pressID=2286.

2lhttp://www.sap.com/solutions /netweaver/index.epx.

22http://www.looselycoupled.com /stories/2003/xapps-sap-

bo0303.html.

23http://www.sap.com /solutions/xapps/index.epx.

2ahttp://www.looselycoupled.com /stories/2003/xapps-sap-

bo0303.html.

2slnterview, | | 122I 2OO5.

1

166

PARrFIVE:coNCLUSToNINNOVATIONCHALLENGESIN ESTABLISHEDFIRMS

ExHlBlT

6

Examples

of SAP Customers,2OO5

M

OSRAM

g

Panmo*;

ffi

Fr \t

(ft

Postbank

$,F rrnamnnrr

t).r

AE

i

,i':r

PHITI

PaG

KIA

r*

Pr,,.r

t

ps

F

B

c@t

sFrAFrP

Ti:'?'iTf

5E*IEUS

TExns

ffi TRUMETTTS

srnciAP^oREAtnr-rnes$),

H *uns

ObclUasbtngton poet

@

ArEp-us

'Aventis

AlHanz @

g cAr'

BERTELSMANN

daCl.

wcrrC|jlCt

cp

cdtEAfE'

mlrc:uw

IIuil-erCHf,Yslre

(}ln

/tidh

@ E*rcssoru#

rufrrsu

tg, tufttrsrsa

e

Source:SAP InvestorRelations.

Wl

g,it ,f{f*

laraat

METRC}Group

might be taking place in the industry, Kagermann put togethera plan to reignitesalesmomentum.

SAP'S NEW GROWTH STRATEGY

After deliberatingwith his leadershipteam,Kagermann decidedto focusonthreeprimary growthinitiatives.First, SAP would develop an innovative Web services-based "platform"-a collectionof softwaretechnologies,tools, andcontent-that hebelievedwould deliverunparalleled

valueto customersand partners.Kagermannrefenedto thisplatformasthebusinessprocessplatform,or BPPfor short, and it representedthe tangible product of SAP's EnterpriseServices Architecture vision. Second,SAP would intensifyits focuson the SME marketsegmentby developingmore streamlinedand flexible applications and expandingmidmarket saleschannels.Lastly,SAP would broaden the relevance of its products by offering functionality that appealedto more corporate usersand by improving userinterfaces.

I

164

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESINESTABLISHEDFIRMS

EXHIBIT 4

fotal

Apptications

SAP"-

Oracle

MicrosoftBusinessSolutions"""

License Revenue by vendor,

2004

2005

321

J,

tzo

otJ

267

2OO1 -2OO5'

2003

2,683

605

227

'ln ''Estimate millionsof US dollars.

basedon Euro/dollarexchangerateas

of March1 of each year.

"'Estimate

sources:SAP Oracle,Microsoftannualreports;htlp://www.oanda.com/convert/{xhistory

basedon assumptionol licenserevenuepercentageof totalrevenueequalto 40 percent

2 474

703

tlJ

2001

2,243

1,022

42

suchas desktopapplications (e.g.,MicrosoftExcel and Access) and/or human solutions such as bookkeepers. (SeeExhibit 4 for moredataon thecompetitivelandscape in theenterpriseapplicationsmarket.) The dynamics of the enterprisesoftware industry weremarkedby "coopetition,"primarily becausemany vendorsplayedin multipleareasof thetechnologystack. SAP,for example,did not have a significantpresence in the databasesoftwarearena,but Oracledid. Conse- quently,despitethe fact that SAP andOraclewere fierce competitorsin theenterpriseapplicationsspace,over60 percentof SAP customersusedOracledatabasesto store the datausedby their SAP applications.rrFurthermore, SAP and Oraclesalespeoplehadbeenknown to collab- orateon joint salesopportunities.In a similar fashion, IBM supplied its DB2 databasesoftwareto many SAP customersand provided application hosting servicesto SAP.However,IBM alsoofferedtools,technologies,and consulting servicesto help enterprisecustomersbuild their own customtzed applications instead of buying standardizedapplicationsfrom vendorslike SAP.

SAP Company History

Founded on April

neers,SAP employedover 35,000employeesworldwide in 2006.12Headquarteredin Walldorf, Germany, the company servedmore than 32,000 businesscustomers in 120differentcountries.l3SAP'sproductlineconsisted primarily of a set of applications called the "mySAP BusinessSuite" that includedapplicationsfor enterprise resourceplanning (mySAP ERP), supplychain manage- ment (mySAP SCM), customer relationship manage- ment (mySAP CRM), and severalother areas.SAP also offered industry-specificfunctionality for companiesin

l,

1912, by five former IBM engi-

||

']SAP

rrSAP 2006 annualreDort.

http://www.eweek.com/article2|0,1895,1790357,00.asp

2006 annualreport.

over25 dift'erenttargetindustries.'o (SeeExhibit5 fora rnoredetailedoverviewof theSAP solutionportfolio.) For most of its history, SAP had focusedon selling complex,standardizedapplicationsto thelargeenterprise rnarketsegment. (SeeExhibit 6 for a sampleof SAPcus- tomers,Exhibit 7 for SAP'ssalesmodelandExhibit 8 for

recentdealsizetrends.)Typically,companiespaidSAP millions of dollarsfor therightsto usethebasicversionof

a softwareapplication-a

fee"-and

the softwareto their specificneeds,deployit within their informationtechnology (IT) infrastructure,andmaintain andupgriideit in the future.In the majority of cases,sys- telnsintegrators (SIs)suchasAccenture,IBM, or smaller

regionalfirrnsperformedthe implementationanddeploy-

ment of

applicirtion.anERPsolutionnamed "R /3," hadgenerated

billions of

largecompaniessinceits launchin theearly 1990s. 15 Asa result.in severitlindustriesover90 percentof Global500 companiesusedsoftwarefrom SAP. (SeeExhibit 9 fora chartof SAP industrypenetration.) In the late 1990sandearly2000s,SAP haddeveloped the rnySAPERP applicationas a successorproductto R /3 anddiversifiedinto non-ERPareassuchasCRM and SCM. Betu,een1999and 2001,SAP alsospunofftwo subsidiarycompanies,SAPMarketsand SAP Portals,to focuson building and selling lrtternet-basedtechnology' SAP re-integratedbothof thesesubsidiariesbackintothe

chargeknown asthe "license

then incurred additional costs to customize

SAP software. SAP's best-known enterprise

dollars of licenseand servicerevenuesfrom

parentcompanyin20O2.

Internally, a seven member Executive Board gov- erned SAP Kagermann,who took over leadershipof the companyfrom his former Co-CEO andoriginalSAP co-founderHassoPlattnerin May of 2003, also served astheChairmanof theExecutiveBoard.(SeeExhibit10 for Kagerntann'scorporatebiography.)Kagermann'sfirst

llhttp:// u wrv.sap.conr/solutions/index.epx r5SRP lgg-s-1999annualreports.

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlNESTABLISHEDFIRMS I 163

ExHlBlT

3

Depiction

of the Technology

lENp USERI ApplrcationApplicationApplication Recovery Avarlabilitv Performance

1t'r

ttl

Staak

HR,Financials,Manulacturing "een abledmy€AP.comapplications

BrcwserPluginslorInternetTransactions

Oracle,DEZo,Informix,Mtcrosoft

SQLSeruer

Unix,WindowsNT/2000

F

ApplicationSeruers,InternetSelers

@

Source:BMC Soltware(www.bmc.com).

productcategoriesincludedenterpriseresourceplanning (ERP),customerrelationshipmanagement(CRM), sup-

ply chain managementtSC\'l t, andanalyticsor business intelligence(BI). Primary customersegmentsincluded largeenterprises(LEs), snrallto nridsizebusinessesor enterprises(SMBs or SN{Es).and srnallofficeor home

officebusinesses(SOHOs).Eachcustomersegmentfea-

tured customerswith verv differentneeds,and no one vendordominatedall thrcescsrnents.TheSME segment, also known as the "midmarket." was particularlybroad,

definedby some vendorsand analystsas including any companywith betweenl0 and 2,500employees. In 2005, SAP's share of the worldwide enterprise applications market by total revenuewas approximately

9 percent,the largestof any industry player.aIn March

2006,SAP reportedthat its licenserevenuesfor business applicationsover the most recentfour quarterswere more than threetimes thoseof its closestcompetitor,Oracle.5

However, Oracle recently had made aggressivemoves to consolidatethe industry. By purchasingPeopleSoft (which itself had acquired another establishedvendor, J.D.Edwards, just two yearsearlier)in January2005and

'SAP's 2005 software and nraintenancerevenuesdivided by 2005 worldwide market sizeestimatefrom IDC. sSRP 2006 annualreDort.

SiebelSystemsin January2006,Oracleeffectivelyhadcre- ateda duopolywith SAP in the LE segment.bIn the SME segment,SAP andOracleboth competedwith Microsoft's BusinessSolutionsdivisionanda hostof othercompanies suchasSageSoftwareandLawsonSoftware.i In addition, new technological developmentssuch as softwareasa service(SaaS)andopensourcesoftwarewere growingin popularitywith SMEsandSOHOs,andupstart vendors such as Salesforce.com,NetSuite, Entellium, and SugarCRM were attackingthe enterpriseapplications market from the low end.8SAP statedthat basedon soft- ware revenues it was the midmarket segment leader, but several other companies had a greater number of SME customers than SAP.e For example, Salesforce.com,a companythat launchedits first servicesin February2000, already claimed 20,000 SME accounts; Sage Software claimed 4.7 million.l0 Furthermore. millions of smaller companies managed their operations using alternatives

oOracle Web site (www.oracle.com). TEarlier in 2004, Microsoft had initiated talks to acquire SAB but the negotiations had broken down due to the anticipated complexities involved in combining the two companies. 8hftp://wwwinfoworld.com/article/05/08/05/HNmidmarket- l.html.

'SAP Investor Relations presentation, February 2005.

site

(www.salesforce.com),SageSoftwareWeb site (www.sage.com).

'ohttp://blogs.zdnet.com/SAAS/?p=103,

Salesforce.com Web

1162 pARr FIVE:coNCLUSToN:rNNovATroNcHALLENGESrNESTABLTsHEDFIRMS

ExHlBlT 2 SAP Stock Prace (NySE) Peilormance Relative to Peers

Fiveyear performancecomparison:June 2001-June2006

 

w

ffilEEru

s

r@,

.60l

.2A7

ol

-402

cryidr

2d{

Y&or

1rc.

httn://f

itre.tr&.cm/

Source:Yahoo! Finance

EXHIBIT 2

to Peent

One year performance comparison: June 2005-June 2006

(continued)

SAP Stock

Price

(NySH

Performance

Relative

paying invoices)and enabling accessto and analysisof data from disparate corporate functions. Like popular desktopapplicationssuch as Microsoft Excel or Adobe Photoshop,enterprise applications contained logic to manipulatedata as well as graphical interfacesto inter- act with users.Applications were a primary component of the "technologystack,"a framework usedto illustrate how primary software and hardware technologies inter- operated.(SeeExhibit 3 for adepictionofthe technology stack.) Enterprise applications required both database software and middlewa.reto run. and all three of these

software technologiesran on top of networks of powerful computerscalled servers. Enterpriseapplicationsconstitutedan approximately $80 billion worldwide market in 2005, with compound annual growth in the range of 7.5 percent projected through 2010.3 The market was typically segmented by product category and by customer size. Primary

3lDC, Worldwide Enterprise Applications #2Ol'791,May 2006.

2006-2010

Forecast,Doc

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlNESTABLISHEDFIRMS 1 163

EXHIBIT 3

Depiction

of the Technology

St tck

[lNDUSx-]

ApplicalronApplrcationApplication Recovery Avarlabilitv Pedormance

'lt'l

rtl

HR,Financials,Manufacturing "+en abledmySAP.comapplications

BrorvserPluginsforInternelTransaclions

Oracle,DE29Inlormix,Microsoft

SQLServer

Unix,WindcryvsNT12000

F

ApplicationSeruers,InternetSenrers

r@

Source.BMC Soltware(www.bmc.com).

productcategoriesincludedenterpriseresourceplanning (ERP),customerrelationshipmanagement(CRM), sup-

ply chainmanagement tIjC\,1t, andanalyticsor business intelligence(BI). Primary customersegmentsincluded largeenterprises(LEs), snrallto nridsizebusinessesor enterprises(SMBs or SN,lEs).and snrallofficeor home

officebusinesses(SOHOs).Eachcustolnersegmentfea-

turedcustomelsrvith verv dit'lelentneeds,and no one vendordominatedall thrcescgrtrcnts.TheSME segment, alsoknown as the "rnidmarkct." u'asparticularlybroad, definedby somevendorsand analystsas includingany companywith betweenl0 and2,500employees. In 2005, SAP's share of the worldwide enterprise applications market by total revenuewas approximately 9 percent,the largestof any industry player.aIn March 2006,SAP reportedthat its licenserevenuesfor business applicationsoverthe mostrecentfour quartersweremore thanthreetimes thoseof its closestcompetitor,Oracle.5 However,Oracle recently had rnade aggressivemoves to consolidatethe industry By purchasingPeopleSoft (which itself had acquired anotherestablishedvendor, J.D.Edwards,just two yearsearlier)in January2005and

'SAP's 2005 softwareanJ ntJint(.nilnacrc\enues divided by 2005 worldwidemarket sizeestimarefrom IDC. 5SAP 2006 annualreDort.

SiebelSystemsinJanuary2006,Oracleeffectivelyhadcre-

ateda duopolywith SAP in the LE segment.bIn the SME segment,SAP andOraclebothcompetedwith Microsoft's BusinessSolutionsdivisionanda hostof othercompanies suchasSageSoftwareand LawsonSoftware.i In addition,new technologicaldevelopmentssuch as softwareasa service(SaaS)andopensourcesoftwarewere growingin popularitywith SMEsandSOHOs,andupstart vendors such as Salesforce.com,NetSuite, Entellium, and SugarCRM were attackingthe enterpriseapplications market from the low end.8SAP statedthat basedon soft- wa.rerevenuesit was the midmarket segmentleader,but several other companies had a greater number of SME customers than SAP.e For example, Salesforce.com,a companythat launchedits first servicesin February2000, already claimed 20,000 SME accounts; Sage Software claimed 4.7 million.'0 Furthermore,millions of smaller companiesmanagedtheir operationsusing alternatives

oOracle Web site TEarlier in 2004,

(www.oracle.com). Microsoft had initiated talks to acquireSAP,but the

negotiationshad broken down due to the anticipated complexities involved in combining the two companies.

"http://www.infoworld.com/article/05/08/05/HNmidmarket_I .html. eSAP

site

'%ttp://blogs.zdnet.com/SAAS/?p=103,

Salesforce.com Web (www.salesforce.com), SageSoftwareWeb site (www.sage.com).

InvestorRelationspresentation,February2005.

PARTFIVE:CONCLUSION:INNOVATIONCHALLENGESlN ESTABLISHEDFlRtvls I

161

EXHIAIT I

Selected

SAP Financial

Results, 1997-2OO5r

 

2005

2004

TOTALREVENUE

8,513

7,514

7,O25

7" Change from Prior Year

13.3%

7.0%

- 5.2%

 

Revenue by Business Area

Software(License)

2,783

2,361

2,148

Maintenance

3,175

2,823

2,569

Consulting

2,139

1

0-71

1,954

Training

343

302

299

Other

57

55

Revenue by Geographical Region

Europe,MiddleEast& Africa

4,513

4,223

3,970

Americas

3,000

2,424

2,216

Asia Pacific

1,000

867

839

SoftwareRevenueby Category

EnterpriseResourcePlanning

1,'t57

oon

802

CustomerRelationshipMgmt.

603

cul

440

SupplyChainMgmt.

509

480

477

SupplierRelationshipMgmt.,

352

223

273

BusinessIntelligence,Other

ProductLifecycleMgmt.

162

167

156

OPERATINGINCOME--

2,410

2,086

1,880

Pro Forma Operating Margin %"

28.3%

27.8%

26.8%

NETINCOME

1,496

1,311

1,077

Earningsper Share (Diluted)

4.83

4.22

3.47

 

2005

2004

2001

2000

TotalRevenue

8,513

7,514

7,O25

7,413

7,341

' 6,265

o/" Software Revenue

32.7%

31.4%

30-6%

30.9%

35.2%

39.2%

R&DSpending

1,071

900

832

898

866

457

As 7. of TotalRevenue

12.6%

12.0%

11.8%

12.1%

11.8%

13.7%

Numberof Employees.-.

35,873

32,205

29,610

28,797

28,410

24,177

% in R&D

32.4%

30.7%

29.9%

27.7%

28.0%

31.0%

% in EMEA Region

60.1%

64.1%

67.0%

66.8%

64.9%

63.3%

Revenue per Employee

0.237

0.233

0.237

o.257

0.258

0.259

'All

figuresshownin millionsof Euros;datasourcedlrom SAPannualreportsand SAP Web site (www.sap.com). "Before

"'Measured stock-basedcomoensationand acouisitionrelatedcharoes.

by totalheadsbefore2000,and by frlt timeequivalJnts(FTE)in 2O0Oand allsubsequent years.

7,413

7,341

1.0%

17.2"/"

2 2q1

2,423

2,121

2,204

2,083

414

466

81

90

4,044

3,786

2,502

2 724

863

831

927

941

473

445

464

583

259

416

168

196

1,688

1,471

22.8%

20.0"/o

509

581

1.63

1.85

1999

1998

1997

5,110

4,316

3,022

37.8%

44.0%

49.9%

705

572

363

13.8%

13.3%

12.0%

21,488

19,308

12,856

25.1%

n/a

n/a

60.8%

n/a

n/a

0.238

0.224

0.235

As Kagermann deliberatedhis options, three ques- tions recurredin his mind. First,how could hedetermine whetherthe currentpaceof executionregardingthe new growth strategy was right? Moving too slowly would give SAP's competitorsprecioustime - but moving too quickly could agitateemployeesand alienatecustomers who did not sharea senseof urgencytoward SAP's new strategicdirection.Second,how shouldhe sequencethe rollout of changesstill required?And third, given the industryenvironmentandtheresurgentgrowthof SAP's

legacybusiness,how shouldhe balanceresourcealloca- tion betweenshortandlong-termopportunities?

TNDUSTRy AND COIIPANy OVERVIEW

The Enterprise Software Ap plications

Enterprise software applications helped companies achieve cost efficiencies, make better decisions. and increasecustomer value. They did so by automating formerly manualbusinessprocesses(e.g.recordingand

Ind ustry