ST.

MARY’S UNIVERSITY
Department of Accounting and Finance
Strategic Management Assignment

Group members
1. Gabriela Mamushet……………… RAD/1375/2012
2. Tsion Awoke………………………… RAD/0223/2012
3. Hani Tesfaye………………………… RAD/0194/2012
4. Yasmin Abdurahman……………. RAD/0226/2012
5. Afra Kedir……………………………… RAD/0030/2012
6. Meseret Teklu………………………. RAD/2141/2012

Section: D

Submission Date: 22/12/2021

Table of contents. Page
1. History, development and growth 1
2. Internal strengths and weaknesses
3. External environment analysis
4. Evaluation of SWOT analysis
5. Corporate level strategy
6. Business level strategy
7. structure and control systems
8. Recommendation
 Analyzing SAP and the Evolving Global Business Software Industry in 2011 Case study

To analyze a given case study there are steps or areas one must cover by applying strategic
management concepts. Those steps or areas are as follows:

1. The history, development, and growth of the company over time

SAP was started in 1972 by five former IBM employees with a vision of creating a standard application
software for real time business processing. SAP stands for systems application process, since its start
SAP has issued several releases such as SAP R/1 in 1973, SAP R/2 by the end of 1970s, and SAP R/3 in
1992.

By 1997, SAP realized the need to release new Internet-enabled ERP R/3 solutions, which converted its
internal ERP system into an externally-based network platform, to satisfy customers’ needs for SCM
(Supply Chain Management) and CRM (Customer Relationship Management). In 1999 SAP’s realization
of the growing importance of the Internet was made apparent by major changes to its business model
and strategies when it introduced its mySAP.com (my SAP) initiative.

In 2000 SAP planned to succeed in 4 areas. First, to meet its customers’ needs in a new electronic
environment. Second, diversification of service from its competitors such as Oracle and Microsoft. Third,
it made My SAP more affordable and fourth it decided to support small and medium sized business
enterprise.

SAP’s number of global software installations and customers increased steadily between 1998 and
2002 when SAP was still the industry leader with a worldwide market share of over 30%. SAP continued
to attract new large business customers and it already had around 50% of the global market by 2003. By
2004, SAP’s share of the global ERP market had now grown to 58%. SAP expected single digit growth in
the next few years. After heavy competition and other barriers SAP had about 26% of the worldwide
market share by 2011.

2. The identification of the company’s internal strengths and weaknesses

Strengths

 Strong in research and development: SAP itself spends a lot of investments on research
and developments to improve their business and to introduce new products and services
to the global market.
 Good market position: SAP secures a good position among the major leading
technological companies in the world which makes it a trustworthy company

Human resource competencies: SAP prides itself on its talented and professional staff that can learn
and adapt to many different situations and networks across the globe.
 Adaptive to strategic change: Top managers of SAP are quick to respond to changes by
using methods of alliance, acquisitions and working closely with its customers.
  Good brand name reputation: By quickly responding to the changing customer needs and
focusing on organic growth SAP has built a good reputation for itself.
 Well-developed corporate strategy: strategic alliances and acquisitions became increasingly
important parts of its strategy to reduce its cost structure, enhance the functionality of its
products, and build its customer base.

Weakness

 Rising manufacturing costs: Increased overhead costs in the 1990s, as it pumped money
into building it’s my SAP initiative.
 inappropriate organizational structure: didn’t have the right structure for servicing the
growing range of its products and the increasing breadth of the companies, in terms of size,
industry, and global location, it was serving.
 Poor financial management: profitability of SAP has never been stable and profitability
ratios are mostly under industry average.
 Narrow product line: Only offers ERP.
 Weak in the telecom and finance sectors
 limited amount of money to spend on business software

OPPORTUNITY

 Exploit new market segments: SAP broadened its offering targeted market not only to
large corporation but also to small medium sized companies. IT also updates its basic
ERP platform to accommodate the needs of companies in different kinds of industries.
 Expansion into foreign markets: SAP grouped is national subsidiaries into 3 main world
regions: Europe, the Americas, and Asia/Pacific.
 Acquisitions: SAP began to use acquisitions to speed its entry into crucial new segments
of the Web software market. SAP acquired Top Tier Software Inc. in 2001 to gain access
to its iView technology. SAP also made many small acquisitions to improve its
competitive position in various industries. In 2010, SAP decided to acquire Sybase, a
leader in the kind of software that helps corporate customers run applications on
mobile devices.
 Alliances: SAP has worked hard to develop strategic alliances with all kinds of software
companies and formed contracts with over 1,000 independent software vendors that
have helped it expand its offerings. An important alliance was made with IBM in 2006,
IBM would invest $40 million over the next 5 years to develop the capabilities necessary
to install SAP’s new software. SAP formed alliances with major companies such as
Verizon, Dell, and Amazon.com, to sell its mobile products, Hana, and its SOA software
as a service
 Related diversification: It was branching out into more segments of the software
industry to capitalize on higher-growth emerging software segments like providing the
evolving IT platform that would allow SAP’s own product offerings— software
applications.
 Reduce cost: SAP focused on making my SAP more affordable by breaking up its
modules and business solutions into smaller, separate products.

Threats

 Changes in economic factors: Economic recessions made customers not want to invest in My
SAP which in turn reduces its growth. SAP suffered as its revenues fell and its stock price
plunged.
 industry competition: Major competition from companies like Oracle and Microsoft. Oracle’s
major acquisitions, Oracle’s price reduction of services and Microsoft’s ERP offerings being
compatible with the Windows platform posed major threats.
 New technologies stand as a threat:  Newly introduced cloud-based ERPs are getting popular
and the open sources threaten the SAP company in a serious manner as their market share of
the service decreases.
 Changes in consumer behavior: Changes in consumer behavior and buying patterns results in
fewer purchases in and keeping up with the customer buying behaviors all the time is a difficult
task thus this is a threat for the SAP.

3. The nature of the external environment surrounding the company

We analyze SAP’s competitive environment by using Porter's Five Forces is a framework.
The five forces are shown in the figure below

Figure 1: Porter’s 5 forces model

 Threat of new entrance
SAP is doing business in an industry where every company looking for technology
enhancement. The startup cost for starting a new software company is high. New
entrants have to face a competitive response. Customer’s decision making depends on
the ERP of a company. So, the customer selects only those suppliers which are more
trustful so brand loyalty exists. Every software company has its software with different
features that creates product differentiation. R&D plays an important role in this
industry and every company invest a lot of capital on it. This industry is capital intensive
and needs a large amount of production. Once the customer purchased the ERP,
changing the ERP is not possible because the customer would have to pay a large
amount so there is a high switching cost in this market. Therefore, there are low threats
of new entrants in this market.

Threat of substitution
SAP and Oracle are two big giants of industry. Their core characteristics of products
are different. Similarly, there are a lot of diversified segments for which companies are
doing business. As the market is diversified and there are some substitutes available in
the market. Therefore, threats of substitutes exist in a market.

Suppliers bargaining power:

As this industry is capital intensive, which depends on capital rather than labors.
Companies provide the software. Software is developed by different developers. There
are a large number of universities educating software skills to a lot of students. Every
year a lot of potential comes in a market for a job. Every individual wants to work for big
firms like SAP and others due to the benefits they get in return and to secure the future.
So, in this condition companies have a large number of developers available in a market.
The company can hire anyone for a specific task. Therefore, all of these factors show
that there is a low bargaining power of suppliers in the software industry.

Buyers bargaining power:

 The number of suppliers in the industry in which SAP operates is a lot more than the
number of firms producing the products. This means that the buyers have a few firms to
choose from, and therefore, do not have much control over prices. This makes the
bargaining power of buyers a weaker force within the industry.
 The product differentiation within the industry is high, which means that the buyer’s
bargaining power is a weaker force within the industry.
  The quality of the products is important to the buyers, and these buyers make frequent
purchases. This makes the bargaining power of buyers a weaker force within the
industry.

Competitive Rivalry

The concentration ratio in this industry is high which means a few numbers of companies are
dominating the industry. Price change by one company can affect other company, brand loyalty
exists in the market, as customers only select those companies for ERP that has positive word of
mouth and goodwill in a market and their product is more efficient than others. Each company
has diversified values and products they are offering. Therefore, a moderate level of
competitive rivalry exists in the market. 

4. Evaluate the SWOT analysis

SAP is one of the largest publicly traded companies in the world. In the extensive study of the SWOT
Analysis of SAP, we saw that it is one of the most reliable brands in the market and has a good market
capture by investing in its R&D simultaneously it can grow in the market by acquiring new companies,
forming alliances and entering new market segments. Even with such potentials, it lacks in some
places. It spends very less amount of money on its technology and had rising manufacturing costs which
it reduced with strategic moves like outsourcing the enormous amount of routine programming involved
by improving and creating advanced applications to low-cost countries overseas, such as India.
Outsourcing also contributed to its rising profitability.

5. The kind of corporate-level strategy that the company is pursuing

First we need to identify the company’s mission and vision

Mission:

As market leader in enterprise application software, SAP helps companies of all sizes and
industries run better. From back office to boardroom, warehouse to storefront, desktop to
mobile device – SAP empowers people and organizations to work together more efficiently and
use business insight more effectively to stay ahead of the competition. SAP people,
applications, and services enable approximately 300,000 customers to operate profitably, adapt
continuously, and grow sustainably. Its core mission is to be a developer of business solutions

Vision:

Helping the world run better and improve people's lives

A corporate strategy is essential for guiding a company’s performance in its overall business
activities as well as resource allocation in order to achieve the established goals of the business.
  Growth strategy
This type of corporate-level strategy helps in achieving increased business growth. Whether
it’s revenue, market share or market penetration.

Diversification is a strategy for growth through branching out into a  new market

segment. SAP had begun to pursue related diversification by providing the evolving IT platform
that would allow SAP’s own product offerings—software applications. SAP employed
Concentric diversification, a type of horizontal diversification, involves introducing new
products or services to your product/service line that are closely related to your existing
products or service.

 Concentration strategy is a wise and sensible business strategy. It focuses on a single

niche and competes in the same category. Concentration strategy has three major
types; market penetration, market development, and product development.
Market Penetration

The market penetration strategy’s goal is to increase the market share by selling the current
product/service. It’s my SAP solutions was designed to fit and support the needs of large,
medium, and small companies, and it intended to compete in all market segments.

Market Development

Market development is selling the current product/service to the newer markets. SAP entered
new markets like Business Intelligence.

Product Development

Product development is the process of introducing a new product/service to the current

market. software engineers of SAP who write and improve the specific new my SAP software
applications, were joined with the sales force for that group. So they could integrate their
activities and provide better customized solution.

6. The nature of the company’s business-level strategy

1. Differentiation Strategy
SAP’s Supply Chain Management increases differentiation
over the product life-cycle. By, forecasting future product developments, and then
devising solutions to more effectively manage a company’s value-chain operations.
2. Cost Leadership Strategies
SAP focused on making my SAP more affordable by breaking up its modules and
business solutions into smaller, separate products.
 Another cost Leadership Strategies of SAP is forming alliance with successful companies.
Strategic alliances and acquisitions be-
came increasingly important parts of its strategy
to reduce its cost structure

7. The company’s structure and control systems and how they match its strategy

SAP could not find the appropriate organizational structure to make the best use of its
resources and competencies. It continued to search for the right structure for servicing the
growing range of its products and the increasing breadth of the companies, in terms of size,
industry, and global location, it was now serving. Recall that in the mid-1990s, SAP had
begun to centralize authority and control to standardize its own business processes and
effectively manage knowledge across its organizational subunits but because of many
reasons or problems change in customer need and need for product customization they
converted to decentralization.

SAP also changed the way of worked engineering group by division of their work or based
on work departments. At the global level SAP construct three regional coordinate or main
world region to transfer knowledge and information between countries and serve the
specific demands of national markets inside each region.

In the recession period , while its stock price plunged, it was able to control its global cost
structure by making better use of its resources Strict new controls on expenses had been
implemented, a hiring freeze imposed, and the company was focusing its German
programmers to work on urgent problems. strategic alliances and acquisitions also became
increasingly important parts of its strategy to reduce its cost structure. Outsourcing was also
a major system that helped control costs.

SAP’s global cost structure had soared as its workforce increased and it entered new
markets like Business Intelligence. SAP adopted a stock option program to retain valuable
employees after losing many key employees and consultants to competitors

8. Recommendations
 SAP should search out ways to increase growth and generate revenue because the
market is getting saturated. To generate increased revenue SAP should increase
involvement in service training activities.
 It should broaden the range of products it offers to SME business segment in order to
compete with Oracle, Microsoft and new internet companies.
 SAP should strengthen its EPR system and focus on increasing profitability by
increasing productivity. It should continue to be adaptive, innovative and responsive
to market demands.
 Building capacities and spending money on research and development.
 By understanding the core need of the customer rather than what the customer is
buying.
 Building a sustainable differentiation and forming alliances.