P A R TF I V E : C O N C L U S I O N : N O V A T I O N H A L L E N G E SN E S T A B L I S H E D I R M S t I 7 9 IN l C F

ExHlBlT

17

GOAL Organizational

Structure,

2OO5'

Benelits of the Realignment I Clear handoffs from one group to the next r Consolidation industries of r Consolidation the businesssuite of SAPCorporate Stralegy Group. Source: r Single face to the market r SAP Labs responsibilityin one organization I Strong ownershipto develop and manageecosystems

guy hatesthe try to pleasethe [SVs. and the applications with them.So Shai owns ISVs because partly competes he both. Similarlv.in services, you haveone personowning if to custom developmentand anotherpersonwho is supposed services, creates it friction. And in build morc productized very termsof sales and nrarketing, Leo can now implement, quickly. u'orlclu'idestructuresand programs targeting the midmarket. We are in a big transition with the Enterprise Services Architecture. and the hope is that GOAL offers lessfriction rnd rnore:oeed within eachunit.52

r DENTtFytNG CHALLENGES

TRANSFORMATTON IN 2OO5

Although he believed that GOAL would help the company increase alignment and execution efficiency, Kagermann knew that executing on the new growth strategy posed several challenges that he could not solve with organizational restructuring alone. Clarification Motivation of the Strategy of Employees and

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

of the EnterpriseServicesArchitecture.The new growth strategy involved uncertainty,change,and the sacrifice of clear short-term opportunities,and he knew that not all employeeswould agreewith his decision and timing to pursue it. Kagermann and Heinrich were particularly concerned with keeping veteran employees engaged. "The veterans have 10, 15 years of deep integration knowledge," stated Heinrich. "They are not the people who instigate change,but they make successhappenif you can align them in the right direction. It's interesting You have to tell the peoplewho from an HR perspective. 'This is an evolution,' and the people are too aggressive, 'This is a revolution."'53 who are too slow, Kagermann was cognizant that thousandsof lower level implementation issues lurked beneath the surface of the three growth initiatives, and that he needed strong commitment from all of his employeesin order for SAP to have any chance at achieving its goals. As Herbert Heitmann, Senior Vice President,Global Communications, remarked, "At the board level, it is often The tough part startswhen easyto achievean agreement. you are in the implementation processand nobody has told the rest of the organization that there is a need for Why are we doing this and why are changemanagement.
s3lnterview.ll/2212005.

srlnterview. l/l l/100.5 I

I 178

pART FIVE:coNCLUSToN: rNNovATroN CHALLENGESESTABLTsHED rN FrRMS EXHf BIT l6 SCORE Organizationat Strucrure,2OO4

Office of the CEO

GlobalComm. Corp. Consulting lnlernalAudit GloballP

Global Field Organization Global Service and Support SAP Gonsulting Manulacturing Industries Service Industries r Solution uanagement r Application Development Financlal & Publlc Services r Solution Management r Appllcatlon Development

Finance& Administration

r Solution Management r Appllcation Development

Application Plafform& Architecture Human Resources TechnologyPlatform Solution Management

Global Marketing

Solution Management includescapabilityfor both industryspecificsolutionsand cross-industry solutions r r IndustryBusinessUnit (lBU) ApplicationSolution Management(ASM)

Application Deyelopment combinesthe development executioncapabilityof both the industriesand the crossindustrysolutions

Applicatlon'Development
Global ilarketing and Global Communications will provideshared servicesto the SolutionManagement functionof the BSGs (format/ deliverymechanism)

Industry-Specif Development ic Cross-industry Development

Source;SAP CorporateCommunications Team.

FIRMS 1177 I IN N P A R TF I V E : C O N C L U S I O N : N O V A T I O C H A L L E N G E SN E S T A B L I S H E D

EXHIBIT

l5

Best-Run

SAP Six-Tier

Schematic

Vision

+ lT "embedded"in business

SAP Sttategy

" ESA" - the next big thing

Structure

Policies

KPIS

framework The organizational

Gors Values & New Requiremonts

9 The winningculture

& -$ Global Management Talent Management LeadershiP;

CascadingStrategyand Goals

July 21, 2005' London' Source:SAP CEO BriefingPresentation,

many different SAP product, industry,and supportteams to Zencke's group in order to acceleratemomentum on theseinitiatives. Kagermannhad statedpublicly that the BPP would be made accessibleto ISVs by the end of 2006, and the Breakthrough Innovation group played a critical role in achieving this milestone. KagermannnamedAgassiasthe leaderof the Products group. In his new role Agassi maintainedsole responsibility for the NetWeavertechnology platform, and also 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,and making 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 1,500 members in 2OO2into a 2,500persongroup."' Apotheker was named head of the Customer Solutions and Operations unit, and was charged with transforming SAP's salesfunction into a more volume-driven model that supported the company's goal of acquiring tens of thousandsof ne* midmarket customersin the next five years'In

this position,Apothekerwould play a critical role in defining the value proposition of the businessprocessplatform in such a way that both large and SME customersfound it compelling. Kagermann was also relying upon Apotheker and his team to convince customersto adopt SAP solutions in broader internal usage scenarios.Together. Apotheker and Agassi served as co-presidents under Kagermann' Agassi led the Product Leadership Team (PLT)' a group oisenior developmentexecutives,and Apotheker led the Field Leadership Team (FLT)' the PLT's counterpart on the customer-facingend of the business' Board member Claus Heinrich, who previously led the Manufacturing Industries BSG under the SCORE structure. took over the Production group and the Human group. Gerd Oswald, another Resourcesand Processes player in the development of SAP R/3, assumed key ownership of Global Service and Support, and CFO Werner Brandt headedFinance and Administration' After he implemented the changes' Kagermann describedsome of his reasoningbehind GOAL: to challenging achieve it In theold structure, wasextremely andfield groups' support groups, product across alignment can leader reallyoptirnize' box each each Now,within units. on we Forexample, wouldnot be ableto execute theBPPif manperson and applications another managed oneperson platform'The platformguy will and agedISV partners the

s r l n t e r v i e w i t h S h a i A g a s s i ,1 0 / 3 1 / 2 0 0 5 w

P A R TF I V E :C O N C L U S I O NN N O V A T I OC H A L L E N G E lS E S T A B L I S H EF I R M S 1 1 7 5 I: N N D

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

Business Innovation

100.,,"

Eusiness Mix
"lnnovation"

Business Mix

"lnnovation"

.'
MySAP Appi, (scM,cRM, SBM) PLM, :50%

19 9 9 I r

2004/2005

2004/200s

201 0

Today, SAP generates -50o/ool ils business with solutions which were launched to the market 5 years ago 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

F l C PARr FrvEC O N C L U S I O NI:N N O V A T I O N H A L L E N G E SN E S T A B L I S H E DI R M S

EXHIBIT

13

Example

of ESA Ecosystem

Partners

by Category

I Drru,'rNo-rr<:

Deloitte"
karingfuint

FT
8fJ5INESSO6fCI9 ,t':i'':i:

Model I\
'rlivendaw
CI'C'GE

mceilarc
lltnt!

5[lE"

w
ffi

IBtrt
lttt--

fttr

IETtrI'I

btrl

aohrl|on.

/r\ (if,A,D +#w ldoh \--.;

Source: SAP Corporate Strategy Group.

7;$lurE*gg

"One of the realitiesof a softwarecomthoughtprocesses. pany is that whateverwe deliver is never exactly what all of our customerswant or expect," he commented."Our larger customersapply immense pressureon us to close this gap as soon as possible, and they have more money. So guess what? 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 analysts and competitors did. 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

countries, was considered a midmarket customer by This approachcausedsome outsidersto question SAP.33 SAP's true performance in meeting the unique needsof smaller firms. "Microsoft considersany company with more than 500 PCs or 1,000 employees to be an Enterprise company, not an SME," said Anthony Cross, a Lead Product Manager for Microsoft. "I would hardly catego'small' 'midsize."'34 or rize a billion dollar company as In addition, SAP's direct salesforce still servedasthe primary channel for acquiring midmarket customersespecially the larger SME customers that substantiated the company's claim of being the market leader in the segment(seeExhibit 7). To increasethe volume of SME sales. SAP needed to move further down-market, where channels, customers, and competitors were quite different. Although a huge growth opportunity for SAR
'rHarley-Davidson Web site (http://www.harley-davidson.com). "lnterview.I 0/I 5/2005.

"Interview, 2l312006. r2SAPCorporate StrategyGroup.

F l IN N P A R TF I V E : C O N C L U S I O N : N O V A T I O C H A L L E N G E SN E S T A B L I S H E D I R M S 1 1 7 1

ExHlBlT

l2

Schematic

of Business

Process

Platform

'^S*@ Is&
Rendering Devices Office RFID

+ tt

Home GrownI

lsv

Source:SAP CorporateStrategyGroup.

vendorssuch as Intel and EMC could design products and services that f'eatured"plug and play" integration suchas integrators Finally,systems with SAP solutions. continue to play a core role in Accentureand IBM r.r'ould SAP'sstrategyby using the BPP to composeapplications for customers.All of thesepartnersalso could serve as costeffectivechannelpartnersfor SAP, especiallyin the (SeeExhibit l3 for examples of segment. SME customer partners.) ESA ecosystem The Dual Business Model: Application Platform Provider and Application Provider SAP did not intend to abandon its legacy applications business,at leastin the short term. in order to become a pure platform vendor. The company's sizeabledirect salesforce even as other would continue to sell SAP applications on ISVsbeganto build their own applications top of the (e.g. BPP. Justas Microsoft sold both operatingsystems (e.g. Word) in the desktop Windows) and applications software space. SAP rvould sell both a platform and

applications in the enterprise software space. Nothing would prevent an ISV from using the BPP to build a solution that competedwith a similar applicationalready being sold by the SAP salesforce. Growth lnitiative Two: Building in the Midmarfiet Mafl(et shal

SAP had competed in the SME segmentfor years, but its successdependedupon what measureone used. On the one hand, as Leo Apotheker, SAP Executive Board member and President of the Customer Solutions and Operationsgroup, was fond of saying, "SAP has 32,000 customers.How many companies are there in the ForOn tune 1,000?"30 the other hand, Hasso Plattner,who had become Chairman of the SAP Supervisory Board after retiring as Co-CEO, explained how large customers exerted a gravitational pull on SAP's resourcesand

rolnterview, | | /22 12005

117O

p A R T F r V E : c o N C L U S I o N : r N N o v A T l o Nc H A L L E N G E St N E S T A B L I S H E D I R M S F

ExHlBlT

I l

Examptes

of Enterprise

Services

(HR & Finance)

itmentNotif ication CreditComm lrom an ol the Serviceupdating creditexposure a customer internal source(e.9.,salesdepartment). CreditWorthinessChangelnf ormation of Serviceupdatingthe creditworthiness a customer.The source(e.9.the credit from an internal is information retrieved department). management CustomerBankAccountchangeRequestconf i rmation This servicechangesthe bank accountdetailsthat are masterdata. in maintained the customer CustomerlnvoiceAccountingCheckQueryResponse This servicechecks whether billingdocumentsresultingfrom in transactions logisticscan be lransferredinto the accounting system CandidateResumeQueryResponse resumetext and receiveback structured Send unstructured candidate data. CreditAgencyReportQueryResponse This service enablesthe applicationto receivean external credit rating reportvia the Internet.The credit report is attachedto the customermaster data. CustomerBankAccountListQueryResponse This serviceorovidesa list of bank accountsthat are maintainedin the customermaster data. The service expectsa customernumber as input parameter.

i CustomerAccountPaymentAdviceDeleteRequestConfrmation This servicedeletesalreadycreated payment advicesfor a given cuslomer. CustomerAccountPaymentAdviceRequestConfi rmation This serviceassigns open items to payments.The assignmentis accountleveland it is usedwhen the clearing done on a customer step. itemsis done in a following of the corresponding CustomerlnvoiceListQueryResponse This service providesa list ol invoicesfor a given payer. Further selectivecriteriaare: date range for invoices,all open invoices. CandidateCreateRequestResponse and This inboundservice receivesresume-typeinformation generatesa candidate.Detailederror data is requiredin the response. BankAccountstatementNotification Serviceto obtainthe statementol accountfrom your bank for all your bankaccounts. CustomerlnvoiceDetailsQueryResponse This servicewill providea list of line items that belongsto a and a giveninvoice. outputcontains headerline for the invoice lts a list of items. CustomerAccountPeriodBalancesQueryResponse Servicereadingthe period balanceof a customeraccount.The balanceis the amount resultingfrom the differencebetweenthe debit and credit side of the account.

SAPPHIREMay 2005. Group Presentation, source: Adaptedfrom sAP Producland Technology

The Enterprise Services Architecture Partner Ecosystem SAP hoped to attract a large ecosystemof product partnersto build innovativenew solutionson top of the BPP. As Kagermann put it, "We want to encourageco-innovationon the platform."z7With its Enterprise Services Architecture strategy, SAP was pursuing a model similar to the one Google had developedwith its "Google Maps" service in the consumer Internet space. By defining simple interface standards and allowing external programmers to accessits geographical mapping technologyvia the Internet,Google had sparkedthe independentcreation of hundreds of new, specialized Web sitesthat featuredembeddedGoogle Maps.28 With the BPP, Kagermann hoped that hundreds of independentsoftware vendors (ISVs) would build new, highly specializedbusinessapplicationsby leveraging technology and functionality from the BPP. "We will and ISVs will do processes do the big head of business

the long tail," summarizedShai Agassi, SAP Executive Board memberand presidentof the Productand TechnolJim Hagemann Snabe, General Manager, ogy group.2e Industry Solutions, liked to bring up the case of KMD' a firm that developed software that the governments of small towns in Denmark usedto 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 development of more generic businessapplication functionality (e.g. employeetime tracking) to SAP. ISVs, however,constitutedjust one part of the partner ecosystemthat SAP looked to cultivate around the of sharedstandards the ESA. Kagermannenvisionedpersonalproductivity vendorssuch as Microsoft developing widely used tools by integrating their desktop products with SAP solutions. Suppliers lower in the technology stack,suchas networking giant Cisco, could embedSAP functionality directly into their offerings, and major IT

2Tlnterview. | 122/2005. | : 8 S e e t t p : / / w w w . h o u s i n g m a p s . c o mr/ h t t p : / / w w w . c h i c a g o c r i m e . o r g / o h for examoles

rolnterview. lOl3ll2005.

I 168

F p A R T F I V E : C O N C L U S T O NN N o V A T I O N H A L L E N G E SN E S T A B L I S H E D I R M S l C I:

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

EUR I > Oeats 5 mill.

EUR l-5 oeats mill.

EUR < oeats 1 mill'

Source; SAP Investor Relations.

EXHIBIT 9 SAp Gtobat 5OOGustomer Penetration by Industry. February 2OO5 # comoanies

70

6 0- - - - - - - - - 50 40 --------------

I sne customer
! 5oo etouat comPanY

302010:

s9
CP / Retail

E = = EE 3 v# 6
Process

to 6-

E; E5
Services

Discrete

Fin. Services

#1

#1

#1

#1

#1

Notes: & Engineering Construction' A&D = Aerospaceand Defense,ME&C = Machinery, CP = ConsumerProducts, = Serv' HT = High Tech,Chem = Chemicals,tttiti= Uitt Products,O&G = Oil &Gas, Pharma Pharmaceulicals' P = Service Providers, Util = Utilities Source.'SAP Investor Relations.

F l P A R TF l v E : C O N C L U S I O N : N O V A T I O C H A L L E N G E SN E S T A B L I S H E D I R M S I 1 6 7 IN N

EXHIBIT 7

SAP Sales model, April 2OO6

CHANNEL

S E GME N T R E P OR T IN G

Direcl

lndirect

Sourcei SAP.

If Kagerrnann's corporate analysts were correct, growth strategywould executingon this three-proneed growth double-digit resultin the returnof sustained sales However, and net margins of more than 30 percent.l8 Kagermannbelieved that it rvould take until 2010 or 2011 before the BPP and other products of the new growth strategyachievedbroad adoption acrossthe SAP Defendingthe legacyenterprise applicustomerbase.re was critical in the interim. cationsbusiness Growth Initiative One: The Business Pnocess Platform Kagermannpositionedthe BPP as an extensionof an existing set of integration technologiescollectively The main purposeof NetWeaver called SAP NetWeaver. integrate disparate was to help SAP customers SAP and seamnon-SAP applicationsso that they interoperated at lessly. For example,if a sales rcpresentative the Fender guitars Con.rpanyentered an order for 300 Stratocaster

into mySAP CRM, NetWeaverautomaticallytriggered order within Fender'ssupan inventory replenishment ply chain managementapplication. Additionally, the order data also incremented Fender's accounts receivable,which were trackedwithin a third system,mySAP thencould view dataflromthese Financials.20 Customers all three applications and from other non-SAP systems on one screenusing NetWeaver'senterpriseWeb portal technology.2r NetWeaveralso served as the technology foundation for a new class of applicationscalled xApps, the first of xApps werecomposwhich SAP released late 2002.12 in ite applications that leveraged NetWeaver to integrate functionality acrossmultiple SAP (and potentially nonIn SAP) products.23 addition to developing xApps, SAP also launched a program to certify third party software partners build novel xApps and sell them to joint custo 7 tomers.2a of April 2006,SAP had developed xApps, As and partnershad developedan additional 20. Despite the flexibility of NetWeaverand xApps, the differfact that distinct SAP applicationseachaddressed hinderedoverall extensibility and ent businessprocesses innovation. For instance,if a potential customerneeded a solution that integrated20 percentof the functionality contained within three different SAP applications,that customer neededto buy all three of those applications and then use NetWeaverto integratethem. The license fees, technological complexity, implementation time, and supportcostsfor such an initiative could be prohibitive, especiailyfor a smaller business.Kagermannquestioned the continued viability of this model: We haveall thesedifferentproducts-ERP,CRM, SCM, Why andso on-and they arenot very tightly integrated. don'twantterms Companies categories? do we needthese and like ERPandCRM. Theyjust wantproductivity inno'What should this,you askyourself, vation.If you believe the architecture the productof the futurelook like?' And of if you think aboutit a little bit, you cometo the ideaof the that Architecture-something is stable, Enterprise Services and and to pre-integrated, to easier support, simpler extend application functionaround around. centered But innovate SAP2s alitv. because is whatdifferentiates that

2%ttp://www.sap.com/company/press ?pressID=2286. /press.epx 2lhttp://www.sap.com/solutions /netweaver/index.epx. 2 2 h t t p : / / w w w . l o o s e l y c o u p l e d . c o/m t o r i e s/ 2 0 0 3 / x a p p s - s a p s bo0303.html. 23http://www.sap.com /xapps/index.epx. /solutions 2 a h t t p : / / w w w . l o o s e l y c o u p l e d . c o/mt o r i e s/ 2 0 0 3 / x a p p s - s a p s bo0303.html. 2slnterview, | | 122I 2OO5.

r s S A PI n v e s t o rR e l a t i o n s r e s e n t a t i o n . e b r u a r y 0 0 5 . p 2 F r e h t t p : / / w w w . e w e e k . c oa r t i c l e 20 . I 8 9 5 .I 8 I 8 4 8 5 , 0 0 . a s p / /m

1 166

F IN I PARrFIVE: coNCLUSToN N O V A T I O N H A L L E N G E SN E S T A B L I S H E D I R M S C

ExHlBlT 6

Examples of SAP Customers,2OO5

M
OSRAM

g
Panmo*;

ffi Fr t).r
\t
5E*IEUS

AE KIA
i ,i':r r* Pr,,.r t

P H I T Ips
F

(ft Postbank $,F rrnamnnrr

PaG

B
(}ln /tidh

c@t

sFrAFrP

srnciAP^oREAtnr-rnes $),

..Ti:'?'iTf ffiTExns TRUMETTTS

H *uns

poet lUasbtngton Obc

@ ArEp-us
daCl. wcrrC|jlCt

'Aventis

BERTELSMANN

g cAr'
IIuil-erCHf,Yslre
laraat

AlHanz @

cp
cdtEAfE' mlrc:uw

E*rcssoru Wl #

rufrrsu
tg, tufttrsrsa e
Source:SAP InvestorRelations.

g,it ,f{f*
METRC}Group
value to customersand partners.Kagermannrefenedto processplatform, or BPPfor this platform as the business the tangible product of SAP's short, and it represented Enterprise Services Architecture vision. Second,SAP by would intensify its focus on the SME market segment developing more streamlined and flexible applications and expanding midmarket sales channels.Lastly, SAP would broaden the relevance of its products by offering functionality that appealed to more corporate usersand by improving user interfaces.

might be taking place in the industry, Kagermann put togethera plan to reignite salesmomentum. SAP'S NEW GROWTH STRATEGY After deliberating with his leadershipteam, Kagermann decidedto focus on threeprimary growth initiatives.First, SAP would develop an innovative Web services-based "platform"-a collection of softwaretechnologies, tools, and content-that he believedwould deliverunparalleled

I 164

FIRMS IN CHALLENGESESTABLISHED INNOVATION FIVE:CONCLUSION: PART fotal Apptications License Revenue by vendor, 2OO1-2OO5' 2005 2004
J, tzo otJ

EXHIBIT 4

2003 2,683 605 227 2 474 703

tlJ

2001 2,243 1,022 42

SAP"Oracle Solutions""" Microsoft Business

321

267

'ln million o ''Estimate s f U S d o l l a r s . exchangerate as of March 1 of each year. based on Euro/dollar "'Estimatebased on assumptionol licenserevenuepercentage total revenueequalto 40 percent of sources:SAP Oracle,Microsoftannual reports;htlp://www.oanda.com/convert/{xhistory

(e.g.,Microsoft Excel and such as desktopapplications Access) and/or human solutions such as bookkeepers. (SeeExhibit 4 for more dataon the competitivelandscape market.) applications in the enterprise The dynamics of the enterprisesoftware industry many were markedby "coopetition,"primarily because stack. of vendorsplayedin multiple areas the technology SAP, for example,did not have a significantpresence softwarearena,but Oracle did. Consein the database quently, despitethe fact that SAP and Oracle were fierce over 60 space, applications in competitors the enterprise to percentof SAP customersusedOracle databases store Furthermore, the data usedby their SAP applications.rr had SAP and Oracle salespeople been known to collabIn orate on joint salesopportunities. a similar fashion, IBM supplied its DB2 databasesoftware to many SAP customersand provided application hosting services to and SAP.However,IBM also offered tools, technologies, consulting services to help enterprise customers build their own customtzed applications instead of buying applicationsfrom vendorslike SAP. standardized SAP Company History Founded on April l, 1912, by five former IBM engineers,SAP employed over 35,000 employeesworldwide in 2006.12Headquartered in Walldorf, Germany, the company served more than 32,000 businesscustomers SAP'sproductline consisted in 120differentcountries.l3 primarily of a set of applications called the "mySAP BusinessSuite" that included applicationsfor enterprise resourceplanning (mySAP ERP), supply chain management (mySAP SCM), customer relationship management (mySAP CRM), and severalother areas.SAP also offered industry-specificfunctionality for companies in

(SeeExhibit 5 for a targetindustries.'o over 25 dift'erent the SAP solutionportfolio.) rnoredetailedoverviewof For most of its history, SAP had focused on selling applicationsto the largeenterprise complex,standardized (SeeExhibit 6 for a sampleof SAP cusrnarketsegment. tomers,Exhibit 7 for SAP's salesmodel and Exhibit 8 for paid SAP recentdeal size trends.)Typically,companies of usethe basicversion millions of dollarsfor the rights to as the "license a softwareapplication-a charge known fee"-and then incurred additional costs to customize the softwareto their specificneeds,deploy it within their and maintain information technology(IT) infrastructure, systhe majority of cases, and upgriideit in the future. In IBM, or smaller (SIs)suchas Accenture, telnsintegrators regionalfirrns performedthe implementationand deployment of SAP software. SAP's best-known enterprise an applicirtion. ERP solutionnamed"R /3," had generated from billions of dollars of license and service revenues 15 1990s. As a largecompaniessinceits launch in the early result.in severitlindustriesover 90 percentof Global500 companiesused softwarefrom SAP. (SeeExhibit 9 for a chartof SAP industrypenetration.) In the late 1990sand early 2000s,SAP had developed productto the rnySAP ERP applicationas a successor as CRM and R /3 and diversifiedinto non-ERPareassuch SCM. Betu,een1999 and 2001, SAP also spun offtwo to subsidiarycompanies,SAPMarkets and SAP Portals, technology' focus on building and selling lrtternet-based back intothe both of thesesubsidiaries SAP re-integrated parentcompanyin20O2. Internally, a seven member Executive Board govof erned SAP Kagermann, who took over leadership SAP the company from his former Co-CEO and original co-founder Hasso Plattner in May of 2003, also served Board.(SeeExhibit10 as the Chairmanof the Executive first corporatebiography.)Kagermann's for Kagerntann's

| |http://www.eweek.com /article2| 0,1895,1790357,00.asp ']SAP 2006 annual report. rrSAP 2006 annual reDort.

llhttp:// wrv. ap.conr olution/index.epx /s s u s r 5 S R Pl g g - s - 1 9 9 9 n n u a lr e p o r t s . a

FIRMS I 163 lN PART FIVE: INNOVATION CHALLENGESESTABLISHED CONCLUSION: ExHlBlT 3 Depiction of the Technology Staak

lENpUSERI Applrcation Application Application Recovery Ava bilitv Perf rla ormance
1t'r ttl

Manulacturing HR,Financials, "eenabledmyAP.com applications Tran Plugins Internet sactions lor Brcwser Mtcrosoft Oracle, DEZo, Informix, SQLSeruer Unix, Windows /2000 NT

Internet Selers Application Seruers,

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

product categoriesincluded enterpriseresourceplanning (CRM), sup(ERP),customerrelationship management ply chain management SC\'l t, and analyticsor business t included intelligence(BI). Primary customersegments (LEs), snrall to nridsizebusinesses or large enterprises (SMBs or SN{Es).and srnalloffice or home enterprises (SOHOs).Eachcustomer feaoffice businesses segment tured customerswith verv different needs,and no one vendordominated thrcescsrnents. SME segment, The all also known as the "midmarket." was particularly broad, defined by some vendors and analystsas including any company with between l0 and 2,500 employees. In 2005, SAP's share of the worldwide enterprise applications market by total revenue was approximately 9 percent,the largest of any industry player.aIn March for 2006, SAP reportedthat its licenserevenues business applications over the most recent four quarterswere more than three times those of its closestcompetitor,Oracle.5 However, Oracle recently had made aggressive moves to consolidate the industry. By purchasing PeopleSoft (which itself had acquired another establishedvendor, J.D. Edwards,just two yearsearlier) in January2005 and
'SAP's 2005 software and nraintenancerevenues divided by 2005 worldwide market size estimatefrom IDC. sSRP 2006 annual reDort.

SiebelSystemsin January2006, Oracle effectively had creIn ateda duopoly with SAP in the LE segment.b the SME segment,SAP and Oracle both competedwith Microsoft's Business Solutionsdivision and a host of othercompanies suchas SageSoftwareand Lawson Software.i In addition, new technological developmentssuch as softwareas a service(SaaS)and open sourcesoftwarewere growing in popularitywith SMEs and SOHOs,and upstart vendors such as Salesforce.com,NetSuite, Entellium, and SugarCRM were attacking the enterpriseapplications market from the low end.8SAP stated that basedon software 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 company that launchedits first servicesin February 2000, already claimed 20,000 SME accounts; Sage Software claimed 4.7 million.l0 Furthermore. millions of smaller companies managed their operations using alternatives
oOracleWeb 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. 'ohttp://blogs.zdnet.com/SAAS/?p=103,Salesforce.com Web site (www.salesforce.com), Sage Software Web site (www.sage.com).

1162

pARr FIVE:coNCLUSToN: rNNovATroN rN FIRMS cHALLENGES ESTABLTsHED ExHlBlT 2 SAP Stock Prace (NySE) Peilormance
w
r@, .60l

Relative to Peers

Five year performancecomparison: June 2001-June 2006

ffilEEru s

.2A7

ol

-402

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2d{

Y&or

1rc.

httn://f

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Source: Yahoo! Finance

EXHIBIT 2 to Peent

(continued)

SAP Stock Price (NySH Performance

Relative

One year performance comparison: June 2005-June 2006

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

software technologies ran 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 2006-2010 Forecast, Doc # 2 O l ' 7 9 1M a y 2 0 0 6 . ,

PART FIVE: INNOVATION CONCLUSION: CHALLENGESESTABLISHED lN FIRMS 1 163 EXHIBIT 3 Depiction of the Technology St tck [lNDUSx-]

Applicalron Applrcation Application Recovery Ava bilitv Pedormance rla 'lt'l

rtl

g HR,Financials, Manufacturin "+enabledmySAP.com applications Brorvser Plugins Internel saclions f or Tran Oracle, DE29Inlormix, Microsoft SQLServer Unix, Windcryvs 12000 NT

Application Seruers, Internet Senrers

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

productcategories includedenterprise resource planning (ERP),customerrelationship (CRM), supmanagement ply chain management or tIjC\,1 and analytics business t, intelligence(BI). Primary customersegments included (LEs), snrall to nridsizebusinesses large enterprises or (SMBs or SN,lEs). enterprises and snralloffice or home (SOHOs).Eachcustolner officebusinesses segment featured customelsrvith verv dit'lelentneeds,and no one vendordominated thrcescgrtrcnts. SME segment, all The also known as the "rnidmarkct."u'asparticularlybroad, definedby some vendorsand analysts includingany as companywith betweenl0 and 2,500employees. In 2005, SAP's share of the worldwide enterprise applications market by total revenue was approximately 9 percent,the largest of any industry player.aIn March 2006, SAP reportedthat its licenserevenues business for applications over the most recentfour quarterswere more than three times those of its closestcompetitor,Oracle.5 However, Oracle recently had rnade aggressivemoves to consolidate the industry By purchasing PeopleSoft (which itself had acquired another establishedvendor, just two yearsearlier) in January2005 and J.D.Edwards,
'SAP's 2 0 0 5 s o f t w a r e a n J n t J i n t ( . n i l n a cc \ e n u e s divided by 2005 r worldwide market size estimarefrom IDC. 5SAP2006 annual reDort.

SiebelSystems inJanuary2006,Oracleeffectivelyhadcreateda duopoly with SAP in the LE segment.b the SME In segment, SAP and Oracleboth competedwith Microsoft's Business Solutionsdivision and a host of other companies suchas SageSoftwareand Lawson Software.i In addition, new technologicaldevelopments such as softwareas a service(SaaS)and open sourcesoftwarewere growing in popularitywith SMEs and SOHOs,and upstart vendors such as Salesforce.com,NetSuite, Entellium, and SugarCRM were attacking the enterpriseapplications market from the low end.8SAP stated that basedon softwa.rerevenuesit was the midmarket segment leader, but several other companies had a greater number of SME customers than SAP.e For example, Salesforce.com, a company that launchedits first servicesin February 2000, already claimed 20,000 SME accounts; Sage Software claimed 4.7 million.'0 Furthermore,millions of smaller companies managed their operations using alternatives
oOracleWeb site (www.oracle.com). TEarlierin 2004, Microsoft had initiated talks to acquire SAP, but the negotiations had broken down due to the anticipated complexities involved in combining the two companies. /article/05/08/05 /HNmidmarket_ I .html. "http://www.infoworld.com eSAP Investor Relationspresentation, February 2005. '%ttp://blogs.zdnet.com/SAAS/?p=103, Salesforce.com Web site (www.salesforce.com), Sage Software Web site (www.sage.com).

l F P A R TF I V E : C O N C L U S I O NI:N N O V A T I O C H A L L E N G E SN E S T A B L I S H E D l R t v l s I 1 6 1 N

EXHIAIT I

Selected SAP Financial Results, 1997-2OO5r 2005 2004 7,514 7.0% Revenue by Business Area 7,O25 - 5.2% 7,413 1.0% 7,341 17.2"/"

TOTALREVENUE 7" Change from Prior Year

8,513 13.3%

(License) Software Maintenance Consulting Training Other

2,783 3,175 2,1 9 3 343

2,361 2,823
1 0-71

302 57

2,148 2,569 1,954 299 55

2 2q1

2,423 2,204 414 81

2,121 2,083 466 90

Revenue by Geographical Region Europe,MiddleEast & Africa Americas Asia Pacific 4,513 3,000 1,000

4,223 2,424 867

3,970 2,216 839

4,044 2,502 863

3,786 2 724 831

SoftwareRevenueby Category
Enterprise ResourcePlanning Mgmt. CustomerRelationship SupplyChainMgmt. Supplier Relationship Mgmt., Business Intelligence, Other ProductLifecycleMgmt. O P E R A T I N GN C O M E - I Pro Forma Operating Margin %" NETINCOME Earnings per Share (Diluted) 1,'t57 603 509 352 162 2,410 28.3% 1,496 4.83
oon cul

480 223 167 2,086 27.8% 1,311 4.22

802 440 477 273 156 1,880 26.8% 1,077 3.47

927 473 464 259 168 1,688 22.8% 509 1.63 1999 5 , 11 0 37.8% 705 13.8% 21,488 25.1% 60.8% 0.238 1998 4,316 44.0% 572 13.3% 19,308 n/a n/a 0.224

941 445 583 416 196 1,471 20.0"/o 581 1.85 1997 3,022 49.9% 363 12.0% 12,856 n/a n/a 0.235

2005
TotalRevenue o/"Software Revenue R&D Spending As 7. of TotalRevenue Numberof Employees.-. % in R&D % in EMEA Region Revenue per Employee 8,513 32.7% 1,071 12.6% 35,873 32.4% 60.1% 0.237

2004
7,514 3 1. 4 % 900 12.0% 32,205 30.7% 64.1% 0.233 7,O25 30-6% 832 11.8% 29,610 29.9% 67.0% 0.237 7,413 30.9% 898 12.1% 28,797 27.7% 66.8% o.257

2001
7,341 35.2% 866 11.8% 28,410 28.0% 64.9% 0.258 '

2000
6,265 39.2% 457 13.7% 24,177 3 1. 0 % 63.3% 0.259

'All figuresshown in millionsof Euros;data sourcedlrom SAP annual reportsand SAP Web site (www.sap.com). "Before stock-based comoensation and acouisition relatedcharoes. "'Measuredby total heads before2000, and by frlt time equivalJnts(FTE) in 2O0O years. and all subsequent

As Kagermann deliberated his options, three questions recurredin his mind. First, how could he determine whether the current paceof executionregardingthe new growth strategy was right? Moving too slowly would give SAP's competitors precious time - but moving too quickly could agitate employeesand alienatecustomers who did not sharea senseof urgency toward SAP's new strategic the direction.Second, how shouldhe sequence rollout of changes still required? And third, given the growth of SAP's industryenvironment and the resurgent

how should he balanceresourceallocalegacy business, tion betweenshort and long-term opportunities? TNDUSTRy AND COIIPANy The Enterprise OVERVIEW I nd ustry

Software Ap plications

Enterprise software applications helped companies achieve cost efficiencies, make better decisions. and increase customer value. They did so by automating (e.g. recording and formerly manual businessprocesses