Global Business Case Study - SAP Profile, History and Status Quo

In 1972, five former IBM employees had the vision of a standard piece of application software for real- time data processing. To make this vision a reality, they founded a company called System Analysis and Program development, later known as SAP, in Weinheim, Germany. After only a few months of development, the company successfully released the first version of its software to interested clients.

Within its first year, the company built up the necessary customer base, including the German branch of Imperial Chemical Industries in stringen, to generate over 620,000 DM (approx. 317,000 EUR) in revenues. Over the following years, SAP software solutions became increasingly advanced, allowing customers to handle purchasing, inventory management and invoice verification. By the end of 1976, SAP and its 25 employees had generated 3.81 million DM (1.95 million EUR) in revenue.

The next decade ushered in major growth for the German-based company. After moving their headquarters to Walldorf, SAP GmbH was founded and efforts were taken to widen the capabilities of software solutions. These developments ultimately led to the release of SAP R/2 in 1979, enabling material management and production planning for new and existing customers. Thanks to these software enhancements and new server technology integrated into SAP headquarters in 1979 and 1980 the company was able to expand its customer base to over 200 companies by the end of 1981.

On its 10th anniversary, SAP reached the 100-employee milestone and had successfully expanded its customer base to companies in Austria and Switzerland. SAP (International) AG was founded in Switzerland as a starting point for SAP's efforts in foreign markets. In addition to this new base outside of Germany, the headquarters in Walldorf was expanded to accommodate further employees and provide a new base of operations for further growth. The transition from a private, limited-liability company into the publicly traded SAP AG in 1988 enabled the company to finance its further investments.

When SAP R/3 was presented to the public in 1991, SAP had long outgrown its initial borders. With over 14 subsidiaries in Canada, China, Australia and other important markets all over the world, SAP had more than 2,200 customers in 31 different countries using its software. After the fall of the Iron Curtain, SAP was one of the first companies to enter the Eastern European market. They released a specialised version of SAP R/2 for the Russian market. Strengthened by fruitful cooperation with software giants like Microsoft and expanding their workforce to over 3,600 employees, SAP reached over 1 billion DM (approx. 510 million EUR) revenue in 1993, establishing themselves as one of the most important players in the software market.

The end of the century saw SAP rise to become the world's leading provider of e-business software solutions for companies. Thanks to their overall success on the stock market and further increasing revenues, SAP used strategically suitable acquisitions to add to their product portfolio and thereby in- crease their employee and customer numbers. With the strategy introduced by co-CEO Hasso Plattner in 1999, the foundations of success in the Internet-driven days of the new millennium were built. The

transformation for a simple component vendor to a full solution provider attracted numerous new customers, including the financial service provider MLP, Hewlett-Packard and later, Nestl signing the biggest SAP contract to date.

The global financial crisis in the first decade of the new millennium forced SAP to make some cuts in reaction to a declining stock market. During that time, around 3,300 employees had to be dismissed in order to reduce expenses. Nowadays, SAP has recovered from the crisis and employees more than 66,000 employees to serve over 253,000 customers worldwide. Thanks to mostly successful acquisitions, partnerships and newly built subsidiaries, SAP has established offices in 130 countries and annual revenue of over 16 billion EUR.

The Software Industry

Very few industries undergo as many changes and developments as the software industry (see PWC 2014). Technological evolution and the fact that more and more businesses and people are relying on software solutions fuels the constant growth of numerous big software companies like SAP, Microsoft and Oracle. Furthermore, mobile devices, cloud technology and other developments are starting to reshape the way software is used and forcing software companies to rethink their strategies. SAP has already acted on those ongoing trends and in 2011 announced the acquisition of Success-Factor, a leading expert for cloud technology.

Table 1: SAP Revenue Categories in 2013

Revenue categories

%

Cloud subscriptions and support

4

Software

27

Support

52

Software and software-related services revenue

Professional service and other services Total revenue

One-time revenue Source: SAP, 2014, p.1

83

17 100

Consulting

13

Other services

4

Recurring revenue

In 2013, 4% of SAP's revenues (see Table 1) came from cloud subscriptions and over 50% from support. Based on the new product elements of their latest solutions concepts, this number is likely to increase. Overall, most of the revenues in this industry are still made via the traditional licensing model, but experts suggest that in 2016 almost 24% of all software related revenues will be based on cloud-related, subscription revenue (PWC 2013, p. 8). These reshaped business approaches carry some potential risks. Subscription models such as a cloud make it relatively easy and interesting for customers to switch companies after a short amount of time; therefore, product solutions must be attractive enough to ensure customers' loyalty to the given solution (PWC 2013, p. 12).

Traditionally, US companies are the leading providers of software solutions. Only a few of the biggest and most successful companies in this industry are not based in the United States . SAP is by far the biggest European software company. The fact that most of the biggest software companies originate in the United States also leads to a certain industry focus on this market. SAP has already established an office in the United States to gain access to possible cooperation partners and better access to technology that emerges from this very important market.

Go Big - Go Global

SAP's Product Strategy

The basic product line introduced by SAP in the early 1970s was offered support for basic functions, such as finance, human resource management or manufacturing. Since then, SAP has added various functions to meet enhanced requirements. Their application suites R/2 (1981) and R/3 (1991) had a particularly large influence on their success and can be seen as industry milestones. As the Internet

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gained importance in the late 1990s, R/3 was rediscovered as a tool for managing globally operating businesses (Lehrer, Schlegelmilch and Behnam 2009, p. 101). Therefore, SAP spent the following years creating solutions suitable for different work environments and incorporating companies' major tasks.

. Since the 1990s, SAP has added new features to its initial product line to become a full-service provider that can cover almost every task demanded by their clients. The introduction of SAP HANA, a powerful database tool, in 2010 laid the foundation for the incorporation of new features, such as the support from mobile devices and cloud technology.

Differentiation of a Standardised Product to Fit Local Markets

With a global customer base in over 180 countries, SAP uses the internationalisation of their products as a key element to differentiate themselves from competitors. Thanks to customised packages for individual customers in line with different legal and language requirements, their widely standardised software solutions can be implemented in various companies worldwide. So far, SAP has delivered over 60 country versions that meet the respective legal requirements and translated products into 39 different languages.

Localisation

Translation

Technical enablement of a system to operate globally:

Multi-language support

Code pages/unicodes

Time zones

Multiple currencies

Calendars

Business solutions are not viable without localisations of content:

Speak the language of the locals

Local best business practices

Legal requirements and statutory reporting

For SAP, international expansion of software solutions involves three main ideas . Internationalisation covers the basic possibilities for making suitable software solutions that can be implemented during the basic development of the software, enabling customers to use different languages, work in different time zones, and adjust to the given currency and other minor features. This can be regarded as highly standardised content that provides a foundation for further adjustments to suit the given environment. By localising to incorporate local best business practices and meet local requirements and statutory reporting, globally active companies and their employees can easily adjust to business demands in countries different to their usual base of operation. Finally, translation into the local language is necessary, as language localisation is a central factor of success to reach new customers.

Global Activities of SAP

One strength of SAP's global operations is that they enable their customers to run a global solution to their country-specific needs. Various subsidiaries in key markets are part of SAP's strategy to gain local knowledge that can be used to differentiate of their products. With over 1,100 employees focusing on this issue, SAP can successfully implement business solutions in a majority of the market. SAP recently announced a further investment in international growth to strengthen their market position in economies such as Brazil, India and Russia. SAPs Globalisation Services (GS) build on the key software features discussed earlier. It is through these local service centres, that customers get the necessary support to find the best solutions to their goals in the given market.

Another very important aspect of SAP's success is their international research & development facilities. The SAP Labs and SAP Research organisations cooperate with partners, customers and universities to create new global solutions.

SAP Labs or development centres are located in major areas worldwide. The most important facilities are located in Germany, India and the USA. Global key performance indicators and development standards to ensure a certain level of quality guide the work of every station. SAP research centres are always co-located with a partner university or a development centre. Thanks to these facilities, SAP is able to react to the requirements of customers and markets alike.

These locations are chosen for numerous reasons. Being close to potential and existing customers, gives SAP personal contact with them - allowing SAP to not only present new technology and products, but also to gain knowledge about their customers' special needs. It also ensures that SAP is able to find new employees, new technology and new product ideas almost anywhere in the world. Being close to all the world's major technology hubs provides them with a keen advantage over other competitors.

SAP has recently begun to build up a very strong presence in India. With over 4,000 employees in their new facilities in Bangalore, it is already their second biggest branch worldwide. India is a very attractive market for several reasons. In addition to more general advantages already listed that are true for most subsidiaries, India also offers a few additional, almost unique benefits. The highly skilled workforce is a crucial factor in possible success. Well-trained college graduates are keen to work for big international companies like SAP. Since an entry-level worker will only earn around 7,900 EUR a year, SAP saves a lot of money by shifting their production and development facilities to India (Handelsblatt 2011).

Approaching New Markets - Forming a Global Brand

With the launch of their new product line mySAP.com in the late 1990s, SAP drastically changed their brand and its perception in the market. Many critics had argued that SAP was late in recognising e- commerce as a serious and important aspect of the overall software market. Therefore, SAP's management was keen to use the launch of mySAP.com to reinvent their brand image. By replacing the company's original brand logo with the new mySAP.com product line logo, the company tried to reshape their market position.

Unfortunately, this drastic step led to further confusion in the brand's perception and also had some damaging effects on brand equity. In addition, the logo appeared with different slogans all around the world, thus further confusing customers. Between 1997 and 2000, SAP used different slogans such as "We Can Change your Business Perspective", "A Better Return on Information", "The Time of new New Management", and "You Can. It Does." A similar approach was used for the company's online representations. With one global website, various local country sites and numerous subsidiary company sites, no clear corporate design could be identified.

This was a major obstacle that had to be overcome for future, international success. In their attempt to cater to customers' demands in numerous markets all over the world, the insufficiency of each individual offering was possibly harming their success. In order to gain the desired global market power and successfully build up a unique experience for their customers on a global basis, they had to reinvent their brand appearances. After all, the reputation they had already built was a unique resource to transfer into new markets.

At the SAPPHIRE conference (established by SAP to present new products and solutions to the media, customers and analysts) the new Global Chief Marketing Officer, Martin Homlish, announced the new vision for SAP marketing efforts to give the company a fresh look. One of the ideas behind the marketing concept was the transition from a German company selling worldwide to a true global player, able to compete in every market. To align with these stated goals, the team around Homlish decided to slowly transform the overall brand from mySAP.com back to its original. Figure 3 shows the newly formed brand architecture. It features a strong master brand and several sub-brands that represent individual product solutions. These changes were complemented by newly designed Internet representations that streamlined the former websites and establish one global site that, like the product itself, was able to adjust to the language of its current viewer. Thereby, the content was easily distributed in every market in a similar fashion without adding too many local influences.

As shown in this case study, SAP has made enormous efforts in the last 40 years to develop from a small 5-man start-up to one of the most important companies in the software industry. Thanks to their strategic measures to localise most of their products and solutions, SAP has reached customers in over 180 countries. Supported by the newest technology, enhanced R&D institutes and diversified input from different cultures and markets, the company seems able to adapt to most market requirements. Their extremely strong brand names and clear communication guidelines have strengthened their product.

Recently, rumours have surfaced suggesting a possible relocation of SAP's main operation from Germany to the United States. This indicates one of its important motives in international location selection is resource seeking: Co-CEO Jim Hagemann Snabe stated that the most important industry impulses come out of Silicon Valley and a stronger presence in that area could only benefit SAP (Handelsblatt 2013). In 2011, SAP started a project in that area, already showing their interest in this location. In their new complex named AppHaus, SAP gathered a mix of experienced developers from their German headquarters and some new employees to design and develop new technology (Somerville 2013). Through this project, SAP is trying to stay ahead of possible competition and gather fresh, new impulses for the rest of the company. Innovation is an important factor in this industry, and SAP sees Silicon Valley as a way to access new ideas.

Source: Morschett, D., Schramm-Klein, H. and Zentes, J. (2015). Strategic International Management: Text and Cases. Wiesbaden, Germany: Springer Gabler.

Question:

1.There were two strategies critical to SAP's global success - Internationalisation and Research & Development. Describe each of these strategies in terms of how these supported SAP's growth into international markets.

2.'Recently, rumours have surfaced suggesting a possible relocation of SAP's main operation from Germany to the United States.' Identify and discuss the pros and cons of such a move and how this applies to SAP's global business strategy.