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PARTFIVE:CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS t I 79

ExHlBlT 17 GOAL Organizational Structure, 2OO5'

Benelits of the RealignmentI Clearhandoffs rom onegroup to thenextr Consolidation f industriesr Consolidation f the business uite

Source: APCorporatetralegy roup.

try to please he [SVs . and the applications uy hates heISVs because e partlycompetes ith them.So Shaiownsboth.Similar lv. n services,f yo u haveon eperson wningcustom development nd anotherpersonwho is supposedobui ld morc productized ervice s,t createsr ict ion. And intermsof sales ndnrarketing, eo can now mplement, er yquickly. u'orlclu'idestructuresand programstargeting themidmarket.We are in a big transition with the EnterpriseServicesArchitecture. and the hope is that GOAL offersless rict ion nd rnore oeedwithin eachunit.52

r DENTtFytNG TRANSFORMATTONCHALLENGES IN 2OO5Although he believed that GOAL would help the com-pany increase alignment and execution efficiency,Kagermann knew that executing on the new growthstrategy posed severalchallenges hat he could no t solvewith organizational restructuring alone.Clarification of the Strategy andMotivation of EmployeesKagermann needed SAP employees to understand andembrace the grorvth in i t ia t ives, and especia l ly the vision

r Single ace o the marketr SAPLabs responsibility n oneorganizationI Strong ownership o developandmanageecosystems

of the EnterpriseServicesArchitecture.The new growthstrategy nvolved uncertainty,change,and the sacrificeof clear short-termopportunities,and he knew that notall employeeswould agreewith his decisionand timingto pursue t. Kagermannand Heinrich were particularlyconcerned with keeping veteran employeesengaged."The veteranshave 10, 15 years of deep integrationknowledge,"statedHeinrich. "They are not the peoplewho instigate change,but they make success appen fyou can align them in the right direction. It's interestingfrom an HR perspective. ou have o tell thepeoplewhoare oo aggressive,This is an evolution,' and he peoplewho are oo slow, This is a revolution."'5 3

Kagermannwas cognizant that thousandsof lowerlevel implementation issues lurked beneath the sur-face of the threegrowth initiatives,and that he neededstrongcommitment from all of his employees n orderfor SAP to have any chance at achieving ts goals. AsHerbert Heitmann, Senior Vice President,Global Com-munications, emarked,"At the board level, it is ofteneasy o achievean agreement. he toughpart startswhenyou are in the implementationprocessand nobody hastold the rest of the organization hat there s a need orchangemanagement.Why arewe doing this andwhy are

sr lnterview.I l / l l /100.5 s3lnterview.ll/2212005.

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I 178 pART IVE: oNCLUSToN:NNovATroNHALLENGESNESTABLTsHEDrRMSEXHf BIT l6 SCORE Organizationat Strucrure,2OO4

Office ofthe CEOGlobalComm.Corp.ConsultinglnlernalAuditGlobal P

Finance&Admini-stration

HumanResources

Global Field OrganizationGlobal Service and Support

TechnologyPlatformSolutionManagement

SAPGonsulting

GlobalMarketing

Solution Managementincludescapability or bothindustryspecificsolutionsandcross-industry olutionsr IndustryBusinessUnit (lBU)r ApplicationSolutionManagement ASM)

Application Deyelopmentcombines he developmentexecution apabilityof both theindustries nd the cross-industry olutions

Global ilarketing andGlobal Communicationswill providesharedservices othe SolutionManagementfunctionof the BSGs (formatdeliverymechanism)

ManulacturingIndustriesr SolutionManagementr AppllcationDevelopment

ServiceIndustriesr Solutionuanagementr ApplicationDevelopment

Financlal &Publlc Servicesr SolutionManagementr AppllcatlonDevelopment

ApplicationPlafform& Architecture

Applicatlon'Development

Industry-Specifc DevelopmentCross-industry evelopment

Source;SAPCorporateCommunications eam.

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PARTFIVE:CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS 1177

EXHIBIT l5 Best-Run SAP Six-Tier Schematic

Vision

SAP Sttategy

Structure Policies KPIS

Gors Values &New Requiremonts

Source:SAP CEO BriefingPresentation, ul y21, 2005' London'

manydifferentSAP product, ndustry,andsupport eamsto Zencke'sgroup in order to acceleratemomentum onthese nitiatives.Kagermannhad statedpublicly that theBPP would be made accessible o ISVs by the end of2006, and the Breakthrough nnovation group played acritical role in achieving his milestone.KagermannnamedAgassias he eaderof theProductsgroup. In his new role Agassimaintainedsole responsi-bility for the NetWeaver echnologyplatform, and alsotook over leadershipof all of SAP's product teams,industry teams, and existing applications' Kagermanncharged Agassi with continuing to improve Netweaver,expandingthe product partnerecosystem,and making allexisting SAP applications nteroperablewith the BPP'The Products group was SAP's largest organizationalunit, and by late 2005, Agassi's NetWeaver team alonehad grown from 1,500members n 2OO2 nto a 2,500-persongroup."'Apotheker was namedheadof the CustomerSolutionsand Operationsunit, and was chargedwith transformingSAP'ssales unction into a more volume-drivenmodel thatsupported he company'sgoal of acquiring tens of thou-sands f ne* midmarketcustomersn thenext five years' n

+ lT "embedded" n business

* " ESA"- the next big thing

{ The organizationalramework

9 The winningculture

-$ GlobalManagement&LeadershiP; alentManagement

I CascadingStrategyand Goals

thisposition,Apothekerwould play a critical role n defin-ing the valuepropositionof the businessprocessplatformin sucha way that both largeand SME customers ound itcompelling. Kagermannwas also relying upon Apothekerandhis team o convincecustomers o adoptSAP solutionsin broader nternal usagescenarios.Together.Apothekerand Agassi served as co-presidentsunder Kagermann'Agassi led the Product LeadershipTeam (PLT)' a groupoisenior developmentexecutives,and Apotheker led theField LeadershipTeam (FLT)' the PLT's counterpartonthe customer-facingend of the business'Board member Claus Heinrich, who previously ledthe Manufacturing Industries BSG under the SCOREstructure. ook over the Production group andthe HumanResourcesand Processes roup. Gerd Oswald, anotherkey player in the developmentof SAP R/3, assumedownership of Global Service and Support, and CFOWernerBrandt headedFinanceand Administration'After he implemented the changes' Kagermanndescribed omeof his reasoningbehindGOAL:

In theoldstructure,t wasextremelyhallengingo achievealignment cross roduct roups, upport roups' nd ieldunits.Now,withineach oxeacheader an eallyoptirnize'Forexample, ewouldnotbeable o executen heBPP fonepersonmanagedpplicationsndanother ersonman-aged SV partnersnd heplatform'Theplatform uy willsr lnterviewwith ShaiAgassi,10/31/2005

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PART IVE :CONCLUSION:NNOVATIONHALLENGESN ESTABL ISHEDIRMS 1175

EXHIBIT 14 SAP Roadmap and Goals, February 2OO5

SA P wil l launch th el i rst BusinessProcess Platformto lhe marketI by enriching theSAP NetWeavercomposit ionplatform withready-to-runbusinessprocessesI accessible throughEnterpr ise Services

Connect iv i ty Businessnnovation

100.,," Eusiness Mix Business Mix"lnnovation" "lnnovation"

. 'MySAPAppi,(scM, RM,PLM, BM):50%

199 9 2004/200s 201I Today, SAP generates -50o/o l il s business with solutions which

were launched to the market 5 years agor In 5 years from now, cont inuous innovai ion wi l l a l low SAP togenerate -50% ol its business with new solutions

Source:SAP CorporateStrategyGroup,SAP InvestorRelations.

2004/2005

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1172 PARr rvECONCLUSION:NNOVATION HALLENGESN ESTABLISHEDIRMSEXHIBIT 13 Example of ESA Ecosystem Partners by Category

Deloitte"karingfuintmceilarc

lltnt!5[lE"

l ttt--IETtrI'I

btrl aohrl|on.

7;$lurE*gg

W I Drru,'rNo-rr

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PARTFIVE: CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS 1171

ExHlBlT l2 Schematic of Business Process Platform'^S*@RenderingDevices

HomeGrownlsvSource:SAP CorporateStrategyGroup.

vendorssuch as Intel and EMC could design productsand services hat f'eatured plug and play" integrationwith SA P solutions. inally,systemsntegrators uc hasAccenture nd IBM r.r'ould ontinue o play a corerole inSAP's trategyby using he BPP o composeapplicationsfor customers.All of thesepartnersalso could serveascosteffectivechannelpartners or SAP,especially n theSM Ecustomer egment.Se eExhibit 3 fo r examples fES Aecosystem artners.)The Dual Business Model: Application PlatformProvider and Application Provider SAP did notintend to abandon ts legacy applicationsbusiness,atleast n the short term. in order to becomea pure plat-form vendor.The company'ssizeabledirect sales orcewould continue o sell SAP applications ven as otherISVsbegan o build their own applications n top of theBPP. ustas Microsoftsoldboth operating ystems e.g.Windows)and applications e.g.Word) in the desktopsoftware space. SAP rvould sell both a platform and

Is&Office RFID+t t

applications n the enterprisesoftware space.Nothingwould preventan ISV from using the BPP to build asolution hat competedwith a similar applicationalreadybeing soldby the SAP sales orce.Growth lnitiative Two: Building Mafl(et shalin the MidmarfietSAP had competed n the SME segment or years,butits success ependedupon what measureone used. Onthe one hand,as Leo Apotheker, SAP ExecutiveBoardmember and Presidentof the Customer Solutions andOperationsgroup,was fond of saying, SAP has 32,000customers.How many companiesare there in the For-tune 1,000?"30On the other hand, HassoPlattner,whohad becomeChairman of the SAP Supervisory Boardafter retiring as Co-CEO, explainedhow large custom-ers exerteda gravitationalpull on SAP's resourcesand

rolnterview, | | /22 12005

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117O pARTFrVE:coNCLUSIoN: NNovATloN HALLENGES N ESTABLISHEDIRMS

ExHlBlT I l Examptes of Enterprise Services (HR & Finance)CreditCommtmentNotifcationService pdatinghe creditexposure l a customerrom aninternal ource e.9., alesdepartment).C editWorthinessChangelnformationServiceupdating he creditworthiness f a customer.Theinformations retr ievedrom an int ernal ource e.9. he creditmanagement epartment).CustomerBankAccountchangeRequestconf i mationThisservice hanges he bankaccount eta i ls ha tar emaintainedn the customermasterdata.CustomerlnvoiceAccountingCheckQueryResponse CandidateCreateRequestResponseThis servicecheckswhetherbillingdocuments esulting rom This nboundservice eceives esume-typenformation ndtransactionsn logistics an be lransferred nto he accounting generatesa candidate.Detailederror data is required n thesystem response.CandidateResumeQueryResponse BankAccountstatementNotificationSendunstructuredesume ext and receivebackstructured Service o obtain he statementol account rom your bank or allcandidate ata. yourbankaccounts.CustomerlnvoiceDetailsQueryResponseThis servicewill providea list of line tems hat belongs o agiven nvoice.ts output ontains header ine or he nvoice nda list of items.

CustomerAccountPeriodBalancesQueryResponseService eading he periodbalanceof a customeraccount.Thebalance s the amount esulting rom the differencebetween hedebitand creditside of the account.

CustomerAccountPaymentAdviceDeleteRequestConf mationThis servicedeletesalreadycreatedpaymentadvices or a givencuslomer.CustomerAccountPaymentAdviceRequestConf mationThis serviceassignsopen tems o payments.The assignmentsdoneon a customer ccount evelan d t s usedwhen he clearingof the correspondingtems s done n a fo l lowing tep.CustomerlnvoiceListQueryResponseThis serviceprovidesa list ol invoices or a givenpayer.Furtherselective riteriaare: date range or invoices,al l open invoices.

CreditAgencyReportQueryResponseThis serviceenables he applicationo receivean externalcredit ating eportvia the Internet.The credit eport sattached o the customermasterdata.CustomerBankAccountListQueryResponseThis serviceorovidesa list of bank accounts hat aremaintainedn the customermaster data.The serviceexpectsa customernumberas inputparameter.source:Adapted rom sAP Producland TechnologyGroup Presentation, APPHIREMay 2005.

The Enterprise Services Architecture PartnerEcosystem SAP hoped to attract a large ecosystem fproductpartners o build innovativenew solutionson topof the BPP. As Kagermannput it, "We want to encour-ageco-innovationon theplatform."z7With its EnterpriseServices Architecture strategy, SAP was pursuing amodel similar to the one Google had developedwith its"Google Maps" service n the consumer nternetspace.By defining simple interface standardsand allowingexternal programmers o access ts geographicalmap-ping technologyvia the Internet,Googlehad sparked heindependentcreation of hundreds of new, specializedWeb sites hat featuredembeddedGoogle Maps.28With the BPP, Kagermann hoped that hundredsofindependentsoftware vendors(ISVs) would build new,highly specialized usiness pplications y leveragingtechnology and functionality from the BPP. "We willdo the big headof business rocesses nd ISVs will do

the long tail," summarizedShai Agassi,SAP ExecutiveBoard memberandpresident f the ProductandTechnol-ogy group.2e im Hagemann Snabe, General Manager,Industry Solutions, iked to bring up the caseof KMD'a firm that developed software that the governmentsofsmall owns n Denmarkused o manage heir day-to-dayoperations.Using the BPP,a company ike KMD couldfocus solely on building functionality uniquely relevantto small town governments n Denmark, and outsourcethe developmentof more generic businessapplicationfunctionality (e.g.employee ime tracking) to SAP.

ISVs, however,constituted ust one part of the part-ner ecosystem hat SAP looked to cultivate around heshared tandards f theESA. Kagermannenvisioned er-sonalproductivityvendorssuchas Microsoft developingwidely used ools by integratingtheir desktopproductswith SAP solutions.Suppliers ower in the technologystack,suchas networkinggiant Cisco,could embedSAPfunctionality directly into their offerings, and major IT

2Tlnterview.| | 122/2005.:8Seehttp:/ /www.housingmaps.com/r http:/ /www.chicagocrime.org/for examoles rolnterview.lOl3ll2005.

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I 168 pARTFIVE: CONCLUSTON:NNoVATION HALLENGESN ESTABLISHEDIRMS

EXHIB|T a SAP Deal Size Tlends, 2OO2-2OO4l st Quarter2002 2003 2004

2nd Quarter2002 2003 2004

3rd Quarter2002 2003 2004

4th Quarter2002 2003 2004

I Oeats 5 mil l . UR I oeats-5 mill. UR I oeats 1 mil l ' URSource; SAP Investor Relations.

EXHIBIT9 SAp Gtobat 5OOGustomer Penetration by Industry. February 2OO5# comoanies

70 I snecustomer6 0 - - - - - - - - -! etouat oocomPanY5 0 - - - - - - - - -

CP / Retail#1

s9Discrete

#1

E = 3 EE6 = v #Process

#1

t o6 -

Fin.Services#1

E; E5Services

#1Notes:CP = ConsumerProducts,A&D = Aerospace nd Defense,ME&C= Machinery, ngineering Construction'HT = HighTech,Chem= Chemicals, ttiti= Uitt Products,O&G = Oil &Gas,Pharma= Pharmaceulicals' erv'P = Service Providers, Util = UtilitiesSource.'SAP Investor Relations.

40 - - - -3 0 -20 -1 0 :

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EXHIBIT 7 SAP Sales model, April 2OO6

CHANNEL SEGMENTREPORTING

Direcl

lndirect

Sourcei SAP.

If Kagerrnann's corporate analysts were correct,executingon this three-proneed rowth strategywouldresult n t he returnof sustained ouble-digit ales rowthan d net marginsof more than 30 percent.l8However,Kagermannbelieved hat i t rvould take until 2010 or20 11 bef ore the BPP and oth er productsof the newgrowth strategyachievedbroad adoptionacross he SAPcustomer ase.re efending he legacyenterprise ppli-cationsbusiness as critical n the nteri m.Growth Initiative One:The Business Pnocess PlatformKagermannpositioned he BPP as an extensionof anexisting set of integration technologiescollectivelycalled SAP NetWeaver. he main purposeof NetWeaverwas o help SAP customersntegrate isparate AP andnon-SAP applications o that t hey interoperated eam-lessly. or example, f a sales cpresentativet heFenderCon.rpany ntered an order for 300 Stratocaster uitars

rsSAPInvestorRelat ions resentat ion.ebruary 005.rehttp:/ /www.eweek.com/art ic le20. 895. 8 8485,00.asp

PARTFlvE: CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS I 167

into mySAP CRM, NetWeaver utomatically riggeredan inventory eplenishment rder within Fender's up-ply chain managementapplication. Addit ionally,th eorder data also incremented Fender's accountsreceiv-able,which were rackedwithin a third system,mySAPFinancials.20ustomershencouldview data lrom hesethreeapplications nd from othernon-SAP systems llon one screenusing NetWeaver'senterpriseWeb portaltechnology.2r

NetWeaveralso servedas the technology oundationfor a new classof applicationscalled xApps, the first ofwhich SA Preleasedn la te 2002.12Appswerecompos-ite applications that leveragedNetWeaver o integratefunctionality acrossmultiple SAP (and potentially non-SAP) products.23n addition to developingxApps, SAPalso launcheda program to certify third party softwarepartnerso build novelxApps and sell hem o oint cus-tomers.2as of April 2006,SA P haddeveloped xApps,andpartnershad developedan additional20.Despite he flexibility of NetWeaverand xApps, thefact that distinct SAP applicationseachaddressed iffer-ent business rocesses inderedoverall extensibilityandinnovation.For instance, f a potentialcustomerneededa solution that integrated20 percentof the functionalitycontainedwithin three different SAP applications, hatcustomerneeded o buy all three of those applicationsand then use NetWeaver o integrate hem. The licensefees, technological complexity, implementation time,and supportcosts or such an initiative could be prohibi-tive, especiaily or a smaller business.Kagermannques-tioned the continuedviability of this model:

We haveall these ifferent roducts-ERP,CRM, SCM,andso on-and theyarenot very ightly ntegrated. hydo we need hese ategories?ompanieson'twant ermslike ERPandCRM.They ust wantproductivity nd nno-vation. f youbelievehis,youaskyourself,Whatshouldthe architecture f theproductof the uture ook ike?' Andif you hink about t a little bit, youcome o the deaof theEnterprise ervices rchitecture-somethinghat s stable,pre-integrated,asiero support, ndsimpler o extend ndinnovate round. utcentered round pplicationunction-alitv. ecauseha t s whatdifferentiatesAP2s

2%ttp://www.sap.com/company/press/press.epx pressID=2286.2lhttp://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/ s t o r i e s 2 0 0 3 / x a p p s - s a p -bo0303.html.23http://www.sap.com/solutions xapps index.epx.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 m/ s t o r i e s 2 0 0 3 / x a p p s - s a p-bo0303.html.2slnterview, | | 122 2OO5.

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1 166 PARrFIVE: oNCLUSToNNNOVATIONHALLENGESN ESTABLISHEDIRMS

AE KIAi , i ' : r r * P r , , . r t

OSRAM Panmo*; Fr\t PHITI(ft Postbank $,Frrnamnnrr PaG

psFB

5E*IEUS srnciAP^oREAtnr-rnes),

ExHlBlT 6 Examples of SAP Customers,2OO5M g ffi t).r

TExnsTRUMETTTSc@t sFrAFrP..Ti:'?'iTf ffi

@ArEp-us AlHanz@Aventis (}ln/tidhBERTELSMANN

daC l . wc r rC | j l C t g cAr'cpcdtEAfE'mlrc:uw

g,it ,f{f*l a r a a tMETRC}Groupg, tufttrsrsa e

Source:SAP InvestorRelations.

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

SAP'S NEW GROWTH STRATEGYAfter deliberatingwith his leadership eam, Kagermanndecided o focuson threeprimary growth nitiatives.First,SAP would develop an innovative Web services-based"platform"-a collection of software echnologies,ools,andcontent-that he believedwould deliverunparalleled

H *unsObcUasbtngtonoet

IIuil-erCHf,Yslre

value o customersand partners.Kagermann efened othisplatformas he business rocess latform, or BPP orshort, and it representedhe tangible product of SAP'sEnterprise Services Architecture vision. Second,SAPwould intensify ts focus on the SME market segment ydevelopingmore streamlined and flexible applicationsand expanding midmarket sales channels.Lastly,SAPwould broaden the relevance of its products by offeringfunctionality that appealed to more corporate usersandby improving user nterfaces.

@ E*rcssoru Wlrufrrsu

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I 164 PART IVE:CONCLUSION:NNOVATIONHALLENGESNESTABLISHEDIRMS

EXHIBIT 4 fotal Apptications License Revenue by vendor, 2OO1 2OO5'2005 2004 2003 2001

SAP"-OracleMicrosoft usiness olutions""" 321

J , t z oo t J26 7

2,68360 522 7

2 474703t l J

2,2431,02242'l n mi l l ions f US dol lars.''Estimatebased on Euro/dollar xchange ateas of March 1 of eachyear."'Estimatebasedon assumption l license evenuepercentage f total revenueequal o 40 percentsources:SAP Oracle,Microsoftannual eports;htlp://www.oanda.com/convert/{xhistory

suchas desktopapplications e.g.,MicrosoftExcel andAccess) and/or human solutions such as bookkeepers.(SeeExhibit4 for more dataon thecompetitiveandscapein the enterprise pplicationsmarket.)The dynamics of the enterprisesoftware ndustry

were markedby "coopetition,"primarily becausemanyvendors layed n multipleareas f the echnology tack.SAP, or example,di d not have a signif icantpresencein the database oftwarearena,bu t Oracle did. Conse-quently,despite he fact that SAP and Oraclewere fiercecompetitorsn the enterprise pplications pace, ver 60percentof SAP customersusedOracle databaseso storeth e datausedby their SAP applications. rr urthermore,SA P and Oraclesalespeoplead beenknown to collab-orateon joint salesopportunities. n a similar fashion,IBM supplied ts DB2 database oftware o many SAPcustomersand provided application hosting services oSAP.However, BM also offered ools, echnologies, ndconsulting services o help enterprisecustomersbuildtheir own customtzed applications instead of buyingstandardized pplications rom vendors ike SAP.SAP Company HistoryFoundedon April l, 1912, by five former IBM engi-neers,SAP employedover 35,000employeesworldwidein 2006.12Headquartered n Walldorf, Germany, thecompany servedmore than 32,000 businesscustomersin 120different ountries.l3 AP'sproduct ine consistedprimarily of a set of applicationscalled the "mySAPBusinessSuite" that ncludedapplications or enterpriseresourceplanning(mySAP ERP), supplychain manage-ment (mySAP SCM), customer relationship manage-ment (mySAP CRM), and severalother areas.SAP alsooffered industry-specific unctionality for companies n

| http://www.eweek.comarticle2 0,1895,1790357,00.asp']SAP 2006 annual eport.rrSAP 2006 annual reDort.

over25 dift'erentarget ndustries.'oSe eExhibit 5 for arnoredetailed verviewof the SAP solutionportfolio.)For most of its history, SAP had focusedon selling

complex,standardizedpplicationso the argeenterprisernarketsegment. SeeExhibit 6 for a sampleof SAPcus-tomers,Exhibit 7 for SAP'ssalesmodeland Exhibit 8 forrecentdeal size rends.) ypically,companies ai dSA Pmillionsof dollars or the rights o use he basicversion fa softwareapplication-a chargeknown as the "licensefee"-and then incurred additional costs to customizethe software o their specificneeds,deploy t within theirinformationtechnology IT) infrastructure, nd maintainand upgriide t in the future. n the majority of cases, ys-telns ntegratorsSIs)suchas Accenture,BM , or smallerregional irrnsperformed he mplementation nddeploy-ment of SAP software. SAP's best-known enterpriseapplicirtion. n ERPsolutionnamed R /3," hadgeneratedbillions of dollars of licenseand servicerevenuesromlargecompanies ince ts aunch n theearly 1990s. 5Asaresult. n severitl ndustriesover90 percentof Global500companiesusedsoftware rom SAP. SeeExhibit 9 forachartof SAP ndustrypenetration.)In the late 1990sandearly2000s,SAP haddevelopedth e rnySAP ER P applicationas a successor roduct oR /3 anddiversified nto non-ERPareas uchasCRM andSCM. Betu,een1999an d 2001,SA P also spunofftwosubsidiarycompanies,SAPMarkets and SAP Portals,ofocuson building and selling rtternet-basedechnology'SAP re-integrated othof thesesubsidiaries ack nto heparent ompany n20O2.

Internally, a seven member Executive Board gov-erned SAP Kagermann,who took over leadership fthe company rom his former Co-CEO and originalSAPco-founderHassoPlattner n May of 2003, also servedas heChairmanof the Executive oard. Se eExhibit10for Kagerntann's orporatebiography.)Kagermann'sirst

l lht tp: / /u wrv. ap.conrsolut ionsindex.epxr5SRPlgg-s-1999 nnual eports.

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PART IVE:CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS I 163ExHlBlT 3 Depiction of the Technology Staak

lENpUSERIApplrcationApplication ApplicationRecovery Ava la ilitv Perf rmance1 t ' rt t l

HR,Financials,anulacturing"een bledmyAP.compplicationsBrcwser luginsor Internetran actionsOracle, EZo,nformix, tcrosoftSQLSeruerUnix,Windows T 2000

F Applicationeruers,nternetelers

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

productcategories ncludedenterprise esource lanning(ERP),customer elationshipmanagementCRM), sup-ply chain management SC\'l t, and analyticsor businessintelligence BI). Primary customer egmentsncludedlarge enterprisesLEs), snrall o nridsizebusinesses renterprisesSMBs or SN{Es). nd srnalloffice or homeofficebusinessesSOHOs).Eachcustomer egmentea -tured customerswith verv differentneeds,and no onevendordominated ll thrcescsrnents. he SME segment,also known as the "midmarket." was particularlybroad,defined by some vendors and analystsas including anycompany with between 0 and 2,500employees.

In 2005, SAP's share of the worldwide enterpriseapplications market by total revenuewas approximately9 percent, he largestof any industry player.an March2006, SAP reported hat ts license evenuesor businessapplications over the most recent our quarterswere morethan three imes thoseof its closestcompetitor,Oracle.5However, Oracle recently had made aggressive movesto consolidate he industry. By purchasingPeopleSoft(which itself had acquired another established endor,J.D. Edwards,ust two yearsearlier) n January2005 and'SAP's 2005 software and nraintenance evenuesdivided by 2005worldwide market size estimate r om IDC.sSRP2006 annual reDort.

SiebelSystemsn January2006,Oracleeffectively hadcre-ateda duopoly with SAP in theLE segment.bn the SMEsegment,SAP andOracle both competedwith Microsoft'sBusinessSolutionsdivision and a hostof othercompaniessuchas SageSoftwareand LawsonSoftware.iIn addition, new technological developmentssuch assoftwareas a service SaaS)and opensourcesoftwareweregrowing n popularitywith SMEs and SOHOs,and upstartvendors such as Salesforce.com,NetSuite, Entellium,and SugarCRM were attackingthe enterpriseapplicationsmarket from the low end.8SAP stated hat basedon soft-ware revenues it was the midmarket segment leader, butseveralother companies had a greater number of SMEcustomers than SAP.eFor example, Salesforce.com,acompany that launched ts first services n February 2000,already claimed 20,000 SME accounts; Sage Softwareclaimed 4.7 million.l0 Furthermore. millions of smallercompanies managed their operations using alternativesoOracleWeb site (www.oracle.com).TEarlier in 2004, Microsoft had initiated talks to acquire SAB but thenegotiations had broken down due to the anticipated complexitiesinvolved n 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), ageSoftwareWeb site (www.sage.com).

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1162 pARrFIVE: oNCLUSToN:NNovATroNHALLENGESNESTABLTsHEDIRMSExHlBlT 2 SAP Stock Prace (NySE) Peilormance Relative to PeersFiveyear performancecomparison: June 2001-June2006

w ffilEEru sr@,.60l

.2A7

ol

-402

cry i d r 2d { Y&o r 1 rc .Source: Yahoo! Finance

paying invoices)and enabling access o and analysisofdata from disparate corporate functions. Like populardesktop applicationssuchas Microsoft Excel or AdobePhotoshop, enterprise applications contained logic tomanipulatedata as well as graphical nterfaces o inter-act with users.Applicationswere a primary componentof the "technologystack," a framework used o illustratehow primary software and hardware technologies inter-operated.SeeExhibit 3 for a depiction ofthe technologystack.) Enterprise applications required both databasesoftware and middlewa.re to run. and all three of these

httn://f itre.tr&.cm/

EXHIBIT 2 (continued) SAP Stock Price (NySH Performance Relativeto PeentOne year performance comparison: June 2005-June 2006

software technologiesran on top of networks of powerfulcomputerscalled servers.

Enterpriseapplicationsconstitutedan approximately$80 billion worldwide market in 2005, with compoundannual growth in the range of 7.5 percent projectedthrough 2010.3 The market was typically segmentedby product category and by customer size. Primary

3lDC, Worldwide Enterprise Applications 2006-2010 Forecast,Doc#2Ol '791, ay 2006.

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PART IVE:CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDIRMS 1 163EXHIBIT 3 Depiction of the Technology St tck

[lNDUSx-]Appl icalron pplrcat ionAppl icat ionRecovery Ava la ilitv Pedormancel t ' lr t l

HR,Financials,anufacturin"+en bledmySAP.compplicationsBrorvserluginsor nternelran aclionsOracle, E29 nlormix, icrosoftSQ LServerUnix,WindcryvsT12000

F Applicationeruers,nternetenrers

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

product ategoriesncluded nterpriseesource lanning(ERP),customer elationshipmanagementCRM), sup-ply chainmanagementIjC\,1 , an danalytics r businessintelligence BI). Primary customer egmentsncludedlargeenterprises LEs), snrall o nridsizebusinesses renterprisesSMBs or SN,lEs). nd snrallofficeor homeofficebusinessesSOHOs).Eachcustolner egment ea-turedcustomels vith verv dit'lelentneeds,and no on evendor ominated ll thrcescgrtrcnts.he SME segment,alsoknown as the "rnidmarkct."u'asparticularly road,definedby some vendorsand analysts s ncludingan ycompanywith between 0 and 2,500employees.In 2005, SAP's share of the worldwide enterpriseapplicationsmarket by total revenue was approximately9 percent, he largestof any industry player.an March2006,SAP reported hat ts license evenuesor businessapplications ver he most recent ou r quartersweremorethan three imes thoseof its closestcompetitor,Oracle.5However,Oracle recently had rnadeaggressivemovesto consolidate he industry By purchasingPeopleSoft(which itself had acquired anotherestablished endor,J.D.Edwards,ust two yearsearlier) n January2005and'SAP's 2005 software anJ ntJint( .ni lnacc\enuesworldwidemarket size estimare rom IDC.5SAP2006 annual eDort.

divided by 2005

SiebelSystemsnJanuary2006,Oracleeffectively adcre-ateda duopoly with SAP in the LE segment.bn the SMEsegment, AP and Oracleboth competedwith Microsoft'sBusinessSolutionsdivisionand a hostof othercompaniessuchas SageSoftwareand LawsonSoftware.iIn addition,new technologicaldevelopments uch assoftwareas aservice SaaS)and open sourcesoftwareweregrowing n popularitywith SMEsand SOHOs,andupstartvendors such as Salesforce.com,NetSuite, Entellium,and SugarCRM were attackingthe enterpriseapplicationsmarket from the low end.8SAP stated hat basedon soft-wa.re evenues t was the midmarket segment eader,butseveral other companies had a greater number of SMEcustomers than SAP.e For example, Salesforce.com, acompany that launched ts first services n February 2000,already claimed 20,000 SME accounts; Sage Softwareclaimed 4.7 million.'0 Furthermore,millions of smallercompaniesmanaged heir operationsusing alternativesoOracleWeb site (www.oracle.com).TEarlierin 2004, Microsoft had initiated talks to acquireSAP, but t henegotiations had broken down due to the anticipated complexitiesinvolved n combining the two companies."http://www.infoworld.com article 05/08/05 HNmidmarket_ .html.eSAPInvestorRelationspresentation, ebruary2005.'%ttp://blogs.zdnet.com/SAAS/?p=103, Salesforce.com Web site(www.salesforce.com), ageSoftwareWeb site (www.sage.com).

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PARTFIVE:CONCLUSION:NNOVATIONHALLENGESN ESTABLISHEDlRtvls I 16 1

EXHIAIT I Selected SAP Financial Results, 1997-2OO5r2005 2004

TOTALREVENUE7" Change from Prior Year 8 , 5 1 313.3% 7,5147.0%Revenue by Business Area

7,O25- 5.2% 7,4131 . 0 % 7,34117.2"/"

Software License)MaintenanceConsult ingTrain ingOther

2,7833,1752,1 9343

2,3612,8231 0-71

30257

2 , 1 4 82,5691 , 9 5 429 955

2 2q12,4232,2044148 1

2,1212,08346 690Revenue by Geographical Region

Europe,MiddleEast& Afr icaAmericasAsia Pacific4 , 5 1 33,0001 , 0 0 0

3,9702,2168394,0442,502863

3,7862 724831

4,2232,424867SoftwareRevenueby Category

Enterpr ise esourcePlanningCustomerRelationship gmt.SupplyChainMgmt.SupplierRelationship gmt.,Business nte l l igence, therProductLifecycleMgmt.OPERATINGNCOME--Pro Forma OperatingMargin %"NET NCOMEEarningsper Share (Diluted)

1 , ' t 5 760 3509352162

2,41028.3%1,4964.83

oo nc u l480223167

2,08627.8%1 , 3 1 14.22

8024404772731 5 6

1,88026.8%1,0773.47

9274734642591 6 8

1,68822.8%5091.63

9414455834 1 61 96

1 , 4 7 120.0"/o5811.85

2005 2004 2001 2000 199 9 1998 1997TotalRevenue 8,513o/"Software Revenue 32.7%R& DSpending 1,071As 7. of TotalRevenue 12.6%Number f Employees.-. 35,873% in R&D 32.4%% in EMEA Region 60.1%Revenueper Employee 0.237

7,5143 1 4 %90012.0%

32,20530.7%64.1%0.233

7,O2530-6%8321 1 . 8 %

29,61029.9%67.0%0.237

7,41330.9%89 812.1%

28,79727.7%66.8%o.257

7,34135.2%8661 1 . 8 %

28,41028.0%64.9%0.258

'6 ,265 5 ,1 039.2% 37.8%

457 70513.7% 13.8%24,177 21,48831 0% 25.1%63.3% 60.8%0.259 0.238

4,316 3 ,02244.0% 49.9%572 36313.3% 12.0%

19,308 12,856n/a n/an/a n/a0.224 0.235'All figuresshown n millions f Euros;data sourced rom SAP annual eportsand SAP Web site (www.sap.com)."Beforestock-based omoensation nd acouisition elated haroes."'Measuredby total headsbefore2000,and by frlt time equivalJnts FTE) n 2O0O nd all subsequent ears.

As Kagermann deliberatedhis options, three ques-tions recurred n his mind. First, how could he determinewhether he currentpaceof execution egarding he newgrowth strategy was right? Moving too slowly wouldgive SAP's competito rsprecious ime - but moving tooquickly could agitateemployeesand alienatecustomerswho did not sharea sense f urgency oward SAP's newstrategic irection.Second, ow shouldhe sequenceherollout of changes still required? And third, given theindustryenvironment nd he resurgent rowthof SAP's

legacybusiness, ow shouldhe balance esourcealloca-tion betweenshort and ong-term opportunities?TNDUSTRy AND COIIPANy OVERVIEWThe Enterprise Software Ap plications I nd ustryEnterprise software applications helped companiesachieve cost efficiencies, make better decisions. andincrease customer value. They did so by automatingformerly manualbusinessprocessese.g. recordingand