Imacs 2016 imecs 2016 Proceedings (Preliminary version) of the 4


WHAT DID SAP CHANGE? A MARKET SHAPING ANALYSIS



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WHAT DID SAP CHANGE? A MARKET SHAPING ANALYSIS

90.Burak Erkut



Abstract

The market for enterprise resource planning (ERP) software was analysed in the contexts of computer science, business models and history. However, the impact of SAP which has driven the ERP market was not analysed in the framework of economic theories. Especially a new direction within marketing which aims to re-connect it to markets, can be an interesting point of departure for the analysis. The analysis is based on the business history of the software firm SAP as well as a theoretical framework. The point of view of the study is evolutionary economics, which focuses on the role of innovation and knowledge generation in an open loop evolving, non-pre-determined economic system. Findings suggest that SAP's impact was mainly on agency costs, transaction costs and network effects. These three points suggest a similarity to the market shaping impact of internet economics, put forward by Dholakia and co-authors (2002).


Key words: Market shaping, product innovation, SAP, evolutionary economics
JEL Codes: B52, O30, L10

91.Introduction


The global market for enterprise resource planning (ERP) software is expected to reach $41.69 Billion by 2020 according to Allied Market Research, 2015. ERP software is aimed at businesses for organizing their own business processes. Although the emergence of the ERP market was analysed from the perspectives of computer science, business models and history, it lacks an economic framework to understand its economic impacts, and contribute to the understanding of shaping of a new market.

92.1 The ERP Market


The meaning and the emergence of a new market or a new market segment is important for every developed economy. Especially for the competitive advantages of economies, the role of innovation gained importance during the last decades. Not only countries, but both national and multinational firms need to find innovative ideas and to create new market segments for their future existence.

The focus of innovation research is on how to find relevant target groups outside the companies for finding innovative ideas (Chesbrough, 2003), whereas the entrepreneurial research is going in the direction of exploring and explaining entrepreneurial orientation in a broader context, combining both personal characteristics of existing and potential entrepreneurs and the economic landscape such as conditions, opportunities and cultural influences (Saeed et al., 2014). Some scholars found out that by focusing more on the emergence stage of new market segments, and connecting market emergence stage to marketing can increase the explanatory power of the latter (Araujo et al., 2010).



How does a product innovation contribute to the shaping of a new market segment? This is the question behind the history and the evolution of ERP market. The evolution of business integration concepts is a key factor in understanding today's ERP market which evolved from material requirements planning and manufacturing resource planning (Klaus et al., 2000). Starting with the aim to have more precise calculations for needed materials, the next step was having a more efficient manufacturing process – the more profitable these steps were, the more interest emerged for applying it to the enterprise as a whole (Klaus et al., 2000). In 2013 worldwide ERP software market had a volume of $25.4 Billion, where the five biggest shareholders of the market are SAP (24%), Oracle (12%), Sage (6%), Infor (6%) and Microsoft (5%) (Columbus, 2014). Software products of the ERP market target building digital infrastructures, and their evolution continue towards cloud computing.

93.2 The Role of SAP


In addition to being the biggest shareholder of the ERP market, SAP is also the largest European software firm with an annual revenue of €20.8 billion (see sap.com for more details). The role of SAP as the market leader in the ERP market goes back to the product innovation made by its founding team in 1970s. Founded in Mannheim, Germany, SAP introduced a standardized business software for integrating business processes in real-time (Leimbach, 2010) for the first time in computer history – at a point of time where the computer industry in USA was more developed than that of Germany.
A number of factors seem to be effective in SAP's success (Meissner, 1997). Some interesting facts need to be mentioned: The founders were all former employees of IBM, they were able to observe different business processes of different clients of IBM, they financed themselves for a very long period of time, they were a heterogeneous team with different competencies, their geographic location was full of international customers which led them use English in their programming procedures, they were the first ones introducing a particular product innovation to the market, they used a word-of-mouth strategy to build on a previous innovation of a team member known in the region, to mention only a few. Since this paper is the first of a series of papers, the question of whether SAP's story is a pre-defined success story, and which factors caused its success, will be answered later on. At this point, the emphasis will be put on the forming and leading firm of ERP market, and what its impact was and still is.

94.3 Economic Impacts


What did SAP change in economic terms? The economic impacts of the introduction and implementation of the software programme can be analysed within the framework of Dholakia et al. (2002). This framework analyses infrastructure innovations and their economic impacts, which is applicable to ERP since implementing an ERP system is accepted as a digital organizational infrastructure innovation (Clagett and Berente, 2012).

3.1 SAP’s Product Innovation


What were the innovative notions of SAP's “System R”? SAP introduced a new software which was standardized for businesses (1), integrating business processes for sales, materials management and accounting (2) and allowing to enter data in real-time (3) (Leimbach, 2010). Starting with a prototype for a single client (where they were not sure, whether they would continue with selling the programme), the SAP founders learned with each installation and shaped a new market segment (Meissner, 1997). The economic impacts of this product innovation and the corresponding emergence of a new market segment can be described with three effects.

3.1.1 Agency Costs


Diverging interests of the owner/manager of an organization and the agents who carry out tasks for the owner/manager may lead to agency costs (Dholakia et al., 2002). ERP decreases administrative reporting costs, costs of coordinating and monitoring the activities of agents as well as costs of errors in product and information (Poston and Grabski, 2001). The latter point was a crucial factor associated with entering data in real-time, which was made possible with SAP's “System R”. The previous method of entering data was by using the batch processing using punch cards (Leimbach, 2010) which caused huge delays and errors in planning and production.

3.1.2 Transaction Costs


Transaction costs are “costs of acquiring the knowledge which is necessary to make transactions or the costs of making arrangements to counteract the irremediable lack of knowledge about the future” (Loasby, 2002, p. 76). ERP systems reduce the costs of “search, transportation, inventory holding and communications” (Poston and Grabski, 2001, p. 278) which were also reflected in the initial form of SAP's software programme consisting of three modules (sales, materials management and accounting) to give an overview of business processes with accurate information processed in real-time.

3.1.3 Network Externalities


Infrastructure technologies are considered as network technologies linking people and institutions where “the economic benefit of the network derived by each linked node increases as the size of the network expands” (Dholakia et al., 2002, p. 38). In case of more organizations joining the ERP system, cost efficiencies come into existence for present organizations, since “the zero or very low marginal costs for information reproduction reduces the high ERP implementation costs” leading to positive network externalities (Huang et al., 2004, p. 691).

In fact, SAP founders' initial observation of similarities in business processes of different firms (Meissner, 1997) can be interpreted as a move towards making use of network externalities – since the absence of a standardized business software led the programmers to create a new programme for every new customer every time.


3.2 Market Shaping and Entrepreneurial Discovery


A successful product innovation pioneers the emergence of a new market segment. This emergence does not occur with an external shock, but rather with the imagination and actions of human beings (Witt, 1998). SAP’s founders introduced their standardised, integrated business software in real-time at a point of time where it was the first of its generation, an advantage which SAP still keeps today as it is the biggest shareholder of the ERP market.

Since finding an innovative idea, establishing an entrepreneurship, designing a business conception and therefore shaping the market are all very individualistic actions, they do not necessarily need to be pre-determined; “of many ideas about technological and commercial activities which may be developed by many people, only a tiny fraction is actually turned into a venture in the form of a multi-person firm” (Witt, 1998, p. 175) implying a selection process. In general, processes influenced by human agents suffers from simplifying stylizations (Lehmann-Waffenschmidt, 2010). These include product innovations and markets as well, even though these concepts “begin as gleams in the eyes of individuals” (Sarasvathy, 2001, p. 261) and are contingent to environmental, social, technological conditions.

Examples from SAP’s founding story include Hasso Plattner’s choice of customer service against working in the R&D lab of IBM (Plattner et al., 2000), which led him share his office with his later business partner Dietmar Hopp. Another example is how he dropped all the punch cards to the floor on a rainy day, on which the software program of SAP was coded; Plattner claims that if he did not dry all the cards immediately, they might have never had SAP’s software program R (Srinivasan and Neumann, 2009). A third example include how long the start-up period of SAP lasted, namely 15 years all by own financing, where SAP collaborators claim that with an external financing, they needed to show sound results immediately, which might not occur and SAP would not be today’s successful SAP (NWZ Online, 2015).

These all point out to the contingent nature of entrepreneurial discovery. Defining contingency as “not impossible, but not necessary” (Lehmann-Waffenschmidt, 2010, p. 482) implies that these past events have at least one other alternative possible event, which was not realized. Focusing on the concept of contingency, which has a long tradition in the management literature (see e.g. Woodward 1965), can be applied to the concept of entrepreneurial discovery if it is also seen as in the midway between chance and necessity. According to Kirzner (1997), entrepreneurial discovery can be defined as “midway between deliberately produced information in standard search theory, and that of sheer windfall gain generated by pure chance” (Kirzner, 1997, p. 72).

These all lead to the contingent character of an entrepreneurially driven market process, where “the progress of any particular innovation (…) will depend on a variety of contingent circumstances” (Tidd and Bessant, 2014, pp. 76-77). The market process is built upon competition as a discovery procedure where “the situation is somewhat like agreeing to play a game based partly on skill and partly on luck” (Hayek, 2002, p. 16). Although the provided framework of Dholakia et al. (2002) provides a relevant point of departure for understanding the economic impact of SAP’s, however, a new question arises: Is SAP a pre-defined success story, or would its development and therefore the development of the ERP market be different than realized due to the existence of alternative possible events? The next step will be providing a conceptual framework for analysis.

95.Conclusion


Introduction of a new product and its economic consequences was the key point of this paper. The case study was SAP's market shaping role in ERP market, which came into existence with the corresponding product innovation aiming to provide a standardized business software in real-time with integrated business processes. The economic impact of this development was considered within the framework of Dholakia et al. (2002) based on agency costs, transaction costs and network externalities – emphasizing the importance of a closer analysis of SAP's business history to understand both today's ERP market and the notions of product innovation and market shaping. The contingent character of the entrepreneurially driven market process was discussed within theoretical considerations going back to Kirzner (1997) and Hayek (2002). The next goal was set as providing a conceptual framework for the further analysis.

96.References


Araujo, L., Finch J. & Kjellberg, H. (2010). Reconnecting Marketing to Markets. New York, USA: Oxford University Press.

Clagett, J. L. and Berente, N. (2012). Organizing for Digital Infrastructure Innovation: The Interplay of Initiated and Sustained Attention. 45th Hawaii International Conference on System Sciences.

Chesbrough, H. W. (2003). Open Innovation. The New Imperative for Creating and Profiting from Technology. Boston, Massachusetts, USA: Harvard Business School Press.

Columbus, L. (2014). Gartner's ERP Market Share Update Shows the Future of Cloud ERP is Now. Forbes, 12 May 2014. Retrieved March 31, 2016 from http://www.forbes.com/sites/louiscolumbus/2014/05/12/gartners-erp-market-share-update-shows-the-future-of-cloud-erp-is-now/

Dholakia, N., Dholakia, R. R., & Park, M. (2002). Internet and Electronic Markets: An Economic Framework for Understanding Market-Shaping Infrastructures. In: N. Dholakia, W. Fritz, R. R. Dholakia, N. Mundorf (eds.) Global e-commerce and online marketing: Watching the evolution. Westport, Connecticut, USA: Quorum Books.

Global ERP Market (Deployment, Functions, Verticals, End - User and Geography) - Size, Share, Global Trends, Company Profiles, Demand, Insights, Analysis, Research, Report, Opportunities, Segmentation and Forecast, 2013 - 2020. Retrieved March 31, 2016, from http://www.researchandmarkets.com/research/5w2x3d/global_erp_market.

Hayek, F. A. (2002). Competition as a discovery procedure. English translation of the 1968 lecture by Marcellus S. Snow. The Quarterly Journal of Austrian Economics, 5:3, 9-23

Huang, M., Wang, J., Yu, S., and Chiu, C. (2004). Value-added ERP information into Information Goods: An Economic Analysis. Industrial Management and Data Systems, Volume 4, Number 8, pp. 689-697.

Kirzner, I. (1997). Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. Journal of Economic Literature, Volume 35, Issue 1 (Mar. 1997), pp. 269-290.

Klaus, H., Rosemann, M., Gable, G. G. (2000). What is ERP? Information Systems Frontiers, 2(2), pp. 141-162.

Lehmann-Waffenschmidt, M. (2010). Contingency and Causality in Economic Processes –Conceptualizations, Formalizations, and Applications in Counterfactual Analysis. European Review Volume 18, Number 4, pp. 481-505.

Leimbach, T. (2010). Die Geschichte der Softwarebranche in Deutschland: Entwicklung und Anwendung von Informations- und Kommunikationstechnologie zwischen den 1950ern und heute. Universitätsbibliothek München.

Loasby, B. J. (2002). Knowledge, Institutions and Evolution in Economics. London and New York: Routledge.

Meissner, G. (1997). SAP: die heimliche Softwaremacht: Wie ein mittelständisches Unternehmen den Weltmarkt eroberte [SAP: the secret software power: How a medium-size enterprise conquered the world market]. Hamburg, Germany: Hoffmann und Campe.

Neumann, C. and Srinivasan, J. (2009). Managing Innovation from the Land of Ideas and Talent, The 10-Year Story of SAP Labs India. Berlin, Germany: Springer Verlag.

NWZ Online (2015). SAP-Gründer Hopp Wird 75: Milliardär im Unruhestand [SAP-Founder Hopp will be 75: The Unretired Billionaire]. Retrieved May 9, 2016 from http://www.nwzonline.de/wirtschaft/milliardaer-im-unruhestand_a_27,0,100785092.html.

Plattner, H., Scheer, A.-W., Wendt, S., Morrow, D. S. (2000). Dem Wandel voraus. Hasso Plattner im Gespräch [Ahead of Change: Talks with Hasso Plattner]. Bonn, Germany: Galileo Press.

Poston, R. and Grabski, S. (2001). Financial Impacts of Enterprise Resource Planning Implementations. International Journal of Accounting Information Systems, 2 (2001), pp. 271-294.

Saeed, S., Yousafzai, S. and Engelen, A. (2014). On Cultural and Macroeconomic Contingencies of the Entrepreneurial Orientation-Performance Relationship. Entrepreneurship Theory and Practice, 38:2, pp. 255-290.

Sarasvathy, S. D. (2001). Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency. Academy of Management Review, Volume 28, Number 2, pp. 243-263.

Tidd, J. and Bessant, J. (2014). Managing Innovation, integrating technological, market and organizational change. Chichester, West Sussex, UK: John Wiley & Sons Ltd.

Witt, U. (1998). Imagination and Leadership – The Neglected Dimension of an Evolutionary Theory of the Firm. Journal of Economic Behavior & Organization, Volume 35, pp. 161-177.

Woodward, J. (1965). Industrial organization: Theory and practice. New York, USA: Oxford University Press
Contact

Burak Erkut

Professorship of Managerial Economics, Faculty of Business and Economics

Dresden University of Technology

Helmholtz Street 6-8, 01069 Dresden, Germany

E-Mail Address: Burak.Erkut@tu-dresden.de

Telephone: +49-351-463-34797



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