Use Porter’s “5 forces” model to analyze the attractiveness of the standardized business software industry and SAP’s strengths and weaknesses. Threats from competitors: differentiation protects a company from competitors when customers develop brand loyalty for its products. It is very costly and time consuming for a company to implement a new ERP system. One of the examples given by the case was Chevron, which spent over $100 million and 2 years installing and getting its R/3 system operating effectively. Therefore, once customer implements SAP software for the company, it rarely changes to another competitors’ product.
Power suppliers: powerful suppliers become less of a problem because the differentiated company’s strategy is directed toward the premium price it can charge and it can often pay along price increases to loyal customers. For a software company like SAP, there aren’t many suppliers except database and consultants. SAP made the wrong decision of outsourcing both at the early stage of its business. As a result, they lost first-hand knowledge of its customers’ emerging problems and an understanding of the changing needs of its customers. In the 1980s, SAP did not develop its own database management software package; its system was designed to be compatible with Oracle’s database management software.
This had repercussions later when Oracle began to catch up technically and develop its own ERP software platform in the 2000s. Power buyers: differentiators are unlikely to experience problems with powerful buyers because they offer a distinctive product that commends brand loyalty. SAP focused on the largest multinational companies with revenues of at least $2.5 billion because these companies would reap the biggest cost savings there. These companies are willing to pay the premium price as they believe the saving in time and costs outweigh the cost of implementing SAP ERP system.
Substitute products: substitute products are only a threat if a competitor can develop a product that satisfies a customer need similar to the need met by the differentiator’s product. In this case, SAP had faced this challenge in the 1990s when its competitors, such as Oracle, Baan, PeopleSoft, and Marcum were catching up technically and focused their resources on the needs of one or a few industries, or a particular kind of ERP module. New entrants: a new company must find way to make its product distinctive enough to be able to compete, which involves an expensive investment in building some type of distinctive competence.
Although only a few global organizations have the resources to compete with SAP, the new entrants threats are still very high in the software industry as technology development and innovation by others could make SAP become obsolete one day.