EPLM06 Anup Varghese 2226288 Project Report v 1.1

Analyzing ERP Industry using Porter's five forces' Version 1.1 November 2013

Author: Anup Varghese (2226288) EPLM – Batch 6 of 20

AnalyzingERPIndustryusingPorter'sfive forces'

November

Qualitatively analyze the major players in ERP industry using Porter’sfive forces to understand the industry structure, underpinnings ofcompetition and the drivers for profitability.

Project Report



Acknowledgement

I would like to thank God Almighty for helping me successfully complete this project. I would like toexpress my deep gratitude to Professor Vidyanand Jha who has guided me in the project preparation andto Professor Sushil Khanna who has taught us the basics of strategy and has introduced Michael Porter andthe five competitive forces that can shape strategy. They have enlightened me with their vast academicexperience especially in the area of strategic management and organizational behavior. I would also like tothank my wife who has supported me in this endeavor.



Contents

Acknowledgement ..............................................................................................................................2

Abbreviations......................................................................................................................................4

Abstract ..............................................................................................................................................5

Introduction.........................................................................................................................................6

Methodology .......................................................................................................................................7

Brief History........................................................................................................................................9

Data..................................................................................................................................................12

Analysis ............................................................................................................................................15

Conclusions ......................................................................................................................................18

References .......................................................................................................................................19



Abbreviations

ERP - Enterprise Resource PlanningMRP - Manufacturing Resource PlanningSAP - Systems Applications & Products in Data ProcessingRDBMS - Relational Database Management SoftwareMS - DOS - Microsoft Disk Operating SoftwareSMB - Small & Medium SegmentOS - Operating SystemSQL - Structured Query LanguageSaaS - Software as a Service



Abstract

This project will qualitatively analyze the major players in ERP industry using Porter’s five forces tounderstand the industry structure, underpinnings of competition and the drivers for profitability. MichaelE Porter in his first HBR article (“How Competitive Forces Shape Strategy”, 1979 Harvard BusinessReview) introduced the following five forces which later became Porter’s five forces.

Rivalry among existing competitors Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitute products or services

SAP and Oracle are the two biggest and prominent players in the ERP market; this project will also look atother players in the ERP Industry like Microsoft, Infor, Epicor and Sage to understand the competition andtheir relative positioning in the Industry. If the interplay of the five forces is intense then the overallprofitability will not be attractive where as if the interplay is moderate then the profitability can beattractive. So understanding the competitive forces and their underpinnings will reveal the profitability ofthe industry and is also important for effective strategic positioning for these companies.



Introduction

Enterprise resource planning (ERP) is a set of business applications that coordinates the resources,information, and activities needed to complete core business processes. ERP Industry is a multibilliondollar industry today; the major players in the industry are SAP, Oracle, Microsoft, Infor and Epicor. Theseplayers jointly occupy more than 50% of the market share in 2013 with SAP leading the market share withapproximately 26%. This project will qualitatively analyze the ERP Industry using the Porter’s five forcesto understand the interplay of the competing forces which ultimately shape up the profitability of theindustry.

The ERP Industry has evolved over the last 40 years emerging as an extension of material requirementsplanning and later manufacturing requirements planning (MRP) to the current state where we have fullyintegrated applications which can be used across almost all functional areas.

SAP developed its first accounting software in 1973 which became the cornerstone for the ongoingdevelopment of other modules which was eventually named as SAP R/1. In the late 70’s SAP came up withSAP R/2 which was based on mainframe and was very successful as a business application software in the1980’s and 90’s. In 1992 SAP officially launched SAP R/3 with client server concept, uniform graphicalinterface and dedicated use of relational databases. In the late 90’s SAP came up with mySAP.com andcontinued to launch industry specific solutions and different Business Application Suites. SAP made somestrategic acquisitions like Business Objects, Sybase, and SuccessFactors to expand their product portfolioin the new millennium.

Oracle was founded in the late 70’s under the name Software Development Laboratories when thefounders decided to commercialize a working proto type for a relational database management system.Oracle subsequently released multiple versions of their relational database management system and bymid-80 became the leading vendor RDBMS vendor. Oracle invested heavily in innovation which paid richdividends in the 90’s by building internet ready products. Oracle introduced Oracle Applications in theearly 90’s which included accounting programs for the emerging client/server computing environment.This became the base for the various business applications that Oracle released after the turn of themillennium. Oracle expanded rapidly in the new millennium by making some big ticket acquisitions likeJD Edwards, PeopleSoft, Siebel, Sun Microsystems in addition to several small scale ones.

SAP & Oracle together holds more than 40% of the market share as of September 2013, while other ERPvendors like Microsoft, Infor, Epicor, Sage, Tier II & III vendors have the remaining market share. Thisproject aims to analyze how Porter’s five competitive forces affect the Industry structure, competition andthe main drivers of the profitability. SAP and Oracle compete head to head primarily for mid to large sizebusinesses, while Microsoft, Sage, Infor and others compete for small and mid-size business, thus therivalry among competition is not significant. The threats of new entrants are typically low considering therelatively high level of entry barriers in the industry. The bargaining power of suppliers of this Industry isnot significant, as long as the ERP application is compatible with different combinations of serverhardware, operating systems and database. Customers generally don’t have much bargaining power as theswitching costs are very high, however smart customers can put the industry players against each otherand demand better quality or more services. The threat of substitutes in the industry is very minimal as theswitching cost for the customers are high. The overall profitability of the ERP Industry should be highconsidering the interplay of these competing forces.

System integrators / implementation partners generally play a key role in the ERP vendor selectionprocess. So the relationship between the ERP vendors and system integrators also need to be considered.Cloud ERP solutions are also fast emerging as an alternative to the traditional ERP system. This brings alot of new vendors into play; also the existing vendors have expanded their product portfolio to includecloud based offerings. The cloud based ERP have lower upfront costs, lower operating costs, rapidimplementation, better accessibility and mobility could give a stiffer competition to traditional ERPProducts. This project will also look at the impact of emergence of “Cloud ERP” on the traditional ERPvendors.



Methodology

Michael E Porter wrote the HBR article “How Competitive Forces Shape Strategy” in 1979 which started arevolution in the strategy field. He has identified that the following forces will shape Industry competitionand profitability.

Rivalry among existing competitors Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitute products or services

These forces are popularly called Porter’s five forces.

Rivalry among existing competitors

The impact of competition depends on the intensity and the basis on which they compete with each otherand it may be manifested in different forms like discounts, better products and services, advertising etc. Ifthe competition is intense then the overall profitability of the industry will come down. The intensity of thecompetition is high if there are many competitors or if they are of roughly same size. If this is the case thenrivals will find it difficult to get to their opponent’s customer base. If the industry growth is slow or if theexit barriers are high then also the profitability of the industry will suffer. The basis of competition is alsoequally important factor and has a major influence on the profitability. If the basis of the competition ispurely based on price then it will have a grave impact on the profitability. Direct price competition canhappen when the rivals have similar products or service offerings and when the switching costs are lower.This can also happen if the fixed costs are high and the marginal costs are minimal. If the dimensions thatrivals compete are different from price like product features, brand value, superior services then it is lesslikely to affect the profitability. If the rivals are not competing on the same dimensions and are targetingdifferent customer segments then the average profitability of the industry will not be negatively impacted.

Threat of new entrants

New entrants can drive down the profit potential of the industry as they try to gain market share whichputs pressure on price. If the new entrants are diversifying from a different market then they can leveragetheir existing capabilities and cash flows can have significant impact on the existing players. The threat ofnew entrants depends on how high the entry barriers are, the higher the barriers the lower the threat. Thethreat of the entry drives down the profitability irrespective of whether it happens or not. There aremultiple sources of barriers which the new entrants face.

Economies of scaleThis can be a deterrent to the new players by forcing them to come in a large scale or to accept costdisadvantages.

Demand side benefits of scaleThis can be a deterrent to the new player as the willingness of customers to buy from a new entrantis less as they value being part of a large customer group.

Switching costIf the switching cost is high then it is difficult for new entrants to get a big customer base.

Capital requirementsHigh capital requirements generally will be a deterrent for a new entrant. However if the profitpotential of the industry is high then this alone will not be a deterrent as the investors will providesufficient fund that the new entrants need.

Cost Advantages of current playersExisting players may have a cost advantage compared to the new entrant which arise due totechnology know how, better access to raw materials, geographic locations etc.



Unequal access to distribution channelsIf the distribution channels are used up by the existing player then it will be difficult for the newentrants to secure the distribution channel.

Government PoliciesGovernment policies can help new entrant by providing subsidies, funding research or be adeterrent by restricting foreign direct investment, having licensing requirements etc.

Power of suppliers

If the suppliers are powerful they can charge higher prices which if not passed on will result in the increaseof cost and it drives down the profitability. The supplier group is deemed to be powerful: - 1) if it is moreconcentrated than the industry it sells to, 2) the supplier group serves many industries and is not dependedon the industry that you are in, 3) if there is switching cost in changing suppliers, 4) offers differentiatedproducts from other suppliers, and 5) if no substitutes exist for the same.

Power of buyers

If customers are powerful they can put the players against each other and demand more discounts, or moreservices which all can drive down the profits. Customers are considered powerful if there are only few ofthem, or if they are a large volume buyer compared to the size of the vendor. Customers also tend tonegotiate hard if the products they are buying are standardized and can find similar products from othervendors, or if they have low switching cost, or if the customers can threaten that they have the capability toproduce the product in-house. It is also important to understand whether the customers are pricesensitive. They are considered to be price sensitive if the product it purchases forms a significant portion ofits procurement budget or cost structure or if the customer group earns low profit and has low cash flow. Ifthe quality of their output is directly dependent on the products they purchase then the customers tends tobe less price sensitive.

Threat of substitutes

If the threat of Substitutes is high then the overall industry profitability will be lower. In this situation oneproduct can’t command a huge premium as customers have alternate cheaper options. The threat of asubstitute is high if the industry price performance trade off to the product is attractive. If the relativevalue of the substitutes is high then it will drive down the profitability of the industry. Also the threat ishigh if the switching cost for the customer is low.

We will look in detail how the above forces play against each other in the ERP industry by analyzing theprominent ERP vendors like SAP, Oracle, Microsoft, Infor, Epicor, and Sage. The ERP industry hasevolved over the last 40 years. Gartner initially coined the acronym ERP as an extension of materialrequirements planning, later manufacturing resource planning and computer integrated manufacturing.Some of the vendors started with an accounting package and not the core manufacturing even thoughoverall industry has its roots in manufacturing industry.



Brief History

SAP

SAP was founded in 1972 by five former IBM employees with a vision for building standard applicationsoftware for real time data processing. SAP initially came up with a financial accounting system – RFwhich eventually became the base for their first ERP package SAP R/1. In the 80’s SAP built SAP R/2packaged mainframe software application which processes data in real time and integrates all ofenterprise’s business function. In the early 90’s SAP came up with a client server version of theirapplication software SAP R/3 – which had uniform graphical user interface, dedicated use of relationaldatabases, and support for servers from various manufactures. SAP started partnering with Microsoft andreleased SAP R/3 for Windows NT. In the mid-90’s SAP expanded its customer base worldwide and someof the big companies decided to implement SAP R/3. In the late 90’s SAP introduced mySAP.com as partof their new strategy which will combines e-commerce solutions with SAP existing ERP applications on thebasis of cutting edge web technology. SAP became the 3rd largest software vendor by 2000 with aworkforce of 24,000 employees in more than 50 countries. SAP introduced the first version of SAPNetweaver to the market and continued to expand their product portfolio by making several strategicacquisitions like Pilot software, Oulooksoft, Wicom, BusinessObjects, Sybase and lately SuccessFactors.SAP embraced in-memory computing by introducing SAP HANA platform. SAP also started focusing oncloud computing by offering SAP Business ByDesign, SAP Business One cloud, and process specificofferings in HCM, Finance, Procurement, and Sales & Marketing.

Oracle

In 1977 Larry Ellison, Bob Miner, and Ed Oates started Software Development Laboratories which was theprecursor to Oracle. In 1978 Oracle Version 1 was developed but was never officially released. OracleVersion 2 was released in 1979 which was the first commercial SQL relational database managementsystem. Oracle became the leading RDBMS vendor by the mid-80’s, offering Oracle Version 3 built on Cprogramming language and was the first RDBMS to run on mainframes, minicomputers and PCs to Oracleversion 5 which was the first relational database systems to operate in client/server environments. After 10years of existence Oracle launches a new effort to build an enterprise application to take advantage of theirpowerful database. In 1990 the company launches Oracle Applications Release 8 which includesaccounting programs designed for the emerging client / server environment. Throughout the 90’s Oraclecontinuously improvised and released innovative products by embracing internet, Java programminglanguage and offering support for open standard technologies like XML and Linux. In the beginning of thefirst decade Oracle unveils its application strategy, by launching Oracle E-Business Suite 11i, acquiring JDEdwards, PeopleSoft and Siebel. Oracle now offers a wide variety of products in addition to Oracle E-Business Suite like Hyperion, JD Edwards Enterprise one, JD Edwards World, PeopleSoft Enterprise,Siebel & Taleo.

Microsoft

Microsoft was formed in 1975 when Paul Allen and Bill Gates formed a partnership with a big vision of acomputer in every home and desktop. Microsoft started with building their first operating system –Microsoft Disk Operating System (MS – DOS). In 1985 Microsoft officially launched Windows 1.0 theirfirst operating system based on Graphical user interfaces. Microsoft subsequently released variousversions (Windows 2.0, Windows 3.0, Windows NT, Windows 95, Windows 98, Windows 2000, WindowsMe, Windows XP, Windows vista, Windows 7 and Windows 8) of their operating systems over the lastthree decades. In addition Microsoft has released multiple productivity improvement packages as well.

Microsoft entered ERP market when it acquired Great Plains in 2001. Great Plains had acquired Solomonin 2000. Axapta was originally developed by IBM and Damgaard Data; later IBM returned all rights of thisproduct to Damgaard Data which then got merged with Navision Software in 2000. Microsoft thenacquired Navision Software in 2oo2, which was successfully competing against Great Plains and Solomon.Microsoft clearly revealed its strategy of entering into the ERP market with these acquisitions. Microsoftended up with four product lines (Solomon, Great Plains, Axapta, and Navision) which were competing inthe same market and for the same customers. This forced Microsoft to decide on whether to continuedevelopment of all four products, pick one or two systems and market them to different segments, or builda completely new system. In 2003 Microsoft announced that for the next 10 years they will continue toinvest in all four product lines. In 2005 it announced a new wave strategy to bring all four products into a



single code base; this led to rebranding of all the products under a single brand “Dynamics” which createdfurther confusion for potential customers. The four products were named as following

Microsoft Dynamics AX (Axapta) Microsoft Dynamics GP (Great Plains) Microsoft Dynamics NAV (Navision) Microsoft Dynamics SL (Solomon)

There was a lack of clarity in the sales channels and partners about which product suited which industrythe most which prevented the opportunities from being realized. After a few years Microsoft started toslowly focus on partner strategy rather than product strategy. This partner strategy became a relief for theMicrosoft partner community and it has evolved over the years. In 2010 Microsoft revised this strategy byinsisting that the partners should differentiate themselves by focusing on specific vertical markets and alsoshould invest in an implementation methodology to provide consistent results to customers. Potentialcustomers should choose a Microsoft partner for their industry and the partner will know which productwill best suit the customer.

Infor

Infor was founded in 2002 under the name Agilisys which then acquired German company Infor in 2004and changed its name to Infor Global Solutions. Infor subsequently made a number of acquisitions toemerge as one of the largest providers of enterprise software. In 2006 Infor acquired SSA Globaltechnologies which in turn had bought Baan ERP from Invensys in 2003. Baan was rechristened to InforERP LN which was then renamed to Infor10 ERP Enterprise which is positioned as their flagship productfor large and mid-market customers in manufacturing and distribution industries. Infor 10 ERP Business(formerly known as Infor ERP Syteline) is primarily targeted at the following industries – Industrialmanufacturing, High Tech, Automotive, Equipment, Aerospace and Defense manufacturing sectors. In2011 Infor acquired Lawson and continued to expand their product portfolio. Infor M3 is a comprehensivesuite of software solutions primarily for medium to large organizations that have physical inventories andassets to manage. This product is targeted for Equipment, Food & Beverage, Distribution, Chemicals & LifeSciences etc. Infor through its aggressive acquisition has landed up with number of disparate systems. Tocounter this Infor introduced a middleware Infor 10 ION Suite to connect all Infor applications. Infor hasmany applications which at a first glance offer same capabilities, but on close inspection one can find thatthey offer unique functionality for different industries. Infor product portfolio includes Infor LX, Infor SunSystems, Infor Distribution SX.e, Infor VISUAL, and Infor XA.

Epicor

Epicor was founded in 1984 under the name Platinum Software Corporation. Their initial product wasfinancial accounting software designed for multi user LAN based environments. In 1992 the first financialaccounting product specifically designed for client/server computing was released. In the late 90’s theymade a series of acquisitions like Clientele (CRM Solution), FocusSoft (Distribution Solution), andDataWorks (Manufacturing Solutions). In 1999 the company name was changed to Epicor SoftwareCorporation. Epicor continued to release innovative products like first CRM solution based on Microsoft.Net, Web service based enterprise service automation solution. Epicor ERP is their flagship product whichis targeted for Midsize to large scale manufacturing, distribution and service companies. The product wasintroduced in 2008 as a result of multiyear product consolidation which ended up creating new serviceoriented architecture. This product provides extensive analytical capabilities and a full mobile access. In2011 Apex Partners acquired both Epicor and Activant merged the organizations together and retained thename of Epicor for the merged entity. Epicor ERP has an innovative and complete Service OrientedArchitecture. It also supports Service as a Software deployment and is one of the few vendors who have afull multitenant SaaS and on-premises version out of a single product. This product is fully built usingMicrosoft .Net which makes customers who are using Microsoft products easy to adapt. Epicor Express is acomprehensive SaaS offering which is leveraging the core functionality that has been used in their on-premise ERP product.



Sage

The company was founded in 1981 by David Goldman, Paul Miller, and Graham Wylie to produceaccounting software to small scale businesses. Sage acquired Tetra in 1999 which opened avenues for Sageto move into mid-market. In the new millennium also Sage continued to grow making strategicacquisitions. In 2005 Sage acquired Adonix which helped them to launch a global product in the latteryears. Currently Sage has offices in 24 countries and has emerged as the largest supplier to small businesswith 6.1 million customers worldwide. Sage offers Sage One & Sage 50 Accounting software for smallbusiness and Sage 100 ERP, Sage 300 ERP, Sage 500 ERP, and SAP ERP X3 for midsized business inNorth America. Typically most of Sage offerings are country/region specific catering to small business withan exception of Sage ERP X3. Sage ERP X3 is their global ERP solution (built on former Adonix product)and is available in 55 countries. It aims to capture the global midmarket segment. This product has beenelevated as a core strategic offering within Sage, the current version of Sage has been built with usercentric approach, supports search and is well integrated with Microsoft office 2010 products. It alsosupports Microsoft SQL Server and Oracle databases thus giving more options to the customers. Sageleverages an extensive partner community to deliver and support clients and also provides professionalservices for large and/or complex deployments. Sage offers industry specific solution for verticals such asautomotive, aerospace and defense, industrial engineering and machinery but lacks the depth infunctionality.



Data

Table 1: Total Revenue - 2000 to 2012

TotalRevenues

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Microsoft 73,723 69,943 62,484 58,437 60,420 51,112 44,282 39,788 36,835 32,187 28,365 25,296 22,956

Oracle 37,121 35,622 26,820 23,352 22,430 17,996 14,380 11,799 10,156 9,475 9,673 10,860 10,130

SAP 21,405 18,416 16,654 15,374 16,109 15,077 12,383 10,042 7,514 8,849 7,772 6,534 5,881

Sage 2,118 2,148 1,993 2,217 2,305 2,292 1,684 1,342 1,238 937 863 - -

Infor 2,759 2,648 2,584 - - - - - - - - - -

Epicor 855 305 369 - - - - - - - - - -

In USD Millions

Note: - Data has been compiled using publically available information like company websites, securityexchange website, Wikipedia etc. If the information was not available in the public domain the same hasbeen left blank. The total revenue of Microsoft & Oracle includes revenues from their flagship products -Operating Systems & Database. So the total revenue shouldn’t be used to do direct comparison of how welltheir ERP products performed instead it should be used just to understand how they performed relativelyacross the years and also to indirectly understand the size of the companies.

Table2: ERP Implementation Cost, Duration & Overruns 2009 to 2012

Year Cost % of CostOverruns

Duration % Of DurationOverruns

% Receiving 50%of Less Benefits

2012 $7.1MM 53% 17.8 Months 61% 60%

2011 $10.5MM 56% 16 Months 54% 48%

2010 $5.5MM 74% 14.3 Months 61% 48%

2009 $6.2MM 51% 18.4 Months 36% 67%

Source: Page 2, 2013 ERP Report – A Panorama Consulting Solutions Research Report



ERP Vendor Market Share –2013

ERP Market Share – 2012 & 13



ERP Vendor Selection 2013

Traditional Vs. Cloud Based



Analysis

The ERP Industry was in existence in various forms over the past 40 years; however with the turn of thecentury the industry has undergone substantial changes. ERP Industry witnessed large scale acquisitionsand mergers where even some of the established players like PeopleSoft, JD Edwards, Lawson, Baan,Navision, Siebel etc. got acquired by Oracle, Microsoft, and Infor.

SAP is currently holding 26% of the market share; Oracle holds 17% and Microsoft 11%. All three of themgained market share compared to the previous year at the expense of the Tier II & Tier III vendors. Let usnow analyze how the Porter’s five forces shape up the competition in this industry.

Rivalry among existing competitors

SAP & Oracle primarily competes for the Large to Midmarket customers while Microsoft primarilycompetes with other Tier II & III vendors for mid to small market customers. The intensity of thecompetition between SAP & Oracle is determined to be high as they are roughly of the same size. SAP’sentire revenue is generated from enterprise applications and services related to it, whereas Oraclegenerates its majority of the revenue from a number of other line of business including its flagship OracleDatabase. Similarly Microsoft generates its revenue primarily from its Operating System software andOffice productivity tools. ERP industry lacks a clear industry leader even though SAP has the majority ofthe market share as Oracle is not far behind and there are numerous Tier II & Tier III vendors whocollectively holds significant market share. The exit barriers for customers are high as if one customer hasimplemented ERP software it will take significant effort and cost to move to another one.

SAP, Oracle & Microsoft is highly committed to their enterprise application software which is clearlyshown by the huge investments they have made with several acquisitions. The dimension of thecompetition is primarily based on product features specific for an industry, quality of the support services,brand image and less on price discounts. Profitability is adversely affected if the competition is primarilybased on price alone. In this case the product features are not identical, switching cost is high, and is notperishable. Hence price competition is not significant in ERP Industry. Even though SAP & Oracleprimarily caters to Large to Midmarket customers they also have expanded their product portfolio to caterto Small & Medium Business (SMB) segment which puts them in direct competition with Microsoft, Infor,Epicor, Sage and other Tier II & III vendors. If they compete just on price then this can result in zero-sumcompetition.

Threat of new entrants

Numerous ERP vendors currently exist but very few of them are of significant size or have global presence.The entry barriers for a player to come at global level are pretty high. The success of ERP vendors isheavily dependent on the partner network which can be reseller, system integrators, and hardwarevendors. So a new entrant needs to build significant partner network to become a global player. Customertends to move with the other customers while choosing the ERP as they value being in the network ratherthan trying out a new vendor. Customers trust large vendors like SAP, Oracle & Microsoft as ERP softwareis a critical product which affects their operations. This becomes a deterrent for new entrants as they willhave to significantly reduce the price till they build up a significant customer base. Customer switchingcost is significant as the effort required for migrating the data from one application to the other is veryhigh, change in business process to adapt to the new application and also the effort required to retrain theusers are very high. High switching cost raises the entry barrier and becomes a deterrent for the newentrant.

Initial capital requirements are on the higher side as the products need to be built over a period of timewithout any returns till the product is successfully launched in the market. Some of the ERP vendors madestrategic acquisitions to shorten the cycle to launch the product in the market and thus expanding theirproduct portfolio rapidly. Distribution channel for ERP products are primarily reseller and systemintegrators. SAP & Oracle rely heavily on system integrators for sales and successful implementation oftheir product whereas Microsoft depends on reseller partner network to sell their products. Currentvendors will take up the majority of the available capacity thus making it difficult for the new entrant topush their products.



Power of Suppliers

Supplier/Vendor to ERP Industry includes Server Hardware / OS vendors, Database vendors, partnerswho provide skilled human resources. SAP is dependent on various Hardware & Database vendorsincluding Oracle but as their product is compatible with various Servers, OS & Database there is nomonopoly for any one vendor. Oracle with acquisition of Sun Microsystem can offer end to end ERPsolution which includes Server Hardware, Server OS, Database, and the Enterprise Application withoutdepending on any vendors. So the power of suppliers is not significant for the top two players in theindustry. Microsoft ERP products are aligned with their own Server OS and SQL Database thus dependenton vendors for Server Hardware only. Additionally their products are compatible with office productivitytools which become an added advantage for the customers. Microsoft products are not compatible withother operating systems or databases which can be a disadvantage for some customers. However thecustomer can choose from a variety of Hardware, and are not heavily dependent on any particularhardware vendor. So the power of suppliers is not significant for Microsoft as well. Epicor is builtcompletely on Microsoft platform, which makes them dependent on Microsoft.

Sage is compatible with both SQL & Oracle databases thus giving better options for customers. Infor has avery diverse set of products which they have added through acquisitions. System Integrators /Implementation Partners play a key role for ERP Vendors; the availability of the skilled workforce for theproducts is an important criterion in the success of the implementation of the product. These partners caninfluence the customer’s decision in the ERP Vendor selection process. Microsoft sells their products onlythrough their partner network and has recently emphasized on their partner strategy. Microsoft expectsthe partners to specialize themselves for an industry and also develop an implementation methodology togive consistent results to customers. ERP Vendors need to maintain the partner network and also have asolid strategy to engage them at the optimal level. Partners as such cannot put undue pressure on vendors;instead both vendors and partners need to work together for the mutual benefit. Upfront cost for ERPImplementation is high due to expensive hardware, databases, implementation cost which is passed on tothe customers. Overall the power of vendor is not that significant in ERP industry and hence cannotnegatively influence the profit.

Power of Buyers

Buyers are considered powerful if they have more bargaining power compared to industry participants.Customers can demand more value by asking for discounts and/or more services by playing the industryparticipants against each other. SAP & Oracle deals with large customers who can be considered powerfulbut can’t influence the pricing beyond a point as the depth of the functionality that vendors offer vary andalso as the switching cost is very high. The influence of Buyers (customers) also depends on the pricesensitivity. Customers are considered sensitive: - 1) if they need to spend a significant portion of theprocurement budget or cost structure or 2) if they earn low profits. If they are sensitive then the customertend to weigh all the options and tend to bargain hard. Also if the products that the customers buy have adirect influence on the output they produce then the customers tend to be less sensitive. ERP systems cangive significant return on investment by improving experience, reducing labor, material, and other cost; ifthis is case then the customers are more interested in the quality of the product rather than the price. Sagehas lot of SMB segment customers; also there are a lot of Tier II & III vendors who cater to the same group.Here even though the customers have lot of options to choose from, the products don’t have lot of featuresin common. Customers tend to go with the features that suit them the best and also based on their overallIT strategy. Generally customers cannot put undue influence on ERP Vendors beyond a limit and hencecannot negatively affect the profitability of the industry.

Threat of substitute

Substitute products limit an industry’s profit potential by putting a ceiling on the prices. The threat ofsubstitute is relatively less as the switching cost for customers are high and the alternate options availablemay not always have the depth of the functionality that the main products offer. Also customer tends tostick to the established vendors as ongoing support is an important aspect of ERP application. Theseapplications are often critical to the daily operations of the company. Hence ongoing support is animportant aspect during the ERP selection process. Customers generally will go with the establishedplayers as they tend to provide the ongoing support for a longer time period. Unless the substitute productcan provide a cost effective way to migrate to the new system, the threat of substitute will generally remainminimal. However changes in Industry can make the substitute attractive.



Change in Industry Structure

Profit potential of the industry in the long run is determined by the industry structure as described aboveusing the five forces. Technological Innovations can change the Industry structure dramatically. Impact ofIn-memory computing, Cloud computing in ERP Industry can be significant. Leading vendors haveinvested heavily on technological innovation. SAP has introduced HANA Platform to leverage In-memorycomputing which will significantly reduce the response time especially for their analytical applications.SAP, Oracle, and Epicor have embraced Cloud computing by adding new products to their productportfolio. They offer SaaS (Software as a Service) products in addition to on-premise products.

As the industry structure changes, there can be changes to entry barriers which can shift the threat of newentry. Emergence of a disruptive technology can catapult a new entrant as a serious threat to the marketleaders. Strategic decisions made by key players can have a significant impact on the entry barriers. Theycan make big investment in Research and Development of superior technology/product; increase theeconomies of scale which can raise the entry barrier for new entrants. Also technological advances cancreate new threat from substitutes which did not exist earlier. The power of supplier and buyers also canchange over time and / or as the underlying factors change.

Cloud based ERP Solutions

Cloud based ERP solutions appear to provide a number of benefits related to cost savings, scalability, andability to quickly adapt to changes in business process. It is observed that cloud based solutions are moresuitable for SMB segment primarily because of the subscription based pricing schemes and the lowerupfront investments. The part of upfront cost that is mainly reduced includes expenses for serverhardware, user licenses and implementation. Cloud based ERP solutions should also have lower operatingcosts, scalability and a shorter implementation period. They generally boast of improved accessibility &System availability, better disaster recovery, and easier integration with other cloud services. Howevercloud based ERPs also have certain drawbacks like security/confidentiality risks, strategic risks,functionality limitations, and performance risks. Security risks are typically more of a concern for largeenterprises as they fear loss of confidential data. Cloud ERP creates a strategic risk as outsourcing abusiness critical system to a service provider will create a critical dependency on the service provider.Cloud ERPs are also not as mature and don’t have the functionality depth when compared to traditionalones. It also has limitation in integrating with existing applications of the customers. Performance issuesdue to network outage, speed and reliability of the network, and also limitation in transferring largevolume of data also are there.

ERP Industry is witnessing a change where cloud based solutions are growing at a rapid pace. There is aclear shift from traditional ERP to cloud based ERP. Though the cloud based ERP offers lower upfront,operating cost and rapid implementation the adoption is generally limited to SMB segments. The primarydeterrent especially for the large enterprises is the security risk drawback of Cloud ERPs. Customers feelinsecure when the data is stored in a cloud where they do not have any control over security. Also it couldbe more vulnerable to hackers. SMBs choose Cloud ERPs as the benefit of lower upfront cost and operatingcost are especially relevant to them. They typically don’t have enough financial and human resources toinvest in information systems. Also Cloud ERPs provide easier scalability which SMBs can leverage as theygrow.



Conclusions

The ERP industry grew year on year (except for couple of years) in the new millennium. Qualitativeanalysis of the Industry using the Porter’s five forces reveals that the profitability of the industry can besustained or increased on the long run. The intensity of the competition of the rivals is not strong enoughto start price war and thus reduce the profitability. Currently the entry barriers are high for a new entrantto be a global player and successfully compete with the major players. Bargaining power of suppliers andbuyers are also not significant to drive down the profit margins. Also in the current situation the threat ofsubstitutes are not intense for major players to put a price ceiling for their products. The major players areconstantly enhancing their product portfolio to adapt to innovative technologies like In-memory and Cloudcomputing.

Generally ERP Implementation is costly, time consuming and also disrupts the existing businessprocesses. Many implementation projects overrun both cost & duration (refer table 2) which has adverseeffect on the customers. The challenge for the industry is to reduce the Total Cost of Ownership (TCO) andprovide better Return of Investment (ROI) for the customers. ERP Products like Epicor ERP which hasSOA and model driven architecture offer more configuration capabilities compared to traditional productswhere customizations can prove difficult during upgrades. Vendors need to make their product more usercentric, more relevant for the information user, casual user, business leaders, and process owners.Accessibility of information via Mobile is gaining lot of momentum and vendors need to define theirmobile strategy clearly.

Cloud ERP Solutions has witnessed a tremendous growth in the past couple of years. Cloud ERP Solutionsare primarily adopted by SMBs while large enterprises are yet to adopt as it has some inherent drawbacks.The major players are making significant investment in this space by releasing the cloud version of theirtraditional ERP as well as through acquisitions. In the past couple of years SAP has acquiredSuccessFactors and Oracle has acquired Taleo to expand their footprint in cloud solutions. SAP BusinessByDesign, Oracle Fusion applications, Epicor Express are examples of vendors offering cloud solutionsbased on their traditional products.



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2006, SAP: Building a Leading Technology Brand (B): Columbia CaseWorks

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EPLM06 Anup Varghese 2226288 Project Report v 1.1

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