Business Plan On Qualitative Evaluation OF The Enterprise Resource
PLANNING SOFTWARE INDUSTRY
Qualitative Evaluation of the ERP Industry
Enterprise resource planning (ERP) software are utilized in industries to coordinate a wide array of transactions and tasks. ERP companies create and install information system infrastructures for different business needs. Companies such as SAP, BAAN, and Oracle entered into this business scene by providing the needed support and IT services to small businesses. Their systems evolved with the growing needs of customers. Modules for financials, human resources, supply chain, materials management, and production planning were added to make their systems a complete business suite.
Michael Porter (1979) discusses five competitive forces that shape strategy in the modern business world: (1) threat of new entrants, (2) bargaining power of buyers, (3) bargaining power of suppliers, (4) threat of substitute products or new services, and (5) rivalry among existing competitors. These are the five forces that will be used to qualitatively evaluate the ERP industry’s strategic position. Usually, the five forces differ from industry to industry. The ERP software industry is a sector of the larger software industry headed by Microsoft. It is a dynamic industry as businessmen are finding ways to streamline operations and analyze business data.
Threat of New Entrants
New competitors are attracted to the market: however, threat of new entrants is low. This is an advantage for existing ERP software companies since there are factors to be considered by new entrants in this market such as: (a) high capital investment, (b) importance of strong brand names, (c) high learning curve, (d) patent restrictions, and (e) advance technologies requirement. These barriers limit new entrants. However, new-entry developers can target niche markets and develop on them. They can develop enterprise software on areas such as school administration, training systems, etc. focusing on small businesses as an upstart. Quality and customer support is important in this business segment.
First a high capital investment is involved to develop an ERP suite similar to what the Big Three (SAP, BAAN, and Oracle) offers to their customers. Their experiences in hardware infrastructures and software systems are backed by engineers, computer scientists and IT specialists. Next is the importance of strong brand names. Primarily, the advantages of the Big Three in their software are customizability, integration, data management, and financials management. Their products are used by small, medium, and large companies and have a good following due to the results of their system upgrades. Also, there are companies opting to try them out to change their business systems and make them more efficient. Thus, the market leaders have become benchmark setters (O’Leary, 2000). Another is high learning curve. A thorough market research has to be done to attain the same level of service and competency as SAP, Oracle, and Baan. Also, ERP software companies have the distinct advantage of technology due to their investment in research and development. This could limit or hinder new entrants in two ways: (a) patent restrictions, and (b) acquiring advanced technologies. The best technologies are patented and this could limit the new competitor in their software development and integration.
Bargaining Power of Buyers
Then, there is the bargaining power of buyers. Generally, buyers have limited bargaining powers in this industry. First, limited amount of information is available to the customers. Customers usually do an in-depth study of what they need and how to address this need. However, key business research would entail insider interview from previous employees who have recently use these software, or there is a new manager or leader who would support use of these IT systems. Second, the products are important to the customers. These products usually handle business transactions, financials, and people management. These are important aspects of businesses and mishandling of information for these tasks would have a negative impact on the whole business. Third, there is a huge customer base consisting of new customers and old customers who need technological support (since ERP system implementation require months to years before going live). Lastly there are limited options for customers. Most notable are SAP, Baan and Oracle, but there are also good business reviews from SAGE, Microsoft Dynamics, Netsuite, and Xero. However, acquisitions of these smaller companies are done by the group leaders. Famous examples are Oracle acquiring Peoplesoft and SAP acquiring Concur.
One power of customers is that of product customization. It is essential as each business model differ from each other on a case-to-case basis (O’Leary, 2008). That is why the implementation of ERP systems relies on a system development life cycle (SDLC) where constant improvement is supported by an IT teams. ERP system implementation is divided into manageable phases before going live to assure success of the system. But, there are also independent system developers who can cater to smaller businesses at a cheaper cost. Customers are after this customization, and this can be offered by startup IT companies.
Bargaining Power of Suppliers
Inputs basically have little impact on cost as most part of the cost is concerned with human capital more than on input materials such as in the case of manufacturing. Maintaining an employee base of IT professionals with the necessary skills is the key in ERP software companies. Currently, it is common practice to outsource basic services such as customer support, and this lowers the total cost of operations and basically low bargaining power for service providers and employees.
It is during startup that investments on hardware and structures are high. It is on this stage that suppliers have high command of their product prices. However, as operations become steady, the bargaining power of suppliers in this industry segment is primarily low.
Threat of Substitute Products or New Services
There is a low threat of substitute products or new services primarily because of high switching cost. This involves employee retraining and software installation which can incur high costs for the firm. However, there are new products catching the attention of the ERP customer base such as cloud computing (Leon, 2008). Cloud computing programs have already been integrated by some ERP companies such as SAP and Oracle, to take advantage of this technology. This is an example of a new service or product that is integrated by the ERP companies to improve their systems. Cloud computing allows for faster data connections, less risk, and lower cost.
Rivalry among Existing Competitors
Currently SAP (Systems, Applications, and Products in Data Processing) is the market leader in terms of ERP suite of products. Generally, there are only a few competitors in this industry and acquisitions by market leaders further reduce this number. With the steady business, existing competitors now focus on sales and advertising for their best-of-breed systems, a group of successful product integrated into one whole system (Kreher, 2005).
However, Janstal, as cited by Kreher (2005), dicusses that current ERP systems are towards their twilight after 15-20 years, since software changes into the overall algorithm could damage the stability of their systems and software architecture. This is a challenge for leaders and developers in their respective R and D programs to make the step forward in ERP software industry.
Kreher, Y.W. (2005). ERP Application Suites: A Comparison from a Non-IT Perspective. Syracuse University. Retrieved January 9, 2015 from http://classes.ischool.syr.edu/ist600erp/white/doc/white_erpapplicationsuite.pdf
Leon, A. (2008) Enterprise Resource Planning. New Delhi: Tata McGraw-Hill Education, 1-11.
O'Leary, D.E. (2000) Enterprise Resource Planning Systems: Systems, Life Cycle, Electronic Commerce, and Risk. Cambridge, U.K.: Cambridge University Press, 28-37
Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Retrieved January 9, 2015 from https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
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