Strategic Future Orcl Vs Sap

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The Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the Enterprise Software Applications Industry …

The Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the Enterprise Software Applications Industry

ORCL vs. SAP

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  • 1. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industry The Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryIntroductionThree firms control now 43% of the enterprise software applications market, whose growingrevenue is projected by Gartner to surpass $253.7 billion in 2011.1 This level of industryconcentration is part of an ongoing trend that characterizes the declining stage in an industrylifecycle model (Porter 1980). As such, the research opportunity is to build a formal model toexplain the industry factors leading up to such high levels of concentration, while being able tocapture firm level strategies as well. Moreover, given the magnitude of change in a relativelyshort period of time in this industry, the transformation that is still going on makes for a quasi-natural experiment, whereby the researcher can test theory driven hypotheses.It is my objective in undertaking this work to build a testable model that answers the followingresearch question: What are the industry-level vs. firm-level factors leading to industryconsolidation in the enterprise software applications industry? The immediate contributionwould be to establish conceptual and methodological linkages between industry and firm levelfactors leading up to consolidation higher concentration. In other words, a potential contributionis to expose the often-ignored ‘conduct’ part in the structure-conduct-performance paradigm. Ata later stage, the model is to be tested not only on the focal industry herein, but also on otherindustries.The industry level working hypothesis is that a significant decrease in environmentalmunificence triggers both the emergence of a dominant design, and a shakeout in the industry(Utterback et al. 1993; Klepper et al. 2005). The emerging dominant design in the enterprisesoftware industry realizes platform economies—of scale, scope and skill—by verticallyintegrating complementary assets (Teece 1986; Rothaermel et al. 2005). The formal modelsuggests that the enterprise software applications market tends to settle towards the Bertrandequilibrium around the marginal cost of the most efficient player.In this work I will employ a mix of qualitative and quantitative methods. More precisely, astylized history of the enterprise software applications industry is used as stage for deriving thehypotheses and building the formal model.In the next section, I will explain the research setting by familiarizing the reader with theenterprise software applications industry in broad terms. Next, industry-, and firm-level theories1 Gartner is one of the top information technology groups of industry analysts. The source of this quotation is at:http://www.gartner.com/it/page.jsp?id=1535314 1 of 15
  • 2. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industryexplaining industry evolution amid discontinuities are reviewed with the idea of suggestingtestable hypotheses and building the model along the stylized history of the industry.Research Setting: Background and Data CollectionThe object of this exploratory investigation is the enterprise software industry, and the factorsand conditions leading to its consolidation.2 A measure of this industry change is given by asurvey revealing a decrease from 300 publicly traded enterprise software firms in 1997, to 111 in2006 (Cusumano 2008).3The gross margins in this industry can theoretically be as high as 99%, assuming that themarginal cost of an additional copy of the software is zero. This feature would make thisindustry a candidate for the very high scale economies associated with monopolies, yet there isno consensus about this among economists (Baumol et al. 2008).4 The top firms by market shareare SAP, Oracle and Microsoft, and their cumulative enterprise software market share was 43%in 2010.5 It should be also noted that SAP has grown organically into a complete solution, thatis, its applications supporting different business processes could interoperate by design. On theother hand, Oracle and Microsoft started as vendors of database and operating system solutions,respectively, and have grown through acquisitions into complete enterprise software architectureproviders. These top tier enterprise software firms target large Global 1000, multi-location andmulti-national firms, whose complex operations require complex implementations interfacingwith multiple systems. The target firms are characterized by the number of users, from 60 toover 1000, the number of employees, over 2000, and the annual revenues, in excess of $250million. A firm spends on a top tier enterprise software package more than $750,000 and anadditional amount, 3 to 10 times higher, on implementation.6According to Gartner, enterprise software consists of: Software products designed to integrate computer systems that run all phases of an enterprise’s operations to facilitate cooperation and coordination of work across the enterprise. The intent is to integrate core business processes (e.g., sales, accounting, finance, human resources, inventory and manufacturing). The ideal enterprise system2 Throughout this paper, enterprise software applications and enterprise resource planning (ERP) are usedinterchangeably.3 This comprehensive industry survey covered those firms selling “services-prepackaged software,” listed under USStandard Industrial Classification (SIC) code 7372, from 1990 to 2006.4 The authors raise the open question of whether or not the software industry is a natural monopoly (ibid. p. 222).The implication of an affirmative answer would then be a natural tendency towards industry concentration, which inturn would render the research question as trivial. However, the answer is not always trivial, especially in anindustry where technological change is going apace. This discussion will continue later within the context ofplatform economies.5 See Annex 1 for the exact breakdown.6 http://www.softresources.com/software-market-overview SoftResources is the former IT practice of KPMG PeatMarwick. 2 of 15
  • 3. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industry could control all major business processes in real time via a single software architecture on a client/server platform. Enterprise software is expanding its scope to link the enterprise with suppliers, business partners and customers.7From a technology perspective, the single software architecture in the above definition ought tobe visualized as a vertical stack whose top layer consists of several isolated softwareapplications, each supporting a core business process, and often sold by a different vendor; thenext layer down consists of middleware software, which abstracts the application layer from theoperating system and hardware layers at the bottom of the stack. The enterprise applications aresegmented by the type of core business process supported, as follows: enterprise management,human capital management, supply chain management, product lifecycle management, customermanagement, and sourcing and procurement (Jacobson et al. 2007). These segments are relevantto this analysis from a couple of perspectives.First, applications are the result of an evolutionary process in the supply and demand. Anenterprise application, such as customer resource management, is just one among several thatrequire integration services to interoperate. This is a process fraught with risk that is correlatedwith the number of different application segments or modules (Davenport 1998).8Second, when successfully integrated in an organizations, these applications automate andintegrate business processes, share common data and practices, and produce and accessinformation in real-time (Markus et al. 2000). The functional integration among the topapplications is achieved by virtue of a database, which normalizes and synchronizes the dataflows among the applications at the top layer (Davenport 1998)—see Annex 2 for a diagramillustrating the central position of the database in an enterprise software system.TheoryIn this section we look at industry level factors followed by firm level factors, which togethercan help explain the transformation in the enterprise software applications industry, and thenassist with the formulation of hypotheses. The industry level factors are environmentmunificence, industry shakeouts and dominant design. The firm level factors are complementaryassets and platform economies.Environmental munificenceEnvironmental munificence, defined as the “scarcity or abundance of critical resources neededby (one or more) firms operating within an environment,” determines firm growth and survival7 http://www.gartner.com/technology/research/it-glossary/8 An idea of the risk of implementing enterprise software systems is given by the 40-60% rate of failure estimated byseveral industry analysts. A compilation is available at: http://www.it-cortex.com/Stat_Failure_Rate.htm 3 of 15
  • 4. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industry(Dess et al. 1984; Castrogiovanni 1991). The so defined resources can be any exogenous factorsthat influence a group of firms in aggregate, e.g., availability of capital, customer markets, andlabor unions. In a theoretical work on environmental munificence, Castrogiovanni (1991) arguesthat it is at this level of analysis that industries ought to be studied. Moreover, Porter’s (1980)model of external forces operationalizes the effects of environmental munificence on firms’strategy and performance at this same level in terms of concentration of market power, entrybarriers, changes in demand, or changes in product characteristics. The general idea of topicalrelevance is that when these types of resources become scarce, the range of strategic options forfirms in the focal industry decreases, and industry-level competition intensifies (Dess et al. 1984;Tushman et al. 1986).Industry shakeout & Dominant designIn many industries, the transition from the growth stage to maturity is marked by an increasefollowed by a sharp decrease in the number of firms in a process called industry shakeout(Klepper et al. 2005). Being such a consequential transformation, there are several theoriesdealing with shakeout as research artifact, yet this research looks specifically for insights into thepost-shakeout period. Among the variety of theoretical accounts, there has been a long line oforganizational change models whose explanations fit the shakeout pattern in the enterprisesoftware applications industry. This body of research, based on empirical and analytical studiesdone across several industries, points to the shakeout of firms just as a dominant design emergesin the industry from the interplay between technical and market choices (Utterback et al. 1993;Agarwal 1998; Klepper et al. 2005). Utterback and Abernathy defined the concept of dominant[product] design and attributed to it the standardization followed by complementary and scaleeconomies in the focal industry (1975). In closing, it should be mentioned that Utterback andSuarez empirically showed that industry concentration round dominant design follows shakeoutin several American industries (1993).9Complementary assetsBefore examining the relevant works in these streams of literature, I should make the readeraware of the change in the unit of analysis. We are moving down at firm level, yet given themarket share of the leaders in the enterprise software applications industry, the implicationsbecome consequential at industry level.Teece defines complementary assets that are specialized as those necessary to the successfulcommercialization of [technical] innovations (1986). At about the same time, Tushman andAnderson distinguish two major [technological] shifts, competence-destroying vs. competence-enhancing, relative to their respective effects on the incumbent firms in an industry (1986).Rothaermel and Hill combine these two insights and show that, following a competence-9 Their model could not be verified by the integrated circuits industry at that time. 4 of 15
  • 5. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industrydestroying technological discontinuity across four industries, the position of the incumbentfirm(s) is strengthened if the complementary assets it owns are specialized (2005).Platform economiesThe second firm level phenomenon of relevance to this work is the platform defined byBresnahan and Greenstein as “a bundle of standard components around which buyers and sellerscoordinate efforts” (1999). These authors make their case around the IBM System/360 and showthat in the computer industry the competition takes place between platforms and not firms (ibid.).The multi-sided networks or markets are a special case of platforms, in which an increase in onekind of membership increases the value of a complementary product to another distinct kind ofmembership. Rochet and Tirole are among the first to have studied two-sided markets bylooking at the credit card two-sided network of buyers and sellers, and showing that an optimalpricing strategy subsidizes one side of the market, as in increased adoption and growth in use bybuyers, by increased revenue from the other side of the market, as in sellers accepting credit cardpayments (2003). In the software industry in general, and the enterprise software applications inparticular, certain technologies such as operating systems, or databases, are platforms enjoyingthe economies of multi-sided markets (Rochet et al. 2003). These are coordinators of demandsfrom two or more types of customers.MethodThe game-theoretical approach in the industrial organization literature has introduced andlegitimized the use of time as a variable. Sutton makes a compelling theoretical case for the useof history at the intersection with economics in the better explain the business phenomena in thefollowing terms:An approach which seeks to characterize the range of feasible scenarios which are possible in agiven environment, while retaining the richness and depth of understanding which can only comefrom a detailed historical analysis (1994).An example of such work is Malerba and colleagues’(1999); they generate an ‘history-friendly’formal model to “capture, in stylized form, qualitative and ‘appreciative’ theories about themechanisms and factors affecting [the computer] industry evolution” (ibid.).The current work uses a stylized history of the enterprise software applications industry togenerate the hypotheses and build a model explaining the factors driving the industry evolutionin its increasing concentration stage.For future empirical research based on inferential statistics, it should be mentioned that for theERP industry the starting point is the Industry Sector under SIC Code: 7372, from which thesoftware games developers will be ignored.10 Then Standard & Poor’s COMPUSTAT data will10 See Annex 3 for a complete description of this sector 5 of 15
  • 6. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industrybe available. Moreover, for contrasts between the focal industry and other industries, whether ornot the latter exhibit platform economies, random sampling of firms within compare and contrastindustries can be employed. This way, relations between the ERP and other industries can beexplored and explained. For example, industries may exhibit different rates of consolidation, orconcentration despite undergoing the same environmental stress as the focal industry. In suchcase, a lifecycle argument can be made in each case.The Evolution of Enterprise Software Applications IndustryTo survey the history of the enterprise software industry, Porter’s four-stage industry cycle is anatural guide (1980). The four stages in the industry lifecycle according to this model areintroduction, growth, maturity and decline (Porter 1980:161). In the growth stage there are manyfirms competing on price; in the maturity stage, the competition is even more intense and ashakeout of firms is likely to lead to the lowest prices and margins throughout the life cycle; inthe decline stage, the number of firms drops and the price and profit margins are pushed down.For a stylized history of the focal industry, data is adapted from the history of enterprise resourceplanning by Jacobs and Weston (2007), and public sources about the key individual firms, e.g.,SAP and Oracle.IntroductionEnterprise software applications came into being as result the need to integrate functional silos,the dominant technology paradigm promoted by IBM. In 1976 and 1977, SAP, developer ofstandard software for integrated business solutions, and Oracle, developer of the first commercialrelational database, were founded to achieve data integration at firm level. The first milestone ofthe nascent industry was reached in 1978, when SAP released R/2, the integrated version of itssoftware allowing for interactivity between application modules. From its release, R/2 had beendesigned to work with Oracle’s database as complements.11 In 1985, PeopleSoft was foundedand by the end of the 1980s it released the first fully integrated human resource managementsystem solution. In 1987, Oracle founded its Applications division to build businessmanagement software closely integrated with its database software; in 1988, it released its firstERP application, an accounting system. By the end of the 1980s, all the major enterprisesoftware application vendors had come into being (Jacobs et al. 2007).GrowthIn the early 1990s, with the coinage of the term ERP by Gartner, the enterprise softwareapplications industry enters its growth stage. The growth of the industry throughout the 1990s11 http://www.oracle.com/us/solutions/sap/database/index.html 6 of 15
  • 7. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industryhad been carried on the wings of business globalization and the technological shift in computingarchitectures, from the IBM mainframe to client-server, and later internet, architectures. By1999, the dominant position of IBM had been eroded as the crop of enterprise softwareapplication firms founded since the mid-1970s controlled much of the ERP software market(Jacobs et al. 2007). A measure of the growth period is also the peak in the number of publiclytraded firms developing enterprise software applications, reached in 1997 (Cusumano 2008), seeFigure 1. Jacobs and Watson identify the year 2000 (or Y2K) problem first as a growth factor,then as a marker of the upcoming consolidation in the enterprise software application industry(2007). Fiure 1. The lifecycle of the publicly traded enterprise software application firms, from 300 publicly traded enterprise software firms in 1997, there are only 111 in 2006 (Cusumano 2008), and the trend continues.MaturityJacobs and Watson posit that Y2K was “the single ‘event’ that signaled both the maturing of theERP industry and the consolidation of large and small vendors,” whose effects had beenaccelerated, beginning in 2000, by the crash on the March 11 of the technology stock market(2007). Cusumano adds to these factors the diffusion of open source software as anothercontributor to the maturation of the enterprise software applications industry. All these point toenvironmental pressures to downsize and/or become more efficient. These lead to theformulation of the first two hypotheses: • H1: Sudden decrease in environment munificence leads to industry shakeout (Utterback & Suarez 1993; Klepper & Simons 2005). • H2: Triggered by the shakeout, the dominant design in the focal industry emerges around platform economies (Teece 1986; Rothaermel & Hill 2005; Evans et al. 2007).The dominant design in the ERP industry is round Oracle database technology. Indeed,enterprise customers, wanting to take advantage of vertical enterprise software applications ormodules, would need to integrate these applications, and the database is the integration platform(Davenport 1998; Markus et al. 2000). The first hypothesis above should test the effects of thepost-2000 shakeout against what seems from Figure 1 to be a case of industry lifecycle decline.In order to test the second hypothesis, a trending change in an industry concentration index, e.g.,Herfindahl-Hershman Index, along with an increase in Oracle market share should be observed.For a qualitative view of the ERP industry shakeout in this period, a vignette describing theconvulsions of two market leaders in vertical enterprise software applications, before beingacquired by Oracle in 2005, is included in Annex 4. 7 of 15
  • 8. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryDeclineGiven the technical and functional requirements for integration of the enterprise softwareapplications, we can observe that databases, middleware and operating system pieces of softwareare complementary product extensions of the application software pieces, and vertical mergersare likely to occur (Shy 1995).12 In 2005, Oracle, major database player in the enterprisesoftware market, and theoretical candidate for dominant design, begins to acquire firms in itsindustry at an unprecedented intensity. Annex 5 is a graphical illustration of the type and size offirms Oracle has acquired since 2005—more than 50 firms worth more than $50Bn. Accordingto the industrial organization literature, Oracle’s database is a multi-sided platform (Evans et al.2004). This leads to the formulation of an analytical hypothesis that suggests a model ofequilibrium for the ERP industry: • H3: The ERP market tends to settle towards the Bertrand equilibrium as determined by the marginal cost of the most efficient player, provided that there is no collusion.A graphic with the equilibrium line in monopolistic competition is included to place the Bertrandequilibrium in context.Market equilibrium under imperfect competition can occur at many points on the demand curve. In thisfigure, which assumes that marginal costs are constant over all output ranges, the equilibrium of theBertrand game occurs at point C, also corresponding to the perfectly competitive outcome. The perfect-cartel outcome occurs at point M, also corresponding to the monopoly outcome. Many solutions mayoccur between points M and C, depending on the specific assumptions made about how firms compete.For example, the equilibrium of the Cournot game might occur at a point such as A. The deadweight lossgiven by the shaded triangle is increasing as one moves from point C to M (Nicholson et al.).12 “Product extension: The acquiring and acquired firms are functionally related in production or distribution.Vertical mergers occur “when a firm producing an intermediate good merges with a firm producing the final good,or when two companies who have a potential buyer-seller relationship prior to a merger merge” (ibid. p. 173-4). 8 of 15
  • 9. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryIn our case, Oracle’s dominant design derived from its platform economies affords it lowermarginal costs than the firms that need to integrate their applications through its database. Thisis indeed a case when the strategy of a single firm, provided that it has leveraged its dominantdesign into a market leadership position, determines performance at industry levels. Oraclecommands indeed 19% of the ERP market, in a trend that is pushing upwards.Two observations are necessary at this time. For the time being, there are no signs of anti-competitive behavior between the market leaders in the ERP industry. Indeed, both Oracle andSAP have in place migration programs whereby customers of their competitor are incentivized toswitch. Then, in 2008, SAP tried to raise the cost of its maintenance contracts, yet it had to giveup by 2010 due to customer opposition.13 These two observations point out the fact that, for thetime being, absent anti-competitive behavior, the ERP industry is headed towards a Bertrandequilibrium characterizing competitive markets, despite the market power of the three firms atthe top.ConclusionWe have seen that in the case of the ERP industry, shakeout was the major discontinuity thatworked as competence-enhancing event, which in turn has led to the emergence of Oracle’sdatabase technology as a dominant design based on platform economies (Rothaermel et al.2005).The contribution of this work is in bringing together a mix of methods to generate testablehypotheses and a model of equilibrium in an industry.The future research potential for this work consists of testing the hypotheses and comparing andcontrasting its explanatory power across several industries.13 http://www.computerworlduk.com/news/it-business/10632/sap-faces-user-wrath-over-price-hikes/ 9 of 15
  • 10. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryBIBLIOGRAPHYAgarwal, R. (1998). "Evolutionary trends of industry variables." International Journal of Industrial Organization 16(4): 511-525.Baumol, W. J. and A. S. Blinder (2008). Economics: Principles and Policy, South-Western College Pub.Bresnahan, T. F. and S. Greenstein (1999). "Technological Competition and the Structure of the Computer Industry." The Journal of Industrial Economics 47(1): 1-40.Castrogiovanni, G. J. (1991). Environmental Munificence: A Theoretical Assessment, Academy of Management. 16: 542-565.Cusumano, M. A. (2008). "Changing software business: Moving from products to services." Computer 41(1): 20-+.Davenport, T. H. (1998). "Putting the enterprise into the enterprise system. (information integration) (includes related article)." Harvard Business Review v76(n4): p121(11).Dess, G. G. and D. W. Beard (1984). "Dimensions of Organizational Task Environments." Administrative Science Quarterly 29(1): 52-73.Evans, D. S., A. Hagiu and R. Schmalensee (2004). A Survey of the Economic Role of Software Platforms in Computer-Based Industries. CESIFO ECONOMIC STUDIES CONFERENCE ON UNDERSTANDING THE DIGITAL ECONOMY: FACTS AND THEORY.Jacobs, R. F. and T. F. C. Weston Jr (2007). "Enterprise resource planning (ERP)--A brief history." Journal of Operations Management 25(2): 357-363.Jacobson, S., J. Shepherd, M. DAcquila and K. Carter (2007). The ERP Market Sizing Report, 2006-2011. Boston MA, AMR Research.Klepper, S. and K. L. Simons (2005). "Industry shakeouts and technological change." International Journal of Industrial Organization 23(1-2): 23-43.Malerba, F., R. Nelson, L. Orsenigo and S. Winter (1999). "History-friendly models of industry evolution: the computer industry." Industrial & Corporate Change 8(1): 3.Markus, M. L., S. Axline, D. Petrie and C. Tanis (2000). "Learning from adopters experiences with ERP: problems encountered and success achieved." Journal of Information Technology 15(4): 245-265.Nicholson, W. and C. Snyder Intermediate Microeconomis and Its Applications, South-Western Cengage Learning.Porter, M. E. (1980). Competitive Strategy. New York, Free Press.Rochet, J.-C. and J. Tirole (2003). "Platform Competition in Two-Sided Markets." Journal of the European Economic Association 1(4): 990-1029.Rothaermel, F. T. and C. W. L. Hill (2005). "Technological Discontinuities and Complementary Assets: A Longitudinal Study of Industry and Firm Performance." Organization Science 16(1): 52-70.Shy, O. (1995). Indutrial Organization, Theory and Applications. Cambridge MA, MIT Press.Sutton, J. (1994). "History Matters. So What?" Journal of the Economics of Business 1(1): 41-44.Teece, D. J. (1986). "PROFITING FROM TECHNOLOGICAL INNOVATION - IMPLICATIONS FOR INTEGRATION, COLLABORATION, LICENSING AND PUBLIC-POLICY." Research Policy 15(6): 285-305.Tushman, M. L. and P. Anderson (1986). "Technological Discontinuities and Organizational Environments." Administrative Science Quarterly 31(3): 439-465.Utterback, J. M. and W. J. Abernathy (1975). "DYNAMIC MODEL OF PROCESS AND PRODUCT INNOVATION." Omega-International Journal of Management Science 3(6): 639-656.Utterback, J. M. and F. F. Suarez (1993). "INNOVATION, COMPETITION, AND INDUSTRY STRUCTURE." Research Policy 22(1): 1-21. 10 of 15
  • 11. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industry 11 of 15
  • 12. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryAnnex 1: Example of Top Vendors in the Enterprise Software Market, Their Market Share andRevenueSource: http://whatiserp.net/erp-report/erp-market-share-and-vendor-evaluation-2011/ 12 of 15
  • 13. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryAnnex 2: “At the heart of an enterprise system is a central database that draws data from and feeds datainto a series of applications supporting diverse company functions. Using a single database dramaticallystreamlines the flow of information throughout a business” (Davenport 1998).Annex 3: Description of the Industry Sector under SIC Code: 7372 (Prepackaged Software)Establishments primarily engaged in the design, development, and production of prepackagedcomputer software. Important products of this industry include operating, utility, andapplications programs. Establishments of this industry may also provide services such aspreparation of software documentation for the user-installation of software for the user; andtraining the user in the use of the software. Establishments primarily engaged in providingpreparation of computer software documentation and installation of software on a contract or feebasis are classified in Industry 7379, and those engaged in training users in the use of computersoftware are classified in Industry 8243. Establishments primarily engaged in buying and sellingprepackaged computer software are classified in Trade; those providing custom computer 13 of 15
  • 14. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP Industryprogramming services are classified in Industry 7371; and those developing custom computerintegrated systems are classified in Industry 7373. • Applications software, computer prepackaged • Computer software publishers, prepackaged • Games, computer software: prepackaged • Operating systems software, computer: prepackaged • Software, computer: prepackaged • Utility software, computer: prepackagedSource: http://www.osha.gov/pls/imis/sic_manual.display?id=149&tab=descriptionAnnex 4: The convulsions of two ERP vendors during the industry shakeout and prior to theirbeing acquired by Oracle (Jacobs et al. 2007).Our interview with Rick Allen, the former Executive Vice President of Finance and Administration and member ofthe J.D. Edward’s Board of Directors during the PeopleSoft acquisition of J.D. Edwards, offered insight into theconsolidations that occurred during this period.In 2002 the major players in order of size were SAP, Oracle, PeopleSoft and J.D.Edwards; Baan had fallen out bythis time. Allen indicated that, at this time, J.D. Edwards had performed extensive analyses of options for growingthe business. These options included acquisitions of competing companies, mergers, or securing additional financingfor developing new products. Although there were earlier meetings, a major event occurred on 31 October 2002when Craig Conway, President and CEO of PeopleSoft, contacted Bob Dukowsky, CEO of J.D. Edwardsconcerning potentially serious talks about merging the two companies.Allen reported that the merger looked attractive from a number of points of view. First, the software products werecomplementary: J.D. Edwards’s products were stronger in manufacturing, accounting and finance while PeopleSoftwas very strong in human resources products. Second, there was very little overlap in their software offerings.Further, the merged company could offer a much more complete software portfolio to the combined set ofcustomers. Finally, the two companies could see that the merger would result in a company that was larger thanOracle, their major competitor along with SAP.The PeopleSoft/J.D. Edwards merger was announced on 2 June 2003. On Friday of the same week (6 June 2003), ina great surprise to the industry, Oracle announced a hostile takeover bid for PeopleSoft. Rick Snow, the Chief LegalCounsel J.D. Edwards has vivid recollections of this period—including a 6 a.m. phone call on 6 June 2003 fromRick Allen, then J.D. Edwards’ VP of Finance. Snow recalls this period with the following:‘‘Rick [Allen] said, ‘Get hold of the lawyers. We’ve got a problem.’ The way that we found out was Bob Dukowsky[J.D. Edwards CEO] was watching CNBC and saw the announcement that Oracle was starting their hostile takeoverof the combined companies. So Rick called me, I called the partner of <law firm> and got him out of bed on Fridaymorning. We all met the following Monday . . . . . . We still had not closed with PeopleSoft and now all the talk wasabout this additional issue. So again, the attorneys and the investment bankers, plus the management of J.D.Edwards, all met and started trying to figure out how we should proceed in light of this addition of Oracle into thepicture.’’The two companies modified their agreement allowing them to close the deal in August 2003, earlier than originallyscheduled. This allowed the combined company to focus their attention on Oracle. The Oracle takeover bid raisedsignificant anti-trust questions both in the United States and in Europe. The takeover was finally consummated inJanuary 2005. This merger has left the industry with two major players Oracle and SAP but with the softwarecapabilities of the five original players. 14 of 15
  • 15. via fChThe Complementarity of Industry-level vs. Firm-level Factors Leading to Consolidation in the ERP IndustryAnnex 5: The list of software firms acquired by Oracle since 2005. 15 of 15