As companies continue to emerge from the economic challenges of the past 18 months, they’re transitioning from cost cutting and survival to investment, growth, and value. Yet stinging lessons of the recent economic roller coaster linger, and no one is prepared to relinquish the belt-tightening strategies any time soon.
To grow — and grow smartly — in these conditions, one approach is to retain your core competencies but create new products and markets by expanding into a new industry. This industry expansion comes either by making a direct bid to enter into that new industry, or by partnering with other companies as part of a multi-industry value chain (see Figure 1).
||Companies are expanding beyond the boundaries of their industries and engaging in multi-industry value chains
Consider the following examples:
- An oil and gas company entered the retail industry when it started selling snacks and drinks at its gas stations.
- A shipbuilder that had extra capacity for building turbines became a windmill manufacturer. And when that windmill business found traction, it expanded into selling electricity.
- An automotive company that traditionally offered financing to customers expanded from a car loan lender into a broader financial services company.
This type of cross-industry expansion happens all the time — and it means that organizations need to acquire not only new capabilities and new business processes, but also new IT systems to support those processes. This situation can put the driver of the change (the business) at odds with the owner of the systems (IT). And as a result, many organizations struggle to find the proper balance between business value and IT value.
The Business/IT Balancing Act
When companies consider business value alone, they typically clutter their IT landscapes with one-off, best-of-breed point solutions that initially provide high value for a small community of users, but in the end are difficult to scale, as well as costly and time-consuming to maintain. IT systems that are over-modularized and fragmented can strain the integration capabilities of your ERP backbone or business information systems — or worse, hinder your organization’s agility and ability to address business challenges and opportunities in a flexible, scalable, and cost-efficient way.
In companies where IT value is dominant, cost is always the main driver, and technology, once it is implemented, generates little endorsement by the functional areas. These companies often have monolithic systems that the business side finds stifling.
The objective should be to achieve a balance between these competing interests. Truly best-run businesses are able to make joint decisions between business owners and IT. The result is a system landscape that supports end-to-end business processes and provides the business with the innovative tools it seeks without incurring excessive maintenance costs (see Figure 2).
||By standardizing on networked solutions — instead of point solutions or a monolithic system — best-run businesses can balance business value and IT value and create flexible, scalable, and maintainable system landscapes
Especially when expanding into a new industry, business and IT must collaborate to achieve maximum value for both groups, but not at the expense of either. According to research, companies that focus on both business value and IT value typically have IT budgets of 2.3%, while those that concentrate more on business value typically expend 2.9% on IT.1 That’s a difference of more than 20%, an avoidable expense that deprives an enterprise of vital capital that could be applied toward the innovation required to expand into new markets and industries.
New Industry Growth: Learn from Experience
When moving into new industries or cross-industry value chains, the key is to acquire any newly required capabilities and business processes without unnecessarily expanding your IT landscape.
If a company is considering branching out into a new industry, it can rest assured that SAP is already there. SAP not only offers solutions within 24 different industry areas, such as retail, utilities, and manufacturing, but we also offer a wide range of supporting resources that allow users to:
- Benefit from the expertise of industry advisory councils. SAP manages a series of advisory councils within all the industries it supports, gathers knowledge from top companies in each of these industries, and then builds its solutions based on this knowledge. As a result, customers benefit from the industry expertise that is infused in our products.
- Take advantage of value engineering metrics and benchmarks. Within all of our industry verticals, we have identified the top business processes and key performance indicators (KPIs) that make a company in a given industry a best-run business. We also work with our customers to understand how the leading enterprises are performing against these KPIs — and we make this information available to other customers. Together with our value architects, an SAP customer can use this benchmarking information to see how the company stacks up against the best in the industry. Contact your SAP representative for more details.
- Apply best practices. There are solutions for all industries that you can deploy right away, based on best practices that SAP has identified over the past quarter-century. For example, if a high-tech manufacturer needs trade promotion management, which is functionality within our consumer products solution, the customer can access it as a best practice. You can learn more about these best practices by speaking with your SAP representative.
An initial barrier to entering a new industry is lack of knowledge and in-house expertise. But if you have to learn a new business, does it make sense to learn new technology at the same time? With SAP, you don’t have to re-teach your systems because the systems already exist. Instead of learning a different system, or even a different platform, you take advantage of systems that you already have within your technological framework and that use a vocabulary you already understand — because you understand SAP.
The other option is to purchase a best-of-breed solution and have a systems integrator implement it. Many companies are finding that this approach is not maintainable in the long run, and that it requires more IT effort, time, and budget to just keep the system running instead of focusing on the next innovation.
Encouraging Both Business and IT Value
SAP’s approach to industry verticals is to not only provide companies with the best tools and functionality within their own industry, but also make the transition to a new industry as smooth as possible.
To increase business value, we focus on end-to-end processes, rather than point solutions, that flow smoothly across different systems. These end-to-end processes leverage technology we have created, acquisitions we have made, or partners with whom we have built a close relationship. All are pre-integrated, tested, and available in implementable steps. For example, a manufacturer may turn to collaborative demand and supply planning, an end-to-end process that would enable the company to anticipate and respond to demand and supply signals in order to satisfy customers while remaining profitable.
Looking ahead, SAP’s strategy is to continue to help customers increase their participation in value chains through end-to-end processes, regardless of whether those processes are in a single company or across several enterprises. At the same time, we are increasing IT value by ensuring that the technology underpinnings of these end-to-end processes become available in smaller and smaller segments, so they can be easily implemented and integrated.
Take Advantage of the Possibilities
SAP started supporting specific industries almost 40 years ago, and that support has evolved and grown. Now, as lines between industries blur and as enterprises move from simple, direct supply chains into complex ecosystems and multi-industry value chains, SAP is there to support that change.
Together with leading companies across many industries, we are developing the thought leadership, end-to-end business processes, and industry solutions to help you run, grow, and transform your organization as you evolve, providing business value that will enable your functional areas to innovate and IT value that will help you keep costs down.
When considering moving into a new industry or joining a value chain connected to a different industry, contact your SAP representative early on. See what SAP solutions and resources may be available to help you before you invest in new technology. Chances are you will be able to take advantage of your existing systems and extend them — without needing to retrain your staff or hire a workforce with an entirely new skill set.
Georg Kube (firstname.lastname@example.org) is Vice President of Industry Solution Marketing at SAP AG. Prior to joining SAP three years ago, he worked for Hewlett-Packard as Marketing Director and Director of Consulting — European Region, focusing on product lifecycle management. Georg holds a degree in mechanical engineering and a master’s degree in business marketing.
1 Joe Barkai, IDC Manufacturing Insights. [back]