Competing in a Global Marketplace

Lisa A. Baiton, Vice-President, Government Relations, Environics Communications Inc., and Director, The Empire Club of Canada; Elizabeth Poon, Grade 12 Student, Lawrence Park Collegiate Institute; Grant Kerr, Pastoral Staff, St. Paul's United Church, Brampton; Sean Jackson, President and CEO, Meridian Credit Union; Robert Courteau, President and Managing Director, SAP Canada Inc.; Stephen Hewitt, Manager, Corporate Communications, NATIONAL Public Relations, and Director, The Empire Club of Canada; Greg Brophy, President and CEO, Securit; and Peter Currie, Executive Vice-President and CFO, Nortel.

Introduction by William Whittaker

A teacher divided her class into two groups--one composed of women, the other men--and asked each group to decide whether a computer was masculine or feminine.

The women concluded that a computer was masculine because:

In order to talk to them, you have to turn them on.
They are supposed to help solve your problems but generally they are the problem.
As soon as you commit to one, you realize you could have got a better model if you had just waited longer.

The men concluded a computer should be referred to in the feminine gender because:
No one but their creator understands their internal logic.
Even your smallest mistakes are stored in long-term memory for later retrieval.
As soon as you make a commitment to one, you find yourself spending money on accessories for it.

The fact that a joke today about the difference between males and females utilizes a computer frame of reference indicates how important computers are in our daily lives. The computer industry has become an important speech topic at the Empire Club in recent years with speakers such as Bill Gates and Michael Dell and today, Henning Kagermann, who represents one important aspect of the computer industry--enterprise software, a business that did not exist 40 years ago. To the uninitiated, enterprise software is utilized by large corporations to operate their businesses covering such aspects as communications, customer relationship management, production, marketing and human resources. Today, it is an industry with annual sales in the $20-billion-dollar range.

Founded in 1972, SAP AG is the recognized leader in providing enterprise software business solutions for all types of industries and every major market. Major players in the enterprise software business are SAP, Microsoft, Oracle and Siebel. SAP is at least three times the size of its closest competitor measured on the basis of annual software license revenue.

Serving more than 33,000 customers worldwide, SAP is the world's largest business software company employing more than 36,000 people in more than 50 countries. Headquartered in Walldorf, Germany, SAP is listed on several stock exchanges including Frankfurt and New York.

Prof. Dr. Henning Kagermann is Chairman of the Executive Board of SAP AG and Chief Executive Officer. Dr. Kagermann has overall responsibility for SAP's strategy, business development and also oversees global communications, global intellectual property, internal audit and top talent management.

Prior to joining SAP in 1982, Dr. Kagermann was a professor of plasma physics at a German university. When asked in a media interview two years ago whether he as the CEO of SAP would hire a theoretical physics professor to run product development, Dr. Kagermann answered "No, but SAP did!"

Dr. Kagermann is currently a member of the supervisory boards of Deutsche Bank AG, DaimlerChrysler Services AG and Munich Re AG.

Please join me in welcoming Prof. Dr. Henning Kagermann, the Chair of the Executive Board of SAP Deutschland AG, to our podium today.

Henning Kagermann

Mr. President, ladies and gentlemen, thank you very much for your invitation. It is an honour for me to speak here in Toronto before the Empire Club of Canada. I promise I will not only talk about software. I will discuss today's subject "competing in a global marketplace" in a broader context.

I frequently meet with CEOs of global companies. Not surprisingly their main concern is how to grow their business. But surprisingly, the same question is discussed amongst our policymakers. For example, I recently joined the new chancellor of the Federal Republic of Germany Dr. Angela Merkel on her visit to the U.S.A. She started a speech before the American Chamber of Commerce in New York with the following statement: "We have to improve or preserve our living standard in Germany."

The same topic is covered in the most recent OECD study of Canada. It talks about "improving the living standard while maintaining the social values that are important to Canada." And this is in fact the same as we try to do in Europe. It is more or less the same as what is discussed among the European policymakers and business leaders. The direction that if followed will bring success is obvious. I again quote our chancellor: "To ensure the standard of living we have to bring more innovative products to the market."

But companies today are competing in a global marketplace. In that marketplace we face challenges from two polarized camps in the world. One is the United States, which from a business point of view is extremely successful. Its success is built on IT, which is more effectively used than anywhere else in the world. U.S. companies as well as the government and society have spent more money on IT than other countries. But they have also invested it more effectively. They invest it more effectively because of a very flexible labour market. Whenever a company incorporates IT, it is automating processes. This cuts jobs. For the moment this is a problem. But a flexible labour market allows job availability to be adapted to the market requirements. It provides the opportunity to develop and to define new professions--thus making new jobs available. Companies are able to offer other and most often better jobs for the people who have been made obsolete. This is not the case in Japan and it is not the case in Europe. And this is one reason why we are not that efficient in the use of IT.

The other camp is Asia. According to my experience we should at the moment not look primarily to Japan. We should observe China as the other extreme to the United States. During my stay in China last spring, I again met the minister responsible for information technology. During my past visits I had to inform him about our plans and what we should do. This time I got a 45-minute lecture about their plans for the next five years. China is still a planned economy, focusing on five-year-plans--their definition as well as their implementation.

Chinese policymakers have on their agenda exactly those topics, which in 2000 the European Heads of State declared as being crucial for Europe to become the most competitive and innovative economy in the world--the famous so called Lisbon Agenda. When I look at the speed of the Chinese policymakers' execution, I am concerned. They will realize what we planned, but in addition they will execute. Amongst European business leaders there is a kind of frustration: We had great forward-looking analyses and great plans five or six years ago. But if we look at execution, we are far away from the goals we defined.

Will there be a third way for Europe, something between the United States' way and the Chinese way?

The discussion in Europe very often comes down to the question of whether national governments as well as the European policymakers should be the first movers to change the situation or whether we as business leaders have the first movers' responsibility. Not surprisingly the government is pointing at us saying that we have to move things forward. We are looking to the government and demanding the legal and political framework we need. First of all we need flexible labour markets.

We understand the policymakers' demands to give something back to society, for example an educated and qualified work force or a safe, legal and political environment. We understand that we need to create jobs again. But can we, as CEOs of global companies, really do something special for Europe? Yes, we can. But we have to do the same for all the places in the world where we are doing business. This is the trade-off.

The question is therefore: "What can we do and how can we proceed to give something back to society globally and not just in our home market?"

On the one hand we as global companies have to be innovative and have profitable growth. I think we agree on that. But this cannot be the solution alone. We have to force not only the business to become more innovative and to grow more profitable. We have to enable society to develop into an innovation economy.

First of all, what can we as businesses do to be more innovative? Company leaders and policymakers agree that we as businesses have more flexibility than a government. Is this enough to be innovative? No, it is not.

Look at Asia, especially at China. It is no longer just a cheap labour market. China is transforming its labour market. Smart people are coming up and producing innovative products as well. The focus on education, an aggressive support of academia, and a close interaction between academia and businesses are also important for being innovative. China is a concrete example.

Secondly, what can we do to be more profitable and to grow? The answer is obvious. Companies have to acquire more customers, and if they want to acquire more customers, in most cases they have to go global to become competitors in a global marketplace. This especially applies to those companies, which do not have a huge home market.

For SAP, for example, Europe is the home market. I think every good business needs a strong home market. But Europe is a very fragmented market. So we went globally very early. Chinese and U.S. companies have very homogenous home markets, which give our competitors a big head start.

That means companies with a small home market have to go outside immediately. I imagine most of the businesses here in Canada, which also has a smaller home market, are to some extent global, at least international.

My home country Germany is another example of a small home market. Germany has already lost four million jobs from its mid-sized companies to Eastern European countries. Their labour costs are 25 per cent of German labour costs. These mid-sized companies went global.

As a third example, in a panel discussion I met a German start-up. With 10 employees he is trading deals in consumer goods, which he buys in Asia and sells over on e-Bay. His business is booming. Since he has to handle a huge number of transactions, he needed a SAP system. I was surprised that he is managing his business with 10 people. If you look at his business model, he is already global. He is situated in Germany, is sourcing somewhere in Asia and he is selling around the world. His business model is fulfilling all relevant legal requirements around the globe.

The key challenge to win more customers in the global marketplace is to offer products, which meet the needs of the global market. In my industry, the software industry, having global products is a necessity and it is one of our key strengths.

If you ask CEOs of all different industries around the world how they view the business in five years from now and what they want to do, you can observe the following. Nearly everybody is moving his business model from a simple product offering to solving a customer's specific problems or business challenges. Nearly everybody is moving to a kind of solution.

But even more important is the transformation from pure product offerings to product and solution offerings.

For example, one of our customers is a well-known producer of drilling machines. In general it is a good business. But nevertheless he analyzed his customers' demands. What do his customers want to have? Do they really want to buy a drilling machine? No, what they actually want is in fact a hole. Why should the manufacturer sell the customer a drilling machine and make the customer's life complex? The same applies with computers, as we have heard in the introduction. Why should he not sell him holes?

He started to transform his business. The first step on the way to selling holes was the management of a tool fleet. This included the ownership and operation of the machines and the knowledge of which machine is doing what for which customer and where. Another and similar example is a customer, who in the past has sold explosives but is now selling broken rock.

This transformation from product selling to solution selling is increasing. Companies solve their clients' pain points and take away or reduce the complexity in their sphere of influence. They bring convenience to their customers. They bring convenience into their clients' business.

But taking away the complexity in the customers' sphere of influence does not eliminate it. It only transfers it into the vendor's sphere of influence, increasing the complexity in their own business. A competitive advantage will be the ability to better manage this type of complexity. The key point will be how to use IT better than others to manage this complexity of the business.

Today, in most cases, competitive advantage is not based on inventing new products. It's based on inventing new business models, different ways of engaging with a client.

And if you agree that in the future most companies will succeed because of the innovation of their business models and that this will be one competitive advantage that they would have, then you will probably also agree that the speed of innovation is of growing importance. In this context we have to pay attention to the fact, that a product is protected by Intellectual Property Rights. With a patent you can protect your product for a specified period and you can protect the competitive advantage the product gives you. But if an innovation is a methodology, a process or a business model, you cannot protect it against your competitors. And the competition will copy the innovative process or the business model. You have to be faster at continuously re-inventing your processes or your business model than they are at copying it. That brings us back to the speed of innovation.

If speed of innovation is the most important competitive advantage, then the traditional way to compete, which primarily has been vertical integration, is not valid any longer. For example SAP has 50 or 60 subsidiaries doing business in 150 countries around the world. To manage these entities was a challenge 10 or 20 years ago. Or another example: a company analyzes the customers' needs. It acquires companies to offer a full spectrum of solutions to meet the customers' needs.

But the challenges today are different. One challenge is the management of people of different cultures. One of SAP's challenges today is the management of a global research and development network spanning 10 different countries. We have a research and development lab here in Canada. How can we bring the Canadian culture together with the German culture? As a first step, that might be easy, but to combine it with the Indian culture, the Chinese culture, the Israeli culture, the Bulgarian culture, with every culture wherever we have labs, in order to come up with one integrated global work force for Research and Development is the challenge we face today.

The other challenge is the management of equal partners in an eco-system. With your own business you can dictate what your people should do. Companies pay attention to the fact that they are not only managing globalization on their downstream business, for example subsidiary selling, but they increasingly have to manage their upstream business which includes: Where do I source? Where do I get talent? Where do I get labour? Where do I have partners who can help me to complete and sell my offering?

Nearly all companies have understood that they have to manage an eco-system, a network of enterprises which is built around a partner within a supply chain, in order to achieve the requirement of speed of innovation.

The third challenge is the management of connectivity required within an eco-system, because the successful management of an eco-system depends on connectivity. We speak a lot about connectivity. We have telecommunication companies helping us to connect to each other. But everybody knows what's happening if you take your mobile phone and you as a Canadian say "hello" in English and on the other end of the line is a Chinese person who does not understand English. You are connected, but you can't do business with each other, because you don't understand each other. If you have to manage many different partners in the eco-system, the question is: "Do you speak the same business language as your partner?"

The same is happening between business processes of different enterprises. If you want to do business fast, as I explained before, you need to connect everybody's processes seamlessly and you need a business language. Is this language available?

From a peoples' point of view, we have already achieved this: English is the business language between human beings. From a technology point of view, it is still missing. If a computer has to communicate with another computer, if software has to speak to software and they have to understand each other without human interference, then the technology has to know exactly how to handle exceptions. We talk about semantics, which is the communication of software based on the content of language.

In the near future we will have this kind of business language. This is described as "services." The IT industry is going into service-oriented architecture. In order to make this service-oriented architecture understandable for people I like to identify using the analogy of the human master plan. Some years ago scientists were able to identify the genome of human beings. We all were very proud that we have 25,000 genes. It's a lot.

People felt that this makes us the crown kings of the universe. But a few months' later scientists surprisingly found out that a simple weed has 27,000 genes. We felt that they might be the hidden champions of the universe. Are we still at the top of the list? The answer is pretty obvious: For the question of intelligence, the number of genes is not relevant. The relevant factor is how flexibly and how intelligently the genes are combined to create something new.

You can understand the different combinations of these 25,000 or 27,000 genes as a kind of language of life. The system of services is similar. It will be a kind of business language.

It is assumed that 98 per cent of all new inventions are done by composing something new based on things, which are known already. It will be of the utmost importance, how smart we are, how intelligent we are in using this flexibility and in combining and creating something new. I'm pointing that out because this might be the winning proposition. It's a big opportunity for companies, which have proven infrastructures that know how to do business. It is an opportunity to gain an advantage over the Chinese competitors, who are still at the stage of implementing ERP. I think we're beyond that stage.

Coming back to my question: Will there be a third way for Europe between the U.S. way and the Chinese way?

Yes, there might be and I see two opportunities. One is to take advantage of the next wave of IT, of the namely service-oriented architecture. As I described, this is the business language, which enables enterprises to do business more seamlessly in automating business more than today. And first movers will have a head start. I think that we in the developed countries can have such a head start. I think that we can be faster and more innovative than our competitors in the developing countries.

The second point is: We should not forget that those who will win in the future will be the ones who have not only more intelligent business models and business process, but who also have in addition more intelligence in the actual products, in other words, who incorporate "embedded systems" into their products. IT embedded in products drives product intelligence. For example, your car is getting smarter and smarter. There will come a time when the car is driving for you. But today at least it already indicates when it needs to go to a service station or if it needs some maintenance.

The same will happen more and more in the whole enterprise environment, in production, in sales, etc. The systems will monitor themselves and will indicate when an operator needs to interfere. And that is also a winning proposition for companies in developed countries. They will have a competitive advantage and a chance, because of the synergy between different disciplines, between engineering software and others. This, I think, will be the big opportunity.

And a final point: We have to focus on the link between academia and business. I'm always surprised when I see that we believe we can be more competitive in Europe by just bringing our research and development spending from 2.4 per cent up to 3 per cent. That might solve some problems. But the question is: Are we spending our money for research and development smartly? In most of our countries we have a very good network of universities. But the issue is that the link between universities and business is not the best it could be. If I look to my industry, I honestly have to say that we give money to universities, that we teach people and that we educate students. But if we look at the results of research and innovation, what they develop is never good enough to immediately bring into practice. They have very tiny little models to practice on, which do not reflect the reality of these huge real-life complex systems companies are working with. Whatever they develop, it takes years to launch a functional product or solution.

But that brings us back to this catalogue of services: With this business language, IT also gives academia a foundation and a tool set with which they will be able to be more innovative and deliver results that stand up to real-life complexity. We will therefore not only find areas where we can innovate and differentiate ourselves, but where we also can leverage what we as developed countries have done well in the past. Thank you very much!

The appreciation of the meeting was expressed by Stephen Hewitt, Manager, Corporate Communications, NATIONAL Public Relations, and Director, The Empire Club of Canada.