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Synopsis on Rise and Fall of Baan

1.0. Introduction to the Case Study

This case study focuses on the rise and fall of Baan Company which developed in the market of software technology.

Baan was one of the leaders of the market in the beginning, but it crashed in 2000. Initially, Baan was especially strong

with its manufacturing module, SAP with its finance module and PeopleSoft with its HRM module. Later, these

differences became smaller because each company was in a continuing process of product improvement, imitation and

innovation. In any case, Baan was the most visionary of the ERP vendors. It then (in the 80ss) positioned itself as a

software manufacturer and gave up a part of the service sector. Contrary to the others ERP vendors, it chose to grow on

the licenses market which was more volatile than the services market but the profit margins were much higher.

1.1. PESTEL Analysis and Key Drivers

1.1.1. Economic

Economic environment is a critical layer of macro environment which drive many changes in the industry structures.

Economic recessions and booms are significant determinants of the successfulness of strategies. Baan faced theeconomic downturn in 1998 and could not cope up with the changes. There ambitious license growth strategy was not fit

the recession compared to the boom. Their capabilities such as consultancy and services have not been improved to

distinctive core competences which sustain the competitive edge under a recession.

1.1.2. Socio cultural environment

Many ethical and social issues arise with the automation. Privacy issues, layoffs and changes in lifestyles (Increased

mechanization) are some examples. Baan also had to cut down their employees to reduce the cost by 1998. It harms the

image of the company. Attitude of the customers under a recession and millennium problems also adversely affected the

company license revenue which led to a fall in share prices.

1.1.3. Technological

ERP industry is highly technology driven. Early MRP moved to MRP II and ERP. Finally it is moving to beyond ERP with

CRM and SCM. Further Customers postpone their investments since Millennium problem which is called Y2K. UNIX and

Client server architecture significantly affect the industry. However Baan exploited these drivers well under the rise of

Baan with Y2K proof ERP and innovations under new architectures. On the other hand side Y2K problem led to reduction

in new license which hit the Baan since they depend only on license revenue much.

1.1.4. Legal

Following accounting treatments, company and securities exchange commission regulations is mandatory to Baan since

its a listed company. Under the growth strategy investment arm of Baan, Vanenburg was so keen to manipulate the

revenues. However SEC advised to follow the correct disclosures which led to showing correct revenues which are far

below the records. It is also another issue which causes the crisis of Baan. Further there was no clarity in the income

flows with the subsidiary called Vanenburg. Baan left the firm due to this and that affected the firms image.

1.2. Five Forces and Key Drivers

1.2.1. Rivalry among existing competitors

This is mildly attractive since higher industry growth rate, low fixed

cost and the competitive strategy of Baan Web which is different

from the competitors. Baan rise is mainly because they have

addressed the above key drivers. License growth strategy was

introduced by Baan to cope up with the higher industry growth.

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Cost of license is very low where margin is 90%. High quality installation methodology and services are outsourced from

global partners with the web strategy which led to acquire the biggest order ever from Boeing in 1994. However the

growth strategy did not provide a sustainable solution to Baan where competitors hold themselves even under a

recession with their services and consultancy revenue.

1.2.2. Barriers to Entry

This is also mildly attractive due to high switching cost, customer loyalty, access to distribution channels, capital

requirement and access to latest technologies. Baan web has addressed many drivers of the above factors. Quality

service, installation and distribution have been intensified with the web. Subsidiary called Vanenburg is the separate

investment arm of the Baan which invested heavily in the business.

1.2.3. Power of Buyers

It is mildly attractive due to high switching cost, less substitutes, strategically importance to the buyer, contribution to

the quality of service of buyers products, low price sensitive buyers. These drivers helped Baan to attract Boeing and

exploit on that.

1.2.4. Power of Suppliers

It is mildly unattractive due to fewer substitutes for suppliers products, high switching cost, high contribution to the

quality of service and product, high total cost contributed by suppliers. Baan has identified these drivers and created the

web to have strategic partnerships with the suppliers. It helped them to rise.

1.3. Capabilities and Sustainable Strategy

Resources Competences

Threshold Capabilities Creative and competent Developers &

Engineers

Relevant Technology

Developing a bug free ERP,

Innovation

Capabilities for

competitive advantage

License

Strong Investment Arm

Ambitious Management

Sales model

Readily adoptable

Visionary

Developing a Web (Strategic

Partnerships)

Baan possessed core competences but those were not sustainable and not sufficient to cope up with the environmental

changes. Distinctive core competence of the industry is mainly the services and installation methodology as explained by

Scott Griffin, IT Director of Boeing. Ongoing Support and the service revenue are the main source of revenue even under

a recession. Baan is originally a Consultancy company. They have ignored that capability which is sustainable and movedto the license growth strategy. They have outsourced the main strategic capability and hence fell with the environmental

changes. Developing the strategic partnership helped them to rise under better environmental conditions but could not

drive it to keep up the sustainable competitive position.

1.4. Conclusion

Industry is attractive since four forces are mildly attractive and only suppler bargaining power is mildly unattractive.

PESTEL change over the period and cause rise and fall of the company due to lack of a distinctive core competence which

is sustainable. There are three reasons which cause the strategy to fail as strategic drift, not understanding the

contemporary issues and lack of strategic lenses. This Company has not developed many scenarios such as growth and

decline base on the possible environmental changes in their strategy development. Baan aware of the risks of playing the

licenses card, but the company ignored. Further this Company did not understand the attitude of the customers to post

pone the investment on license under a recession. Baan had all these issues discussed above which led the rise to a fall.