supplies Apple with some components, as batteries, for the

A case study of iPod (Cattani 2006). In other words, these two firms are
competitors in the market of mp3 devices (B2C), while
coopetition: SAP they are supplier/client to each other in the market of

by Roberto Longo components (B2B). Moreover, Sony has been involved

also in the process of developing miniaturizing solutions
for the iPod (ibidem), extending the alliance to the most
Introduction valuable core of this product’s technology. This example

This case study is aimed to apply the concept of shows how it is nearly impossible to only use the

coopetition to a specific business strategy, by analyzing traditional concepts of competition and cooperation to

the strategic moves employed by SAP to succeed in the understand modern strategies, especially in hi-tech

ERP market. The theoretical framework of this study is markets. In fact, technology increasingly forces

centered on the work of Nalebuff and Brandenburger companies to make decisions about standards,

(1996) and completed by basic considerations about compatibility and networks, and these decisions often

complementarity and compatibility. The analysis will imply coopetitive strategies. These key concepts will be

point out some of the peculiarities of hi-tech and network deeply explained in the next sections.

structured markets, which present a wide array of The second benefit of coopetition is that it can

opportunities to implement coopetition. Specific focus suggest innovative strategies to implement, in order to

will be offered to partial compatibility, offering a solution “change the game” (Nalebuff Brandenburger 1996, p.10).

to the potential risks of coopetitive agreements. This case This can be seen as an active use of coopetition, if

study is not intended to be exhaustive about the subject, compared with the aforementioned descriptive analysis.

but to serve as stimulus to further discussion. Changing the game is a comprehensive expression to
define all the possible strategies which are not intended to
A brief review of coopetition get the best out of the current status quo, but to re-design
the status quo in order to be better off. Before explaining
The term “coopetition” was used for the first time in the
the use of coopetition to design business strategies, it is
early nineties by Ray Noorda, founder of the networking
essential to briefly review the basics of game theory.
software company Novell. He said: “You have to compete
and to cooperate at the same time” (Nalebuff,
SAP’s strategy
Brandenburger 1996, p.4). In other words, coopetition is a
different way of looking at business that does not consider SAP was founded in 1972 as Systemanalyse und

cooperation and competition as a dichotomy. This thought Programmentwicklung by five former IBM engineers in

comes from the observation of many companies, in many Mannheim, Germany (Dietmar Hopp, Hasso Plattner,

industries, which are increasingly adopting mixed Klaus Tschira, Claus Wellenreuther and Hans-Werner

strategies, often cooperating with their competitors. As Hector). The acronym was later changed to stand for

Nalebuff and Brandenburger (ibidem) brilliantly pointed Systeme, Anwendungen und Produkte in der

out, “business is cooperation when it comes to creating a Datenverarbeitung ("Systems, Applications and Products

pie and competition when it comes to dividing it up”. in Data Processing"); in 1976 SAP GmbH was founded;

This mindset is innovative at least in two the next year its headquarters was moved to Walldorf and

dimensions. First, it allows to analyze and to understand since the 2005 annual general meeting the company's

strategies which can not be defined as purely competitive official name is just SAP AG. While a concise view of

or cooperative. For example, the alliance between Apple SAP history will be soon presented, key facts about the

and Sony to produce the iPod is an evident case of company, including references to look for any further

coopetition: they both sell mp3 devices, while Sony also details, can be found in following facts-sheet.
 A case study of coopetition: SAP

Horizontal, with competitors.

SAP AG
(ISIN: DE0007164600, FWB: SAP, NYSE: SAP) At the early stages of its history, SAP had serious
Founded: Weinheim (1972) gaps both in technology and in distribution capabilities;
• Largest European SW firm
Headquarters: Walldorf, Germany • Largest ERP provider worldwide what would have rapidly grown to become the world
• Third SW firm worldwide
Industry: Computer software leader in ERP, was then a startup whose only resources
Products: ERP • 100,800 SAP installations
• 38,000 customers
were the brilliant ideas of its five founders (Kim,
Revenue: 9.4 billion EUR (2006) • 120 countries
• 12 million users
Mauborgne 2000). Rather than cultivate capabilities
Employees: 39,300 (2006) internally, SAP decided to acquire them through various
Website: www.sap.com
alliances; for example, it partnered with Oracle to develop
the central database software that sits at the heart of SAP’s
core products R/2 and R/3 (ibidem). On the other side of
As shown, SAP is the largest Enterprise Applications
the value chain, SAP established licensing agreements
provider in the world; it holds a 24% market share,
with major consulting firms as Cap Gemini and Accenture
followed by Oracle (9%) and Microsoft (5.2%), and its
to install and implement its products, leveraging on their
business is growing faster than the market (SAP Annual
network of subsidiaries and consultants to exploit their
Report 2006). SAP’s core product is the ERP (Enterprise
customers portfolio.
Resource Planning), which can be defined as a software
At the origin of these choices are two main points
application composed by several sub-modules, the aim of
of SAP’s strategy: innovation and multi-segment access to
which is to manage all company functions in an integrated
the market; they are fundamental drivers of coopetition in
way.
hi-tech industries, and this is confirmed by the fact that
Going back to the history of SAP , we can divide
SAP has exploited coopetition with the following
it in four main stages, roughly coinciding with the decades:
objectives:
1970s: creation of R/1, the first standard application for
real-time business data processing;
Continuous innovation, not only against competitors’
1980s: consolidation of ERP technology with R/2 and products, but also against its own;

international expansion;
Target extension from large corporations to midsized

1990s: R/3 moves to client-server concept, enabling to run and small companies.

the software on different types of servers and with These aims have been pursued combining traditional

different databases; competition with cooperative strategies involving a wide

2000s: the company exploits the Web to offer automatic array of actors, mainly customers, companies from other

updates and services; the target of its offer now includes industries and competitors.

small and midsized companies. Customers have played an important role from the

By the way, the aim of this thesis is not to take into beginning to help SAP improving its products and

consideration all the steps taken by SAP through its services; for instance, clients have always been asked to

history; in fact, this chapter will be focused on its main talk about their implementation experiences and the issues

choices about competition, cooperation and coopetition, they face to successfully exploit the potential of SAP

and on the way these strategies have been exploited products. Initially, specialized magazines were created to

depending on different business needs and on the give voice to the clients and to build up a loyal community

competitive environment. From this point of view, we will of users helping with each other and helping SAP to solve

examine three types of relationships: the major problems they found in its products. This

Vertical, with customers; system of customers communicating with each other has
been also a way to attract new prospects from the

Transversal, with companies from other industries;
industrial network of SAP customers portfolio (Gueguen,

2

Bouchere 2004). This strategy has already proved to be
effective and it is even more since the company created in
the early 80s a subsidiary specialized on training, to help
customers and partners and to make them even more
independent during implementation projects. A further
evolution of this bidirectional collaborative approach with
customers has taken place during the last fifteen years,
with clients co-financing part of SAP’s generic
developments, those which can be used also for other
clients, even competitors. For example, Nestlé is
financing these kind of expenses as part of its agreement
with SAP, which is implementing R/3 worldwide at
Nestlé, in a project called Globe. This gigantic project
implies expenses for tens of million Euros and will see the
two companies collaborating for five to ten years in order
to align and harmonize all Nestlé subsidiaries, generating
the largest information system in the world (Gueguen,
Bouchere 2004).
Another leg of SAP’s cooperative strategy are
transversal relationships, occurring with players from
adjacent industries; a clear example of this approach is the
realization of Business One, an e-business platform, which
is the leading standard worldwide. The project to create
the backbone of this product and to establish it as standard
has involved HP, Informix, Praxis Software Solutions and
other partners. Their expertise on specific technological
fields has allowed SAP to integrate all the elements
necessary for an e-business suite and to “maintain high
barriers to entry to prevent innovators from building
alternative ecosystems” (Gueguen, Bouchere 2004, p.13).
The most interesting type of cooperative
agreements are those involving SAP’s competitors in
different markets; they are mainly three:

Duet, a partnership with Microsoft to improve the
interoperability between MS applications and SAP
ERP;

The aforementioned agreement with Oracle to base
SAP ERPs on Oracle databases;

Various licensing agreements with consulting firms for
the distribution of SAP products.
All these alliances will be deeply explained and discussed
in the next paragraphs, after having drawn the value net of
3
A case study of coopetition: SAP
SAP, to understand how each of them changed a
component of the game (PARTS model).
The value net
The value net is useful to analyze the business
environment SAP is operating in. The following chart
represents the current situation, while the evolution from
the beginning of SAP’s history to the present will be
analyzed later with the PARTS model.
The current value net of SAP
Suppliers
Oracle
Consulting firms
Competitors Complementors
Oracle SAP HW producers
Microsoft
Microsoft/Linux
Consulting firms
Customers
Large firms
Smaller companies
As we can notice, the simplest part of the value
net is customers, which is composed by two segments,
large enterprises and small-midsized companies; it is
worth distinguishing these two targets, since their needs
are addressed with different products and services.
Moreover, they required SAP to adopt segment-specific
strategies also on the distribution side. The strategy
adopted by the German company to target small and
midsized companies is composed by two pillars: the
creation of AcceleratedSAP (ASAP), a faster-to-implement
version of R/3; more diffused licensing agreements with
consulting firms to implement and optimize ERPs in small
business, where SAP consulting division does not have a
sufficiently capillary network to reach all demand.
As for competitors, their role is much more
complex than in traditional industries; as reported by
Oracle in a press release, “Even the fiercest competitors in
one market may collaborate in another arena, often
because they share common customers and must ensure
that their products perform optimally with one another”
(www.oracle.com). Oracle and SAP are competitors in the

ERP market, trying to capture as many customers as
possible, since high switching costs limit their incentives
to change supplier. At the same time, the two companies
are partners in the submarket of databases, because all
SAP systems employ Oracle databases as fundamental part
of their structure. Worth to be noticed, Oracle is no more
just a complementor of SAP, as it could have been
perceived at the early stage of their collaboration; it is a
now a supplier, since it get paid an agreed amount of
money each time SAP installs a license for a customer. In
public documents, the partnership is defined, on its
commercial side, as “resale” of Oracle products by SAP,
which is a clear example of supplier-customer relationship.
A different position is assumed by Microsoft,
which is at the same time a competitor in the ERP market
(targeting mainly small-midsized companies) and a
complementor in any sub-market SAP competes in. In
fact, Microsoft is the world leading producer and seller of
operating systems and applications, both for personal and
professional use; therefore, it is impossible not to consider
compatibility and inter-operability with MS software. The
project called Duet, introduced in the market in 2005, is an
indicator of the importance of this aspect; Duet is the first
jointly-developed product of the two companies, designed
to provide a strong bridge between SAP’s business
applications and Microsoft’s productivity tools, “opening
up new opportunities to bring SAP functionality to a larger
class of end users and helping customers with enormous
productivity gains” (www.sap.com). Other important
complementors are hardware and servers producers, such
as HP, IBM and Dell; by the way, their role is not peculiar
of SAP’s value net, because their bargaining power is
relatively low, after the standardization of SAP
requirements established in the early 80s and kept updated
with the changes in industry standards.
Apart from Oracle’s double role, there is another
category of competitors - suppliers which are crucial for
SAP products’ effective distribution and implementation:
consulting firms. Accenture, Cap Gemini, IBM are just
the major distributors of licensed SAP products and they
compete with SAP Consulting division, distributing the
same products through subsidiaries in several countries.
Licensing its products is the most efficient way for SAP to
4
A case study of coopetition: SAP
increase distribution and to reach smaller companies, by
exploiting the capillary network of large IT consulting
firms. To limit the dependence from these partners and to
keep competition high, SAP maintains and continuously
develops its internal Consulting division; in this way,
competitor consulting firms have limited bargaining
power, as they compete with each other and at the same
time they face competition from the licensor, which has
control over future contracts. Moreover, being the leader
with one fourth of the ERP market, SAP has enough
market power to make it not affordable for these suppliers
to lose its license because of aggressive behaviors.
To summarize, the value net shows two
contrasting aspects of SAP’s business competitive
environment. On one hand, SAP has built strong alliances
with Oracle, Microsoft and consulting firms, making its
position very stable and limiting the bargaining power of
suppliers and customers. On the other hand, SAP has
progressively linked its destiny to that of its competitors,
which depend on SAP but are also fundamental assets for
SAP’s success. The PARTS model will help to explain
how and why SAP has changed the components of the
game, involving in these changes the players mentioned so
far.
The PARTS model
PARTS is the acronym of Players, Added values, Rules,
Tactics, and Scope; these are the components considered
by Nalebuff and Brandenburger (1996) that every player
can change to shape the game into a new one that better
fits its strengths. To understand how SAP has
progressively changed the game of ERP business during its
history, it is important to take into consideration each of its
main strategic choices and to evaluate which of the
PARTS has been changed.
As mentioned before, at its founding, SAP had a
major issue: its technology, developed by five former IBM
engineers, was brilliant but technically behind that of the
major competitors, especially in the implementation phase.
A practically zero-costs solution was found, establishing a
collaborative program with customers, who were asked to
report the issues and the solutions they had found in their
implementation projects. Specialized magazines were

created just to give voice to these early customers and to
start building up a community of users (Gueguen,
Bouchere 2004). This approach to customer relationships
was fundamental to improve the quality of SAP products,
as the company was provided with continuous feedback
and many problems were solved directly by the network of
customers, without direct costs for SAP. The German
company has succeeded in something very difficult:
turning customers from mere buyers/users to co-
developers and promoters; in fact, SAP was able to create
strong synergies between its foremost clients and new
prospects (Gueguen, Bouchere 2004). Moreover, this
strong relationship with customers has helped to obtain
their loyalty and their involvement in new initiatives. To
further extend their involvement, at the end of the 1980s,
SAP created a subsidiary specialized in training, to address
the needs of customers who were asking for product-
specific education programs. Finally, as already
mentioned, crossed investments between SAP and its
customers have contributed to establish long-term
partnerships.
By listening to customers, learning from them,
training them and co-financing large projects, SAP has
changed not only the role of customers as players, but also
their perceptions about their role. Considering these
moves as tactics, it is interesting to see how SAP has
exploited customers’ efforts, making them perceive to be
important and worth to be listened to. This approach has
gone so far that every year best customers are awarded a
prize for their successful implementation processes. As
Brandenburger and Nalebuff (1996) brilliantly pointed out,
“saying thank you” and building up collaborative
relationships with customers is also a way to increase
one’s added value, by making the company a unique
partner, instead of just a seller. This is what differentiated
SAP in the early years: while stronger competitors cared
only about selling their products, SAP invested a great deal
of time and resources in the value-added components of
sales. Customers value this kind of attention much more
than cash discounts, since for a customer the total costs of
implementing an ERP has been estimated as eleven times
the purchase price of the process (Varian 2004).
Additional costs include infrastructure upgrades,
5
A case study of coopetition: SAP
consultants, users’ training, organizational changes; these
are the issues SAP focused on since the beginning, with an
excellent vision if compared with competitors’ strategy.
Another part of the game SAP has deeply
revolutionized is rules. Originally every established
enterprise software producer sold its products directly to
the clients, with its own sales force and with agents. SAP
had to face the issue almost every start-up encounters, the
lack of a well-rooted distributive network, able to quickly
diffuse its innovative products. Access to the market is
one of the major objectives of coopetitive strategies.
Moreover, in the late 1970s SAP was already offering its
first ERP, which was a much more complex product than
its competitors’ regular enterprise information systems.
While traditional software was generally just sold and
installed, ERPs needed (and still need) along
implementation process, which involves not only
installation and setup, but also customization, hardware
upgrade and, even more important, organizational change.
In fact, the implementation process often implies a deep
reorganization, being the ERP a prescriptive system, which
means it influences operational behavior. All these
considerations suggested SAP to change again the game,
licensing its software to large consulting firms, which
acted as distributors and consultants for the complex stage
of implementation and for after-sales assistance. These
firms compete de facto with SAP Consulting division,
since they sell the same products to virtually the same
clients. By the way, Cap Gemini, Accenture and other
consulting firms provide SAP with a distribution capacity
and capillarity it could not afford, making it possible to
reach so many incremental customers to substantially
overcome the loss of direct sales.
All competitors have then followed SAP’s
strategy, but lead times to consolidate their ERP offer and
to build partnerships with consulting firms gave SAP
enough time to establish a wide network of users.
Moreover, SAP has always provided its partners with
commercial support during the sale process and during
implementation projects (Gueguen, Bouchere 2004); for
example, SAP has set up a co-marketing program with its
distributors financing 50% of the promotional operations.
Consulting firms thus have incentives to offer to their
 A case study of coopetition: SAP

clients SAP software instead of rival products; moreover, In the last years, SAP has collaborated also with
these strong partnerships act as disincentive to engage in Microsoft, its second competitor in the ERP market, in the
price wars or in other extremely competitive practices. In ongoing Duet project, which is the first jointly-developed
some small services companies SAP has even succeeded in product of the two companies. Duet is a complementary
imposing exclusiveness concerning ERP implementations software that provides a strong bridge between SAP ERP
(Gueguen, Bouchere 2004). Rules have so been changed, and Microsoft productivity tools, such as MS Outlook®,
from direct sales to supported licensing, making SAP a MS Excel® and others; this software allows SAP to target
stronger player and locking customers and commercial small companies with basic needs and provide users with
customers into long-term and high-value added great productivity improvements. The reason to seek
relationships. Players have been changed too, making integration between SAP and Microsoft software is that
consulting firms both competitors and suppliers. almost all SAP user base is covered by Microsoft, as for
Perhaps the most important coopetitive action operating system and productivity applications; therefore,
taken by SAP was the adoption of Oracle databases for its giving SAP-integration advantages to Microsoft users
products. Their partnership dates back to the late 1980s means to advantage SAP customers against rival ERP
(Gueguen, Bouchere 2004), when Oracle was establishing users. This product increases the added value of SAP,
its database format as the leading standard in the enterprise because it does not offer “only” an ERP, but also a unique
software industry and SAP was consolidating its leading complementary product that differentiates its users’
position in the ERP market. The choice to join forces in benefits from those of rival products. In this way, SAP
the database sub-market is consistent on three levels: costs, increases the lock-in effect for its customers, because
tactics and strategy. Costs advantages have already been switching to another ERP would imply also the loss of
discussed; tactics are an important component of this productivity connected to Duet’s benefits.
decision and they are the aspect of the PART model SAP
PARTS of the game changed by SAP
has played very well so far. Despite Oracle’s statements,
which describe SAP customers heavily depending on PARTS Strategic moves Effects
Cooperation with customers for
Oracle databases1, SAP has been able to communicate to product improvement Lower costs
Players
its customers the advantage of having Oracle databases, Cooperation with competitors Higher quality
in SW development
but also the importance of having SAP ERP. Moreover, Co-financing and high level of
Added
service to customers Increased loyalty
SAP has used this alliance as a promotional tool for its
values Cooperation with Microsoft to Reinforced lock-in
Safe Passage program, a comprehensive offering develop Duet
Wider distribution
addressing the concerns of competitors’ customers facing Rules Licensing to consulting firms
Partial
Adoption of Oracle databases
the uncertainties of the end of life of competitors’ compatibility
Adoption of Oracle databases Lower perceived
solutions. An Oracle customer has lower switching costs Tactics “Listening to customers” lock-in
activities Increased loyalty
when adopting SAP ERP, because the database is common Exploitation of
Continuous change of game
and SAP’s software codes are already structured to Scope other players’
boundaries from whole
strengths to keep
value chain to specific stages
interoperate with the common database (SAP Annual leadership
Report 2006). By the way, a smooth passage from an ERP
Business objectives and strategy
to another lies more in the field of promoted perception
than in the field of reality; nonetheless perceptions, and As described in the previous paragraphs, SAP’s strategy

tactics to change them, are crucial tools to succeed, has been a combination of behaviors ranging from open

especially in such a complex market, where products are cooperation to competition. The most interesting choices

difficult to understand also for expert users. are those lying in the middle, offering examples of
different types of coopetition. SAP’s strategy has radically
1
SAP Customers Depend on Oracle Real Application Clusters for changed the original game of the ERP business, mixing the
High Availability and Scalability, 2006, available at
www.oracle.com.

6

roles of different players, gaining a leading market share
and making it harder for competitors to catch up.
Quoting Oracle’s statements, “if asked to pick the
most unlikely software partners, a good number of people
would select Oracle and SAP […]”. In fact, SAP has
never stopped competing the hard way, it has only added
specific cooperative agreements to its competitive
behavior. As seen, SAP has cooperated from the
beginning with customers, later it has started coopetition
with consulting firms and finally with ERP competitors.
What really changed every time was the business need
SAP had to address and the resources it needed to reach its
objective. When SAP needed to improve its technology
and to solve implementation issues, it established
collaborative alliances with customers and created a
feedback system. When it came to distribution, SAP
improved it by partnering with consulting firms. In 1988,
SAP had already established itself as a major vendor of
mainframe-based enterprise applications, and was in the
process of creating its R/3 suite of applications for
emerging client-server environments. To assure the
enormous workflow of R/3 to be efficient, SAP needed the
best-in-class database: developing it would be costly and
time-consuming, therefore SAP selected Oracle’s database
as a foundation for its R/3 development and, in 1992,
certified R/3 for deployment on the Oracle database.
Worth to be said, cooperating with competitors is
never an actual choice, but the answer to a need; any kind
of cooperation involves giving away something, at least
some information. Therefore, it makes no sense to engage
into a coopetitive relationship if it is not needed. The
important question to answer is why coopetition is
sometimes the only way to reach a certain objective; often
the answer lies in complementary resources. For example,
when SAP was developing R/3 and its engineers realized
that they needed a much better database than their own, to
complete their innovative product they had to find a
complementary resource. This means that they had to look
outside their company boundaries to complete their set of
resources. At that time, Oracle was a much weaker
competitor in the ERP market than now, so it was its own
interest to increase sales by allowing SAP to resell Oracle
databases as back-end for SAP ERPs. SAP had many
7
A case study of coopetition: SAP
incentives too, as previously said. During almost twenty
years of partnership the situation changed substantially,
Oracle becoming the second ERP vendor and SAP
consolidating an outstanding market share, mainly because
of its first-mover advantage in the client-server
technology, allowed by the use of Oracle databases. So
why did Oracle give access to databases, its most strategic
resource? It is evident that, even if SAP gained very much
from the partnership, also Oracle had positive payoffs:
first, Oracle had guaranteed revenues for twenty years
from the licensing agreement; second, they learned about
ERPs, improving their products and their market share;
third, they linked SAP’s destiny to their own. As Nalebuff
and Brandenburger (1996) point out, it does not matter if
you advantage a competitor, as long as you improve your
position too.
Network goods and partial compatibility
Leaving apart distributive agreements, whose economics
have traditionally been studied in depth, the most
interesting coopetitive agreements engaged by SAP are
those involving competitors in its core business2, such as
Oracle and Microsoft. These strategies are crucial to
assure technical compatibility in markets which are
characterized by strong network effects (Economides,
Flyer 1997). A network is a system composed of nodes
and links between nodes; network effects exist when
adding to the size of a network increases the value of each
node (Moenius, Trindade 2007).
Adhering to a leading compatibility standard
allows a firm’s product to capture the value added by a
larger network (Economides, Flyer 1997). It is interesting
how alignment to a standard can be sought in many
different ways and at different levels. Common standard
adoption is the most comprehensive compatibility strategy,
but it is not always the most appropriate; in fact, there are
markets where compatibility can be limited only to some
aspects of the products, while still giving access to
network externalities. The example of Microsoft and
Yahoo alliance in the market of Instant Messaging is a
2
The core business of SAP is defined as the sum of software
sales and maintenance, making up the 70% of its revenues; the
other 30% comes from consultancy and training. Source: SAP
Annual Report 2006.

clear example of partial compatibility strategy; they
decided to make their products interoperable only for free
services, while keeping differentiated their high value-
added components. This choice allows the two companies
to benefit from a much larger user network, without giving
away the profits coming from differentiation. In the same
way, SAP and Oracle decided to adopt a common
component, Oracle database, for their products, making
them less differentiated in the back-end of their
functionality, while continuing to substantially
differentiate them on their core characteristics, especially
those directly experienced by users. This partial
compatibility has allowed the two companies to simplify
the development process of their software and has made it
easier for hardware producers to adapt the technical
features of their products to Oracle’s and SAP new
software releases, since they are based on a common
database format. Adhering to Oracle leading database
standard has also allowed SAP to benefit from network
externalities on the side of its customers; in fact, it is now
easier for client companies to interoperate rival ERPs, at
least partially. Choosing SAP ERP, customers have access
to an ERP network covering 24% of the worldwide
market, but also to a database network covering 33% of
the same market.
As observed, network effects can be strong even
in presence of “incomplete networks”, meaning networks
of partially compatible products. Of course, they are even
stronger for pure network goods, such as telephone, fax
machine and computer operating systems (Economides,
Flyer 1997). However, more complex hi-tech markets, as
the one SAP competes in, provide firms with many
intermediate options to combine network effects with the
benefits deriving from differentiation and lock-in effect.
In other words, under partial compatibility, customers can
benefit from a larger network, but at the same time they
are locked in sub-networks, determined by the limited
extension of compatibility. This equilibrium advantages
both firms and customers, if compared with total
incompatibility. Customers would be better off if
compatibility was complete (Economides, Flyer 1997), but
this would imply the disruption of competitive advantage
for leading firms, lowering their differentiation level; this
8
A case study of coopetition: SAP
is why, when we look at the big picture, partial
compatibility is a trade-on (Nalebuff, Brandenburger
1996), not a trade-off. In fact, partial compatibility, as
seen in the alliance between SAP and Oracle, lowers costs
and improves quality. At the same, it allows customers to
experience network externalities and it enlarges the
community of Oracle database users, helping SAP and
Oracle to further improve their products and reduce
development costs.
The equilibrium described in the cases of SAP-
Oracle and of Yahoo-Microsoft alliances can not be
generalized to the totality of hi-tech markets; in fact,
products like ERPs and Instant Messengers have some
characteristics allowing partial compatibility:

They show strong network effects, so that the value for
users is tightly related to the aggregate number of units
sold (Economides, Skrzypacz 2003);

They are composite goods, whose main components
are so important that they can be considered as
individual products by themselves;

They can be greatly differentiated, especially for their
high-value added components.
These features distinguish hi-tech products that can be
organized in partially compatible networks and those
which should be totally compatible to actually generate
network effects. The landline telephone, for example, is a
pure network good, operating only under total
compatibility; this is why landline telephones adhere to a
worldwide standard which makes them interoperable.
Referring to the three features discussed above, landline
telephones show just the first one; in fact, they can not be
differentiated very much, at least not in their most
important features; their components, if considered
individually, are worth nothing3 and users do not even
perceive them as composite goods. To simplify, a modern
Instant Messenger allows users to chat, call, send SMS, set
up a voicemail, see each other through a webcam, send
files, share documents, etc; landline telephones are limited
to traditional calls. A similar example is software: an ERP
3
Even if physical network, hubs and phones are three
components of the landline telephone system, users do not
perceive them as distinguished. Instead, users clearly understand
the composition of Instant Messengers as Skype, since its
components allow them to perform very different actions and are
distinguished also by pricing (some are free, some not).
 A case study of coopetition: SAP

is made of valuable components, such as database,
functional modules, industry-specific applications; an
Operating System (OS) is a pure network good
(Economides, Flyer 1997), perceived as a solid product,
whose components can not be distinguished
economically evaluated. This is why generally OS are just
totally compatible or incompatible, and this is why also
Apple is increasingly installing MS Vista in its computers
and is gradually giving up trying to establish its OS as the
second standard in the market. Providing its customers
interoperability. Further research is needed, to identify the
optimal degree of compatibility under different product
structures, and to understand the array of options available
to implement partial compatibility.
or
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develop outstanding multimedia capabilities. SAP is
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(Working paper), New York.
Exhibit 1: Partial compatibility
GARRAFFO F., 2005., Types of coopetition to manage

emerging technologies (Working paper), Catania.

GUEGUEN G., BOUCHERE E. P., 2004, Coopetition and IT

Product’s features Market structure Implications
business ecosystems: the success of SAP (Working
Partial compatibility
Strong network effects Demand-side network
paper), Catania.
= effects
Components are valuable
and complex by Standardization of Trade-on: costs saving KIM C., MAUBORGNE R., Knowing a winning business idea
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Differentiation can be
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NALEBUFF B., BRANDENBURGER A., 1996, Co-opetition,

Conclusive remarks
Currency, New York.
This analysis has offered a useful approach to apply the
STANGO V., The Economics of Standard Wars, in Review
concept of coopetition to real-world business cases, and to
extract models of coopetitive agreements which can be of Network Economics, Vol. 3, Issue 1, March

replicated in other businesses. The industry focus on ERP 2004.

has provided an interesting example of modern
VARIAN H., FARRELL J., SHAPIRO C., 2004, The Economics
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combinable, while consumers ask for simplification and