Sales Force (Case Study)

8/12/2019 Sales Force (Case Study)

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Blue Ocean Strategy

Institute

Salesforce.com:

Creating a Blue Ocean in the B2B

Space

01/2013-5911

This case was written by Mi Ji and Jee Eun Lee, Institute Executive Fellows at the INSEAD Blue Ocean Strategy

Institute, under the supervision of W. Chan Kim, Professor of Strategy and International Management, and Rene

Mauborgne, Affiliate Professor of Strategy, both at INSEAD. It is intended to be used as a basis for class discussion

rather than to illustrate either effective or ineffective handling of an administrative situation.

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Blue Ocean Strategy Institute

Copyright 2013 INSEAD 2 01/2013-5911

With the constant introduction of new technologies as well as shifting customer needs, themarket for CRM software was highly competitive and rapidly evolving. Developing CRMsoftware required huge expenditure on R&D and resources for system deployment, since the

software needed to be integrated with other applications and databases and heavilycustomized to fit the needs of individual organizations. Accordingly, the CRM softwaremarket was led by major enterprise resource planning (ERP) vendors such as SAP, Oracle andPeopleSoft. Other players in the market included companies specializing in CRM like Siebel,and hundreds of smaller vendors targeting industry-specific niche segments.

Established enterprise software vendors applied the traditional business model to the CRMfield, i.e. selling perpetual software licenses to be implemented in house. The software wasinstalled, configured and customized on the premises for an individual companys use, whichdemanded significant internal expertise and external professional services. CRM software alsoneeded to be integrated with legacy systems within the client company, which could involve

significant changes to work processes and infrastructure.

These traditional CRM software applications mainly targeted large businesses that hadcomplex requirements and systems infrastructure to be integrated with the applications. Theywere offered sophisticated CRM software packages covering the full range of CRM fields sales management, marketing, call centres, customer support and other CRM functions. The

purchase cycle for CRM software was long. As it was often not possible to examine thesoftware's capability out of the box, customers needed proof of concept before theycommitted to purchase. This resulted in long (more than three months) sales cycles andlengthy technology discussions among tech professionals.

The cost of purchasing packaged CRM software was high. A CRM software license for 200users, for example, was priced at approximately $350,000. The price of the software wastypically 25% to 30% of the overall cost. On top of this, customers needed to spend money oninfrastructure (middleware and hardware purchases), support and maintenance, and on hiringinternal or external professionals to implement and upgrade the software and train users. Thetotal cost of owning a CRM application for 200 users could easily exceed $1.8 million in thefirst year alone.

Vendors normally pursued one of two strategies in the CRM software market: they eitherdifferentiated their product by adding more features, or lured customers with big discounts atthe time of closing the license agreement.

Customers generally found the deployment of CRM software complex and the total cost ofownership burdensome. The increasing number and complexity of applications, operatingsystems, networks and computer systems made it even more difficult and time-consuming for

businesses to implement and use the applications. They had to make significant investments,both upfront and on an on-going basis, in applications and IT infrastructure. They also had toemploy costly IT staff and consultants to deploy, maintain and upgrade these applications andtrain their salespeople to use them. It often took 18 to 24 months for companies to get theapplication to work at full functionality. The total cost of ownership of CRM software for 200users over a five-year period could amount to more than $4 million, about half of which wasspent on implementation and maintenance.

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To make matters worse, these lengthy deployments did not always achieve the anticipatedbusiness benefits. Over 60% of CRM deployments failed to work. However, customers stillhad to make a purchase decision and take on excessive upfront costs and technical

infrastructure changes before they could fully grasp the actual usability and productivity ofthe CRM solution they had chosen.

Some companies chose to buy industry-specific versions of the CRM applications in order toreduce the magnitude of customization. But implementation was still time-consuming andexpensive, and the purchase and deployment process long and complex. At the lower end ofthe market there were numerous small businesses that simply could not afford the cost of

basic CRM applications or accommodate the lengthy deployment process. These companiesused alternative tools such as Excel spreadsheets or other database programs to store customerand sales information. Some even managed their contacts and sales-related documents using aRolodex and a filing cabinet.

Salesforce.coms Value Innovation

Challenging the conventional practice of selling software licenses and working with anetwork of consultants to deploy the software on-premise, Salesforce.com launched its firstonline sales force automation offering in 2000. Based on cloud computing, the applicationswere delivered via the Internet from central servers on Salesforce.coms side, where systemswere deployed and data were stored. Users gained access to the service upon signing up for itsmonthly (later yearly) plan. Customers would log on to use CRM applications via a simpleweb site and were thereby freed from the need to purchase software licenses, or to deploy and

maintain the software with their own infrastructure. The cost and time associated with runningand using the software dropped dramatically compared to traditional CRM software.

Salesforce.coms web-based on-demand CRM offering radically changed the customerexperience. It enabled users to access CRM applications anywhere from any device that hadInternet access, be it a laptop computer, a PDA, or a wireless device, as no client software wasrequired to be installed on user desktops. Maintenance of the applications became easier

because they were centrally deployed and managed by the service provider. Salesforce.comdescribed its new offering with the bold tagline The End of Software.

The price structure of Salesforce.coms offering was simplified. Costs for acquiring CRM

software licenses and maintenance were eliminated, as were the professional services feestraditionally charged for onsite deployment of CRM software. Customers simply paid amonthly subscription fee of $65 per user to access the CRM applications online.1Companieswere able to securely manage, share, and leverage their sales information over the Internet for$156,000 per year (for 200 users). The simplified deployment process and low price ofSalesforce.coms offering were appealing to small and medium-sized companies which wouldotherwise have been denied access to advanced CRM solutions due to lack of resources andinfrastructure.

1 The price of the Salesforce.com CRM service starts at $65.00 per user per month for the ProfessionalEdition, a scaled down version. Enterprise Edition is priced at $125.00 and Unlimited Edition is priced at

$195.00.

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The subscription-based, on-demand CRM solution also minimized the time customers spenton lower value activities in purchasing and deploying the service, allowing them to focus onstrategic activities with a greater impact on their business. Salesforce.com let its customers

test the applications in a single work-group or division first, and then extend the use of theapplications to other divisions once the test was successful. This gave customers greaterconfidence in the product at the time of purchase. As the subscription was paid on a permonth basis, customers could quit virtually any time if the solution proved less thansatisfactory.

Salesforce.com also simplified the features of its CRM applications. Whereas other vendorscompeted on features and IT functionality, Salesforce.com stripped off excessive features andfocused on the essentials that catered to buyers core needs. Following its initial sales forceautomation kit, Salesforce.com focused on providing the core features of three key functionalareas: sales, customer service and support, and marketing automation.

The stripped-down features allowed Salesforce.com to develop a user interface that wassimple and easy to operate, making its applications more intuitive and user-friendly. The web-delivered services made it possible for Salesforce.com to collect information on web siteusage patterns and improve its user interface accordingly. It could, for instance, simply movethe buttons most frequently used by users to more convenient locations.

Overall, Salesforce.com freed companies from the costly acquisition and deployment oftraditional CRM software, high failure rates, unacceptable risks and protractedimplementation processes, and instead provided a comprehensive, flexible platform that metthe basic needs of the mass of business users. Hosting and maintaining systems at the central

level enabled sharing of resources and costs across a large pool of users, and thus increasedeconomies of scale and cost-efficiency for individual customers compared to traditional on-

premise CRM solutions.

Competition and Sustainability of Salesforce.coms Blue Ocean

Strategy

Salesforce.coms successful strategic move led to rapid growth of the on-demand CRMmarket. As customers of the CRM software industry were increasingly attracted to the on-demand CRM model, traditional software vendors, including industry giants like Oracle,

PeopleSoft and SAP, were prompted to offer their own on-demand solutions.

To these traditional vendors, the question was how aggressively they should invest insoftware as a utility delivered over the web, and in a way that was compatible with theirtraditional licensed software offerings. Eventually, they became straddlers. On the one hand,they added on-demand solutions to their product portfolios; on the other, they denouncedSalesforce.coms offering as immature, implying that it did not provide the differentiatedfeatures that their traditional solutions carried. SAP, for example, launched an on-demandsolution called Business By Design in 2006, which was a hybrid between on-demand and on-

premise applications targeted at existing customers who might want an Internet-based option.However, its success in penetrating the on-demand market remains limited.

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Companies like Siebel also started offering subscription services more aggressively. In 2003,Siebel purchased UpShot Corporation, the no. 2 hosted CRM provider behind Salesforce.com,and entered the on-demand CRM market with its own product, Siebel CRM OnDemand. In

2004, it marketed a hybrid approach incorporating its licensed software and the SiebelOnDemand application. With this solution a company might choose to use OnDemand for asales division that wanted to get going quickly and didnt need extensive integration, whilechoosing the packaged software for a call centre where deep integration with other enterprisesoftware was required. With this on-demand CRM solution, Siebel extended its strategicfocus to small and medium-sized businesses a big shift as previously it had not servedcompanies with less than $500 million of annual revenue.

But companies with hybrid solutions generally found that the business model of on-demandCRM solutions was not compatible with their existing ones. Oracle, for example, launched ahybrid solution, Oracle On Demand, after acquiring Siebel and upgrading the latters on-

demand CRM solution. Oracle On Demand allowed customers to choose between an on-demand solution and an on-premise one. However, it eschewed the subscription-based pricingmodel as that would have put it at a cost disadvantage given that the company still needed todevelop and maintain software for a multitude of platforms and to employ a large number oftechnical staff to sell the hybrid solution. Consequentially, Oracle On Demand customers hadto purchase the service up front in the same way as conventional software licenses.

New entrants such as Zoho, RightNow Technologies, NetSuite, and Salesnet were more adeptat copying Salesforce.coms model. As these vendors jumped into the market to provide web-delivered subscription-based CRM solutions to small and medium-sized businesses, theyattracted several thousand corporate customers.

To break away from the emerging competition, Salesforce.com again took a different strategicperspective. While other vendors urged customers to forgo custom-built programs so that theycould migrate more smoothly to next-generation releases without spending huge resources,Salesforce.com encouraged customers to build custom programs according to their businessneeds but in a completely different way.

Toward this end, Salesforce.com launched Force.com, a cloud application developmentplatform, and AppExchange, a web-based portal for applications trading. The Force.complatform allowed external developers to create add-on applications for almost any businessneed on a cloud basis and host them on Salesforce.coms infrastructure. These new

applications were packaged and distributed through AppExchange, where developers couldupload applications they had built, and corporate customers could search, read reviews, testfor free, and ultimately purchase and download new applications to their Salesforce.comenvironment. Done in this way, it took hours, not days, months, or years, to implementcustom programs that were reintegrated into Salesforce.coms original CRM offering.

Customizing CRM applications in the traditional manner required huge investments andentailed long deployment process. The Force.com platform made it possible for any developerto quickly create robust, enterprise-class solutions by giving them access to an application-development environment with all the tools and resources they needed. Freed from the need to

buy and maintain an on-premise infrastructure, developers could create complete enterprise

applications four times faster than under conventional programs and at low cost. Corporatecustomers could virtually run an unlimited number of applications. They could also post

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requests for custom applications on Force.com for developers to create applicationsaccordingly. Through AppExchange they had access to a pool of applications for on-demanduse more conveniently.

External developers serving Salesforce.com customers included many renowned companiessuch as IBM, Microsoft, BEA Systems, Sun, TIBCO, PricewaterhouseCoopers, and MillerHeiman. LinkedIn, for example, contributed a popular application that allowed the enrichingof the sales funnel with social information supplied through LinkedIn profiles. And CVMSolutions developed a supplier-management application that ran native on the Force.com

platform. In the spring of 2010, CA Technologies, a Fortune 500 software corporation, startedto develop applications for the Force.com platform and distributed them via AppExchange.As of October 2010, over 900 applications from over 450 independent software vendors wereavailable on AppExchange.

To deepen its blue ocean, Salesforce.com made a further strategic move in 2011, launching aprivate social network service called Chatter, which allowed sales people to collaborate inreal time on their work items.

The effectiveness of traditional CRM solutions was often hampered by fragmentation ofimplementation and use in corporate environments. Individual departments tended to takeisolated initiatives in implementing CRM solutions. But systems that started that way seldomgot integrated later on. Lack of communication and collaboration among differentdepartments and different users within the company compromised the productivity of CRMsolutions.

Transplanting the idea of social networking to the corporate environment, Chatter allowedusers to communicate and collaborate online in real time while doing their jobs. Users couldsend and receive information via a real-time news stream. They could follow co-workers andreceive broadcast updates about project and customer status. Users could also form groupsand post messages on each other's profiles to collaborate on projects. In this way, they gottimely updates about what their colleagues were doing as well as the status of important

projects and deals, and therefore had a full picture of what mattered most to their business.The Chatter service also created a level of fun by allowing co-workers to engage in social-networking activities at work, which they would otherwise do offline or via online publicsocial networking services. Closer ties among sales team members established throughChatter in turn made collaboration easier and more productive.

Mark Benioff, chairman and CEO of Salesforce.com, remained upbeat about the future,Our flagship CRM product line delivers the immediacy, low cost, and low risk of on-demand applications with all the integration and customization capabilities of client/serversoftwareWe have broken through the perception of leader in the ASP (application service

provider) space2 and are considered on our own merits as a CRM vendor, which, circlingback to our satisfied and successful customer base, is where we win.

2 Application service providers are companies that offer corporate customers access to application software

and run it for them.

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Questions

1. Who were the noncustomers of the traditional CRM software industry? What were the

biggest blocks to buyer utility in traditional CRM software offerings?

2. Which one(s) of the six paths did Salesforce.com look across to create new marketspace? Can you draw the value curve of Salesforce.coms initial on-demand CRMoffering in the early 2000s versus traditional CRM software vendors on the strategycanvas?

3. How was Salesforce.com able to sustain its market leadership in the on-demand CRMmarket vis--vis both large players and new entrants for more than a decade?

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Exhibit 1

The CRM vs. On-demand CRM Global Market 2004-2009 ($m)

2004 2005 2006 2007 2008e 2009e CAGR

CRM 5,144 5,458 5,801 6,166 6,576 7,016 6.40%

On-demand CRM 418 599 829 1,155 1,512 1,897 35.30%

Source: Business Insight

Exhibit 2

Market Share of Major CRM Software Vendors

Source: Gartner

0%

20%

40%

60%

80%

100%

2004 2006 2008 2010

Oracle*(avg annual growth: -6%)

Salesforce.com(avg annual growth:29%)

Amdocs (avg annual growth: 0%)

Others

SAP(avg annual growth: -4%)

* Oracles market share includes those of PeopleSoft & Siebel

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Exhibit 3

Salesforce.coms Income Statements from 2001

(in thousands) $ 2001 2003 2005 2007 2009 2011

Consolidated statement of operations:

Revenues:

Subscription and support 5,022 47,656 57,977 451,660 84,574 1,551,145

Professional services and other 413 3,335 18,398 45,438 92,195 05,994

Total revenues 5,435 50,991 176,375 497,098 1,076,769 1,657,139

Cost of revenues:

Subscription and support 1,730 7,199 12,727 61,457 127,082 208,243

Professional services and other 1,692 3,164 20,727 57,433 93,389 115,570Total cost of revenues 3,422 10,363 33,454 118,890 220,471 323,813

Gross profi t 2,013 40,628 142,921 378,208 856,298 1,333,326

Operating expenses:

Research & development 3,366 4,648 9,822 44,614 99,530 187,887

Marketing and sales 25,392 33,145 96,311 252,935 534,413 792,029

General and administrative 6,855 12,958 30,268 84,257 158,613 255,913

Lease recovery (abandonment) -

Total operating expenses 35,613 50,751 136,401 381,806 792,556 1,235,829

Operating income (33,600) (10,123) 6,520 (3,598) 63,742 97,497

Interest income (Investment income) 1,715 572 2,621 14,975 22,774 37,735

Interest expense (42) (178) (191) (107) (24,909)

Gain on sale of investment - - - -

Other income(expense) 63 98 12 1,310 (817) (6,025)

Loss/Income before provision (31,864) (9,631) 9,153 12,496 85,592 104,298

Provision (benefit) for income taxes (1,217) (9,795) (37,557) (34,601)

Income (loss) before minority interest (31,864) (9,631) 7,936 2,701 48,035 69,697

Minority interest in consolidated joint 193 292 (590) (2,220) (4,607) (5,223)

Net income (31,671) (9,339) 7,346 481 43,428 64,474

Source: Salesforce.coms annual reports and SEC filing in 2003

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Exhibit 4

Salesforce.coms Stock Price since its IPO in June 2004

Source: http://finance.yahoo.com

Exhibit 5

Trend in the Number of Salesforce.coms Customers

Date # of customers

Jul, 2011 104,000

Oct, 2010 87,200

Jul, 2009 63,200

Oct, 2008 51,800

Jan, 2008 41,000

Jan, 2007 29,800

Jan, 2006 20,500

Jan, 2005 13,900

Jan, 2004 8,700

Jan, 2003 5,700

Jan, 2002 3,500

Jan, 2001 1,500

Source: Salesforce.coms website

$0

$30

$60

$90

$120

$150

$180

Stockprice

Jan 2001 Jul 2011Jan 2006 Jul 2009

06/23/2004 04/18/201206/16/2008 07/04/2011

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Exhibit 6

Selected Milestones of Salesforce.com

1999 Founded salesforce.com company in San Francisco

2000 Launched first online sales force automation solution

2001 Launched first online CRM app encompassing sales force automation, marketing

automation, and customer service and support

InfoWorlds Top 10 Technology of the Year

Cited as Fastest Growing Online CRM Company by Morgan Stanley

2002 Launched Salesforce CRM Enterprise Edition with advanced functionality

2003 More than 400 employees with operations in USA, Australia, Japan, and Europe

Awarded Best Hosted Application by InfoWorld

2006 Launched AppExchange

More than 400 AppExchange applications created by salesforce.com partners and

developers

2007 Launched Force.com

700+ applications available on AppExchange

Ranked #3 on Forbes Top 25 Fastest Growing Companies

2008 85,000+ custom applications built on the Force.com platform

800+ applications from 460+ partners available on AppExchange

Ranked #2 fastest-growing technology company behind Google by Forbes

Launched Salesforce CRM for Google Apps

2009 Launched first application built on Force.com for the iPhone

Launched Salesforce for Twitter

200 native applications available on AppExchange

110,000 custom applications built on the Force.com platform

2010 4,750 full-time employees

185,000 custom applications built on the Force.com platform

400 native applicationsand more than 1,000 total appsavailable on AppExchange

Launched Database.com, the enterprise cloud database

Named to 100 Best Companies to Work For list (3rd consecutive year) by Fortune

Named to 100 Most Trustworthy Companies list by Forbes

2011 Launched Chatter.com

Acquired multiple industry leading technology services: Dimdim, Manymoon,

Radian6, Assistly, Model Metrics

Source: Salesforce.coms website

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