Sales Force (Case Study)

313-019-1

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 Renée 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. Copyright © 2013 INSEAD TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

ecch the case for learning

Di st str ib ibuted by ecch, UK and USA www.ecch.com All rights reserved Printed in UK and USA

Nor th th Amer ic ica t +1 781 239 5884 f +1 781 239 5885 e [email protected]

Rest of the world t +44 (0)1234 750903 f +44 (0)1234 751125 e [email protected]

313-019-1


“There has been something fundamentally wrong with the technology industry for a long time. There’s been an unnecessary burden placed on customers to ensure that enterprise software delivers on the vendors’ promised results...Maybe if these software applications worked, it would be okay. The problem is, they don’t.” “Customers don’t want to develop [applications] but they do want to make the system completely for them, make their technology fit their business and not the business fit their technology.”

Marc Benioff, Chairman and CEO, Salesforce.com Salesforce.com, a customer relationship management (CRM) service provider, was founded in 1999 by former Oracle executive Marc Benioff with the revolutionary tagline “The End of Software”, meaning the end of traditional packaged software. Founded with just 10 employees composed of engineers, marketing and sales people and a modest investment of $2 million, Salesforce.com grew to be the world’s largest hosted CRM service provider within four years. By redefining CRM as a web-delivered solution, Saleforce.com has become an eye-catching and fast growing player in the B2B world. The company had 87,200 customers in 2010, and its revenues amounting to US$1.3 billion. In the same year it ranked 4th on Fortune’s list of “100 fastest-growing companies”. Since its successful strategic move in the early 2000s, Salesforce.com has sustained undisputed market leadership in the on-demand CRM market for more than a decade, despite the attempts by both established enterprise software vendors such as Oracle, SAP and PeopleSoft and numerous new players to penetrate the market. 



What was unique in the strategic logic of Salesforce.com that allowed it to break away from the competition? How was Salesforce.com able to sustain its leadership position in the on-demand CRM market and continuously stay ahead of the pack for more than a decade?

This case will consider the above questions as it seeks to capture the industry dynamics in the past decade.

The CRM Software Industry Customer relationship management (CRM) is a strategy solution companies use to manage their interactions with customers and sales prospects in every area of their business. CRM uses technological tools to help businesses comprehensively manage their customer-facing processes such as identifying, acquiring and retaining customers across different lines of business and via multiple channels, e.g. face-to-face, phone, fax, and email. CRM software has been developed to enable businesses to automate key functional areas such as sales, marketing and customer service and support. Due to the booming need for database and one-to-one marketing, the CRM software market grew tremendously in the second half of the 1990s. Annual growth rate was more than 50% since 1996, reaching 71% in 1999. This in turn led to a surge in the number of CRM applications and vendors.

Copyright © 2013 INSEAD

1

01/2013-5911

313-019-1


With the constant introduction of new technologies as well as shifting customer needs, the market for CRM software was highly competitive and rapidly evolving. Developing CRM software required huge expenditure on R&D and resources for system deployment, since the software needed to be integrated with other applications and databases and heavily customized to fit the needs of individual organizations. Accordingly, the CRM software market was led by major enterprise resource planning (ERP) vendors such as SAP, Oracle and PeopleSoft. 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 CRM field, i.e. selling perpetual software licenses to be implemented in house. The software was installed, configured and customized on the premises for an individual company’s use, which demanded significant internal expertise and external professional services. CRM software also needed 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 had complex requirements and systems infrastructure to be integrated with the applications. They were 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 the software's capability “out of the box”, customers needed proof of concept before they committed to purchase. This resulted in long (more than three months) sales cycles and lengthy technology discussions among tech professionals. The cost of purchasing packaged CRM software was high. A CRM software license for 200 users, for example, was priced at approximately $350,000. The price of the software was typically 25% to 30% of the overall cost. On top of this, customers needed to spend money on infrastructure (middleware and hardware purchases), support and maintenance, and on hiring internal or external professionals to implement and upgrade the software and train users. The total cost of owning a CRM application for 200 users could easily exceed $1.8 million in the first year alone. Vendors normally pursued one of two strategies in the CRM software market: they either differentiated their product by adding more features, or lured customers with big discounts at the time of closing the license agreement. Customers generally found the deployment of CRM software complex and the total cost of ownership burdensome. The increasing number and complexity of applications, operating systems, 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 to employ costly IT staff and consultants to deploy, maintain and upgrade these applications and train their salespeople to use them. It often took 18 to 24 months for companies to get the application to work at full functionality. The total cost of ownership of CRM software for 200 users over a five-year period could amount to more than $4 million, about half of which was spent on implementation and maintenance.


2

01/2013-5911

313-019-1


To make matters worse, these lengthy deployments did not always achieve the anticipated business benefits. Over 60% of CRM deployments failed to work. However, customers still had 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 of the CRM solution they had chosen. Some companies chose to buy industry-specific versions of the CRM applications in order to reduce the magnitude of customization. But implementation was still time-consuming and expensive, and the purchase and deployment process long and complex. At the lower end of the market there were numerous small businesses that simply could not afford the cost of basic CRM applications or accommodate the lengthy deployment process. These companies used alternative tools such as Excel spreadsheets or other database programs to store customer and sales information. Some even managed their contacts and sales-related documents using a Rolodex and a filing cabinet.

Salesforce.com’s Value Innovation Challenging the conventional practice of selling software licenses and working with a network of consultants to deploy the software on-premise, Salesforce.com launched its first online sales force automation offering in 2000. Based on cloud computing, the applications were delivered via the Internet from central servers on Salesforce.com’s side, where systems were deployed and data were stored. Users gained access to the service upon signing up for its monthly (later yearly) plan. Customers would log on to use CRM applications via a simple web 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 running and using the software dropped dramatically compared to traditional CRM software. Salesforce.com’s web-based on-demand CRM offering radically changed the customer experience. It enabled users to access CRM applications anywhere from any device that had Internet access, be it a laptop computer, a PDA, or a wireless device, as no client software was required to be installed on user desktops. Maintenance of the applications became easier because they were centrally deployed and managed by the service provider. Salesforce.com described its new offering with the bold tagline “The End of Software”. The price structure of Salesforce.com’s offering was simplified. Costs for acquiring CRM software licenses and maintenance were eliminated, as were the professional services fees traditionally charged for onsite deployment of CRM software. Customers simply paid a monthly subscription fee of $65 per user to access the CRM applications online.1 Companies were 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 of Salesforce.com’s offering were appealing to small and medium-sized companies which would otherwise have been denied access to advanced CRM solutions due to lack of resources and infrastructure.

1

The price of the Salesforce.com CRM service starts at $65.00 per user per month for the Professional Edition, a scaled down version. Enterprise Edition is priced at $125.00 and Unlimited Edition is priced at $195.00.


3

01/2013-5911

313-019-1


The subscription-based, on-demand CRM solution also minimized the time customers spent on lower value activities in purchasing and deploying the service, allowing them to focus on strategic 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 the applications to other divisions once the test was successful. This gave customers greater confidence in the product at the time of purchase. As the subscription was paid on a per month basis, customers could quit virtually any time if the solution proved less than satisfactory. Salesforce.com also simplified the features of its CRM applications. Whereas other vendors competed on features and IT functionality, Salesforce.com stripped off excessive features and focused on the essentials that catered to buyers’ core needs. Following its initial sales force automation kit, Salesforce.com focused on providing the core features of three key functional areas: sales, customer service and support, and marketing automation. The stripped-down features allowed Salesforce.com to develop a user interface that was simple and easy to operate, making its applications more intuitive and user-friendly. The webdelivered services made it possible for Salesforce.com to collect information on web site usage patterns and improve its user interface accordingly. It could, for instance, simply move the buttons most frequently used by users to more convenient locations. Overall, Salesforce.com freed companies from the costly acquisition and deployment of traditional CRM software, high failure rates, unacceptable risks and protracted implementation processes, and instead provided a comprehensive, flexible platform that met the 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 increased economies of scale and cost-efficiency for individual customers compared to traditional on premise CRM solutions.

Competition and Sustainability of Salesforce.com’s Blue Ocean Strategy Salesforce.com’s successful strategic move led to rapid growth of the on-demand CRM market. As customers of the CRM software industry were increasingly attracted to the ondemand 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 in software as a utility delivered over the web, and in a way that was compatible with their traditional licensed software offerings. Eventually, they became straddlers. On the one hand, they added on-demand solutions to their product portfolios; on the other, they denounced Salesforce.com’s offering as “immature”, implying that it did not provide the differentiated features that their traditional solutions carried. SAP, for example, launched an on-demand solution 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.


4

01/2013-5911

313-019-1


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 Siebel OnDemand application. With this solution a company might choose to use OnDemand for a sales division that wanted to get going quickly and didn’t need extensive integration, while choosing the packaged software for a call centre where deep integration with other enterprise software was required. With this on-demand CRM solution, Siebel extended its strategic focus to small and medium-sized businesses – a big shift as previously it had not served companies with less than $500 million of annual revenue. But companies with hybrid solutions generally found that the business model of on-demand CRM solutions was not compatible with their existing ones. Oracle, for example, launched a hybrid solution, Oracle On Demand, after acquiring Siebel and upgrading the latter’s ondemand CRM solution. Oracle On Demand allowed customers to choose between an ondemand solution and an on-premise one. However, it eschewed the subscription-based pricing model as that would have put it at a cost disadvantage given that the company still needed to develop and maintain software for a multitude of platforms and to employ a large number of technical staff to sell the hybrid solution. Consequentially, Oracle On Demand customers had to 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 adept at copying Salesforce.com’s model. As these vendors jumped into the market to provide webdelivered subscription-based CRM solutions to small and medium-sized businesses, they attracted several thousand corporate customers. To break away from the emerging competition, Salesforce.com again took a different strategic perspective. While other vendors urged customers to forgo custom-built programs so that they could migrate more smoothly to next-generation releases without spending huge resources, Salesforce.com encouraged customers to build custom programs according to their business needs but in a completely different way. Toward this end, Salesforce.com launched Force.com, a cloud application development platform, and AppExchange, a web-based portal for applications trading. The Force.com platform allowed external developers to create add-on applications for almost any business need on a cloud basis and host them on Salesforce.com’s infrastructure. These new applications were packaged and distributed through AppExchange, where developers could upload applications they had built, and corporate customers could search, read reviews, test for free, and ultimately purchase and download new applications to their Salesforce.com environment. Done in this way, it took hours, not days, months, or years, to implement custom programs that were reintegrated into Salesforce.com’s original CRM offering. Customizing CRM applications in the traditional manner required huge investments and entailed long deployment process. The Force.com platform made it possible for any developer to quickly create robust, enterprise-class solutions by giving them access to an applicationdevelopment 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. Corporate customers could virtually run an unlimited number of applications. They could also post


5

01/2013-5911

313-019-1


requests for custom applications on Force.com for developers to create applications accordingly. Through AppExchange they had access to a pool of applications for on-demand use more conveniently. External developers serving Salesforce.com customers included many renowned companies such as IBM, Microsoft, BEA Systems, Sun, TIBCO, PricewaterhouseCoopers, and Miller Heiman. LinkedIn, for example, contributed a popular application that allowed the enriching of the sales funnel with social information supplied through LinkedIn profiles. And CVM Solutions 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, started to 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 were available on AppExchange. To deepen its blue ocean, Salesforce.com made a further strategic move in 2011, launching a private social network service called “Chatter”, which allowed sales people to collaborate in real time on their work items. The effectiveness of traditional CRM solutions was often hampered by fragmentation of implementation and use in corporate environments. Individual departments tended to take isolated initiatives in implementing CRM solutions. But systems that started that way seldom got integrated later on. Lack of communication and collaboration among different departments and different users within the company compromised the productivity of CRM solutions. Transplanting the idea of social networking to the corporate environment, Chatter allowed users to communicate and collaborate online in real time while doing their jobs. Users could send and receive information via a real-time news stream. They could follow co-workers and receive broadcast updates about project and customer status. Users could also form groups and post messages on each other's profiles to collaborate on projects. In this way, they got timely 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 socialnetworking activities at work, which they would otherwise do offline or via online public social networking services. Closer ties among sales team members established through Chatter 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 ondemand applications with all the integration and customization capabilities of client/server software…We have broken through the perception of ‘leader in the ASP (application service provider) space’2 and are considered on our own merits as a CRM vendor, which, circling back 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.


6

01/2013-5911

313-019-1


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 market space? Can you draw the value curve of Salesforce.com’s initial on-demand CRM offering in the early 2000s versus traditional CRM software vendors’ on the strategy canvas? 3. How was Salesforce.com able to sustain its market leadership in the on-demand CRM market vis-à-vis both large players and new entrants for more than a decade?


7

01/2013-5911

313-019-1


Exhibit 1 The CRM vs. On-demand CRM Global Market 2004-2009 ($m)

2004

CRM On-demand CRM

2005

2006

2007

2008e

2009e

CAGR

5,144

5,458

5,801

6,166

6,576

7,016

6.40%

418

599

829

1,155

1,512

1,897

35.30%

Source: Business Insight

Exhibit 2 Market Share of Major CRM Software Vendors

100% SAP (avg annual growth: -4%)

80% Oracle*(avg annual growth: -6%) Salesforce.com (avg annual growth: 29%)

60%

Amdocs

(avg annual growth: 0%)

40% Others

20% 0% 2004

Source: Gartner


2006

2008

2010

* Oracle’s market share includes those of PeopleSoft & Siebel

8

01/2013-5911

313-019-1


Exhibit 3 Salesforce.com’s 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

Tot al revenu es

5,435

50,991

176,375

497,098

1,076,769

1,657,139

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

115,570

Total cost of revenues

3,422

10,363

33,454

118,890

220,471

323,813

2,013

40,628

142,921

378,208

856,298

1,333,326

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

1,235,829

Cost of revenues:

Gros s pr ofi t

Operating expenses:

Lease recovery (abandonment) Total operating expenses Operati ng inc ome

Interest income (Investment income) Interest expense

35,613

50,751

136,401

381,806

792,556

(33,600)

(10,123)

6,520

(3,598)

63,742

1,715

572

2,621

14,975

22,774

37,735

(42)

(178)

(191)

(107)

(24,909)

-

-

-

-

Gain on sale of investment Other income(expense) Loss/Income before provision

63

98

12

1,310

(817)

(6,025)

(31,864)

(9,631)

9,153

12,496

85,592

104,298

(1,217)

(9,795)

(37,557)

(34,601)

Provision (benefit) for income taxes Income (loss) before minority interest Minority interest in consolidated joint Net in come

97,497

(31,864)

(9,631)

7,936

2,701

48,035

69,697

193

292

(590)

(2,220)

(4,607)

(5,223)

(31,671)

(9,339)

7,346

481

43,428

64,474

Source: Salesforce.com’s annual reports and SEC filing in 2003


9

01/2013-5911

313-019-1


Exhibit 4 Salesforce.com’s Stock Price since its IPO in June 2004

Stock price $180 $150 $120 $90 $60 $30 $0 06/23/2004

07/04/2011

06/16/2008

04/18/2012

Source: http://finance.yahoo.com

Exhibit 5 Trend in the Number of Salesforce.com’s 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

Jan 2001

Jan 2006

Jul 2009 Jul 2011

Source: Salesforce.com’s website


10

01/2013-5911

313-019-1


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 InfoWorld’s 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







2006





2007







2008









2009









2010













2011





More than 400 employees with operations in USA, Australia, Japan, and Europe Awarded Best Hosted Application by InfoWorld Launched AppExchange More than 400 AppExchange applications created by salesforce.com partners and developers Launched Force.com 700+ applications available on AppExchange Ranked #3 on Forbes Top 25 Fastest Growing Companies 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 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 4,750 full-time employees 185,000 custom applications built on the Force.com platform 400 native applications—and more than 1,000 total apps—available 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 Launched Chatter.com Acquired multiple industry leading technology services: Dimdim, Manymoon, Radian6, Assistly, Model Metrics

Source: Salesforce.com’s website


11

01/2013-5911

313-019-1

To order INSEAD case studies please contact one of the three distributors below:

ecch, UK and USA

ecch UK Registered Office: www.ecch.com Tel: +44 (0)1234 750903 Fax: +44 (0)1234 751125 E-mail: [email protected]

Centrale de Cas et de Médias Pédagogiques

ecch USA Registered Office: www.ecch.com Tel: +1 781 239 5884 Fax: +1 781 239 5885 E-mail: [email protected]

www.ccmp-publishing.com Tel: 33 (0) 1.49.23.57.25 Fax: 33 (0) 1.49.23.57.41 E-mail: [email protected]

www.insead.edu Europe Campus Boulevard de Constance 77305 Fontainebleau Cedex, France Tel: 33 (0)1 60 72 40 00 Fax: 33 (0)1 60 74 55 00/01 Asia Campus 1 Ayer Rajah Avenue Singapore 138676 Tel: 65 6799 5388 Fax: 65 6799 5399

Printed by INSEAD

Abu Dhabi Campus 4th Street - Muroor Road - P.O. Box 48049 Abu Dhabi, United Arab Emirates Tel: 971 2 651 5200 Fax: 971 2 443 9461

Sales Force (Case Study)

Recommend Documents