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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 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.
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Blue Ocean Strategy Institute

“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.

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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.

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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.

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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 web-
delivered 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 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 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.

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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 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 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 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 web-
delivered 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 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. Corporate
customers 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 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 social-
networking 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 on-
demand 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.

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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 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?

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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

100%
SAP (avg annual growth: -4%)
80%
Oracle*(avg annual growth: -6%)
60% Salesforce.com (avg annual growth: 29%)
Amdocs (avg annual growth: 0%)
40%
Others
20%

0%
2004 2006 2008 2010

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

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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
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 93,389 115,570
Total cost of revenues 3,422 10,363 33,454 118,890 220,471 323,813
Gross profit 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.com’s annual reports and SEC filing in 2003

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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 06/16/2008 07/04/2011 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 2001 Jan 2006 Jul 2009 Jul 2011
Jan, 2002 3,500

Jan, 2001 1,500

Source: Salesforce.com’s website

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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
 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  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 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
2011  Launched Chatter.com
 Acquired multiple industry leading technology services: Dimdim, Manymoon,
Radian6, Assistly, Model Metrics

Source: Salesforce.com’s website

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