Salesforce's International Strategy

In order for Salesforce to continue to grow, it has to be able to accomodate international and multi-national customers. As the marketplace becomes even more global, there will increasingly be an incredible, potential value in enterprise software that has the ability to cross international boundaries with ease and simplicity.  As the company continues to reach international customers, they will increase their economy of scope by developing new core competencies.

The following is copied from Salesforce's Fiscal Year 2013 Annual Report:

Revenues in Europe and Asia Pacific accounted for $926.5 million, or 30 percent of total revenues, for fiscal 2013, compared to $726.3 million, or 32 percent of total revenues, during the same period a year ago, an increase of $200.2 million, or 28 percent. The increase in revenues outside of the Americas was the result of the increasing acceptance of our service, our focus on marketing our services internationally and improved renewal rates as a result of the reasons stated above. Revenues outside of the Americas increased despite an overall strengthening of the U.S. dollar relative to major international currencies, which reduced aggregate international revenues by $43.9 million compared to the same period a year ago.

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Sales to customers outside the United States expose us to risks inherent in international sales.

We sell our service throughout the world and are subject to risks and challenges associated with
international business. Historically, sales in Europe and Asia Pacific together have represented over 30 percent of our total revenues, and we intend to continue to expand our international sales efforts. The risks and challenges associated with sales to customers outside the United States include:

• localization of our service, including translation into foreign languages and associated expenses;
• laws and business practices favoring local competitors;
• compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;
• pressure on the creditworthiness of sovereign nations, particularly in Europe, where we have customers and a balance of our cash, cash equivalents, and marketable securities. Liquidity issues or political actions by sovereign nations could result in decreased values of these balances;
• regional data privacy laws that apply to the transmission of our customers’ data across international borders;
• treatment of revenue from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding income or other taxes in foreign jurisdictions;
• foreign currency fluctuations and controls;
• different pricing environments;
• difficulties in staffing and managing foreign operations;
• different or lesser protection of our intellectual property;
• longer accounts receivable payment cycles and other collection difficulties;
• natural disasters, acts of war, terrorism, pandemics or security breaches; and
• regional economic and political conditions.

Any of these factors could negatively impact our business and results of operations.

Additionally, our international subscription fees are paid either in U.S. dollars or local currency. As a result, fluctuations in the value of the U.S. dollar and foreign currencies may make our service more expensive for international customers, which could harm our business.

Salesforce's Mergers & Acquisitions Strategy

The reason I chose to write about Salesforce.com is because I always like a good underdog story. Salesforce has always been the scrappy new kid on the enterprise software block. Of course, one way that Salesforce feels like it can increase market share is by buying up young startups that they feel can can add value to users. The problem is that as Salesforce buys up smaller companies, the more it begins to look like Oracle and Microsoft.

What users want from enterprise software is a seamless experience. They want all of their enterprise applications to play nice in the same sandbox. Therefore, the best way for an enterprise software company to scale quickly to provide that seamless experience is to buy up strategically related targets that provide the bidder with additional economies of scope.

In addition to purchasing targets that provide economies of scope, firms like Salesforce can attempt to acquire targets that provide them with a new and different customer base. In its recent purchases of Radian6 and Buddy Media, Salesforce was able to add new customers that would have been difficult to convert otherwise. Switching costs for enterprise software customers is extremely high, as such, once implemented, most customers are hesitant to switch enterprise software services.

So there are two questions that Salesforce has to ask itself when courting a target:

1. Does the target provide a value added experience to Salesforce's current customers?
2. Does the target provide Salesforce with an increased customer base?

In the cases of both the Radian6 and Buddy Media acquisitions, the answer to both of those questions was "Yes".

Salesforce's Strategic Alliances

Below is a list of strategic alliances that Salesforce has engaged in over the past several years.

Twitter - June 13, 2012 - Salesforce and Twitter announced a strategic global alliance to provide Twitter’s Firehose of public Tweets to Salesforce Radian6 customers. This powerful combination allows businesses to analyze the more than 400 million Tweets generated daily to listen, fuel engagement and gain customer insight. This latest effort builds on an existing three-year relationship between the two social pioneers.

Intuit - April 1, 2011 – Intuit Inc. and Salesforce announced a strategic alliance that will make it easier for millions of small businesses to manage customer information alongside their financial data. This collaboration will merge leading CRM and financial management to allow small businesses using QuickBooks to more efficiently manage customer relationships so they can save time and close more deals. As a part of the strategic alliance, Intuit will resell Salesforce CRM with QuickBooks integration that synchronizes customer data with QuickBooks and QuickBooks Online. This application will provide streamlined information to those in sales and management to eliminate data entry in two different systems, showing aggregated customer information alongside probability for closing a deal.

 

VMware - April 27, 2010 - Salesforce and VMware, Inc., the global leader in cloud infrastructure, announced a partnership to jointly deliver, sell and support a new enterprise Java cloud called VMforce™. To be announced at an event today in San Francisco hosted by the Chief Executive Officers of the two companies, VMforce will bring together the technologies, expertise and communities of the two leading cloud computing companies driving the tectonic shifts in the information technology industry. With VMforce, the more than 6 million enterprise Java developers, including the over 2 million developers using the Spring framework backed by the SpringSource division of VMware, will have an open path to cloud computing. Now, CIOs and IT departments will be able to leverage their existing programming skills and investments in Java applications, and take full advantage of the industry-leading Force.com platform to build Cloud 2 enterprise applications that are social and work on any mobile device in real-time. VMforce will dramatically simplify how enterprises and enterprise Java developers can harness the economics of cloud computing without compromising the flexibility, control and choice they require.

BMC Software - November 19, 2009 - BMC Software and Salesforce, announced a strategic alliance to deliver BMC’s industry-leading IT management solutions on the Force.com platform. The initial joint offering addresses the overwhelming customer demand for critical service desk function and processes delivered via the cloud.

Google - June 5, 2007 - Salesforce and Google announced that they have formed a strategic global alliance to help millions of businesses leverage the Internet to achieve success. The newest product resulting from this alliance, Salesforce Group Edition featuring Google AdWords, is a robust offering that combines the power of Salesforce on-demand CRM applications with the Google AdWords™ platform to achieve integrated sales and marketing success. This joint solution provides businesses of all sizes with the same tools used by larger enterprises to successfully attract and retain customers.

Risks of Salesforce's Radian6, Buddy Media Acquisitions

In recent years, Twitter has improved its ad-buying and monitoring interface, providing customers with an improved user experience. The risk for Buddy Media is that Facebook will improve its ad monitoring service and dashboard capabilities, making the need for Buddy Media irrelevant. As mentioned above, one way to mitigate this risk is for Saleforce to integrate Buddy Media into its CRM, providing customers with a method for not only tracking clicks, but providing them with a way to measure ad spending and ROI.

Buddy Media has historically been a money-losing company, losing $3.5M in the first two quarters of 2011 and $20.6M in the first two quarters of 2012, despite increasing revenues by almost 80% period-over-period. From an equity holder perspective, this Salesforce’s investment in Buddy Media is incredibly risky, since the investment represents negative-present-value. 

Assuming that there are agency costs in the form of managerial perquisites tying Salesforce’s corporate performance to managerial compensation, the acquisition is a surprising investment given Buddy Media’s inability to generate profit. In fact, according to Salesforce’s press release announcing its agreement to acquire Buddy Media, the acquisition is expected to lower Salesforce’s non-GAAP EPS by $0.14 or $0.15 in the 2013 fiscal year despite raising revenues by $20M to $25M. According to the same press release, Salesforce “now expects FY13 revenue in the range of approximately $2.990 billion to $3.025 billion, and FY13 non-GAAP EPS in the range of approximately $1.45 to $1.49.“ Therefore, the drop in non-GAAP EPS is estimated to be close to 10%.

Since the announcement on June 4,2012 that Salesforce would be acquiring Buddy Media, Salesforce’s stock price (CRM: NYSE) increase from $131.22 to $169.52 at the close of trade on April 12, 2013; an increase of 29.19%. Since Salesforce was willing to pay $689M for a money-losing firm, it must believe that the economy of scope that the acquisition provides is greater than the purchase price.

From an equity holder’s point of view Salesforce’s acquisition of Buddy Media seems like a risky investment; one that, if presented as a stand-alone investment, most investors would likely pass on. This type of investment presents a possible agency problem for Salesforce’s shareholders, especially since the acquisition is expected to lower the firm’s EPS. Monitoring mechanisms and bonding mechanisms can provide Salesforce’s outside equity holders with assurances that the firm’s management is making decisions in line with its shareholders. Unfortunately, the cost of monitoring and bonding come at a cost to its outside equity holders in the form of residual agency costs. Therefore, any time Salesforce makes an investment in any external acquisitions or major internal investments, there will be subsequent residual agency costs that will increase the cost of capital.

Diversification at Saleforce.com

Salesforce has not been an historically diverse firm. As a dominant-business firm, between 70 percent and 95 percent of its total sales comes directly from its cloud-based CRM platform. However, with its acquisition of Radian6, a social media monitoring platform, in March of 2011 and its subsequent purchase of Buddy Media, a social media marketing platform, in June of 2012, Salesforce has increased its diversification into the advertising industry. The two services were combined under the name of Saleforce Marketing Cloud to provide customers with the world's biggest social media analytics and ad-buying platform.

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Together, these acquisitions signal a strategic shift for Salesforce. In the press release announcing its deal to purchase Buddy Media, Marc Benioff, chairman and CEO, Salesforce.com was quoted as saying that “With CMOs surpassing CIOs in spend on technology within the next five years, our Marketing Cloud leadership will allow us to capitalize on this massive opportunity.”

The "massive opportunity" the Benioff is banking on continued increases in social media advertising spending as estimated in a 2013 BIA/Kelsey study and outlined in the chart below. 

In my next several posts, I will outline the benefits and risks of Salesforce's diversification strategy by examining these acquisitions more closely. 

A More Vertically Integrated Salesforce.com

As mentioned in a previous post, one of the issues that is preventing Salesforce from being more profitable is the fact that Salesforce still runs on Oracle software (presumably some version of MySQL).

If Salesforce can acquire its own database supplier for its cloud software (similar to Oracle's acquisition of MySQL in 2008) or use a free, open source platform, it can end its reliance on one of its biggest competitors. As an October 2012 Wired article pointed out, Salesforce was actively searching for engineers and devs with PostgreSQL experience.

Although PostgreSQL is known for its scalability, it is unknown wether the database can scale to meet the huge data demands of Salesforce.

Besides labor, data storage and data processing are probably the largest costs that Salesforce has.  If Salesforce could build its own data farms to store its data using PostgreSQL's free, open source database, it would achieve a greater level of backward vertical integration.

Because Salesforce distributes its own software, there really isn't much room to vertically integrate in the forward direction. There may be opportunities to purchase some companies that sell custom implementation services, but the company would be better served by focussing on backward vertical integration than forward vertical integration, since there is a greater opportunity for cutting costs.

Collusion & Strategic Alliances

According to Investopedia, collusion is defined as:

A non-competitive agreement between rivals that attempts to disrupt the market's equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their advantage. The parties may collectively choose to restrict the supply of a good, and/or agree to increase its price in order to maximize profits. Groups may also collude by sharing private information, allowing them to benefit from insider knowledge.

There does not appear to be any evidence that Salesforce has been involved in any type of illegal or explicit collusive activity. However since there are so few competitors in the CRM world, it is within the realm of possibility that CRM developers indirectly keep prices artificially high.

Although Salesforce does not appear to have ever been involved in any collusive agreements, the firm has engaged in a number of strategic alliances.

Investopedia defines a strategic alliance as:

An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

Below is a list of just a few strategic alliances that Salesforce has had with other firms:

Twitter - June 13, 2012 - Salesforce.com and Twitter announced a global strategic alliance that provides full access to the Twitter Firehose of public Tweets to Salesforce Radian6 customers. This alliance allows social enterprises to turn the massive volume of social conversations about their products, brand and industry into dynamic engagements that strengthen customer relationships.

Toyota - May 23, 2011 - Salesforce.com and Toyota Motor Corporation announced that they formed a strategic alliance to build “Toyota Friend”, a private social network for Toyota customers and their cars. Toyota Friend will be powered by Salesforce Chatter, a private social network used by businesses, and will be offered, first in Japan, initially with Toyota’s electric vehicles (EV) and plug-in hybrid vehicles (PHV) due in 2012.
Intuit - April 1, 2011 - Intuit Inc. and salesforce.com announced a strategic alliance that will make it easier for millions of small businesses to manage customer information alongside their financial data. This collaboration will merge leading CRM and financial management to allow small businesses using QuickBooks to more efficiently manage customer relationships so they can save time and close more deals.

VMware - April 27, 2010 - VMforce will enable Java developers to instantly tap into Force.com platform services, including the Force.com database, Chatter collaboration, workflow, analytics and search. Part of the industry-leading Force.com cloud platform, VMforce will enable Java developers to quickly and easily build next-generation enterprise Cloud 2 apps that are instantly social, mobile, and collaborative.
Google - June 5, 2007 - Salesforce.com, the market and technology leader in on-demand business services, and Google today announced that they have formed a strategic global alliance to help millions of businesses leverage the Internet to achieve success. The newest product resulting from this alliance, Salesforce Group Edition featuring Google AdWords, is a robust offering that combines the power of Salesforce on-demand CRM applications with the Google AdWords™ platform to achieve integrated sales and marketing success. This joint solution provides businesses of all sizes with the same tools used by larger enterprises to successfully attract and retain customers.

Flexibility & Real Options Analysis

One way in which a firm can attempt to mitigate risk under conditions of uncertainty is to adopt a strategy of flexibility. A flexible strategy provides firms with the ability change course quickly and sharply, should the firm experience unanticipated changes in the competitive landscape. In his book "Gaining & Sustaining Competitive Advantage" Jay B. Barney outlines the following types of flexibility:

TYPE OF FLEXIBILITY	EXAMPLE
The option to defer	An oil company leases land for potential exploration instead of buying it.
The option to grow	A firm builds a plant with the ability to add capacity at low cost
The option to contract	A firm hires contract and temporary employees instead of full-time employees.
The option to shut down and restart	A firm outsources distribution to a firm that distributes the products of many firms instead of outsourcing distribution to a firm that distributes only its production.
The option to abandon	A firm builds a manufacturing plant that employs only general-purpose machinery.
The option to expand	A firm invests to create one product because that investment could lead to the development of other products in the future.

As a tech company with a high level of scalability, Salesforce already has a great deal of inherent flexibility just by the nature of the industry in which it operates. This economy of scale provides Salesforce the option to grow and expand quickly and at very low cost. Tech companies also have the ability to contract, shutdown and restart, and abandon certain aspects of its operations.

Unlike hardware manufacturers, Salesforce does not have to worry about investments in plant and equipment that makes flexibility options more costly to exercise. This position makes it easy for the company to expand and contract quickly when the competitive landscape faces unanticipated changes.

Salesforce's Differentiation Strategy

Differentiation relies on a firm achieving competitive advantage by increasing a consumer’s willingness to pay a premium for products and services through the firm’s manipulation of the product's objective properties. What sets Salesforce apart from its competitors are:
Cloud-based Platform - Salesforce works in the cloud as opposed to on-premises software.

• Force.com - A repository of third-party developer apps and modules built for the Salesforce platform 
• Chatter - An enterprise-wide social network for collaboration, which is incredibly popular and even used as a separate product outside of Salesforce's CRM software. 
• Mobile - Because it is cloud-based, it is accessible from any mobile device. 
• Plays well with others - Works well with Microsoft Office, Lotus Notes, and Google Apps. 

Salesforce markets itself as a friendlier, more user-friendly, and scalable alternative to SAP and Microsoft.

Cost Leadership & Economies of Scale

A cost leadership strategy focuses on reducing economic cost to provide a firm with a competitive advantage over its competitors. One of the main forces that provides a firm with a cost advantage is economy of scale. Unfortunately, Salesforce.com, a company that boasts its ability to help its customers achieve economy of scale, has not been able to capitalize on any kind of economy of scale itself. According to an article on YCharts, Salesforce's sales and marketing spending as a percentage of revenue continues to rise year after year. Research and development costs as well as general and administrative costs have all gone up as a percentage of revenue over the past two years, and it should be noted that revenues for Salesforce increased by 74% during the same two-year period.

Below is a comparison of some key statistics taken from Yahoo Finance:

As mentioned in previous posts, once Salesforce can vertically integrate by migrating its software from Oracle's servers to its own servers, it will be able to capitalize on an economy of scale that, until then will be difficult to achieve.

Salesforce: Applying the VRIO Framework

According to the VRIO framework, a firm's competitive potential can be determined by how it answers four questions:

• Value - Do a firm's resources and capabilities enable the firm to respond to environmental threats or opportunities?
• Rarity - How many competing firms already possess particular valuable resources or capabilities?
• Imitability - Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?
• Organization - Is a firm organized to exploit the full competitive potential of its resources and capabilities?

Let's attempt to answer those questions in regards to Salesforce's capabilities as a cloud-based CRM, since the firm uses that capability to differentiate itself from its competitors.

• Value - Yes. Because Salesforce's software is cloud-based as opposed to software installed on-premises, the software can be updated more frequently to fix bugs and install new features, making it more nimble than competitors like SAP.
• Rarity - No. Although SAP is installed on-premises, there is an increasing number of new entrants that are cloud-based, such as SageCRM and Microsoft Dynamics CRM, which has some web-based services.
• Imitability - No. Salesforce touts that, because it is cloud-based, it scales easily. The reason it scales easily, is because the software is less complicated to engineer than on-premises software.
• Organization - Yes. As mentioned in a previous post, what gives Salesforce a potentially sustainable competitive advantage is its decision to open up the platform for third-party developers to build apps providing additional functionality and customization to the software. 

Because Salesforce's cloud-based CRM is valuable but not rare, one might say that only provides the firm with competitive parity. 

Although the VRIO framework is a decent analytical tool, it is fairly limited since it doesn't take into account environmental changes or managerial influences. It also has a very narrow focus on resources and capabilities and ignores advantages and disadvantages on the firm level.

Salesforce.com vs. Oracle: When a Supplier is a Rival

How crappy would it be, if your biggest supplier was also your biggest rival?  It turns out, the backbone of Salesforce runs on Oracle databases.

Salesforce.com is understandably pretty secretive when it comes to the extent of their dependence on Oracle, but in October of 2012, Wired ran a story about how Salesforce posted several job listings for engineers with experience in PostgresSQL, an open source database platform.  Obviously, Salesforce is feeling the pressure to ween itself from relying upon Oracle as a supplier and is now looking for ways to become more self-sufficient.  

What sets the tech industry apart from most other industries, is its ability to tap open source technology. Because there is so much open source technology available for just about any developer to use, it removes a lot of entry barriers that would otherwise exist. New entrants no longer have to purchase existing technology or engineer their own from scratch. They can simply take open source technology and adapt it to fit their needs.

The rise of the tech industry has no historical precedent, in that the industry is so protective of its democratic roots.  As soon a first-mover emerges and plants its flag firmly in the ground to stake its claim as the leader in a certain area (e.g. Microsoft, IBM, etc.), someone is close behind, ready to push them off the mountain (e.g. Google, Apple, etc.).  In the tech industry, underdog is king, and you have an entire community of hackers and open-source developers supporting his efforts.

Right now, Salesforce is the underdog - the Apple to Oracle's Microsoft (or possibly even Microsoft's Microsoft).  Developers are rallying around Salesforce, and it will be interesting to see if they can neutralize the threat of its biggest supplier/rival and kock him off the mountain.

Threat of Entry

What sets salesforce.com apart from its competitors and other companies is its unique strategy for combatting the threat of new entrants while adding value to its product. In 2006 Salesforce acquired Sendai Corporation, which later became Force.com.

Force.com is a platform that allows developers to build apps for Salesforce. Developers can then sell the apps they they developed on the Force.com platform on Salesforce's AppExchange.

By allowing developers to build and sell apps that provide a more customizable and scalable product, Salesforce is basically crowdsourcing a large portion of its R&D without absorbing much risk. As more developers create and sell more apps, and the platform gains in popularity, the greater the network effect will be. 

Since developers have a revenue stream available through SalesForce's AppExchange, they are less likely to become new entrants. The AppExchange also allows SalesForce the opportunity to acquire top developers. 

I have a feeling that this model for fighting off new entrants will be oft repeated.

Competitive Advantage

In assessing the competitive advantage of salesforce.com (NYSE:CRM), I've decided to compare it to both SAP (NYSE:SAP) and Oracle (NASDAQ:ORCL). SAP and Oracle both provide enterprise software solutions in the software as a service (SaaS) industry. Microsoft's Microsoft Dynamics also competes directly with salesforce.com, SAP, and Oracle, but because Microsoft Dynamics is only a small portion of Microsoft's revenue stream, I decided not to include it in this comparison.

Salesforce.com is the underdog in the enterprise software fight with a market cap of $24.69B, while SAP's market cap is $98.63B and Oracle's is $167.5B. Salesforce.com has been able to grow revenues steadily over the last ten year. And despite the fact that SAP and Oracle outperform salesforce.com in just about every key financial ratio, investors have been extremely bullish on CRM over the 5-year period and 10-year periods.

Below are some of CRM's key financial measures:

Sales	2.85 Bil
Income	-253.68 Mil
Net Profit Margin	-8.91%
Return on Equity	-14.16%
Debt/Equity Ratio	0.25
Revenue/Share	20.47
Earnings/Share	-1.79

You'll also notice that I've added quotes and a comparison chart for CRM, SAP, and ORCL on the right hand side of this page along with top stories about salesforce.com.

Salesforce.com

As part of my capstone course for the Fogelman College of Business and Economics MBA program at The University of Memphis, I have been asked to dissect the corporate strategy of the company of my choosing.  In April of 2012 Forbes published a list of the world's most innovative companies.  Their top pick?  Salesforce.com.

Salesforce.com is a social enterprise software company, whose main product is a cloud-based customer relationship management (CRM) platform.   According to Salesforce.com's website, its mission states:

The Salesforce.com Foundation is based on a simple idea: Leverage salesforce.com's people, technology and resources to build collective knowledge and enable action to improve communities throughout the world. We call our integrated philanthropic approach the 1/1/1 model.

Founder Marc Benioff created the 1/1/1 model, which states that salesforce.com will donate 1% of its equity, 1% of its employees' time, and 1% of its product to improving communities around the world.

Stay tuned for will hopefully be an insightful look into a young, fast-growing, and innovative company.

Coming Soon!

I've started a blog.  This is my first post.