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.