Tuesday, March 1, 2011

How Salesforce Can Win the Online Battle

With the introduction of Dynamics CRM as an online offering on the international stage, Salesforce now has a viable competitor, raiding their territory, who they need to repel. How can Salesforce position themselves such that they have an unassailable position?

Porter’s Generic Strategies for Competitive Advantage

Professor Michael Porter (http://en.wikipedia.org/wiki/Michael_Porter) is a thought leader on competitive strategies for organisations who pioneered the concept of competitive strategy during the eighties. One of Porter’s concepts was that of generic strategies (http://en.wikipedia.org/wiki/Porter_generic_strategies). Here is the obligatory two-by-two matrix.

Essentially, Porter says you can either go for a specific segment of the market or you can try and attract everyone. If you try and attract everyone you can distinguish yourself by having the lowest cost (and therefore the lowest sustainable price) or you can offer something none of your competitors do, such as excellent customer service.

Competitive Advantage in the Car Industry

To understand how the theory works, let us look at the car industry. A good example of a segmentation strategy is the Bugatti Veyron (http://en.wikipedia.org/wiki/Bugatti_Veyron). The car is the most expensive modern car in the world and the fastest street-legal production vehicle in the world. There are not many people that can afford the $1.6m price tag, so this is not a broad market play. Also, of those that can afford it, there is a specific market segment interested in fast cars. Arguably, at the other end of the spectrum, is the Tata Nano (http://en.wikipedia.org/wiki/Tata_Nano ). This is the most inexpensive car in the world but gives millions of Indians the opportunity to own a car. If the car has mass-appeal, it could be labelled as a cost leadership strategy. If the car has appeal only to a small niche, it is a segmentation strategy.

A more conventional example of a cost leadership strategy would be something like Kia. Kia cars have broad market appeal but are offered at a compelling price, presumably because they are a cost leader. Toyota’s hybrid cars can also be argued as a differentiation strategy. While a little pricier than Kia, they still have broad market appeal and have the unique proposition of using a hybrid engine. Another differentiation Toyota have is their brand and the values associated to it. While Toyota has had their problems, it is still one of the world’s strongest brands (http://issuu.com/interbrand/docs/bgb_report_us_version?viewMode=presentation&mode=embed) and differentiates it from their competitors.

So Where Does Salesforce Fit?

To be competitive, Salesforce needs to find the strategy that fits them and the industry.

Cost leadership: Microsoft has come in with very aggressive pricing. They also claim that they can share the costs of the online version across complimentary technologies such as Office 365 and their on-premise version (http://www.softwareadvice.com/articles/crm/will-microsoft-dynamics-crm-2011-slow-salesforce-microsoft-executive-interview-1022211/). Given Salesforce is triple the price for similar functionality and yet barely makes double-digit profits, I do not believe cost leadership is attainable. Dynamics CRM is owning the cost leadership position.

Differentiation strategy: Salesforce likes to think they have a sustainable differentiation with products like Chatter and their ‘fun’ brand but the key is it must be a differentiation that matters to the customer. Fun is meaningless to the customer. Being ‘social’ has some resonance but when the surface is scratched, there is nothing especially social about Salesforce. Chatter is an internal collaboration tool. Customers cannot access it. Sure it is easy to consume but, with similar products like Sonoma’s Vibe, any differentiation resulting from it is rapidly eroding away. If Salesforce is a Kia, Dynamics CRM needs to be a Tata Nano to justify the price differential. The fact is, Dynamics CRM is not a Nano.

Functional differences are, generally, easily copied. There is the possibility of a complimentary offering to differentiate e.g. superior customer service but this has not yet revealed itself if it is on the cards.

Segmentation strategy: In my opinion this is the best option for Salesforce. Just as Pivotal focuses on medium-large organisations with very complex work process requirements, Salesforce also needs to find its ‘niche’ to justify the premium price. What this niche will be is not obvious.

Conclusions

Microsoft has made it clear that they wish to own the cost leadership position. This leaves one of two options for Salesforce. Differentiate its offering or focus on a specific market segment (or both). Either option is profitable but, if Salesforce believe they can continue to prosper with general appeal and no obvious difference in their service, their territory will be slowly captured until they are removed from the map.

2 comments:

LJ said...

Leon

Would agree on the basics about the Porter strategy.

However, I think there is a bit more complexity than pure segments and published pricing.

I think sfdc have a different go to market model. The Direct model means that departments in large companies can buy "off the cloud" apps at a departmental level with no need for IT and no need for a reseller.

Their published prices are far off their deal prices ( granted for a 2year contract).

Their brand is still pretty strong and for a simple install they are very good. I see their sales style as a bit like a phone company - strong where the needs are straight forward, but gets a little flaky when some complexity flows through.

So, if I was a corporate unit manager, with credit card in hand and a problem to solve in 6 weeks - sfdc is the solution. Lots of those.

Don't forget SugarCRM as they wil open in Sydney soon.

Leon Tribe said...

As for buying "off the cloud" this also applies to the Online version of Dynamics CRM. Anyone can sign up with a credit card.

You are right on the deal prices. SFDC do tend to drop the price to get the deal. Specific numbers I don't know but discounting 60-odd percent would be a hell of a drop.

The brand is VERY strong. I often try to explain what I do for a living and often people will say "oh so the software is like salesforce.com then?".

SugarCRM? They have had presence in Sydney for a while but I'm yet to see them gain any traction.