Theory of Disruptive Strategy Applied to Salesforce.com
Salesforce went from non-existent in 1999 to market leader in 2012, leapfrogging giants of the industry. For 8 years running now, Salesforce is still the leader of the pack
21 years is a long time of sustained success in business. Salesforce has done a lot right! However, we know throughout history though, success can not be taken for granted and should always be viewed as temporary. I recently completed the Harvard Business School online course, Disruptive Strategy, and this article applies those theories of innovation to Salesforce as a company. Clayton Christensen is considered the father of “ Disruptive Innovation”, first with his book “The Innovators Dilemma” in 1997, years before disruption became part of our everyday vernacular, and now immortalised in this Harvard course. What would Clayton Christensen’s theory of disruption and disruptive strategy recommend for a company in a dominant position such as Salesforce?
(A disclaimer: This is merely my interpretation of the theory and I have no insight into the Salesforce strategy beyond what is publicly available)
A Quick Intro to Salesforce
Many of you reading this would already have Salesforce imprinted in you. For the rest of us, here’s a quick recap…
Salesforce was founded in 1999 and makes CRM (Customer Relationship Management) software distributed as a service entirely online. Marc Benioff had the vision of making software “as easy as buying a book on Amazon”. Marc, Parker Harris, and two other co-founders (Dave Moellenhoff and Frank Dominguez), adopted a new technology model, becoming the first company to be completely built from the ground up as a software as a service company — a novel approach unheard of at the time. Few people believed that any business would trust its data to be held online in someone else’s data center. Back in 1999, software needed to be installed and hosted in resilient and secure on-premise server rooms with teams of infrastructure and operational support ‘keeping the lights on’. Salesforce abstracted out these infrastructure and support needs. Companies could simply sign up online and almost instantaneously have a working CRM solution up and running.
Salesforce also adopted a new business model with subscription services. At the time, the traditional profit model was based on large upfront licensing costs and recurring maintenance and upgrade fees. Salesforce flipped this by betting that customers would pay cheaper monthly / annual fees with no cost to upgrades, as the software in the cloud was always up to date and all customers shared the same version of Salesforce. By focusing on customer success and adoption, customers would continually renew its licenses and this would be used to fuel product enhancements and innovations.
From the outset, Salesforce also committed to a new philanthropy model that it called the 1:1:1 model. Salesforce would donate 1% equity, 1% product, 1% employee time, to charitable causes. Non-profit organisations can sign up to free Non-Profit Cloud versions of its product and its employees donate their time either to charitable activities or pro-bono projects. This would later be the start of the Pledge 1% movement. For Salesforce, doing well also means doing good.
The rest, as they say, is history. The Salesforce business model based on 1) customer success, 2) subscription software-as-a-service revenue model, and 3) giving back to the community is a model that has been widely followed by just about every tech company since. This is a business model made to thrive, especially in these times of uncertainty in the midst of a global pandemic. Salesforce has achieved some truly astonishing market numbers that continually smash all industry expectations. It’s share price has risen astronomically since IPO with year on year growth that is the envy of many enterprise software vendors. It’s market cap is now bigger than Oracle.
The Salesforce Disruption
Salesforce was the very definition of disruptive technology in 1999. It created a new market with its first version of CRM as a service in the cloud. According to the theory of disruption, ‘New Market Disruption’ is characterised by new innovations that target historically non-consumption consumers, typically at low price points to attract consumers that could not afford to buy in to use the products in the existing market.
Many of Salesforce’s initial customers were small businesses that did not have the budget or resources required to run their own CRM infrastructure. Businesses in this market were typically using spreadsheets, access databases, small custom built solutions, or good old fashioned pen and paper.
By entering the market with a low cost subscription model, Salesforce did not have to have all the bells and whistles to compete with larger incumbents. By constantly innovating and adding more and more features, Salesforce quickly bridged the performance gap…
Understanding the Customers’ Job to be Done
The Jobs to be Done (JBTD) theory is central to Clay’s disruptive strategy. It is common to hear companies call themselves customer obsessed or customer first but often miss out on understanding why their customers are buying their products. Clay observes that companies fail because they take the wrong lens to understanding products and customer data applied to their design and innovation processes. Consumers ‘hire’ a product / service to solve a specific job that they need to get done, given their circumstances at the time. By understanding your customers’ Job, you have better clarity to target the right attributes you need your product / service to focus on.
Salesforce has understood this theory better than most and organised itself around “helping companies connect with their customers”. The Salesforce platform enables companies to have a holistic view of their information about their customers (a.k.a 360 degree view / whole of customer view) so that their users can access & use that data when they need it to do their job efficiently. This might be their previous interactions, sales history, interests, or their warranty information, etc. By providing timely access when they need it and where they need it, whether it is on their desktop, phone, or ipad devices, their teams are better able to close sales, resolve cases, forecast trends, or view reports & dashboards about the health of their business. The potential return on investment of this performance improvement in many cases is many multiple times more than the cost of the Salesforce license. Eg. Closing a multi million dollar sale because your sales team were able to use the Salesforce platform to collaborate on their top deals.
Salesforce created an experience that was easy to use (‘as easy as buying a book on Amazon’), looked after its customer base, grew a fanatical ‘Trailblazer’ community, continuously innovated with three releases a year, culminating in the massive annual Dreamforce events that literally takes over the entire San Francisco city. All this epitomised with a purposeful brand of Do Well, Do Good.
“The business of business is to make the world a better place”
- Marc Benioff
This complete integration around the whole experience, purpose, and community is what gives Salesforce its competitive advantage, setting itself apart, and makes it difficult for others to disrupt.
Recommendations for Maintaining Disruptive Scope
1. Recognise Threats From Low-End Disruptors
Just as Salesforce disrupted the industry, so too will new businesses attempt to enter the market and eventually compete and take away market share.
Low end disruptors start off with cheaper offerings that are ‘just good enough’ for the bottom end of the market. Typically, incumbents like Salesforce would ‘flee’ the bottom end as the profit margins are too low to focus any resources. This allows these low end disruptors fly under the radar and operate unhindered. New entrants can build entirely on a more nimble, modern technology stack from the ground up, or they may have more efficient business processes that allow them to be more profitable at lower costs.
Over time, disruptors are able to learn, adapt and improve their offerings to meet the performance that customers demand. These improvements and advances allow them to grow and move up the value chain from low-end to middle and eventually, to compete at the top most profitable market segments.
2. Salesforce can not Disrupt Itself
A key theory in Disruptive Strategy is that a company can not disrupt itself. What this means is that when a new disruptive innovation is created inside a company, the company’s profit model typically does not allow the new innovation to thrive. This is true in many case studies of companies that were once behemoths of their industries but no longer exist today. Companies in dominant positions focus on ‘sustaining’ innovations — making better and better product improvements their most demanding customers need. They fail to take advantage of disruptive innovations because by doing so, it would challenge their existing business model without a clear, guaranteed path of success. Think Kodak, Blockbuster, Nokia, AOL. Nokia once had almost total domination of the mobile phone market and was a very innovative company, constantly producing better and better phones. Kodak actually invented the digital camera!
In order to tackle this, Disruptive Strategy recommends creating a new company completely outside of the parent company or a separate, independent business unit which frees them from the restrictions, business processes, decision making, traditional thinking and KPIs of the legacy profit model. With this in mind, Salesforce could create a whole new CRM company from scratch or perhaps it could spawn off separate businesses from its many innovations (eg. Blockchains, IoT, Einstein AI). How would Salesforce build a CRM if it were to start today? What pricing strategy would it employ? How would it be distributed? What are the gaps in the current market that need filling?
3. Be Specialised Back in its Core.
The theory of disruption predicts that as the CRM Software-as-a-Service market matures, the market will dictate the ecosystem of components that make up the product architecture to become more modular with the ability to be swapped in and out interchangeably. Smaller companies will become highly specialised in niche components of the eco-system and focused on optimising just for their component. In this modular environment, the theory suggests that companies that have integrated heavily forwards will find it difficult to dis-integrate and unable to become specialised.
In recent years, Salesforce has integrated heavily forwards with massive acquisitions of Exact Target (a.k.a Marketing Cloud), Demandware (a.k.a Commerce Cloud), Mulesoft, and Tableau to name just a few. This is a deliberate strategy to grow and integrate products around the core offering. From the latest quarter financial announcements, it is a strategy that is working immensely well.
The theory, however, suggests that Salesforce needs to modularise its products and operate them entirely separately so they can continue to be leading platforms in their own specialisations. Its Marketing Cloud platform needs to be modular so that it can integrate easily with any CRM and not just Salesforce, Heroku needs the freedom to operate on its own to flourish, Commerce Cloud, Tableau, and so forth.
4. Maintain Focus on the Job to Be Done
The Salesforce platform has grown exponentially larger and significantly more complex than what it was back in 1999. With so many different capabilities (CPQ, Field Service, Analytics, etc.), industry specific verticals (Health, Education, Manufacturing, Consumer Goods, Financial Services, etc. ), and numerous distinct cloud products (Analytics, Marketing, Mulesoft, Commerce, etc. ) , it has become increasingly difficult to integrate and maintain a seamless experience between all its products. No one person can confidently master the whole platform anymore and it is no longer “as easy as buying a book on Amazon”.
Salesforce needs to double down on its focus on its customers’ job to be done that it “hires” Salesforce to do. Resources need to be aligned back to making the core product simple to use and easy to adopt. This means focusing on closing gaps and adding features that address what its customers most need to use Salesforce for. Salesforce does a great job with respect this already through things like the Idea Prioritisation system, Guided Setup Flows, and Automated Health Checks. However, there is still much more that needs to be done.
Further aligning to the Job to Be Done theory, new products and solutions need to address a customer problem rather than releasing products, features & attributes and then finding use cases for them. Companies that are able to integrate around a “Job” are better able to avoid being disrupted. The new Work.com product release is the perfect example of this strategy at play. Salesforce built Work.com around the customer’s JTBD of “Help me get our employees back to work safely”.
Salesforce is a company built on core values, customer convenience & simplicity, and has always been visionary and at the forefront of innovation. It’s customisable platform, open APIs, AppExchange marketplace, Einstein artificial intelligence and machine learning business processes are all examples of leading innovations that have helped it differentiate and maintain its disruptive scope. Salesforce achieved incredible success the right way and as it grows beyond a $200 billion market capitalisation and 50,000+ people company, it will continue to reshape and realign itself… just as it has done so continuously over the last 21 years.
