Software Industry And Salesforce Com Information Technology Essay

In this section of the paper the industry, in which Salesforce.com operates, will be identified, the information about main competitors, historical development and main specifications of industry will be provided.

Porter defines term industry as follows: “The group of firms producing products that are close substitutes for each other. Definition of industry is not the same as the definition where the firm wants to compete. There may be strong benefits to competing in a group of related industries”.[Porter, 1980]

Salesforce.com is the fifth biggest player in the Application Software Industry [Yahoo Finance, 2010] and provides mainly customer relationship management systems to its customers. Software industry is classified with SIC Code 7370, 7371, 7372 and 7373 by SEC.

The easiness of their systems’ interface and very flexible customization possibilities allow Salesforce to grow its reputation. In response to fast changing software industry, Salesforce has recently expanded it business areas to new developing application software segments such as cloud computing and AppExchange platforms. Salesforce.com offers diverse professional services such as consulting and trainings to its customers too. Salesforce.com is engaged in providing its services and products across USA, Latin America, Europe, China and Japan.

Historical Progress and Financial Analysis of Software Industry

The history of software is a big, black hole in the history of modern technology in the opinion of historians examining the evolution of computing and information technologies because historians have yet to define a typology for software, along with the historical questions that need to be answered.[Cortada, 2002].

1950s

In spite of different views of historians, the establishment date of Software Industry which consists of two main sectors, programming services and enterprise software products, is accepted as mid-1950s. First software companies were founded by entrepreneurs with high programming skills who worked for larger organization and government agencies, to meet the market demand. Computer Usage Company (or Computer Usage Corporation), the first software company, was established by two former IBM employees, Elmer Kubie and John W. Sheldon in 1955. Their first project was developing simulation software for flow of oil for California Research Corporation. The entrance barrier to the industry was very low and what you needed was just “a coding pad and pen”. The number of companies increased toward end of the 1950s.

1960s

Increase in the number of middle and small size computers in the market at rapid pace triggered the demand for the software packages which were developed under agreements with consumers. This motivated new skilled people to join the market and it lead to market expansion. Autoflow and Mark IV were the first software products that were sold to many different consumers. By selling these pioneer products with different application areas companies started to generate high revenues. E.g. The revenue from sales of Mark IV was more than 1 million dollars in 12 months. The annual revenue of 45 major companies in the software industry reached to 100 million dollars by 1965. In 1967 the number of companies reached to 2800 and some big companies were publicly held.

1970s

In 1970 IBM started to unbundle its software and services and converted them to paid software packages, it means that consumers could not get free software from IBM any more. The pressure from other companies played big role in making this decision. It was a turning point in industry because the other software companies started to earn big revenues. After the invention of personal computers (PCs) Microsoft, Computer Associates and Oracle entered the market. In 1976, 64 software companies generated more than 1 million dollar revenue. Despite its rapid growth, software industry exceeded 1 billion dollar revenue barrier only in the year 1978, in which IBMs revenues were 17 billion $.

Figure 1.Industry Concentration

1980 and 1990s

The most crucial development period of Application Software Industry covers from the beginning of 1980s to the middle of 1990s. In this time of period vast amount of new companies entered the software industry and it lead to diversification of application areas of software, expansion of markets and high competition among companies. Actually this period of time can be considered as the formulation and reaching maturity of industry. Therefore detailed financial analysis of Industry which covers this period of time is provided in the following graphs in details.

Beginning from 1980s software industry started to reach to its maturity and the total industry revenue increased from 2.7 billion $ to over 30 billion $ at the end of 80s. During 80s the number of software companies started to increase dramatically but the Industry Concentration analysis for this period (Figure 1) implies that top five (ten) percents of all firms own around forty (sixty) percent of the total industry sales [Chatzoglou, 2000]. It means that the new comers were able just to compete with each other or small companies that already are operating in the industry and could not influence the big players. The companies tried to expand their market share by either acquisition of other small or medium size companies in industry or with specializing in a specific application area.

Because of dramatic increase in the number of new entering companies to industry from 1980 to 1988 that resulted in the decrease of economic gain, the Return on Equity (ROE), Return on Assets (ROA) and Return on Sales (ROS) ratios declined significantly as the Figure 2 suggests [Chatzoglou, 2000]. Increasing intensity of competition and development of substitute products decreased return on sales constantly till 1993 which was really above industry norms at the beginning of 1980s. The decrease in Return on Assets suggests that the companies, especially the new entrants could not use their assets efficiently. Figure 2. Profitability

Figure 3 suggests that the amount of Capital expenditures and Research and Development expenditures were about the same at the beginning of period. Since the companies have already built the facilities required for operations, the capital expenditures declined drastically as a percentage of total assets and the amount of money invested in Research and Development increased at very rapid pace in opposite. This was the result of shorter product lifecycles and high pressure on firms derived from intensive competition. In 1994 the median company in software industry spent three times as much on R&D than it did in capital Investments. [Chatzoglou, 2000]

Figure 3. Investment spending

Software Industry in 1990s can be characterized with development of two significant types of software systems. First, Entertain Resource Planning Systems (ERP) which is the sector in which Salesforce.com operates by offering its CRM Systems. Although ERP concept was invented by SAP in 1980s, the development and expansion phase covers 1990s. Till now no US companies can overcome Germany based SAP, which uses the advantages of being first in this sector. Second, Relational Database Technology which was developed in 1970s by IBM and University of California, Berkeley researchers, reached to advance and mature form in the middle of 1990s.

The analysis of the the period from 1980s to mid 90s suggests that (1) the software industry has been steadily expanding over the sample period, (2) the relative market power of the industry leaders has remained fairly stable, (3) the median firm operating in the industry has become smaller through time, (4) firms have been spending increasingly more on R&D and less in capital investment through time, (5) profitability was declining over the first half of the sample, stabilizing in the second half, and (6) the risk of bankruptcy for the median firm has similarly declined over the sample period [Chatzoglou, 2000].

One of the most important turning points in the software industry after invention of personal computers (PCs) was the invention and wide use of Internet after 1990s. The use of Internet lead to development of new Internet based software industry sector which is defined as future of all other software industry sector products.

2000s

Revolution in hardware production process, the intensive improvement and wide use of Internet and the contribution of big players to the industry due to their past experiences changed the shape of software industry in 2000s.

The 2000s in software industry can be characterized as a period of acquisitions. In 2005, merger and acquisition (M&A) activity in the software industry was in high level and represents 16 percent of the 10,716 deals closed in the United States throughout the year. [Grant Thornton’s Report, 2005]. The following fact from the Grant Thornton’s report explains the situation very good: The number of companies in ERP sector decreased from 400 to 20 big players from 1995 to 2005.

Ranking Company

Revenue (billion dollars)

Microsoft Corporation [MSFT]

62.5

Oracle Corporation [ORCL]

29.3

SAP AG ADS [SAP]

16.2

Insight Enterprises, Inc. [NSIT]

4.5

CA Inc. [CA]

4.4

Adobe Systems Incorporated

[ADBE]

3.5

Intuit Inc. [INTU]

3.5

BMC Software, Inc. [BMC]

1.9

Salesforce.com Inc

[CRM]

1.5

Nuance Communications, Inc.

[NUAN]

1.1

Grand Total

128.4

Figure 5. Total Revenue (2010)

Figure 4 and Figure 5 describes the total revenue for the 10 biggest players of the Industry in percentage and in dollars respectively in 2010. The total revenue of 10 (3) biggest companies in Application Software Industry is 128 (108) billion dollars. This numbers describes the evolution way of industry. As mentioned above the total revenue (not the revenue of 10 biggest companies) of software industry was just 100 million dollars in 1960s.

Software Industry Structure

Environment in which, company operates, influences it’s business strategy development process. Therefore, industry structure analysis plays a crucial role for determining which strategies the company should formulate and what the reactions of market to these strategies are. Threat of substitute products, the threat of established rivals, the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers are the five forces (Figure 6) defined by Porter to identify the industry structure and attractiveness and to determine company’s potential business strategies. [Porter, 1980]

The threat of new entrants

Although the barriers to industry entry is low, with a few thousands dollars you can enter the market, it is very hard to obtain a good position and maintain it for longer time. Actually, threat level of new entrants for the companies, which have been operating in the software industry like Microsoft specialized in operating systems and office packages, SAP in entertain resource planning systems, Adobe in photo processing software or Salesforce.com in customer relationship management services, is low. The first reason is that, such companies were able to establish very high value brands which influence buyers to make decision when buying their products. Second, with the experience they have gained since their foundation, these big players can not only maintain their position in the industry but also can change its shape, expand it and identify new directions and trends.

Product differentiation which affects the entry barrier levels too, is much harder now than a few years ago. The product differentiation process in application software industry is highly correlated with development and improvement of new technologies. For example, the invention and very high progress in Internet enabled companies to establish collaboration software systems. But the software industry history indicates that these new software package types are developed mainly by big players in order to increase and maintain their market share and product differentiation is very hard for newcomers.

The bargaining power of suppliers

The term, suppliers, is not widely used in software industry because the company pays just high skilled employees to develop software systems. Some researchers or consulting agencies that generate ideas which later are coded by employees can be viewed as “suppliers” of ideas.

In customer relationship management, entertain resource planning and supply chain management segment of industry, software system can integrate other software systems that are developed by other partner companies. For example, Microsoft uses the product of Crystal Reports for reporting process of it Microsoft Dynamics CRM system to generate reports.

The bargaining power of buyers

The sales transaction in software industry can be classified mainly to two groups: Business-to-Business (B2B) and Business-to-Consumer (B2C). The number of Business-to-Government (B2G) transactions has been rapidly growing for a few years. The bargaining power of buyers is different in different segments due to segment features and customer types. For example, as in collaboration software segment the suppliers are only few big player, the bargaining power of buyers is small or as biggest operation system (Microsoft Windows) supplier in the industry, Microsoft reduce the bargaining power of customer significantly.

In difference with the early years of software industry development both individual and both the customers can now better formulate what they actually need and which software systems are more suitable for them. The number suppliers in application software industry, in exception of some oligopolistic segments, increased enormously. These two factors give freedom to consumers and increase their bargaining power.

Figure6. Porters Five Force Model

Threat of substitute products

Threat of substitute products is very low because there are no other products that can substitute software packages.

One of the determinants threat level is the switching costs, which refers to monetary or non-monetary efforts the customers have to incur to change the suppliers or products. Switching costs in software industry especially in its CRM Segment is very high and it is not only because of financial reasons but also for non-monetary costs like adaptation period of employees to the new system, training process, restoring and customizing the existing data in the new system.

The threat of established rivals

The application software industry growth now is more stabile and smoother than in 1980s or 1990s but the number of market participants is growing steadily. This is leading to high rivalry in application software industry. Especially in the last few years a lot of companies from developing countries entered industry and obtained good positions in local markets.

Fixed costs in the software industry follows an increasing trend and it is one of the most important factors for high rivalry among companies which is trying to maintain their market shares.

Forces

Degree

The threat of new entrants

Medium

The bargaining power of suppliers

Low

The bargaining power of customer

High

Threat of substitute products

Low

The threat of established rivals

Very high

Figure 8.Porters Five Forces Summary for Software Industry

Competitors

In order to understand the industry conditions more deeply it is very crucial to analyze the important existing competitors and the prospective competitors with high potential. The issues about competitors like whether their financial conditions match industry norms, what strategies and trends they are following and etc. are important indicators that provide information about the position of your company in the market.

According to Yahoo Finance the main competitors of Salesforce.com in Application Software Industry are Microsoft Corporation, Oracle Corporation, SAP AG, Intuit Incorporation and Adobe Systems Incorporation.

Microsoft Corporation

With 76.3 billion dollars brand worth Microsoft is ranked fourth among top 100 most valuable brands. At least 400 million people in the world use Windows operating systems offered by Microsoft. Microsoft manufactures and develops software systems and offers diverse services in IT industry. The auditor of Microsoft Corporation is  Deloitte & Touche LLP. Windows was established in Redmond, WA, USA and has now more than 89.000 employees. Microsoft runs its business in 5 business divisions (www.Microsoft.com/about):

Windows & Windows Live Division

This division of Microsoft develops and offers all type of Windows operating systems like Windows XP, Windows Vista and Windows 7 and Web applications and services through Windows Live. The main source of revenue for Windows Live is online advertisements.

Server and Tools

Server and Tools department provides different products such as Windows Server, Microsoft MySQL Server, Visual Studio, Silverlight, Windows Azure, services, trainings and certification to professional application developers, project managers and architects to increase their efficiency. This division generates half of its revenue annuity volume licensing agreement, 30% from transactional volume licensing programs and 20 % from Enterprise Services.

Online Services Division

This division of Microsoft consists of online advertising platform and offers services such as Bing, MSN portal and channels. This division generates the revenue from online advertisements too.

Microsoft Business Division Segment

90 % of revenue of Microsoft Business Division Segment comes from Microsoft Office Programs and the rest 10 % comes from Microsoft Dynamics business solutions including ERP, CRM and supply chain management systems.

Entertainment and Devices Division

The offerings of this division include PC software games, Online games and services, Windows Phone, Zune digitial music platform and Xbox game console and its games and accessories.

Oracle

Oracle Corporation was founded in Redwood city, California, USA in 1977. The business of Oracle is focused mainly on developing and licensing database systems, application servers, data migration, developer environment systems, business intelligence systems and Java platform. Oracle founders saw the importance of relational database systems in mid 1970s when these systems were not commercial offered by others. As the company which offered relational database systems based product, Oracle still uses the advantage of being pioneer in the industry and is leader of this sector with significant market share.

Recently, Oracle Corporation has expanded its business by offering application software including entertain resource planning (ERP), Customer Relationship Management (CRM), Supply Chain Management (SCM) systems and Enterprise Project Portfolio Management services.

Oracle is also engaged in hardware systems production and offers servers, storage products, networking product, Solaris operating system and etc. Trainings and Certifications are other sources of revenue which are offered for solution integration, enterprise architecture design, product implementation and etc.

Oracle generated last year over 29 billion $ revenue and 6,3 billion $ net income. This company has approximately 105.000 employees worldwide and 18.059 shareholders. The financial statements of Oracle Corporation are audited by Ernst & Young LLP. You can find detailed information about Oracles financial ratios in Appendix B.

SAP AG

Germany based SAP which was incorporated in 1972 in Germany is the pioneer of business intelligence systems and still control over 50% of this market all over the world. SAP offers business intelligence software systems including ERP, CRM and SCM systems and provides related services. SAP generates revenue from it three main divisions: Sales of products, Consulting and maintenance. High reporting and analytic features of SAP software systems contribute high value.

Number of employees of the company exceeds 48.000 worldwide. With approximately 66 billion dollars market capital SAP is the third biggest and only non-American player in the USA. The financial statements of SAP are audited by KPMG AG.

Intuit Incorporation

Intuit Incorporation was founded in 1983 in California, USA. Inuit offers business and financial service and product to small and midsized companies, accounting professionals and financial institutions. Financial Management Solutions, Employee Management Solutions, Payments Solutions, Consumer Tax, Accounting Professionals, Financial Institutions and Other Businesses are the main segments of Intuit Inc. The company offers different software including QuickBox, Quicken, TurboTax, ProSeries and Lacerte.

This company generates about 3.5 billion dollars revenue and 574 million dollars net income from its software products, services and maintenance. Number of its employees reaches to 7700. The Intuit Inc is audited by Ernst & Young LLP.

Adobe Systems Inc

Adobe Systems Inc., which was founded in CA, USA in 1983, offers different software systems all over the world. The product line of the company is quite different from others and it provides creative business and web software that are used by creative professionals and agencies. Professional photography, Video processing, Web design, Animations are the main segments where Adobe operates. Adobe provides collaborations systems too which supports virtual teams to corporate. Adobe Reader and Adobe Flash Player are most popular software products offered by Adobe.

Number of employees and shareholders are 8660 and 1709 respectively. Revenues from different software and services are 3.6 billion dollars and net income is 473 million dollars. The financial reports of Adobe Systems are audited by KPMG LLP.