How GenAI Will Disrupt Salesforce with Intelligent CRM (3 of 3) (Tech Strategy)

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Salesforce is a dominant business that is now facing a major tech change with generative AI. And maybe a disruption to its business model.

Yes, Salesforce has been crushing competitors in CRM software (and generating crazy cash flow) for +20 years.

But GenAI is giving rise to intelligence capabilities. Which is giving rise to “intelligent CRM”.

  • How will GenAI and “intelligent CRM” impact “digital CRM” giants like Salesforce?
  • Is this an opening for competitors?

Those are the key questions for this article.

First, A Quick Summary of the Salesforce Playbook

I love Salesforce.

Its business model is awesome. It pioneered SaaS and has been dominating CRM software for +20 years.

And I really like its cash flow. Plus, its big negative working capital.

Like Microsoft, it has a powerful position in enterprise software. But unlike Microsoft it is specialized in CRM. That makes it more focused. It also makes it easier to understand. Which is good for analysis.

The Salesforce business model is basically 3 points. For those that want a more detailed look, here are some in-depth articles on the company.

And here is a podcast on all this.

Point 1: The Salesforce Customer Value Proposition Is a Proven Winner. This Isn’t Changing.

Salesforce does B2B sales of enterprise software, specialized in CRM. And this is mostly for medium and especially large enterprises. And especially multinationals.

Salesforce offers solutions for connecting and interacting better with customers. So, it’s about improving connecting and engaging with customers. And to a lesser degree with employees.

CRM software is an attractive market. As pretty much every business needs this. And there are no real substitutes.

CRM also has a great growth trajectory. Digital CRM tools keep evolving and upgrading. And businesses are stuck in a never-ending arms race where they must keep upgrading their customer-facing tools to stay competitive.

So, Point 1. It’s a great market and Salesforce has a great (and proven) value proposition.

Point 2: Salesforce Is Selling the Digital Operating Basics as an Integrated Bundle with Recurring Revenue

For those of you familiar with my frameworks, you will have already recognized that the Salesforce core value proposition sounds a lot like my Digital Operating Basics.

Specifically, they sound like they are selling DOB2 (never ending customer experience improvements), with some degree of DOB3 (digital core for management and operations). They are basically selling these necessary digital capabilities to large businesses.

Digital Operating Basics

And they are doing this as a bundle of services. Salesforce has lots of products, but the core business is mostly:

  • A software (+ services) bundle specialized in CRM. I really like software bundles (like Microsoft). I like when they create recurring revenue. And I love when they are specialized (like Adobe in creator tools). Salesforce has a bundle of services specialized for customer-facing knowledge and interactions. That’s great.
  • A specialized database (almost an ERP) creating a “single source of customer truth”. This is the database that supports their bundle of services. And a 360-degree view of customers is a big part of their value proposition. You can almost see this as a specialized ERP system. And I love ERP businesses. More than I love bundles with recurring revenue.

Point 3: Salesforce Has 4 Big Advantages

Salesforce’s big competitive weapon is switching costs.

Changing out integrated enterprise software can be a big deal. It costs a business a lot in terms of time, training, and capital (sunk and new). And it’s a bigger problem when all your customer data is in that particular database. Yes, everyone says data is portable. But switching lots of data is difficult.

Enterprise software is great when it becomes deeply integrated in the operations of a business. And when it becomes integrated with other software systems. ERP systems, which are the digital foundation, are the most powerful version of this. Trying to change an ERP system is like trying to swap out your nervous system. Salesforce isn’t an ERP but it’s pretty close in many ways.

So as long as Salesforce offers really good products at a reasonable price, it is not worth it to replace them. And especially not just to save 10%. It’s a cost benefit decision by the client. And swapping out Salesforce is almost never worth the cost.

As a result of their big switching costs (and software economics):

  • Salesforce has big gross margins. About 73%.
  • They have big customer huge retention.
  • They can get their annual subscriptions pre-paid (so tons of negative working capital). About $8-10B on $30B of annual revenue.

Second, Salesforce has economies of scale in IT and R&D (including M&A).

This is a pretty common competitive advantage in software businesses. The biggest player can outspend the smaller rivals in key areas. And this tends to be better when it is in a specialized area. Like CRM.

The scale in IT spending lets them have smaller per unit costs that smaller rivals.

But it’s the big spending on creating and upgrading specialized CRM products that is the strategic weapon. And they spend about $5B per year on R&D (15% of revenue). Additionally, they do lots of M&A and can acquire any small company that gets traction in CRM with a new tech or products. Their R&D and M&A spending is a big weapon against smaller rivals. Only their big rivals (Microsoft, Oracle, SAP) can match them here.

Third, their software bundle creates a barrier to entry.

Like Microsoft, Salesforce has an integrated bundle of software. Any aspiring new entrant is going to have to re-create multiple products to enter. That raises the barrier to entry. And limits their main rivals to Microsoft, Oracle, SAP, and a few others. There are smaller businesses that jump in with point solutions. But new entrants are not a big threat in their core market (large companies and multinationals).

Finally, Salesforce has a global direct sales force.

This is not really a competitive advantage. But it’s an operating capability (CRA) that really matters for selling to large enterprises. Selling enterprise software to the big companies is difficult and time consuming. There is a long sales cycle. It is an ongoing relationship. And you need to provide lots of support for onboarding, customization, consulting and customer service.

Salesforce has 75,000 employees globally. Sales and marketing is their biggest expense at 43% of revenue. Their global sales force is really difficult to replicate.

Ok. That’s the basic Salesforce story.

Before going into GenAI, let me summarize their current strategy going forward.

Pre-GenAI, Salesforce Had Mostly Been Focused on Upgrading and Growing Their Core Business

Salesforce lays out its growth strategy pretty clearly. It’s what you would expect. They are doing “land and expand” for sales. Basically, get into customers with a service and then cross-sell and upsell more services.

And outside of this, they have a pretty solid growth strategy. Which is:

  • Adding products
  • Adding geographies
  • Increasingly personalization. This is the big digital upgrade happening in most products.
  • Increasing industry specialization. Same.

The growth strategy is also a solid strategy for their market. Salesforce describes its market as:

  • Evolving
  • With lots of technology changes
  • With constant new products
  • And with changing customer needs (again, not that frequently)

And in the risk section of their 10K, they talk about keeping pace with technological development. Which includes continuing to be integrated with existing services.

But their current strategy (just summarized) has dealt with this ongoing evolution quite well.

They have been making some moves to expand from a software bundle to an ecosystem. So, they bought Slack. They are building out data ecosystems. They look a lot like Adobe in terms of their software bundles. This makes them look a bit more like Microsoft, with ecosystems and maybe a platform.

But then GenAI arrived. Which is a big disruption for this really attractive business.

My 3 Conclusions for Salesforce in GenAI and Intelligent CRM

The rapid emergence of GenAI and intelligence capabilities is beyond Salesforce’s current strategy and approach.

  • Customer interactions are now becoming intelligent, personalized, and automated.
  • We are seeing new user-computer interfaces where customers have ongoing conversations and relationships with chatbots, AI agents and even the products themselves.

This is a major the change right in the core of the Salesforce business.

When I look at businesses like Salesforce (and HubSpot), I look for two KPIs. These are my two “where the rubber hits the road” events for enterprise software. I look for:

  • Teams using these software tools and services on a daily basis
  • Businesses embedding these software tools and services into their workflows.

For enterprise software, I am looking for team adoption and workflow embedding. So, we can look for how GenAI changes this for CRM software.

And here are my 3 working conclusions.

Conclusion 1: GenAI Will Be a Big Upgrade to Existing Products, which Are Already Being Used by Client CRM Teams. Salesforce is Well Positioned Here.

The Salesforce bundle has different services being used by different teams within enterprises. The marketing team. The sales team. The CRM team. The customer service team. The ecommerce team. And others.

So, these products are all going to be upgraded with GenAI capabilities. And Salesforce is well positioned to do this. This is very similar to how Adobe rapidly upgraded its software bundle with GenAI capabilities (i.e., Firefly). And I have described this as Step 1 of the GenAI playbook.

But the key metric here is daily usage by teams. And Salesforce is well positioned here.

Conclusion 2: GenAI Will Be Embedded in Client CRM Workflows. This Requires an AI Tech Stack, which Salesforce Does Not Have. This is a Problem.

Teams using your products is one thing. But how do you get your software embedded into workflows? When you don’t have an AI tech stack?

This is where Salesforce is in trouble.

The AI Cloud companies I have talked about (Huawei, Baidu, Alibaba) are all rapidly building AI tech stacks and then offering intelligence capabilities as a service. They are moving fast in this area.

Huawei’s new “All Intelligence” Strategy, which was their big topic at Huawei Connect 2023 in Shanghai. It was a major upgrade to their enterprise offerings of integrated, end-to-end digital transformation services. Now, instead of just digitizing enterprises, it’s also about making them intelligent. I wrote about how Huawei has repositioned its entire cloud business to provide intelligence to businesses.

And Huawei is well positioned to win as a key provider of foundational technology for intelligence. They can provide the technologies (hardware, software and increasingly AI) that others build with and upon. Note: The short version is of their offering is:

  • Huawei’s AI Tech Stack = Pangu + Hardware + Partnerships / Ecosystems

Baidu, Alibaba Cloud, AWS, Google Cloud, and others are all doing this playbook. It’s going to be a challenge for Salesforce to compete in this area. And the metric to watch is embedding of CRM workflows.

Conclusion 3: AI Agents Will Change the CRM Workforce Within Companies. This is a Big Problem for Salesforce. Competitor Microsoft is a Major Threat Here.

Salesforce provides tools and knowledge to humans working in sales, service, and such. That is what they do. And yes, we are going to see far more powerful GenAI tools for these people in organizations (conclusion 1).

But we are also going to see AI Agents that do these CRM functions without much human involvement.

It will be similar to how taxi drivers will be joined by robotaxis that roam the streets on their own. They operate without human intervention. They will be tracking customers, interacting with customers and providing services to customers.

This is when we start talking about “intelligent CRM”.

  • Imagine AI Marketing agents that are constantly putting out content and hunting for new leads?
  • Imagine AI Sales agents that are constantly working with leads and converting them to new customers?
  • Imagine AI customer service agents that are handling problems and other interactions?
  • Imagine AI CRM agents that become ongoing advisors for customers? The race to build AI Agents has been described as the race to become the customer’s best friend.

Customer knowledge and interactions are where Salesforce lives. Which is does by providing tools to teams of humans. But now we are talking about a workforce with lots of non-humans (i.e., AI agents). Human resources-specialized software player ADP is facing a similar challenge.

That is a major evolution / disruption. And this is going to create an opening for GenAI-first players to jump into the market with services Salesforce does not have. And, unfortunately, their primary competitor Microsoft is way out front in generative AI. They are going to have to build and buy aggressively.

***

That’s my thinking thus far. I hope this is helpful.

Cheers, Jeff

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Related articles:

From the Concept Library, concepts for this article are:

  • SaaS
  • Switching Costs: Financial, Procedural, Relational and Risk
  • Integrated Bundles
  • Economies of Scale: Fixed Costs: Specialized, Cumulative and Niche
  • Enterprise Software: CRM
  • GenAI

From the Company Library, companies for this article are:

  • Salesforce Inc

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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