Strategy
How Long Can a
Just One Thing? Company Thrive Doing
by Andy Wu and Scott Duke Kominers
December 10, 2020
Summary. The news that the chat app Slack was being sold to veteran customer
relationship management company Salesforce for $27.7 billion raised a lot of
eyebrows. Why sell after a year of explosive growth? The deal, however, epitomizes
a question facing so-called best-of-breed companies such as Slack,... more
In a year of many changes and shakeups in the technology world, the
recent news that Salesforce would acquire Slack for $27.7 billion (!)
definitely raised eyebrows. What, exactly, did the veteran customer /
relationship management (CRM) company want from the breakout
chat application? Why did Slack, which had seen record growth this
year, sell? And just how much value could be created from combining
a sales tool with an email substitute? The news left a lot of folks
scratching their heads — and Salesforce’s stock dropped more than
8% after news of the deal surfaced.
On the face of it, the two companies don’t have much in common.
Salesforce pioneered the category of software as a service (SaaS) for
enterprise customers. It built upon its flagship CRM offering to
eventually include a portfolio of related marketing and analytics
applications, and a cloud infrastructure services business. Slack, on
the other hand, achieved great popularity as a communication tool,
primarily used within organizations (although it’s recently aimed to
be used across organizations as well).
What the companies share, however, is the threat of Microsoft. While
Salesforce’s CRM sustains a strong position against Microsoft’s
competing offering (Dynamics 365), it faces steep competition from
Microsoft in business analytics (Tableau vs. PowerBI), and it relies on
Microsoft (along with Amazon and Google) to host its services in the
cloud. The direct threat to Slack is more existential: Microsoft’s 2016
announcement of Teams, an enterprise chat and videoconferencing
application. While Slack really is better at chat than Teams in many
ways, Teams is effectively free to most customers — either through a
standalone free version or as a bundled add-on to Office (formally,
Microsoft 365), the world’s most popular SaaS offering. The bundling
explains why, by late 2019, Teams had nearly twice as many daily
active users as Slack.
The motivations for this acquisition — and the reasons it could turn
out to be a mistake — reveal a lot about the nature of competition in
the technology industry today. Until this deal, Slack epitomized what
we refer to as the best-of-breed strategy: focusing all efforts on
maximizing the quality of a single standalone application. But Slack’s
combined effort with Salesforce is a pivot to what we refer to as the
integrated bundle strategy: an ecosystem of applications that are /
sold together, where those applications do not necessarily have to be
the best in their categories (and are often not). The acquisition puts
Salesforce CEO Mark Benioff one step closer to his vision of offering
an integrated bundle of applications that comprehensively connect
enterprises with their customers — and offers Slack a modicum of
security as part of larger ecosystem.
Technology leaders today face the same strategic decision as Slack:
When should you go it alone and strive to be best-of-breed? And
when it is better to just be a part of the integrated bundle? Victory
(and survival) depend on picking the right strategy.
Slacking Off and Zooming In
Competition between best-of-breed and integrated bundles has been
a central focus of our recent research. In the early months of the
pandemic, we began researching Zoom — an exemplary best-of-breed
success story — to develop a case study to teach our students about
how having the right early strategy and culture can position firms to
leverage unexpected customer opportunities. We spent hours (on
Zoom) meeting with executives to understand their strategy and their
path forward — the foundation for several quarters of explosive user
and revenue growth.
We are also deeply familiar with Microsoft’s technology, and one of us
(Wu) has spent many hours speaking to its executives about the
company’s broader cloud strategy, which includes Office.
This background helps contextualize Slack’s predicament — and
decision to sell. Despite their divergent outcomes this year, Slack and
Zoom share some key similarities (and differences). First, both serve
as excellent illustrations of the best-of-breed strategy. Second, both
face a well-heeled competitor fighting with the integrated bundle
strategy — Microsoft’s Teams, part of the Office suite, offers chat and
video capabilities, directly challenging both companies. By assessing
Slack and Zoom in their competition with Microsoft, we can identify
takeaways for entrepreneurs hoping to succeed as best-of-breed and
executives pushing integrated bundles. /
Best-of-Breed Strategy
Put simply, the core strengths of the best-of-breed strategy derive
from focus. Because the goal is to ensure that the application is the
best of all available options, best-of-breed companies never have to
move resources to other projects or accept trade-offs that undercut
product quality. The strategy also opens up novel partnership options.
But Slack may have found that these strengths didn’t translate into a
long-term advantage against a competitor like Microsoft.
Organizational prioritization. Under a best-of-breed strategy,
managers exclusively commit engineering, sales talent, and cash to
the single application without other offerings competing for their
attention. Dedicating excess resources (which academics fittingly
refer to as “slack” resources) allows mangers to be more agile in how
they innovate, as they continually adapt their application to keep it
the best. Before founding Zoom, CEO Eric Yuan worked for Cisco on
its WebEx videoconferencing application, eventually leaving in
frustration in 2011 because in his 10 years there, he “did not see a
single happy [WebEx] customer.” WebEx was never Cisco’s priority —
instead the company poured cash into networking hardware and
eventually security software.
Product trade-off mitigation. Focusing on a single application also
sidesteps the need to make difficult decisions trading off the quality of
one application against others for the sake of integration. Cisco had to
make sure WebEx could perform best with its own VoIP phones and
hardware, sacrificing the WebEx user experience on other hardware.
Until recently, the forced integrations between Microsoft Word,
OneDrive, and SharePoint caused crashes and lost files when saving.
Best-of-breed Dropbox optimized solely for file hosting — ironically
making it safer to save a Word document on Dropbox than on
OneDrive.
Customer-side customization. Because a best-of-breed application
doesn’t force or push customers to adopt and pay for a whole bundle,
it allows customers to optimize their overall experience by picking
/
and choosing what they want without paying for redundant services.
Instead of purchasing the whole Microsoft 365 package, a customer
might prefer to use the best videoconferencing (e.g., Zoom), the best
file hosting (e.g., Dropbox), and the best presentation design (e.g.,
Prezi), and so forth, all from different vendors.
Partnership opportunity and platformization. By remaining
narrow, the best-of-breed can present itself as a non-threatening
partner to other best-of-breed applications in different categories.
Sustaining this position leaves open a growth opportunity to
transition from a lone application to a multi-sided platform that
creates value by allowing for integration with other complementary
best-of breed applications. When Zoom launched its Zoom Apps
platform in October 2020, it counted Dropbox and Slack among its
25 launch partners. In the best-case scenario, this opportunity can
generate a virtuous cycle of indirect network effects between end
users and third-party complementors, leading to mass adoption, as
recent research by Wu and co-authors shows.
Integrated Bundle Strategy
By contrast, the integrated bundle strategy offers economies of scope
and scale across applications that benefit customers or lower costs for
the firm. To justify the Slack acquisition, the resulting Salesforce
integrated bundle must be able to demonstrate some of these benefits.
Higher pricing. Through what economists refer to as price
discrimination, the integrated bundle can generate more revenue than
the applications sold separately. For example, imagine that there are
two customers for Office applications — call them Scott and Andy.
Scott would pay $10 for Word and $8 for PowerPoint, while Andy
would pay $8 and $10 respectively. If Microsoft sold Word and
PowerPoint separately, it could generate the most revenue by
charging $8 for each application — the highest price under which
both Scott and Andy would buy both — leading to $32 (= 2 × ($8 +
/
$8)) in revenue. However, if Microsoft sells the two applications in
one bundle, then the company can charge both Scott and Andy $18,
earning $36.
For this to work, customers must differentially value the applications
in the bundle but still have some desire for both. Are there customers
that want both Slack and Salesforce CRM, with some valuing Slack
more while others value Salesforce CRM more? It is certainly
plausible, although this is probably not the main motivation for this
particular acquisition.
Efficiency in go-to-market sales. By giving its account managers
and third-party channel partners more to sell, the integrated bundle
can get more bang-for-the-buck on customer relationships. Existing
customers on one application can be cross-sold another application.
Moreover, an integrated bundle can justify a higher cost of acquiring
a new customer since the revenue potential is greater. As the
quintessential example of this advantage, Cisco uses its customer
relationships in networking hardware to sell both WebEx and security
software, a now routine process that Wu has examined.
This was a major weakness of Slack: Its sales efforts could never be as
efficient as the massive and experienced Microsoft enterprise sales
force, amplified by Microsoft’s deep network of partners like
Accenture and decades-long customer relationships. The Salesforce
and Slack sales effort can be more efficient together than separately,
even if it still pales in comparison to Microsoft.
Driving value through integration. In theory, complementary
applications can create more value when they are integrated.
Remember, there are two key stakeholder types for a given enterprise
customer: the end user and the high-level executive (usually a CTO)
that makes the actual purchase. As end users of Office, we may
appreciate being able to directly edit Excel graphs in PowerPoint so
we don’t have to switch between applications. But it was the Harvard
CTO — not us — who made the decision to subscribe to Office. And
/
for the modern CTO, who manages dozens of services, the value of
integration comes from being able to just go to a single vendor, say
Microsoft, when anything goes wrong.
Salesforce likely hopes to create value for both users and CTOs by
integrating Slack into the Salesforce CRM. In particular, Salesforce
CEO Marc Benioff has had a long-running vision to replace email.
Integrating Slack’s ongoing foray into inter-business chat would give
salespeople using the CRM a seamless way to communicate with
customers, without having to leaving the CRM to email or make a
phone call. Third-party developers often help with this innovation —
Salesforce already has a sizable ecosystem of third-party applications,
and Slack brings 2,400 Slack-supporting applications into the fold.
And CTOs would now have one less vendor to deal with when
salespeople have technical problems.
When Does Best-of-Breed Win
Bundle — or at Least Survive? Against the Integrated
The make-or-break question for a best-of-breed application is
whether the incremental customer value it offers can beat out the
convenience and across-application value offered by an inferior
application included in a bundle.
Think about it like this: If most enterprises already subscribe to
Microsoft 365, then best-of-breed applications competing against
Microsoft are likely asking customers to purchase their applications
redundantly with something already (or soon to come) in the Office
bundle. Customers will only pay for a redundant best-of-breed
application when it really distinguishes itself from the “free”
applications already included with Office. When Microsoft launched
Teams in 2016, Slack took out a full-page advertisement in The New
York Times arguing that to get customers to switch, Microsoft was
“going to have to match our commitment to their success and take
the same amount of delight in their happiness.” Unfortunately for
Slack, that wasn’t quite true: “free” (or at least, “zero marginal cost”)
can be a powerful motivator for customers.
/
There are several factors that allow a best-of-breed application to
achieve the difficult benchmark of customers being willing to
purchase redundantly — and many specific considerations that
depend on the application category and the type of customer
targeted. But there are two key questions that just about every best-
of-breed company needs to consider:
Do incremental improvements create disproportionate
customer value? Answering this question boils down to (1) how
intensely customers use the application and (2) whether the
application is mission-critical for the customer.
First, end users need to use the application intensely — frequently
enough and for long enough time to care deeply about their
experience. Customer value from the marginal superiority of a Zoom
video feed is a function of the fact that office workers now spend a
huge percentage of their time every week in videoconferences: at that
level of usage, small visual distortions, like when a video feed drops
off, get really tiring and impair engagement and productivity. On top
of that, incremental quality has a multiplicative effect on the
customer value. The more comfortable Zoom is to use, the more
hours we will (or can) use it.
Unlike videoconferencing, most users never really fully immerse
themselves in a chat conversation for long periods of time: They tend
to glance at Slack, not spend hours at a stretch on it. A few small
aberrations or inefficiencies in chat might go unnoticed and certainly
won’t be draining.
Second, the application must be mission-critical to the
decisionmakers who decide to sign the check. It does not need to be
mission-critical all the time — just in key moments where even minor
failures are unacceptable. For example, our dean considers teaching
to be a top priority, and it would be absolutely unacceptable to him if
our videoconferencing application failed during a class. Thus,
Harvard Business School spares no expense to ensure we are using
/
the best-of-breed applications, including Zoom, for everything
pertaining to the classroom. On the other hand, a 30-minute outage
in our chat system would be survivable.
Is the customer positioned to maximize potential value? To a
large extent, this question comes down to how large the customer is:
Global enterprises are better positioned to get the most value from
best-of-breed applications as opposed to small- and medium-sized
businesses (or consumers). When the customer has scale, the
incremental advantage of a best-of-breed is easier to justify the cost of
and pays more dividends.
First, large sophisticated enterprises have the scale and resources to
effectively build their own bundles — they don’t need someone else to
do it for them. A smaller customer would be better off just getting the
integrated bundle, as it does not have as many end users that can
benefit from the customized effort.
Second, many best-of-breed applications also rely on direct network
effects to create value: Slack is only valuable if many other people in
the organization use it. Often that means that a high-level
decisionmaker needs to tell everyone in an organization to install and
use the application to ensure the internal installed base is large
enough that the investment pays off. Indeed, in order for Andy to chat
with Scott using Slack, both have to have it installed and check it
regularly. If people are used to another form of messaging, such as
email, then there isn’t as much value from being on Slack, specifically
— and that means the application doesn’t create enough value to
justify buying it separately.
Yet Zoom does not rely as heavily on this network dynamic. If Andy
sets up a meeting with Scott and sends him a Zoom link, Scott does
not need to have Zoom at the ready to take his call. Scott could still
take the meeting with Andy even if Scott had Teams as his default
videoconferencing application. (For the record: he does not!) It’s
/
easier for best-of-breed applications to gain an advantage when they
don’t rely on network effects — but of course, this isn’t always a
choice.
How Does Best-of-Breed
Integrated Bundle? Sustain Advantage Against the
If a best-of-breed product doesn’t already face an integrated bundle
competitor, it is virtually inevitable that some bundle provider will try
to move into the space. Once that happens, existing integrated
bundles will stick around and compete — likely sinking a lot of money
into protecting their overall product. Microsoft doubled down on
Teams once it saw the opportunities (and potential threat to Office)
demonstrated by Slack and Zoom. Google aimed similarly with recent
upgrades to its Meets messaging and videoconferencing. An
integrated bundle doesn’t have to innovate on its own, it just has to
imitate the best-of-breed, which it can often do quickly thanks to
superior resources.
Whether the best-of-breed stay ahead of a deep-pocketed integrated
bundle depends on several factors:
Potential to maintain product distinction. For a best-of-breed
application to sustain its lead against a bundle, it must be technically
possible to continually build on that lead by incrementally improving
the product as competitors copy the best-of-breed’s past innovations.
For a chat application like Slack — whose innovations in topic-based
channels and fun user interfaces are visible to competitors and easily
replicable — that could prove a real long-term challenge.
Again, consider Zoom. Most people have forgotten this already (or
maybe never noticed) but Zoom pioneered the concept of the virtual
background in videoconferencing, which required significant
investments in technology around computer vision. Once Zoom
proved that this was a meaningful feature to have, the virtual
background became a bull’s-eye for competitors — and others rapidly
began replicating the feature. But products like videoconferencing
improve through complex technology advancements protected by
/
trade secrets or patents, which buy applications like Zoom crucial
time to maintain their lead while working on its next big product
innovation. Indeed, the virtual background took Microsoft months to
copy, and Zoom rolled out a number of new features in that time. It’s
not clear that Slack on its own would have been able to generate
similarly defensible technical innovations in just chat messaging.
Extent of customer lock-in. For a product that relies on within-
organization network effects like Slack, ease of adoption is
particularly essential — but it also makes it vulnerable. Factors that
lock in customers often directly conflict with design decisions made
to make the product accessible or easy-to-use. A product category
with a steep adoption curve raises the bar for best-of-breed customers
considering switching to another application. Once customers have
invested significant time and effort into figuring out features — the
breakout rooms and polling features in Zoom, for instance — they do
not want to have to start the whole process over again.
Importance of across-application synergies. A best-of-breed takes
the bet that it can survive on the strength of doing one thing — and
that novel combinations in bundles won’t render them suddenly
obsolete. For example, Teams demonstrates some synergy from
combining chat with document sharing, which it can probably do
better than Slack given that Slack users often share Word and Excel
files. If there turns out to be value in combining videoconferencing
and document editing, Microsoft would be far better positioned than
Zoom to take advantage of it, unless Zoom can get ahead of that
opportunity now. But if there’s little value in such a feature, that will
help Zoom maintain its advantage.
Potential for network effects between stakeholders. Finally, a
best-of-breed application can push to turn itself into a multi-sided
platform that integrates with third-party applications, creating an
ecosystem that in essence is an integrated bundle of best-of-breed
applications. Slack had a fairly solid ecosystem, and Zoom has
recently started pursuing this strategy. But while this strategy allows
/
for new across-application value that the best-of-breed can or will not
build itself, Slack’s experience shows it might not be enough to
overcome comparative weaknesses in the core application strategy.
Conclusion
The rise of best-of-breed applications has been of great value to all of
us — especially this year, as the world has faced upheaval in how we
communicate and work. Without Slack and Zoom, we would not
know how valuable it would be to have strong chat and
videoconferencing tools in our daily lives. The applications that
previously dominated these categories, many of which existed in
integrated bundles, never innovated enough to really demonstrate
what was possible.
In that sense, we are rooting for future best-of-breed entrepreneurs
to keep pushing the frontier in these and other categories. These
entrepreneurs make us all better off. But as revealed by the Slack and
Salesforce announcement, sometimes the best-of-breed needs to be
absorbed into an integrated bundle. For its first significant acquisition
ever in 1997, Microsoft acquired Forethought, a small company which
made a best-of-breed presentation application called PowerPoint. And
as was true then — and is still true today — the cycle continues.
Andy Wu is an Assistant Professor in the Strategy
Unit at Harvard Business School and a Senior
Fellow at the Mack Institute for Innovation
Management at the Wharton School of the
University of Pennsylvania. He researches,
teaches, and advises managers on entrepreneurial
strategy for technology ventures.
SK
/
Scott Duke Kominers is the MBA Class of 1960
Associate Professor of Business Administration in
the Entrepreneurial Management Unit at Harvard
Business School, and a Faculty Affiliate of
the Harvard Department of Economics. Prior to
that, he was a Junior Fellow at the Harvard
Society of Fellows and the inaugural Saieh Family
Fellow in Economics at the Becker Friedman
Institute.
