How Does salesforce.com Keep Its Edge Over Larger Rivals?

Few fields move as rapidly as innovation. Businesses creating outsized profits and returns for shareholders quickly get a bull's-eye painted on their back as they become targets of other companies looking to disrupt their products by selling cheaper alternatives that on the whole prove "good enough." Not only that, nevertheless even if a company continues to dominate its particular field, other changes in research can shift spending away from their products. Think about how Microsoft everything considered dominates PCs yet feels pressure from the sales shift toward mobile devices just as smartphones and tablets.

Technology companies can innovate either through acquisitions or by spending more money on innovation and development. We'll compare salesforce.com's spending in these areas with that of its closest peers and assess whether the company is investing enough in its future.

Research and developmentOver the past five years, salesforce.com has spent an average of 10% of earnings on R&D. The following table below summarizes how salesforce.com's R&D expenditure relative to earnings compares with some of the company's closest peers.

The past five years

Over the past five years, salesforce.com's R&D expense has increased to be inline -- as a percentage of sales -- with key rivals Oracle and Microsoft. That's partially due to the company's expansion of its focus into new areas, and it's as well the result of a deferred revenue model that leaves reported GAAP revenue lower than the real level of sales growth at the company.

However, during salesforce.com was innovative in its initial push of creating cloud-based customer-relationship software, the key to analyzing the company's continued growth against rival Oracle isn't in the R&D line. Instead, investors should be looking at sales and marketing expenses. The ability to successfully market its services to new cloud-computing adopters is where the vast amount of salesforce.com's resources are centralized.

Nearly 50% of all revenue at salesforce.com goes directly to marketing its services and finding new customers. Compare that with Oracle, which spends a significantly lower 18% on sales and marketing.

That's not to say salesforce.com is doing anything wrong by spending such a large amount on sales and marketing. Qlik Technologies and NetSuite , other cloud-centric companies looking to disrupt traditional IP powers, spend 54% and 48% of earnings on sales and marketing, respectively.

However, this does illustrate that during innovation is important in driving salesforce.com into new revenue opportunities aside from its core customer relationship offerings, having a sales team that's adept at evangelizing the company's solution to a world leery of giving up its IT infrastructure and embracing a cloud-computing future is salesforce.com's most important point of execution.

Acquisitions  In innovation, some of the best companies have turned growth through acquisitions into an art. IBM has adeptly spun off capital-heavy businesses just as the hard-drive and PC segments, during it focused on acquiring additional services and software expertise that have transformed its business model.

The size of these buys shows the commitment salesforce

The size of these buys shows the commitment salesforce.com is putting behind being the leader in the"social enterprise area." The company's progress in this up-and-coming field was highlighted when it signed an agreement to create a private social network for Toyota based on its Chatter platform.