Sridhar Vembu, CEO of Zoho, in two recent postings in his company blog tries to explain how small Zoho can compete with large Google in the online office app space and win — likely a question he gets asked every now and then.

Zoho is the publisher of a suite of Web applications that include a word processor, spreadsheet, presentation and email, much like the Google Docs product. In addition, the Zoho suite contains backoffice business applications like CRM and Invoicing.

In his first post, Vembu lays out his analysis of the revenue and profit per employee of the largest business software and Internet consumer companies and finds (not surprisingly) that margins are much higher for Internet consumer companies, Google and Yahoo, than business software companies, Oracle and SAP. He concludes that while Google creates Google Docs to keep Microsoft on the defensive, they won’t have the stomach to compete vigorously for the less profitable business application market.

In a follow-up post, Vembu further explains his reasoning by saying that for Zoho’s parent company AdventNet, which started off selling software to network companies as an OEM, web applications via Zoho means moving up the value chain but for Google the same applications mean moving down the chain. He compares their business as to how McDonalds wants to move up by selling premium coffee like Starbucks but Starbucks has no desire to start selling fast-food.

He further explains that to a bootstrapped company like Zoho, moving up the value chain makes sense as an evolutionary step, but those kinds of steps can be skipped by today’s mostly venture-backed companies.

Interesting reading and reasoning but decide for yourself whether it sounds like a CEO trying to explain to his board justification for starting up an unprofitable business.