Microsoft Corporate Case study

INSTRUCTOR: PhD. Eldi Metushi

STUDENT: Zakariya Albaroudi

SUBJECT: Strategic management

MAY 18, 2015

TABLE OF CONTENTS

1. INTRODUCTION2. HISTORY AND

DEVELOPMENT3. VISION & MISSION4. SWOT ANALYSIS5. PORTER’S FIVE FORCES

ANALYSIS6. CAPABILITIES & CORE

COMPETENCES7. CORPORATE & BUSINESS

LEVEL STRATEGY 8. STRATEGIC

PARTNERSHIPS9. RECOMMENDATION

1 | P a g e

1. INTRODUCTION

Microsoft is an American public multinational corporation began in 1975, with a vision by a Harvard drop-out, to see a PC on every desktop. It is headquartered in Redmond, Washington, USA. Today, Microsoft is a dominating the world and a leader in multiple industries. Microsoft is listed in the Fortune 100 and has amassed an impressive portfolio of resources, alliances, global operations, customers and critics.

Microsoft Corporation manufactures, licenses, and supports software products forComputing devices and games solutions. It offers many products as: Operating Systems, Office Suites, Xbox, Internet Explorer, Search Engine, Mail’s, Security, Servers, Visual Studio, and Calling Devices etc. Its most profitable products are both MicrosoftWindows and Microsoft Office suite. Since the 1990’s, it is the most profitable IT companyWorldwide. It is 93,000 employees. The ensuing rise of the company's stock price has made four billionaires and an estimated 12,000 millionaires from Microsoft employees.

Through several analysis tools this report will make recommendations for Microsoft’s business strategy in the near future in the enterprise software industry.

2. HISTORY AND DEVELOPMENT

Paul Allen and Bill Gates were childhood friends with a passion in computer programming, they were seeking to make a successful business utilizing their shared skills, so they developed an interpreter on a simulator, after that they demonstrated the interpreter to MITS in New Mexico in March 1975. On April 4, 1975, they established Microsoft with Gates as the CEO. At the beginning of 1984

2 | P a g e

Started developing a new OS with IBM to Release after that a graphical extension for MS-DOS - Microsoft Windows. Microsoft corporate moved its headquarters to Redmond on February 26, 1986 and on 13th of March they went public.

Microsoft introduced its office suite, Microsoft Office, in 1990, after that on May 26, 1995 Microsoft expanded its product line into computer networking and the World Wide Web, then they Released Windows 95 on August 24, 1995.

Bill Gates handed over the CEO position on January 13, 2000 to Steve Ballmer and took role as Chief Software Architect. The next version of Windows – WINDOWS VISTA - Released in January 2007. After that Bill Gates retired from his role as Chief Software Architect on June 27, 2008. On February 12, 2009, Microsoft opened the first retail chain of Microsoft-branded retail stores in Scottsdale, Arizona. The same day the first store opened Windows 7 was officially released to the public.

3. VISION & MISSION

"Our vision is to create innovative technology that is accessible to everyone and that adapts to each person's needs. Accessible technology eliminates barriers for people with disabilities and it enables individuals to take full advantage of their capabilities."

—Bill Gates, Chairman, Microsoft Corporation

Microsoft overall vision for the company is a general one and include two main features for the company which are Diversity and inclusion, those two features are integral to Microsoft’s vision, strategy and business success.

3 | P a g e

4. SWOT ANALYSIS

Strengths

Brand loyalty & reputation. Over the years, Microsoft has been the leading OS and software provider, which resulted in more than 90% market share for PC OS. Few other brands are capable to compete with Microsoft for this reason. Even open source OS, which are completely free and well suited to use for common user, find it hard to attract users. Microsoft’s brand is the 5th most valuable brand in the world, valued at $ 57.8 billion. Brand reputation leads to higher sales and greater market share.

Easy to use software. Microsoft products including its flagship Windows operating system are popular among the masses because of great quality and many decades of experience that Microsoft has put into its development.

4 | P a g e

Tie ups with Hardware manufacturers. The company works with all the major computer hardware producers like Dell and Samsung and major computer retailers to make sure computers would be sold with already pre-installed Windows software. The company also invested in Dell and Nokia to tighten its relationships with these companies.

Robust financial performance. Microsoft grew its revenues by 20% from 2008 to 2012 and holds more than $63 billion of cash and cash equivalents that can be used for acquisitions and substantial investments into R&D.

Acquisition of Skype. With nearly 300 million users, Skype is a significant boost toMicrosoft’s online presence and have a lot of potential in generating income from online advertising.

Weaknesses

poor acquisitions and investments. Many of Microsoft’s acquisitions were not successful. Massive, Link Exchange, WebTV, Danger are just few examples of multimillion acquisitions made by Microsoft but soon shut down or divested.

Dependence on hardware Makers. Microsoft is a giant software corporation but it does not produce its own hardware and depends on computer hardware manufacturers to develop products that run Windows OS. If cheap and popular alternative OS would appear, hardware manufacturers may simple choose the alternative and Microsoft could do little to change the situation.

PC market has matured. Only recently has Microsoft entered the mobile technology sector and still heavily depends on its OS and software sales for standalone and laptop computers. The market for these products has matured and Microsoft will find it harder to grow revenues in these sectors.

Slow in Innovation. Microsoft has huge R&D resources and great position to enter new markets with innovative products but constantly failed to do so. It had an opportunity to be the first player in online advertising but missed the opportunity. Its entrance to mobile OS was also too late, while Google and Apple captured the market share.

5 | P a g e

Opportunities

Cloud based services. Microsoft could expand its range of cloud services and software as the demand for cloud-based services is expanding.

Mobile advertising. Mobile advertising markets are expected to grow in double digits over the next few years and Microsoft has a great opportunity to tap into these markets with its mobile OS.

Mobile device industry. Smartphones and tablets markets will grow steadily over the next few years and Microsoft could exploit this opportunity by introducing more of its own tablets and a new company phone.

Growth through acquisitions. With a huge reserve of cash Microsoft could start acquiring new startups that would bring new technology, skills and competences to the business.

Threats

Intense competition in software products. Microsoft is more than ever on the pressure to introduce successful OS both in PC and mobile markets as such competitors likeGoogle and Apple have already established positions.

Changing consumer behavior. Customers shift from buying laptops and standalone PCs to buying smartphones and tablets, the markets, where Microsoft has only a modest market share and may never establish itself.

Open source projects. Many new open source projects are coming to the market andSome of them became quite successful, such as new Linux OS and Open Source Office.Open source projects are free and so they can become an alternative to expensiveMicrosoft’s products.

Potential lawsuits. Microsoft has already been sued for many times and lost quite a few large scale lawsuits. Lawsuits are expensive as they require time and money. And asMicrosoft continues to operate more or less the same way, there is high probability for more expensive lawsuits to come.

6 | P a g e

5. PORTER’S FIVE FORCES ANALYSIS

Industry rivalry: HIGH

There is considerable rivalry within the enterprise software industry. The intensity of industry rivalry within the enterprise software industry is affected by several factors: (1) the concentration of competitors, (2) diversity of competitors, (3) product differentiation and (4) price differentiation. First, there is a high concentration of competitors within the industry. Several large multinational vendors and a handful of smaller localized firms compete in the enterprise software industry. Many of the companies have very specific skill sets that concentrate on segments of the industry while a few have very general skills that apply across the board. Since the edges of the industry are not clearly defined, several of the larger companies not only produce and consult on hardware and

7 | P a g e

software, but also manufacture operating systems, general computer software, and development platforms. Third, there is considerable product differentiation within the industry. Enterprise software applications can be tied together in a myriad of ways and run of various platforms. The products are differentiated by being focused on different size enterprises, levels of customizability, and varying deployment and development times. Fourth, considerable variation in price exists within the industry and there is a significant amount of price competition. The boundaries of the industry are blurred and companies tend to vary their pricing schemes depending on the total number of licenses purchased. Prices vary depending on the size of the client, the clients systems, the types of software required, and the amount of consulting required, the amount of training required, and the amount of technical support required.

Threat of New Entrants: LOW

For several reasons, the threat of new entrants to the industry is somewhat low. First, the capital requirements to enter the industry are very large. The cost to design and develop enterprise software is extremely high due to the large amount of time it takes to do so successfully and the limited availability of people who possess the required proprietary knowledge. The software development process is quite long and expensive due to the reality of the software development lifecycle. There is also a limited amount of skilled personnel who can successfully develop and consult on enterprise software. Such skilled employees also come at great expense. Second, the companies within the industry have already achieved economies of scale, thereby reducing the potential profit that a new entrant could obtain. In general, the companies within the industry have already achieved absolute cost advantages because of the length of time that they have been participating in the industry. Third, there is considerable product differentiation within the industry. The major companies have very strong brand names and tend to invoke strong customer loyalty. Compatibility issues also play a role in loyalty because of the high switching costs associated with changing vendors. Lastly, proprietary knowledge and existing intellectual property are important components of competing in this industry, which inhibits new entrants. If a new company were to attempt to enter, the major players would most likely react immediately. Since the technology used in the software industry requires it to be compatible with other software and continue to be supported, the existing companies could

8 | P a g e

intentionally create compatibility issues by altering their platforms or halting the support of platform or hardware. However, if a new company had a promising piece of software or skilled employees, it is most likely that one of the major companies would take over the new firm in order to acquire the technology for themselves.

Threat of Substitutes: LOW

There are few substitute products that compete with enterprise software.The old way of maintaining and sharing company information was manual paper archival systems or printed reports from separate databases. The modern way of connecting all of a business’s information requires enterprise software. A business could continue with building multiple disparate systems, however, they would never be able to achieve what an enterprise software business solution could provide. Therefore, enterprise software is more flexible, scalable, and less expensive than the older types of solutions. The near absence of modern substitutes in the industry is a good sign for the companies within the industry.

Bargaining Power of Suppliers: LOW

Within the industry, the bargaining power of suppliers is quite minimal. The main reason is because there are few suppliers with whom the companies must negotiate. The fact that enterprise software applications are an intellectual and intangible product rather than a physical product minimizes the number of suppliers required.

Bargaining Power of Buyers: LOW

The bargaining power of buyers within the enterprise software industry is fairly minimal for several reasons. First, the concentration of buyers is growing quickly; however, they are a very diverse and non-unified group, because they all have different backgrounds and needs.Second, more companies are deciding that enterprise software is a necessity for their business. Therefore, they are often willing to pay the going rate. Lastly, there are extremely high switching costs from one supplier to another, due to the high cost of the related infrastructure for these types of systems.

9 | P a g e

6. CAPABILITIES & CORE COMPETENCES

Identifying a firm’s resources and capabilities, and thus its core competencies, is a vital step to establish corporate strategy and to achieving profitability. Resources and capabilities, in order to be strategically valuable, must be superior to those of competitors. Resources include assets specific to the firm and capabilities are the ability to utilize these resources effectively.

Tangible Resources

Cash Reserves: Microsoft has approximately $67 billion in cash reserves, giving them a large amount of financial flexibility.

Operating Revenue: Microsoft reports revenue in FY 2013 as $86 billion. Microsoft ranks #34 in the Fortune 500.

Financial Leverage: Microsoft is currently not highly leveraged with a leverage ratio of 0.79 in 2014. Therefore they have the option of pursuing further debt financing in order to finance growth, if necessary in the future.

Property and Equipment: Of Microsoft’s net physical assets, almost half, is related to computer equipment and software. Additional holdings include land and buildings, totaling $9.9 billion before depreciation expenses.

Distribution Channels and Customers: Microsoft has established distribution channels for its products, including online vendors and retailers. Microsoft also has an established customer base.

All of these tangible resources indicate that Microsoft has significant borrowing capacity, resilience, investment capacity and reserves.

Intangible Resources

10 | P a g e

Intangible resources include technology, reputation and corporate culture. Microsoft’s technological resources include its research capacity and intellectual property portfolio.

Research and Development: Microsoft employs almost 1100 people purely dedicated to long-term future focused research in lab facilities throughout the world, and spent more than $9 billion in FY’14 for these activities.

Intellectual Property: Microsoft maintains a large patent portfolio. Microsoft has 40,000 patents and many other forms of intellectual property.

In addition to technological resources, Microsoft’s primary intangible resources lie in its reputation and brand. The Financial Times ranks Microsoft just after Apple, as the number two most valuable brand name in the world Additionally, Microsoft’s reputation is another of its strongest resources.

Human Resources

A company’s human resources can be measured in terms of its employee’s qualifications, commitment. Microsoft is able to attract and retain the best talent in the information technology business. Their employees are educated, dedicated and committed to their company, and this loyal and intelligent employee base is a very strong resource for Microsoft.

Capabilities

Beyond identifying resources, a firm should leverage those resources into capabilities, in order to determine competitive advantage. Microsoft has many capabilities that enable them to use their resources effectively by being embedded in company routines, including:

Financial control Capacity for decision making Continuous improvements Brand management Ability to identify and respond to market trends and adapt Engineering and technical know-how Research capability

11 | P a g e

Microsoft’s core capabilities allow the company to dominate the market and to shape the direction of the technological future.

7. CORPORATE & BUSINESS LEVEL STRATEGY

Microsoft has a divisional organization. In other terms, each division or group focuses on a specific good or service. Customer service staff, research and development, and sales are all parts of each individual group. This allows for better customer support but at a higher expense. The 5 groups are Windows & Live Windows Group, Server Software, Online Services, Microsoft Business, and Entertainment and Devices.

Another large section of the corporate strategy is investments and global expansion throughout the world. This is because in other parts of the world like China and India, population size is enormous. This allows for a huge market that has maybe not been effected by all of what Microsoft has to offer.

Business level strategy

Microsoft's business level strategy involves driving and expanding innovation to achieve market excellence. The strategy to accomplish this is to incorporate the talents of Microsoft's diverse workforce into their products. By working with highly-trained women, minority, veteran owned businesses and businesses owned by people of disabilities, as well as the small businesses looking to competitively purchase the products from Microsoft. In 2009, Microsoft spent more than $1 billion working with over 1,200 suppliers that are women, minority or veteran owned. This spending has increased more than 250% in the past few years. This is a huge step for Microsoft and for the employees and consumers supporting it.

12 | P a g e

8. STRATEGIC PARTNERSHIPS

Strategic alliances are unique organizational structures that enable cooperation between companies. They help to spread risk, mitigate costs, and shape future opportunities.Microsoft maintains many partnerships and alliances to help further its goals.

Enterprise Software Alliances

In the enterprise software arena, Microsoft maintains significant alliances with Dell, HP and IBM. Each provides co-specialization benefits for both Microsoft and the partner.

HP: The HP and Microsoft global strategic alliance is one of the longest standing alliances of its kind in the industry, with more than 25 years of combined marketplace leadership focused on helping customers and channel partners around the world improve productivity through the use of innovative technologies. HP and Microsoft are working together and combining their

13 | P a g e

respective strengths to deliver innovative technologies to help advance businesses. Together they take familiar platforms from mobile devices and desktops to data center and cloud - and build integrated solutions; Microsoft won PartnerOne Alliance Partner of the Year – Americas from HP in FY 2013.

IBM: The alliance with IBM allows Microsoft enterprise applications to run on IBM servers. For customers, the benefit of the alliance is that all parts of your solution hardware, software, and middleware will install quickly, start up easily, and run reliably.

Dell: Additionally, Microsoft maintains an alliance with Dell which is designed to help business reduce the complexity and cost of deploying a server based environment and to create a comprehensive and integrated set of distributed computing services using both Dell and Microsoft technologies.

9. RECOMMENDATION

“Mobile First, Cloud First” strategy

Microsoft has been lagging behind in the mobile markets (vis-à-vis smartphones, tablets, etc.). Its Windows Phones which come with a Windows Phone OS constitute only 3.6% of the entire market. It has acquired Nokia in hope of improving its market share and making a turnaround. We recommend it to invest and innovate more in the mobile market segment purely because of the growth potential this segment has and also since it seems to be the future of personal computing.

Product Innovation and Invention

Microsoft has been the industry leader because of the constant research and innovation and the wide range of products and services it provides. Trend suggests that in house developed products have been Microsoft’s strength: Windows OS, Office Suite, Windows Server, etc. Instead of focusing on acquiring new companies it should invest more internally to come up with new products.

14 | P a g e

Reduce Poor Investments

Microsoft has been making too many blunders while acquiring new companies. It should improve its investment research and try to cut down on the rate of poor acquisitions. More often than not, Microsoft has been bad at making the acquired companies profitable. It should be more investigative before acquiring any company in the future.

Strengthen Strategic alliances

One of the few ways to sustain the market dominance and leadership is to make many strategic business alliances in the industry. This has been Microsoft’s strength since its existence and it should try to keep the existing partners while trying to find new partners for competing in the industry.

Cut down unprofitable Products

For example Bing search engine. Despite having 18.1% of market share, it has been a bleeding investment for Microsoft for many years. It should decide the strategy for such products, and possibly cut down on loss generating services.

Microsoft Research Division

Microsoft has been spending huge amounts of money on general computer science research, which might be good for the future but doesn’t lead to any significant returns in the short term. It’s necessary to be more efficient while investing in research like its competitors such as Google and Apple.

15 | P a g e