Environmental Analysis The information technology (IT) industry has always been highly driven by innovations in technology. It is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and businesses. The following PESTEL analysis will try to gain an understanding of Microsoft’s business potential, future market situation and the direction of its operation. The political, economic, social, technological, environmental and legal factors are six components of PESTEL analysis. Table 1: PESTEL Analysis of IT industry Political - Restrictions on foreign recruitments - Regulations to education - Regulations to the industry - Regulations at emerging markets
Economic - Fluctuations and unpredictable behaviours of foreign currency - Trade cycles - Economic growth rates (around the world) - Disposable income level of people - Demand and supply conditions - Tax and import export barriers - New avenues to raise capital
Social - Accessibility to technology to differently capable people - Social media - Shift in personal computing to mobile devices
Technological - Innovations related to IT (especially in SOA(SAAS) and innovations to operating systems - Emergence of smartphones and tablets - Cloud computing - Enterprises exploring opportunities that emerging technologies provide
Environmental - Energy saving - Green IT
Legal - Laws on business regulation (against monopoly and forced competitor acquisitions) - Intellectual property rights - Emerging class of patent pirates - Employee working hours, and employment enrichment
Key drivers of change Base on the Bowman’ clock in figure 1, we can see that Microsoft business strategy is of the Hybrid nature where they compete on both differentiation and price. Microsoft differentiation bases were not always technology centered. Microsoft
benefitted a lot through others’ innovations and most of the time was not the original sole inventor. However they had developed the capability to absorb technology very quickly and improve it to provide numerous innovative perceived benefits to the customers in terms of user friendliness, flexibility, reachability to the products, availability, compatibility with all other common hardware and software, etc. Microsoft differentiates itself through both technology innovations and its availability. Microsoft was always not the first entrance to market but gradually they earn dominance through this commoditization strategy where they focus on staying low price while providing various means of differentiation. This strategy can be greatly influenced if its differentiation capabilities developed on technical and market competences are challenged by external forces. Considering the PESTEL analysis shown in Table 1, we can see that Technology is the key driver which could influence impulsively to Microsoft business strategy. Out of the various PESTEL factors, Microsoft’s sustainability of business is greatly dependent on the ability of competitors to provide better solutions at competitive low prices. Given the fact that today’s cutting edge technology could be obsolete tomorrow due to the dynamic nature of the IT industry, if Microsoft fails to acquire or innovate the substitute next level technology for their platforms, the existing strategy have better chances to fail. True enough, in emerging markets such as cloud computing, mobile, search and social, the company made repeated missteps; affecting its software and technology leader status.
Fig. 1 Bowman’s Clock (Jhonson, Scholes, Whittington, 2008) Tied closely to the subject of technology innovations, a major development for the industry came in October 2013 when the U.S. Securities and Exchange Commission proposed rules for “crowdfunding”. Once finalized, the rules will provide the regulatory guidance and over sight for businesses to raise capital through direct
investor solicitation. Crowdfunding could change the game for startup companies and entrepreneurs. Next to product development, access to cash is the critical path in bringing an idea to fruition. And, it is increasingly urgent as the life cycle to test ideas and then grow them or kill them off continue to compress. The ability to obtain small funding amounts from many investors could have a transformative effect on the IT industry over the next several years. Also related to technology innovations is the development of social media. The recent proliferation of mobile devices and connectivity helped fuel the continued growth of social media. At the same time, consumers’ time spent with social media on mobile apps and the mobile web has increased 63 percent in 2012, compared to the same period in 2011. Figure 2 shows the result of a Nielsen study where we can
see how mobile devices and social media are complimenting each other. Fig. 2 Nielsen study on people time spent on the Internet
Industry Analysis So far Microsoft is still the leading software provider in the world in terms of its market share. It has faced many types of competitors from competitive products, and industry regulation challenges from various governments. It has thrived on this competition which contributed to Microsoft’s overly aggressive tactics. For example, “bundling” which was found guilty of illegally maintaining a monopoly, but escaped with permission to bundle products in any way it sees fit with relatively minor restrictions. However, things are changing with every stumble Microsoft makes in the emerging markets. To stay competitive in this new market, Microsoft will need to make the industry favourable to it by tactical control of five forces.
Fig. 3 Porter’s Five Forces (Porter, 1979) Nature of Competition Figure 3 shows Porter’s five forces which determine the competitive intensity and therefore the attractiveness of a market. Threat of new entrants - Low The way and scale how the main players (Microsoft, Apple, Google) operates makes a big entry barrier for new entrants. In consumer PCs and corporate enterprise market, Microsoft has over the years created a very successful coherent network, integrating people, partnerships, businesses, etc, making everyone directly or indirectly dependent to Microsoft technologies. For existing customers, this makes things difficult for them to switch. Threat of substitutes - Moderate Microsoft offers a broad range of products. Product wise there can be many substitute. When it comes to their core products (operating systems, office software package, etc) there are substitutes. But they are not popular due to cross platform limitations. Microsoft having advantage of their operating systems, they successfully avoid customer moving towards competitor products by strictly limiting support for competitors. Microsoft has successfully standardized the PC market to rely on Microsoft platforms. This makes no close substitutes. The challenge facing Microsoft now is the substitution of PCs by mobile devices in the personal computer market. People are turning less to their PCs and more to their mobile devices to accomplish much of what they used to do on their desktops or laptops. The PC has seen little upside over the past couple years as smartphones
and tablets have bit into sales. Microsoft effort in mobile devices has not been successful. The company is facing a daunting lead by iOS and Android based competitors in the tablet market. The Window versions for mobile may lack the draw needed to pull users from competing OSs: In particular, software like Office loses much of its appeal in the absence of a PC setup that is more conducive to productivity. Also, development momentum currently favours Android and iOS, simply because that’s where the money is to be made. The catch-22 that has favoured Windows on PCs - namely, users engage environments with lots of software and developers create software for environments with lots of users is favouring competitors in the mobile space. Bargaining power of customers - Low Through Microsoft’s traditional base of PC users is declining, Windows is the number 1 operating system in the world and Office is still the most used productivity suite. In operating systems, there are only Apple’s OSX and Linux available for substitute. Among these, Apple does not allow any other company to use Apple’s operating system which limited it’s availability, while Linux, as a opensource freeware, lacks supports. Bargaining power of suppliers - Low Microsoft has a global procurement group in place to look for suppliers for all types of quality goods and services and practices supplier diversity. They have enough suppliers and many established partnerships around the world, hence having a more bargaining power than their suppliers. Rivalry among existing competitors - High/Moderate In its traditional core product business, Microsoft has an almost monopoly in the PC market by licensing to PC producers, bundling its operating system with all new PCs. Obviously there is competition for Microsoft products but due to the scale Microsoft operates at and the dependability they maintain, they create a successful lock in while keeping the rivalry at a moderate level. However, in the emerging cloud computing and mobile device market, Microsoft is facing stiff competition. The greatest challenge to Microsoft is Google and Apple’s duopoly control over the burgeoning mobile device market. As the smartphone market continues to mature, existing handset manufacturers and newcomers continue to compete, each looking to differentiate at hardware and software level, and each contributing to the growth of fragmentation in the market. Microsoft is trying to carve out a space in this market with the Windows phone and Surface tablets, using Windows 8 to allow desktop, tablet and phone to work seamlessly. Base on the industry analysis, it is evident that Microsoft is facing strong competition due the emergence of new technology. However, it is possible for Microsoft to crave a space in this fragmented market once it finds its niche in it.
Fig. 4 Radar diagram for competitive forces Figure 4 shows the radar diagram for competitive forces. Since technology is the key driver of change, we can predict the changes in the competitive forces based on technological advancements. The radar diagram expects barriers to entry can be slightly diluted due to possible external innovations. However new entrant may find it harder to challenged the existing main players which have the economic of scale, unless it was some huge innovation. The other four forces can get higher in the future considering the effects of diffusion of technologies and probable new inventions. This reflects the need for Microsoft to innovate or acquire new technical capabilities in order to stay ahead in competition.
Diagnosing Strategic Capabilities To determine what strategic capability Microsoft has in order to sustain competitive advantages, we can look at Microsoft’s value chain. Microsoft value chain is integrated to their IT infrastructure network called corpnet, so as to bring central control and efficiency to management. As a software provider, the need for logistics used to be minimum. They have the capabilities to advertise, consult, deliver, customer service, finance, interview, maintain, market, support, recruit, etc with the help of this network around the clock and globally accessible. Table 2 categorizes Microsoft’s capabilities based on the competitive advantage.This is to identify its threshold strategic capabilities which earn competitive advantage.
Table 2: Resources and competences
Threshold capabilities
Capabilities for competitive advantage
Resources
Competences
Threshold resources
Threshold competences
1. Physical resources - Infrastructure - Establish networks 2. Financial resources 3. Experienced staff
1. Ability to produce software for low prices 2. Ability to market 3. Ability to be innovative and R&D 4. Ability to finance 5. Ability to recruit, retain and develop talents 6. Ability to offer good customer service
Unique resources
Core competences
1. Interllectual capital 2. Brand reputation 3. Dependent customer base (PC and Business)
1. Ability to absorb and innovate competitive technologies to market software
These resources and competences have let Microsoft became the world’s biggest software vendor in terms of market share for over 20 years. However in the emerging market of mobile devices, and to a certain extend cloud computing, these have failed to allow Microsoft to gain competitive advantage over their key competitors - Apple and Google.
Sensing the existential threat posed by the tectonic shifts in landscape of personal computing, Microsoft is currently in the process of transforming itself from a software player to a “devices and services company” in an organizational overhaul aimed at improving sales and Microsoft’s competitive position. Figure 5 shows the
changes in Microsoft’s business model due to this transformation. Fig. 5 Changes in Business Model By transforming into a devices and services company, Microsoft aims to primarily monetize high-value activities by leading with devices and enterprise services. With users continuing to prioritize devices with touch and mobility, the consumer PC market is declining. Meanwhile, Microsoft’s enterprise products and cloud solutions are seeing continued strength. Microsoft previously operated its business under five segments: the Windows Division, Server and Tools Division, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. Figure 6 shows the market segments of Microsoft. As part of its transformation to a devices and services company, there is a change in organizational structure. The realignment is expected to enable Microsoft to innovate with greater speed, efficiency, and capability in a fast-changing technological landscape.
Fig. 6 Market segments of Microsoft The realignment aims at improving revenues due to declining PC sales and reducing the duplication of efforts across various divisions. Microsoft is trying to end its dependence on the saturated and declining PC market by shifting to new markets such as mobile, cloud services, gaming, search, and tablets.
Fig. 7 Segment-reporting framework Figure 7 shows the new segment-reporting framework used after the realignment. The five new reporting segments tightly align with the company’s focus on delivering innovative devices and services for both its enterprise and consumer customers. This framework was designed to give valuable insight into the company’s progress in its key business transformations in order to drive long-term growth.
After the realignment, Microsoft has a new value chain of a service and device company. Figure 8 shows Microsoft value chain which is very similar to the integrated value chain of their competitor, Apple. As Apple did, Microsoft want to control every step of their value chain from content and services to devices, in order to offer users a complete ecosystem across a range of devices and platforms. They are only missing some retail presence like Apple stores, as there is danger for Microsoft to upset its long standing partnership with PC manufacturers. Fig. 8 New value chain of Microsoft Table 3 shows a competitor analysis between Microsoft and Apple products and marketing strategies. Table 3: Analysis of competitors products Competitors
Microsoft
Apple
Key Benefits Offered
- Leverage the power of computing to work better - Ease of use - Design and quality
- Ease of use - Design and quality - Lifestyle and trends - User experience
Type of Positioning Used
- Position themselves based on the benefits they offered to stand out from their competitors - Marketing dominance
- Position themselves based on the benefits they offered to stand out from their competitors - Product leadership
Table 3: Analysis of competitors products Message Strategies
-Rational appeal • “Your privacy is our priority”: Goes hand-in-hand with its pledge to default-enable Do Not Track in IE 10. Ads create an emotional connection based on the idea that even big time sharers need some personal privacy. • “I’m a PC”: Appeal with prominent and popular individuals say “I’m a PC”
- Rational appeal • Think different campaign: Apple was highlighting that while it might have made computers, they aren’t machines for ordinary folks • “Designed by Apple in California” and “Your Verse Anthem”: Show off why people love and use its products. How they are being used by real people for real projects that belie over and again the claim that tablets can only by used for consumption of content.
Media Strategies
- Maintains an official website consisting of company background, testimonials, latest products and supports - Advertising - Sponsoring sports program
- Maintains an official website consisting of company background, testimonials, latest products and supports - Advertising - Align their brand with creativity in work, education and life
From the analysis, we can see that, compared to Apple, Microsoft was never as good in marketing their products from advertising campaigns. While Apple appeals to the heart and emotion of consumers and sells to them an user experience, Microsoft sells the tangible benefits of utilities in their product. Microsoft has previously dominated the PC market due to product quality, low price and strategic partnership with PC manufacturers to highly increase the availability of their products to the consumers. They successfully market their products through clever business strategies. With the realignment, Microsoft is trying to once again refocus their business strategies and company resources towards gaining market dominance in the emerging mobile devices and cloud computing markets.
SWOT Analysis To have a clearer picture of what challenges Microsoft is going to face in the changing IT industry and recommend strategies to overcome these, we can do a SWOT analysis. Table 4 shows the SWOT analysis of Microsoft. Table 4: Microsoft SWOT Analysis
Table 4: Microsoft SWOT Analysis Strengths -
Human Resources Ability to operate across cultures A proven R&D process Strong brand recognition Strong intellectual property Strong distribution channels Installed product user base Comprehensive product portfolio Robust financial performance Acquisition of Skype
Opportunities -
High growth rate of emerging economies Mobile device industry Cloud based services Strategic Acquisitions Partnerships and Collaborations
Weaknesses -
Declining brand equity Mature PC markets Slow to innovate Leadership and internal culture
Threats -
Highly Competitive Environment Rapid Technological Changes Low cost of production Changing consumer needs and habits
Strengths Human Resources Microsoft has approximately 99,000 employees worldwide. The company has 58,000 employees in the U.S., majority of whom work in the Puget Sound region of Washington State, headquarters of Microsoft. Microsoft has a rigorous recruitment process and only the best and the brightest are given an opportunity to work for the company. Microsoft recruits from campuses of top colleges and universities from around the world and the company has a highly diversified workforce. Microsoft provides high pay and great benefits in addition to a highly competitive work environment and thus is a magnet for high achievers. Thus, this network or ecosystem of 99,000 brilliant minds is the most important strength of the company.
Ability to operate across cultures In a highly globalized marketplace, ability to operate in different cultures can be an extremely important competitive advantage. Microsoft operated from 629 sites across the world out of which 373 are outside the U.S. Thus, the company has generated capability to operate successfully in different cultures. This strength will keep increasing in importance as foreign markets become bigger and more significant to growth of Microsoft. A Proven R&D Process Prioritizing innovation and optimization through strong research and development activity, the company develops a strong competitive advantage and builds brand equity. Key research areas of the company include algorithms and theory, hardware development,
human-computer interaction, machine learning, adaptation, and intelligence, multimedia and graphics, systems, architecture, mobility, networking, security, cryptography, smart connected devices and cloud computing among others. The company’s innovation investments focus on the emerging technology trends and breakthroughs across a wide spectrum of technologies, tools, and platforms spanning communication and collaboration; information access and organization; entertainment; business and e-commerce; advertising; and devices. The company started Microsoft Research Group in 1991 to explore the possibilities of developing new technologies. Microsoft has research facilities in Beijing (China), Cambridge (the UK), Bangalore (India), Canada, Denmark, Ireland, Israel and in New England, Redmond, and Silicon Valley in the US. The company also operates Microsoft Research, one of the world’s largest computer science research organizations, and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science sector. Microsoft has been succeeding with a commoditisation strategy in the consumer PC market until their competitors’ success in mobile device market and they are being forced to make much bigger investments just to catch up with the market and defend their right to exist. Microsoft has done a lot of rethinking and revising in their innovation process the past couple of years as to how to bring innovations more quickly to market. Microsoft has focused on and allocated a high percentage of revenue to R&D to maintain and increase lead in segments that the company operates in. Microsoft’s research and development expense were $9.8 billion, $9.0 billion and $8.7 billion, during fiscal years 2012, 2011, and 2010, respectively. These expenses accounted for approximately 13%, 13%, and 14%, respectively, of revenue in each of those years. This huge spending allows Microsoft to pursue a wider array of technologies if necessary. Figure 9 shows Microsoft’s new organizational approach to innovation process.
Fig. 9 Microsoft’s organizational approach to innovation process As shown in figure 10, the various labs throughout the company are the conduit between Microsoft Research and the PGs (product groups). Products/technologies in Microsoft Research are anywhere from five to 10 years from commercialization. Once a technology hits one of the Microsoft Labs, it is about two to four years from commercialization.
Fig. 10 Microsoft’s product pipeline To help employees turn ideas into potential products, various programs and groups have been formed in the organisation, as shown in figure 11. Amongst these, Alchemie Labs is an organization/group within Microsoft dedicated to creating teams and projects that function as internal startups. Idea Hub -- which is tied to Microsoft's internal Poll performance-management system -- is also something that Microsoft is making available to partners for customizing SharePoint. Built on top of SharePoint, an internal Microsoft offering known as Acing allows employees to use social-networking technologies similar to Twitter and Facebook inside the company only, so that they can find subject matter experts and share information without it being exposed to the public cloud.
Fig. 11 Internal innovation programs and groups of Microsoft
Fig. 12 Innovation process of Microsoft Figure 12 summarizes the improved innovation process in Microsoft. They believe they can use technology and process improvements to make innovation happen more rapidly and repeatedly. Strong brand recognition Microsoft has been one of the leaders of the information technology revolution and its operating systems are used on almost 70 percent of computers worldwide. According to Interbrand, Microsoft’s brand is the 5th most valuable brand in the world, valued at $ 57.8 billion. Forbes listed the corporate as the 7th most reputable business in the world. Thus, the company has unparalleled brand name recognition among target customers. This brand recognition means that Microsoft has the ability to charge premium prices from its
customers, has the ability to attract top talent to work for the company and the strong brand name also helps Microsoft in launching new products in the market. Strong intellectual property Securing patent rights is important for the development of the company’s product portfolio. Strong patent portfolio creates market exclusivity to the proprietary technology, giving the company an edge over its competitors. The company's success depends primarily on its ability to maintain and establish the proprietary nature of its technology through the patent process. The company protects intellectual property investments in a variety of ways. It actively works in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to its software and hardware products, services, business plans, and branding. Microsoft maintains a comprehensive U.S. and international portfolio of intellectual property which help it in protecting its technologies. As of December 2012, Microsoft is one of the leading technology companies with a portfolio of over 31,000 U.S. and international patents issued and over 38,000 pending. Microsoft is also involved in outbound and inbound licensing of related patented technologies that are incorporated into licensees’ or Microsoft’s products. The company also purchases or license technology that it incorporate into products or services. A strong patent portfolio would help the company protect its various products from being infringed, strengthen its market presence and generate revenue through milestone licensing fees. Strong distribution channels The company works with all the major computer hardware producers such as Lenovo, Dell, Toshiba 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. Installed product user base Microsoft has a large user base. The company’s operating system is used by more than 70 per cent of personal computers in the world and its productivity suites do not face any strong competitor. Since the company’s current products are well received in the market, Microsoft has the option of using the installed user base to launch new products. This installed user base have the potential to become early adopters of Microsoft’s future products. Comprehensive product portfolio Microsoft offers a comprehensive range of software, services, and hardware solutions across different customer classes, which enable it to enjoy a leading market position. Microsoft generates revenue by developing, manufacturing, licensing, and supporting software and services across a wide variety of computing devices. The company does business worldwide through offices in more than 100 countries. Microsoft carries out the development of systems (servers, personal computers, and intelligent devices), server applications (distributed computing environments), information worker productivity applications, business solution applications, high-performance computing applications, software development tools, video games, and online advertising. Microsoft also provides consulting and product and solution support service, and trains and certifies computer system integrators and developers. It also concentrates on the development of various cloud-based solutions that provide customers software, services and content over the Internet by way of shared computing resources located in centralized data centers. The comprehensive product portfolio of Microsoft enables it to cater to a wide variety of customer requirements across industries and geographies.
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. This significant increase in revenue is due to strong sales of Server and Tools products and services and the Microsoft Office 2010 system, partially offset by the decrease in Windows operating system revenue. Consistent increase in revenue may indicate that the company is efficiently using the shareholders' money and that it is generating high returns for its shareholders compared to other companies in the sector. Acquisition of Skype With nearly 300 million users, Skype is a significant boost to Microsoft’s online presence and have a lot of potential in generating income from online advertising. Weaknesses Declining brand equity The company reported a decline in brand equity growth, which could affect its brand valuation and brand image in the industry. The company’s overall world ranking in Global Top 100 from Millward Brown Optimor decreased from the top to fifth in 2012. The company reported brand value of $76,651m in 2012, as compared to $78,243m in 2011, representing a decrease of 2%. Prior to this, the company has recorded brand values of $76,249m in 2009 and $70,887m in 2008. In 2012, Apple Inc. recorded an increase of 19% in its brand value. The declining brand equity could affect the overall brand image of the company. Mature PC markets 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 to innovate Microsoft’s operating system dominated the 80’s and the company’s productivity suite dominated the business landscape in the 90’s. However, Microsoft has not been able to bring a new product in the market in the last decade that dominated the market place. 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. It’s entrance to mobile OS was also too late, while Google and Apple captured the market share.The company successfully forayed into the entertainment segment with launch of X-Box but it is sharing leadership with Sony and Nintendo in that segment. The reason for Microsoft slow progress in innovation is few-fold. First of all, Microsoft has been making use of a commoditisation strategy where it identifies technologies that are established and successful, then decides whether it wants part (or all) of that success and uses its size and power to chip away at the competition until it gains market share. With a commoditization strategy, Microsoft let others take the risk of finding a new market, and wait until that market reaches a certain size and maturity. Then, they can penetrate the market with a communization strategy that basically gives the user the same set of product features at significantly lower cost. While commoditisation negates the cost and the risk involved in the early stages of that market, it is not without risk. Microsoft is paying for years of lack of innovation now to catch up with the market.
One key reason to this lack of innovation is because Microsoft is a blue-chip stock with huge institutional investors that expect a dividend—which doesn’t jibe with a culture of risktaking and innovation. As a result, the company tends to be more conservative in its decision-making. As a result, Microsoft’s last decade has been almost entirely reactive. The company launched its competitor to the iPod, the Zune, just before Apple rolled out the fifth generation of the iPod and eventually discontinued the Zune. Bing and Office 365, reactions to Google’s search and Apps, respectively, came late enough that they seem destined to forever remain niche products. Now, in a race to catch up with their competitors in the mobile device market, Microsoft is refocusing on innovation and powerful devices like Surface Pro 3 is coming out to the market. However, Microsoft can no longer offer their product at significantly lower cost as they did before hence finding difficulties in gaining market share. This is where, perhaps, target costing may be useful in Microsoft’s product development process once a new product is ready for commercialization . Figure 12 shows the process in target costing for both manufacturer and service provider.
Fig. 13 Target Costing Process From figure 13, we can see that target costing always starts from research from the market; determining what is the customer needs and a selling price at which the company expects to achieve the desired market share. This is especially useful for Microsoft as the IT industry is now highly competitive and the market is subject to rapid changes, hence it is important to for Microsoft to stay oriented to products’ end users and loyal clients, by respecting their needs, so as to gain new market segments and new clients and keep track of external market forces. Target cost is selling price less desired profit. Here, top management sets the desired level of profit on the basis of firm strategy and financial goals, so that shareholders can be reassured of annual performance and dividend which may reduce their resistance to innovation. With its existing cross-function groups, various departments can easily come together to design and development the product with the target cost in mind. Most of the cost of a
product is determined in the design stage. Once a product has been designed and has gone into production, not much can be done to significantly reduce its cost. This means that most of the opportunities to reduce costs come from designing the product so that it is as simple as possible to make, uses the least inexpensive parts possible and yet is still robust and reliable. By practicing target costing, Microsoft can reduce cost while planning and designing high quality products which are relevant to market needs. At the same time, they can maintain profitability, enhance employee awareness and empowerment and encourage collaboration between groups and departments. Leadership and internal culture The timing of the handover of Microsoft from founder and technical genius Bill Gates to employee no. 30 and MBA dropout Steve Ballmer could hardly have been worse for Ballmer. In 1999, when Microsoft was a blue-chip company wringing a steady stream of income from the Windows monopoly, it might have made sense to put Ballmer, who was initially the company’s first business manager, in charge. But Microsoft remained a technology company, and having a non-technical CEO meant that Ballmer was illequipped to oversee the increasingly large and unwieldy development project that Windows had become. There is copious evidence of Microsoft’s broken product pipeline, which stretches back a decade, at least: In 2004, Steve Jobs unveiled a version of Mac OS X that incorporated many of the features that Microsoft had promised in its “Longhorn” reboot of Windows, a project that became so snarled that Ballmer eventually had to decide to throw out all the work his engineers had done and start again, delaying the release of Windows Vista (which succeeded Longhorn) by at least two years. But perhaps the most concrete demonstration of Ballmer’s failure to be a “product guy” as a CEO is the way the company has pushed touch-screen PCs and a touch-centric Windows interface onto a public that has been trained for decades not to leave smudges on our PC screens (in contrast to tablets and phones) by touching them. Touch screen PCs and “convertibles”—heavy laptop/tablet hybrids—have both failed to sell as manufacturers had hoped, contributing to the overall slump in the PC industry. The root of Microsoft’s broken product pipeline was the fact that Ballmer was a tone-deaf manager. Microsoft’s “stack ranking” system of management, in which employees were graded on a curve that meant that one in 10 members of a team always had to receive a rating of “poor” even if everyone in a group was an A player, pitted employees against one another, discouraged collaboration between and even within teams, and slowed Microsoft’s development process to a crawl. In 2012, Ballmer’s rating among his own employees was just 46%, compared to Google CEO Larry Page’s 94% approval rating and Mark Zuckerberg’s 99%. Morale at the company is at an all-time low, and Microsoft has for years been losing its best executives and engineers to competitors like Google. Even when Microsoft hires talented employees, the most talented ones leave more quickly than the less talented ones, degrading the overall quality of Microsoft’s workers. Microsoft has also for many years paid sub-par wages. This policy was born at a time when Microsoft could compensate employees with stock, but the company’s stock price
has been flat for a decade. Meanwhile, companies like Google are paying employees up to 23% more than the industry average. Opportunities High growth rate of emerging economies Almost 46% of Microsoft’s revenues come from emerging markets. The company has the understanding and experience on how to operate in these markets. However, most of the revenues have been generated by company’s software publishing business. U.S. online services businesses have not been very successful in emerging markets. A case study would be Google’s dominant market share in U.S. but a small market share in China. Culture plays a very big role in these markets. With the rise in disposable incomes in these economies, Microsoft’s Entertainment business is bound to show great growth in future. The companies operating in developing countries lack the technological expertise to compete in this segment and Microsoft should enjoy high penetration in these markets in the near future. Mobile device industry The company could capitalize on the growing demand for smartphones, which are emerging as a major growth opportunity for mobile device manufacturers. According to industry analysts, the global market for smartphones, is predicted to reach from 487 million units in 2011 to more than 675 million units (approximately 35%) in 2012, more than 907 million units (approximately 35%) in 2013 and surpass 1 billion by 2014. The growth would be driven by factors including lower product cost, improved handset design and functionalities, the expansion of global mobile email and browsing services, the emergence of 3G and 4G network technologies, and the standardization and upgrades of operating systems. Considerable demand is expected from developing countries, particularly the Asia-Pacific region, besides North America. Emerging countries including China, India and Brazil are expected to witness significant usage in smartphones other than the US and the UK. By 2016, China would be leading the smartphone market with approximately 20% of market share, followed by the US (approximately 15%), India (approximately 10%), Brazil (approximately 5%) and the UK (approximately 4%). The company could look forward to increase its market presence across the emerging countries to fuel its revenue growth. Cloud based services The company could capitalize on growth potential in cloud service market with its offerings in cloud computing and managed IT solutions. Microsoft could expand its addressable market opportunity through cloud computing. The company provides content and services to business users through the Microsoft Online Services platform, which includes cloudbased services such as Exchange Online, Microsoft Dynamics CRM Online, Microsoft Lync, Microsoft Office 365, Microsoft Office Communications Online, Microsoft Office Live Meeting, SQL Azure, SharePoint Online, Windows Azure, and Windows Intune. According to the industry analysts, the global market for global cloud computing is forecast to grow from $37.8 billion in 2010 to $121.1 billion in 2015 at a CAGR of 26.2%. According to estimates, the cloud computing market of Germany is expected to grow from €1.14 billion in 2010 to €8.2 billion in 2015, at an average growth rate of 48%. The cloud computing market is expected to account for approximately 10% of total IT expenditure in Germany by 2015. North American and European virtualization markets are expected to grow at a
CAGR of 8.5% during 2010-2016. The company could benefit from the growing demand in cloud-based services sector. Strategic Acquisitions The company expands its boundaries of operations and increases its customer base through acquisitions. In October 2012, Microsoft acquired PhoneFactor Inc., a provider of multifactor authentication (MFA) solutions. This acquisition would help the company bring effective and easy-to-use multifactor authentication to its cloud services and on-premises applications. Also during the same month, Microsoft announced that it has reached a definitive agreement to acquire StorSimple Inc., a provider of Cloud-integrated Storage (CiS) solutions. The addition of CiS would advance Microsoft’s Cloud OS vision and help customers more efficiently embrace hybrid cloud computing. In July 2012, Microsoft entered into a definitive agreement to acquire Perceptive Pixel Inc. (PPI), a leader in research, development and production of large-scale, multi-touch display solutions. Acquisition of PPI would allow the company to draw on its complementary strengths. In June 2012, the company entered into a definitive agreement to acquire Yammer Inc., provider of enterprise social networks. The acquisition would add best-in-class enterprise social networking service to the company’s growing portfolio of complementary cloud services. The strategic expansion initiatives would help the company expand its business presence to new geographical regions and gain better market coverage. Partnerships and Collaborations The company could benefit from the various strategic partnerships that it enters. In February 2013, Microsoft introduced the Microsoft 4Afrika Initiative, a new effort to help place tens of millions of smart devices in the hands of African youth by 2016. Also during the month, the company in collaboration with the government of Kenya’s Ministry of Information and Communications and Indigo Telecom Ltd., launched a pilot project to deliver low-cost wireless broadband access to locations near Nanyuki and Kalema, Kenya. In January 2013, Microsoft signed a patent licensing agreement that gives BMW access to the latest Extended File Allocation Table (exFAT) to enhance the digital entertainment offerings in BMW’s line of automobiles. The company entered into a transformative threeyear Joint Enterprise Licensing Agreement with the U.S. Army, U.S. Air Force and Defense Information Systems Agency for expanded access to its solutions. In December 2012, Microsoft announced plans to make Microsoft Surface available at additional retailers and transition of several of the stores into permanent Microsoft retail outlets. In April 2012, the company entered into strategic partnership with Barnes & Noble, Inc to accelerate the transition to e-reading. The company also acquired over 800 patents and their related patent applications from AOL Inc. In February 2012, the company entered into a strategic application partnership with Good Technology to enable the use of the Good for Enterprise solution on Windows Phone devices. In January 2012, Microsoft and TechStars enhanced their relationship through the new BizSpark Plus program for accelerators and incubators. Partnerships and collaborations would enable the company to enhance its product and service offerings and serve its customers better. Threats Highly Competitive Environment Intense competition across business segments could limit the company’s business prospects. Microsoft faces stiff competition in all its operating segments. The major competitors of Microsoft include Apple, BMC, CA, Inc., Hewlett-Packard, IBM, Nintendo and Oracle. In the online search engine sector, the company faces competition from
Google and Yahoo, which are the major players in the market. Huge competition across its business segments could make the company susceptible to market pressures, leading to a loss in market share and decline in revenue. Rapid Technological Changes The technology market is subject to rapid changes, and to compete effectively, the company must continually introduce new products that achieve market acceptance. The IT enabled communication equipment industry is characterized by fast technological changes, evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make the existing products or products under development obsolete or unmarketable. In order to remain competitive and increase its sales, the company needs to adapt to the rapidly changing business environment. Low cost of production The industry is very dynamic. The cost of producing a new product is very low. Many successful new products have been created by engineers operating in garages. Although, large corporations invest large sums in R&D, revolutionary new products such as Google search engine have been known to have been developed by geeks without any corporate affiliation. Thus, innovation is driving this industry. For eg., Microsoft’s Hotmail email lost share to start up Yahoo! in the 90’s and Yahoo! has lost market share to Google during the last decade. The Windows operating system has yet to meet a credible threat due to high penetration but the gaming industry is another game. Microsoft has recently taken lead in the gaming market with introduction of Kinect but the lead may be short lived. Changing consumer needs and habits 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.
