Microsoft

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Microsoft Corporation

Strategic Analysis Report (2013-2014)

Chinmay Chauhan

Microsoft

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Company Summary and History

Microsoft began in 1975, with a vision by a Harvard drop-out, to see a PC on every desktop.

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.

Mission Statement "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 Corporation manufactures, licences, and supports software products for

computing devices and games solutions. Its most profitable products are both Microsoft

Windows and Microsoft Office suite. Since the 1990’s, it is the most profitable IT company

worldwide. It is 93,000 employees. Supported by a partnership with IBM, Microsoft

progressively dominated the home computer operating system market, first with MS-DOS in

the mid-1980s, second with Windows. Microsoft is also present in cable TV with MSNBC

cable television network and Internet accesses with the MSN Internet portal. The company

also markets computer hardware as well as home entertainment products such as the Xbox,

Xbox 360. The company's initial public stock offering (IPO) was in 1986; 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

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Environmental Analysis (SWOT analysis)

Strengths Weaknesses

Opportunities Threats

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.

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.

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.

Strong Financial surplus. 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 to

Microsoft’s online presence and have a lot of potential in generating income from online

advertising.

Brand loyalty & reputation

Easy to use software

Tie-ups with hardware industry

Robust financial performance

Acquisition of Skype

Poor acquisitions and investments

Dependence on hardware makers

PC markets have matured

Slow to innovate

Cloud based services

Mobile advertising

Mobile device industry

Growth through acquisitions

Intense competition

Changing consumer behavior

Open source projects

Potential lawsuits

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Weaknesses

Bad Investment Decisions. 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 manufacturers. 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.

Acquisition of Nokia. With nearly 18,000 layoffs planned in FY 2014, 12,500 of which will

be from Nokia division, there are speculations that Acquisition of Nokia has been a bad

move for Microsoft in the short term leading to a drop in share prices. The company is

expected to recover the costs by 2016. However, Microsoft is playing a long strategy in

this case seeing growth potential of the Smartphone market.

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.

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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 like

Google and Apple have already established positions.

Changing consumer 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.

Open source projects. Many new open source projects are coming to the market and

some 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 expensive

Microsoft’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 as

Microsoft continues to operate more or less the same way, there is high probability for

more expensive lawsuits to come.

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Enterprise Software Industry Analysis (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 software, but also manufacture operating

systems, general computer software, and development platforms. Third, there is

Threat of Substitutes

Brand loyalty: High

Switching Costs: High

Close relationships: High

Bargaining Power

of Suppliers

Switching costs: Low

Industry Rivalry

Concentration of competitors: High

Diversity of competitors: High

Product/price differentiation: High

Bargaining power

of Buyers

Switching Costs: High

Buyer concentration: High

Threat of New Entrants Cost of entry: High

Economies of scale: High

Brand loyalty: High

Product differentiation: High

Proprietary knowledge: High

Potential Retaliation: High

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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, 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

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.

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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

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Capabilities & Core Competencies

Identifying a firm’s resources and capabilities, and thus its core competencies, is a vital step

to establishing 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,

totalling $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

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.

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Microsoft’s unique culture is an additional intangible resource. It can be described as casual,

fun, team-oriented and intense. Employees are valued for their contributions. Such a highly

dedicated workforce, developed through a strong culture and identity, represents a

significant competitive advantage. Intangible resources are immeasurably more important

than tangible resources because they are less easily copied by competitors. Microsoft is in a

strong position regarding intangible resources due to its technological capacities, brand

equity and cultural intensity.

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

Microsoft’s core capabilities allow the company to dominate the market and to shape the

direction of the technological future.

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Strategic Groups in Software Industry

Figure 1 : Strategic Map

Cloud Databases (DaaS): Companies in the Cloud databases (aka Database-as-a-Service

or DaaS) strategic group provide on-demand relational database software, available on a

pay-as-you-go basis, based on an elastic architecture. This enables users to employ a

relational database without having to purchase any software or servers, or manage the

configuration.

Cloud Platforms (PaaS): Companies in the Cloud platforms (aka Platform-as-a-Service or

PaaS) strategic group provide complete on-demand development environments and

tools, including an abstracted Cloud infrastructure layer and Cloud database, enabling

enterprise IT groups develop, test, and deliver custom on-demand business applications

without investing in traditional Systems Software or infrastructure. Cloud platforms, such

as Microsoft Azure, also offer a stand-alone relational Cloud database, putting them in

direct competition with pure-play DaaS firms.

Traditional Software: Companies in the traditional Systems Software strategic groups

provide programming languages, relational database software, Integrated Development

Environments (IDEs), private Cloud environments, middleware, and other tools enabling

enterprise IT groups to develop, test, host and manage custom on-premise business

applications.

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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 respective strengths to deliver innovative technologies to

help advance businesses. Together they take familiar platforms from mobile devices and

desktops to data centre 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.

Facebook: Under the strategic alliance, Microsoft is the exclusive third-party advertising

platform partner for Facebook, and sells advertising for Facebook internationally in

addition to the United States.

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Current Business Models

Microsoft largely pursues a long-term positioning strategy of differentiation, emphasizing

branding, software design, quality service and innovation, as opposed to a low-cost strategy,

which emphasizes economies of scale and reduction of input costs. Companies that pursue a

differentiation strategy, such as Microsoft, are common in that they have access to

research, highly skilled employees, a strong sales team and a reputation of excellence.

Microsoft has been a market leader in the Enterprise software industry. However, the PC

market revenues are declining because of market saturation. Microsoft’s late entry into the

mobile market might is already haunting the company executives.

“One Microsoft, One Strategy” – Alignment Strategy

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. In July 2013, management announced a change in

organizational structure as part of its transformation to a devices and services company

under the “one strategy, one Microsoft” banner.

The realignment aims at improving revenues due to declining PC sales and reducing the

duplication of efforts across various divisions. Although Microsoft revenues increased for

the year ending June 2013, a fall in PC sales continued to impact earnings. For fiscal year

2013, the company’s revenue grew 6%, to $77.85 billion. Microsoft said 2013 revenue

increased, primarily due to higher revenue from Server and Tools as well as revenue from

new products and services, including Windows 8, Surface, and the new Office. These gains

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were offset in part by the impact on revenue of a decline in the x86 PC market. It seems that

Microsoft is trying to end its dependence on the saturated and now declining PC market by

shifting to new markets such as mobile, cloud services, gaming, search, and tablets.

Mobile First, Cloud First world

The industry is moving from PCs to Mobile / Tablets / Other devices, from Licensing to

Licensing & Subscription, from On-premise software to Cloud 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 MSFT’s

competitive position. Microsoft’s $7.2 billion acquisition of Nokia’s devices and services

business last year is in line with this transformational move.

By transforming into a devices and services company, Microsoft aims to primarily monetize

high-value activities by leading with devices and enterprise services. The consumer x86 PC

market is declining, as users have continued to prioritize devices with touch and mobility. At

the same time, Microsoft’s enterprise products and cloud solutions are seeing continued

strength, and adoption of Microsoft’s consumer services has increased. After missing

revenue expectations in four out of the five previous quarters, Microsoft beat analyst

expectations in 1Q 2014 earnings on the back of strong growth in the company’s enterprise

and consumer segments.

Microsoft’s consumer services, such as Bing and Skype, will differentiate Microsoft’s devices

and serve as an on-ramp to its enterprise services while generating some revenue from

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subscriptions and advertising. Enterprise services will remain an area of growth and

opportunity as businesses of all sizes look to move to a cloud, manage a growing number of

devices and tap into big data.

Microsoft’s current CEO Satya Nadella announced that it would be making Windows free for

phones and tablets (< 9” screens). Free Windows licenses factor into Nadella's plan to make

Windows ubiquitous. This is consistent with the fact that Windows Phone OS growth hasn’t

been gaining momentum among the phones and tablets market.

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Future Recommendations

Microsoft has been a technology industry leader and has strong capabilities and resources

to make anything possible. We recommend it to make improvements in the following areas:

“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.

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 it’s

competitors such as Google and Apple.

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References

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happened-to-them-2011-3?IR=T&op=1

http://bgr.com/2013/09/09/microsoft-business-strategy-analysis/

http://www.bizjournals.com/seattle/blog/techflash/2013/09/investors-see-nokia-

acquisition-as-a.html?page=all

http://www.telegraph.co.uk/finance/businesslatestnews/10760392/Apple-and-

Microsoft-have-bigger-cash-holdings-than-UK.html

http://markets.ft.com/research/Markets/Tearsheets/Financials?s=MSFT:NSQ

http://fortune.com/fortune500/wal-mart-stores-inc-1/

http://www.geekwire.com/2013/microsofts-patent-tracker-push-transparency/

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81-last-year-a-6-4-billion-difference/

http://www.forbes.com/powerful-brands/

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becomesclearer/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%

3A+forbes%2FwcdN+(Forbes.com%3A+Business+News)

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http://www.dell.com/learn/us/en/uscorp1/secure/2013-12-12-dell-cloud-microsoft-

partnership-windows-azure

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oftGlobal-Rainbow.pdf

http://www.microsoft.com/investor/reports/ar13/financial-review/discussion-

analysis/index.html