Microsoft

Microsoft Corporation
Strategic Analysis Report (2013-2014)
Chinmay Chauhan

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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 1990s, 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 Microsofts business strategy in the near future in the enterprise
software industry

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Environmental Analysis (SWOT analysis)

Strengths

Brand loyalty & reputation

Easy to use software
Tie-ups with hardware industry
Robust financial performance
Acquisition of Skype

Opportunities

Cloud based services

Mobile advertising
Mobile device industry
Growth through acquisitions

Weaknesses

Poor acquisitions and investments

Dependence on hardware makers
PC markets have matured
Slow to innovate

Threats

Intense competition
Changing consumer behavior
Open source projects
Potential lawsuits

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. Microsofts 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
Microsofts online presence and have a lot of potential in generating income from online
advertising.

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Weaknesses

Bad Investment Decisions. Many of Microsofts 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
Microsofts 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)

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

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
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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
businesss 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 firms 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 Microsofts 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. Microsofts
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 FY14 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, Microsofts 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, Microsofts reputation is another
of its strongest resources.
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Microsofts 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 companys human resources can be measured in terms of its employees 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
Microsofts 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. Microsofts 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 companys 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 MSFTs
competitive position. Microsofts $7.2 billion acquisition of Nokias 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, Microsofts enterprise products and cloud solutions are seeing continued
strength, and adoption of Microsofts 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 companys enterprise
and consumer segments.
Microsofts consumer services, such as Bing and Skype, will differentiate Microsofts 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.
Microsofts 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 hasnt
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--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 Microsofts 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 Microsofts 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 doesnt lead to any significant returns in
the short term. Its necessary to be more efficient while investing in research like its
competitors such as Google and Apple.
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References

http://www.businessinsider.com/microsofts-15-biggest-acquisitions-and-whathappened-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-nokiaacquisition-as-a.html?page=all
http://www.telegraph.co.uk/finance/businesslatestnews/10760392/Apple-andMicrosoft-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/
http://thenextweb.com/microsoft/2012/11/01/microsofts-rd-edge-it-outspent-apple-281-last-year-a-6-4-billion-difference/
http://www.forbes.com/powerful-brands/
http://www.forbes.com/sites/sarahcohen/2014/07/25/microsofts-strategy-for-nokiabecomesclearer/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%
3A+forbes%2FwcdN+(Forbes.com%3A+Business+News)
http://www.salesforce.com/company/news-press/press-releases/2014/05/140529.jsp
http://h22168.www2.hp.com/sg/en/partners/microsoft/
http://www.dell.com/learn/us/en/uscorp1/secure/2013-12-12-dell-cloud-microsoftpartnership-windows-azure
http://www.hp.com/hpinfo/newsroom/press_kits/2010/HPMSFTAlliance/HPandMicros
oftGlobal-Rainbow.pdf
http://www.microsoft.com/investor/reports/ar13/financial-review/discussionanalysis/index.html

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