Case Analysis: Microsoft

Case Analysis: Microsoft

Write a summary of the case study. Be sure to describe and explain the importance of strategic leadership in managing Microsoft’s resources in your summary. Your summary should be a minimum of 2-3 double-spaced pages and must be in your own words. Use APA style. You must include 3-5 references. Only one reference may be from the internet (not Wikipedia). The other references must be located within the Grantham University online library. Only the body of the paper will count towards the page requirement

INTRODUCTION

 

This case study takes a comprehensive look at the Microsoft organization and its competitive environment. The case material furnishes a thorough picture of the internal factors that define the company as well as the external forces that challenge its dominant hold on the software market. As new technological trends take shape, Microsoft’s preeminent position in the industry is being overshadowed by its more innovative rivals.

 

The primary objective of this case is to evaluate Microsoft’s strategic business practices and to identify effective measures to help the company combat competitor advancements. A complete situation analysis will provide an understanding of current conditions and a foundation to propose recommendations that address crucial strategic issues.

 

• Evaluate the external environment to identify the greatest opportunities and threats facing Microsoft at this time. Are conditions favorable for the company?
• What does a competitor analysis reveal about Microsoft’s major rivals? Discuss the strategic impact of competitive rivalry in each of the company’s business segments.
• Assess Microsoft’s internal environment and financial performance to define the company’s strengths and weaknesses. Which factors are the most critical for addressing the current situation?
• Summarize the key strategic challenges confronting Microsoft and identify suitable options for consideration.

 

Microsoft operates in a fast-paced, rapidly changing technology industry, where preferences vacillate continually. Of the forces shaping technology trends, most are unfavorable to the software giant. Advancements in mobile device capabilities have revolutionized functional computing. Smart phone sales are outgrowing PC sales by a factor of 5, and the popularity of portable tablets threatens the strength of the PC market. Enterprises are leveraging consumer electronic equipment to facilitate communication and employee productivity gains. As personal devices enter the workplace environment, consumer tastes are superseding business choices. Under these conditions, Microsoft’s dependence on PCs and enterprise markets is a disadvantage. Furthermore, computing markets are on the verge of a transformational shift toward a “cloud-based” service model. New platforms are inconsistent with Microsoft’s marketing and distribution structure, and this change puts Windows’ 90% market share at risk.

 

Though these environmental threats seem ominous, awareness of these trends is an eye into the future and reduces uncertainties surrounding the direction of the industry. PC sales still eclipse the sales of newer mobile devices, and usage of the company’s operating systems and Office suite of software products is not going to dissipate anytime soon. Even though cloud computing is a move away from Microsoft’s successful “software in a box” platform, it opens up new opportunities for the company to participate in new technology markets estimated to exceed $3 trillion in value. Despite missed opportunities to introduce new technologies in the past, Microsoft is investing heavily in its cloud computing platform, is already delivering cloud applications to 300 million users, and is introducing innovative cloud platforms to support datacenter efficiencies and database management systems in its primary enterprise market.

 

In addition, Microsoft has made a successful bid in the lucrative search engine advertising market, where Bing has captured an impressive 11.5% share during its first 16 months in the market. More growth is possible as users discover appealing features offered by the upstart search engine. With 42% of its revenue generated outside of the domestic market, international growth opportunities should also factor into Microsoft’s strategic planning.

 

Microsoft is losing ground to competitors in consumer markets, and recently took a psychological hit when Apple surpassed its ranking as the most valuable technology company. The company still has a firm hold on the business enterprise market, but falls conspicuously behind competitors in the introduction of new technologies such as tablets, smart phones, gaming, and media.

 

Multimarket competition characterizes the rivalry among Microsoft, Apple, and Google, as each competitor eyes converging IT, telecommunications, and media markets.

Revenue is generated differently at each of the three companies. Specifically:

 

• Google generates 97% of its revenue from online advertising.
• Apple generates 60% of its revenue from consumer electronic sales.
• Microsoft generates 58% of its revenue from software and operating systems.

 

Both Microsoft and Apple have related constrained (moderate) levels of diversification. Apple competes with a consumer-centric entertainment/communication “hub” model that promotes zealous customer loyalty. 27% of the competitor’s sales are PC’s, which impacts Microsoft’s software and operating system reach.

 

Google is more dependent on revenue from a single source, but the appearance of a lower level of diversification can be deceiving. A closer look at the competitor’s strategic approach reveals the potential impact of its business model. Innovative development in operating systems, applications, browsers, and other software to support its ad-based model makes Google competitive in nearly all of Microsoft’s business segments.

 

Google is directly attacking Microsoft’s enterprise market with new product development in cloud computing, attracting users with free software to connect MS Office products to Google’s cloud. Google Docs, its online cloud-based alternative to MO Office, has gained 25 million users in just 4 years. Though this represents only 4% of the market and the product has fewer features than full desktop applications, Google Docs’ pricing is attractive when compared to Microsoft’s recurring licensing fees. Also, Google’s new Chrome OS is a promising alternative to Windows, designed specifically for notebooks and tablet devices. Google’s aggressive acquisition strategy provides the company with a continual influx of innovative capabilities, and the company’s innovation-friendly corporate culture is luring the next generation of technology creators to give the competitor a competitive advantage in innovative product development.

 

The table below summarizes the critical strategic considerations in each of Microsoft’s five business segments.

 

Business Segment	Strategic Threat
Windows and Windows Live	– ½ of Microsoft’s operating income is generated in this segment– Increasing demand for smart phones and tablets threatens PC-based Windows revenues – Consumers are turning away from Internet Explorer to alternative browsers – The Mac OSX now has a 12% market share, and Apple owns 27% of the PC market – Linux is offered free on servers – Google’s Chrome OS aims to replace Windows, especially in portable devices
Business Division	– Google is aggressively targeting this segment with its cloud computing connections and attractively-priced Google Docs– OpenOffice.org is an Oracle-sponsored cross-platform office software package offered to users for free
Server and Tools	– Unique set of competitors lends complexity to the competitive forces in this segment, which is composed of software, tools, and services for enterprise systems and professional IT developers
Online Services	– Bing’s successful play at the search engine market has yet to prove profitable for Microsoft– Google is imitating Bing’s most popular features – Google acknowledges the strengths of Microsoft’s search engine and is expected to act aggressively to protect its dominant share of the market
Entertainment and Devices	– Fierce pricing, console life cycles, and innovative competitors threaten the Xbox platform– Sony is steadily gaining market share with its PlayStation products – Rapid life cycles and new product releases continue to outpace Microsoft in all non-gaming areas of this segment – Apple dominates the non-gaming share of this segment, edging out all other competitors – Google’s Android supports a significant share of the smart phone market

 

Microsoft is one of the biggest names in the technology industry. It has held a dominant position in the software market for over 30 years and has a vast customer base throughout the world. Entrepreneurial leadership and successful strategic practices have aligned the company at the center of the PC industry. Microsoft’s integrative product development and promotion, strategic acquisitions and alliances, and distinct distribution channels are all strengths that have played a significant role in the company’s success.

 

Although aggressive business practices have secured 500 million MS Office users (or 94% of the office software market) and 96% of the browser market, they have not been without a price. Microsoft has gained a cut-throat reputation among its cooperative partners and is the respondent of extensive litigation over intellectual property claims and anti-competitive behavior.

 

Despite the company’s history of initiating and embracing disruptive technology trends, entering new markets, and driving broad adoption of its products/services, Microsoft is losing ground in the area of new technology development. Internal innovation is stifled by dependencies and coordination across product lines, organizational size and bureaucracy that interfere with the ability to act with speed, and the loss of creative talent to innovative firms engaged in more exciting product development and offering more generous compensation packages. Visionary failures to recognize the importance of web-based and mobile advancements have left Microsoft ill-prepared to compete in the fastest growing technology segments. The use of 3^rd party manufacturers has left the company without in-house capabilities to understand and compete in the Entertainment and Devices Division. As computing transfers to smaller, portable devices, Microsoft finds itself without a role in the smartphone and tablet markets and with an antiquated operating system for mobile devices. With 23 million subscribers to Xbox Live, only the Xbox gaming platform has provided Microsoft with success in this challenging segment.

 

Financially, Microsoft achieved record revenues in 2010. Net income grew 29%, and an 18% increase in operating income is evidence of internal efficiency gains. Performance by segment is detailed in the following table.

 

Year End June 30, 2010  (in millions)		Revenue		Operating Income/Loss
Windows & Windows Live Division	$	17,788	28%	12,089	50%
Microsoft Business Division		18,909	30%	11,664	48%
Server and Tools Division		14,878	24%	4,990	21%
Entertainment and Devices Division		8,114	13%	589	2%
Online Services Division		2,198	4%	-2,436	-10%
Consolidated	$	62,484		24,098

 

Despite steadily growing revenues, a 30% increase in diluted EPS, and the distribution of $16 billion to shareholders, investors and employee shareholders continue to be disappointed by the firm’s lackluster stock performance (particularly when compared to Apple’s soaring stock value in the past year).

 

As increased popularity of Web-based software, emergence of cloud computing, greater competitive intensity, and shifts in user preferences chip away at Microsoft’s dominant position in the software market and threaten to render its distribution formula irrelevant, the company must act strategically to again position itself as a focal point in the emerging computing industry. The challenge is to grow in areas where Microsoft has limited strengths (in Online Services and Entertainment/Devices), meanwhile protecting its Windows and MS Office businesses from competitor moves. This requires:

 

• visionary leadership
• innovative technological talent
• enhanced responsiveness to emerging markets
• increased focus on consumer markets
• new delivery mechanisms
• a revised business model

 

Gates’ removal from daily operations has left a leadership vacuum at Microsoft. Though Ballmer is credited with sales and marketing skills and an enthusiastic personality, employees and Board members still question his effectiveness as strategic leader of the organization. He lacks Gates’ technological vision, product design skills, and competitive zeal. Coupled with the loss of Ray Ozzie, Microsoft is obviously in need of a technological visionary leader to navigate the company through the strategic and competitive challenges confronting the industry.

 

In light of these considerations and the need for increased internal innovativeness, an argument can be made for hiring new leadership talent from outside of the organization. The external managerial labor market is often sought for top management talent when the firm is faced with strategic change. In addition, HR policies that attract valuable talent, energize the culture, and promote and reward creativity, entrepreneurship, expansive thinking, innovativeness, and other strategy-supportive behaviors must be adopted to curb the recent loss of critical human capital.

 

To compete in the emerging marketplace requires radical innovative breakthroughs. Microsoft is investing 90% of the company’s R&D resources in the development of cloud-related products and services. Internal innovation can be further enhanced by:

 

• encouraging autonomous strategic behavior through product champion endorsements and tools to facilitate the ongoing diffusion of tacit and new knowledge throughout the organization
• aligning the company’s strategy and structure to induce strategic behavior that promotes internal corporate venturing
• using cross-functional and cross-product development teams to support the integration of efforts across divisional boundaries
• strengthening shared values and communication systems to improve the development and commercialization of new products and services

 

If Microsoft is going to compete in the Entertainment and Devices segment, the company is going to need to bring development in-house to control the process as it does for all of its other divisions. Mobile devices are replacing PC’s as consumer devices of choice. The fusion of hardware and software with social networking and Internet-centric interactions has left Microsoft far behind in this fast-paced, hip consumer market. Consequently, the company needs to either (1) acquire resources to overcome its weaknesses and quickly establish a position in the market or (2) seek a cooperative partnership with an existing contender to compete against Apple’s leading status.

 

Quick and decisive focus on emerging markets requires an organizational structure that enables rather than impedes adaptability. A cooperative form of the multidivisional structure is suggested for Microsoft’s related constrained corporate strategy. This structure promotes interdivisional cooperation needed to enhance the quality of decision making and speed of implementation required for competitiveness and market responsiveness. This will be especially important as Microsoft discovers new ways to distribute and market its expanding portfolio of products and services online.

 

Creating customer value is the cornerstone of the firm’s business strategy. To determine the core competencies necessary to satisfy consumer market needs, Microsoft should enrich its connections with Bing and Xbox users to better understand and appreciate the tendencies of this segment. Opening a small group of trial retail stores to connect with consumers and explore their product preferences and buying habits will reinforce the effort to build awareness of consumer expectations.

 

As Microsoft seeks to project its past successes into shifting technology markets, the company must embrace the concept of the “virtual desktop” and a subscription-based utility computing model, where the user pays for the services needed. Despite competitor advancements, Microsoft is in a strong position to develop powerful cloud computing solutions for the marketplace. By mastering outstanding security and control issues in public cloud systems (through internal development efforts or a cooperative alliance to access expertise in this area), the company has an opportunity to retain its status as the heart of the computing world.

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