Microsoft Business Analysis

8/11/2019 Microsoft Business Analysis

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Environmental Analysis

The information technology (IT) industry has always been highly driven byinnovations in technology. It is dynamic and highly competitive, with frequentchanges in both technologies and business models. Each industry shift is anopportunity to conceive new products, new technologies, or new ideas that can

further transform the industry and businesses. The following PESTEL analysis willtry to gain an understanding of Microsoft’s business potential, future marketsituation and the direction of its operation. The political, economic, social,technological, environmental and legal factors are six components of PESTELanalysis.

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 differentlycapable people- Social media- Shift in personal computing to mobile

devices

Technological

- Innovations related to IT (especially inSOA(SAAS) and innovations tooperating 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 competitoracquisitions)

- 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 theoriginal sole inventor. However they had developed the capability to absorbtechnology very quickly and improve it to provide numerous innovative perceivedbenefits to the customers in terms of user friendliness, flexibility, reachability to theproducts, 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 theyearn dominance through this commoditization strategy where they focus on stayinglow price while providing various means of differentiation. This strategy can begreatly influenced if its differentiation capabilities developed on technical andmarket competences are challenged by external forces. Considering the PESTELanalysis shown in Table 1, we can see that Technology is the key driver which couldinfluence impulsively to Microsoft business strategy. Out of the various PESTELfactors, Microsoft’s sustainability of business is greatly dependent on the ability ofcompetitors to provide better solutions at competitive low prices. Given the fact thattoday’s cutting edge technology could be obsolete tomorrow due to the dynamicnature 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 andsocial, the company made repeated missteps; affecting its software and technologyleader 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 Commissionproposed rules for “crowdfunding”. Once finalized, the rules will provide theregulatory guidance and over sight for businesses to raise capital through direct



investor solicitation. Crowdfunding could change the game for startup companiesand entrepreneurs. Next to product development, access to cash is the critical pathin bringing an idea to fruition. And, it is increasingly urgent as the life cycle to testideas and then grow them or kill them off continue to compress. The ability toobtain small funding amounts from many investors could have a transformativeeffect on the IT industry over the next several years.

Also related to technology innovations is the development of social media. Therecent proliferation of mobile devices and connectivity helped fuel the continuedgrowth of social media. At the same time, consumers’ time spent with social mediaon mobile apps and the mobile web has increased 63 percent in 2012, compared tothe 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 itsmarket share. It has faced many types of competitors from competitive products,and industry regulation challenges from various governments. It has thrived on thiscompetition which contributed to Microsoft’s overly aggressive tactics. Forexample, “bundling” which was found guilty of illegally maintaining a monopoly, butescaped with permission to bundle products in any way it sees fit with relativelyminor restrictions. However, things are changing with every stumble Microsoft

makes in the emerging markets. To stay competitive in this new market, Microsoftwill 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 andtherefore the attractiveness of a market.

Threat of new entrants - LowThe way and scale how the main players (Microsoft, Apple, Google) operates makesa big entry barrier for new entrants. In consumer PCs and corporate enterprisemarket, Microsoft has over the years created a very successful coherent network,integrating people, partnerships, businesses, etc, making everyone directly orindirectly dependent to Microsoft technologies. For existing customers, this makesthings difficult for them to switch.

Threat of substitutes - ModerateMicrosoft offers a broad range of products. Product wise there can be manysubstitute. When it comes to their core products (operating systems, office softwarepackage, etc) there are substitutes. But they are not popular due to cross platformlimitations. Microsoft having advantage of their operating systems, theysuccessfully avoid customer moving towards competitor products by strictlylimiting support for competitors. Microsoft has successfully standardized the PCmarket to rely on Microsoft platforms. This makes no close substitutes.

The challenge facing Microsoft now is the substitution of PCs by mobile devices inthe personal computer market. People are turning less to their PCs and more totheir mobile devices to accomplish much of what they used to do on their desktopsor 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 beensuccessful. The company is facing a daunting lead by iOS and Android basedcompetitors in the tablet market. The Window versions for mobile may lack the drawneeded to pull users from competing OSs: In particular, software like Office losesmuch of its appeal in the absence of a PC setup that is more conducive toproductivity. 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 ofsoftware and developers create software for environments with lots of users isfavouring competitors in the mobile space.

Bargaining power of customers - LowThrough Microsoft’s traditional base of PC users is declining, Windows is thenumber 1 operating system in the world and Office is still the most usedproductivity suite. In operating systems, there are only Apple’s OSX and Linuxavailable for substitute. Among these, Apple does not allow any other company touse Apple’s operating system which limited it’s availability, while Linux, as a

opensource freeware, lacks supports.

Bargaining power of suppliers - LowMicrosoft has a global procurement group in place to look for suppliers for all typesof quality goods and services and practices supplier diversity. They have enoughsuppliers and many established partnerships around the world, hence having amore bargaining power than their suppliers.

Rivalry among existing competitors - High/ModerateIn its traditional core product business, Microsoft has an almost monopoly in the PCmarket by licensing to PC producers, bundling its operating system with all newPCs. Obviously there is competition for Microsoft products but due to the scaleMicrosoft operates at and the dependability they maintain, they create a successfullock in while keeping the rivalry at a moderate level. However, in the emerging cloudcomputing and mobile device market, Microsoft is facing stiff competition.

The greatest challenge to Microsoft is Google and Apple’s duopoly control over theburgeoning mobile device market. As the smartphone market continues to mature,existing handset manufacturers and newcomers continue to compete, each lookingto differentiate at hardware and software level, and each contributing to the growthof 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 allowdesktop, tablet and phone to work seamlessly.

Base on the industry analysis, it is evident that Microsoft is facing strongcompetition due the emergence of new technology. However, it is possible forMicrosoft 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 thekey driver of change, we can predict the changes in the competitive forces based ontechnological advancements. The radar diagram expects barriers to entry can beslightly diluted due to possible external innovations. However new entrant may findit 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 thefuture considering the effects of diffusion of technologies and probable newinventions. This reflects the need for Microsoft to innovate or acquire new technicalcapabilities in order to stay ahead in competition.

Diagnosing Strategic Capabilities

To determine what strategic capability Microsoft has in order to sustain competitiveadvantages, 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 competitiveadvantage.This is to identify its threshold strategic capabilities which earncompetitive advantage.



Table 2: Resources and competences

Resources Competences

Threshold capabilities Threshold resources Threshold competences

1. Physical resources- Infrastructure- Establish networks2. Financial resources3. Experienced staff

1. Ability to produce software forlow prices

2. Ability to market3. Ability to be innovative and R&D4. Ability to finance5. Ability to recruit, retain and

develop talents6. Ability to offer good customer

service

Capabilities for competitive

advantage

Unique resources Core competences

1. Interllectual capital2. Brand reputation3. Dependent customer base (PC

and Business)

1. Ability to absorb and innovatecompetitive technologies tomarket software

These resources and competences have let Microsoft became the world’s biggestsoftware vendor in terms of market share for over 20 years. However in theemerging market of mobile devices, and to a certain extend cloud computing, thesehave failed to allow Microsoft to gain competitive advantage over their keycompetitors - Apple and Google.



Sensing the existential threat posed by the tectonic shifts in landscape of personalcomputing, Microsoft is currently in the process of transforming itself from asoftware player to a “devices and services company” in an organizational overhaulaimed 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. Withusers continuing to prioritize devices with touch and mobility, the consumer PCmarket is declining. Meanwhile, Microsoft’s enterprise products and cloud solutionsare seeing continued strength.

Microsoft previously operated its business under five segments: the WindowsDivision, Server and Tools Division, Online Services Division, Microsoft BusinessDivision, and Entertainment and Devices Division. Figure 6 shows the marketsegments of Microsoft. As part of its transformation to a devices and servicescompany, there is a change in organizational structure. The realignment is expectedto 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 andreducing the duplication of efforts across various divisions. Microsoft is trying toend its dependence on the saturated and declining PC market by shifting to newmarkets 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 ondelivering innovative devices and services for both its enterprise and consumercustomers. This framework was designed to give valuable insight into thecompany’s progress in its key business transformations in order to drive long-termgrowth.



After the realignment, Microsoft has a new value chain of a service and devicecompany. Figure 8 shows Microsoft value chain which is very similar to theintegrated value chain of their competitor, Apple. As Apple did, Microsoft want tocontrol every step of their value chain from content and services to devices, inorder 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 andmarketing strategies.

Table 3: Analysis of competitors products

Competitors Microsoft Apple

Key BenefitsOffered

- Leverage the power ofcomputing to work better

- Ease of use- Design and quality

- Ease of use- Design and quality- Lifestyle and trends- User experience

Type ofPositioningUsed

- Position themselves based onthe benefits they offered tostand out from their competitors

- Marketing dominance

- Position themselves based on thebenefits they offered to stand outfrom their competitors

- Product leadership



Table 3: Analysis of competitors products

MessageStrategies

-Rational appeal

• “Your privacy is our priority”:Goes hand-in-hand with itspledge to default-enable DoNot Track in IE 10. Adscreate an emotionalconnection based on theidea that even big timesharers need some personalprivacy.

• “I’m a PC”: Appeal withprominent and popularindividuals say “I’m a PC”

- Rational appeal

• Think different campaign:Apple was highlighting thatwhile it might have madecomputers, they aren’tmachines for ordinary folks

• “Designed by Apple inCalifornia” and “Your VerseAnthem”: Show off whypeople love and use itsproducts. How they are beingused by real people for realprojects that belie over andagain the claim that tablets

can only by used forconsumption of content.

MediaStrategies

- Maintains an official websiteconsisting of companybackground, testimonials, latestproducts and supports

- Advertising- Sponsoring sports program

- Maintains an official websiteconsisting of companybackground, testimonials, latestproducts 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 asgood in marketing their products from advertising campaigns. While Apple appealsto the heart and emotion of consumers and sells to them an user experience,Microsoft sells the tangible benefits of utilities in their product. Microsoft haspreviously dominated the PC market due to product quality, low price and strategicpartnership with PC manufacturers to highly increase the availability of their

products to the consumers. They successfully market their products through cleverbusiness strategies. With the realignment, Microsoft is trying to once again refocustheir business strategies and company resources towards gaining marketdominance 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 thechanging IT industry and recommend strategies to overcome these, we can do aSWOT analysis. Table 4 shows the SWOT analysis of Microsoft.

Table 4: Microsoft SWOT Analysis



Table 4: Microsoft SWOT Analysis

Strengths Weaknesses

- 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

- Declining brand equity - Mature PC markets - Slow to innovate - Leadership and internal culture

Opportunities Threats

- High growth rate of emerging economies - Mobile device industry - Cloud based services - Strategic Acquisitions - Partnerships and Collaborations

- Highly Competitive Environment - Rapid Technological Changes - Low cost of production - Changing consumer needs and habits

Strengths

Human ResourcesMicrosoft has approximately 99,000 employees worldwide. The company has 58,000employees in the U.S., majority of whom work in the Puget Sound region of WashingtonState, headquarters of Microsoft. Microsoft has a rigorous recruitment process and onlythe best and the brightest are given an opportunity to work for the company. Microsoftrecruits from campuses of top colleges and universities from around the world and thecompany has a highly diversified workforce. Microsoft provides high pay and great benefitsin addition to a highly competitive work environment and thus is a magnet for highachievers. Thus, this network or ecosystem of 99,000 brilliant minds is the most importantstrength of the company.

Ability to operate across culturesIn a highly globalized marketplace, ability to operate in different cultures can be anextremely important competitive advantage. Microsoft operated from 629 sites across theworld out of which 373 are outside the U.S. Thus, the company has generated capability tooperate successfully in different cultures. This strength will keep increasing in importanceas 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. Keyresearch areas of the company include algorithms and theory, hardware development,



human-computer interaction, machine learning, adaptation, and intelligence, multimediaand graphics, systems, architecture, mobility, networking, security, cryptography, smartconnected devices and cloud computing among others. The company’s innovationinvestments focus on the emerging technology trends and breakthroughs across a widespectrum 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 toexplore the possibilities of developing new technologies. Microsoft has research facilities inBeijing (China), Cambridge (the UK), Bangalore (India), Canada, Denmark, Ireland, Israeland in New England, Redmond, and Silicon Valley in the US. The company also operatesMicrosoft Research, one of the world’s largest computer science research organizations,and works in close collaboration with top universities around the world to advance thestate-of-the-art in computer science sector.

Microsoft has been succeeding with a commoditisation strategy in the consumer PCmarket until their competitors’ success in mobile device market and they are being forcedto 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 thepast 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 maintainand increase lead in segments that the company operates in. Microsoft ’s research anddevelopment expense were $9.8 billion, $9.0 billion and $8.7 billion, during fiscal years2012, 2011, and 2010, respectively. These expenses accounted for approximately 13%,13%, and 14%, respectively, of revenue in each of those years. This huge spending allowsMicrosoft to pursue a wider array of technologies if necessary. Figure 9 shows Microsoft’snew 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 betweenMicrosoft Research and the PGs (product groups). Products/technologies in MicrosoftResearch are anywhere from five to 10 years from commercialization. Once a technologyhits 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 havebeen formed in the organisation, as shown in figure 11. Amongst these, Alchemie Labs isan organization/group within Microsoft dedicated to creating teams and projects thatfunction as internal startups. Idea Hub -- which is tied to Microsoft's internal Pollperformance-management system -- is also something that Microsoft is making availableto partners for customizing SharePoint. Built on top of SharePoint, an internal Microsoftoffering known as Acing allows employees to use social-networking technologies similar toTwitter and Facebook inside the company only, so that they can find subject matterexperts 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 theycan use technology and process improvements to make innovation happen more rapidlyand repeatedly.

Strong brand recognitionMicrosoft has been one of the leaders of the information technology revolution and itsoperating systems are used on almost 70 percent of computers worldwide. According toInterbrand, 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. Thisbrand 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 strongbrand name also helps Microsoft in launching new products in the market.

Strong intellectual propertySecuring 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 itsability to maintain and establish the proprietary nature of its technology through the patentprocess. The company protects intellectual property investments in a variety of ways. Itactively 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 hardwareproducts, services, business plans, and branding. Microsoft maintains a comprehensiveU.S. and international portfolio of intellectual property which help it in protecting itstechnologies. As of December 2012, Microsoft is one of the leading technology companieswith a portfolio of over 31,000 U.S. and international patents issued and over 38,000pending. Microsoft is also involved in outbound and inbound licensing of related patentedtechnologies that are incorporated into licensees’ or Microsoft’s products. The company

also purchases or license technology that it incorporate into products or services. A strongpatent 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 channelsThe company works with all the major computer hardware producers such as Lenovo,Dell, Toshiba and Samsung and major computer retailers to make sure computers wouldbe sold with already pre-installed Windows software. The company also invested in Delland Nokia to tighten its relationships with these companies.

Installed product user baseMicrosoft has a large user base. The company’s operating system is used by more than 70per cent of personal computers in the world and its productivity suites do not face anystrong 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. Thisinstalled user base have the potential to become early adopters of Microsoft’s futureproducts.

Comprehensive product portfolioMicrosoft offers a comprehensive range of software, services, and hardware solutionsacross different customer classes, which enable it to enjoy a leading market position.

Microsoft generates revenue by developing, manufacturing, licensing, and supportingsoftware and services across a wide variety of computing devices. The company doesbusiness worldwide through offices in more than 100 countries. Microsoft carries out thedevelopment of systems (servers, personal computers, and intelligent devices), serverapplications (distributed computing environments), information worker productivityapplications, 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 trainsand certifies computer system integrators and developers. It also concentrates on thedevelopment of various cloud-based solutions that provide customers software, services

and content over the Internet by way of shared computing resources located in centralizeddata centers. The comprehensive product portfolio of Microsoft enables it to cater to awide variety of customer requirements across industries and geographies.



Robust financial performanceMicrosoft grew its revenues by 20% from 2008 to 2012 and holds more than $63 billion ofcash and cash equivalents that can be used for acquisitions and substantial investmentsinto R&D. This significant increase in revenue is due to strong sales of Server and Toolsproducts and services and the Microsoft Office 2010 system, partially offset by the

decrease in Windows operating system revenue. Consistent increase in revenue mayindicate that the company is efficiently using the shareholders' money and that it isgenerating high returns for its shareholders compared to other companies in the sector.

Acquisition of SkypeWith nearly 300 million users, Skype is a significant boost to Microsoft ’s online presenceand 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 brandvaluation and brand image in the industry. The company ’s overall world ranking in GlobalTop 100 from Millward Brown Optimor decreased from the top to fifth in 2012. Thecompany 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 of19% in its brand value. The declining brand equity could affect the overall brand image ofthe company.

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

Slow to innovateMicrosoft’s operating system dominated the 80’s and the company’s productivity suitedominated the business landscape in the 90’s. However, Microsoft has not been able tobring 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 withinnovative products but constantly failed to do so. It had an opportunity to be the firstplayer 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 successfullyforayed into the entertainment segment with launch of X-Box but it is sharing leadershipwith Sony and Nintendo in that segment.The reason for Microsoft slow progress in innovation is few-fold. First of all, Microsoft hasbeen making use of a commoditisation strategy where it identifies technologies that areestablished and successful, then decides whether it wants part (or all) of that success anduses its size and power to chip away at the competition until it gains market share. With acommoditization strategy, Microsoft let others take the risk of finding a new market, andwait until that market reaches a certain size and maturity. Then, they can penetrate themarket with a communization strategy that basically gives the user the same set of productfeatures 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 foryears 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 withhuge institutional investors that expect a dividend—which doesn’t jibe with a culture of risk-taking and innovation. As a result, the company tends to be more conservative in itsdecision-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 outthe 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 seemdestined to forever remain niche products.

Now, in a race to catch up with their competitors in the mobile device market, Microsoft isrefocusing on innovation and powerful devices like Surface Pro 3 is coming out to themarket. However, Microsoft can no longer offer their product at significantly lower cost asthey did before hence finding difficulties in gaining market share.

This is where, perhaps, target costing may be useful in Microsoft ’s product developmentprocess once a new product is ready for commercialization . Figure 12 shows the processin 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 companyexpects to achieve the desired market share. This is especially useful for Microsoft as theIT industry is now highly competitive and the market is subject to rapid changes, hence it isimportant to for Microsoft to stay oriented to products’ end users and loyal clients, byrespecting their needs, so as to gain new market segments and new clients and keep trackof external market forces.

Target cost is selling price less desired profit. Here, top management sets the desired levelof profit on the basis of firm strategy and financial goals, so that shareholders can bereassured of annual performance and dividend which may reduce their resistance toinnovation.

With its existing cross-function groups, various departments can easily come together todesign 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 hasgone into production, not much can be done to significantly reduce its cost. This meansthat most of the opportunities to reduce costs come from designing the product so that it isas simple as possible to make, uses the least inexpensive parts possible and yet is stillrobust and reliable.

By practicing target costing, Microsoft can reduce cost while planning and designing highquality products which are relevant to market needs. At the same time, they can maintainprofitability, enhance employee awareness and empowerment and encouragecollaboration between groups and departments.

Leadership and internal cultureThe timing of the handover of Microsoft from founder and technical genius Bill Gates toemployee no. 30 and MBA dropout Steve Ballmer could hardly have been worse forBallmer. In 1999, when Microsoft was a blue-chip company wringing a steady stream ofincome from the Windows monopoly, it might have made sense to put Ballmer, who wasinitially the company’s first business manager, in charge. But Microsoft remained a

technology company, and having a non-technical CEO meant that Ballmer was ill-equipped to oversee the increasingly large and unwieldy development project thatWindows had become.

There is copious evidence of Microsoft’s broken product pipeline, which stretches back adecade, at least: In 2004, Steve Jobs unveiled a version of Mac OS X that incorporatedmany of the features that Microsoft had promised in its “Longhorn” reboot of Windows, aproject that became so snarled that Ballmer eventually had to decide to throw out all thework 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” asa CEO is the way the company has pushed touch-screen PCs and a touch-centricWindows interface onto a public that has been trained for decades not to leave smudgeson our PC screens (in contrast to tablets and phones) by touching them. Touch screenPCs and “convertibles”—heavy laptop/tablet hybrids—have both failed to sell asmanufacturers 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-deafmanager. Microsoft’s “stack ranking” system of management, in which employees weregraded 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 oneanother, 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 GoogleCEO Larry Page’s 94% approval rating and Mark Zuckerberg’s 99%. Morale at thecompany is at an all-time low, and Microsoft has for years been losing its best executivesand engineers to competitors like Google. Even when Microsoft hires talented employees,the most talented ones leave more quickly than the less talented ones, degrading theoverall quality of Microsoft’s workers.

Microsoft has also for many years paid sub-par wages. This policy was born at a timewhen 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 upto 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 theunderstanding and experience on how to operate in these markets. However, most of therevenues have been generated by company’s software publishing business. U.S. onlineservices businesses have not been very successful in emerging markets. A case studywould 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 Entertainmentbusiness is bound to show great growth in future. The companies operating in developingcountries lack the technological expertise to compete in this segment and Microsoft should

enjoy high penetration in these markets in the near future.

Mobile device industryThe company could capitalize on the growing demand for smartphones, which areemerging as a major growth opportunity for mobile device manufacturers. According toindustry analysts, the global market for smartphones, is predicted to reach from 487 millionunits in 2011 to more than 675 million units (approximately 35%) in 2012, more than 907million units (approximately 35%) in 2013 and surpass 1 billion by 2014. The growth wouldbe driven by factors including lower product cost, improved handset design andfunctionalities, the expansion of global mobile email and browsing services, theemergence of 3G and 4G network technologies, and the standardization and upgrades ofoperating systems. Considerable demand is expected from developing countries,particularly the Asia-Pacific region, besides North America. Emerging countries includingChina, India and Brazil are expected to witness significant usage in smartphones otherthan the US and the UK. By 2016, China would be leading the smartphone market withapproximately 20% of market share, followed by the US (approximately 15%), India(approximately 10%), Brazil (approximately 5%) and the UK (approximately 4%). Thecompany could look forward to increase its market presence across the emergingcountries to fuel its revenue growth.

Cloud based services

The company could capitalize on growth potential in cloud service market with its offeringsin cloud computing and managed IT solutions. Microsoft could expand its addressablemarket opportunity through cloud computing. The company provides content and servicesto business users through the Microsoft Online Services platform, which includes cloud-based services such as Exchange Online, Microsoft Dynamics CRM Online, MicrosoftLync, Microsoft Office 365, Microsoft Office Communications Online, Microsoft Office LiveMeeting, SQL Azure, SharePoint Online, Windows Azure, and Windows Intune. Accordingto the industry analysts, the global market for global cloud computing is forecast to growfrom $37.8 billion in 2010 to $121.1 billion in 2015 at a CAGR of 26.2%. According toestimates, the cloud computing market of Germany is expected to grow from €1.14 billionin 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 Germanyby 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 incloud-based services sector.

Strategic AcquisitionsThe company expands its boundaries of operations and increases its customer basethrough acquisitions. In October 2012, Microsoft acquired PhoneFactor Inc., a provider of

multifactor authentication (MFA) solutions. This acquisition would help the company bringeffective and easy-to-use multifactor authentication to its cloud services and on-premisesapplications. Also during the same month, Microsoft announced that it has reached adefinitive 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 helpcustomers more efficiently embrace hybrid cloud computing. In July 2012, Microsoftentered into a definitive agreement to acquire Perceptive Pixel Inc. (PPI), a leader inresearch, development and production of large-scale, multi-touch display solutions. Acquisition of PPI would allow the company to draw on its complementary strengths. InJune 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 cloudservices. The strategic expansion initiatives would help the company expand its businesspresence to new geographical regions and gain better market coverage.

Partnerships and CollaborationsThe company could benefit from the various strategic partnerships that it enters. InFebruary 2013, Microsoft introduced the Microsoft 4Afrika Initiative, a new effort to helpplace tens of millions of smart devices in the hands of African youth by 2016. Also duringthe month, the company in collaboration with the government of Kenya’s Ministry ofInformation and Communications and Indigo Telecom Ltd., launched a pilot project todeliver 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 tothe latest Extended File Allocation Table (exFAT) to enhance the digital entertainmentofferings in BMW’s line of automobiles. The company entered into a transformative three-year Joint Enterprise Licensing Agreement with the U.S. Army, U.S. Air Force andDefense Information Systems Agency for expanded access to its solutions.

In December 2012, Microsoft announced plans to make Microsoft Surface available atadditional retailers and transition of several of the stores into permanent Microsoft retailoutlets. 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 companyentered into a strategic application partnership with Good Technology to enable the use ofthe Good for Enterprise solution on Windows Phone devices. In January 2012, Microsoftand TechStars enhanced their relationship through the new BizSpark Plus program foraccelerators and incubators. Partnerships and collaborations would enable the companyto enhance its product and service offerings and serve its customers better.

Threats

Highly Competitive EnvironmentIntense competition across business segments could limit the company’s business

prospects. Microsoft faces stiff competition in all its operating segments. The majorcompetitors of Microsoft include Apple, BMC, CA, Inc., Hewlett-Packard, IBM, Nintendoand 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 itsbusiness segments could make the company susceptible to market pressures, leading to aloss in market share and decline in revenue.

Rapid Technological ChangesThe technology market is subject to rapid changes, and to compete effectively, the

company must continually introduce new products that achieve market acceptance. The ITenabled communication equipment industry is characterized by fast technologicalchanges, evolving industry standards, changing market conditions and frequent newproduct and service introductions and enhancements. The introduction of products usingnew technologies or the adoption of new industry standards can make the existingproducts or products under development obsolete or unmarketable. In order to remaincompetitive and increase its sales, the company needs to adapt to the rapidly changingbusiness environment.

Low cost of productionThe 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 Googlesearch engine have been known to have been developed by geeks without any corporateaffiliation. Thus, innovation is driving this industry. For eg., Microsoft’s Hotmail email lostshare to start up Yahoo! in the 90’s and Yahoo! has lost market share to Google during thelast decade. The Windows operating system has yet to meet a credible threat due to highpenetration but the gaming industry is another game. Microsoft has recently taken lead inthe gaming market with introduction of Kinect but the lead may be short lived.

Changing consumer needs and habitsCustomers shift from buying laptops and standalone PCs to buying smartphones andtablets, the markets, where Microsoft has only a modest market share and may neverestablish itself.

Microsoft Business Analysis

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