Microsoft Corporation has been and still is the leader in the information technology industry due to its strong brand name appeal, strong consumer support base, breadth of products and services available, prioritization of research and development efforts, and constant release of innovative technologies. It operates globally, transforming the business and personal lives of its customers. However, Microsoft's place in the market is being challenged by competitors who are anticipating the demand for Web-based applications and addressing issues that consumers have against the company, such as the cost of Microsoft's software licenses. The company strong and has a significant market share, and is attempting to address its weaknesses through targeted efforts like price reduction of software licenses and developing the Windows Azure platform so that it can retain and improve its share of the market in the future.
Keywords: Microsoft Corporation, Windows Azure, cloud computing
The technology industry is very broad and competitive, with frequent changes due to constant innovation. When one thinks of technology, one of the first companies that come to mind is Microsoft because they have pioneered the software industry for the last few decades and continue to be the standard for industry benchmarking. Throughout its existence, Microsoft has strived to compete in a very broad technology industry and diversified into several sectors in an effort to transform the way people and businesses work, play, and communicate as referenced in their mission statement presented in the 2009 10k report.
Today, Microsoft has strong competition throughout all of the sectors it operates in, and it is constantly changing to maintain its status as the technology leader. This paper is going to examine the technology industry and Microsoft's current situation in this industry, and present some strategy recommendations and suggestions for implementation of these recommendations.
The technology industry has several economic characteristics that are dominant above all others. It is constantly growing, and the market size is expanding rapidly as technology spreads overseas and into developing countries. Innovation is what drives the market, as there are constant changes and intense competition within. There are a number of companies competing in the industry, and this serves to drive prices down.
The industry has fierce competition within, with various companies constantly introducing new products and utilizing aggressive marketing plans to gain a bigger market share. It is easy for consumers to switch sellers in this industry because a majority of the substitute products use the same format, making the cost of switching low. It is also common to see several acquisitions throughout the year, which cranks up the competition even more. The threat of potential entry in this industry is moderate and the barriers are moderately weak as well.
There is an element of customer loyalty, but it seems to be diminishing every year as more products flood the market with greater capabilities at lower costs. The demand for new products is strong, and it encourages entry of new players. This demand has also led to the strengthening of substitutes in the market. With open source becoming more popular, the market has been flooded with alternative products. Many of these are very good quality, and most are acquired online free of charge.
Supplier bargaining power is weak in the technology industry because open source has virtually eliminated suppliers for software applications, many hardware components are a commodity, and many of the major players have backwards integrated to decrease the costs. There is still some supplier bargaining power in components that have strong brand name recognition such as operating systems and processors, but with this exception, the majority of the industry has weak supplier bargaining power.
Meanwhile, the power of the buyers is moderate. Due to the large amount of suppliers and similarities in the product offering, buyers may choose from a vast array of products, a majority of which are compatible and offer similar features, e.g., personal computers and various software programs using the same file format. The exception would be when switching to a product where the seller has proprietary software not compatible with other programs, e.g., Apple or Linux computers or various gaming consoles.
The collective strength of the five forces is moderately strong. The market size and growth are so large that even with the strength of the five forces it is possible to produce solid profits in this industry, provided that buyers like the product being sold.
Driving forces are a major factor in the technology industry because there is constant change and any seller not keeping up with the trends will be quickly left behind. The growth of the internet is a major driving force in this industry, and is a major reason for the threat of potential entry of new sellers. The biggest change related to the internet recently is the emergence of web-based applications, and even basic office replacements such as word processors and spreadsheets.
Other major changes resulting from the internet is collaboration along the value chain resulting in increased efficiencies. Product innovation is another driving force because there is a constant flow of new products into the marketplace. Every time a new product hits the market, the competition is working on their own products to match or improve upon this first mover. This leads to constant changes and large research budgets among competitors. The industry continues to grow because more people are embracing technology and trying out new products as the prices are driven down due to competitive pricing pressures. These new demographics of people are a driving force in the industry that creates more opportunity for new products that address their specific desires.
Microsoft is currently leading the industry in product breadth and degree of service as shown in the chart above. Apple is in a unique position because it has carved out an identity in the market and has a very strong brand loyalty. This is a favorable position because they have a strong hold on their current market share, much stronger than the rest of the industry.
Google's main focus is online applications. It began as a search engine, and it has grown to be the industry leader in search, online advertising, and is taking the initiative to ramp up demand for internet-based applications such as office and productivity solutions. Google is in a very solid position right now because its online operations are very profitable, and it seems to be leading the way to cloud computing which is the future of the industry. Meanwhile, Linux, as shown on the strategic group map, represents the open source market. Open source software is already gaining market share, and is in a very potentially strong position to gain more due to its competency in high innovation at a very low cost. Microsoft is keenly aware of this threat and has been working on various solutions to counter it.
Table 1. Analysis of competitors by strategy and predicted moves.
|Microsoft||Broad differentiation across entire technology industry||Launch Azure (cloud computing), continue improving other products|
|Apple||Narrow differentiation through marketing and quality of products||Continue to successfully launch new products into the market|
|Low-cost provider on internet-based solutions||Launch cloud computing operating system to compete with Microsoft Windows|
|Linux||Low-cost provider||Continue innovation and improving products to gain market share|
Microsoft plans to launch its Windows Azure platform soon, which will be the foundation for web-based programs and other future cloud computing initiatives. Apple always has and will continue to drive innovation and be a first mover in the market with new products. Google will continue to try to gain market share and attempt to lead the push to cloud computing and dominate that portion of the market in a similar fashion to their success in search and advertising. Linux will continue to try to gain market share, as its products are almost all free and continually updated through its open source network of programmers. When more of their products contain features close to what are currently available in licensed software, Linux will begin to gain a solid foothold in the industry.
The major key success factor in the technology industry has always been product innovation. It is crucial for companies to survive in the industry to be constantly updating their products and bring new ones to market in order to remain competitive. Distribution is another success factor because if companies cannot get products into the hands of consumers then they will fail quickly. The market is flooded with products, and without effective marketing strategies, consumers will find it difficult to discover which product best fits their needs.
The overall attractiveness of the industry is strong due to its market size and potential growth. The competition is fierce due to low barriers to entry and shifting market share, but this is offset by the potential for massive revenues. A major issue in this the technology industry is software piracy, especially in the international markets. Companies such as Microsoft who have their revenues tied to software licensing lose millions of dollars every year to piracy. Many governments have passed legislation imposing strict penalties on these practices, and Microsoft has launched its own initiatives to decrease piracy internationally. The profit outlook for this industry is favorable, because there is always room for new products and the market size is huge but still growing.
According to Microsoft's Annual Report (2009), their mission is "to develop and market software, services, hardware, and solutions that we believe deliver new opportunities, greater convenience, and enhanced value to people's lives." Their vision is "to enable people and businesses throughout the world to realize their full potential," and they aim to accomplish this by "creating technology that transforms the way people work, play, and communicate."
The underlying strategy behind Microsoft is broad differentiation across a global scope. According to its annual report, they plan on "laying the foundation for long-term growth by delivering new products and services, creating new opportunities for partners, improving customer satisfaction, and improving our internal processes" (2009). Its strategy for accomplishing these tasks is "through ongoing innovation in our integrated software platforms; by delivering compelling value propositions to customers; by responding effectively to customer and partner needs; and by continuing to emphasize the importance of product excellence, business efficacy, and accountability" (Microsoft, 2009).
Qualitative Analysis. In the technology industry, innovation is the major competency that must be maintained by any company that wants to remain competitive. Microsoft has done well with this through significant investment in research and development (15 percent of revenues in 2009) along with the purchase of technology and intellectual property rights. Its main research and development facilities are located in Redmond, Washington, but it has taken innovation globally by establishing facilities in various parts of the United States, as well as in other countries including Canada, China, Denmark, England, India, Ireland, and Israel, among others. This has allowed Microsoft to recruit top employees around the world while also remaining competitive in local markets.
The company has also taken steps to localize products and services in order to increase quality and customer satisfaction. Call centers are spread across the world by region so that they reflect the local cultures they are located in and provide a higher level of support to customers. This global approach to business along with significant investment in research and development and localizing products has been successfully executed and effectively carried out the broad strategy of Microsoft. According to Burrows (2009), Microsoft is also attempting a new approach to dealing with competition by slashing prices on a variety of products from Windows and Office products to Internet services.
Table 2. Microsoft Corporation's financial analysis.
|Financial ratios||Net profit margin||Debt to Equity||Return on Asset||Current Ratio|
|2009||24.93 percent||0.29||18.71 percent||1.82|
|2008||29.26 percent||0.18||24.29 percent||1.45|
Microsoft has a very strong balance sheet and profit margins. The economic downturn affected them in 2009 along with a massive legal settlement with the European Union, but even with these two major events the company remains financially solid. It has very low leverage and a very high return.
Microsoft has much strength due to its size and available resources, but its size also generates some weaknesses. Its distinctive competence is creating high quality software that is easy to use with a relatively low overall cost. It is hard for other companies to compete with this because of the resources Microsoft pours into research and operations, and the economies of scale that Microsoft commands. Microsoft has several core competencies, more than any of its competitors, and this is a competitive advantage in itself. Among their competencies include worldwide brand name recognition, excellent global distribution network, the largest technical assistance resources in the industry, and the breadth of its product portfolio.
Microsoft also has some company weaknesses that must be considered when analyzing its internal environment. It is very reliant on its current business model, which is licensing software that it has developed and distributed. This model is currently being challenged, and has lost some market share to open source software solutions. Another weakness is in internet search and advertising, which Google currently leads. In response to this, Microsoft recently launched a new search engine called Bing, but according to CEO Steve Ballmer it still has a long way to go (Loudon, 2009). Microsoft also has its Windows Live product line that operates via the web, and it is also lacking in market share. Microsoft is devoting significant resources to these weaknesses in hopes of quickly recovering lost ground from missing the changing market, but there is no guarantee that its efforts will work.
The final major weakness is Microsoft's breadth of products that prevents it from focusing on one specific area, so its competitors who have a narrower product array are able to focus more and potentially create better products. Microsoft counters this with its huge market share and brand name appeal, along with its distribution which plays a large part in maintain its current market share.
Microsoft is looking at the economic downturn as a giant opportunity. According to Ballmer, the company intends to continue investing its financial resources to help increase its market share (Montalbano, 2009). He also sees cloud computing as the future of the industry, and predicts that cloud computing and other applications derived from it will be the focus of future endeavors (eWeek Staff, 2010). Although Microsoft is already located in over 100 countries, the company still sees opportunity in the global market. It is actively investing in emerging markets in an effort to build international growth and extend global brand name recognition (Hern�ndez, 2009).
As with any other company, Microsoft faces some significant threats that it must be prepared to deal with in order to continue to succeed. One of its significant challengers is the open source community as a whole, because they offer substitute products free of charge and make money through alternate methods. It also needs to shift from selling to renting software so that it can compete with free (or cheap) alternatives shared on the internet (Burrows, 2009). Microsoft must continue to add value to its products in order to compete with open source threats, along with decreasing prices to more competitive levels when necessary.
Microsoft's distributors like Dell and Hewlett-Packard may already utilize open source software to satisfy consumers looking for cheaper products, so Microsoft must maintain high customer satisfaction to offset this threat (Wasserman, 2008). Other lesser threats include security vulnerabilities, government regulations, lawsuits, and inadequate return on investment on acquisitions or new product research.
Microsoft's value chain consists of all of the primary activities that it accomplishes to add value to the customer, along with the support activities that are required to maintain the organization. As mentioned above, research and development is a core competency and an area they spend a significant portion of their resources on. As such, it is a key component in adding customer value to products. Sales and marketing add value by creating product awareness and building company image. Microsoft strives to be a leader in technical assistance, and has the largest amount of assistance available in the industry. This is a key feature to Microsoft products that adds value to customers because they can trust that if they need help it will be available to them. Distribution is also vital to Microsoft, as OEM sales drive its operating system sales and many of its software package sales such as the Microsoft Office Suite. The company recently introduced a resource management program which aims to decrease operational expenses; this adds to customer value by allowing the product to be produced and thus sold at a lower overall cost. The support activities listed are in place to facilitate the primary activities and allow for continuingly increasing performance from each area in the value chain.
Table 3. Weighted assessment of Microsoft competitors.
Microsoft currently owns a large portion of the market share, but it faces strong competition across all products. Apple stands to maintain its market share and possibly gain, depending on the success of its new product launches and marketing. Linux has a small portion of the market share, but it is continually gaining popularity. One open source software that has strong market share is Mozilla Firefox, which competes with Microsoft, Apple, and Google in internet browsers. If open source companies launch more products as successful as Firefox, Linux could quickly become a significant stakeholder in the market.
Google currently has a strong market share through its search and online advertising, and is poised to gain much more through the launch of its cloud-based computing system. Marketing and distribution are tied to market share because in this industry, customers are flooded with products and must know that the product exists and how to get it easily. Microsoft is available online and at any major retailer and has a huge marketing budget, so this is a significant reason for its market share. Google is easily available online, and as the leading search engine, is able to market through that high traffic site for free, virtually eliminating the marketing expense of competitors. Apple has increased distribution with storefronts in Best Buy and retail outlets in major malls, and has ramped up marketing in recent years. Linux and open source solutions must spread the word successfully about their products as this is vital to gaining market share.
* Can Microsoft successfully maintain its market share?
o With increased low cost competitors, Microsoft must expand its business model to create income in other areas besides licensing.
* Will Microsoft be able to make Windows Azure successful?
o This is the future of Microsoft, and if it is not successfully launched, Google could steal a large portion of the market that would be hard to regain.
* Will Apple continue its status of first mover and innovation leader?
o This is key to Apple's success, and must stay at the forefront of strategic decisions.
* Will Linux market its products better so that more consumers download them?
o This is the key to open source becoming an industry standard business model. It must create demand for its products or it will not pose a significant threat in the industry.
According to experts, Azure will be among those which will dominate the cloud platform industry, given that there is an existing base of Windows .NET developers (Toan, 2009). Microsoft and Google are poised to launch platforms in this new realm very soon, and the success of these launches will have a significant impact on the future of this industry.
Microsoft's mission is to create "software, hardware, services and solutions that create new opportunities, greater convenience, and enhanced value to people's lives." Its vision is to continue growth by launching "new products and services, creating new opportunities for partners, improving customer satisfaction, and improving internal processes" (Microsoft, 2009).
Objectives. Microsoft must launch Windows Azure in 2010 and gain at least 40 percent of the market share in cloud computing through this platform. Microsoft must continue to actively market the Bing search engine and increase its market share in the search and advertising industry up to 20 percent in 2010. New acquisitions should also be made in 2010 to continue to gain new technology and leading innovation. Microsoft needs to increase net profit to $18 billion in 2010, which is about what it was before the economic downturn.
Microsoft needs to continue its broad differentiation strategy by adding value to all products offered. According to Microsoft CEO Steve Ballmer, Microsoft will maintain its current annual investment in research and development next year at $9.5 billion (roughly 16 percent of the company's gross revenue) and will focus ongoing investments across a range of product segments (April, 2009). It must maintain its strong research and development programs and further increase marketing to drive demand for its product line. Customer service and technical assistance are also vital to customer satisfaction and must be maintained at a high level.
Research and Development must continue to bring new products to the market in 2010. It needs to develop the Azure platform to handle the launch of new web applications in the same year with minimum glitches. Operations launched a resource management program in 2009 that successfully reduced costs across all functional areas. This program must be maintained in 2010 with additional cost reductions in all functional areas.
Marketing must create further demand for the Bing search engine and drive market share to 20 percent in 2010. It must also market the new Azure platform and applications so that it quickly gains popularity and controls 40 percent of the cloud computing market by the same year. Finance must continue to add to shareholder value by increasing net profit $18 billion in 2010. It must also add to shareholder value by continuing the stock buyback program that has been ongoing for a few years. Human Resources must continue to recruit top talent in the industry, and must work with various colleges and universities around the world to develop programs that will attract talent to Microsoft in 2010.
|Research and Development||Launch new applications based on the Azure platform||Launch new Office Suite of products||Launch new operating system|
|Marketing||Bing and Azure gain 10 percent market share each||Market new Office Suite, Bing at 40 percent of search market share||Azure at 60 percent cloud computing market share|
|Operations||Maintain Resource Management Program||COGS down 2 percent from 2009 levels||Increase efficiency to allow product price reductions|
|Finance||Net profit $20 billion||$0.60 dividend per share||Net profit $25 billion|
Research and Development is a critical department at Microsoft as it determines what the future holds for its products. It is vital to the success of the company that top talent is recruited and retained for this department, and that significant resources are devoted to it in order to support all of its functions. Marketing is another critical area, and one that needs to be increased in the future. New employees need to be recruited to bring in fresh ideas, and current employees need to be retained to maintain corporate culture. Operations must also recruit and maintain talent in order to continue cost reductions and implement future programs. It is critical that Microsoft maintain its competencies in distribution and innovation as they are the key to success in the future.
The research budget needs to be maintained at its high level of 15 percent of revenues in order to facilitate innovation. Human Resources must also be given budget increases to recruit and retain top talent, as this is vital to leading the industry. Marketing budget must be increased in order to increase marketing for the Bing search engine and prepare for the launch of Azure.
Microsoft must continue to increase customer satisfaction levels, and discover what customers are looking for through feedback programs and online polling. Large technical assistance databases are available to customers online, and must be updated for new products and features and to support arising customer issues. Relationships with distributors must be maintained going forward in order to continue efficient distribution. The resource management program has been very successful, and should be continued into the future for ongoing cost reductions and to increase efficiency. Programs that encourage new ideas from customers and employees should be implemented to increase innovative ideas and product updates, and the Microsoft culture must be strengthened internally through new policies and culture initiatives, and externally through marketing.
Microsoft is currently involved in almost every market within the technology industry, and is either leading or a major player in every market it is involved in. It has been very successful since birth at creating technology solutions that enhance customers' lives and distributing those to customers. With an eye on the competition and the objectives laid out above, Microsoft will continue to lead the industry and will be a great investment for shareholders for years to come.
April, C. (2009). Ballmer urges partners to stick with 'tenacious' Microsoft. Channel Insider. Retrieved from http://www.channelinsider.com.
Burrows, P. (2009). Microsoft defends its empire. BusinessWeek, 4138, 28-33.
Burrows, P. (2009). Microsoft's aggressive new pricing strategy. BusinessWeek, 4140, 51.
Ehmke, C., Fulton, J., Akridge, J., Erickson, K. & Linton, S. (2004). Industry analysis: The five forces. Purdue University. Retrieved from http://www.ces.purdue.edu/extmedia/ec/ec-722.
eWeek Staff (2010). Microsoft's Ballmer says company betting on cloud. Channel Insider. Retrieved from http://www.channelinsider.com.
Hern�ndez, G. M. (2009). Microsoft bets on IT innovation to drive economic growth. Caribbean Business, 37(30), 52-54.
Loudon, C. (2009). Ballmer's battle plan. Marketing Magazine 114(21), 8-11.
Microsoft Corporation Annual Report. (2009). Retrieved from http://www.microsoft.com/msft/download/FY09/MSFT_10K_2009.docx.
Montalbano, E. (2009). Ballmer still plans to throw money around. Computerworld, 16.
Toan, T. (2009). Microsoft's future: How we modeled Windows Azure. Morningstar StockInvestor, 22-25.
Wasserman, T. (2008). Microsoft hears Windows breaking. Brandweek, 49(40), 18.