A strategic analysis o f the microsoft corporation

Introduction

For the purpose of this case study we, have chosen to analyse the strategies employed by the Microsoft Corporation in its 31 years of doing business. The rationale for this is that Microsoft is a very large and very successful global corporation, which time and again, have proven its formula to success. Through the strategies it employed, it has become the No.1 software firm, not only in its Redmond, Washington, USA headquarters, but also in the rest of the globe (Microsoft.com 2006a). Thus, we believe that analysing the strategy of this kind of company will cover much of the models, concepts, and theories of strategy that have been discussed in class.

Products and Services

The products and services that Microsoft offers are wide and varied. In the general sense, its product and services extend and specialises in the industries of computer software, computer hardware, video games, cable television network, research and development, and publishing (BBC News 2006a).

It would not be an exaggeration if we say that the geographic scope of its business ventures almost extends to the whole globe. In terms of operation alone, notwithstanding the fact that it sells in countries where it has no establishment, Microsoft has a scope of 102 countries as of July of this year (Microsoft.com 2006a, 2006d). Wherever in the world, Microsoft has an established name, and therefore, a considerable geographic scope. It’s being oftenly termed as a monopolist in the industries it engages in, and its widely recognised market power, could therefore speak of the vastness of its geographic scope.

It is the leading software firm, and in general terms, software has become its prime value driver probably due to its monopolistic nature in that industry. More specifically, Microsoft’s best selling products were identified to be the Microsoft Windows (MS) operating system and the Microsoft Office productivity software suite. Both products are almost ubiquitous in the market of desktop computers (Microsoft.com 2006a, 2006d). In other words, its value drivers have a nearly limitless geographical scope.

Aside from the aforementioned, Microsoft is also established in other markets such as the computer hardware market, where the Microsoft mouse has become its value driver. In the home entertainment market, the Xbox, Xbox 360, and MSN TV are its top products. Microsoft has topped in other markets through its assets namely: the MSN Internet portal, the MSNBC t.v. network, and Microsoft Encarta, among others (Microsoft.com 2005). In the Internet, Microsoft.com has been named as among the most frequently visited sites (Alexa.com 2006).

Strategic Position and the Business Model

In 1975, Bill Gates and Paul Allen founded Microsoft as a company initially positioned as a developer and seller of BASIC interpreters for the Altair 8800 (BBC News 2006a). Those were the times when Altair 8800 has just been introduced as the newest technology, being the newest microcomputer in the block. Therefore, it needed an interpreter, and Bill Gates saw this opportunity. Together with Allen, he developed the BASIC programming language, demonstrated its implementation in front of Micro Instrumentation and Telemetry Systems (MITS) who made Altair, and got MITS as a distributor (Microsoft.com 2006b).

In the second half of the 80’s, IBM PC clones flooded the market and Microsoft did a repositioning. With the position it gained in the industry through its partnership with IBM, it repositioned itself as the leading provider of home computer operating system. Its repositioning eventually paid off as MS-DOS (Microsoft Disk Operating System) soon dominated the market (Thocp.net 2006).

Later on, it concentrated its product line on Microsoft Windows, which actually started as a mere add-on for MS-DOS but eventually became the most popular operating system worldwide (BBC News 2006b, Encarta.com 2006, Fordahl 2005, Microsoft.com 2006c).

Through time, Microsoft Corporation has approached the market with an aggressive multi-concentrated strategy. It ventured in different market segments, and concentrated on each by assigning them into seven separate segments or core business groups. In April 2002, Microsoft made each core group an independent financial entity so that the performance of each unit can be tracked more effectively and responsibility is delegated more effectively and efficiently as well. In 20 September 2005, Microsoft made further organisational innovations by rationalising the 7 core business groups into the current 3 core divisions. The Microsoft.com Presspass section outlines the rationalisation as these:

the Windows Client, MSN and Server and Tool groups were merged into the Microsoft Platform Products & Services Division; the Information Worker and Microsoft Business Solutions groups were merged into the Microsoft Business Division; and the Mobile and Embedded Devices and Home and Entertainment groups were merged into the Microsoft Entertainment and Devices Division.

The business model of Microsoft Corporation can be considered as normative. Through time, it has developed ways of analysing the relationships of market factors that come into play, and further progressed into using the information to predict future strategies. Key to this is Microsoft’s ‘developer-centric business culture’. It uses massive resources of time and capital to develop its business model, mainly through employing the best people. Microsoft recruits the freshest potential talents and software developers from leading universities yearly and maintains them in the company in pampering and conducive working conditions.

These developers eventually become the key decision-makers of the corporation, so they basically know the “whats and hows” in the business model (Microsoft.com 2006). The Microsoft Corporation has an excellent 31 years of executive experience, all the resources it will need to fund data collection, more than competent organisational standards, and the best people to utilise all these to form the business model, which is why its business model is a success.

Further, Microsoft has a policy of testing its newest products by using them inside the company before releasing them in the market, to simulate the situation in the actual world. This policy has been internally termed “eating our own dog food” (Zdnet.com 2006).

Resource and Capabilities

To identify Microsoft’s resources would be to identify its capabilities. With an initial resource of its “BASIC programming language,” Microsoft has been able to expand its resources in terms of capital, labour, name it. In a reverberation, this expansion in resources led to an expansion of its capabilities. With all the resources it needs to innovate and venture into new investments, it was able to do more. From BASIC, to Altair BASIC, to MS-DOS, to MS Windows, to MS Office, and to MS Vista; from its initial resources in microcomputer interpreters, to its assets in several industries today, Microsoft indeed has voluminous resources and almost limitless capabilities.

In terms of capital, it stands today with 44.28 billion US dollars annual revenue. It has a labour resource of 71, 553 as of this year’s figures.  It has offices in 102 countries (Microsoft.com 2006a, 2006d). Its assets amount to 69.597 billion US dollars and it has no long term debts to pay. It also has a massive investments and stakes in the stock market (Reuters.com 2006).

Its assets are also comprised of numerous companies, and therefore their products, which it has acquired through time. Some of these companies are former Microsoft competitors that could not keep up with Microsoft’s market power. These assets include MS-DOS, Internet Explorer, Hotmail, Microsoft Frontpage, WebTV, Microsoft Visio, and Direct3d. Microsoft renames these brands, a practice that has been criticised as misrepresenting these products to be Microsoft’s original creations (Businessweek.com 2006).

Just this year, Microsoft Corporation bought the Lionhead Studios headquartered in UK (April); Softricity, Inc., Whale Communications Ltd., and Winternals Software LP (July); and Colloquis Inc. this October (Reuters.com 2006).

Today, Microsoft stands as a corporation capable of commanding the high ground of the information superhighway. This is because Microsoft owns the basic applications and operating systems that makes 170 million computers in the globe work (Cusumano and Selby 2002).

With its resources, market power, and experience as a corporation, it is able to engage in value creating activities such as constant innovation, specialisation, expansion, pursuit of future markets, advertisement, and dissolving or buying companies which it deems profitable or threatening. Its comparative advantage lies in its bigness and monopolistic power in the sense that with a big share in the market, all the resources, and technology that it will need, it is able to produce at costs cheaper than that of its competitors. Also, as a global monopolist, it is able to reach out to the majority of the consumers wordwide, and to dictate the game in the market.

On the controversial side, Microsoft is also capable to use its dominant position in desktop OS to create an advantageous market share in other areas of the market of computers. This has become a target of criticisms because Microsoft uses the software tying tactics, so that its innovative products would become successful by riding on the success of its monopoly products. For instance, Microsoft claims that Windows will grant users relative ease because its built in Windows Media Player and Microsoft Messenger will save the user from the trouble of having to download these products themselves.

By doing this, Microsoft becomes capable of making consumers stick to their products instead of buying the alternatives, even if those alternatives are better. Therefore, it can be said that Microsoft is monopolising by employing vertical integration. The result is the starvation of competitor products or companies. Microsoft justifies this practise by saying that it is merely giving out free software for its consumers, and besides, it is just doing its best to meet the capitalist market with the necessary innovation and competitiveness (Wikipedia 2006a).

External Analysis

To conduct an external analysis of how Microsoft has used its resources and competencies in response to its external environment would be to review its history.

The first external environment factor that Microsoft had to battle on was the legal factor. In 1981, it got its first legal challenge before its first ever taste of real success in the MS-DOS. This is because MS-DOS was just a clone of Digital Research’s CP/M operating system, which was IBM’s original choice for its IBM PC (Personal Computer). When negotiations between IBM and Digital Research did not work out, IBM “awarded” the contract to Microsoft. In order to provide a version of CP/M, Microsoft had to buy a clone named QDOS from Tim Paterson, an employee of Seattle Computer Products. Unbelievably, the purchase only cost Microsoft less than 50,000 US dollars. IBM then renamed QDOS to PC-DOS.

Then, the legal factor surfaced in the form of copyright infringement quandaries, so that PC-DOS had to be marketed by IBM against CP/M head on. However, its competency in pricing was exploited in Microsoft’s strategy. With its US$40 selling price against that of CP/M’s US$240, Microsoft’s PC-DOS defeated CP/M. Note that it was possible for Microsoft to offer at one sixth of CP/M’s price because it did not have the Digital Research’s burdens of research and development cost. Microsoft just bought the product from Paterson and at a relatively cheap cost, so that Microsoft’s PC-DOS was able to defeat CP/M through a lower price offering (Maiello 2002, Wikipedia 2006b).

Today, Microsoft has had to deal with several lawsuits for intellectual property rights, antitrust, abuse of monopolistic power, etc. The company has dealt with these primarily by using its resources to defend its cases in the court, with the aim of either winning the case, or prolonging the case enough so that when Microsoft loses, the opposing company has already lost its opportunity to market that specific product. Microsoft has also used its resources to settle these cases by buying the companies that threaten it either in legal or competitive aspects (Wikipedia 2006a).

The next external environment factor, in the context of which, Microsoft’s response performance could be analysed, is technology. Its first dealing with this factor was also in the 80’s, when IBM PC clones flooded the market. Of course, these clones needed an OS, and Microsoft rose to the challenge. With the use of the competency, resources and position it has gained as a provider of IBM, Microsoft has become successful in deriving its own QDOS version that was named MS-DOS.

From the US$50,000 Microsoft invested to acquire the operating system clone, Microsoft was able to earn billions of dollars. From being a small software seller, it was able to become a global monopolist in desktop operating system (Wikipedia 2006b). Now that is not only effective use of resources and competency. That is magic.

From then on, Microsoft has been effectively employing its resources and competencies in response to the external factor of technology by constant innovation, advertisement, specialisation in products and certain markets, expansion of product line, and investment in research and development activities. Some critics say that Microsoft does not really develop anything on its own, but just buys products from small sellers and creators (Wikipedia 2006a, 2006b, 2006c). Even with this practise, what comes into play is Microsoft’s effective use of its capital resources and competency, in its market power and size as a corporation, to be able to rise up to the challenge of technology and competition as well.

May of 1990 saw to the repositioning of Microsoft in the introduction of Windows 3.0. It was another innovation of Microsoft on its operating systems that responded to the technological innovation made by Intel through its Intel 386 processor. Within two weeks after its launch, Windows already sold more than 100 thousand copies. Microsoft responded to this change in the consumer preference of Windows over OS/2 in that it decided to transfer its resources from the production of OS/2 to Windows.

This was a very risky move, and put a great deal of resources at risk too. However, Microsoft gambled, and everything paid off as Windows earned much revenue for the corporation than OS/2 did. Still, what we can call a wise exploitation, and even risking, of resources and competencies.  The years that followed saw to a decline in the prevalence of OS/2, and the rise of Windows to become the most opted PC platform (Wikipedia 2006b).

Competition was another external factor to which Microsoft has had to respond effectively. Aside from the above mentioned strategies that Microsoft used to respond to competition, it also uses the plain strategy of just getting its desired markets share through a desirable product. For instance, in order to gain advantage over Lotus 1-2-3 and WordPerfect in the application-software field, Microsoft used the effectiveness of its Microsoft Office. Microsoft was then accused by a former WordPerfect owner to have employed its competency and resources of inside knowledge on Windows kernels and DOS, and on undocumented API features to give Microsoft Office an advantage in performance over its competitors. In time, this use of Microsoft’s resource paid off when Microsoft office gained its dominant share of the market (Wikipedia 2006b).

Another aspect that should be analysed is how Microsoft responds to consumer demands and preferences, and how it directs its strategic decisions towards these issues. In an August, Microsoft launched an entirely novel interface that included a new start button in the form of Windows 95. Its convenient features that responded to what the consumers want in an operating system resulted to sales by the millions in its fourth day of launching alone.

Again, multimillion worth of resources is assumed to have been employed to fund this development, but almost everything Microsoft does pays off, big time. Advertising also plays an important role in these triumphs. In 1994 alone, in an attempt to attract the increasing consumer group of nontechnocrats, Microsoft adopted a new slogan: “Where do you want to go today?” For that campaign alone, Microsoft spent an estimated 100 million US dollars.

Also, in an industry where constant innovation is the name of the game, Microsoft has been keeping the pace by expanding its product line. An example of this is its venture in Microsoft Encarta, which has become the foremost computer-ran encyclopedia. The middle part of the 90’s also saw to Microsoft’s ventures into the World Wide Web, computer networking, online magazine, and cable television news outlet, i.e. MSNBC which was designed to compete the likes of CNN. Its awareness of product life cycles has also led it to constantly develop its products. The latest among these would be the Windows Vista, which would be released come January 2007 (Wikipedia 2006b).

Evaluation of Strategies

In terms of the historical and current strategy it has been employing, Microsoft has become very effective and efficient. Its resources of massive capital has enabled it to fund the necessary innovations, risk-taking investments and activities, acquisition of threatening or profit-generating companies, and even suppressing lawsuits. Its labour force is not only very huge, but also very equipped to keep it on top, what with its top rank developers, engineers, and executives. Its technology is one of the most advanced in the world, enabling it to lead, and therefore keeps it dominance in the global market.

Its experience in the industry is also insurmountable. It already knows the strategic game in the market in and out, which is why it is already able to bend the rules to its advantage. Its brand name is among the most prominent worldwide and sends the message of quality and greatness. Even China, the world’s biggest economy, has subscribed to use it. Its massive share of the market stabilises its position even for the years to come. Its reach in 102 countries and aggressive pursuit of future markets almost ensure further success. With all these resources, and the capability to use them efficiently and effectively, Microsoft has been able to plan the best strategies and has the power to implement them.

Its strategic performance in the past 31 years in response to external factors is also very effective. Its stable multibillion revenues and global scope from a mere asset of a programming language, BASIC, speaks well of how well its strategies have exceeded the challenges of the external environment. Its constant practise of innovation, specialisation of products, development and widening of product line, pursuit of new markets, and use of its monopolistic advantage also serves as the key strengths of its strategy as a corporation.

However, it must be taken into that Microsoft has its share of weaknesses and threats. Its strategies in the game console and MSN seem not to work, with both ventures running at a loss. Moreover, the intended growth level is not being realised with MSN.

The overall growth rate of the corporation also seems too stagnate. It can be attributed to Microsoft’s current bigness. With that, it may be impossible to grow even more because the peak might already have been reached. It is probable that there is just no space left in its current room for it to grow more. It may also be that the economy is coming into a recession, and therefore, fewer products will be sold. Microsoft must then develop a strategy to respond to this challenge.

Further, Microsoft should take care of ethical concerns. With the lawsuits and antitrust cases that it is faced with, it may be that Microsoft would eventually loose the consumers’ respect that it have been enjoying for so long. The public is growing to be more sensitive to ethical issues. For instance, Microsoft’s alleged misrepresentation of its products, which in reality were product of other companies that were bought and dressed to become Microsoft’s “own” might lead consumer sentiments to favour those smaller and “authentic-creator” companies.

Another concern should be Microsoft’s time tested strategy defined in its battlecry, “embrace, extend, and extinguish.” This involves venturing in market segments where commonplace standards prevail, improving those standards with its advantageous resources and capabilities, and eventually using the disparity it is able to create to deprive other firms of their market share. However, as mentioned in the paragraph above, the public opinion, finally aware of this strategy, could side on the disadvantaged companies.

Microsoft must realise that the public is growing to be more informed and wise consumers. They may not buy the concept that Microsoft is more convenient because it saves the trouble of downloading, with others product already integrated in its operating system, while in reality is a strategy to deprive other companies of market share. As discussed in the prior sections of this paper, this vertical integration strategy could probably not work anymore in the years to come. Especially with the rise of Microsoft criticisms and strategy exposes in books, prints, blogs, newspapers, etc., the anti-Microsoft sentiments might just reach boiling point and gain power in the collective.

Lastly, Microsoft should consider its labour strategies. Today, Microsoft has been termed a “velvet sweatshop” because of its intensive labour practices where employees work to the point of exhaustion and illness. In time, the best talents may not be willing to work for Microsoft, even if it offers great financial incentives, if it persists on ignoring the health concerns of its employees.

Therefore, Microsoft’s current and historical strategies, although effective during the past years and at present, might just not be as effective in the future. Microsoft then must devise new strategies and take the aforementioned factors into account. For instance, its concerns at MSN can be faced with two strategies. First, it could allocate more resources to MSN. Microsoft probably has all the capital it will need to fund the necessary developments for MSN, so this is a prospective option. The second option, however, is to entirely abandon the MSN unit, and maybe save the resources that might be lost at MSN’s expense, or use the resources in other profit generating activities.

Another concern, the stagnating growth rate of the corporation, could be met with a strategy comprised of aggressive ventures in other roomy markets while maintaining its current stronghold in its current industries. For instance, possible opportunities could be pursued in the hardware or consumer services market, where Microsoft could use its respected brand name to dominate the scene.

Its problems on ethical issues, which can be its biggest source of problem, can be faced with various strategies. One is that, assuming the allegations against Microsoft are true, Microsoft could quit on merely buying out the product of other companies and start developing its own products. It should also consider strategies that could keep or elevate its market dominance, without having to abuse its monopolistic power in the operating systems segment. That way, consumer sentiments could favour it and it could develop healthy competition with other companies. Besides, a corporation that big could only be responsible of its undertakings, or eventually disintegrate.

However, if it could not forego its success formula of “embrace, extend, and extinguish,” and its whole point of existence lies on its monopolistic power, Microsoft could substitute change by creating a considerable amount of political good will. For instance, it could engage in charitable acts since it has the money to avail it anyway. It could venture into large software and computer donations to institutions such as schools, and government establishments in deprived areas or third world countries.

With regards to its labour strategy, it must innovate on maximising the potentials and working time of its employees without having to overwork them. Along with this, its continued great deal of financial incentives for employees, along with a conducive working atmosphere and potential for individual career development should be held intact.

To respond to the impending economic challenges, Microsoft could strategize on decreasing price rates in the short run to increase the demand for its products. The profit it would initially forego in doing this would be nothing compared to the profit it would generate in the long run. If price is inelastic, it could develop a strategy to “hold out” by not supplying the market with the necessary quantity to also increase demand while holding price constant.

With its effective current strategies, and the employment of timely strategies in response to the aforementioned concerns, Microsoft could not only keep its current position in the world market, but also soar to greater heights.

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