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Since the date of its foundation in 1975, Microsoft grew into a multinational corporation with global revenue as high as 73.72 billion U.S. dollars (for 2012 fiscal year). Headquartered in Redmond, Washington D.C., this world’s largest software producer does business in over 100 countries worldwide. Microsoft operates in five segments: Client, Server and Tools, Online Services Group, Microsoft Business Division, and Microsoft Entertainment and Devices Division, and offers a wide range of the software, as well as hardware services and solutions. (Profile: Microsoft Corp., 2013)
Microsoft sees its mission in helping people and businesses throughout the world realize their full potential. The values of the company include integrity and honesty; passion for customers, partners, and technology; openness and respectfulness in interactions with others; willingness to take on significant challenges and see them through; self-criticism and commitment to personal excellence and self-improvement; accountable for commitments, results, and quality to customers, shareholders, partners, and employees. These values provide a strong guideline and reflect Microsoft’s commitment to ethical business practices, making the products of the company created around these principles particularly appealing to the public. (Miscrosoft’s official website, 2013)
The threat of entry for Microsoft is relatively low. The company is in control of the major share of the PC business and virtually has only one viable competitor – Apple. New companies lack finances, time and, most importantly, computing experience necessary to create a competitive OS. New entry entities almost always buckle under the pressure of the two market giants. As for the gaming console sector, Microsoft, Nintendo, and Sony are firmly set and fully satisfy the demands of the public leaving no space for any new firm to wedge.
The threat of rivalry is again rather low for Microsoft in the OS sector but quite high in the gaming division. Not that many other companies produce quality OS to present any real threat for Microsoft. Besides, Windows works pretty well with Apple hardware whereas Mac Os X is incompatible with most non-Apple products. In the gaming sector, however, the situation is tense. Microsoft, Nintendo and Sony live in the state of the console war against each other.
The threat of substitute for Windows is low. Though Mac OS X is an advanced OS it only works with Apple hardware, and users are hardly going to buy Apple machines (which are rather expensive) just for the sake of switching OS. Linux could become a threat of substitute, but first it needs to solve some user-unfriendly tech drawbacks, and this will take time.
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In the game division, the threat of substitution is moderately high. Inveterate gamers are not likely to contribute to a threat because they need specific consoles for certain games, but casual gamers will easily drift to Nintendo or Sony or even opt for smartphone games.
The threat of powerful suppliers is relatively low both for OS and gaming divisions. There are many firms that can provide Microsoft with all necessary items if it has to turn to outside suppliers. The size and recognition of the company diminish the threat of powerful suppliers even more.
The threat of powerful buyers is low both from OS and game console standpoint. The cost of installing Windows OS on the computer is not large and does not weigh heavily of PC manufacturers. Besides, since Microsoft has deals with almost all significant PC manufacturers to market their machines together with the latest version of Windows, buyers of non-Apple computers expect them to have a Microsoft OS and tend to react negatively if they do not. As for the gaming division, Microsoft consoles are popular among users and, therefore, economically profitable for retailers.
Thus, the above analysis of the external environment of Microsoft shows that its major concerns for the moment are associated with its rivals at the gaming console market and threats of substitution of its consoles with Nintendo, Sony or smartphone applications.
SWOT analysis for Microsoft
· Strong brand reputation. It is the 7th most reputable business in the world according to Forbes, and the 5th most valuable brand ($ 57.8 billion) in the world according to Interbrand.
· Global brand recognition. Over the years of business activity, Microsoft has grown into the most trustworthy and recognizable PC OS provider.
· Vast product portfolio. The Company’s products include servers, phones, operating systems for personal computers (PCs), and other intelligent devices; productivity applications; software development tools; server applications for distributed computing environments; desktop and server management tools; business solution applications; video games, and online advertising. Among the products there also are designs and sells hardware, including the Xbox 360 gaming and entertainment console, Xbox 360 accessories, Kinect for Xbox 360, and Microsoft PC hardware products. (Profile: Microsoft Corp., 2013)
· User-friendly software. Microsoft products are of high quality yet very easy to use.
· Strong distribution channels. Microsoft has established strong ties with all major PC manufacturers and retailers to make sure they pre-install Windows on their machines.
· Impressive financial performance. In 2012, Microsoft reported a new record of 73.72 billion U.S. dollars of revenue, which means that the company has enough resources for R&D.
· Massive investment into R&D of innovative technologies. Microsoft quarterly R&D expenses reached the peak of 2.64 billion in March 2013 (Microsoft R&D expense, 2013).
· Purchase of Skype increases Microsoft market presence and opens new opportunities.
· Dependence on PC manufacturers. Microsoft does not produce hardware to run with its OS. If cheaper alternatives appear on the market, manufacturers will probably flow.
· Poor security system. In comparison with other competitive operating systems, Windows is considered to be the least protected against viruses’ attacks.
· Mature PC markets. Microsoft mostly depends on OS and software sales for desktops and laptops, and it becomes harder and harder to generate revenue in this sector.
· Poor acquisitions/investment choices. A number of Microsoft’s purchases proved to be unsuccessful (LinkExchange, WebTV, Danger).
· Slow to innovation. Though having extensive R&D resources, Microsoft constantly fails to take over new innovative segments, often bringing up the rear rather than leading the market.
· Extension of mobile device product range (smartphones and tablets).
· Expansion of cloud-based services and software.
· Development of mobile OS suitable for the growing mobile advertising needs.
· Growth through the purchase of new innovative startup companies.
Threats include strong competition; gradual shift of consumer demand from stationary to portable devices; open source project trend that can drive expensive Microsoft products out of the market; governmental restrictions against monopoly; piracy; potential lawsuits.
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Taking into account the SWOT analysis and the principal tendencies of the external environment, the following strategic solutions may be beneficial for Microsoft:
SO strategic options: 1) restructuring of its R&D expenditure to bring it to focus more on mobile OS and applications; 2) expansion through acquisition of promising electronics and IT companies; 3) building and running of cloud services; 4) further diversification of its product line; 5) building up an image of a responsible corporate citizen to support the brand.
WO strategic options: 1) sector of development of the inhouse PC hardware manufacturing; 2) seeking mobile device market share; 3) R&D of cutting-edge technologies.
ST strategic options: 1) improvement of its relationships with government institutions for lobbying of its interests; 2) propaganda of anti-piracy action and legislation using its brand recognition; 3) revision of its pricing and licensing policy to make it cheaper; 4) support of independent research centers and grand funds to discover fresh ideas and attract top talent into the company; 5) development of its portable devices software division.
WT strategic options:1) exploitation of new market sector to generate new profit sources and keep up with the competition; 2) R&D of more effective OS security tools and mechanisms to keep the trust of its users and prevent some of the potential lawsuits.
Microsoft is a renowned market player with a stout customer base won and held by Microsoft’s strong brand recognition, diversified product portfolio, simple and user-friendly products and broad chain of partners. Nevertheless, using its stable financial status and sturdy investment capabilities, Microsoft can win over a large portion of new clientele by exploring and satisfying rapidly growing and constantly changing needs of the public. Under the current conditions on the market, the key to maximizing competitiveness and profitability for Microsoft is R&D and timely introduction of cutting-edge technologies in the portable devices sector.
To increase its profits and competitive strength, Microsoft may employ various models of diversification that for such a market giant generally prove to be effective and low-risk.
1. Related (concentric) diversification is a perfect strategy for Microsoft because it allows the company to enlarge its portfolio by adding new products developed on the basis of the existing technology and marketing system. It works well in gradual taking over of new or unexplored business segments. Microsoft can use this strategy to develop its mobile device software sector.
2. Unrelated (corporate) diversification. Microsoft used this strategy when it decided to explore a totally new healthcare IT industry and entered into a JV with General Electric Co. in June, 2012. Further, the company can employ to open new profit horizons and serve the growing needs of the public.
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3. Horizontal integration is realized through development or acquisition of new products or services that are in line with the company’s product portfolio and appeal to the existing customer base. A good example of this strategy would be the purchase of Skype S.a.r.l. in October, 2011. This strategy can be utilized to accomplish Microsoft’s expansion ambitions and portfolio diversification course.
4. Vertical integration is another widely used strategic tool at Microsoft. Microsoft employed this approach when it decided to develop its own gaming console, Xbox, in 2001. Before that, the company had been developing gaming software for Windows PCs and some Sony Playstation consoles. The decision to take on the full cycle of gaming console production proved to be very profitable. Since the company depends heavily on hardware producers, Microsoft may want to strategize in this direction and move towards the business pattern of full cycle PC production.
To make the new strategic objectives known to its shareholders, staff, suppliers, customers and the government, Microsoft needs to come up with a solid communications plan. It will help both the public and employees of the company to see clearly the priorities and goals set for the future. A well-thought communications plan promotes accountability to the public and owners, establishes order in the company and serves as a guideline throughout the entire project realization process. To reach its stakeholders, Microsoft may choose from a wide variety of communication tools: periodic publications, online communications, meetings and conferences, media presentations, PR campaigns, marketing and sales instruments, legislation initiatives, committee and board communiques, public speeches of the company executives, annual reports, corporate mission and other vision materials etc.
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Ethical corporate citizenship is a powerful business tool Microsoft should and is actively exploiting to its benefit. Applying its extensive technological expertise and resources the company constantly works to solve various social and environmental challenges both globally and locally. Microsoft builds its program of ethical citizenship around two focal points: working responsibly and serving communities around the world.
The first principle embraces transparent and customer-accountable business practices, provision of reliable and secure computing experience, the commitment to protection of the fundamental human rights within its product line and outside, responsible sourcing (making sure that the company’s contractors, suppliers and vendors follow the same working principles and values), environmental awareness and action. 100% of Microsoft’s suppliers, for instance, are required to abide by its Corporate Code of Conduct. Also, Microsoft encourages minority-owned, women-owned and veteran-owned businesses (over 1.5 billion supply transactions with such businesses in 2012). As for environmental action, in 2012 Microsoft decreased its carbon intensity by 30% and purchased 1.1 billion kilowatt-hours of green power. Besides, it announced an ambition goal to become carbon neutral in 2013.
The second principle means creating educational and employment opportunities for youth throughout the globe, empowering nonprofit organizations, employee giving, humanitarian response, and accessibility. In 2012, Microsoft had 600,000 students connected through Skype into classroom, awarded 1 million USD in Imagine Cup grants, provided free access to Office 365 for education, donated software and hardware to over 62,200 nonprofit organizations as well as 99.6 million USD in cash. (Microsoft citizenship report, 2012)
The above examples show that Microsoft not only recognizes the need to be a responsible corporate citizen but actively contributes to wellbeing of the public on a global scale. Such a positive image builds up consumer confidence for its brand, which has a positive influence on the overall success of the company.
All corporate governance mechanisms at Microsoft are built around the following purposes: accountability to Microsoft's owners by appropriate distribution of rights and responsibilities among its Board, managers, and shareholders; establishment of a structure through which the Board and management can set and meet targets and monitor performance; strengthening and safeguarding of the company’s culture of responsible business practices and integrity; efficient use of resources.
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Being elected by the shareholders, the Board serves long-term interests of the owners of Microsoft. It establishes and promotes the company’s business objectives and strategies, reviews financial reports, assesses potential risks and develops ways of their mitigation.
Microsoft has a multidivisional structure which works really well for the company because it draws a clear separation line for projects and managers. Such business pattern leaves little room for confusion when it comes to resourcing for a project. Since Microsoft is a very large company, the issues of accountability and awareness are of primary importance. With a company as large as Microsoft, it is important to be aware of who should be accountable for what. Multidivisional system solves these issues and makes it much easier to monitor the progress of various projects.
One of the problems of the leadership system at Microsoft is resistance to experimental initiatives. Leaders of big established operations that are the profit engine of the company focus on constant delivery of outstanding results and see innovative endeavors as risky distractions. However they must realize that long-term growth and ultimate survival of the company depends on innovation. Thus, Microsoft should work towards the establishment of efficient mechanisms of partnership between power engine and innovation leaders of the company.