Introduction
Microsoft is recognized as one of the leading competitors in the global technology market(s). The company currently licenses and manufacturers products and services ranging from consumer operating systems, cloud computing solutions, mobile tablets (e.g. Surface Pro 4), smartphones, and enterprise software/hardware solutions (MarketLine, 2016). Microsoft grew its sales revenues by 7.8 percent from 2014 to 2015 (MarketLine, 2016). Although the company’s sales revenues increased in fiscal year 2015, Microsoft’s net profits decreased by 44.8 percent during the same period (MarketLine, 2016). While the substantial decline in 2015’s net profits can largely be explained by the company’s write down of its Nokia phone hardware division (MarketLine, 2016), Microsoft has seen an overall decline in revenues between 2010 and 2015 due to a decline in the global demand for personal computers (Capgemini, 2011). Microsoft’s business model heavily relies on hardware manufacturers distributing its operating systems and cloud-based software subscriptions (Mlglanl, 2016). This explains the company’s ability to increase profits during this period, but simultaneously experience a decline in growth.
A decline in the global consumer personal computer market could also explain Microsoft’s renewed focus on its enterprise market(s). Enterprise consumers represent the business segment, including large corporations and government agencies in need of large scale software solutions, including server software and operating system licensing fees for a large amount of systems. Microsoft’s purchase of the social media platform, LinkedIn is viewed as part of this strategy – to refocus on the enterprise consumer and integrate opportunities to garner additional sales through the targeting of business professionals (Reisinger, 2016). Although the acquisition has been questioned by some, Microsoft’s current CEO Satya Nella, is quoted as saying Microsoft can “reinvent ways to make professionals more productive while at the same time reinventing selling, marketing and talent management” (Vella, 2016, p. 12).
Market Overview
Competition in the global technology market has been increasing and is considered to be a challenging dynamic, even for companies with an established market presence. Many computer hardware manufacturers and software developers have focused on reducing costs in lieu of establishing methods to stimulate short-term growth (Capgemini, 2011). The market is also experiencing an overall shift from tangible products to services (Capgemini, 2011). What this means for technology companies is that the business models can no longer rely on hardware sales or software sales that are dependent upon the purchase of hardware. While research and development is important to companies engaged in the global technology market, a company’s research and development activities must focus on strengthening core competencies, and establishing a competitive advantage (Capgemini, 2011). In other words, a company’s competitive strategy needs to include an area of strength that is difficult or too costly to duplicate. In addition to increasing competition, the global technology market is shifting towards an emphasis on quality control, quality assurance, and streamlining operational efficiency (Capgemini, 2011).
Competition
Microsoft’s primary competitors are Apple and Google (MarketLine, 2016). Apple has existed as Microsoft’s main rival since the company’s inception. Microsoft competes against Apple, not only in terms of software, but in terms of cloud computing services, mobile phones (smartphones) and tablets (MarketLine, 2016). What is interesting about Apple’s business model is that the company generates its revenues from products (e.g. MacBooks, iPhones, iPads, etc.), subscriptions to iCloud and Apple Music services, and extended warranty fees on its products (Mlglanl, 2016). Additional revenues come from content sales delivered via the Apple App store, iTunes store, and similar platforms (Mlglanl, 2016). From a strategic standpoint, Apple’s business model is focused on the experience of the end user. In the majority of cases, the end user is a consumer, as far as Apple’s model is concerned (Mlglanl, 2016). As part of its strategy, Apple designs its products, services and operating systems to provide an intuitive, seamless experience for the consumer (Mlglanl, 2016). This is not to say that Apple does not cater to businesses, but that is primary focus is on the home user. The company’s business model includes the following segments: consumers and businesses, content owners, app developers, and large and independent book publishers (Mlglanl, 2016). Apple’s revenues have outpaced Microsoft’s revenues since 2008. In fiscal year 2015, Apple’s revenues exceeded Microsoft’s by 2.5 times. Apple’s 2015 revenues amounted to $234 billion versus $94 billion for Microsoft (Mlglanl, 2016).
Google is a primary competitor in terms of software and cloud-based applications. Microsoft’s Office 365 cloud-based applications compete directly with Google’s services, including Google Docs, Google Drive, Gmail, the Android OS, and social media platforms (MarketLine, 2016). In addition to providing direct competition for Microsoft’s Office 365 platform, Google offers a wide array of services that target and engage Internet users. This array includes Google Music, Google Maps, Google Hangouts, YouTube, the Google Chrome browser, Google search engine, Blogger, and Google Earth (MarketLine, 2016). All of this presents significant challenges to Microsoft, as it struggles to offer competitive cloud-based services and browser applications that are perceived as user-friendly as Google’s. Google also generates revenues through online advertising and is in the process of becoming a high-speed internet service provider in rural communities (MarketLine, 2016).
Microsoft Growth vs. Profits
The period of 2010-2015 resulted in somewhat puzzling results for Microsoft. The company experienced an increase in profits, but a reduction in sales growth and expansion. By definition, profits can increase if one or more of the following conditions are met – an increase in revenues or a decrease in costs. Since we know that Microsoft experienced a decrease in revenues, the logical conclusion is that the company was able to decrease its costs enough to offset the decrease in sales. For an increase in profits to occur, Microsoft had to cut those costs enough to more than offset a decline in revenues. The question is whether the decrease in revenues were tied to specific products, divisions, or services that were simultaneously written off, sold off, or eliminated as a result of poor sales. A further question is what factor(s) led to the decline in revenues during the years 2010 to 2015.
One of the most probable explanations for Microsoft’s decline in revenues during this period is the subsequent decline in personal computer desktop sales. Microsoft’s business model depends on personal computer desktop and laptop sales, as a majority of the company’s revenues come from sales of its Windows operating system (MarketLine, 2016). Global sales growth in personal computer sales decreased to 2.6 percent in the second quarter of 2011, down from a high of 20 percent in the first quarter of 2010 (Capgemini, 2011). Microsoft has traditionally depended on the distribution of its operating systems and related software via original equipment manufacturers, such as Hewlett-Packard, Dell, Lenovo, Toshiba, Lenovo, and others (Mlglanl, 2016). Microsoft has also faced stiff competition in the emerging markets of enterprise cloud computing solutions and mobile devices. Its Windows-based smartphone has yet to gain the same market enthusiasm as Apple’s iPhone and the numerous designs suitable for Google’s Android operating system (MarketLine, 2016). Microsoft’s mobile tablet device, the Surface Pro, started to gain momentum starting with its Pro 3 model (MarketLine, 2016).
LinkedIn Acquisition
The acquisition of the social media platform, LinkedIn, is viewed as part of Microsoft’s strategy to focus on enterprise customers (Vella, 2016). Microsoft’s business model relies heavily on selling commercial products to organizations, developers and original equipment manufacturers (Mlglanl, 2016). Of all of the company’s targeted segments, organizations ranks as the largest. LinkedIn is one of the few well-known social media platforms aimed at professional interests (Vella, 2016). Sometimes touted as the equivalent of Facebook for professionals, LinkedIn provides opportunities for individuals to create online resumes detailing professional interests, experience, credentials, and network with likeminded peers. Individuals can also search for open positions, follow companies, individuals, and communicate with hiring managers.
Microsoft purchased LinkedIn at a premium – that is the purchase price of $196.00 per share was well above the market price of $131.08 per share (Reisinger, 2016). This suggests that Microsoft anticipates that the future financial returns of the purchase will far exceed the market price (and likely purchase price) at the time of acquisition. Given the fact that Microsoft’s most promising and largest market opportunity is aimed towards organizations and professionals, the purchase of LinkedIn will allow Microsoft to further capitalize on this market strength. Although Google is certainly a formidable competitor in terms of cloud-computing services aimed at organizations, it is arguable that both Apple and Google’s efforts to target enterprise level organizations have not been as successful as Microsoft. The company offers server solutions, commercial business productivity software, enterprise exclusive operating system features, licensing, and advertising solutions (Mlglanl, 2016).
References
Capgemini (2011). The Changing Dynamics of the Global High Tech Industry. Retrieved from
https://www.nl.capgemini.com/resource-file-access/resource/pdf/The_Changing_Dynamics_of_the_Global_High_Tech_Industry_____An_Analysis_of_Key_Segments_and_Trends.pdf
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Mlglanl, Jltender (2016, January 11). Apple Vs. Microsoft – Revenues and Profits 1995 to 2015.
Revenues and Profits. Retrieved from http://revenuesandprofits.com/apple-vs-microsoft-revenues-and-profits-1995-to-2015/
Reisinger, D. (2016). What's at Stake in the $26.2 Billion Microsoft-LinkedIn Buyout. Eweek,
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Vella, M. (2016). Microsoft's LinkedIn Buy Proves Social Media Is Graying. Time, 187(24), 12.
