Executive Summary
Microsoft Incorporation is a leading company operating globally. To assess the company’s strategic management, internal and external analysis has been conducted using strategic tools like Porter’s Fiver Forces Model and SWOT analysis. The company’s competitor’s analysis has been discussed in detail and strategic recommendations are also provided.
Financial analysis of an organization assists in evaluating the past performance of the company, analyzing its current status, predicting future potentials and deciding strategies to maximize profits and resources (Bhadhuri, Wachowiz and Horne, 2008). Microsoft Incorporation is a company that has witnessed increasing revenues from the fiscal year 2010 to 2011 with a percentage change of approximately 89 percent (Appendix A; Microsoft’s Annual Report 2011). The company however has not been able to curtail its operating expenses since they are increasing at almost the same rate as that of its revenues in the same time period (Appendix A). One of the reasons for this is that the company is that the company launched its Microsoft Office 2010 and also witnessed increase in its cost of marketing and sales as well as research and development (Microsoft’s Annual Report, 2011). Microsoft’s current and quick ratios reveal that the company has enough assets to cover its debts (Appendix E). Furthermore, the firm’s financial leverage ratios depict that it has created a protective cushion for itself in case of a financial crisis since the percentage of debt being financed by equity is higher than it being financed by its assets (Bhadhuri et al, 2008; Appendix E). Microsoft’s gross and net profit margins also indicate that the firm is making use of its operations effectively and pricing its products well since its gross profit margin has a relatively high value of 0.78 and its net profit margin is standing at 0.33 during fiscal year 2011 (Appendix E; Microsoft’s Annual Report, 2011). Furthermore, the company has shown that it has made some good investment choices since its return on assets and particularly return on equity is showing favorable values (Appendix E).
Since Apple has been identified as the closest competitor to Microsoft, an analysis of its financial performance will give a clearer understanding of where Microsoft stands. Apple’s net sales have not increased with the same pace as that of Microsoft since the percentage change from fiscal year 2010 to 2011 is 60.25 as compared to Microsoft’s 89 percent (Appendix A; Appendix F). The company has also not been able to curtail its operating expenses and since the percentage increase in expenses is greater than its net sales, the net income has only been able to increase by 54 percent as compared to Microsoft’s 89 percent. Apple’s current and quick ratios are lower than Microsoft's value since they are standing at 1.61 and 1.58 respectively in 2011 which indicates that the company has tied less number of assets within the company so that it remains effective (Bhadhuri et al, 2008; Appendix). Apple has also been able to keep its current and total liabilities lower than Microsoft which shows that the company is dependent on its own investments and is not relying on financing through debt from external resources (Appendix B; Appendix G). Apple has shown a relatively higher increasing inventory turnover than Microsoft’s ratio which suggests that the company is changing its strategy and moving towards being liquid and maintaining low inventories (Appendix E; Appendix J). By doing so nevertheless, the company is at a risk of maintaining too low an inventory and running out of stock when needed (Bhadhuri et al, 2008). Apple’s return on assets and equity are roughly at the same level as that of Microsoft’s which shows that these averages might be the industry averages as well.
Microsoft has shown a better financial performance than Apple since the company’s sales have increased at a higher percentage than its competitors and it has been able to provide a much better protection cover to its business operations as it is financing its activities mostly through shareholders’ equity.
Internal and External Analyses
External Analysis
External forces affect the company’s profitability and strategic decisions (Stimpson, 2002). To analyze the external forces working within the industry in which Microsoft is operating, Porter’s Five Forces Model is used as it will help to deduce the market attractiveness and the competition that exists for Microsoft (Kotler, 2009). The industry rivalry is high which is reflected in the Annual Report of Microsoft (2011) which states that the company has to compete with a number of software producing vendors specifically against Apple Incorporation, IBM and Google. Along with that it has been observed that since there are numerous competitors operating within the market, the strategies and products that they offer are very diverse in nature which further increases the competition for Microsoft. The threat of entrants is low since within this industry a company needs substantial amount of capital not only to enter but also maintain its operations as it is solely based on technological processes and innovations (Microsoft’s Annual Report, 2011; Apple’s Annual Report, 2011; Porter, 2008). Furthermore, the industry is dominated by major players like Oracle, Microsoft and a few others; all of which are most likely to react immediately when a new company enters the market since they have the financial capability to do so (Kotler, 2009). Powerful suppliers can capture most of the value for themselves (Daft, 2010). In the case of the industry where Microsoft is operating, the power of suppliers is very low since the companies have to interact with few suppliers. Microsoft for instance was able to erode the profitability of the suppliers producing personal computers through its strategy of raising prices on operating systems (Porter, 2008). Microsoft caters to a number of customers which range from educational institutions to small and medium sized organizations (Microsoft’s Annual Report, 2011). The threat of substitutes is low since there are only few substitutes available and customers need to purchase software from companies that satisfy their demands. This decreases the bargaining power of customer as well since there they cannot switch easily to other competitors or produce the software themselves (Kotler, 2009).
The legal environment has affected Microsoft however since it is operating within a developed country like United States that has rules and regulations for customers, employees and even monopolistic activities (Stimpson, 2002). Microsoft had to go through a trial when it refused to eliminate its monopolistic activities with regard to software producing which resulted in the share prices of the company falling rapidly (Economides, 2001). Therefore, Microsoft has to take into regard not only the legal requirements of the countries it is operating within but also the demands of its stakeholders.
Internal Analysis
SWOT analysis is a tool that analyzes company’s strengths and weaknesses along with the opportunities and threats that can affect the company’s business operations and its profitability (Stimpson, 2002). The biggest strength that Microsoft has it is increasing revenues, customers and net income (Microsoft’s Annual Report, 2011; Appendix A). High revenues and a large customer database mean that the company has been able to create loyalty within the market for itself. Additionally, Microsoft’s human resource is capable and competent in nature that not only performs well but also adjusts within the changing environment of the industry (Microsoft’s Annual Report, 2011). The company has also formed strategic alliances with organizations like Nokia which has helped to create a competitive edge for it in the industry (Kotler, 2009; Microsoft’s Annual Report, 2011). The major weakness that exists is the company’s rigidity towards changing its business operations as well as the dominance of a single personality that is Bill Gates on its business environment (Hestres, 2003). Microsoft can diversify its product range in future and form a service oriented business section like video-on0demand which is becomingly increasingly popular. The company can even form more strategic alliances and engage in co-branding of its products to reach out to more markets and reduce risks and costs (Kotler, 2009). The biggest threat that exists for the company is the ever changing technological changes. If the company is unable to change its business operations and human resource according to the new technologies or even fail to implement the new technologies, it will result in becoming obsolete and redundant in the eyes o its customers (Stimpson, 2002; Daft, 2008). Another threat that exists is the increasing competition within the industry for the various products and services that Microsoft is offering. There is a threat that some of its competitors might attract a portion of Microsoft’s customers if their demands are unmet by the company and reduce its profitability (Microsoft’s Annual Report, 2011).
Identification of the Firms Strategies and its Competitors Strategies
Microsoft’s Value Chain Analysis
Value chain analysis is a tool that is used to analyze companies operating within industries (Kotler, 2009). It consists of two parts, the primary activities (inbound logistics, operations, outbound logistics, marketing and sales and service) and the secondary activities (firm’s infrastructure, human resource, management, procurement and technology development). The company’s primary activities are complex in nature since it has to rely on external sources to ensure that it is able to reach out to customers effectively. The inbound logistics that is its raw materials are purchased from various sources which include IBM that provides integrated central processing unit and memory chips are purchased from Taiwan Semiconductor Manufacturing firm (Microsoft’s Annual Report, 2011). The company is able to get discount from its vendors and suppliers and has a number of options available due to which its dependency on a single supplier is limited. Operations for Microsoft are complex since it has five different business units and therefore five operating activities (Microsoft’s Annual Report, 2011). The company has operation centers all over the world and it has localized its products and services to match the customer demands in different countries. The outbound logistics of the company depends on its suppliers and distributors which provide the end product to the customers. The distributors working for Microsoft include LARs, OEMs and VARs; all of which reach out to different customers which make the whole process smooth for the company (Microsoft’s Annual Report, 2011). The company markets and sells its products through these distributors only. The service that the company provides is such that it concentrates on providing quality products and services. Due to which it has operation centers around the world that have local employees working within them and the company has effective call centers available for its customers to ensure that all their queries and issues are solved (Microsoft’s Annual Report, 2011).
The firm’s infrastructure is such that it enhances employees’ participation within it, encourages innovation to be the backbone of its operations and promotes a culture that is flexible. The human resource of the company is able and competent since the company has clearly outlined the need to hire flexible and capable employees (Appendix K). There is also vigorous training sessions provided to the workforce to ensure that they can adjust to the changing external environment. The management of the company is influenced by the thinking and decision making of Bill Gates, the company’s CEO who has developed the firm from scratch (Hestres, 2003). It is the effort and intellectual of Gates that has brought the company to the success that it is enjoying currently.
Strategic Recommendations
Microsoft Incorporation has encouraged innovation to be a cornerstone of its company’s operations. The company however has not been able to produce an innovative product that has impacted its sales positively since a couple of years (Microsoft’s Annual Report, 2011). Since the company believes in providing new technologies to its consumers, it should increase its capabilities and form partnerships with other firms operating within the market to take advantage of their knowledge and product a product that is able to satisfy consumers’ changing demands (Stimpson, 2002). Furthermore, Microsoft is relying too much on its distributors and sellers to channel its products to its customers. The company should form a distribution channel of its own to mitigate the risk in case it loses a supplier (Kotler, 2009). Microsoft should also consider moving towards other industries to diversify its risks like the video on demand industry that is it should adopt product development strategy to enter new markets and attract new customers. The company should also consider sponsoring a cause or CSR event or initiate a campaign to clean its global supply chain since it will give a positive and responsible image of the company and attract those customers that are demand companies to adopt socially responsible activities within their companies (Sarkis, 2003). Lastly, the firm should deviate from adopting monopolistic activities since it will result in stakeholder retaliation and increasing costs.
References
- Apple’s Annual Report, (2011). Apple Incorporation, available at
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- Daft, R., (2008). Management, U.S.A: South-Western College., pp., 376-378
- Daft, R., (2010). Organization Theory and Design, Cengage Learning: South-Western Publishers, pp. 104-120
- Economides, N., (2001). The Microsoft Antitrust Case, Journal of Industry, Competition and Trade: From Theory to Policy,8, pp. 5-7
- Hestres, L., (2003). The Influence of American Culture on Software Design: Microsoft Outlook as a Case Study, White Paper, Georgetown University, pp. 9-12
- Kotler, P., (2009). Marketing Management: A South Asian Perspective, U.S.A.: Prentice Hall, pp. 117-123, 178-182
- Microsoft’s Annual Report, (2011). Microsoft, available at
accessed [12/8/2012]
- Porter, M., (2008). The Competitive Forces that Shape Strategy, Harvard Business Review, 12, p. 79-83
- Sarkis, J., (2003). A Strategic Decision Framework For Green Supply Chain Management, Journal of Cleaner Production, 11(1), pp. 397-409
- Stimpson, P., (2002). Motivation in Theory and Practice, UK: Cambridge University Press, pp. 144-149
