Introduction
Every market segment is different. Porters 5 forces models provides us with a guideline of different parameters that should be considered while analyzing a business situation. Information Technology industry is not different. Microsoft is the largest software company of USA in terms of market capitalization. It is one of the most respected brands across the world but still it faces threats from its rivals in each segment it operates. The information technology market changes so fast that the company leading the market today can go out of business tomorrow if it fails to keep pace with the changing demands. This essay will discuss the external and internal factors of Microsoft that set it apart from others and the areas in need of improvement for Microsoft to maintain its dominant position in the future market.
Company Background
Microsoft is a multinational company that excels in the creation of software products like Windows, Office suite software, Xbox games, consoles and hardware products like surface tablets. The core business for the company is software, especially the Windows operating system and the Office products.
Two fresh college graduates Bill Gates and Paul Allen started the company way back in 1975. The vision for both the founders was to reach desktops to every home. The initial product of windows called the MS-DOS was a huge success during the 1980s. However, at that time desktops were very common and MS-DOS was not easily decipherable for common people. During late 1980s Microsoft started developing its iconic Windows product. During the early part of 1990s Windows launched its first commercially successful Windows product called Windows 3.0. With the advent of internet and a user friendly Windows 95, Microsoft became a household name in the 1990s. In the subsequent years Microsoft developed its Office products and its gaming line called Xbox (Channel 9). In 2012, Microsoft penetrated the mobile and tablet market by introducing its Surface line of tablets. It recently has acquired the mobile division of Nokia in 2013. It shows that Microsoft aspires to become a leading player in both software and hardware market in future.
General Environmental Conditions and Microsoft
There are many factors in a business segment that affects a company. Factors like, product, competition, technological changes, regulations, buyer behavior and supply chain related changes can affect a company’s performance. Presently in IT industry the two major two factors seeing significant changes are macro-economic condition and technological shift.
The overall macro-economic condition for the IT industry is changing very fast. The main trend in the current scenario is information and computing on the go. Previously people were more accustomed to work and they would look for data using laptops and desktop computers and store data in those machines. In the current scenario many people want to access data from anywhere around the world. Therefore, cloud based applications are becoming the norm for many product features. Google started its cloud based document application where documents can be edited and saved on the cloud and then can be retrieved virtually from anywhere. There is no need to carry a machine or laptop along. Microsoft and others soon followed suit. Microsoft needs to come up with total solution offering in cloud space before others so that it does not lose any more customers. Furthermore, the recent macro-economic trend of buyers is to shift from desktops and laptops to tablets and smartphones. The computing is coming on the palm. Microsoft was slow to react to the OS (Operating System) development for tablets and smartphones and for that Microsoft paid a huge price by losing lot of Windows customers. However, Windows-8 is a nice product and Windows may make a comeback with this product along with it first tablet called Surface.
Technology shifts are also rapid in information technology industry. The operating systems are becoming touch based and customers are shifting from desktops and laptops to smartphones and tablets. For last one decade laptops have dominated the electronic space and Windows operating systems have flourished with the growth of laptops. However, from 2008 onwards smartphones and tablets have started replacing laptops. With the growth of that, iOS and Android operating systems have flourished. Microsoft was late to come up with an operating system and it lost huge market share because of that. Microsoft is struggling now to catch up with Google’s Android. Microsoft’s main bet is now to get into the electronic product market. Surface line of business not only will give Microsoft headway into the highly lucrative electronic segment but it also will provide the growth of its operating system.
Strategic Analysis Using 5 Forces Model
The main two threats for Microsoft are substitutes and buyers. Although Microsoft is worshipped by many in the software segment with a loyal customer base unmatched by any, still the volatility of software industry cannot ensure steadfast customer loyalty for the future. In the past we have seen people shifting from Nokia phones to Apple phones very quickly. It can happen with Microsoft as well. In fact in recent past due to the slowness in adapting to mobile based operating system Microsoft has lost its number one position to Google’s Android operating system. Similarly, Adobe and Apple are trying to come up with Office products and Google is trying to come up with cloud based Office products. This may take away further market share from Microsoft (Chen, 2012). Microsoft needs to act fast. The market trend is changing and if Microsoft cannot keep pace with the changing needs of the buyers then over a period of time it may lose its loyal customer base. Microsoft needs to come up with innovation in its product line in such a way that it is superior, user friendly and caters to the need of the buyers. If it can do that quickly and continue to deliver then it may retain its market share successfully.
Similarly, the same can be said for product substitutes. We have seen smartphones are replacing the conventional mobile phones and tablets are replacing laptops at fast pace. With this change the overall concept of the conventional operating system has changed too. Now there is a high demand for an operating system that can be operated by touch. Microsoft Windows were geared to operate with mouse and not touch. Google and Apple were faster in adapting to the change and they took away the market share for OS from Microsoft. Windows 8 is now available and able to cater to the changing needs of the customers but the customer base has already shifted to Android and iOS operating systems (Chen, 2012). It will be a mammoth task for Microsoft to win back the customers to Windows environment. Office is another product facing similar threat from its competitors. However, Microsoft was quick to react to the need in case of MS Office. It has created Office 360, cloud based office application, and touch based usage of office products. Microsoft still commands the maximum market share by far in the office based segment.
SWOT Analysis (Strength/Weakness/ Opportunity/Threat)
The biggest strength of Microsoft is its brand. There are millions of loyal customers of Microsoft across the world. It is also the leading innovator in Information Technology and software business. Microsoft is also the strongest company in terms of financial position in the software business segment with more than $50 billion as cash reserve (MSFT, 2013).
The main weakness at this moment for Microsoft is the high price of its products and decreasing market share. The hardware business in which Microsoft is trying to enter using its Surface line of mobiles is highly priced. Microsoft needs to make the pricing more competitive. Furthermore, the main revenue that Microsoft earns from its Windows is not increasing substantially in the current market.
The high growth rate in smartphone and tablet market provides Microsoft with a huge opportunity to grow exponentially using its expertise in those segments. It already has an established brand name and if it can establish its OS as well as Tablets and Mobiles in that segment then it can become one of the largest companies in the world. Microsoft has a huge cash reserve which it can use to grow inorganically as well.
Android OS which has almost 75% of the market share is one of the main threats for Microsoft at this moment (MSFT, 2013). Microsoft works in a segment in which technology changes rapidly and so it needs to come up with innovations in a rapid manner.
Internal Strength and Core Competency
Every company has its own value chain and its own special way to reach its customers. Microsoft continues to live its vision of touching each and every life. It continues to bring in new products in the market. Over the decades Microsoft has introduced Xbox, newer versions of Windows, upgrades to MS-Office and other products like Skype, Windows Server, Visual Studio, and .NET platform. However, apart from Xbox Microsoft was unable to expand its product line in the segment of newer innovative products. Microsoft has a loyal customer base and because of its great product updates over the last 15 years, that loyal customer base has never stopped using Microsoft product. However, Microsoft has the capability to innovate and the next big thing from Microsoft is expected by many around the world.
Microsoft has yearly revenue of $77 billion and net income of $21 billion (Income Statement, 2013). The net margin for the company is one of the highest in any industry segment and is superior to any of its close competitors. The total profit of its closest rival, Google is $12 billion. The company does not have any long term debt in the market which makes it a risk free company for investors. Microsoft has a cash reserve of almost $50 billion. Financially it is one of the healthiest companies in the world and continues to grow at good rate despite problems in Windows business. Microsoft has a huge financial strength and it can grow organically as well as inorganically in the coming future.
Capabilities, Future Trends and Strategy
The main market share of Microsoft comes from Windows Operating System and MS-Office operations. Xbox operation is also doing well and the revenue is increasing with the launch of Xbox 360. Windows Server applications are the fastest growing and one of the most profitable businesses for Microsoft. Surface line of business is just launched few months back and Microsoft is still struggling to get hold of the new business segment.
In the Information technology segment another area in which Microsoft has potential to enter is the enterprise software segment. The main enterprise software giants like SAP and Oracle currently dominate the market. However, Microsoft has the basic infrastructure and knowhow to enter the market if it can develop a good product. As most of industries use Microsoft products for other purposes so having a Microsoft Enterprise solution will go easily with other applications.
Finally, Microsoft is trying to enter the fast growing smartphone and tablet market. This will help the company grow in terms of revenue as the hardware market is much bigger than the software and IT segment. With the introduction of Surface and acquisition of Nokia’s mobile segment, Microsoft has taken the right step (MSFT, 2013). Although Surface is not doing well in the market so far but with Microsoft’s experience and innovative capabilities it may soon become the higher revenue earner for the company.
Potential demographics of Microsoft products include almost the entire population of all countries. Microsoft currently has two options; 1) to get into the hardware market in an aggressive manner and market its products competitively in terms of price in comparison to the main rivals like Samsung and Apple, and 2) it can continue to invest heavily on innovation and come up with software products in newer segments that are technologically and feature wise far superior than its competitors. It also should continuously look out for opportunities to grow inorganically as well if that suits the business need.
The technological change in the electronics market is very fast paced. Every year all the companies operating in the electronics market come up with new product features, state-of-the-art accessories and advanced technological innovations. For example, Apple came up with three improvements in its iPhone line of smartphones in 3 years in a row. Microsoft has a strong R&D department, dedicated to the innovation of new technologies, which brings in advancements in technologies for the existing products efficiently (MSFT, 2013). Now that Microsoft is trying to enter the electronics market, it needs to show continuous improvement in its R&D strategy from software to hardware segment.
Conclusion
Microsoft is one of the largest companies of all time. It is the market leader in the Operating System and Office based products market and continues to come up with products superior to its competitors. Even with such stellar portfolio Microsoft business is not without threat. The sluggish macroeconomic condition of US and EU are slowing down the laptop growth and also other competitors of Microsoft are gaining market share. To grow at the rate of its past performance, Microsoft needs to incorporate a few changes in its approach. First, it needs to get back its market share in the Operating System business. Now that Microsoft has a product for smartphones and tablets, it may gain back market share from Google and Android. Secondly, it also needs to get into other segments to diversify its risk. Getting into the mobile and tablet business is a step in right direction. Thirdly, Microsoft can think of getting into the enterprise software business seriously. There is a chance that Microsoft will succeed in that segment. Finally, Microsoft also should look for inorganic growth by using its cash reserve. Microsoft also should try to look for visionary leadership to take the company to the next level.
References
Chen, Chuan-Yi (2012). Strategic Analysis, Microsoft Business Solutions. Heyroth. Retrieved on 31st October 2013 from <http://heyroth.tripod.com/angela/examples/microsoftstrategy.pdf>
Microsoft Corporation (MSFT) - Financial and Strategic SWOT Analysis Review (2013). Research & Markets. Retrieved on 31st October 2013 from <www.researchandmarkets.com/Freports/1291204/Fmicrosoft_corporation_msft_financial_and.pdf>
Riley, Jim (2012). Porter's Five Forces Model: Analyzing Industry Structure. Business Strategy. Retrieved on 31st October 2013 from <http://www.tutor2u.net/business/strategy/porter_five_forces.htm>
Income Statement (2013). Microsoft Investor Relations. Retrieved on 31st October 2013 from <http://www.microsoft.com/Investor/EarningsAndFinancials/Earnings/FinancialStatements/FY13/Q4/IncomeStatements.aspx>
The History of Microsoft. Channel 9. Retrieved on 31st October 2013 from <http://channel9.msdn.com/Series/History>
