Strategic Analysis of MIcrosoft

Microsoft Strategic Analysis

Introduction:

Apart from being the maker of Windows Operating System , Microsoft is also well known as  a cloud player. However, the technology industry has seen higher competition during the recent years. Apart from Apple and Google, several other technology and especially cloud players are competing with Microsoft’s products and services. In order to find faster growth the brand is investing in innovation and expansion of its product portfolio. Its revenue grew from 85.3 Billion dollars to 90 Billion dollars from 2016 to 2017. Increased revenue from the cloud business is the reason behind this growth. Apart from product innovation, the brand is also investing in acquisitions and partnerships to find faster growth. Acquisition of Linked In enabled the brand to connect its cloud business with the leading professional network of the world. Microsoft Azure has also seen fast growth during the recent years with the rate of usage having doubled in less than an year. Microsoft also broadened its product offerings to reach new customers.

It introduced hundreds of new Azure services, including new cognitive services APIs for vision, speech, text, translation, emotion and more. Another major point of focus for Microsoft is AI. Today, Microsoft’s technologies are being used across the industry by various players to improve efficiency. With growing digitisation and focus on new technologies like AI having the potential to increase productivity multifold, the technology industry is undergoing a major transformation. Apart from things like Data and AI, it is the gaming industry which is also experiencing massive growth. Microsoft’s Xbox has maintained an impressive presence in this industry whose worth has grown past hundred billion dollars. Founded in 1975, the brand operates across more than 190 countries worldwide. It develops, licenses, and supports a wide range of software products, services, and devices which create new opportunities and greater convenience for people, professionals and businesses all around the world. Apart from higher business efficiency and productivity, the platforms and tools provided by Microsoft have brought higher convenience and competitiveness for big and small businesses. Apart from global presence, a major strength of Microsoft is its large product/services portfolio.

Microsoft Important Stats 2017:

Revenues: 89950 Million Dollars

Net Income: $ 21204 Mn

Gross Margin: 55689 Mn dollars

Employees: 124,000

 

SWOT Analysis of Microsoft (2018):

Strengths:

Global Presence:

One major strength of the brand is its global presence. It operates across more than 190 countries worldwide. Technological development has happened at a very fas rate in the 21st century and that has led to computers performing a very large part of the work going on inside offices.  Today Windows 10 is active on more than 500 million devices around the world. More than 100 million people are using Office 365 commercial.

Large product/services portfolio:

Another major strength of the brand is its large product/services portfolio. The brand has a very large product/service offering including operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and training and certification of computer system integrators and developers. Apart from that it makes and sells devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories, that integrate with our cloud-based offerings. It offers a large array of services including cloud-based solutions that provide customers with software, services, platforms, and content. Microsoft also offers online advertising services.

Growing cloud business:

The growth of cloud industry has proved good for Microsoft brand. Increased demand for cloud based services has proved good for the cloud players. Microsoft is also enjoying growth in revenue and is growing its range of cloud based services. the intelligent cloud segment of Microsoft’s business includes  public, private, and hybrid server products and cloud services that can power modern business. It is mainly comprised of :

Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, and Azure.

  • Enterprise Services, including Premier Support Services and Microsoft Consulting Services. (Microsoft Annual report, 2017)

In 2017, its revenue from intelligent cloud businesses rose to 27.4 Billion dollars from 25 Billion dollars last year.

Focus on innovation: 

Microsoft has maintained heavy focus on innovation. It is essential for the growth of a technology business. Most of these large technology brands invest very large sums in research and redevelopment every year. Since technological growth is happening at a very fast pace, it is essential that you stay focused on innovation to not lose your competitive edge. Apart from AI another area where Microsoft has focused on innovation is mixed reality. Mixed reality has the potential to radically alter gaming, firstline and knowledge work through immersive experiences. In its cloud business too the brand is focusing heavily in innovation in a wide range of services.  In 2017, it invested $ 13 billion in research and development which was 1 Billion higher than its investment in R & D during the past 2 years.

Brand image/equity:

Brand image ad equity are very important strengths for any brand that are directly related to its market position as well as the level of sales it can achieve. Microsoft is a market leading brand in the technology industry that  has managed to create a very high level of trust. It a brought  large range of innovative products to the market that add efficiency and increase productivity of the users. Over these years, it has been a major name in the world of computing. the Windows OS and Microsoft Office are used widely across a very large number of computers in the world.  Apart from widespread use, it has helped them derate very high level of trust among its users.

Weaknesses:

– Declining PC market – The declining PC market is major shock for the players in the computing industry. Worldwide major PC brands have seen their market shrinking and Microsoft being a major provider of software and devices has also seen its business being affected because its business depends on the sales of PCs worldwide. This is going to hurt sales.

– slower in terms of innovation – Compared to several other players in the industry  including Apple and Google. Its Bing search engine and Internet explorer browser are a lot behind the ones released by Google. It is why it has a much smaller market share in the search engine industry.

– Small advertising market share: While the advertising revenue of the brand has grown in the recent years, its share is still much smaller compared to the major players like Google and Facebook.

Opportunities:

– Innovation and AI: Investing in innovation and modern technologies like AI is a key area of opportunity for the brand. Apart from data & AI as well s cloud industry, innovating in the games industry also presents a significant opportunity for the brand to achieve market expansion and faster growth.

– Acquisitions and partnerships: In past Microsoft engaged in several acquisitions like Nokia which were not highly fruitful. However, its acquisition of Linked In has proved good for the brand in several ways. Moreover, these acquisitions and new partnerships can be a great way of market expansion and growth for the brand. It should do that selectively and carefully but acquiring the right businesses can help it grow faster in a fast changing business environment.

– Affordable services: The brand can farther extend its market presence and grow its brand by making its products and services more affordable. Several of its products may yet be quite costly for a large audience around the globe. This is especially true about the larger software packages and these products can be made more affordable to reach a larger audience. Apart from making its products widely accessible, this will help at growing the brand and its market faster.

Threats:

– Legal issues and  a poor regulatory environment: One biggest threat to the technology industry is the poor legal and regulatory environment worldwide. Legal issues have continued to trouble the technology brands as the number of laws related to user safety and privacy have continued to grow. In the past Microsoft was fined severely by the EU. Apart from the it has also continued to see heavier pressure due to growing data related regulations in the recent period. In US too businesses have kept complaining regarding the outdated regulatory structure.

– High competition: The growing competition in the tech industry is also creating heavy pressure on the technology brands. Apart from Apple and Google, there are several cloud players too including Amazon that are competing with Microsoft across large range of products and services. growing competition also cerated severe pressures related to innovation and adds to operational costs for the brand. Higher competition also leads to higher R&D and marketing costs.

– Fast changing technology market and consumer preferences:

The technology industry is undergoing a paradigm shift and changes are happening at a much faster rate than ever before. With technology changes happening fast and consumer preferences changing faster, the brand requires to retain its heavy focus on technological innovation and marketing. On one side it adds to the operational costs of a brand and on the other it may sometimes create extra heavy pressure with regards to product innovation. Many times it also leads to product failures.

PESTEL Analysis of Microsoft –

Political: –

The importance of political factors has grown heavily in the 21st century. It is evident in the form of higher regulation of businesses. All around the world governments are exercising higher control and this has led to increased pressures on the international brands.  The larger brands are especially seeing very high level of regulation internationally. Moreover, regulations vary from country to country and market to market. Apart from taxes, political forces affect businesses in many other ways too. Many times are relationships between two nations may also affect the level of sales one business achieves in foreign markets.  Political stability is also important in terms of business and overall political stability is also a sign of economic stability which is compulsory for a profitable business environment. Political chaos leads to business disruption and creates pressures on businesses which can lead to loss of sales and profits.  It can also disruption supply chain and cause losses for businesses. In the way political factors affect businesses in multiple ways.

Economic: –

Economic factors are also a major impact on businesses. They have a direct effect on sales and profits of businesses. The world has been through a bitter recession some years ago. During this period the income of both businesses and individuals had fallen which had led to decreased sales for the technology brands. Several large brands in the vehicle industry had to be bailed out with government help. With the level of employment having declined to the lost, people were not having much dispensable income. This made people and businesses cut down costs to save money and therefore lower sales of brands. Economic activity has returned worldwide and the level of employment has also increased. this has led to people spending more on various products and services. The technology world has benefitted especially from these changing trends.  Sales are growing and translating into larger profits for the technology brands. Microsoft is also seeing higher revenue and net income with rising economic activity.

Social: –

Social factors too have acquired an important position in the context of business. Social trends and changing demographics of the world population are   affecting businesses in new ways. With competition in the technology industry having reached anew level the brands are fighting for retaining their market share. each customer is valuable and in order to attract and retain them brands are adapting their marketing strategies to the local taste and culture. Business strategies are also being based on the same facts. Overall the importance of sociocultural factors has increased manifold in the 21st century.

Technological: –

Technology is at the heart of everything from shopping to business in this era. It drives everything from sales to marketing and customer service as well as is a major source of competitive advantage for brands. Not just this technology enables brands to perform better. In case of technology brands like Microsoft, it is the central focus and the is why these brands have retain such heavy focus on innovation by making major investments in R&D. While Microsoft has increased the range of its product/service offerings in the recent years, it is also creating new partnerships with other technology brands to find faster growth and for market expansion. It acquired Linked In to grow the exposure of its advertising programs to new customers. Apart from that this acquisition has also helped it reach a larger customer base and in this way grow its market share. Moreover, Microsoft continues to invest inner technologies like AI and Mixed reality to grow faster and bring more effective and efficient product/services to the market. Technology forms the core of the business in the new era and its importance can also be understood from the fact that digital technology is changing consumer experiences like never before.

Environmental: –

Environmental factors are also of paramount importance in the 21st century. However, the large businesses can lay a a major role in environmental protection and energy conservation. these are some of the most important areas where businesses are investing. Apart from the environmental laws, there are other factors too causing these changes. Investing in sustainability has a positive impact in the brand image and can change consumer perception of a brand. It is also why brands are investing heavily in making their supply chains more sustainable and minimising their carbon footprint. Some of the important focus areas were Microsoft has invested include carbon neutrality, water conservation, energy conservation and waste reduction. In this way environmental factors are a major concern associated with business in the 21st century.

Legal: –

Legal factors are now playing amore important role than ever n the context of business. It is because a wide net of laws is affecting businesses all over the world and this has led to growing pressure on businesses. There are laws related to environment, labor, consumer safety and even marketing which have to be abided to in order to avoid any form of legal action. Businesses that do not comply face stringent legal action and the fines can often be quite large running into billions. Microsoft has also been at at the receiving end in the past, fined heavily by the EU some years ago. the growing legal pressures are increasing the compliance related and operational costs. Most big technology brands like Microsoft have special compliance teams that take care of legal compliance for their business around the world.

Five Forces Analysis of Microsoft:

Bargaining power of suppliers:

The overall bargaining power of Microsoft suppliers is moderately low which is mainly because of the large size of the brand and its financial strength. Microsoft has a very large chain of suppliers and subcontractors from all around the world. It has managed this large chain very efficiently. Most of these are much smaller brands and businesses as compared to Microsoft. However, the list also contains some large and notable names that hold some bargaining power but the number of such large suppliers is very few. The overall bargaining power of the suppliers gets to be moderately low and their are several factors moderating their bargaining power including brand name, image, financial strength and global presence.

Bargaining power of customers:
There has been an increase in the bargaining power of customers in the 21st century. these changes have been affected by several factors including technological growth happening at a very fast rate. The customers of the 21st century are well informed customers. Moreover, due to higher competition hey have several choices before them and switching costs are mostly low. All these factors have led to higher bargaining power for the customers. Some of the factors that moderate the bargaining power of the customers include brand image and equity as well as quality of products and services. Apart from that the pricing strategy used by the brand is also an important factor that moderates the bargaining power of customers.

Threat of substitutes:

The threat of substitutes for Microsoft is low. While cloud industry has got several players and still the large range of products and services offered by Microsoft minimises the threat. Moreover, Windows OS and Microsoft office face absolutely low threat from substitutes because most of the like Mac are costlier or less efficient like the ones created by smaller brands. Its software and operating system are also a major source of revenue for the brand. The heart also gets minimised by the quality of products and services offered by the brand, customer experience and trust as well as pricing strategy and its global presence. So, the overall threat for Microsoft from substitute products and brands is very low.

Threat of new players:

The threat of new entrants is very low which is because either it is some major innovation or a very large investment that can help  new player establish itself in the market. Microsoft is a well known global brand and to establish a global presence like it, one must have major technological capabilities like Google or Apple and valuable offerings. New players do not venture into this field also for the reason that the existing brands invest heavily in research and development for innovation and protection of their market share and domain. Apart from that skilled human resources are also a costly investment in this era. The overall threat from new players is negligibly small.

Intensity of competitive rivalry:

The intensity of competitive rivalry has grown very high in the technology industry. From Google to Amazon and Apple, all the competitors of Microsoft are aggressive about retaining their market share and customer base and invest a lot in innovation and marketing for market expansion and financial growth. Technological changes are happening very fast and disruptive innovation has also turned the brands quite aggressive. The overall level of competitive rivalry in the industry is very high.

Value Chain Analysis of Microsoft:

Primary Activities:

Inbound logistics:

World’s biggest technology brands have a very large part of their supply chain in Asian countries and mainly China. These Chinese suppliers form a large part of Microsoft’s supply chain as well and supply goods and services. the brand uses digital technology to leverage its supply chain capabilities and manage inventory.

Operations:

Microsoft is operational in more than 190 countries. Its business operations are categorised into four operating segments – productivity and business processes, intelligent cloud, personal computing, corporate & other.

Outbound logistics: Apart from OEMs (Original Equipment Manufacturers) who preinstall Microsoft’s products and software, Microsoft uses a large network of distributors and resellers for the distribution of its products and services all over the world.   

Marketing/sales: It uses a wide network of distributors, resellers, OEMs and other marketing and sales channels including online channels for the marketing and sales of its products. Apart from these things the brand also spends on advertising and promotion of its brand and products. In 2017, it spent 1.5 Billion dollars on advertising. 

Support activities:

Technology:

Micrsosoft is  technology brand known for its extra ordinary technological capabilities as well as a very large technological infrastructure that  ranges from Windows operating system to a large range of software as well as cloud based services and more. It has managed a large online sales and marketing channels too.

HRM: 

As of June 31, 2017, the brand employed 123000 full time employees of which 71000 were employed in US and 51000 internationally. In 2017, the number of employees creased by 11000 which was because of the acquisition of Linked In.

Infrastructure:

Infrastructure is an important support behind the growth and success of a brand. Microsoft has managed  large and global infrastructure that  includes its datacenter, corporate offices, support offices etc.

Procurement:

The procurement team of Microsoft procures raw materials from major suppliers around the globe. A large part of its supply chain for goods is there in China because of availability and affordability of raw material and labor.

VRIO Analysis of Microsoft:

Resources/Capabilities of Microsoft

Global presence: Microsoft is present in more than 190 countries of the world. Its global presence is a key strength for the brand.

Brand image/equity: Microsoft has a strong brand image in the technology market as a customer oriented and innovative brand.

Technological capabilities: Microsoft is an innovative technology brand widths thing market position and excellent capabilities.

HRM: Microsoft hires highly skilled human resources. This is also an area where competition is quite intense in the 21st century.

customer loyalty: Microsoft has a very large base of loyal customers from around the globe.

product portfolio: Microsoft has a large and diversified product portfolio that is focused on serving a large customer base made of individuals, professionals, businesses and government agencies as well as large corporate brands.

Resources/Capabilities –  Valuable – Rare – Inimitable – Exploited  – Implications

Global presence                        Yes                 No            No                     Yes       Temporary advantage

Brand image                             Yes                  Yes            Yes                  Yes         Competitive advantage

Technology                                Yes                Yes           Yes                  Yes         Competitive advantage

HRM                                           Yes                No              No                  Yes            Temporary advantage

customer loyalty                       Yes                No              No                   Yes             Temporary advantage

Product portfolio                      Yes               Yes            Yes                 Yes               Competitive advantage

Financial analysis of Microsoft:

The revenue of Microsoft increased 4.6 Billion dollars or 5% in 2017 reaching 89.95 Billion dollars from 85.32 Billion dollars in 2016.  the increase in revenue was driven mainly by growth in revenue across Productivity and Business Processes and Intelligent Cloud, offset in part by lower revenue from More Personal Computing. Acquisition of Linked In and increased revenue from Microsoft Office led than increase in revenue from Productivity and Business processes. Gross margin increased $3.1 billion or 6%, due to growth across each of MICROSOFT’s  segments, including the acquisition of LinkedIn, driven by higher revenue. Gross margin included an unfavorable foreign currency impact of 2%. Operating income increased $2.1 billion or 11%, primarily due to higher gross margin and lower impairment, integration, and restructuring expenses, offset in part by an increase in research and development and sales and marketing expenses. Apart from that costs of revenue increased 1.5 Billion or 5% due to growth in commercial cloud, Linked In acquisition and higher search advertising traffic acquisition costs.

Suggestions:

  • Innovation in Games and Mixed reality as well as AI will help the brand find faster growth.
  • Making services more affordable could reduce the threat from piracy.
  • Focus on innovation in its web based services including search engine and browser could help increase market share in search advertising.
  • Related diversification can help find faster growth.
  • Linked In’s acquisition has brought fruitful opportunities for Microsoft and more such acquisitions and partnerships can help grow the brand and revenues.

Sources:

Microsoft Annual Report 2017

https://www.recode.net/2017/3/14/14890122/google-search-ad-market-share-growth

https://www.searchenginejournal.com/bings-share-search-market-growing-faster-googles/164425/

https://www.microsoft.com/en-us/about/corporate-responsibility/environmental-sustainability

https://www.microsoft.com/en-us/trustcenter/compliance/default.aspx

https://www.microsoft.com/investor/reports/ar13/financial-review/business-description/distribution-sales-marketing/index.html 

https://www.microsoft.com/investor/reports/ar13/financial-review/business-description/distribution-sales-marketing/index.html

 

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