Micosoft was founded on 4th April 1975 by Bill Gates & Paul Allen and is headquartered in Redmond, Washington (USA). The company provides employment to more than 89000 people. Microsoft recorded revenues of $62000 million in the financial Year 2010 (Microsoft, 2011). Microsoft became the global leader of software services and internet technologies for the computing industry in the early 90’s. It provides wide range of products & services and is involved in developing manufacturing, licensing and supporting software support.
Microsoft’s software product includes operating system, business solution aps, computer and server applications as well as software development tools. Microsoft offers different range of services from its five divisions (Microsoft,2011). Microsoft holds a strong credit rating of AAA from Standard & Poor’s & Moody’s and is one of the strongest US companies with $41billion worth of assets and only $8. 5 billion in unsecured debts. The Company has presence in over 100 countries of Asia, America, Europe ,Africa & Middle East. Reuters,2011) The global software & service industry stood at $2,330 billion in 2009 and even though it experienced bit decelerating growth in the recent years, as per the forecast it will experience 50% growth and will reach $3,400 billion by 2014 (Datamonitor,2010). The firms in the industries require varied inputs that includes employees, hardware & software tools. The employees with required technical know how & expertise is an essential input for the market and thus the success of the firms depend on the services of qualified employees to a large extent (Datamonitor, 2009).
The Industry includes Companies of size Fortune 100 companies to specialized single service firms as well as open source community based project. Subsequent advancement in technology is made very frequently in the industry due to which the whole industry has changed and is changing time to time. To survive successfully in this industry it is essential to make rapid developments in the product & services by keeping track of the environment of the industry because adopting any strategy or strategic position not only will affect the company but the entire industry as well.
Market Based view: Porter (1980) explained that the profitability of any organization depend on the competitive forces which it experience from the market and thus examining the five forces is essential for the formation of future strategies. Let us explore the five forces experienced by Microsoft: Power of Suppliers: The main supplies in the industry are of Hardware devices & software tools (Microsoft,2011). The hardware components are mainly obtained from a sole supplier which large companies are offering differentiated products resulting in substantial supplier power.
The power of suppliers is strong because of high importance of inputs. Bargaining power of buyers: The main buyers in the industry in the industry are businesses, individual consumers as well as government bodies. The buyers could be divided into two segments, one is the lower end buyers who are small businesses who are served by local or regional firms and upper end buyers that includes big corporates & large customers for whom a name reputation carries importance.
The buying power of these customers is not very strong because there are very few companies catering services of required caliber and Micosoft being the most reputed brand in the Industry gains a competitive edge (Lecture Notes, 2011). Rivalry among existing players: The industry consist of small firms operating along the large MNC’s , that boost rivalry. The large market players like the Microsoft is experiencing increased competition from the diversification from other fields. But the dominant players like Microsoft, IBM, Google, Apple etc continue to intensify competition in the high end market.
The low switching cost and high exit barriers also add to the rivalry (Lecture Notes, 2011). Thus there is moderate competition in the industry. Barriers to entry: The strong growth forecasts offer an attractive prospect for the new entries which can enhance rivalry to great extent. But even though the entry for small players could be easy, the entry for a large firm is not that easy. A high technical expertise is must for a new entry. The brand image of the large players who are most like acquire and retain customers also act as a barrier.
Threat of substitutes: A substitute to the services of the industry would be that the customer organization employ & train the in house staff to come up with such services. The company may rely on the existing staff but market players provide advantage by releasing the core employees from doing non-administrative processes. In all there is a weak threat of substitutes in the industry (Datamonitor,2011). The generic strategy allows the firm to react to the five forces better than their competitors (Worthington & Britton, 2006).
According to Porter (1985), an organization can enjoy competitive advantage by focusing on the generic competitive strategies. The organization could enjoy competitive edge by either offering the product at low cost or differentiating the product from the competitors or by focusing on a specific market. Porter (1985) emphasized that the generic strategies should be at the centre of the strategic plans. About 15-20 years back, Microsoft was adopting the generic strategy of cost leadership. Microsoft was enjoying sales monopoly in the absence of any alternative for windows & office.
But today Google aps has acquired low end market and possess classic disruptive technology & is cheaper as well easier to use than office. Apple’s iPhone for mobile users and ipad for low end PC business has brought new trend of Windows. As a result it could be agreed that Microsoft is struck in the middle, which is not good for company’s profitability. Resource Based view: The resource based view reflect the link between the firm’s internal features and its performance, thereby the relation of the firm’s resource to its competitive advantage (Ambrosini, 2007).
The internal capability of the firm determines its strategic choices to respond in the external environment. According to Barney (1991), the resources should not be heterogeneous in nature and not completely mobile for providing sustained competitive advantage. He also came up with the concept of VRIO as per which the resources should be Valuable , Rare ,inimitable and organized. Let us analyze Microsoft’s resources and its distinctive core competencies. Strong brand image: Microsoft has gained a significant brand image since its foundation.
Microsoft was ranked 3rd in terms of brand value with $56,000 million in 2009. It was ranked above some of its main competitors like HP and Google (Datamonitor, 2009). The oldest brand online is Microsoft’s MSN. The strong image of Microsoft is also responsible for a large proportion of intangible earning. Due to its strong image the customers prefer Microsoft’s OS over their rivals. It also generate greater trust for Microsoft’s product and enhance thereby enhance their demand. Strong and consistent Balance Sheet: Microsoft has been producing a strong balance sheet for many years.
The cash & cash equivalent of the company was $24 million in the financial year 2008 but increased by 50 % and reached $36 Million by 2010. The strong balance sheet allows Microsoft to invest in inorganic growth measures and also buy back its own shares. It also makes it possible to make investment for some future avenues. The company also recorded increased equity levels and thus maintained a strong debt equity ratio of 0. 1 in 2010. Whereas for the same period Oracle had debt equity ratio of . 5 and IBM had 1. 2. But the profit margin has been declining for the last couple of years (Microsoft News Center,2011). Distinctive competency:
Microsoft also possesses a distinctive competency of its universality as most of the business applications are designed to run on Micosoft’s Windows & DOS. Apple’s operating system for its PCs could be superior thaN Microsoft’s DOS & Windows but its usage is restricted to the Macintosh personal computer systems only because Apple has a closed system. Microsoft thus has the advantage of an open system as it could be run in every other system except Apple’s. Though Micosoft’s other primary competitor IBM could be run on personal computers but the number of programs produced for OS/2 of IBM is very comparatively very low.
Microsoft has divided its business in five areas divisions that provides a great potential to serve their customer. The five divisions of Microsoft includes Windows & Windows live , Server & Tools, Online service division, Microsoft Business division , Entertainment & Devices division. All its divisions are among the best companies in their respective markets (Microsoft,2011). But it does not possess complete monopoly in any of the division and faces intense competition across all markets. Critique of organizations sustained competitive advantage:
It can be inferred from five forces analysis that there are high barriers to new entry for large firms in the industry and the bargaining power of buyers is also not much. Thus Microsoft need to formulate strategies tom compete with the existing players like Apple, IBM, Google etc. Even though Micosoft possess a competitive advantage of its brand image but its sustainability does not look much good. The strong image and monopolistic condition in which Microsoft was able to survive with its Windows & Office are breaking down. The importance of PC’s was negatively affected and Microsoft did not transform windows on other devices.
The competitors may soon offer cheaper or even free services for the rest PC like devices which can put pressure on Microsoft to keep the margins low. Even the second cash cow of micosoft i. e Office is also being targeted by the competitors. The Google apps has acquired the low end market and also started to acquire the middle market. Some big companies are also now preferring Google aps over Microsoft Office (Blodget,2010). Thus there is also a threat to sustainability of Microsoft’s Office too. Even the internet explorer of Microsoft which was not having much competitors is experiencing strong competition from chrome & Firefox.
Simultaneously, the strong balance sheet of Microsoft will be affected too and the company will not have funds for its R & D as well as future investments. A serious threat to the sustained competitive advantage of Microsoft is also due to increased piracy. It is believed that more than 50 million systems end up with pirated windows every year, which is a significant loss not only to Microsoft but to the whole industry. There is increase in number of pirated products despite of company’s measures of educating consumers of the benefits of licensed product & obtaining indemnification gains for intellectual property risk.
The lack of presence of harmonized patent law in many countries also makes it difficult to remove piracy (Datamonitor,2010) Even though majority of business application today have been designed to run on Microsoft OS and thus Microsoft do have a competitive advantage. But some of the biggest customers of Microsoft Windows are switching. For Instance, Dell is in talk with Google to produce systems that will be able to run Chrome and HP also brought a wreckage of palm so that it could have a better operating system for Cell Phone to stand against Apple (Blodget,2010).
These steps of Microsoft customers are not good for company’s sustainability. As a result, most of the devices will run application not designed to run on Microsoft. For Instance, Apple has a closed system where customer can download application from its own store and non apple designed application will not run. For long time Microsoft emphasized that the windows will remain focus for computing and believed that PC desktops will remain important. But the new innovations of Google made this appear contradicting.
The desktop PC is not the focal point anymore, everything revolves around internet which does not require Microsoft’s Window (Blodget,2010). Microsoft thus failed to examine the corporate environment to some extent. This is evident from its inability to recognize the importance of cellular phones which is providing alternatives for many of its cash cow products. Even though the rivalry is moderate among the existing firms but due to the large companies involved and high exit barriers in the industry the competition is quite intense.
The companies are also not able to enjoy the competitive advantage for a long time due to rapid advancements in technology. Thus to have a sustained competitive advantage is difficult to keep in the industry. Conclusion & Recommendations: Thus it can be concluded that Microsoft experience very moderate threat of new entry but experience intense competition from the existing firm. Microsoft possess the competitive advantage of its strong brand image and strong balance sheet results. It also derives advantage from being the most universal platform for which most of the business applications are designed to run.
But it was discussed that the best profit generating products of Microsoft has been targeted by customers and with the better services offered by the competitors, the competitive advantage of Microsoft is being affected. Its competitors for instance Apple is adopting differentiation strategy and is providing unique products and google is offering alternatives to many Microsoft services at cheaper and even at free (Blodget, 2011) thereby adopting generic strategy of cost leadership . Microsoft is thus experiencing intense competition.
Other challenges before Microsoft were found to be increased piracy, not adopting any particular generic strategy and being struck in the middle. Microsoft have to take some immediate steps to turn around its fortune and need to fight to be on its way back to the become industry leader again. Being the first mover is always very important for this industry and provides a competitive edge for substantial amount of time. This leads to not only increased profit but also cuts the profitability of competitors (Worthington et al, 2006).
Microsoft is focusing on its Research & Development division for providing distinctive & creative products . It has spent more than $8 billion in each of the last 3 years which is about 15% of its annual revenues. Also , about 10% of Microsoft’s employees are involved in R&D. The strong Research could result in products that could augment the Market position of Microsoft & provide a sustainable competitive advantage (Datamonitor, 2011). For better innovations Microsoft is also recommended to obtain the best human resource and should look for a mix of people with expertise and experience as well as fresh graduate with potential.
It was also observed from the market based view of Microsoft that though the company was at the position of cost leadership in the past but is now struck in the middle which is not good for its profitability. Thus it need to adopt any particular generic strategy in order to continue its brand image. The Research & Development of Microsoft should come up with products that are unique and could be offered at competitive prices. Microsoft has not entered the mobile market and it has got the advantage of its brand image and its strong balance sheet which could make it a potential market leader of the cellular industry.
Thus the mobile phone market will be good area where Micosoft can invest in. Another market which possesses good potential to generate profitability for Microsoft is the search engine market. Though unlike mobile phone industry Microsoft is already in this market (Bing search), but it acquires very low share in the market compared to the search engines of Google & Microsoft. Thus it is also a potential area of investment where Microsoft can utilize its competitive advantage of its strong brand image and improve its market position.