BUSINESS

478
COMPANY SYNOPSIS:
MICROSOFT

Adrian Richens
Yifan Jiang
Jixin Tian
Kathy Zhang
Wenhao Wang

02/05/2016

Table of Contents
History ........................................................................................................................................................ 1
Industry Environment ............................................................................................................................... 2
Threat of New Entries ............................................................................................................................ 2
Competition and Rivalry ......................................................................................................................... 2
Substitute Product ................................................................................................................................... 2
Bargaining Power of Buyers .................................................................................................................. 3
General Environment ................................................................................................................................ 3
Economic Environment .......................................................................................................................... 3
Technology Environment ....................................................................................................................... 3
Legal Environment ................................................................................................................................. 4
Demographic Environment and Globalization ...................................................................................... 4
Current Situation ....................................................................................................................................... 4
Financial Performance .......................................................................................................................... 4
Cloud Computing .................................................................................................................................... 5
Strategy ....................................................................................................................................................... 5
Business Level: Differentiation .............................................................................................................. 5
Corporate Level Strategy: Related Constrained ..................................................................................... 6
International Strategy: Global Operation .............................................................................................. 6
Cooperative Level Strategy: Strategic Alliance ...................................................................................... 6
Strategic Challenges .................................................................................................................................. 7
Decline Market Shares in Hard Devices ................................................................................................ 7
Lack of innovation .................................................................................................................................. 7
References ................................................................................................................................................ 10

History
Microsoft, officially established by Bill Gates and Paul Allen on 4 April 1975 in Albuquerque New
Mexico, is a multinational technology company which develops, licenses, and supports a wide range of
software products and services. On November 1, 1978 Microsoft established ASCII Microsoft, the first
international sales office, in Tokyo. On June 25, 1981, Microsoft reorganized into a privately held
corporation, becoming Microsoft, Inc., which operated in the State of Washington, with Bill Gates as
President and Paul Allen as Executive Vice President. Please see Appendix 1 for futher details.
Microsoft devotes itself to empowering every person and organization on the planet to achieve more.
Microsoft employed approximately 118,000 people on a full-time basis, 60,000 in the U.S. and 58,000
internationally as of 2015. In the same year, Microsoft earned a revenue of $93.580 Million USD. After
reorganization, Microsoft operates in six segments, divided into the two aspects shown in Table 1:
Table 1: Microsofts Operating Segments
Device and Consumer
Including D&C licensing, computing and gaming hardware, phone hardware, and D&C other.
o D&C Licensing
Windows; non-volume licensing of Microsoft Office; Windows Phone operating system.
o Computing and Gaming Hardware
Xbox Platform; Surface; Microsoft PC accessories.
o Phone Hardware
Lumia phones and other non-Lumia phones.
o D&C Other
Resale, consisting of transactions in the Windows Store and Xbox marketplace, search
advertising, display advertising, Office 365 Consumer, comprising Office 365 Home
and Office 365 Personal, Studios, comprising first-party video games, Mojang, and
non-Microsoft products sold in Microsoft retail stores.
Commercial
Including Commercial Licensing and other commercial segments.
o Commercial Licensing
This includes server products, Microsoft Office for business, volume licensing of the
Windows operating system, Microsoft Dynamics business solutions.
o Other Commercial
Commercial Cloud, Enterprise Services

Industry Environment
Threat of New Entries
Global software and telecommunications is a mature, fast growing, and highly competitive industry.
With the existence of oligopolists, the industry has high barriers to entry and it requires high set-up
costs, which includes marketing costs for start-up companies to emphasis their brand image. Through
rapid development and growth, the global software market has precipitated into a maturity stage
(PwC, 2016). Instead of gains from technology innovation, software companies develop their business
through acquisitions (PwC, 2016). The greatest revenue comes from the ability to globalize
(TechAssure, 2013). To break through the bottleneck, disruptive technologies are required to create a
new market for new entries and growth companies, to unlock extraordinary potential (PwC, 2016).
Competition and Rivalry
The boom of the global software and telecommunication industry has created intense
competition between oligopolists, and the frequent updates on new technologies has frustrated
retailers, who need to differentiate from competition. Drawing their attention away from
customers, software companies have turned their attention to focus on mergers, acquisitions, and
divestitures in order to expand their market share, which makes the market more volatile and
harder for growth companies to achieve long term survival (Casey & Hagen, n.d.).
Substitute Products
Windows, which is the operating system Microsoft developed, plays the most dominant role
among Microsofts products. Although other companies have marketed their own systems, and
have captured a small portion of the market, Microsoft is still the biggest player in the operating
system market, and have more than 80% of global usage (Realtime Analytics, 2016). Due to the
large market share Microsoft has, they have a reduced probability of being substituted.

The bargaining power of suppliers is strong for Microsofts devices, as the hardware market is a
model of oligopoly, limiting the choice Microsoft has. However, it is important to realize that the
sale of Microsofts devices only contribute to a small portion of Microsoft revenues.
Bargaining Power of Buyers
The bargaining power of buyers is low since Microsoft occupies most of the market of operating
systems. In addition, Office is the leading working software among its market. People do not
have much in the way of other comparable choices (Microsoft, 2016).

General Environment
Economic Environment
The significant economic factor that impacts Microsofts global revenue is the US dollar
exchange rate. According to the earning release for the second quarter of 2015, revenue
decreased roughly $1.2 billion, or five percent due to unfavourable foreign currency impact. In
addition, about 50 percent of Microsofts revenue comes from foreign countries, and this
percentage is increasing. Thus, the exchange rate is the most critical factor of the economic
environment for Microsoft to currently consider (Microsoft, 2016).
Technology Environment
To stand out from the competition and satisfy customers ever increasing demand for flexibility, which
allows them to take advantage of new technologies, cloud-based software (XaaS) has become more
acceptable. According to market researcher IDC, SaaS is expected to grow at a compound annual
rate of more than 20 percent throughout the next ten years. XaaS is expected to exceed traditional
software license delivery by five to one. By the adoption of XaaS, customers use it without
significant upgrade costs and can estimate the total costs of ownership of software more accurately.
As a result, the publics attitude towards new channels has changed (Casey & Hagen, n.d.).

Legal Environment
The political environment is a factor that greatly affects Microsoft. The U.S. Justice Department filed
antitrust charges against the company, declaring that Microsoft had stifled Internet browser competition
and limited consumer choice. In March 2004, the European Union fined Microsoft and ordered it to
take out its media player software from Europes version of Windows. Microsoft already reached the
settlement for the first case, but a worst case scenario would be that these legal actions would have
caused Microsoft to segment. In fact, Microsoft had to face quite a few antitrust lawsuits in the past.
Demographic Environment and Globalization
Microsoft is operating in many foreign countries, and approximately 50 percent of its revenue
comes from sales in foreign countries (Microsoft, 2016). Thus, the geo-demographic environment
is an important factor that affects Microsofts decision and strategies. Microsoft is continuing to
expand its global market. From the early 1990s, Microsoft has become the global leader of
software services and Internet technologies for the computing industry.

Current Situation
Microsoft intends to establish itself in the area of artificial intelligence (AI) in 2016. At the
beginning of the year, Microsoft announced that it has acquired SwiftKey, which offers a popular
third-party keyboard that is used on Android and iOS. The deal furthers Microsoft's new mobile
strategy. Instead of focusing on hardware - where the company has a tiny share of the market
with its Windows Phone range Microsoft is now looking to build up a range of productivity
software to be used on any kind of device (Lee, 2016).
Financial Performance
Figure 1 show the recent financial performance of Microsoft Company. Chart 1 shows that the
financial performance is stable every quarter except for Q2 in 2015, where Microsoft suffered

negative net income and profit margin. Chart 2 shows that Microsofts revenue has been
continuously increasing over five years, with a decrease in profit margin. Its net income
fluctuates and reaches its five-year low in 2015.
Figure 1: Microsoft Company Data
Chart 1: Quarterly Data

Chart 2: Five-year Annual Data

Source: Google (2016) https://www.google.com/finance?q=NASDAQ%3AMSFT&fstype=ii&ei=jnO0VojHH8e9igKP1aho

Cloud Computing
For its second fiscal quarter, which ended on Dec. 31, Microsoft reported a decrease in profit and
revenue. The companys personal computer business profits have been hurting for a long time, but its
cloud business continues to grow. According to The New York Times, by most analysts estimates,
Microsoft is in second place in the most prominent segment of the cloud services market in which
computer storage and other services in data centers are rented to customers after Amazon. IBM
and Google are next (Wingfield, 2016). The success of Microsofts cloud business pulled up its
share price while shares in rivals such as Oracle and Apple have declined.

Strategy
Business Level: Differentiation
Microsoft mainly follows a differentiation business level strategy. Microsoft's chief executive, Satya
Nadella, stated that Microsoft's shift from a devices and services company to one focused on

productivity and platforms (Novet, 2014) which implies to differentiate from other technology giants
such as Apple and Google. Microsofts strategy is to build best-in-class platforms and productivity
services for a mobile-first, cloud-first world (Microsoft, 2015a). The productivity includes analytics
software and services, development tools, translation software and more (Foley, 2014). They will
build software and services that can not only run on the Windows, but also on the mobile operating
systems which to fulfill the core meaning of platforms - single experience spanning multiple devices
(Novet, 2014). In this aspect, Microsoft is different from its competitors in that it can provide
customers with a diverse range of products while also providing a unique service experience.
Corporate Level Strategy: Related Constrained
As mentioned before, Microsoft diversifies using six product segments. According to their 2015
annual report, revenue came steadily from multiple product segments. These segments share their
resources and activities among their businesses and enable the alignment of strategies and objectives
across development, sales, marketing, services organizations, and they provide a framework for
timely and rational allocation (Microsoft, 2013). From this we can see that Microsoft clearly follows
a related constrained diversification strategy. Please see Appendix 2 for a visual representation.
International Strategy: Global Operation
Microsoft Corp. is a global digital hardware and software products developer and marketer.
Microsoft offers the same software programs around the world which means their products are
standardized across markets. They also adjust the programs to match local languages and meet
global consumer demands.
Cooperative Level Strategy: Strategic Alliance
Microsoft has different strategic alliances for reaching global markets. Its alliance with Nokia is
an example of Microsofts vertical strategic alliances. They built this partnership to focus on

Windows Phone as the smart phone platform and ecosystem for both companies (Microsoft,
2011). In 2011, Facebook became a strategic alliance with Skype, which was acquired by
Microsoft (Mermigas, 2011). This helped Microsoft to extend their market in the social
networking area. Skype received access to a large number of new users and Facebook could
utilize Skype's technology to accomplish video chat without developing their own.

Strategic Challenges
Decline in the Market Share of Hard Devices
Since the acquisition of Nokias mobile phone business in 2014, Microsoft has improved the product
portfolio of the Windows Phone, but they still suffered a loss on it. According to the 2015 IDCs
Smartphone OS Market Share report, it shows that Windows Phone only occupies 2.6 percent of the
market share (IDC, 2015). Comparing to the nearly 83 percent for Android and nearly 14 percent for
iOS, it's clear to see the challenge Microsoft faces. As Satya Nadella declared, Microsoft will focus on
the cloud and mobile instead of devices, it might be a good chance to offset the shrinkage of market
share in hardware devices. However, Microsoft still needs to push tough competitors such as IBM,
Apple, Google and Amazon in this new frontier.
Lack of innovation
Microsoft has dominated the PC industry for years, but they obviously have been slower on the
innovation front. The life-cycle of new product development is too long, they missed opportunities to
gain the initiative in the market (Foley, M.J., 2010). Reorganization at Microsoft will be good for
new product development (Lundy, 2013). Microsoft should get some innovation wins like Apples
innovative product, Apple Watch to take back lost market growth (Schiesser, 2013).

Appendix 1:
Microsoft History
1980 MS-DOS: In July 1980 IBM approached Microsoft (MS) to develop a new personal computer (PC)
to operating system (OS) the software that manages, or runs, the computer hardware and also serves to
1985 bridge the gap between the computer hardware and programs. The OS was named MS-DOS. IBM PCs
running MS-DOS shipped in 1981. MS-DOS was effective, but difficult to understand.
MS introduced the MS Mouse in 1983.
Windows was announced in 1983, but took so long to develop sceptics called it vaporware. In late 1985,
MS shipped Windows 1.0. and then users would just point and click through screens, or windows.
1986 Microsoft goes public and thus in 1981 Bill Gates became a 31-year old billionaire.
to Windows 2.0 was released in 1987. Other software firms began to write programs to run on Windows.
1990 While Windows 2.0 was designed for Intels 286 processor, it only was well received after the 386 arrived.
MS becomes the worlds largest PC software company based on sales in 1988.
Microsoft Office was released in 1989, Office is a software package that is is a collection of to be used in
the office: a word possessor, spreadsheet, mail program, and business presentation software, etc.
1990 Windows 3.0 was announced in 1990, then Windows 3.1 in 1992. Together, they sell 10 million copies in
to their first two years, making this the most widely used Windows operating system yet. A new wave of 386
1994 PCs helped drive the popularity of Windows 3.0. With support for the 386 processor, programs run faster.
1995 Windows 95: was released in 1995, selling a record-setting 7 million copies in the first five weeks.
to Windows and MSDOS are running on about 80% of the worlds PCs.
2000
Internet Explorer (Internet browser) was released in the summer of 1995.
Hotmail (e- mail services) was acquired for $500 million in 1997.
Windows 98 debuted as the first version of Windows designed for consumers.
2001 Windows XP was released in 2001. From the 1970s until this time about 1 billion PCs have been shipped.
to The X-Box, MSs first gaming unit was introduced in 2001 in the face of stiff competition from Sony.
2007
The Xbox 360 gaming console debuted in 2005, ; it was a success and is still available on the market.
Windows Vista was released in 2006 with better security; though, users see little change from XP.
2008 Windows 7 with Windows Touch was released in 2009. Laptops were outselling desktops, and it became
to common to connect to public wireless hotspots in coffee shops and private networks in the home.
2014 Skype was acquired (voice and image over Internet protocol) for $8.5 billion in 2011.
Windows 8 was released in 2012. Windows 8 introduced a new interface that works for both touch and
mouse and keyboard. As an OS for tablets it was intuitive, for mouse and keyboard it was so cumbersome
that in short order software developers created Windows 7 emulation to run Windows 8 (Otey, 2014).
MS acquires Nokia's mobile phone business in 2014 for $7.2 billion.
2015 Windows 10: For the first time a Windows upgrade was offered free to customers. A month after launch
75 million devices were running Windows 10. MS hopes to see it installed on one billion devices by 2018.
Windows 10 also introduces Windows as a service. It moves away from big releases with long timelines,
opting instead for frequent, automatic advancements.
Sources: Bellis, 2014; Microsoft, 2015b, 2016; Otey, 2014;

Appendix 2:
Microsoft Lines of Business

Source: Microsoft Annual Report 2015a

References
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http://inventors.about.com/od/CorporateProfiles/p/Microsoft-History.htm
Casey, T. J., & Hagen, H. (n.d.). 2015 Technology Industry Trends Computer hardware and software firms
must choose between profit margins and revenue growth while eyeing new delivery models. From
Industry Perspectives: http://www.strategyand.pwc.com/perspectives/2015-technology-trends
Foley, M. (2014, July 14). Microsoft's differentiation plan: A suite of 'experiences' on any device | ZDNet.
From http://www.zdnet.com/article/microsofts-differentiation-plan-a-suite-of-experiences-on-anydevice/
Foley, M.J. (2010, Feb 4). Microsoft's Challenge: Innovation, innovation, innovation. From
http://www.zdnet.com/article/microsofts-challenge-innovation-innovation-innovation/
Google. (2016). Microsoft Corporation. From Google Finance: https://www.google.com/finance?q=
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http://www.bbc.com/news/technology-35479639
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https://aragonresearch.com/founder-departures-apple-and-microsoft-face-similar-innovationchallenges/
Mermigas, D. (2011, May 17). Microsoft's Skype Deal: The Emperor's New Clothes. From Seeking Alpha:
http://seekingalpha.com/article/270293-microsofts-skype-deal-the-emperors-new-clothes
Microsoft. (2011). Nokia and Microsoft Announce Plans for a Broad Strategic Partnership to Build a New
Global Mobile Ecosystem. From Microsoft: https://news.microsoft.com/2011/02/10/nokia-andmicrosoft-announce-plans-for-a-broad-strategic-partnership-to-build-a-new-global-mobile-ecosystem/
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