Diversification Strategy at Microsoft - Case Study Example

? There are companies in the marketplace that are so influential and innovative that they have the ability to change the world. One of those companies is Microsoft. Microsoft was founded in 1975 by Bill Gates. The company has helped make Bill Gates the 2nd richest man in the world. Microsoft is the market leader in the software industry. Its operating systems have the highest market share in the industry by a wide margin. Microsoft is a public company traded in the New York Stock Exchange under the symbol MSFT. The current stock valuation of the company is $25.70 a share (Yahoo, 2011). The purpose of this paper is to analyze the operations of Microsoft using a variety of business analytic tools Mission, Vision, Stakeholders The mission statement of Microsoft Corporation is “Our mission and values are to help people and businesses throughout the world realize their full potential” (Microsoft, 2011). As a public company the firm’s actions must comply with the best interest of a variety of stakeholder groups. Some of the stakeholders that Microsoft must respond too are the shareholders, employees, board of directors, executive management team, suppliers, lenders, community, and the government. The company has tremendous aspirations and visions for the future. “At Microsoft, we believe the most engaging digital experiences will grow out of the combination of four things: smart devices, cloud-based services, natural forms of interaction between people and technology, and finally, people’s imaginations” (Microsoft, 2011). Five forces of Competition The threat of new entrants in the software industry is high. There are thousands of software companies in the marketplace. It is possible that one of these companies might be able to develop a new operating system to compete directly with Microsoft. In the gaming segment it seems as if the industry operates as an oligopoly with Sony and Nintendo being the only competitors. It takes billions of dollars and years of research to develop a new gaming console. The bargaining power of suppliers is low. Microsoft can take advantage of economies of scale to get better prices from suppliers. The bargaining power of buyers is medium low. Buyers are willing to pay the market price for software despite its relative high prices. The buyer power increases during certain seasons such as Christmas. The threat of substitute is medium. In terms of operating system I would classify the buyer power as low due to the lack of real substitute despite the existence of Linux and Mac computers. In the gaming industry substitute are medium since there are only two competitors. The rivalry among firms competing in the industry is high. Due to the intense competition companies have to spend a lot of money on marketing. SWOT One of the strengths of Microsoft is its strong economic position and history of outstanding financial performance. The company’s equity is considered a blue chip stock. The company generated in 2011 sales of $69.94 billion. During the past five years the sales of the company have increased by 36.81%. The net income of the firm in 2011 was $23,150 billion. In comparison of the previous year the net income of the company increased by an outstanding margin of 23.40%. The market capitalization of Microsoft is $216.19 billion. The net margin of the firm in 2011 was 33%. The average net margin in the software industry is a mere 1.9% (Dun & Bradstreet, 2011). The net margin of Microsoft was 17.36 times higher than the industry average in 2010. The dividend yield of the company was 3.10%. A second strength of Microsoft is the brand value of the company. Microsoft has the leader software industry largely due to the superior design of its operating systems programs. The current version of the Operating system Microsoft is selling is Windows 7. The customers of computers visualize Microsoft as the top brand in the industry. Due to the preference of customers for Windows product the majority of new computers come equipped with Microsoft operating systems. Another strength of the company is the variety of products the firm offers. Ever since the company entered the gaming industry with the Xbox the company has become one of the top developers of new games for its Xbox 360 console. The Office product brand has always been one of the best seller processing products in the marketplace. Microsoft has several weaknesses that are affecting its business model. One of the most inherent weaknesses of the business model used by Microsoft is the presence of piracy. Piracy is the illegal copy of software, movies, and music. In 2009 the software industry lost an estimated $51 billion due to piracy (Whitney, 2010). Technology encryption in CDs and DVDs has gotten better, but hackers always find a way to get around the issue that is preventing them from stealing intellectual property. Pirates have figured out a way to implant a chip in the Xbox console to allow it to read illegal copies of games. The patent laws that apply in the United States due not have the same legal strength in many foreign countries. A country that has one of the world’s worse reputations as promoters of piracy is the People’s Republic of China. China exports billions of dollars of counterfeit merchandise every year. A lot of it lands in the largest consumer markets of the world. The U.S. is the top importer of goods in the world. In terms of piracy the country is the highest piracy rate in the world is Georgia with a 95% rate (Whitney, 2010). An innovative product that Microsoft launched in recent years is the Kinetic system for the Xbox 360. The system allows the players to interact with the games as their body movements are scanned by the system which consequently controls the game. The Kinetic system for the Xbox 360 represents a major opportunity for Microsoft. The goal of the company should be to sell a kinetic system to every user of the Xbox 360. The kinetic system is complementary product to the Xbox 360. Another opportunity for the company is in the development of games and application for smartphones. There are 5.3 billion cellular providers worldwide with an estimated 1 billion 3G or 4G subscribers (Plunkett Research, 2011). Cellular have become more important for Americans than landlines as communication devices. Microsoft has to capitalize of the growing popularity of smartphones. The Android market is growing and is competing head on with Apple’s Iphone. Microsoft has to get deeper into the game by designing a better operating system application for smartphones. In the computer market the firm has a great opportunity to increase its income with the release of the Windows 8 operating system. Microsoft faces tough competition form its two main rivals in the game industry Sony and Nintendo. The PS3 and the Wii are the major competitors to Microsoft. Wii is a major threat due to its large market share in sales of games. In 2010 Wii sold 659 million game units, while Xbox 360 and Playstation 3 sold 494 million and 425 million units of games respectively (Plunkett Research, 2011). The company cannot lose any further market share in the sales of games. Apple is another threat to Microsoft due to its superior brand value. Apple due to its brand is able to sell products at higher price points than Microsoft. There are twice as many applications available for the Iphone platform than for the entire Android market. Analysis of SWOT The SWOT analysis shows that the company is doing very well financially. The firm has been able to grow despite the global economic recession. Microsoft has a wide variety or products and services which have helped the firm outperform many of its top competitors. The results of the firm in 2011 were outstanding. As a software company a weakness the firm has to deal with is piracy. Due to consumer awareness piracy has gone down a bit in the United States. The firm faces serious challenges to penetrate foreign markets in which people do not respect copyright laws. The strategy of including operating system already installed in new computers is a great way to diminish the effects of piracy. Despite the presence of piracy the company had its best year in 2011. One of the fastest growing markets is the mobile business. Microsoft has to capitalize on the 3G and 4G movement by developing its own phone to compete directly with the Iphone family. Nintendo and Sony are a threat to the company’s dominance in the video game marketplace. Strategies Being the market leader in an industry in which innovation is needed to differentiate is not easy unless a company has a staff of highly qualified personnel. The most valuable asset a corporation has is the human capital of its human resources. Microsoft spends millions each year in recruiting efforts at hundreds of universities nationwide. The company has to continue to aggressively pursue the top talent available in the United States and abroad. Recruiting employees from other countries increases the diversity of a company. Cultural diversity if a valuable attribute that can help foster a good corporate culture and environment. A strategy that the company must pursue is to introduce new products with innovative features. The company should release a new portable gaming console. The device should have the capability to make phone calls when connected to the internet in a wi-fi network. Other features should be the ability to play music and to save information. The games can be played with the assistance of an interactive touch screen. Games for the console can only be acquired through a download from the corporate website of the company. This strategy will increase the profit margin of the company because it eliminates an intermediary that charges a commission. Another good feature about the strategy is that eliminates the possibility of piracy due to a lack of physical of external software. The arrival of the new operating system of Microsoft, Windows 8, should be capitalized by the company in order to strengthen the brand value of the firm while at the same time optimizing revenues. The company should sell its operating systems at different price points across the world in order to consider the relative value of money in foreign countries. Another product that has a lot of potential to increase the market share of the company in the software industry is the Xbox Kinetic. The kinetic must be marketed aggressively since it can spark the sales of games specialized for the kinetic system. The firm should release in 2012 over 200 new games design to be played with the kinetic system. Corporate Governance Microsoft Corporation is the market leader in the software industry. The firm realizes that its actions impact the social and economic structure of the places where it does business. The firm believes that it is important to give back of the community. Bill Gates is a philanthropist that has donated millions to important social causes such as education. The chief executive officer of the company is Steve Ballmer. Bill Gates continues to be the Chairman of Microsoft. The Board of Directors is composed of nine members: Bill Gates Steve Ballmer Dina Dublon Raymond Gilmartin Reed Hastings Maria Klawe David Marquardt Charles Noski Dr. Helmut Panke The software donation program of the firm is an example of how the company is contributing to changes the quality of life of its customers. Microsoft has a market presence in over 100 countries across the world. The use of corporate governance can help the company improve its reputation in the marketplace. Corporate social responsibility is strategy that can be used to persuade more buyers to support Microsoft products. As the leader in the software industry Microsoft has to provide an example of how to do business ethically. Conclusion Microsoft Corporation has enjoyed over three decades of success in the marketplace due to the ability of the firm stay ahead of the competition. The firm implemented a diversification strategy that allowed the firm to move into other market segment beyond the computer industry. The gaming industry has been exploited by the company in a very effective manner. The Xbox 360 competes head on with the Wii and Playstation 3. As the arrival of the Christmas season is upon us Microsoft must capitalize on the season since the gaming activity of the company is seasonal. Santa Claus is often asked for video games from kids. The organization must analyze the most effective way to exploit the sales of the Windows 8 operating system. The presence of Bill Gates in the board of directors raises the probability that the firm will be run effectively. Microsoft must hire the top minds coming out of college in order to refill its human capital assets to have the leaders of tomorrow ready to take over in the future. The organization has a tremendous tradition and track record of success in the business world. The future of all businesses faces a certain degree of uncertainty. The broadband age changed the way people communicate with each other. Microsoft has to stay at the forefront of technology in order to continue to satisfy the needs of its customers. References Dun & Bradstreet (2011). Key Business Ratios. Retrieved December 8, 2011 from Dun & Bradstreet database. Microsoft.com (2011). 2011 Annual Report. Retrieved December 10, 2011 from http://www.microsoft.com/investor/reports/ar11/download_center.html Microsoft.com (2011). Our Mission. Retrieved December 8, 2011 from http://www.microsoft.com/about/en/us/default.aspx Plunkett Research (2011). Introduction to the wireless industry. Retrieved December 10, 2011 from Plunkett Research database. Whitney, L. (2011). Piracy costs software industry $51 billion in 09’. Digital Media. Retrieved December 9, 2011 from http://news.cnet.com/8301-1023_3-20004783-93.html Yahoo.com (2011). Microsoft Corporation (MSFT). Yahoo Finance. Retrieved December 10, 2011 from http://finance.yahoo.com/q?s=msft&ql=1 Read More