Analysis of Strategic Factors for Microsoft Corporation - Research Paper Example

Analysis of Strategic Factors (EFAS, IFAS, SFAS) for Microsoft Corporation Introduction Microsoft Corporation develops, manufactures, licenses, and supports a wide range of software products and services for different types of computing devices. Microsoft Corporation operates its business across five business divisions including: Client, ‘Server and Tools’ Online Services Business, Microsoft Business Division, and Entertainment and Devices Division (Google Finance, 2009). The software products and services include operating systems for servers, personal computers, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; computing applications; software development tools, and video games. The Company provide consulting and product and solution support services, and trains and certifies computer system integrators and developers. It also designs and sells hardware, including Xbox 360 video game console, the Zune digital music and entertainment device, and peripherals (Google Finance, 2009). This paper aims at analysing the strategic factors that currently affect Microsoft’s business. The analysis is conducted both at the internal and external level. The rest of the paper continues with the analysis. 2. Strategic Analysis of Microsoft Corporation All organisations are affected by a number of factors in both the external and internal environments in which they operate. These factors have an impact on the strategy that the company decides to adopt in order to remain competitive and profitable. Some of the factors pose opportunities while other pose threats. A company needs to be able to devise a strategy that capitalises on opportunities and one that attempts to do away with the threats. To better understand how Microsoft is affected by it environment, we make use of two strategic management tool known as the PEST model and SWOT analysis. 2.1 Analysis Based on the PEST Model PEST stands for the political/legal forces; economic forces, socio-cultural forces; and technological forces that are exerted on an organisation (Healey, 1994; http://www.marketingteacher.com/Lessons/lesson_PEST.htm). The PEST framework for Microsoft can be depicted as shown in figure 1 below Figure 1: The PEST Framework Political/legal forces: Microsoft Corporation runs the risk that its business may be affected by changes in the political landscape of the U.K. However, the political climate of the UK is quite business friendly and this is really not a problem. Moreover, new legislation on tax may come into force. This may have a direct impact on Microsoft Corporation. Value added tax recently witnessed a decline. This is good news for Microsoft Corporation as it means that more customers can now shop for Software given that they will be paying less tax on consumption. Moreover, there has been a renewed increase in environmental protection. This may lead to new environmental legislation that may have a direct or indirect material adverse impact on the operations of Microsoft Corporation. Economic Forces: The main economic forces that may affect Microsoft Corporation include fluctuations in interest rates, which has been the case in the UK recently. Interest rates have fallen significantly recently inducing consumers to spend more. Higher inflation means that the cost of inputs will be rising. Exchange rate fluctuations indicate that cash flows denominated in foreign currency are unstable. Prices of inputs sourced from abroad will be unstable as well. The Great British Pound has depreciated significantly against major currencies such as the euro and the dollar. On the one hand, this is good news for Microsoft Corporation given that tourists from abroad can spend more on Software in the UK. On the contrary it is bad news to Microsoft Corporation in that the prices of foreign inputs in terms of Great British Pounds will be higher. Fluctuations in GDP have an impact on consumer spending. Increasing GDP indicates that consumers can spend more, while decreasing GDP indicates that aggregate demand will drop which will reduce consumption of Software. The global recession has also affected a number of industries and Microsoft Corporation may have witnessed a decline in the demand for its products as well as a decline in funding for its projects. Socio-Cultural Forces: The world is gradually becoming a global village creating a number of multicultural societies across the globe. The interaction of different cultures has an important role to play in the manner in which an organisation such as Microsoft designs its corporate strategy. Microsoft Corporation needs to understand the different cultural backgrounds and behaviours to be able to better satisfy the needs of each group. Moreover, the different cultural groups speak different languages. This may have an adverse impact on successful communication. Different religious backgrounds also pose problems in that religion has an impact on people’s life styles, which in turn affects their tastes. Technological Forces: Technology is changing at a very fast rate. This may affect the manner in which Microsoft Corporation communicates with customers. It may also affect the manner in which Microsoft Corporation distributes in products to customers as well as the manner in which it prepares its Software. Financial innovation promoted by technology is also changing the manner in which customers can pay for their products. For convenience most people prefer paying with a credit card. Microsoft Corporation must therefore put in place the necessary technology to accept payment through credit card. There are also threats to information security when making online purchases. 2.2 SWOT ANALYSIS SWOT (Strengths, weaknesses threats and opportunities) enables an organisation to understand the internal and external factors that affect its operations. Strengths and weaknesses represent internal factors. These are the resources and competencies of the organisation which make up its strategic capabilities (Johnson and Scholes, 2002). Threats and opportunities on the other hand are the external influences on the organisation (Johnson and Scholes, 2002). External Influences on Microsoft Corporation Opportunities for Microsoft Table SFAS table in the attached excel sheet summarises the effects of different factors on Microsoft corporation, as well as their weighting. It can be observed from the table that Microsoft’s internal market is growing at a rapid rate. It has a weight of 0.1 and a rating of 5, thus giving a weighted score of 0.5. This is an opportunity for Microsoft to capitalise on. It provides Microsoft with a high probability of growth. Another opportunity for Microsoft is that consumption of IT products is on the rise. The weight for this factor is 0.1 and the rating is 5 giving a weighted score of 0.5. This is an opportunity in that it is going to increase potential demand for Microsoft’s products and services. Threats Despite the opportunities facing Microsoft Corporation, the company is also exposed to threats that can have an adverse impact on its business. The global recession if one of the main threats that may have had a tremendous impact on Microsoft. With a weighted score of 0.2, the recession can lead to declining sales as well as making it difficult for Microsoft to generate enough cash flows to meet its credit commitments. Another threat is lower operating margins. The weighting score for this factor is only 0.1. Although the weight appears very small, it has the capability of disrupting the markets in which Microsoft operates. There are also threats from competitors such as Google, Yahoo, Oracle, etc. These competitive threats can lead to lower profits. Internal Influences on Microsoft Corporation Strengths Microsoft is one of the world’s most reputed brands. With a weighted score of 0.5, this reputation has the potential of earning the corporation a huge brand loyalty. In addition to being the world’s leading brands, Microsoft is also a highly profitable company. Appendix 1 reports various financial performance measures for Microsoft alongside its competitors. It can be observed that Microsoft is one of the most profitable companies in the Software Industry. Return on average assets for the last accounting period stood at 19.34%; return on average equity was 38.42%; operating margin stood at 34.85% and Net profit margin stood at 24.3%. Similar measures for competitors were comparatively very low as can be observed from appendix 1. This high level of profitability can enable the company to expand aggressively. Finally, Microsoft has a global presence, which earns it the potential to be an industry leader. Weaknesses Microsoft is facing declining earnings growth, declining sales growth and it is a weak player in the online market. These factors may lead to high pressure on operating margins and shrinking market share. 3. Conclusions Based on the foregoing discussion, one can conclude that Microsoft is affected by both external and internal factors. Among the internal factors, its strengths outweigh its weaknesses. This puts the company in a better competitive position as compared to its peers in the Software industry. On the external front, the opportunities also outweigh the threats which also put the company in a better position to grow. The company needs to maintain this track record, improve areas in which it is weak, take advantage of the opportunities and make efforts to overcome the threats that currently face it. Bibliography Google Finance (2009) “Microsoft Corporation (Public, NASDAQ:MSFT)”  available online at: http://www.google.com/finance?q=NASDAQ%3AMSFT PEST Analysis, What is PEST Analysis? Available online at: http://www.marketingteacher.com/Lessons/lesson_PEST.htm Healey, N. M. (1994) “The transition economic of central and eastern Europe : A political, economic, social and technological analysis” The Columbia Journal of World Business, Volume 29, Issue 1, Spring, Pages 62-70 Johnson, G., schools, K. (2002), “Exploring Corporate Strategy: Texts and Cases”, Prentice Hall Financial Times. Appendix 1: Competitive Analysis of Microsoft Corporation Valuation Dividend Financial ratios Operating metrics Margins Company name Exchange Currency Price Change Chg % Earnings per share P/E ratio Mkt Cap Dividend Total debt to assets Return on avg assets Return on avg equity Operating margin Net profit margin MSFT Microsoft Corporation NASDAQ USD 27.73 0.00 0.00% 1.54 17.99 246.22B 0.52 7.38 19.34 38.42 34.85 24.93 GOOG Google Inc. NASDAQ USD 536.12 0.00 0.00% 15.48 34.64 169.72B 0.00 0.00 14.80 16.60 25.41 19.39 NOVL Novell, Inc. NASDAQ USD 4.09 0.00 0.00% 0.07 60.84 1.42B 0.00 5.54 -0.48 -1.10 0.50 -1.29 IBM Intl. Business Machine... NYSE USD 120.61 0.00 0.00% 9.71 12.42 158.11B 1.90 30.98 10.73 58.82 15.38 11.90 AAPL Apple Inc. NASDAQ USD 188.50 0.00 0.00% 6.29 29.98 169.78B 0.00 0.00 12.21 23.35 20.96 15.61 SNE Sony Corporation (ADR) NYSE USD 29.39 0.00 0.00% -1.88 29.49B 0.36 9.25 -0.83 -3.08 -3.00 -1.32 YHOO Yahoo! Inc. NASDAQ USD 15.90 0.00 0.00% 0.10 167.25 22.31B 0.00 0.00 -1.29 4.08 0.18 -2.32 ORCL Oracle Corporation NASDAQ USD 21.10 0.00 0.00% 1.11 19.01 105.78B 0.05 21.59 11.81 23.25 35.79 24.05 SYMC Symantec Corporation NASDAQ USD 17.58 0.00 0.00% -8.26 14.32B 0.00 19.73 -46.46 -90.19 -105.26 -108.55 HPQ Hewlett-Packard Company NYSE USD 47.46 0.00 0.00% 2.97 15.98 112.53B 0.32 15.75 8.25 21.50 8.85 7.04 ADBE Adobe Systems Incorpor... NASDAQ USD 32.94 0.00 0.00% 1.25 26.42 17.25B 0.00 6.01 15.12 19.24 28.72 24.35 Source: Google Finance (2009) available online at: http://www.google.com/finance?q=NASDAQ%3AMSFT Read More