Secret of Microsoft's Success - Research Paper Example

Company analysis of Microsoft corporation Microsoft Corporation is an American multinational corporation that was founded by Bill Gates and Paul Allen in 1975.It is one of the leading providers of software and hardware products and services. It is headquartered in Redmond Washington and it manufactures, licenses, markets and supports software products worldwide. Its best-known software product is the Microsoft Windows line of operating systems, internet web browser and Microsoft office open suite. Its flagship hardware products include the Xbox game consoles and the Microsoft surface tablets. Other products include cloud-based solutions, productivity applications; business solution applications, video games, online advertising, desktop and management tools and so forth. Microsoft’s mission Microsoft’s mission statement has evolved over the years in response to the changing client needs and preferences. The company’s mission statement in the 70s was “A computer on every desk and in every home, running Microsoft software. “This statement was simple, clear and concise and has been achieved with Microsoft having a majority of the world’s operating systems market share. The company’s mission statement before 2013 was “To help people and businesses throughout the world realize their full potential.” This statement was regarded as poor because it only focused on the markets and customers and provided little information to Microsoft’s stakeholders about the company itself. The mission statement did not mention any values or philosophies that were to guide the corporate’s actions and decisions. Microsoft’s mission statement from 2013 onwards is “to create a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most" (Microsoft, 9). This mission statement is a better because it precisely communicates the company’s transition from a software company to software and hardware device company. The only disadvantage of this mission is its length. Characteristics of the company Microsoft is a technology leader that is focused on helping people and businesses throughout the world realize their full potential. The company creates technology that transforms the way people work, play and communicate across a broad range of computing devices. The technology industry is dynamic and highly competitive with frequent changes in both technologies and business models. Microsoft pushes the boundaries of possibilities through a broad range of research and development activities that try to anticipate the customer patterns in a dynamic industry when faced with competitive forces. Microsoft has more than 120,000 employees globally with more than a half situated in the United States. Seventy percent of these workers are male, and 60% are from the Caucasian race. Majority of the employees are above 40 years ranking at 45 percent. The smallest age ranges are employees below 29 years who constitute seventeen percent of the total employee population. Microsoft’s total assets as of 2014 stood at 172.384 billion dollars that was a gain from the 142.431 billion dollars that was registered in 2013.The Company owns 133 sites globally with a total area of 20,404,191 square feet. The company has subsidiaries in all major continents with operations in 119 countries in Europe, America, Asia and Africa. The net revenue as at fiscal year ending June 2014 stood at 86.83 billion dollars. This change in net revenue represented a twelve percent growth from the previous year that was a significant improvement from the -3% revenue growth in 2009.The net income of the company for the year ending June 2014 stood at 22.07 billion dollars that were an increase from the -6% growth in net income in 2013. Company’s culture Microsoft consists of a conglomeration of a diverse set of people with unique experiences, skills and passions that are bound together by a shared passion for technology and a belief in its tremendous impact on the world. Diversity and inclusion are key components of Microsoft’s culture. The work culture recognizes and respects people with diverse skill sets and perspectives and embraces gender sensitivity in its initiatives. The company’s learning and development initiatives are tailored in helping employees acquire expertise and excellence in the growth of their careers. The company has a fostering leadership program that seeks to identify and nurture technology talent with leadership potential. Microsoft provides its employees with a world-class environment that promotes productivity, innovation, and the desired work/life balance. The company has employee-friendly human resource policies that are customized for each location. Some of the initiatives the company has put in place include a flexible work culture, access to the latest productivity tools, training and resources and a comprehensive family life, medical and dental insurance. In addition, the work environment of the company is one that encourages fun and collaboration. The Company’s strategies Microsoft has had several strategies in its business operations. Some the strategies that have been successful include network marketing and regular product launches. Network marketing was the first strategy to be employed by Microsoft, and it involved replicating features of one product in other Microsoft products. This strategy has been successful because the level of compatibility of Windows products is extremely impressive. The company’s regular product launch strategy has enabled Microsoft to be present in many industries be it the music market, video gaming market, computer peripheral market, cloud computing and so forth. Its presence in many industries has contributed to its increased profits and revenues. Microsoft’s follower strategy has hindered the company from indulging in innovation initiatives in the past decades. Apart from the change in graphics, the company has been producing similar products over and over. There has been hardly any innovation in the hardware department too. Microsoft’s inability to innovate and just copy advances of its competitors has seen Microsoft’s competitors gain a significant advantage by gaining substantial revenues through innovative products. Microsoft’s 2013 Strategy Microsoft launched a new strategy in 2013 that currently governs the company’s operations. The strategy dubbed “High-value activities enabled by a family of devices and services” has allowed the company deliver better devices and services more quickly (Microsoft, 4). The focus of the company is in the creation of household devices and services that empower people around the world, at work, on the go and for the activities they put value. The company launched Windows 8 operating system and has brought forth consistent user experiences to tablets, PCs, phones and Xbox. The company’s focus on high-value activities seeks to generate innovative ideas and new areas of growth. The high-value activities revolve around its customers day to day experiences. Microsoft also plans in the coming years to monetize its operations through its advertising and subscriptions for its enterprise services and growth in devices all integrated into the cloud. Financial Analysis In the fiscal year ending 2014, Microsoft had a market capitalization of 347.51 Billion dollars beating on of its main competitors Google. Market capitalization is the market value of a company given by the number of outstanding shares. It is a measure of growth that allows investors to gauge the amount of growth versus potential of risk for a company. Microsoft Corp had the highest market capitalization in the business software and services industry where the total market capitalization of the industry stood at 5.728 Trillion Dollars. This growth in market capitalization was primarily due to increased market price boosted by growth in net revenue and net income of the company. The liquidity ratios; current ratio, quick ratio, and the cash ratio all experienced an improvement from 2012 to 2013 but later declined in the fiscal year ending 2014. Liquidity ratios are used to determine how able a company is in paying its short-term debt obligations. The current ratio is the most basic liquidity measure. The quick ratio refines the current ratio by measuring the most liquid current assets to cover current liabilities. The cash ratio further improves the quick ratio. The current ratio declined from 2.71 to 2.50 but higher than the industry benchmark of 2.18. The quick ratio dropped from 2.53 to 2.31 but greater than the industry benchmark of 1.87 in 2013. The cash ratio fell from 2.06 to 1.88 but greater than the industry benchmark of 1.37 in 2013. This decrease may be due to an increase in Microsoft’s debt for the purchase of Nokia. In Profitability measures, the Return on Sales ratios had varied performances. These ratios indicate the amount of gross profit, operating profit, or net profit generated by a company as a percentage of sales made. The Gross profit margin has been in decline from 2012 standing at 68.98% in 2014. However, the operating profit margin and net profit margin had an improvement from 2012 to 2013 but later slightly declined in 2014. The operating profit margin and net profit margin stood at 31% in 2014 for the former and 25.42% for the later. These values are higher than the industry benchmarks proving the company to be a profitable investment. Despite a growth in software sales, the overall decline in gross profit can be attributed to a reduction in price of Operating System software. The decrease in operating profit and net profit is a result of declining revenues resulting from layoffs and integration of Nokia’s handset business (Lorenzetti, 1). The return on investment also experienced declines from the previous year. The Return on Equity (ROE) measures the shareholder's return on investment. The ROE had improved from 2012 to 27.69% in 2013 but deteriorated significantly in 2014 to 24.59%. The Return on Asset (ROA) measures the profitability of a company relative to its total assets. The ROA also improved from 2012 to 15.35% in 2013 but declined significantly in 2014 to 12.81%. These profitability measures were slightly higher than the industry benchmarks. The decline in ROE and ROA is despite increased solvency of the company whose debt to equity ratio has been in decline in the last three years to stand at 0.25. This value is lower than the industry average of 0.27. The stock valuation ratios; Price to Earning (P/E) and Price to Book Value (P/BV) increased from 2013 to 2014. The P/E ratio gives a company’s current share price when compared to its Earnings per Share (EPS). It shows how much an investor is willing to invest for a particular earning. The P/E in the fiscal year ending 2013 was 12.14 which improved to 16.11 exceeding its value in 2012. This P/E was higher than the industry benchmark. The P/BV shows how much a company’s stock is trading per share as compared to its book value per share. It indicates how much shareholders are willing to pay for the company’s net assets. The P/BV in the fiscal year ending 2013 was 3.36 which improved slightly to 3.96 exceeding its value in 2012 of 3.68. This P/BV was also higher than the industry benchmark. The current P/BV value shows that the stock is overvalued. The rise in the valuation ratios indicates increased confidence in Microsoft which has a relatively stable return over the years. The dividend yield for the company for the fiscal year ending 2014 stood at 2.93%. It shows how much cash flow an investor gets in return of equity investments. This value was higher than the industry benchmark value of 2.7%. SWOT Analysis Strength One major strength of the company is its brand. Over the years, Microsoft has become synonymous with the Personal Computer having a market share of over 90% of the global PC OS market. Currently, Microsoft is one of the top 10 global brands in terms of brand equity and brand reputation (Interbrand, 39). The strong brand is a result of decades of good customer experience with Microsoft’s products and massive advertising in its operations in 119 countries around the world. Microsoft’s brand helps the company achieve a dominant market share of the global software market and experience a steady return despite global environmental changes. The Strength of the company also lies in its strong distribution, sales and marketing channels. The three major channels are Original Equipment Manufacturers (OEMs), global distributors, and online sales. Through its vast partnership network with OEMs, Microsoft software is bundled into many consumer electronics sold to end users. Microsoft’s resellers and distributors are widely varied so as to optimize sales and marketing. The company also offers software sales through various online portals. All these channels assist in leveraging the company’s products to a top position globally. Microsoft's strength also lies in its easy-to-use software and strong patent portfolio. Microsoft products know no age bracket with the young and the old able to use Microsoft products with ease. Microsoft ability to develop quality software that have a global appeal has resulted in Microsoft products being global standards. The company’s research and development into patents have enabled the company to strengthen its market presence and protect its products. This strength has allowed the company to achieve a cult following in the PC market, monopolistic power and increased brand equity. Weaknesses The company’s weakness is in its string of poor acquisitions and investments. In the last three decades, Microsoft has made many acquisitions and investments in various enterprises. Some investments such as buying a stake in Facebook in 2007 and partnership with Yahoo in their search engine have been successful in returning a profit to the company. However, many of its acquisitions and investments have been unsuccessful. Microsoft’s past investments in cable and telecommunication companies resulted in losses for the company. Microsoft’s most recent acquisition of Nokia’s phone division has also experienced much criticism. The result of this investment remains to be seen. The company is also failing in its inability to secure its software business properly. As the world has become more connected and technology more pervasive, there has been a substantial increase in computer threats. Computer security has been grown to be more important. Over the years, Windows Operating System has been widely criticized to be more prone to attacks compared to other Operating Systems such as Apple and Linux. The reason for this is Microsoft’s popularity in the OS market and security flaws in how the software operates. The company experiences shortcomings in its high dependence on hardware manufacturers. As a business software and services company, the company does not produce its hardware. Microsoft, therefore, has to depend on hardware manufacturers known as Original Equipment Manufacturers (OEMs) in order to develop products compatible with Windows, as well as bundle Windows in their products. Therefore, there is the risk of its partner OEMs refusing to develop consumer electronics for Microsoft products when faced with cheap and attractive alternative software. The company’s recent change in strategy into a software and device company may be a result of the company developing hardware for its software. Opportunities One opportunity Microsoft can use to grow its business is in Cloud Computing and Cloud-based services. The world has seen an increase in global bandwidth, connections and connection speeds. These improvements have resulted in an increased demand for cloud-based services. These opportunities lie in cloud advertising, cloud storage, and cloud computing. This sector is predicted to experience high growth over the next decade. This opportunity has not gone unseen by Microsoft’s main competitors, Apple, and Google, investing in Cloud Based services. Microsoft has taken advantage of this through its cloud service, SkyDrive. Microsoft has decreased the price of its SkyDrive service as well as made the platform more readily available to its customers. Microsoft has an opportunity in mobile advertising. While Personal Computer sales have declined, the mobile platform has experienced high growth with a wider reach especially in developing countries. Mobile advertising provides opportunities of customer re-engagement that is measured in billions of possible ad revenue. This opportunity is being exploited by almost all businesses in the technology industry. Microsoft has a better opportunity to use mobile advertising than most technology companies due to its mobile OS. Microsoft should seek to add more developers to its mobile platform to attract more customers. The mobile device industry has seen strong steady growth and is expected to grow even more over the next few years. This growth is driven mostly by decline in mobile device production cost, improved handset design and devices expansion in the developing world. Microsoft should exploit this opportunity to capitalize on the growing demand for mobile devices. Microsoft’s recent acquisition of Nokia’s phone division is seen as a method the company is using to exploit this opportunity (Alam, Khan, Zafar, 9). Threats Microsoft’s main threat is intense competition in the software industry. This competition is experienced in both the PC and mobile platform. While Microsoft may have a commanding lead in the PC market, it has a smaller market share in the mobile market which is dominated by Google and Apple. This stiff competition is on all its software services. Open Source OS has also had the company’s market share in the PC market decline over the years. This strong competition in software may impact negatively on Microsoft’s performance as it makes the company more susceptible to market pressures and therefore declining revenues. The rise in technology in the current age of computing has seen many consumer electronics being developed. Availability of many consumer electronics has resulted in a shift in consumer patterns as customers are exposed to a wider range of products thus changing their needs and habits. One major change is in customer’s buying more tablets and mobile phones as compared to PCs. In these markets, Microsoft has a modest market share, and this may impact on its ability to establish itself. Therefore, to curb this threat, Microsoft continuously needs to develop products that will achieve market acceptance. References Ayesha Alam, Ayesha, Khan, Sana and Zafar, Fareeha.” Strategic management: managing mergers & acquisitions.” International Journal of BRIC Business Research (IJBBR) 3.1 (2014): Web. 7 March 2015 Interbrand, Best global brands 2014. April, 2014. 7 March 2015. Lorenzetti, Laura. “Microsoft's layoffs are huge - or small - depending on how you look at it”, Fortune. July 17, 2014. Web. 7 March 2015. Microsoft. Microsoft annual report 2013, June, 2013. Web. 7 March 2015 Read More