The External Environment of Microsoft Inc - Research Paper Example

? THE EXTERNAL ENVIRONMENT OF MICROSOFT INC Table of Contents Company Overview 3 Industrial Structure 3 Dominant Economic Traits 4 Porter’s Five Forces Analysis and the Driving Factors 5 Bargaining Power of Buyers 5 Bargaining Power of Sellers 6 Threat of New Entrants 6 Threat of Substitutes 7 Intensity of Rivalry 7 Value-Net Analysis 8 Strategic Group Map 8 Competitor Analysis 9 Key Success Factors 11 Conclusion 11 Works Cited 12 Company Overview Microsoft Corporation is an US based multinational company headquartered at Redmond, Washington and was founded in the year 1975 (“Microsoft Corporation: Business Summary”). The company operates its business activities in the global software industry and some of its primary products include a wide variety of software and hardware products and services like operating systems for PCs, phones, servers, different server applications, video games, Microsoft Office products, Microsoft PC hardware products, etc (“Company Profile for Microsoft Corp (MSFT)”). It has been ranked 37th in the Fortune 500 list in 2012 (“Fortune 500”). Industrial Structure As mentioned earlier Microsoft Corp. operates in the software industry globally. This industry mainly consists of the IT industry, the Software industry and the Internet Software and Services industry. If we look at the global software industry it mainly comprises of application software, software for home entertainment and systems software. The global IT Services industry is not that relevant to Microsoft because it comprises of the data processing and outsourcing market. The internet software and services industry mainly comprises of the organizations which develop and market internet software and provide internet services related to interactive services and online databases. There has been a growth of around 7% in the global systems software market in the year 2010. It is expected that the market value of this industrial sector would increase by around 31% in 2015 since the year 2010. Operating systems software can be regarded as the largest segment related to the global systems software industry and accounts for a significant portion of the industry's total market value in the world. If we look at the geographical segmentation of the industry it can be found that the Asia-Pacific region accounts for the maximum share of the market value in the world. Microsoft Corporation is considered to be the leading player in this industry and accounts for the maximum share of the market value. Overall the market for systems software is fragmented which results in intensifying rivalry amongst the competitors. Dominant Economic Traits Some of the dominant economic features of the systems software industry are discussed below: a. Market Size and Growth Rate: There has been a continuous growth in the global systems software market in the recent years and it is expected to grow at a same pace in the forthcoming years as well. The total revenue generated by the global systems software market was around $198 billion in the year 2010 which represented a compound annual growth rate (CAGR) of around 5.4% in between the years 2006 and 2010. The most lucrative segment of the market in 2010 was the Operations Systems software market which accounted for almost 37.5% of the total revenue generated in the market. b. Scope of Competitive Rivalry: Most of the companies in the software systems industry operate their business activities in different areas of the world. The majority of the market value for this industrial sector is concentrated in the Operating Systems software market. Of all the areas in the world, Asia-Pacific region accounts for most of the revenues generated in the global systems software market. Microsoft Corp. is the leading player in this industrial sector and since the market is fragmented it results in enhancing the rivalry amongst the competitors. c. Number of Rivals: Overall the systems software market is fragmented in nature. However, only a small number of large multinational companies like Microsoft, IBM, Oracle, etc. are present in the market. The market trend shows that it is concentrating into the hands of few market players because of the large amount of mergers and acquisitions occurring in the market. d. Pace of Technological Change: Continuous advancements and changes in technology are observable in the global systems software industry. This implies that there is an introduction of new products in the market on a continuous basis. This results in increased rivalry amongst the players in the market. e. Product Innovation: The global systems software industry is characterized of incurring rapid changes in technology and thus investment in R&D is important. The demand for a particular product does not remain for long and as a result of which the products are having short life cycles. All these factors necessitate constant innovation and high spending in R&D in the industry. Porter’s Five Forces Analysis and the Driving Factors Porter’s Five Forces Model can be a useful tool to understand the various competitive forces existing in the global software systems industry that can have an impact on Microsoft Corporation (Hill, and Jones 49). All those five forces along with the various driving factors behind each force have been discussed in details below: Bargaining Power of Buyers Some of the buyers in the market comprises of large organizations or governmental institutions that have greater powers of negotiation. Losing such customers might have an adverse impact on the revenue generated by the market players like Microsoft Corp. However, large market players like Microsoft do not rely significantly on only one buyer for the major portion of its revenue generation. This results in weakening of the buyer power to some extent. It can be expected that the systems software market is concentrated in nature since the end-users are needed to choose their system software supplier based on some constraining factors like the hardware base that exists, and the ease of using certain types of IT products. This results in high switching costs for the buyers and thus weakens the buyer power. Hence the customers or the buyers are greatly reliant on certain specific market players resulting in low bargaining power of buyers. Bargaining Power of Sellers The various types of inputs required by the organizations operating its business activities in the systems software market include employees, software tools and hardware devices. In order to succeed in this market one requires skilled developers or programmers. Hence the market players are observed to rely on continued services offered by such employees. Making succession planning in an effective manner is also important for ensuring long term success. The employees of the organizations who are viewed as suppliers of skilled labor have switching costs associated with them in relation to various factors like high turnover rate of staffs, failure in effective transfer of knowledge, etc. Various inputs like the hardware components are often obtained from a single supplier. Such types of suppliers are characterized of being large organizations that offer various differentiated products. All these factors suggest that the bargaining power of suppliers is high in the systems software market. Threat of New Entrants Development of systems software is labor intensive in nature because of the dependency on highly skilled software professionals. In a market which is characterized of experiencing rapid technological advancements, investment in research and development (R&D) is critical. Moreover the product life cycles are short which necessitates R&D spending and product innovations on a constant basis. The success of the market players is also dependent on ownership of important intellectual properties. Hence, large corporations like Microsoft continue to dominate the industry and the threat of new entrants is low. Threat of Substitutes Substitutes for the systems software market mainly includes open source software products and operating systems like Linux. The open source organizations like Red Hat mainly relies on revenues generated from maintenance and services rather than on license contracts business. Open source software can prove to be a beneficial alternative for many of the end users because the software can be easily distributed amongst the users. However, switching costs between two conventional software developers are high comparatively high. Hence the threat of substitutes in the software systems industry is low. Intensity of Rivalry Figure – 1 Source: (Marketline 18) Overall the systems software market is fragmented in nature. However it is more concentrated compared to the application software market. The market comprises of few large multinational companies like Microsoft and IBM. Rapid advancements in technology in the recent years implies introduction of new products in the market on a continuous basis. This results in enhancing the rivalry amongst the market players as they struggle to compete with each other. Companies like Microsoft have diversified their product offerings covering different industries like video game consoles, storage software, servers and digital music players. This results in decreasing the rivalry to some extent. However, overall the intensity of rivalry is high in the systems software industry. Value-Net Analysis The substitutes for products offered in the systems software industry mainly include the open source software products. It includes operating systems like Linux. Most of the substitute products allow the end users to redistribute the software and adapt it themselves. This proves to be a lower cost alternative for the users. The important suppliers in this industry are identified to be the employees of the organizations, providers of software tools and hardware devices. On the other hand the consumers in the market include small and medium sized corporations, large companies, and public sector institutions. Strategic Group Map The strategic group mapping of the systems software industry given below gives us a pictorial view about the existing competition in the industry (Porter 152). Figure – 2 Strategic group mapping of major players in the operating systems software industry Source: (Author’s Creation) Competitor Analysis The three major competitors of Microsoft Corporation in its operating industrial division have been identified to be Google, Apple and Red Hat. Google Inc. is an US based multinational company which was founded in the year 1998 and is headquartered at Mountain View, California (“Google Inc.: Business Summary”). In relation to the operating systems market segment of the systems software industry it is credited to the development of an open source mobile operating system named Android and the other open source operating system named Google Chrome OS. Apple Inc. is also an US based multinational company founded in the year 1976 and is headquartered at Cupertino, California (“Apple Inc.: Business Summary”). The Mac OS has been developed by Apple. Red Hat Inc. is another US based company headquartered at Raleigh, North Carolina and was founded in the year 1993 (“Red Hat, Inc.: Business Summary”). Red Hat offers open source operating systems to its customers in the form of Linux. All the three competitors mentioned here compete with the Windows OS developed by Microsoft. The intensity of rivalry amongst the competitors can be adjudged through the market shares of some of the major competitors who offer operating system software as one of their major products. Figure – 3 Market share of major competitors in the operating systems software industry It is noteworthy mentioning the fact Google is trying to expand its market in the operating systems business in a significant manner through Android and Google Chrome OS. Both are open source operating systems and prove to be a cheaper substitute for the windows operating system developed by Microsoft. The company is trying to grab the opportunity of increasing use of hardware devices other than personal computers to access internet (“Google Inc.: Form 10-K: Annual Report”). Next if we look at Apple it can be found that innovation in technology is the key towards its success. MAC OS X and iOS are the two types of operating systems offered by Apple for Macs and mobile devices respectively. Price, products features and innovative designs are the key attributes which the company focuses on to gain competitive advantage in the market (“Apple Inc.: Form-10K: Annual Report 2011”). As for example Mac OS X 10.6 is priced at $30 as against $119 for Widows 7 operating system. Linux operating systems which are open source operating systems provided by Red Hat is also a major competitor for the Windows and Mac operating systems. The future strategies of Red Hat include strengthening its existing strategic relationships and developing software that are compatible with Linux. Key Success Factors Some of the key success factors in relation to the operating systems industrial segment of the systems software industry have been discussed here. Expertise in software technology and investment in R&D is critical to the success of the market players in this industry. The industry being highly competitive in nature requires the companies to diversify their product lines to reduce the impact of rivalry. Offering high quality services at low costs is also critical towards the success of the companies in the market to generate higher revenues through increased customer base. Conclusion The analysis of the external environment of Microsoft Corp. suggests that the global systems software industry and its operating systems segment are attractive in nature. This industrial segment is expected to generate constant revenue growth in the forthcoming years. The intensity of rivalry in the market is high. However, it proves to be a good opportunity for large corporations like Microsoft to extend their market share and continue to dominate the industry mainly through diversified product offerings and innovations using advanced technologies. Works Cited “Apple Inc.: Business Summary.” Yahoo Finance, n.d. Web. 15 Oct. 2012. . “Apple Inc.: Form-10K: Annual Report 2011.” SEC Filings, n.d. Web. 15 Oct. 2012. “Company Profile for Microsoft Corp (MSFT).” Bloomberg, n.d. Web. 15 Oct. 2012. . “Fortune 500.” CNNMoney, n.d. Web. 15 Oct. 2012. . “Google Inc.: Business Summary.” Yahoo Finance, n.d. Web. 15 Oct. 2012. . “Google Inc.: Form 10-K: Annual Report.” SEC Filings, n.d. Web. 15 Oct. 2012. . Hill, Charles W. L., and Gareth R., Jones. Strategic Management Theory: An Integrated Approach. 10th ed. Connecticut: Cengage Learning, 2012. Print. Marketline. “MarketLine Industry Profile: Global Systems Software.”Marketline, n.d. 15 Oct. 2012. PDF file. “Microsoft Corporation: Business Summary.” Yahoo Finance, n.d. Web. 15 Oct. 2012. . Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Simon and Schuster, 1998. Print. Read More