Strategic Recommendations for Microsoft Corporation - Research Paper Example

Strategic Recommendations Introduction With the emergence of the global financial crisis 2008-09, many firms found it difficult to continue with their business operations profitably, and the result was that many firms were liquidated. In order to assess the competitiveness and sustainability of a business, generally its market performance is evaluated against industry benchmarks; and if that company’s achievements are found greater than industry benchmarks, then it would be assumed that the business is a leading player in the industry. Mergers and acquisitions are some common strategies used in the current business era to address the intense market competition and to defend the growing threat of new market entrants. However, it is important to note that mergers and acquisition would badly affect the competitiveness of a business and produce other unintended outcomes if they are planned thoughtlessly. Modern business organizations take strategic initiatives from time to time to influence the industry forces in such a way to enhance their sales and profitability. This paper intends to give the Microsoft Corporation some strategic recommendations for their future performance in the light of the company analysis and industry analysis already performed in the previous papers. A Brief Restatement of Facts While going through the financial statements of the Microsoft Corporation over the recent years, it is clear that the company had achieved a considerable financial growth throughout 2012 and 2013 fiscal periods and the first half the of 2014 before it began to experience growth declines in second half of the 2014. Although the company is currently experiencing financial setbacks, it still performs better when compared to industry benchmarks. It is interesting to see that in the fiscal year ending 2014, Microsoft was the top leading player in the business software and services industry with a market capitalization of $347.51 billion when the total market capitalization of the industry was $5.728 trillion. Although the company’s cash ratio, current ratio, and quick ratio dropped notably in the recent years, the drop was still better than the industry benchmarks. When the firm’s gross profit margin has been decreasing since 2012, the operating profit margin and net profit margin improved during the period 2012-13 but later slightly dropped in 2014. According to the annual reports, Microsoft’s operating profit margin and net profit margin were 31% and 25.42% respectively in 2014. It is observed that these values were higher than the industry benchmarks at that time, justifying that company is still able to provide potential returns on investments. The drop in gross profit in spite of the noticeable increase in software sales could be attributed to a reduction in the price of operating system software. To worsen the situation, the Return on Equity (ROE) declined significantly in 2014 making the company less attractive to investors. In addition, the Return on Assets (ROA) also dropped from 15.35% in 2013 to 12.81% in 2014. Still the profitability measures of the company were slightly higher than the industry benchmarks. The organization’s stock valuation ratios such as Price to Earning (P/E) and Price to Book Value (P/BV) improved notably over the period 2013-14. The Porter’s five forces analysis of the business software and services industry indicates that the industry is facing serious challenges in terms of increased competitive rivalry, high threat of new entrants and substitute products, and growing buyer power. In this context, it would be really difficult for companies like Microsoft – that hold a major market share of the business software and services industry – to ensure long-term business sustainability. Similarly, the SWOT analysis of the Microsoft Corporation gives a clear picture of the internal as well as external market environments of the company. The stiff market competition in the business software and services industry appears to be a potential threat to the Microsoft. The steady growth of the mobile devices industry, growing scope of mobile advertising, and the advancements in the cloud computing sector raise promising opportunities for the company. When it comes to the strengths of the company, it is obvious that Microsoft has a huge line of user-friendly products, strong brand recognition, and potential distribution channels. The firm’s major weaknesses include poor acquisitions and investments, inability to properly secure its software business, and high dependence on hardware manufacturers. Strategic Recommendations The growing demand for cloud computing and other cloud based services turns out to be a potential opportunity for the Microsoft because this sector is expected to experience a tremendous growth in coming decades. As Srinivasan notes, Microsoft has introduced its own cloud services, SkyDrive, to seize the opportunities emerging in this sector (52). The company’s major competitors such as Apple and Google have also decided to take advantages of the growing scope of the cloud computing sector. Therefore, it is recommendable for the Microsoft to take some immediate steps to get positioned well in the cloud market. As the Microsoft enjoys a reputed brand image, it may not be much difficult for the company to establish its brand in the cloud sector. The organization can capitalize on the immense scope of the E-business sector. Dess, et al indicate that the net effect of the digital economy is not very significant but it provides greater opportunities for sustainable advantages (162). Hence, Microsoft can seize these opportunities by integrating combination strategies effectively. Similarly, the field of mobile advertising offers a great future for the Microsoft because this business sector has achieved a significant growth over the years and it fosters customer re-engagement. Although many other companies have begun to exploit this opportunity, Microsoft is capable of using mobile technology more effectively as the company has its own mobile OS. It would be a wise policy for the Microsoft to invest more in mobile advertising because this practice is effective to interact with customers directly and hence to be in line with fast changing market trends. With the decline in the mobile device production cost and improvements in the handset design, the mobile device industry started to experience a steady growth, and this trend is predicted to remain the same over the next few years. This is the reason why Microsoft acquired Nokia’s phone division recently. Although it has been a well debated acquisition, the introduction of Nokia Lumia on the Windows gained considerable market acceptance. However, it is advisable for Microsoft to exit the mobile phones segment so as to avoid wasting its resources and to concentrate more effectively on other profitable business sectors. As Page repots in the Inquirer, currently the Android Operating System is widely considered as the perfect OS for mobile devices because the vast majority of the mobile device users are really satisfied in the compatibility and performance of this software platform. Therefore, it would be a burdensome task for Microsoft to compete with Android OS successfully in the mobile devices market. As mentioned already, rising competition in the global business software and services industry poses great threats to Microsoft. Although Microsoft still enjoys a commanding lead in the PC market, currently the company struggles to maintain this lead because of growing degree of competitive rivalry. In the case of mobile market, Microsoft holds a smaller market share compared to its competitors such as Samsung and Blackberry. The increasing popularity of Operating Systems like Apple and Linux makes its very difficult for the organization to grow its market share. In this context, it is vital for the company to review its existing competition strategy and to assess what went wrong with its market competitiveness. It is clear that currently Microsoft follows the cost leadership strategy; the practice of setting lower price for its products has assisted the company to become a leader in the software industry. However, market trends have been changed notably, and today consumers are willing to pay even a price premium for the product if they think that the particular product is capable of meeting their needs efficiently and sustainably. Here, it is recommendable for the organization to switch to the generic strategy of differentiation introduced by Michael Porter. In the words of Dess, et al, the differentiation strategy suggests firms to produce and market something ‘that are unique and valued’ and focuses on “nonprice attributes for which customers will gladly pay a premium” (142). The authors add that the differentiation may take several forms such as prestige or brand image, technology, innovation, features, customer service, and dealer network (147). Considering the nature of current competition and the trend of consumer demand in the business software and services industry, it is advisable for Microsoft to differentiate its products/services based on innovation and technology. Dess, et al say that the company would be in a position to sustain the differentiation advantages when its price premiums exceed the additional costs incurred in developing unique products/services (148). Terrific advancements in the technological sector over the last decade led to the development of numerous improved consumer electronics and majority of them were affordable to consumers. This customer-friendly market environment noticeably changed consumer behavior, and today they prefer tablets and other mobile devices to PCs. As the Microsoft has a modest market share in the PC market, such an unfavorable shift in the market trend leads the company directly to sales declines. Dess reflects that currently the PC industry is at the decline stage of the industry lifecycle as technological innovations coupled with changes in consumer tastes have severely affected the demand of PCs (p.187). Industry analysts like Bajarin predict that the PC industry will never rebound because of the incredible growth of mobile market (Bajarin). Therefore, it is no longer recommendable for the Microsoft to continue investing in this market segment. Referring to the decline stage strategies proposed by Dess, et al, it is better for the organization to adopt the harvesting strategy to gain maximum profit from the PC sector by reducing the costs quickly (168). They continue that the Microsoft may also emphasize on turnaround strategies at this juncture to identify the market segments that still find the product attractive and to reduce costs and improve efficiency (Dess, et al 169). Here, the company can consider investing additionally in the R&D to raise more revenues from other sectors and to balance the sales decline experienced in the PC sector. As noted earlier, strong brand image is a great strength of the company that still attracts consumers towards Microsoft. Currently Microsoft is one of the 10 leading brands worldwide by means of brand equity and brand reputation. The strong brand established by the Microsoft through its decades-long quality customer service has assisted the company to maintain a dominant market share of the global software industry and to attain a steady flow of returns regardless of the changes occurring in the global marketplace. In the current business context where Microsoft is losing its market share to competitors such as Google, Apple, and Samsung, it is advisable for the company to highlight its reputed brand to regain consumer confidence in the company and improve its overall sales. According to Dess, et al, in order to ensure that the strong brand image increases shareholder values, the firm’s board of directors should ensure that the managerial motives of CEO and other top executives serve to enhance value creation. For this, it is vital to eliminate managerial motives such as “growth for growth’s sake, excessive egotism, and the creation of a wide variety of antitakeover tactics” (Dess, et al.201). Since organization has a strong network of well-established marketing, sales, and distribution channels, it can enter new market segments without huge additional investments. The organization may also partner with other potential marketers that lack adequate sales and distribution channels to expand its business spectrum and increase the market coverage. Referring to the ideas proposed by Dess, et al, the company may rely on diversification strategies to “achieve synergies and create value for its shareholders” (193). It may not be better for the organization to use M&A strategies to attain synergies because mergers and acquisitions have not benefited the company significantly over the last decades. The vertical integration strategy is specifically recommended for Microsoft to take advantages of its strong supply logistics network. The process of vertical integration can assist the organization to become its own supplier or distributor by ‘integrating preceding or successive production processes’ (Dess et al. 186). The firm should continue to emphasize on building easy-to-use software products and keeping strong patent portfolios. While evaluating the weaknesses, it is clear that a series of poor investments and acquisition has negatively affected the market competitiveness of the organization. As stated in CB Insights, the company adopted aggressive M&A strategies to gain faster market coverage and a competitive edge over its rivals in the marketplace. Many organizations have experienced severe setbacks during the recent global recession and hence they seek to be acquired be larger and stable companies to avoid winding up. Therefore, currently it may not be a feasible strategy for the Microsoft to acquire struggling businesses and to allow them to operate at the expense of Microsoft’s profits. Rather than depending on an aggressive M&A approach, it is advisable for the organization to make strategic alliances or partnerships with other potential business enterprises to improve synergies and to control industry forces effectively. This policy can assist the organization to avoid taking too much risk and improve revenues by capitalizing on the wider market coverage it gained. If the organization finds that those strategic partnerships and alliances can contribute significantly to its long-term success, it may think of a merger or acquisition later. Since Windows Operating Systems are more vulnerable to security threats than other Operating Systems such Apple and Linux, it is really a challenge for the organization to secure its OS. Microsoft should not hesitate to invest in security management because its OS users do not want to allow unauthorized access to their confidential information. In an effort to improve its security measures, the organization may provide more frequent software updates to the users or hire ethical hackers to detect security vulnerabilities in the software. Finally, the Microsoft’s high dependence on hardware manufacturers often hurts the interests of the company because those manufacturers may refuse to develop consumer electronics for the organization once they obtain access to cheap alternative software. Hence, it is recommendable for the company to develop hardware for its software products in order to avoid supply interruption and production delay. Conclusion From the above discussion, it is clear that Microsoft is operating an industry where the degree of competitive rivalry, threat of new entrants and substitutes, and buyer power are high. Although Microsoft was the recognized synonym for personal computers over the past decades, today the personal computer industry is losing its market share to tablets and other mobile devices. As a result, the Microsoft Corporation’s financial performance weakened notably in 2014 even though the financial performance indicators were greater than industry benchmarks. It is recommendable for the company to widen its cloud-based market and to engage actively in mobile advertising to address the ongoing industry sluggishness. In order to manage the increasing competition intensity in the global business software and services industry, it is better for the Microsoft to adopt the generic strategy of differentiation and develop unique and valued products/services. As the company still enjoys a strong brand image, it would be easy for the company to promote its newly introduced products and services. In addition, the organization should abstain from massive mergers and acquisitions for some time, because the global economy is yet to recover from the shock of the recent global recession. Under this circumstance, it is not advisable for the company to invest in risky ventures. Works Cited Bajarin, Tim. “Why the PC Industry Will Never Rebound”. PC, July 29, 2013. Web 30 March 2015. http://www.pcmag.com/article2/0,2817,2422386,00.asp CB Insights. Microsoft M&A Activity Has Increased Under Satya Nadella. Oct 10, 2014. Web 30 March 2015 https://www.cbinsights.com/blog/microsoft-acquisitions-2014-satya-nadella/ Dess, Gregory G., Lumpkin, G. T and NcNamara, Gerry. Strategic Mgmt: Text & Cases. Tata McGraw-Hill Education, 2009. Print. Dess, Gregory G., Lumpkin, G. T and NcNamara, Gerry. Strategic Management: Text & Cases. Seventh Edition. McGraw-Hill Education, 2014. Print. Page, Carly. Android hits 83.6 percent marketshare while iOS, Windows and BlackBerry slide. The Inquirer, Nov 03 2014. Web 30 March 2015. http://www.theinquirer.net/inquirer/news/2379036/android-hits-836-percent-marketshare-while-ios-windows-and-blackberry-slide Srinivasan, S. Cloud Computing Basics. Springer, 2014. Print. Read More