Impact of Microsoft's’s International strategy on its business performance

Strategic Management Project Project Report: Impact Of Company’s International Strategy on Its Business Performance (Microsoft)

Submitted to: Dr. Nandakumar M. K.

[July 2009] Author Derrick Vijayan

Indian Institute of Management Kozhikode

30th July 2009

SM Project: Impact of company's international business strategy on its

business performance

Vision of Microsoft: “A personal computer in every home running Microsoft software.”

Mission of Microsoft: “At Microsoft, our vision and values are to help people and businesses throughout the world realize their true potential.”

Values at Microsoft: As a company, and as individuals, we value integrity, honesty, openness, personal excellence, constructive self-criticism, continual self-improvement, and mutual respect. We are committed to our customers and partners and have a passion for technology. We take on big challenges, and pride ourselves on seeing them through. We hold ourselves accountable to our customers, shareholders, partners, and employees by honoring our commitments, providing results, and striving for the highest quality.

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Introduction About Microsoft

Microsoft Corporation is a software company based in Redmond, Washington. Microsoft's flagship product, the Windows operating system, is the single most popular operating system for home desktop use. Its other desktop products, namely Microsoft Office, Internet Explorer, and Windows Media Player, are either bundled directly with the Windows operating system, or are often sold together with Windows as preinstalled software on new computer systems. The company also manufactures and sells computer hardware such as keyboards and mice, owns several content-distribution channels such as MSNBC, the MSN Internet portal, and the Microsoft Encarta electronic encyclopedia. The Microsoft Windows operating system was introduced as an optional addition to the MS-DOS operating system. The idea of a graphical user interface was pioneered by Apple Computer's Apple II and Macintosh. However, due to prior work with IBM, Microsoft successfully convinced the hardware giant to ship Microsoft Windows preinstalled on IBM personal computers. This step strategically had made Windows to be one of the most recognized software titles in history. The Microsoft Office suite of applications (Word, Excel, PowerPoint, and Access) began life as Microsoft Works, an Apple Macintosh application that provided the functions of a word processor, spreadsheet, and database all in one. Microsoft's popular Internet Explorer web browser was originally a rebranded version of Spyglass Mosaic. Microsoft products have traditionally been plagued with security problems, leading to an entire malicious software industry today. Although all major operating systems and computer programs have been subject to attack at one time or another, Microsoft's latency at resolving issues, and the simple number of them, has tarnished the company's image. Microsoft has a policy of releasing patches to its software on the second Tuesday of every month via Microsoft Update, with no more than 10 major changes to its products at those times. Thus, exploits that are discovered around mid-month are not corrected for at least four weeks, and in many cases eight or twelve weeks can go by before a patch is released for a security issue. Microsoft Corporation has promised that its new Windows Vista operating system will be more secure than previous offerings such as Windows XP, however the ten patches a month policy has not been changed. Group8, Section-C, IIMK

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Timeline History of Microsoft (1975 to 2009) Founded by Bill Gates in 1975 in New Mexico after he dropped out of Harvard He partnered with Paul Allen to sell BASIC, programming language developed by them for Altair which is the first commercial microcomputer In 1979, Microsoft moved to Seattle and began to develop software to help users write their own program as they found a better market in Seattle In 1980, they developed operating system for IBM by name Quick and Dirty Operating System (QDOS) which they later renamed to Microsoft – Disk Operating System (MS-DOS) In 1983 Allen left the start-up and Bill Gates became the only lead of the firm In mid 1980s Microsoft developed Windows Graphic User Interface (GUI) that copied many features of rival Apple’s Macintosh System  In 1986, Microsoft went public and Microsoft became the industry’s first

billion dollar company in the same year  In 1993, Microsoft developed Windows NT to compete with the threat

from UNIX and continued to dominate Desktop Software Segment  In 1998, US Justice Department Filed Antitrust charges against them for

stifling the Internet Browser Competition by limiting Consumer Choice. Microsoft sold its Internet Explorer along with its Windows OS and limited the Choice of Consumers for Internet Browsers  In 2000, Courts asked Microsoft to split up into 2 companies  Later settlements saw the company intact, but there more restrictions on the licensing and it also saw Microsoft signing settlement agreements with other players like Netscape, Sun Microsystems etc  In 2003, EU fined Microsoft and asked the company to provide Europe

based manufacturers a stripped down version of windows by removing media player from it for a similar reason

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 Microsoft was initially reluctant to enter into the networked economy till it launched MSN in 1995  Like other Inter companies Microsoft too suffered the dotcom bubble  The new startup companies were able to catch up faster than Sluggish Microsoft in email, desktop search engines, instant messaging over the internet  This sluggishness in New product development was because their flagship product Windows had become too complex and gigantic for example windows vista marked the longest duration between 2 version

Strategies followed (1975 – 2009) Their aim is always to Became a leader in the market in which they compete. For which they followed strategies like the following when they were just a start-up company,

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Partnerships with or acquiring other market leaders Entry in new markets, where there is a need Business level strategy Find out needs of customer, form customer groups according to market location and take an advantage through distinctive strategies, as in case of Seattle Product differentiation as in 1980’s they developed QDOS, Windows (GUI) After Microsoft established its feet, it changed its strategies as, They use their resources and achieve growth with maximizing shareholders wealth With a continuous development and entry in new markets they maintained their competitive advantage In reaction to the actions from US justice department, MICROSOFT signs some settlement agreements with other players in market As bigger in size MICROSOFT’s growth rate is slower compared to other small companies in the industry, complex nature of windows was also one of the reason

History of software industries The software industries started in the early 1960s when university and businesses first began to use computer to do certain computing task. The software programs were written in-house by full-time staff programmers. Some were distributed freely for no charge. But there are some done on commercial basis. The first standard software firms started in the United States in 1959-1960. In the mid 1970s the software industries start expanding with the rise of personal computer market. This has lead to the growing market for games, applications, and utilities. Gradually the concept that software should be brought and paid for took hold. In the early years of the 21st century, another business model has arisen for hosted software, called software as service (SaaS). This reduces the concern about the

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software piracy, since it can only be accessed through the web, and by definition no client software is loaded onto the end user’s system.

Porter five force analysis

High Potential competitor In software industry people are less concerned about the brand name associated with the product. What really matter is the quality of the product. So whether it is an existing brand or a new brand, the product sells because of its content, usability and cost. There is very little customer brand loyalty in software industry. Any new firm with potential human capital and innovative technology can give a thread to existing firms. As per the government rule there is no preventive rule for the new entry into the market. So, it is easier to make an entry into the market. Currently there is a threat from the mobile manufacturing companies like Nokia to enter into software industry. Such threats are notable because in future people want more flexible and portable forms of gadgets.

High competition from established firms

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Software industry is a highly competitive industry. Microsoft has many competitors in different product divisions: Business, client, entertainment & devices, online services and server& tools. Linux remains the chief Microsoft competitor in the Desktop and Server division. Linux operating system, which is derived from the UNIX and is available without payment under a general public license, has gained some acceptance as competitive pressures to Microsoft PC division. Recent Linux desktop offers from Dell and Lenovo have also led to the effort to “reduce costs”. Server and tools Microsoft is much more concerned about Linux on the server industry. Nearly all computer manufacturers offer server hardware for the Linux operating system. Linux’s competitive position has also benefited from the large number of compatible application now produced by many leading commercial software developers and non-commercial software developers. Business Microsoft identified its major desktop competitors as: Apple, Corel, Google, IBM, Novell, Oracle, Red Hat, Sun, and local application developer in Europe and Asia. Apple announced its revamped and more competitive productivity suit. Microsoft sees freely downloadable cross platform, OpenOffice.org as competitor. Corel’s suite and many local software suites around the world are worrisome for OEMs to preinstall on low priced PCs. Online Services This division competes with: AOL, Google, Yahoo and a wide ray of Web sites and portals that provide content and online offerings of all types to end users. Microsoft compete these organization to provide advertising opportunities for merchants.

Entertainment & Devices Microsoft Xbox hardware business competes with console platforms from Nintendo and Sony, both of which have large, established base customers. The life cycle for video game consoles averages five to seven years.

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Low bargaining power of customer Microsoft has a huge consumer base and product ranges. Each customer contributes very less amount to the whole market share. Even though a corporate customer who purchases Microsoft products in bulk, it is still very small as compared to the whole Microsoft customer-base. So there is very low bargaining power of the Microsoft customer. Buyers have to buy the product from the Microsoft which is very difficult to be produced by them. Entering into the industries by the buyers is very difficult. Microsoft does not depend on few customers. Their products are focused on mass production. They are less concerned when few customers object about prices or services.

Low bargaining power of supplier Microsoft has no suppliers as such. In software industries, requirement for raw material in almost nil and other Microsoft products need less material and there are a number of supplier in the market for its equipments. What actually important in the software firm is the human capital. Microsoft has a large potential for hiring employees and it can get many more from the market. Microsoft has made its employees more sophisticated by its culture to learn and different training programs. People there simply love to be a part of a company like Microsoft.

Low threat of substitute There is usually no substitute product for any software product. Each software is mainly designed for some specific purposes and once it is made, there is less concern about getting a substitute product. Hence, there is very low threat of substitute products.

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Microsoft's international strategy entry mode The reason why Microsoft wanted to go international was, they were leaders in domestic market and they want to increase their market size. They wanted to take advantage of other growing markets around the world. Being a leader in OS business, they wanted to take first mover advantage by entering in new markets before competitors, and maintain their competitive advantage. Initially they followed licensing and strategic agreements as an entry mode International Strategy. There are many reasons why they go for this kind of strategy, some of these are •

Involves low cost to expand internationally, as there is low cost of development.

•

Allows licensee to absorb risks, less amount of risks because of risk sharing approach.

But there are some disadvantages also, as •

This strategy has low control over manufacturing and marketing

•

It offers lower potential returns, as they are shared with licensee and because of inability to realize location and experience curve economies.

•

Involves risk of licensee imitating technology and product for own use, i.e. lack of control over technology.

•

Again

there

more

restrictions

on

the

licensing

from

US

government and from Customer approach.

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•

Also because of antitrust regulation in the US, EU and because of the competition in the desktop software industry, they decided to change their strategy

Changes in Microsoft's international strategy entry mode Companies’

both

International

Business

level

strategies

and

international corporate level strategies depends on its entry mode strategy. There industry life cycle shows they are now in shakeout zone of industry life cycle.

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Stages in the Industry Life Cycle

They are searching for growth in both demand and capacity, and hence they go for International Diversification and Innovation. With the help of International Diversification strategy, a firm can expand sales of its goods or services across the borders of global regions and countries into different geographic locations or markets. They get benefits in terms of returns and large market, they choose International Diversification and Innovation, because it gives •

Exposure to new products and markets

•

Sustain innovation

and use opportunity

to integrate

new

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•

Generation of resources to sustain innovation efforts

Shakeout: Growth in Demand and Capacity In view of the antitrust regulation in the US, EU and because of the competition in the desktop software industry, Microsoft decided to move beyond PC Software Market. This can be achieved through their International Diversification and Innovation type of entry mode i.e. they can enter in new market segments and also can use this knowledge to integrate into Microsoft’s core operations. Its basic strategy was to extend its software services into Web-based Services for business and consumers. By transforming from a traditional software provider to a broader technology services and media company, Microsoft tried to position its OS, Software's and Services as a de facto

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standard for accessing, communicating, and doing business over the internet. This helps them to enter in new market segments while maintaining current operational excellence. Hence they go for related diversification strategy and by the end of year 2005 they have three main divisions under their OS division as shown in fig. below.

International business-level strategy Microsoft had seven-pronged strategy for its business levels.

Competing with Products and Standards Interoperability standards have been a critical factor in the sustained growth of Microsoft in the information technology industry. Microsoft contributes to, and collaborates with, more than 150 standards organizations on an annual basis. It also participates in a wide variety of other specification development initiatives with groups of industry leaders, or publishes Microsoft specifications in order to enhance interoperability of its products and services. Its standards work embraces innovations in PC hardware, software and associated devices, the Internet and its Group8, Section-C, IIMK

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infrastructure, Consumer Electronics devices, Telecommunications systems and products, and a wide variety of industry specific products and services. This work is made possible through development of core interoperability technologies, without which these products and services would not be able to deliver the value they do to customers.

Defining Products and Development Processes Microsoft’s process of software componentization allows it to capture and embed intellectual property in a flexible and easily accessible form. The component “libraries” that result from this process and the architectural frameworks that specify how these components interact represent critical resources that can provide a source of competitive advantage in dynamic environments. The benefits from these resources manifest themselves internally, in terms of enhanced development productivity, and externally, through their role in attracting third-party developers to build upon Microsoft’s platforms.

Developing and Shipping Products To manage the process of developing and shipping products, Microsoft follows another

strategy

described

as

doing

everything

in

parallel

with

frequent

synchronization. Teams implement this strategy by working in parallel teams but “synch up” and debug daily, always have a product you can ship, with versions for every major platform and market, speak a “common language” on a single development site, continuously test the product as you build it, use metric data to determine milestone completion and product release.

Building a Learning Organization Microsoft in its early years was not known for self-critique. The firm today has so clearly accepted a new position on this point that critique has become one of their key strategies. Information-sharing is now important - both as between the marketplace and the firm, and as between various functions within the firm.

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Organizing and Managing the Company The firm, from the beginning, has continuously sought, and employed, such people and can thus immediately spot (and grasp) opportunities when they appear. It has hired managers who are competent in technology as well as understanding the business situation, and hence they are highly effective in implementing solutions for their customers. These people have constituted the managers at different levels in the organization.

Managing Creative People and Technical Skills Microsoft usually formed small teams to handle projects, with cross-functional specialists, who could easily switch from one function to another, giving them a wider range of reach and productivity and creativity.

Go To Market To compensate for less-frequent product launches and to focus on integrated solutions rather than specific products, Microsoft organized its marketing efforts around annual "go-to-market" (GTM) campaigns. GTMs focused Microsoft and its partners on short-term strategic challenges and provided consistent marketing approaches for most of its business products. Partners could align their products or services with Microsoft’s GTMs to benefit from these campaigns. However, while GTMs were intended to make Microsoft’s message to the marketplace more focused and coherent, their short-term focus and vagueness meant partners would take time to understand their benefits.

INTERNATIONAL CORPORATE-LEVEL STRATEGIES

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Microsoft went over expanding mostly by the way of acquisitions, both of products as well as companies, and then added on their own features and specifications and brought it to the market. Microsoft has acquired 147 companies, purchased stakes in 60 companies, and made 27 divestments by 2008. Of the companies that Microsoft has acquired, 99 were based in the United States. Microsoft has not released the financial details for most of these mergers and acquisitions. But estimates say that the figure reaches to several billions of dollars.

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At the same time, research and development was given lesser priority over acquisitions, in the process of organizational and business growth.

Global Strategy Microsoft focused on increasing profitability by reaping cost reductions that come from experience curve effects and location economies. Also it pursued a low-cost strategy on a global scale. By formally recognizing the emerging business opportunities introduced by the new era of technological change via Internet, Microsoft had to reinvent itself. It restructured its key business units, streamlined decision-making processes, and realigned itself to become more nimble in producing and marketing its software.

Diversification Strategy: Related diversification The first unit was the platform products and services division, which oversaw Windows Client, Sever and Tools, and MSN groups and aimed to leverage MSN’s success in the development of Windows-based products. The second unit was the business division, which oversaw the Information Worker, and Microsoft Business Solutions. The third group was Entertainment and Devices division, which oversaw the Home and Entertainment group, and the Mobile and Embedded Devices group, aimed to compete with other players.

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Related diversification

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Impact on performance

The three divisions, showing negative growth in the initial years, will soon turn into positive growth, as the organization learns and establishes itself in the new business over the years, leveraging on its past learnings.

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Recommended strategies for future The following are the strategies recommended for Microsoft:

•

Develop strategic partnerships in new industries

•

Grow inorganically: Acquire market leaders

•

Focus to build employee relationships

•

Software as Service

•

Entry into new areas like cloud computing by Google

•

Entry in different verticals through unrelated diversification

•

Increasing focus towards R&D, to increase product launches

•

More open approach to development and distribution, as it helps to maintain quality patent portfolio while increasing product sells

References

•

Web references:

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•

http://search.barnesandnoble.com/booksearch/isbnInquiry.asp? userid=2VQCBE84TR&isbn=0684855313&itm=1#TOC

•

•

www.microsoft.com

•

http://news.cnet.com/8301-13505_3-9836499-16.html

Book references: •

“BUSINESS AT THE SPEED OF THOUGHT”, by Bill Gates

•

“Strategic Management An Integrated Approach – 2009 Edition” by Charles W. L. Hill and Gareth R. Jones

•

“Microsoft Secrets: How the World's Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People.” by Michael A. Cusumano, Richard W. Selby, Richard W. Selby

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