1

Table of Contents Executive Summary ............................................................................................... 3 Intro ...................................................................................................................... 4 Issues & Outlook Profile ......................................................................................... 6 Mission and Strategy ........................................................................................................................................ 6 Key Issues .............................................................................................................. 8 Slow to Innovate ................................................................................................................................................. 8 PC Market in Decline ........................................................................................................................................ 8 Mobile Device’s Poor Performance ............................................................................................................ 9 The External Environment .................................................................................... 10 PESTEL Analysis ............................................................................................................................................... 10 Conclusions ......................................................................................................................................................... 14 Porters Five Forces ......................................................................................................................................... 15 Conclusions ........................................................................................................................................................ 18 Competitor Analysis ....................................................................................................................................... 19 Internal Analysis .................................................................................................. 21 Strategic Capability ......................................................................................................................................... 21 Resources ............................................................................................................................................................ 21 Competences ...................................................................................................................................................... 22 Utilizing Capabilities ....................................................................................................................................... 23 VIRO Analysis ....................................................................................................... 25 SWOT Analysis ..................................................................................................... 25 Strengths .............................................................................................................................................................. 26 Weaknesses ........................................................................................................................................................ 26 Opportunities .................................................................................................................................................... 27 Threats ................................................................................................................................................................. 28 Conclusions ......................................................................................................................................................... 29 Action Plan .......................................................................................................... 30 Nokia Integration and Microsoft Mobile Division ................................................. 31 Challenges ........................................................................................................................................................... 32 New Windows Phone ........................................................................................... 33 Product Details and Development ............................................................................................................ 33 Marketing ............................................................................................................................................................ 34 Product Convergence ..................................................................................................................................... 35 Moving Forward .................................................................................................. 35 Conclusion ........................................................................................................... 36 Appendix ............................................................................................................. 37 Bibliography ........................................................................................................ 38

2

Executive Summary
Microsoft’s shift from a ‘software and services’ led business to a ‘device and services business’ led business was a big decision that we found very interesting. Our report investigates why the ex-software giant decided to change the focus of its business after four decades of success in software. The analysis highlights some key issues and external forces that we believe have contributed to this required transition.
The key issues that Microsoft needs to address include the Decline in the PC
Market, their Poor Mobile Device Performance and the company’s Slow
Innovation in recent history. Our external analysis identifies important factors that need to be considered moving forward and it reveals why Microsoft decided to change their business model. A summary of PESTEL concludes that the projected
Growth in Mobile Devices will create huge opportunity for Microsoft, but also reveals that the company has lost touch with a younger generation.
Our recommendation stems from a thorough analysis of Microsoft’s environment and what strategic capabilities can be utilised to create competitive advantage moving forward. Derived from our SWOT analysis, our action plan is to create a new
Microsoft Mobile Division, through the integration of Nokia, and produce ‘X
Mobile’ as the New Windows Phone. The development, production and marketing of the product will address key issues and the overall action plan will have a long-term view of gaining a Sustained Competitive Advantage.

3

Microsoft Rebooted: A Strategic Analysis of Microsoft’s Fundamental Shift to a Devices and Services Company.

Intro
In 2012, Microsoft declared that they would be shifting their focus from a softwareled company to a devices and services company. This decision was made on the basis of many external factors, including the decline of the PC market and the growth of mobile globally.
‘By transforming into a devices and services company, Microsoft aims to primarily monetize high-value activities by leading with devices and enterprise services.’1
This was a much-needed shift in focus, for a company that has perhaps relied too much on tradition over its lifetime. The fundamental change in Microsoft’s attention was marked by a complete company overhaul. Over the last two years Microsoft has undergone organizational restructuring, invested in key acquisitions, reshuffled key employees and chose Satya Nadella as the new CEO to execute the transformation.
Nadella’s appointment underlines Microsoft’s clear intent to reenergize the business, redirecting it from a Model of Yesterday to a Model of Tomorrow.

(Source: Market Realist2)

1

‘A guide to Microsoft’s shift from software to devices and services’, Market Realist, Last modified:
Jan 21 2014, http://marketrealist.com/2014/01/microsoft/

4

We aim to provide a strategic analysis of Microsoft’s current situation, hoping to gather an understanding as to why such a large-scale transformation is required. Our objective is to carry out a rounded assessment by analysing the company’s internal competences and external environment. An in-depth analysis of these factors will allow us to suggest relevant action plans that will boost Microsoft towards its new focus. 2

Ibid.

5

Issues & Outlook Profile
Mission and Strategy

Mission
Microsoft’s mission is to ‘enable people and businesses throughout the world to realize their full potential by creating technology that transforms the way people work, play, and communicate.’3
Strategy
‘Our strategy: High-value activities enabled by a family of devices and services.’4
In recent years Microsoft’s strategy has slowly transformed. The software tech giant has been forced to strategically reposition to offset the decline of PC sales and resulting decline in software sales. As Microsoft’s third CEO, Satya Nadella brings a relentless drive for innovation and a spirit of collaboration to his new role.
Microsoft’s strategy is to create innovative devices and services that are seamlessly interlinked: ‘a family of device and services’. Nadella expects to achieve this by changing the way Microsoft approaches business, taking into consideration their
Competitive Advantage (loyalty, brand, culture, operations, R&D, values and other capabilities) and recognising the Key Growth Drivers (mobile, cloud, video on demand, social media and other emerging technology) in this sector.
Nadella has identified Microsoft’s strategy moving forward as one which is clearly defined in our ‘Mobile First, Cloud First’5 world. Although Key Growth Drivers indicate that

mobile

and

cloud

are

increasingly important, it is Microsoft’s

3

Smita Nair, ‘Company Overview and Strategy’, Microsoft, Last modified: 2014, www.microsoft.com
Ibid.
5
‘Satya Nadella: Mobile First, Cloud First Press Briefing’, Microsoft, Last modified: March 27, 2014, www.microsoft.com 4

6

ambition not only to make them a core part of the business but to strive towards further innovating and developing these platforms, and the ways in which we interact with them.
Microsoft’s new ‘One Microsoft’ strategy aims to realise these ambitions by increasing its efficiency, speed and innovation, while also enhancing its capabilities.
This is a strategy which was implemented in 2013 and which saw the initial restructuring of the organisation. ‘One Microsoft’ will see the company’s Value
Chain realigned and better integrated to pursue their vision; as such, Microsoft will undergo a ‘reboot’, and return to its position of dominance.

7

Key Issues
Slow to Innovate
‘Microsoft failed to recognize the impact of nearly every worthwhile development and missed every major tech innovation of the new millennium.’6
Critical to Microsoft’s fall in dominance within the technology industry was the company’s poor investment and understanding of emerging technology. Its execution of ‘Zune’, the portable music player designed to rival the iPod was branded an embarrassment; it arrived late to the Web Search game with the failing ‘Bing’; and it missed the revolutionary rise of touch-screen technology. The company’s Lack of
Innovation is a key issue that Satya Nadella addressed in his first speech as
Microsoft’s new CEO, and it is tantamount to the company regaining market share.
PC Market in Decline
‘Microsoft and PC manufacturers have a vastly symbiotic relationship.’7

The product life cycle for PCs is reaching decline, as sales continue on a downward spiral. According to tech research group Gartner, the 10% decline throughout 2013 is the worst in history for the worldwide personal computer market.8
The impressive Growth of Mobile Devices and their increasing capabilities is perhaps the biggest influence for this decline.

Although Microsoft does not

manufacture or sell PCs, the poor performance of the PC market negatively impacts its software sales. PC manufacturers and Microsoft are Complementors, so a decline in PC sales results in fewer Windows licenses and Office packages sold (two products that have always been Microsoft’s biggest earners).

6

Barry Ritholtz, ‘Microsoft’s Fall from Dominance’, The Washington Post, 06/09/13
Accessed: April 14, 2014, www.washingtonpost.com
7
Zack Whittaker, ‘Microsoft’s Domino Effect’, ZDNet, Last modified: 03/12/12, www.zdnet.com

8 Jason Evangelho, ‘2013 Represented Worst Decline in PC Market’s History’, Forbes, Last modified: 09/01/14, www.forbes.com

8

Mobile Device’s Poor Performance
‘In the span of less than two years, Microsoft has launched
Windows Phone to indifference and the Surface tablet to near invisibility’9 As mobile growth eats into the sales of the PC market, Microsoft’s slow innovation has left them at a competitive disadvantage within the mobile device market.
Microsoft’s ‘Surface' tablet device has generated $400 million in revenue, where as
Apple’s ‘iPad’ should generate $6 billion in sales.10 These revenue figures illustrate how much catch up Microsoft need to do if they want to make any significant dent in
Apple’s growing market share. Windows Phones are suffering even more than the
‘Surface’ representing 3% of Market Share in the US behind iOS’s 46.6% and
Androids 48.8%. For a company that has newly announced itself as a device and services business devices were not generating as high revenue as Microsoft would like as the chart below illustrates.

The blame for their performance has been pointed at Microsoft’s Weak Marketing of their products, as well as an Inefficient Organisation Structure and Department
Integration that could be improved. In such a rapidly developing market it’s crucial that Microsoft’s address these issues as soon as possible.

9 Mark Rogowsky, ‘Microsoft’s Marketing Needs a Hard Reboot; It’s Time To Ctrl-­‐Alt-­‐Del Steve

Ballmer, Forbes, Last modified: 29/06/13, www.forbes.com

10 Jay Yarow, Microsoft’s Surface Revenue, Last modified: 24/10/2013, www.businessinsider.com,

9

The External Environment
PESTEL Analysis
•

Political

Microsoft’s Political Action Committee (MSPAC) has been set up this year in order for employees and shareholders to have a more active role in the US political process.
It informs its members about any political issues and government decisions that may affect Microsoft’s business. Members can also collectively support public policy positions that are important to Microsoft and the software industry. MSPAC contribute to federal, state and local candidates and typically support candidates who share Microsoft views on public policy. The MSPAC look after their own interests and only associate themselves with leaders that represent districts or states where
Microsoft has a major business presence or serve on committees that have jurisdiction over legislation that is important to the company. Both government influences and the
MSPAC show how political influences can affect companies such as Microsoft.

•

Environmental

It is important that large companies such as Microsoft do their part to help preserve the environment. Recent concerns over global warming and Co2 emissions have given people a focus towards environmental issues. People want to know what large corporations are doing to try and combat these environmental problems. In the case of
Microsoft they want to make their data centres, software development labs, offices and employee air travel carbon neutral. The Three Strategic Pillars Microsoft have used in their attempts to become carbon neutral are to be lean, green and accountable.
They will be green by making more environmentally responsible choices with energy, waste and water.11
Climate Change Policy: Microsoft is dedicated to trying to reduce their carbon footprint from their operations. They are working with their partners in order to raise the energy efficiency of computing.12 Green IT will be a driving force in order to aid

11 Tamara

DiCaprio, How Microsoft is striving to become leaner, greener, and more accountable,
Microsoft Corporation, June 2012

12 Microsoft,

‘Microsoft Climate change policy statement’, (2014), Available at www.microsoft.com,

10

businesses globally on how to deal with climate change. Microsoft is also involved in research that is being performed by environmental groups, scientists and governments globally. These efforts show the world what this multinational company is doing in order to combat climate change and the extra efforts they are going to in order to help with research and accommodate other businesses in the process.

•

Social
‘Our research indicates that Microsoft is unable to connect with the new generation of users.’13

The use of the Internet has changed over recent years with the rise of social media as people have begun to use it as a communication and socializing tool. Social media has introduced user driven applications such as blogs, social networks (such as
Facebook or Twitter) and video sharing platforms (such as Youtube).14 These new social technologies have allowed for a rise in user-generated content, global community and allowing people to express their opinions in a new form. This is a new generation of users that want their content instantly and mobile. Apple has captured this ‘Social Media Generation’ with their innovative touch screen technology and easy to access social media integration. The success of smart devices turned into somewhat of a Social Trend, and must have for business and personal use. Apple’s simple design and effective marketing made it the ‘cool’ smart devices to have. Microsoft has failed to identify with the younger consumer in the 21st century, with the exception of the Xbox console.

•

Technology
‘There are almost 2 billion devices in the world today, and there will be an additional 2 billion in the next three years.’
– Marissa Mayer, Yahoo CEO

13

http://www.theregister.co.uk/2010/08/05/microsofts_lost_generation/
Smith, ‘The social media revolution’, International Journal of Market Research, (2009),
Available at: http://web.efzg.hr/dok/MAR/vskare/kolegiji/im/materijali/The_social_media_revolution.pdf 14 Tom

11

In 2013 alone the global mobile phone market grew by 5.6% and has a value of
$163.4. It is not predicated to stop there with a projected growth of 21.5% between
2013 and 2018 with a projected worth of $198.5 billion. The projected growth of devices doesn’t stop at smartphone with all Internet enabled devices such as tablets predicted to have explosive growth over the next decade.
Differentiation and innovation is a key growth driver in the industry as fight for tablet market share heats up and the smartphone market is starting to see intense rivalry. It is expected that profitability would

shift

from

handset

manufacturers to the manufactures of key performance enhancement components and company’s that have direct control over both software and hardware production.15
(Source: www.economist.com)

Cloud computing is an emerging technology that is rapidly expanding.

Cloud

computing encompasses cyber infrastructure and constructs itself upon decades of research in virtualization, distributed computing, ‘grid computing’, utility computing and in recent times networking, web and software services.16 Cloud computing is becoming increasingly more important for business in order to keep connected and maintain international competitiveness. Its opportunity for personal use is also vast allowing customers to safely store their data wirelessly and access it from anywhere.
Apple’s iCloud is an example of cloud technology being used for commercial use.
This is a cloud service, which stores users content such as photos, music, contacts, documents and applications.17

15

Marketline, Global Software and Services, (2013), London, UK
Mladen A. Vouk, ‘Cloud computing–issues, research and implementations.’ Journal of Computing and Information Technology- CIT 16.4 (2008)
17
Marketline, Global Software and Services, (2013), London, UK
16

12

•

Legal

Microsoft has been previously accused of monopolizing

the

computer

operating systems market. May 1998 saw Microsoft sued by the United States, nineteen states and the District of
Columbia. They took their case against
Microsoft

as

they

believed

that

Microsoft Eliminated the Competitive Threat of a new company Netscape’s web browser and sun Microsystems’ Java technologies.18 Microsoft is a prime example of an antitrust case, which saw the company having to look to its cash reserves to settle legal disputes.
Antitrust Laws are a significant legal force regarding Microsoft and its attempts to grow as a company globally. Surveillance is conducted over the activities of companies such as Microsoft. Private rights of action can be provided for some consumers or competitors by certain jurisdictions to assert claims of anti-competitive conduct. This is a huge influence in the industry and would affect not only Microsoft but also its competitors. The European Commission also monitors the design of certain Microsoft products regarding the terms on which certain technologies are used in various products including file formats, programming interfaces and protocols available to other companies.19

W.H Page & J.E Lopatka, The Microsoft Case: Antitrust, High Technology and Consumer Welfare,
(University of Chicago Press: USA, 2007)
19
Marketline, Global Mobile Phones, (2014), London, UK
18

13

Conclusions The most important external influences that we recommend Microsoft to recognise/address, that our PESTEL analysis highlights include:

•

Projected Growth of Mobile – The external analysis proves just why
Microsoft have shifted the fundamental focus of their business to a device and services business with the explosive growth of mobile device an impossible opportunity to ignore.

•

Environmental Focus – Projecting an environmentally friendly image and reducing carbon footprint is a huge factor in consumer’s choices that
Microsoft need to give attention to moving forward.

•

Emerging Cloud Technology – It is important that Microsoft addresses its issue of slow innovation, by not missing out on the benefits of incorporating cloud into the business and marketing its own cloud services effectively.

•

Recapture Younger Generation – It is vital for Microsoft to target a younger generation to prevent the company becoming irrelevant in the long-term and to increase revenue.

14

Porters Five Forces

Threat of Entry (Low)

•

Economies of Scale

•

Established Brands

•

Regulations

•

Experience

The device and services industry is a constantly expanding and already has a number of large established players such as Microsoft. It is not impossible for new entrants to penetrate the markets Microsoft operates in that are mostly Oligopoly’s. However, any new entry would only really be achievable on a smaller scale.20 As Microsoft is such a large company in this industry it has significant Economies of Scale in processing and has the ability to offer more services. This is a Barrier to Entry for new smaller businesses as Microsoft has reached large-scale production due to their costs being lower and this makes it very expensive for new entrants to compete. Large market players in this industry have an advantage as they already have wellestablished brands and may be unwilling to trust smaller less established companies.
Microsoft is has a competitive advantage with its Scale and Experience as they have acquired considerable technical expertise that is difficult for new entrants to match.
Regulations also act as a Barrier to Entry to some areas of the industry. Data processing for financial institutes for example would be an area that is stringently regulated. When it comes to product differentiation most people are aware of
Microsoft’s products and services. It is a Well-Established Brand with an excellent reputation and it would take new entrants years to build up a similar reputation, which protects Microsoft against new competition. Taking these factors into account the threat of new entrants into the market is Low.
Threat of Rivalry
Microsoft’s Product Portfolio means the company encounters numerous rivals across different industries such as Sony, Linux and Samsung. Taking into consideration

20 Marketline,

Global Software and Services, (2013), London, UK

15

their product portfolio Apple would represent Microsoft’s biggest rival, as it competes with a number of Microsoft’s products. When it comes to computers Apple have their own operating system that rivals Windows and is implemented across their PC’s and devices. Their devices such as the iPhone and iPad compete with Microsoft’s

Windows Phone and Surface.
Device

Key Competitor’s

Factors

Windows OS

Linux, Apple iOS

•

Dependent by PC

•

Well Established in Market

•

Loyalty

Apple, Amazon,

•

Growing Market

Samsung

•

Fight for Market Share

•

Differentiation Key

•

Intense

Surface

Xbox One

Sony

Threat

Rivalry

Low

Moderate

with Moderate

PlayStation
•

Only One Direct Rival

•

Product Loyalty

Windows

Apple, Samsung,

•

Low Market Share

Phone

HTC, Sony,

•

Intense Competition

Blackberry

•

High

Maturing Market

Threat of Substitution

•

Product Line Diversification

Microsoft’s threat of substitution and threat of rivalry are in some ways linked. To assist in reducing the threat of substitution they’re product line is diverse. Consumer habits, as outlined in the PESTEL, are becoming increasingly mobile, the PC market declining as a result of this substitution. Tablets are increasing becoming a substitute for Laptops and PC’s. As detailed in rivalry, Microsoft has products in these substitute markets so the threat of substitution would correlate with the threat of rivalry. However, Microsoft’s Xbox One has a High Threat of substitution in the

16

gaming market.

Consumers are saturated with choices across next generation

consoles, online gaming, hand held consoles and the increasing growth of mobile apps. Buyer Power (Low)

•

Competitive Pricing

High Switching Costs

•

As Microsoft is one of the largest players in this industry they would be depending on supplying to the large Multinational corporations as well as the smaller businesses in the industry. The awareness of brands is likely to be significant to customers when it comes to purchasing particularly in the data processing and outsourcing market where Microsoft is a large player.21 Buyer Power is reduced when they dependent on reputable services such as the ones provided by Microsoft in the running on their businesses. Overall although Microsoft is dependent on large companies to purchase their products and services the customers are also dependent on these services for the smooth running of their businesses and there is High Switching Cost to change service, therefore Buyer Power is Low.
Supplier Power (High)

•

High Switching Costs

•

Embedded Culture

If a company has been using Microsoft as their operating system there are High Costs involved in switching these systems therefore giving Microsoft Power Over Supply.
There is an Embedded Culture that the computer-operating workforces are encouraged to have Excel, PowerPoint and Word skills. This Industry Requirement is a phenomenon that increases Microsoft’s supplier power. Their distribution network that includes partnerships to have their software pre installed on devices and selling directly to customers online also increases their supplier power. For these reasons Microsoft have High Supplier Power.

21 Marketline,

Global Software and Services, (2013), London, UK

17

Conclusions
Our Porters Five Forces analysis illustrates that Microsoft’s supplier power is still very strong and, although threat of entry is low currently, rivals are generating
Intense Competition for loyalty.

If Microsoft lose battles in any area of their

product line in could have a Negative Halo Effect across portfolio and could damage
Microsoft’s supplier power in the long run if not addressed.

We recommend

Microsoft to focus on product development and integration while increase marketing expenditure/creativity to

combat

the

threat

of

rivalry

and

substitution.

18

Competitor Analysis

Key Competitor: Apple
It had always been argued that Apple’s produced a better operating system than
Microsoft but up until the start of the 21st century Microsoft had created a Strategic
Lock-In. ‘Windows became the industry standard by working to ensure that the
‘architecture’ of the industry was built around them.’22
However, in recent years Apple has been able to break out of this lock-in and see impressive growth along through out its product line, capitalizing on Innovation and
Effective Marketing.
The release of the iPhone redefined the

mobile

communications market almost immediately. ‘Since its launch, iPhone captured

increasing

market share and displaced the then mobile

phone

market

leader, Nokia.’23 The huge innovation that the product brought resulted in substantial growth in a short space of time, capturing ‘over 70% of the mobile phone industry’s total profits’ by the end of 2012. Apple continued its successes in producing ground breaking and truly innovative products with the iPad, selling three million in the first
80 days of launch.
The success of the iPhone and iPad gave Apple an opportunity to boost other areas of the business. Through Effective Marketing, targeting a Younger Generation they were able to generate a Halo Effect across the business. Mac PC sales, and therefore operating systems, witnessed an impressive increase after previously been dominated by Microsoft.

22 Gerry Johnson et al., Fundamentals of Strategy, (Essex UK: Pearson, 2009), p. 160 23 Marketline, Company Profile Apple Inc., (2014), London UK

19

The unprecedented success of Apple’s products gave them First Mover Advantage in the smartphone revolution and the creating of the tablet market. This competitive advantage allowed them to establish the brand as leading suppliers of these products, forcing Microsoft to play catch up.
Vertical Integration of Apple’s Supply Chain’s has proved to give them a distinct competitive advantage. They have complete control over their Product Life Cycle. In contrast Microsoft use Original Equipment Manufacturers (OME) to pre install
Microsoft software on third party hardware. Microsoft are also missing the global presence of the retail end of the supply chain where as Apple’s integrated Apple
Retail Stores enhance the customer experience and service, with most notably the
‘Apple Genius’ support team in each store. This gives them a Temporary
Competitive Advantage over Microsoft who currently does not provide this customer experience globally.
Further Key Competitors
Adobe

Oracle

BMC

Cicsco

HP

Infro

Intel

IBM

Nintendo

SAP

Amazon
Sony

VMmare

Yahoo

Google

20

Internal Analysis
Strategic Capability
Resources

Human Resources
Microsoft’s investment in human resources represents a critical asset for the company.
‘People are what make Microsoft the unique, innovative and the progressive company that it is.’24 The new CEO, Satya
Nadella, is a prime example of how
Microsoft looks to develop and grow their staff as he was awarded the position after 22 years at the company. However,
Microsoft’s most valued Unique Resource in this area is Bill Gates. The co-founder contributes a wealth of unmatched industry knowledge to the company and illustrates an impressive Experience Curve.
Brand Reputation
Microsoft has established a strong reputation through delivering consistent quality in its sector for almost 45 years. Its unrivalled dominance in the late 20th century generated a loyal customer base that has continually returned to the brand. The
Microsoft brand name is an Intangible Unique Resource that gives the company a competitive advantage when looking to enter new markets or release new products.
Financial Resources
Microsoft has always been known to keep a large cash reserve. This Valuable Resource has been utilized in many different ways over the course of the company’s lifetime. The company began to see unchanging stock prices at the start of the 21st century and to combat this Microsoft famously

24‘Human Resources: Corporate Business’, Microsoft, Available at: www.microsoft.com

21

announced a to pay a Special Cash Dividend in 2004. ‘Bowing to pressure after years of enormous profit but a stagnating stock price, Microsoft Corp. is dipping into its substantial cash reserves with plans to return as much as $75 Billion to shareholders.’25 In more recent years the company has used this resource to expand the business by venturing into some Key Acquisitions including the successful acquiring of ‘Skype’ and the almost complete ‘Nokia deal.

Competences Research and Development
Microsoft has a strong focus on research and development. It represents a Critical
Success Factor in the technology sector and showcases one of Microsoft’s Core
Competences. A significant amount of human and financial resources are committed to the development of the company’s new software, hardware and other solutions. ‘In
FY2013, approximately 37,000 associates were engaged in development activities.’i
Research and Development financial investment equates to, on average, an estimated
$10 billion a year. The value gained through this capability translates to innovative software and emerging technology, as well as the Intangible Unique Resource of a
Patent Portfolio of over 35,000 with over 37,000 pending.
Software
Software is still very relevant and a Core Capability Microsoft has been able to differentiate themselves in terms of quality and reliability for decades. The activity surrounding the development of software has always been Core Competence for the business. Although the company’s new primary focus is device and services,

software will still play an important role in how the hardware and our interaction with the hardware is defined. Microsoft’s heritage is steeped in software production capabilities. ‘We should be very confident in our capability around software as it comes to these new experiences.’26

25 ‘Microsoft to pay special cash dividend’, Tech and gadgets on NBCNews.com, Last modified:

22/07/04, Available at: www.nbcnews.com 26 Connie Guglielmo, ‘New CEO Nadella Tells Customers Microsoft ‘Very Confident’ in Software for Mobile, Cloud’, Forbes, Last modified : 04/02/14, Available at: www.forbes.com

22

Distribution Channels
Microsoft has a strong global distribution network. Microsoft has PC manufactures as key Complementors and capitalize of this relationship to strengthen their distribution power. In the early PC market, Microsoft had established itself as the largest

manufacturer of computer programming languages. This early dominance resulted in
Microsoft having First Mover Advantage in the operating system market and allowed them to strike exclusive deals with PC manufacturers, most notably IBM, to
Bundle their software with manufacturers PC sales. This process of distribution for the organisations software is a Core Competence. Other strong distribution channels include their global reach for physical products, online stores and digital downloads.

Utilizing Capabilities
Value Chain
Microsoft’s Value Chain consists of Primary Activities such as Marketing and
Sales, Operations, Inbound/Outbound Logistics, Operations and Services.

Its

Supporting Activities include its company infrastructure, research and technology development and its human resource management.
This value chain operated around a structure that segmented each of these activities in relation to product. This would mean each product such as Xbox, Windows OS and
Surface would have separate marketing and sales divisions, the organizational structure being Horizontally Integrated.
Microsoft’s Old Value Chain

23

However, in 2013 it was announced that the organizational structure would be adjusted to operate by function. This meant that primary activities would cover all products, following the Microsoft One strategy, and become Vertically Integrated.
‘We will see our product line holistically, not as a set of islands.’27
- Steve Ballmer
This new strategy of Vertical Integration is being applied to Microsoft’s Value
Network as well, Microsoft recognizing the competitive advantage Apple have by having control over each stage of their Product’s Life Cycles, from productions to
Apple Stores. It is important to have implemented the most efficient and effective value chain, to increase Supply Chain Control in order for Microsoft to innovate and create Sustained Competitive Advantage.
New ‘Microsoft One’ Strategy Value Chain

Restructuring the organisation will increase solidarity and interaction across devices.
This will, in turn, increase efficiency and communication across all departments. For example, the marketing department’s communications will become more consistent, resulting in a clearer message delivered to consumers about all products.

27 ‘One Microsoft: Company realigns to enable innovation at greater speed, efficiency’, Microsoft:

News Center, Last modified: 11/07/13, Available at: www.microsoft.com

24

VIRO Analysis

Resources

Valuable

Rare

Difficult to Imitate

Exploited by Organisation

Tangible

Financial

Yes

Yes

Yes

Yes

Tangible

Geographic Presence

Yes

No

No

Yes

Intangible

Reputation

Yes

Yes

Yes

Yes

Intangible

Patents

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

Yes

Experience/ Skills Research and Capabilities Development Human

Capabilities

Value Chain

Competitive Implication Sustained Advantage Advantage Sustained Advantage Sustained Advantage Sustained Advantage Sustained Advantage Advantage

SWOT Analysis
The key issues derived from our analysis of the internal and external environment can be summarised under the following ‘SWOT’ categories:

STRENGTHS
•
•
•
•
•

Human Resources
Brand loyalty and reputation
Robust financial performance
Strong R&D capabilities
Strong distribution channels

OPPORTUNITIES
•
•
•
•

Cloud Technology
Mobile Device Growth
Acquisition of Nokia
Restructuring of Organisation

WEAKNESSES
•
•
•
•

Marketing
Slow to innovate
Poor Mobile Performance
Poor Device Integration

THREATS
•
•
•
•

PC market in decline
Increasing Rivalry
Shifting Consumer Demand
Asian Antitrust Laws

25

Strengths

Strategic Capability

Microsoft’s core strategic capabilities, as outlined previously, include its Human
Resources and Strong Brand Reputation, which together, have allowed the company to build a loyal customer base and achieve an impressive ROI. In FY2013, the company’s revenues grew by 5.6% to $77,849 million, enhancing shareholder value and allowing the company to fuel its expansion plans.28
Research and Development
Microsoft’s impressive R&D Capabilities are also driving organic growth within the company. These strong R&D capabilities have given Microsoft valuable patents that are key to gaining a Sustained Competitive Advantage. This is crucial to the continued success of the company, particularly as competition continues to intensify.

Weaknesses

Marketing
Microsoft’s ability to market its products and services has fallen short. Meanwhile, competitors such as Apple have valuable marketing capabilities have gathered momentum, giving it them competitive advantage. Apple has emerged as one of the world’s most valuable brands, and it has gone on to receive several awards for marketing excellence.

Microsoft

needs

to

reinvigorate

its

marketing

communications by developing a strategy which aims to understand and respond to ever-changing consumer demands by gathering powerful, qualitative customer insights. Their new Internet Explorer ‘Child of the 90s’ features fads from the decade that gave Microsoft a large loyalty base and encourages them to reconnect with Internet Explorer.

This flawed marketing strategy isolates the current

generation that Microsoft has been unable to capture, a generation that will decide the company success in the future.

28 Marketline, Microsoft Corporation SWOT Analysis, (2014), London UK

26

Slow to Innovate
As detailed in Key Issues, Microsoft has been Slow to Innovate, missing out on nearly every major technology development in recent years. This weakness needs to address in an industry where survival depends on Innovation and First Mover
Advantage.
Poor Device Integration
As well as the marketing decision mistakes, another reason for Microsoft’s poor performance with devices is the Poor Integration and Interaction they have with each other, as opposed to Apple’s highly integrated product line. Steps should be taken to overcome this, so that the consumer can seamlessly switch between different
Microsoft devices, thereby enhancing the overall Windows OS experience. Microsoft should also look to continuously diversify by expanding its devices and services portfolio through Product Convergence.

Opportunities

Cloud Technology
We are seeing an increasing adoption of cloud computing on a global scale, and this demand is set to increase rapidly in the coming years. As the rate of consumers and businesses moving to the cloud continues to accelerate, Microsoft should look to leverage its unique advantages to drive growth among its cloud offering which includes Windows Azure and Office 365.29
Restructuring of Organisation
The restructuring of the organisation brings give a lot of opportunity to Microsoft.
It’s ‘Microsoft One’ strategy of vertically integrating the value chains will enable the company to work more efficiently. The Reshuffling of Personnel will strongly contribute to the company’s much-needed reinvigoration. The new CEO will bring a lot of new energy to the role, while other important new position appointments include the executive VP of Marketing, Mark Penn, being moved to Chief Strategy

29 Ibid.

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Officer and Bill Gates acquiring a Product and Technology Advisor role. The shake up involves three key areas of the business that Microsoft need to address;
Marketing, Strategy and Product Development.
Nokia Acquisition
The pending completion of Microsoft’s acquisition of Nokia represents the biggest opportunity that the company faces, taking into account the external environment and it’s core business shift to devices and services. This acquisition was a strategic move, aimed at growing Microsoft’s presence in the mobile devices market. As further detailed in PESTEL, the demand mobile devices are increasing rapidly. The Nokia acquisition will provide Microsoft with valuable resources and capabilities in areas such as hardware design and engineering, as well as hardware sales, marketing and distribution. Threats
PC Market Decline
A significant threat outlined in Key Issues is PC market decline. Tablets and other mobile devices are making PCs increasingly redundant. Most of the growth is found in emerging markets where the average selling prices are low and piracy high, which severely limits the growth opportunities for the Windows PC operating system. This threat has the potential for wider ramifications on the company’s other products.
Increasing Rivalry
As outlined in Porter Fiver Forces, product rivalry in this industry, especially the
Smartphone market is increasing so it’s important Microsoft continue to Innovate and
Diversify; Microsoft’s competitors range in size from small companies, specialised in the production of a single product, to vast, Fortune 100 companies, such as Apple.
There are a range of alternative platforms and devices on the market, mainly offered by Apple and Google. In addition, the company’s Xbox gaming and entertainment business competes with console platforms from Nintendo and Sony. 30 The combination of these significant competitive pressures may threaten the company’s market share and squeeze profit margins.

30 Ibid.

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Shifting Consumer Demand
Consumers needs and habits are constantly in a state of change, no more so when it comes the technological products. The Social and Technological trends concluded in our PESTEL analysis prove this. In less than a decade there has been a shift from customers buying laptops and standalone PCs to buying smartphones and tablets. This puts pressure on technology companies to stay up-to-date, or else risk losing a significant portion of their market share. Microsoft must be positioned to foresee these fluctuations in demand so that they can organise their resources and capabilities accordingly. Antitrust Laws
Asian Antitrust Laws are notably evident in Microsoft’s acquisition of Nokia.
Microsoft has received the approval of the European Commission and the US
Department of Justice for their acquisition. However, the company are still awaiting approval from certain antitrust authorities in Asia, and this is slowing the process.

Conclusions It is vital to the future of Microsoft that the company focuses on its core strengths; that it takes advantage of the current and potential opportunities outlined in our
SWOT analysis; and that it works to mitigate and address any weaknesses and impending threats.
Our analysis has given us a rounded insight of Microsoft’s current strategic position.
Utilising this information we will identify and justify how the company’s resources and capabilities can be used and deployed most effectively for the future. In the following section, we will propose our recommended action plan for Microsoft.

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Action Plan

Short Term
• The Integration of Nokia and the creation of Microsoft Mobile Division.
•

The production, distribution and marketing of a New Windows Phone.

Long Term
•

Product Convergence across all devices to create Sustained Competitive
Advantage.

Stages:
•

Nokia Integration

•

Utilizing

Resources

Gained

from

Acquisition
•

Product Development

•

Marketing

Goals:
•

Vertical integration to boost software

•

and hardware development/innovation
•

Product convergence
(integrated family of devices)

Increase device capabilities

•

Increase environmental awareness •

Target and capture a younger generation of consumers

Objectives
•

Develop and Produce New

•

Windows Phone for July 2015

Increase market share from 3% to
8% in first 12 months

release
•

Increase our social media ‘likes’

•

Increase devices and

by 15% in first 6 months of

entertainment revenue stream to

launch. (Currently approx. 2.9

20% of business revenue by 2016

million likes)

(currently 13%)

Metrics
The goals and objectives outline Realistic targets, taking into consideration current market share of Microsoft devices, transition of Microsoft’s organisation and time required developing a new product
These goals and objectives will be Measured by; market research, digital metrics, social media ‘likes’ and ‘follows’, sales figures and market share analysis.

Nokia Integration and Microsoft Mobile Division
The integration of Nokia will bring with it Core Capability that we can take advantage of, providing us resources that can be applied across the manufacturing of all of our devices. By completing the acquisition of Nokia we will increase Supply
Chain Control and move closer to our objective of vertical integration as outlined in our Microsoft One strategy.
Approval concerning antitrust laws from
Asian authorities is expected to be granted late April 2014 and will allow us to complete the acquisition and integrate
Nokia in May 2014. The acquisition of the device and services business of Nokia will help position Microsoft better in the increasing mobile market place. As outlined in the PESTEL, the Key Performance
Driver for any player producing devices is to have full control over both their software and hardware product lines.
Introducing the manufacturing component of our Windows Phone to our supply chain brings with it a lot of benefits. The direct control we will have over the production will allow us to tailor our software more efficiently to match the devices.
Previously, difficulties arose from trying to convert our software specifications to the devices Nokia produced and this limited our software’s capabilities. We can also use the unmatched Unique Human Resources and experience that Nokia employees have gathered over their decades in the device and services industry.

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We plan on creating a new Microsoft Mobile division and combine our own capabilities and our acquired ones. These capabilities will be utilized across all our devices as we strive to improve our Product Convergence and Integration. Our key competitor, Apple’s, strength is how well their products interact with each other.
We want to our address our competitive disadvantage on this front and by adding our new Microsoft Mobile division to our value chain we can work towards our objective of producing a ‘family of devices and services’. The ability to effectively build a family of devices that interact seamlessly will reduce our threat of substitution and rivalry, as it will encourage consumers to purchase substitutes from our own product line.

Microsoft Mobile added to Value Chain

Challenges
The Nokia brand, although in decline through Europe and the US, is seeing growth in developing countries. The question that arises; ‘If we completely rebrand Nokia, as
Microsoft Mobile, will we compromise brand recognition in these regions?’
We believe so. We recommend that Microsoft should keep producing Nokia phones under the Nokia brand name in these developing countries. A slow transition to
Microsoft Mobile is advised, as the Nokia Brand is a strong asset that can be utilized in these regions.

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New Windows Phone
The recommendation of a New Windows Phone is a result of mobile growth statistics that cannot be ignored. Although our market share in the smartphone market is low currently, the integration of Nokia will provide us an opportunity to increase market share provided we focus on the key factors our External and Internal Analysis pointed to.

•

Innovative/ Utilizing Emerging

•

Environmentally Friendly

•

Sustained Competitive Advantage

Technology
•

Market to Younger Generation

through Product Convergence

Product Details and Development
The Unique Human Resource skills of the product and technology advisor, Bill
Gates, will be utilized in the development of the New Windows Phone. The phone will be the first ever commercially sold Modular Smartphone.

A modular

smartphone is truly Innovative and Microsoft’s First Mover Advantage producing this emerging technology will contribute to reaching our action plan objectives.
Modular hardware technology is an emerging technology that allows users to attach or detach components to a main board.

The ability to

attach and detach components will add value as it makes it easy for users to replace broken parts of the phone easily, enhance components
(bigger camera, better battery) or customize the colour of the phone.
Every component has a unique function, much like a PC’s components (sound card, graphics card, processor,

monitor, and power supply). This concept is Environmental Friendly as it discourages users from discarding their old mobiles and instead allows them to replace or upgrade their device piece by piece.

This will contribute hugely to

reducing the problem of electronic waste as well as increasing value for the customer and the longevity of their device. This differentiated device is Cloud enabled allowing consumers to unlimited wireless storage and easy to update software. Microsoft’s Software Developing Capabilities will be utilized to produce a new and powerful Windows Operating System for the device.
Time Frame
Product development will begin May 2014, immediately after the Nokia acquisition is complete. Microsoft’s strong Research and Development Capabilities are expected to produce the first working proto type in September 2014 and look to have it ready for distribution late 2014 with the early 2015 launch date in mind.

Marketing
Marketing for the new product will begin October 2014. Our analysis recommends the exercising of Microsoft’s Financial Resources to invest heavily in creative advertising that targets the younger generation of consumers.
To identify with a younger target audience we recommend incorporating Microsoft’s ‘Xbox’ brand, the only brand that is currently performing strongly among that demographic. Taking this into consideration we plan on launching the New Windows Phone as the ‘X Mobile’.
We believe the customizable functions of our modular phone will be very appealing to our target audience and the innovative nature of the product could mimic the growth success the first Apple iPhone witnessed.
Investing in a large and engaging digital marketing campaign will help us achieve our objective of increasing our social media ‘likes’ by 15%. Market Research will also

34

be conducted before the launch of the campaign about our target markets views on
Windows Phone’s will act as a Control. We will then conduct market research within the same market 6 months to measure the success of our marketing and to determine if our goals and objectives were achieved.
Product Convergence
The
most important question moving forward is how can we create Sustained Competitive Advantage? The long-­‐term purpose of creating a new Mobile Division is aligned with the strategy of Microsoft’s Organisation Restructuring:

‘Our strategy: High-value activities enabled by a family of devices and services.’31

In order to create an effective family of device and services product convergence is a necessity. Every one of Microsoft’s devices needs to complement each other and interact seamlessly. Our key competitor, Apple, has had a competitive advantage by recognizing the importance of product convergence giving consumers added incentive to stay loyal to the brand across it’s product line.

However, Microsoft has a stronger portfolio of devices, notably the next generation capabilities of the ‘Xbox One’. It has the capability to act as a media hub for an entire household of devices. This will reduce the Threat of Rivalry and Threat of Substitution by offering unique added value through complimentary products. The device portfolio and effective integration will not be Imitable and will create Sustained Competitive Advantage.

Moving Forward
It is vital that all of Microsoft’s devices share the same operating system and create value for each other.

After the release of the ‘X Mobile’ we’d recommend to

continue the branding with the release of the ‘X Mobile Pro’ and ‘X Surface Pro’, with specifications that appeal to a target market of business professionals. We also recommend for Microsoft to further integrate their supply chain by investing in the

31 ‘One Microsoft: Company realigns to enable innovation at greater speed, efficiency’, Microsoft: News Center, Last modified: 11/07/13, Available at: www.microsoft.com

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global presence of ‘Microsoft Stores’. Competitor Analysis revealed how Apple have gained a competitive advantage by providing a excellent customer experience that they have direct control over, an imitable asset that Microsoft should invest more resources in.

Conclusion
Sustained Competitive Advantage will be achieved through a combination of factors that are action plan either details or builds a foundation for. This include

•

Production of innovation

•

Increased brand awareness in target markets

•

Vertical integration of value chains

•

Increased control of supply chains

•

Product convergence

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Appendix

Appendix 1: Major Products and Services
Windows Division
Operating System
Services Suite
Email
Tablets
PC Accessories

Entertainment and Devices
Entertainment Consoles
Video Games
Accesories
Video Chat Solutions
Smartphones

Online Services Division
Search services
Search Advertising
Websites
Social Networking

Appendix 2

37

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