External Analysis - Microsoft Corporation - Case Study Example

External Analysis Report for Microsoft Corporation [Name of Student] [Date of Submission] [1995] Executive Summary This research work addresses issues relating to the external environment analysis of the Microsoft organisation. In this regard, technological, economic, legal, global, customer, labour and resources environments of the company have been examined. Some of the prime services of Microsoft include operating systems, server applications and business solutions. The company’s policies and guide lines were formulated to promote the management accountability, fairness, public trust and to protect the long-term interests of shareholders. Microsoft tried to control the markets in the past by providing specific services for operating systems. Nevertheless, Nadella, the present CEO, made the services available in many areas, where there was no domination in the past. His innovative revolution in the cloud market provided Microsoft, a competitive advantage. This research work scrutinised opportunities and threats, in order to assess Microsoft’s growth in future markets. Finally, conclusions had been arrived at, with recommendations for the future growth of the company. TABLE OF CONTENTS 1.INTRODUCTION AND COMPANY OVERVIEW 2 1.1[Market Controls] 2 1.2 [Policies and Guidelines] 2 2.EXTERNAL ENVIRONMENT ANALYSIS 2 2.1Technological Environment 2 2.2Economic Environment 2 2.3 Competitive Environment 3 2.4 Labour Environment 3 2.5 Resource Environment 4 2.6 Customer Environment 4 2.7 Legal and Regulatory Environment 5 2.8 Global Environment 5 3.INTERPRETATION AND DISCUSSION 6 3.1Main Opportunities 6 3.2Main Threats 6 4.CONCLUSION 6 REFERENCES 8 1. INTRODUCTION AND COMPANY OVERVIEW Microsoft Corporation (Microsoft) has become renowned for developing, licencing and supporting an array of software services and products. Some of its major offerings are: operating systems; business solution applications; desktop and server management tools; training and certification of computer system developers and integrators; server applications; cross-device productivity applications; and video games [Mar163]. 1.1 [Market Controls] Previously, Microsoft had stipulated the services and systems that it would support, to control markets. However, Nadella, its present CEO, has provided its technologies everywhere[Cri16]. He has emphasised upon mobile and cloud services. This is pathbreaking, as Microsoft does not own the standards nor dominates in these areas. Its mobile market share is less than one percent; whereas, Android and Apple have 84% and 15%, respectively. Its cloud market share is 10%, whilst Amazon has 30%[Cri16]. 1.2 [Policies and Guidelines] Microsoft’s corporate governance promotes shareholders’ long-term interests, ensures internal checks and balances, reinforces management accountability, cultivates public trust, and promotes accountability and responsible decision making. This is facilitated by its corporate governance framework’s Articles, Bylaws and policies[Mic162]. 2. EXTERNAL ENVIRONMENT ANALYSIS 2.1 Technological Environment Microsoft has not been very successful in effecting change. Albeit, it has been releasing new versions of Windows regularly, its hardware has frequently been unsuccessful. Thus, it had to withdraw its Kin phones within two months of their introduction. Consequently, it has lagged in mobile devices. Microsoft’s major issue is that its revenues are primarily derived from its Business division. This renders it vulnerable to transition towards mobile devices and consumer products. In 2010, the iPad had been introduced. Prior to that PC sales had experienced 10% growth, and this reduced to 2% [Kin131]. 2.2 Economic Environment The operations of Microsoft have been distributed into business units of: Business division, Client division, Server and Tools division, Entertainment and Devices division and Online Services division. From the perspective of revenue generated, these divisions account for 32%, 25%, 24%, 13% and 5%, respectively[Tho103]. Significantly, 90% of the Business division’s revenue is from Microsoft Office (Office), with 80% of the sales of this suite being to businesses. Hence, its sales growth is determined by the number of employees using Office, instead of the number of personal computers (PCs) sold. The direct consumer sales of Office are usually related to the number of PCs sold, as this suite is frequently purchased along with the PC[Tho103]. In the Client division, 80% of the revenue is derived from original equipment manufacturers selling computers with Windows pre-installed. Revenue growth is directly affected by increase in PC purchase numbers. Half of the revenue of the Server and Tools division arises from licencing agreements. Moreover, the revenue of Entertainment and Devices division, which sells Zune, Xbox, PC and online games, and hardware, such as, keyboards and mice, is seasonal. Lastly, the Online Services division’s revenue is from online advertising, like Windows Live suite, MSN and Bing. Microsoft concentrates upon research and development (R&D) and had allocated US$9 billion or 15% of its revenue for that year in 2009[Tho103]. 2.3 Competitive Environment Microsoft’s presence in the consumer market is minimal. Moreover, dependence upon software sale revenues is a vital weakness, as its rivals, including Google’s Android and Docs, have been offering free software[Kin131]. Despite its near monopoly on PC operating systems, Microsoft has a mere 4% market share, vis-à-vis mobile phones, and its market share in tablets is miniscule. Microsoft should provide a tablet solution that is integrated with the extant information technology infrastructure of servers with its software and businesses using Office. This is important as an iPad application ‘QuickOffice’, enables viewing and editing of Office documents[Kin131]. 2.4 Labour Environment Microsoft opposes underage labour in its supply chain. It implements stringent norms, rigorous audits and best in the industry preventive measures. Microsoft requires its suppliers, whom it identifies as hiring underage workers, to finance their safe return home; fully absorb the cost of such workers school education; continue to pay them wages; and provide employment when they attain the legal age[Rus16]. 2.5 Resource Environment Microsoft’s revenues are predominantly derived from a few divisions, as highlighted in its 2012 Annual Report. With US$23.9 billion, the Business division had the highest revenue, and with 62% margins, the Windows division was the most profitable. Regarding computers running Windows, Microsoft had a 91.7% and 83.3% of the domestic and international market share for computers, respectively. Consequently, Windows and Office constitute the benchmark for sharing files. Microsoft spent US$3 billion in developing the second-generation Xbox, demonstrating its vast resources for launching new products. Its 2012 Annual Report showed that its revenue exceeded expenses by US$33 billion[Kin131]. Microsoft cannot depend upon continued sales to be promoted by the purchase of new PC hardware. It should develop a strategy to address this issue. In addition to disparities in product changes, Microsoft should consider differences among individuals using products. The unprecedented proliferation of cell phones and Internet have rendered computing and communication technology a basic requirement. Thus, the development of Android and Apple software and hardware, poses a major threat to Microsoft’s status as the de facto provider of operating systems[Kin131]. Its operating system is used in more than 90% of the domestic market. Therefore, operating systems introduced by it will be adopted by many individuals[Kin131]. 2.6 Customer Environment Some changes have been effected by Microsoft, for instance, Bing Rewards has been renamed Microsoft Rewards. The underlying concept is that the fringe benefits will be increase in proportion to the increase in use or purchase of its products. Microsoft Rewards ensures accrual of points for browsing with Edge or making purchases at the brick and mortar Microsoft Stores. The objective is to challenge other browsers, including Google Chrome, which had cornered more than half of the browser market share. On the other hand, Edge stood at a mere 5.09%[Hac16]. The culture of a corporation determines its capacity to innovate and evolve. The business organisations that have made their mark in the market place and reinvented their industry have demonstrated cultures of openness, creativity, and enhancement of their members’ imaginative capacity. Such cultures encourage employees to undertake exciting and challenging experiments. In addition, talents are nurtures in such cultures, and the talented employees depict a greater propensity to concentrate upon innovative priorities and their effective achievement[Ali141]. It had been contended that during the Ballmer era, Microsoft had demonstrated conspicuous lack of transformation and the inability to recognise and respond to key market trends. For instance, Microsoft had neglected major changes, such as Web-searching advertising, and the transition of consumers towards social media and mobile devices. Fortune magazine had charged Ballmer with being the primary impediment to innovative and creative ideas[Ali141]. 2.7 Legal and Regulatory Environment Companies can be subjected to several litigations and lawsuits that could enhance costs. For instance, Microsoft had been subjected to antitrust and unfair competition class action lawsuits in British Columbia in 2016. In 2014, the State Administration for Industry and Commerce (SAIC) of China had informed Microsoft that it had commenced a formal investigation, vis-à-vis its Anti-Monopoly Law, which it accused Microsoft of having infringed. Thereafter, the SAIC undertook onsite investigation Microsoft offices in several Chinese cities. These investigations related to bundle sales, file verification issues and compatibility. In addition, Microsoft has been subjected to more than 50 patent infringement cases. This company had estimated that its legal costs could escalate to US$1.6 billion, which would impact its cost structure and involve large cash outlays[Mar163]. 2.8 Global Environment Microsoft operates across the world and has offices in more than 190 nations. This company, with its headquarters in Redmond, Washington, reported for the fiscal year ended June 2016, revenues of US$85.320 million, which represented a reduction of 8.8% over the previous fiscal year; operating margin of 23.3%; and net margin 19.7%. During the previous fiscal year, Microsoft had an operating margin of 19.2% and net margin of 13%. Moreover, it reported revenues of US$22,090 million for the quarter ended March 2017, which represented a reduction of 8.3% over the previous quarter[Mar163]. 3. INTERPRETATION AND DISCUSSION 3.1 Main Opportunities Some of the opportunities for organisations vary from diversification to the outsourcing of non-core operations. A perceptive company identifies profitable opportunities that match its capabilities. Microsoft has such opportunity with respect to the tablet market via a device that uses the Office suite. Some of the major markets, where Microsoft should find its presence, are those of search, tablets and smartphones. Microsoft should develop a strategy that takes advantage of its software strengths, as well as the burgeoning tablet market. Such strategy has been depicted in its Windows 8 operating system, which had integrated touch features required for tablets. Moreover, it should adopt measures to reduce its vulnerability and the weakening of its brand. 3.2 Main Threats The environment being envisaged by a company undergoes continuous change. The processing power available effects change in the technology industry. Microsoft has to redesign its products. For instance, tablets have cannibalised the PC market, and this indicates the trend towards enhancing computing power in smaller devices. This poses a major threat to Microsoft’s primary source of profit and revenue. In addition, Microsoft had considerable debt, and as of 30 June 2016, its total debt was US$40,783 million (Market Line, 2016, p. 7).This could affect the fulfilment of its cash obligations; restrict its capacity to fund acquisitions; require it to allocate a portion of it cash flow from operations to meet debts, which would diminish cash flow availability for working capital requirements, capital expenditure and other corporate objectives; impede planning flexibility; and diminish its competitive advantage with respect to its competitors with less debt. 4. CONCLUSION Microsoft’s presence in the consumer market continues to be marginal. It should diversify its methods of improving revenues from other sources, instead of depending chiefly upon software sales, since its competitors, Google’s Android and Docs, have been providing software for free. Thus, development of Android and Apple software and hardware is posing a danger to Microsoft’s position, as the provider of operating systems. In the browser market, Microsoft’s Edge has lagged behind, when compared to Google Chrome. Microsoft should change its strategies to satisfy the needs of present consumers. For instance, tablets dominate the PC market, hence, Microsoft should redesign its products. Microsoft should be vigilant with its debt issues, since this would affect the cash flow, diminish capital expenditure and working capital in future. It should be careful with law suits, for infringements and violations. It can be surmised that, with the able and innovative leadership of the present CEO, Satya Nadella, Microsoft would achieve success in the global technology market. REFERENCES Mar163: , (MarketLine, 2016, p. 3), Cri16: , (Cringley, 2016, p. 83), Cri16: , (Cringley, 2016, p. 82), Mic162: , (Microsoft, 2016), Kin131: , (King & Peterson, 2013, p. 2), Tho103: , (Thomas, 2010, p. 45), Kin131: , (King & Peterson, 2013, p. 3), Rus16: , (Russel, 2016), Kin131: , (King & Peterson, 2013, p. 1), Kin131: , (King & Peterson, 2013, p. 4), Kin131: , (King & Peterson, 2013, p. 5), Hac16: , (Hachman, 2016), Ali141: , (Ali, 2014, p. 72), Mar163: , (MarketLine, 2016, p. 6), Read More