Strategic Appraisal of Microsoft - Coursework Example

Strategic Analysis and Planning: The Microsoft Acquisition of Mojang (Minecraft) BY YOU YOUR SCHOOL INFO HERE HERE The Microsoft Acquisition of Mojang (Minecraft) 1. Introduction Microsoft is one of the most dominant technology companies in the world. In 2014, the company reported over $22 billion USD in net income in an environment supportive of over $86 billion in sales revenues (Microsoft 2014). In an effort to further diversify its product portfolio, Microsoft acquired Mojang, the developer of the widely-popular consumer gaming software, Minecraft. Launched in 2009, Minecraft is a very creative electronic game that allows customers to build innovative constructions using tools available in a three-dimensional world. The acquisition of Minecraft cost Microsoft $2.5 billion USD in a cash contract (Peckham 2014), which appears to be a strategy that would provide Microsoft with a new strategic position in the gaming industry. Minecraft has been substantially successful throughout the entire world, and has sold 12 million copies that can be played on personal computers, on Microsoft’s Xbox 360 console and even available for download and purchase on smartphones and other mobile units. In 2012, when Minecraft was made available for purchase on Microsoft’s Xbox Live, the game sold over one million copies in a single week (Klepek 2012). The $2.5 million dollar deal provided Microsoft all legal rights to the intellectual property protections of the software, allowing Microsoft opportunities to improve the game and ensure it cannot be replicated by competitive forces. This report explores the rationale behind the strategy for this acquisition, conducting an in-depth strategic appraisal of Microsoft, identification of key stakeholders in this new acquisition strategy, and conducts an analysis of the industry and external market that will influence potential success or failure of this decision-making. 2. Evaluation of levels of strategy A successful company maintains two important levels of strategy: corporate-level and business-level Corporate level strategy consists of making evaluations of the inter-dependencies of a firm’s different business units and determining how each SBU can work together effectively to support a strategic direction (Mulcaster 2009). Corporate strategies view the scope of the business, determine how best to provide stakeholder value, and serves as the framework by which a firm makes long-term strategic decisions. Corporate level strategy consists of strategies regarding new product development or expanding into new markets as a means of diversifying a firm. Microsoft’s decision to acquire Mojang occurred on the heels of a recent internal consolidation of the company’s existing business units in order to centralise decision-making (Ludwig 2013). This is Microsoft’s one strategy, one Microsoft ideology that puts more authority for strategic decisions at the corporate headquarters with a more streamlined and vertical reporting system. Prior to 2013, Microsoft maintained five distinct SBUs, the Windows SBU, Server and Tools unit, Entertainment and Devices, Online Services, and Microsoft Business (Ludwig). Today, a consolidated Microsoft is able to better unify its services and products with oversight occurring at the executive level. This consolidation as a corporate strategy justifies the decision to purchase Mojang. In order to make Minecraft even more successful and profitable, now the company can align marketing, sales, R&D and consumer relationship management in a way that was not achievable with separate business units. Enhanced oversight and reporting at the hierarchical level can coordinate sales platforms, marketing strategy and how to innovate on the Minecraft product to make it more relevant and creative for global mass markets. Microsoft previously maintained little experience with gaming software development and relied on external partners to develop game software for use on its Xbox console and personal computing devices. Now, with renewed competencies in managerial control and coordination amongst once-disparate business units, Microsoft maintains the human capital necessary to effectively promote the product and harmonize all other support-related functions to ensure that long-term value is achieved in all areas of the value chain associated with Minecraft strategy. It is this level of competency through centralisation that made this acquisition viable and feasible. Microsoft’s business level strategy is seeking the best strategic options to effectively position the Minecraft brand to create a positive brand reputation in the established global markets. The aim of business level strategies is to build brand awareness and enhance perceived value of the product to consumers. For instance, Microsoft will consider pricing structures or how to effective differentiate the product from competing software that make it more attractive to consumers (Mintzberg, Ahlstrand and Lampel 1998). Microsoft maintains opportunities for substantial sales success and providing value to consumers through pricing methodologies. In the UK, Minecraft can be purchased for £17.95 and, in the United States, for $26.95 (Mojang 2014). Economic theory states, under the law of supply and demand, that as the price of a product increases, demand decreases respectively (Boyes and Melvin 2005). Microsoft has established a much lower price structure on Minecraft than that of competing games in order to appeal to the price-sensitive consumer. New video games for the Xbox One and Playstation 4 console range between £49.99 in the UK and $59.99 in the U.S. (Karmali 2013). More heralded games with considerable marketing promotion can push those prices even higher. In fact, Nair (2007) identified that many impending game launches are given a premium price in a pre-order system that occurs as a result of effective marketing for a new gaming software. By setting a lower price, Microsoft gains more consumer interest as a business level strategy. The post-recession global consumer now maintains new characteristics trending toward thrift and frugality (KeyNote 2014; Flatters and Willmott 2009). Where prior to the recession consumers were more apt to be extravagant in their consumption decisions, now Microsoft has opportunities to better market its products, using price as differentiation, to improve sales and consumer interest. Mojang, prior to its acquisition, managed to achieve only $326 million in sales revenues in 2013 (Stuart and Hern 2014). Microsoft’s reduced pricing structure is a result of exploiting the size, economies of scale, efficiency, experience, and available development capital needed to follow a cost leadership strategy. Through the facilitation of these competencies, enhanced with superior technological capability at Microsoft, the company can pass on cost reductions to consumers throughout the world to make the product more attractive (Reid 1993). Mojang, as a smaller business enterprise, could not exploit economies of scale and other capacity benefits of the powerhouse Microsoft. Hence, being able to market, innovate, produce, and effectively distribute the product using Microsoft capital justifies the decision to purchase this product as the expenditures of supporting the product are considerably less than they were to Mojang. The end result is a pricing structure that should provide more consumer interest and increase revenues. 3. Evaluating key stakeholders Microsoft must consider the needs and expectations of many different stakeholder groups with a vested interest in the success of Minecraft’s acquisition. Table 1 illustrates these groups and their relevancy to this situation. Table 1: Stakeholders of this acquisition The Stakeholder Their Vested Interests The Customer Customers want innovative and exciting video games. One dynamic that has made Minecraft so successful is the ability to upload user-generated content and download add-ons that enhance the gaming experience. Research show that consumers often purchase the base gaming product without considering a future need for enhanced functionality and therefore are willing to pay higher prices for add-on content (Gabaix and Laibson 2006). Both Microsoft and the consumer, therefore, can benefit from creating new and innovative add-on materials (at a moderately higher price) as a result of new Microsoft capital availability and competency as a major company that enhance game play substantially in a method not achievable by the smaller Mojang organisation. The Shareholder Minecraft maintains ample opportunities to enhance revenue growth for Microsoft. Shareholders want to know that their common stock purchases of a company are aligned with relevant and profitable strategy decision-making. By diversifying Microsoft to become an actual developer of a video gaming software, it will not only lay the foundation for future gaming software development by Microsoft, but capture a brand new market that improves the long-term capital position of the business. Governments Microsoft, a U.S-based company, provides more revenue growth and enhances GDP when successful in their business operations. This country, especially, will want to support Microsoft’s growth through de-regulation and other policies that will, ultimately, provide the government with more capital. However, Microsoft’s purchase of Mojang occurred through international transactions which made the company exempt from all U.S. taxes on this $2.5 billion acquisition (Bass 2014). Therefore, this did not enhance U.S. GDP in the short-term and the government may wish to petition Microsoft to consider more domestic distribution of Minecraft rather than seek higher volumes of foreign consumers. Competition Microsoft has improved its competitive advantages by further diversifying the company. An established gaming software brand with considerable consumer loyalty now makes Microsoft even more challenging to compete against. Financial lenders and credit issuers Companies that have issued loans and credit to Microsoft will desire that Microsoft succeed in improving its revenue position using Minecraft. This ensures that loans and credit issued is repaid timely, thereby reducing risks of default to these stakeholders. Supplier Networks Companies that supply products to other gaming software companies now have a very large company to seek contracts for procurement. This lowers the switching costs to the suppliers and provides new opportunities for revenue growth. Suppliers of gaming raw materials have tremendous profit opportunities in creating supply contracts with a major multi-national firm. 4. External analysis – Five Forces The Five Forces model is most instrumental in describing the market conditions that will most greatly impact the success of this acquisition. This section illustrates how competitive rivalry, market entry threats, substitute products, as well as supplier and buyer power will directly impact the feasibility or detriment of this decision. Competitive rivalry – The gaming industry is a very competitive environment with a plethora of small and large-sized companies providing video games available on consoles, computers as well as hand-held and mobile devices. Many games have been successful in using marketing promotion to gain wide popularity of their innovative and creative games. There are thousands of games available to consumers for the PlayStation console, on personal computers and for download at relatively low costs as applications on their mobile devices. Bungie, one of the largest competitors for Minecraft, has managed to sell its Halo game franchise with revenues of $500 million USD that is available in 178 different countries (Peckham 2014). Many other companies utilise a pre-ordering marketing strategy in which a game is hyped using considerable expenditure in advertising to make consumers anticipatory and excited about an impending game (Chu and Zhang 2011). Rivalry is intensive with differentiation occurring between competitors in terms of price, features, benefits, add-on capabilities, or quality. If Microsoft is to position Minecraft effectively, the firm must conduct competitor analyses, determine their rivalry strategies, and attempt to utilise more effective marketing to ensure Minecraft is viable long-term for profit success. Buyer power – With considerable choice of gaming platforms and game content from many different game manufacturers, the switching costs are very low. Consumers can defect as a matter of price without extensive opportunity costs. Therefore, Minecraft will maintain considerable risks of buyers being able to build loyalty for an up-and-coming gaming innovation or simply choose a comparable product that provides better guarantees of quality gaming experience or a lower price. Supplier power – Fortunately, supplier power is not a tremendous threat for Microsoft. Being a dominant market force, the company can select other suppliers (besides those that currently supply under Minecraft’s existing procurement model). Microsoft, with its resources, capital, and scope is considerably more powerful than the supplier network domestically and internationally. Microsoft can likely dictate pricing along the Minecraft supply chain and simply select another supplier willing to provide lower-cost products in favour of a long-term vendor contract. Threat of substitutes – This is a substantial threat for Microsoft. The most profitable version of Minecraft for Microsoft is the version for play on its Xbox system. However, consumers can play games on their personal computers, their mobile devices, and on other gaming consoles such as the PlayStation and Nintendo Wii systems (and other console devices). Consumers also have many options for gaming experiences through the consumption of board games available from major companies such as Parker Brothers to fulfil their lifestyle recreational needs. Even social media offers downloads of a plethora of games with varying themes at low prices, sometimes as low as £.99 or even free as a means of promoting a better version of the shareware software or an impending game by this manufacturer. Minecraft will need to be well-aware of all substitutes and attempt to promote why Minecraft is a better holistic value for consumers over these substitute options. Market entry – Fortunately, Microsoft is in a position to thwart new market entrants. The cost of entering this market are substantial to new developers and requires significant expenditures in marketing, logistics, production, and payroll to achieve a new gaming innovation. Minecraft is a unique and creative game which has not, yet, been able to be replicated by competitors as a result of strict intellectual property protections. Microsoft maintains the capital, know-how, presence in foreign markets, and distribution network needed to facilitate successful sales of its products internationally. New entrants require significant financial resources to enter this market and the size of the firm as well as its intellectual property ownership make this only a moderate threat. 5. Industry analysis Though a very competitive industry, the gaming industry is quite favourable for improving revenue growth for Minecraft. Estimates place growth levels of this industry at 11 percent by the year 2017 (DigiWorld 2014). Many consumers throughout the world are subscribing to smartphone contracts which open new capabilities for improving and expanding their gaming recreation needs. There are currently over six billion subscribers to mobile networks that provide access to the Internet which represents considerable new market opportunities for distributing the firm’s Minecraft product. Concurrently, with the success of such PC manufacturers as Dell, Fujitsu, Sony and Hewlett Packard, consumers can enhance their game play on personal computers in a global environment where millions upon millions of households have a laptop or desktop computer at their disposal. Continuing price competition for PC manufacturers control pricing structures which make personal computing hardware more affordable for many disparate international consumers. Hence, the industry provides ample consumer opportunities to achieve sales growth for Minecraft on gaming consoles, computers and mobile devices. To illustrate, the new Sony Playstation has achieved tremendous sales success (a 65 percent increase in sales revenues for the firm); as has the Xbox One (Yin-Poole 2014; Rogowsky 2014). Hence, the industry supports a consumer trend of growth in purchasing gaming technologies and software that is critical for supporting long-term sales potential for Minecraft. Microsoft’s decision to acquire Minecraft gave the firm a new competency in the development of games which could, long-term, reduce its reliance on external partners to provide innovative and profitable gaming software. With new capacity and know-how to develop its own products, the industry is supportive of ensuring ample market opportunities throughout the world. Furthermore, Minecraft, through the efforts of Mojang, established strong brand equity for the game as a result of effective marketing strategies. Brand equity is one of the strongest attributes for a firm and reduces the costs of future marketing which are substantially-high for new product developers. In an industry marked by considerable competitive rivalry and competing products, Minecraft’s brand equity underpins the justification for why Microsoft made a competent acquisition decision. With Minecraft, in its particular product category, being an early entrant, industry dynamics related to low consumer switching costs and high competitive rivalry will make it difficult to overcome this advantage for Minecraft (Zhang, Shi and Markman 1998). Figure 1: Growth in the industry – 2010 to 2014 Source: Adapted from Harris, B.J. (2014). Console wars. Harper Collins. 6. Conclusion The Minecraft acquisition is not only a viable decision, but should, long-term, improve Microsoft’s revenue position and competitive position. Minecraft is widely popular (brand equity) and through its acquisition, now Microsoft has internal management and support talent with direct experience in video game development. The consolidation of the firm’s SBUs now allow senior management to have much more direct control over all aspects of the value chain associated with Minecraft which will ensure better coordination and collaboration to achieve greater market-based and profit-based successes. Based on industry conditions, the dynamics of the external market, and new competencies internally at Microsoft, Minecraft was a very rational and shrewd strategic decision that will likely provide the firm with substantial sales success domestically and internationally. None of the risks identified should supersede the opportunities available for this established gaming brand and Microsoft maintains the internal competencies and resources needed to fully exploit this software’s potential. References Bass, D. (2014). 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