Microsoft Corporations Diversification Strategy - Case Study Example

Microsoft Corporation’s Diversification Strategy Name: Course name: Course instructor: Date of submission: Introduction Microsoft Corporation is a global leader in the PC industry and is valued to be worth $36.2 billion. This said it is normal that the sales of PC would not be forever as successful. In the fourth decade of the existence of PC industry, there are signs of saturation, maturity and stiff competition. In today’s very competitive world, corporations must fight it out vigorously and articulately to become successful in any industry and work exceptionally harder to stand out and maintain that success. Each and every component of a corporation’s business must be as efficient and effective as possible in order to form sustainable competitive advantages. A part from diversification and corporate strategies, marketing strategies too must be a priority for these corporations. Microsoft Corporation has been very successful in its diversification strategies and this has led it to the pinnacle of an industry that is now flooded and very competitive. Microsoft has created a variety of products and services, the very first being the Windows operating system and Office software suite. These products serve as the cornerstone of the business but they cannot entirely depend on that considering the competition they face from other players in the industry. Microsoft therefore has entered the video game consoles, enterprise software, computer peripherals, software development tools, internet access services and interactive television. Originally, Microsoft as founded by Bill Gates and Paul Allen in 1975 had a vision of selling its version of the programming language known as BASIC. The company grew by modifying BASIC for other computers and in four years they moved to a bigger location in Seattle Washington (Michaels 1977, p. 78). The success of Microsoft made IBM in 1980 to choose Microsoft to develop the operating systems for the new line of PCs. Gates bought quick and dirty operating systems for $50,000 from a local Seattle programmer and renamed it Microsoft Disk Operating System (MS-DOS) and the revolution of the computer industry began. In the mid 80s, they developed Windows versions that were to compete with the Apple Macintosh Operating System. In 1993 Microsoft introduced Windows NT which buoyed their competition with UNIX. Currently, the market share for windows is 93% of the number of positions in the world against 4% of the Mac Os and Linux which is 1% (Thurrott, 2001). The environment in the industry has changed significantly in the recent years and adaptability to new conditions is pivotal for success. Critics though contend that Microsoft used monopolistic business practices and anti-competitive strategies including refusal to deal and tying, and also putting unreasonable restrictions in the use of its software. A memo by Bill gates in 1995 put Microsoft in the path of diversification into computer networking and World Wide Web. They released Windows 95 that featured pre-emptive multitasking. Windows 95 came bundled with an online service, MSN, and Internet Explorer, a web browser (Paul, 2001, p. 34). The company is run by a board of directors consisting mostly of company outsiders as is normal for publicly traded companies. The board members are elected every year at the annual shareholders meeting using the majority vote system. There are committees in the board that oversee more specific matters. They include audit committee, compensation committee, finance committee, governance and nominating committee and anti-trust compliance committee. The price per share when the company went public in the initial public offer in 1986 was $21 and it closed in that day at $27.75, signaling an advent of one of the most successful companies in the world. The price per share peaked in 1999 when it was $119 and had to be split to $60.928. As described by an executive of Microsoft, one of the business tactics is embrace, extend and extinguish. It embraces a competing product, then extends it to produce a unique version which is incompatible with the standard and then with time it extinguishes competition that cannot use the new Microsoft version. Microsoft has been sued numerously by companies and governments over its business tactics that has resulted in loss of billions of dollars as settlement of the disputes (Mark, 2009, 16). Diversification The common saying “don’t put all your eggs in one basket” makes a lot of sense when it comes to diversification. When any company operates in many ventures, the downs in some ventures can be compensated by the ups in other ventures. In accordance with the portfolio theory, unsystematic risk - the risk particular to a company or an industry can be done away with by building a diversified basket of stocks. A company should be diversified in products, markets, customers and mainly concentrated in its basic knowledge area or it should be diversified in its knowledge areas and highly focused on its products, markets and end-uses. This is called the related and unrelated diversification. Microsoft started with operating systems and then diversified into application software and even moved in recent times to businesses such as enterprise software, web hosting and management services and video games. Today, Microsoft’s activity is turning to internet for further expansion and diversification of its products. Summing it up, although software may be the common thread that goes across these activities, technical management capabilities required for management purposes of these diverse businesses are obviously diverse and even the markets are quite different. Entry into these different businesses is for Microsoft a way of maintaining the development due to the changing needs of the markets and also improving profitability. The computer industry is continuing to grow ferociously in this century and this growth is being propagated by the new segments that are changing the overall landscape and competitive dynamics. There are many players that are looking to other elements of the industry in the value chain to capitalize on and gain profits and new competitors are arising (Allan, 2001, 27). PC main players have seen the industry change from what it used to be as new direct players gain ground in their quest to capture profits beyond the conventional box and exploit non-Wintel appliances of information. The indirect players therefore have a task to always catch up with them. The growth of the industry has largely shifted to the internet where the emergence of application servers may be the trigger for the growth of Linux. For instance, Dell executed competitors to become an industry leader. The company practiced highly efficient direct sales model that included seamless interface between ordering and accomplishing with elimination of indirect distribution costs, they developed virtual account executive to provide customized web interfaces for small and fairly medium ventures. It also had direct customer interface allowing for complete capture of customer demand information besides targeting the product design and customer configuration. Dell has a superior operational model i.e. best in class supply chain management, greater margin capture from both the assembly and the ordering process. The superior product forecasting and inventory management ensures that Dell remains ahead of the pack as a leader in the industry that faces so much competition. The company also has the lowest expense of operation of any major PC OEM as compared to Compaq. Dell will therefore be likely to maintain its competitive advantage in the long-term and the emergences of the internet as a force in the industry will even it even stronger. More or less similarly, Compaq has made multiple recent attempts at defining an effective model to compete but all have recognized the vitality of the channel. It has a goal of delivering 95% of orders within 5 days of placing them, the objective of implementing configure-to-order and build- to-order model, and reduce inventory by decreasing the number of distributors from 39 to just 4. The conflicts of channel issues are proving to be insurmountable for indirect original equipment manufacturers (OEMs) as they have never directly won most customers in the past. It is therefore unlikely that Compaq will be able to move to a purely direct model in order to compete significantly with direct OEMs. Involving interests of the PC community can be described as diverse. Advantages consist across the board for the PC user. Ranging from music manipulation, video enhancement, money management, research, school, science and a myriad of others; there are many uses for the PC. Therefore this means the customers that buy the computers are diverse and use their machines in a variety of ways (Posner 1993 45). The computer offers an efficient way of running a business, playing a game or managing one’s calendar. The bottom line is that any person can find a useful attribute for a computer: which provides the industry with revenue higher than the auto and chemical industries combined. • Dell - The world's number 1 direct-sale computer vendor gives a broad range of computer and entertainment services and products for the enterprise markets and consumers • Sony - Sony has focused its approach to selling computers: Instead of appealing primarily to consumers, it is now targeting business customers (mostly small and medium-sized companies). • HP - HP's Personal Systems Group (PSG) markets desktop and notebook PCs to consumer, businesses, government agencies, and schools. • Apple - Once the world's top PC maker, Apple Computer has been relegated to niche status in a market dominated by "Wintel" machines (computers using Microsoft Windows software and Intel processors). • Gateway – This may be the purest PC player among the leading computer makers. Gateway has been especially hit hard by slowing sales in the industry. With most multinational corporations there are two separate economies operating between the actual company and the markets. The separate economies are internal and external as pointed out below. Internal: Technology Economy, Financial Economy, Managerial Economy, Marketing Economy, and Research & Development External: The external aspects of scale economies consist of the distribution centre and retailers. For example; Apple, Sony or HP manufacture computers, while retailers arrange for computer deliveries to the customer. One exception is Dell, which has excelled in custom-built computers delivered straight to a consumer’s home. The computer industry is now mature and here to stay as has been seen over the decades. In the United States, computers are found in many homes with access to the Internet. Students are taught to use computers in school at a young age and competency is only going to increase. There are people who have problems with applications and user activities such as installing new drivers or fixing monitors. One of the largest complaints within the industry is support. Dell, once again is an exception. Dell observes great rewards when consumers give praise in regards to customer service. Since the industry is so mature the complaints are few due to the reliability of the PC. Benefits of Diversification for Microsoft Even though Microsoft continues to endure speculation and queries about its online services, business and entertainment division as well as devices divisions, the company efforts of expansion have positioned it to drive continued growth in spite of the worsening economic situation in the world. Microsoft core clients and business division segments remain profitable but controlling a big part of the market leaves little shelter from a downturn in spending in the technology. Microsoft Client Business, which includes Windows, is showing weakness - already reporting slim revenue growth of 1.9 %. The department benefitted directly when PC market was on its way up but now it will be on the downward due to the shift to other segments of the industry (Blaxill 2009 47). Microsoft expansion segments such as the server and tools and online businesses have both contributed to maintain corporate wide revenue growth during the financial quarter. Revenue that comes from the entertainment and device business reduced to 6% during the third quarter of 2008 because of difficult comparison but all the same, the revenue was stronger than Microsoft’s guidance which predicted a 23% revenue decline. These expansion segments each required significant investment from the company but are projected to deliver a net benefit to Microsoft. These segments possess opportunity for Microsoft to grow and gain share, provide the opportunity to grow revenue even if the overall market face a period of slow or stunted growth. These segments sometimes may not match the profitability of Windows but they play a very vital strategic role for the development of Microsoft (Thomas, 1999, p. 95). In spite of the continued strength and formidability of Microsoft Business, the company is now working on ways to mitigate the impact of the slowdown in spending on IT. Microsoft has been on an aggressive investment path that includes building out its data centre facilities, expansion overseas and adding the headcount (Henderson, Smith, & Rossiter, 1987, p. 34). Due to the rapid increase in expenditure, Microsoft has decided to rein in spending during the remainder of the fiscal year to keep expenses in tandem with lower revenue expectations. The company plans to start with low-impact cutbacks; this includes a slowdown in hiring and decreased travel and marketing. It has even decided to slow down its data centre built out especially after opening new facilities during 2008 that amounted to over $1 billion. The company’s core business like Windows in time of economic downturn will most likely remain strong as compared to the new segments in the company. Microsoft the global leader in software development started expanding into internet based services from the mid 90s. They started a number of internet based services to tackle its competitors though there was an increase in competition from internet service providers like Google and Yahoo. This forced Microsoft to come up with a new strategy for its internet based services as well as a new business model for its businesses (Matt 1996, p. 52). The challenge was whether Microsoft would be able to dominate the internet like it did software business since its inception. It made an entrance into consumer electronics business with the new Media Centre PC. The company also invested almost US$20 billion on digital entertainment business and was targeting a chunk of US$108 billion consumer electronics market with its PC home entertainment concept. It is trying to replicate the success witnessed in PC business in media centre. It will be hard though for Microsoft to break significantly into the hub for the electronic giants like Sony and Samsung. It will require a lot of efforts to be able to make it big and edge out these perennial giants. Competitor Analysis of PC Manufacturers Dell Inc. It was founded in 1984 when Microsoft had already established itself. Its Mission Statement is “To be the most successful computer company in the world at delivering the best customer experience in markets we serve.” The company has a strategy of next day delivery to the clients. They do not have middlemen or intermediate retailers for their products. Currently the revenue is over $56 billion and the net income of $3.4 billion Hewlett-Packard: It was established in 1939 with a mission “To invent technologies and services that drive business value, create social benefit and improve the lives of customers - with a focus on affecting the greatest number of people possible.” Its very first product was an audio oscillator and they have Multi component system model. Today, the company has $86 billion in revenue and net income of almost $2.4 billion Apple: Founded in 1976, their mission statement of is “Apple will be a leader in providing simple, powerful, high-quality information products and services for people who learn, communicate, and create.” The company is known for its stylish product innovation and also entrepreneurial edge. Currently it has $14 billion in revenue and net income of almost $1.3 billion. Gateway: It was founded in 1985 and the mission statement of Gateway Inc. is, “To invest in our communities and future by providing state-of-the-art technology and technical support.” It is the 3rd largest personal computer company in the United States and ranked in the top ten worldwide and they have a profit pyramid model. It have $4 billion in revenue currently and a net income of almost $6 million. Threat of new entrants There are slim chances of a new PC vendor entering into the market and gaining significant market share because entry barriers are higher now than they have been over the years. Two of those factors that are making entry into the industry so difficult are cost and contribution. Concentration: It is approximated that in future the top 5 vendors will control 70% of the global personal computer market hence pushing to the periphery the small players. Stakeholders: as always overlooked, environmentalists and e-waste are the major stakeholders for the PC industry therefore dumping of high-tech trash like computers in landfills will definitely require attention. This even made Hewlett-Packard, IBM and Dell to start up a computer recycling programme, recycling in all computer brands at an affordable cost. In the marketing sphere, Microsoft commissioned research firms to do independent research that compared the total cost of ownership of windows server 2003 to that of Linux. They found that Windows was easier to administrate than Linux, therefore those using windows would administrate faster leading to lower costs for their company. More studies by Yankee Group concluded that upgrading from one version to another costs a fraction considering the costs for Windows server switching to Linux. Other companies though found out that these studies were outdated and bias to favour Microsoft. Long term success of Microsoft is greatly hinged on the consideration for the environment. Greenpeace ranked the electronics portion of Microsoft Business like game consoles as the third worst in Microsoft’s introductionS back in 2007 and was still the third worst in 2010 out of 18 companies that were surveyed. This was in Greenpeace’s guide to greener electronics. Microsoft though was awarded silver certification for the Leadership in Energy and Environmental Design Program in 2008 as it installed over 200 solar panels on its buildings in the Silicon Valley Campus. This generated approximately 15% of the total energy that its facilities need for operations. It accentuates a need to regard the environment and tap green energy while also diversifying in other businesses (Bishop, 2001, p. 34). Microsoft also made an alternative for of transit by creating one of the biggest private bus systems known as the connector to ferry people outside the company or the on-campus transportation. The connector shuttle uses a fleet of hybrid cars that hugely save on fuel. They have subsidised regional public transport as an incentive for the customers. Due to the current global warming and climate change outcry, Microsoft Corporation is on course in ensuring that in all its dealings, the environment is taken care of to ensure a safer future of success and expansion of business. It is hugely attached in adapting to the changing situation not only in the electronic and PC industry but also the culture and the environment as a whole. The diversification of Microsoft has therefore not only been restricted to new business segments but also in ensuring safety in its operations such as solar energy and incentives for the clients as well as the its workers. Being up there, Microsoft has many options at its disposal as all the upcoming players in the industry would like to partner with them for growth such as Facebook and even the perennial players like Google. This has put the company in a strategic position to expand its horizon and tap into the new ventures and developing culture as has been seen with the emergence of Facebook. It is important to note that massive capital is needed for a new entrant to compete with the big names in the computer industry. HP spent 3.9 billion dollars on research and development in 2008 alone hence any new player who would want t join the fray will think twice. New segments and ideas are always developed by already established companies - therefore very few small fish can compete. Apple, Microsoft, Dell, and HP are household names and it will be very difficult to change that. Conclusion The computer and software geniuses though have an opportunity. Instead of thinking of coming up with new outfits, they can always sell these new ideas to the large already established companies for a fee because these companies are already strategically positioned and it will be near-impossible to outdo them. This is the most possible situation for the technologically savvy individual to make profits for their new innovations. Innovations and technology have made the industry fiercer; therefore competing with new innovations is the new war front in this business. References Allan, Roy A. 2001. A History of the Personal Computer, Allan Publishing, New York Bishop, Todd (2004-01-27). "Studies on Linux help their patron: Microsoft". Seattle Post-Intelligencer (Hearst Seattle Media, LLC). Blaxill, M.& Eckardt, R.2009-03-05, The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property, Portfolio Hardcover Cha, Bonnie (2010-09-01). "Microsoft releases Windows Phone 7 to manufacturers". CNET. CBS Interactive. Computers have evolved over the years. 1993. The Washington post: A12. July 30. Henderson, R.S., Smith, & P.G., Rossiter, 1987, Dynamics of computing world, Van Nostrand, New York. Jackson, Thomas Penfield (1999-11-05). "U.S. vs. Microsoft findings of fact". 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