This Bill Gates left behind. He was not willing

This essay will be dealing with the strategic
changes of the Microsoft Corporation in the aftermath of the change of
management in early 2014, when Satya Nadella took over the position as CEO from
Steve Ballmer.

As an introduction to the topic of a strategic
analysis of Microsoft’s long-term objectives, at first it should be elaborated,
how the company was strategically organized before Satya Nadella became the new
face of Microsoft. In other words: what did Microsoft want to stand for and
achieve during the 13 years of Ballmer being in the lead and what could
actually be accomplished.

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Ballmer, being a consistent part of the
company since the 1980s when he became the 30th employee of the
software giant, followed in the enormous footsteps of Bill Gates who did no
longer see himself in a public, managing role.

According
to Warren (2013), Ballmer came into office in a time when Microsoft was dominating
the market of desktop computing. With the development of Windows XP, a new,
modern operating software, the company seemed to keep shining the light on
their software competences, while the competition – namely Apple – started to
focus more and more on the innovation of new everyday hardware such as the iPod,
or the iPhone in 2007. Ballmer would not want to let that happen: Apple rushing
forward in the hardware segment, Ballmer decided to tackle the backlog in the
mobile segment by first cooperating with and then taking over the Finnish cell
phone manufacturer Nokia’s devices business, which included smartphones and
tablets (Kovach, 2014). What first seemed to be a good idea in order to
strengthen Microsoft’s position on the smartphone market amongst competition
such as Apple or Android with the Windows-run Windows Phones, later revealed
itself to be a complete waste of investment capital.

As Warren
(2013) states, Ballmer used to be very protective of the legacy Bill Gates left
behind. He was not willing to destroy any of the already accomplished
achievements, yet he realised, that Microsoft definitely shall not focus on
either hard- or software, but on both instead, which is why he put a strong
emphasis on reinforcing business products such as Office365 or creating Windows
Azure to penetrate the Cloud-servicing market. This was a smart and important
move and like in many cases, Ballmer knew what was right for the company. He
also knew, that in 2013 it was the right time for him to announce his
retirement, as fresh power and energy was needed to effectively tackle the
visions he set for his beloved company.

2.     An old new Face: Satya Nadella

When Steven Ballmer announced
his resignation in 2013, Microsoft was in the midst of a massive strategic
change, initiated by Ballmer himself. Quickly, experts from in- and outside
Microsoft realized that Ballmer’s successor will not only be taking care of the
technological and revenue-oriented aspects of Microsoft’s strategic
organization, but that he would need to establish a completely new and clear
vision of what Microsoft actually wanted to be as a company. 

Half a year after Ballmer’s
announcement, the chosen successor was finally found in the person of Satya
Nadella, a long-time employee and at this time one of five vice presidents
reporting to Ballmer. (Anders, 2014)

Before elaborating Nadella’s
plans for Microsoft’s future and how industry-internal challenges should or
could be taken on, the following part of the essay will be dealing with the
theory of Porter’s Five Forces. Those will later be applied to Microsoft’s
situation and their reaction.

 

3.     Porter’s Five Forces

 

“Awareness of the five forces can help a
company understand the structure of its industry and stake out a position that
is more profitable and less vulnerable to attack.”

                                                                                                –
Porter (1979)

In his article from 2008,
Michael E. Porter describes a self-created concept to identify, evaluate and
deal with the forces that apply to a clearly defined industry. Ever since then,
strategists and people in executive positions have been treating this concept
as a framework for their strategic organisation, as it is general but can
easily be applied on any industry one is interested in. According to Johnson et
al. (2017), Porter identifies an industry as rather unattractive, when all the
forces to be mentioned are high and strong and therefore hinder the
profitability of a company.

3.1    Competitive
rivalry

According to Johnson et al.
(2017) competitive rivalry is the central force within an industry, as the
competing companies, or in Porter’s words ‘incumbents’, have to deal with the
challenge of trying to penetrate the exact same market segment with mostly only
slightly different products or services. Depending on the industry, a company
has to evaluate, how much of a competition the other players are or vice versa
how much of a competition the own company can be to other, potentially bigger,
incumbents by implementing more specific objections and innovation into their
strategy. Other factors to help identifying whether an industry is worthy to
enter or to stay in, can be the industry growth rate, which indicates, whether
an industry’s market is either already saturated (low growth rate) or if there
is still potential (high growth rate), or the scale of fixed costs and exit
barriers. In case these are high, it can be very hard for a small company to
actually set a foot in that industry or the risk of failing might be too high
to have realistic intentions of entering or staying in that industry.

3.2    The threat of entry

According to Porter (2008),
potential new competition, in other words, companies who want to enter the
industry, is least desired by the incumbents. Not only will these new entrants
try and gain market share in the industry, their presence alone will make
pricing more complicated and competitive, but also increasing costs and necessity
for higher investment might occur to the incumbents. So, obviously, the
incumbents will try and keep the barriers of entry into their industry as high
as possible. But how can this be secured? According to Johnson et al. (2011) big
factors are for example scale and experience: The larger the scale, at which an
incumbent is capable of producing, the harder it will be for an entrant to
produce at the same cost after freshly entering. Obviously, this only applies
to the point where the entrant does not yet produce at the volume of the
incumbents. Experience becomes important for incumbents in a sense of having lots
of know-how in the industry they have been operating in for so long and

having established a
respectable customer network, which can help maintaining the incumbents’
reputation as buyers mostly like to use a product or service that is used by
the majority of customers and are then also more likely to stay loyal to that
company and help raising brand awareness.

Johnson et al. (2011) also
mention the importance of a good access to supply and distribution channels: in
some industries, incumbents basically claim a supplier to be “theirs”, either
by actually acquiring an essential part of the value chain or by establishing a
very intimate relationship to suppliers and vendors, who will be loyal to the
company.

Lastly, Porter (2008) mentions
two more factors to be taken care of: restrictive government policies can pose
an enormous threat to potential entrants, before they even started trying to
penetrate the market. For instance, there could be strong
climate-change-related regulations for manufacturing. The same accounts for
expected retaliation: before an entrant becomes part of an industry, the
incumbents will already have heard of the plans and will surely make plans on
how to defend their market share, on how to keep the entrant from growing
“insider their own house.”

3.3    The threat of substitution

Depending on the industry,
this can be a very important thread to be considered working against. As Porter
states (2008), substitutes are products or services, which satisfy the same
customer needs, simply in a different way and for a different price. In case a
substitute gains more and more recognition and generates affection, the
incumbents have to brace themselves regarding their market share and suddenly
appearing price caps due to the high risk of losing customers to a substitute,
which might not be as “perfect” as the service or product you want to
distribute, but can be offered for a much cheaper price and therefore attract
the incumbents’ customers. According to Johnson et al. (2011) however, a
substitute must not be cheaper, it can certainly also be more expensive but
therefore provide better performance, it all comes down to the ratio of price
and performance, whether incumbents’ customers can be poached by the upcoming
substitutes. The concept of substitutes poses an industry external danger to
incumbents. In this case it is not of strategic necessity to think about what
has to be done to “defend” the industry but much rather what needs to be done
to tap into a new industry and convince the substitutes customers of the own
products.

3.4    The power of buyers

As mentioned in chapter 3.2,
it is essential for a company, that it maintains a good partnership with its
distributors. However, this can certainly also be a force against the company. According
to Porter (2008), big vendors such as Dixon or John Lewis do not only sell one
incumbent’s product. Instead they will buy and sell from players throughout the
whole industry. This can give them a lot of power, when it comes to negotiating
prices. Especially if it is about a product which is being sold in high volumes
and whose revenue makes up a significant share of the whole buyers’ revenue. In
this case, they will of course try and buy the products as cheap as possible,
as this would generate even more revenue. According to Johnson et al. (2011), buyers
can exert pressure on incumbents by threatening with backward vertical
integration, meaning that they could supply themselves or at least are able to
do so.

3.5    The power of suppliers

The last one of the five
forces, is the power of suppliers. This does not only account for materialistic
supplies or equipment, but in many cases other parts of the supply chain such
as financial means, know-how, or supporting services. As Johnson et al. (2011)
state, this force is strong, if there are only small amounts of suppliers for
one specific industry. Furthermore, a supplier is in a strong position, if it
is very expensive to switch suppliers so it often is not really worth ending
the partnership with your current supplier. Another way that suppliers can
exert pressure on the incumbents is through threatening with forward vertical
integration, saying that they could easily sell their products to the ultimate
customer directly, which would take away the incumbents’ ability to profit at
all, as the parts are probably urgently needed to assemble the product or
execute their services.

 

4.     Applying Porter’s Five Forces

Now that the five forces have
been briefly explained, the essay shall be continued by exemplarily applying
them on Microsoft’s situation, before a short evaluation of Nadella’s work so
far and a brief forecast of what Microsoft should or could do in the future,
will conclude the report.

In order to analyse
Microsoft’s strategic position in its industrial environment, it is necessary
to first identify the exact industry Microsoft is being a part of: Being one of
the

biggest companies in the
world, one can also imagine, that it is unrealistic to narrow the industry
classification down to one segment. Probably the best way to describe Microsoft’s
industrial standpoint is as Dudovskiy (2017) did by calling it “technology and
consumer electronics industry.”

In Dudovskiy’s summary of the annual
Corporation Report of 2017 Microsoft is simply being described as an
international technology company. This report also evaluates how which of the
five forces is influencing Microsoft’s position in the industry.

According to Dudovskiy (2017) the
least threatening force in Microsoft’s case is the threat of new entrants,
whereas Ferguson (2017) calls it a moderate force. Nevertheless, they both
agree, that the industry has already created very high entry barriers which
would need tremendous amounts of money and technical know-how to overcome and
create a brand which is capable of staying in this very competitive industry.
Dudovskiy however, sees a slight risk, that small companies might still enter
the market, potentially through investors, in order to try and saturate the
customer demands coming up due to digitalisation and the internet of things.

The
next force to be talked about is the thread of substitutes. Both Ferguson and
Dudovskiy asses this force to be of low priority for Microsoft, as the company’s
product range is massive and there is almost not a single technological product
or service, that Microsoft cannot offer to the customers. Considering only
software applications and cloud-based computing services, the list is already
endless, from Bing to Microsoft Azure, Office 365 or Xbox Live. These
applications simply cannot be substituted directly. There are other companies
who have products, which might add to the services Microsoft can offer, but
there will not be anything more than indirect substitution.

Dudovskiy
and Ferguson both see the bargaining power of Microsoft’s suppliers as quite
weak because especially when it comes to hardware, Microsoft has very many
suppliers, in this case called OEMs such as HP, Lenovo, acer or Samsung. All
those devices run Windows 10, and without Microsoft they probably would not
sell as well. Furthermore, Microsoft’s switching costs are relatively low,
meaning that Microsoft is in a rather comfortable situation here. However,
there are a few suppliers such as Dell who seem to have a little bit more
bargaining power, as they actually do not really depend on Microsoft in order
to sell their hardware because they have established an own retail channel
which does not rely on Microsoft standing towards buyers.

When
it comes to the bargaining power of Microsoft’s customers and buyers, the two
authors do not seem to agree at all:

While
Ferguson thinks, it is a moderate force towards Microsoft’s business strategy,
as there is almost no substitute available. Here he seems to miss the point
that Dudovskiy makes: There might not be a substitute available, but there are
plenty of competitors who sell very similar product. Ferguson sees a problem in
today’s digitalised time, that the buyers can easily acquire information from
the internet and no longer go into the stores, where they can actually be
personally convinced to buy a Microsoft product. While Ferguson calls the
switching costs from Microsoft moderate, Dudovskiy classifies them as almost
non-existent, which is why he does not see any barriers for customers to swop
to the competition. Microsoft definitely has a serious force to fight here.

Which
brings us to the last of the five forces: competitive rivalry. As mentioned in
the paragraph before, Microsoft has a lot of competition to deal with within
the industry. In addition, it has to be considered, that with such a large
product range and such harsh competition, both technologically and also from a
marketing perspective combined with low switching costs, Microsoft really has a
challenge to face here.

According
to Dudovskiy there are simply too many segments that Microsoft is active in and
constantly has to compete without being able to completely establish a safe
situation. What he finds though, is that Windows is still the widest spread operating
system worldwide, having a market share of about 90% in April 2017.

 

5.     Nadella’s accomplishments and strategic
vision

Considering the analysis of the
five forces towards Microsoft’s business strategy, Nadella has established
three main strategic visions:

Cloud first, mobile first: According
to Dudovskiy’s report, Nadella sees the growth of Microsoft’s cloud computing
software in comparison to other providers services, as the main project.
However, critics wonder, whether his plans concerning cloud computing software
and mobile devices will grow fast enough to confirm Nadella in his vision.

Besides that, the new CEO
wants to focus more on achieving growth. This goal, according to Gregory
(2017), can be achieved through product market penetration, product
development, market development and diversification.

Gregory says, Microsoft can
penetrate the market even more than ever, as the firm’s products are unique
concerning the many features, i.e. the Office software specifically for
business. Microsoft can basically operate in any market segment, from private personal
computing to software solutions for whole businesses to gaming and cloud
computing.

Besides the cell phone
segment, Microsoft has such a big product range, that many customers are
attracted and growth will hopefully continue.

Another strategy to grow the
business was focusing more on mergers and acquisitions. This strategy has
immediately been implemented on a large scale, by acquiring LinkedIn for no
less than USD26.2 billion. This allows completely new scenarios and synergies
between already existent Microsoft products for businesses and this newly found
world of professional network. (Dudovskiy, 2017)

According to Weinberger (2017),
Nadella achieved two main goals:

Firstly, he managed to get
Azure, the Microsoft cloud software to gain on Amazon’s web dominance and
posted a growth of extraordinary 127% in revenue. In that context Nadella
stated, that he wants to continue “opening up” on a whole, i.e. by embracing
developer-friendly technologies like the free Linux operating system.

Last but not least, Dudovskiy
mentions Microsoft’s future focus on augmented, mixed and virtual reality, as
competitors like Google, Samsung, Oculus, Sony or HTC are all already in the
virtual reality segment. However, it seems like mixed and augmented reality
glasses like Microsoft HoloLens were rather designed for businesses than for
private users.

All in all, it can be
concluded, that Microsoft might not have gone through a paradigm shift during
the last years, but the situation since Ballmer has definitely improved and
shareholders on Wall Street are relatively happy with that for the first.

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