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Signature Assignment: Strategic Plan - Implementation Plan, Strategic Controls, And Contingency Plan Analysis

Microsoft Corporation

Company Report

2019

Contents 1. Executive Summary ..................................................................................................................... 1

2. Business Strategy ............................................................. ............................................................2

3. Leadership ................................................................................................................................... 3

4. Organisational Structure .............................................................................................................. 5

5. Organizational Culture ................................................................................................................ 7

6. Microsoft and Ansoff Matrix ....................................................................................................... 8

7. SWOT Analysis ......................................................................................................................... 10

7.1 Strengths .............................................................................................................................. 11

7.2 Weaknesses .......................................................................................................................... 13

7.3 Opportunities ....................................................................................................................... 14

7.4 Threats ................................................................................................................................. 16

8. PESTEL Analysis ...................................................................................................................... 17

8.1 Political Factors ................................................................................................................... 18

8.2 Economic Factors ................................................................................................................ 19

8.3 Social Factors ....................................................................................................................... 20

8.4 Technological Factors .......................................................................................................... 20

8.5 Environmental Factors ......................................................................................................... 21

8.6 Legal Factors ........................................................................................................................ 22

9. Marketing Strategy .................................................................................................................... 23

9.1 7Ps of Marketing .................................................................................................................. 24

9.2 Segmentation, Targeting & Positioning ............................................................................... 28

9.3 Marketing Communication Mix .......................................................................................... 30

9.3.1 Print and Media Advertising ............................................................................................. 30

9.3.2 Sales Promotions ............................................................................................................... 31

9.3.3 Events & Experiences ....................................................................................................... 32

9.3.4 Public Relations ................................................................................................................ 33

9.3.5 Direct Marketing ............................................................................................................... 33

9.3.6 Personal Selling ................................................................................................................ 34

10. Porter’s Five Forces Analysis .................................................................................................. 34

10.1 Threat of new entrants ....................................................................................................... 35

10.2 Bargaining power of buyers ............................................................................................... 35

10.3 Bargaining power of suppliers ........................................................................................... 36

10.4 Threat of substitute products or services ........................................................................... 37

10.5 Rivalry among existing firms ............................................................................................ 38

11. Value-Chain Analysis .............................................................................................................. 39

11.1 Microsoft Primary Activities ............................................................................................. 39

11.1.1 Microsoft Inbound logistics ........................................................................................ 39

11.1.2 Microsoft Operations................................................................................................... 40

11.1.3 Microsoft Outbound Logistics .................................................................................... 41

11.1.4 Microsoft Marketing and Sales ................................................................................... 42

11.1.5 Microsoft Service ........................................................................................................ 43

11.2 Microsoft Support Activities ............................................................................................. 43

11.2.1 Microsoft Infrastructure. ............................................................................................. 43

11.2.2 Microsoft Human Resource Management................................................................... 43

11.2.3 Microsoft Technology Development .......................................................................... 44

11.2.4 Microsoft Procurement ................................................................................................ 45

12. McKinsey 7S Model ................................................................................................................ 45

12.1 Hard Elements .................................................................................................................... 46

12.2 Soft Elements ..................................................................................................................... 47

13. Microsoft Ecosystem ............................................................................................................... 48

14. Corporate Social Responsibility .............................................................................................. 49

14.1 CSR Programs and Initiatives ............................................................................................ 49

14.2 CSR Criticism .................................................................................................................... 53

List of Figures

Figure 1 Microsoft Organizational Structure................................................................................... 6

Figure 2 Microsoft Ansoff Growth Matrix ...................................................................................... 9

Figure 3 Annual lobbying by Microsoft Corporation .................................................................... 19

Figure 4 Microsoft's 'Scroogled' Marketing campaign .................................................................. 23

Figure 5 Example of Microsoft print advertisement ..................................................................... 31

Figure 6 Porter's Five Forces ......................................................................................................... 35

Figure 7 Value chain analysis ........................................................................................................ 39

Figure 8 Microsoft production supplier locations ......................................................................... 40

Figure 9 McKinsey 7S model ........................................................................................................ 46

List of Tables

Table 1 Microsoft SWOT analysis ................................................................................................ 11

Table 2 Microsoft product categories and products ...................................................................... 25

Table 3 Microsoft segmentation, targeting and positioning .......................................................... 30

Table 4 Products and services within Microsoft Ecosystem ......................................................... 48

1. Executive Summary

Microsoft Corporation is a US-based global technology company with headquarters in

Richmond, Washington. Founded in 1975, Microsoft’s mission is ‘to empower every person and

every organization on the planet to achieve more’. Microsoft employs more than 130 000 people

internationally.1 During the fiscal year 2018 the tech giant generated USD 110.4 billion in

revenue and USD 35.1 billion in operating income.

Microsoft produces a wide range of products and services related to productivity and business

processes and to support digital work and life of customers. Some of its products and services

have become highly popular in the global scale. For example, more than 135 million people use

Office 365 commercial every month and Outlook Mobile is installed into more than 100 million

iOS and Android devices worldwide.2 Similarly, Microsoft Teams is used by more than 300

organizations worldwide, including 87 of the Fortune 100 and nowadays there are nearly 700

million devices around the world with active Windows 10.3

In 2014, Satya Nadella replaced Steve Ballmer as CEO of Microsoft. Since taking over the top

job, Nadella has focused on ‘humanising’ the company by improving its organizational culture

and he also enhanced the coordination of efforts across the departments and groups of the

company.

Microsoft business strategy can be classified as product differentiation. The company develops

advanced technological products and services and sells them for premium costs. Moreover,

Microsoft business strategy is currently focused on “cloud-first, mobile-first”, growth through

mergers and acquisitions and exploring business opportunities related to augmented and virtual

reality. Recently, the multinational technology company has also included ‘tech intensity’ as one

of the important pillars of its business strategy.

1 Annual Report (2016) Microsoft Corporation 2 Annual Report (2018) Microsoft Corporation 3 Annual Report (2018) Microsoft Corporation

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2. Business Strategy

Microsoft business strategy integrates the following 3 elements:

1 “Cloud-first, mobile-first”. Intelligent cloud represents one of the solid sources of Microsoft

competitive advantage and Microsoft business strategy places a great emphasis on cloud segment

of the business. ‘Mobile first’ part of this strategy stands for the mobility of experiences4 and the

technology giant pays a due attention to this direction as well. Nadella’s bet on cloud has paid

off handsomely. By October 2018, Microsoft surprised Amazon in 12-month cloud revenues.

Specifically, while Microsoft earned USD 26,7 billion revenues, Amazon’s revenues totalled to

only USD 23,4 billion for the same period.5

2. Growing through mergers and acquisitions. Mergers and acquisitions play an important

role in Microsoft business strategy and the multinational technology company engages in

mergers and acquisitions to increase its capabilities, product range and value offering. The list of

the most notable recent acquisitions include Nokia Corporation’s Devices and Services business

for USD 9.4 billion in 2014 and Mojang Synergies AB the Swedish video game developer of the

Minecraft gaming franchise, for USD 2.5 billion.6

Moreover, in June 2016, Microsoft acquired LinkedIn for USD 196 per share in an all-cash

transaction valued at USD 26.2 billion.7 This particular acquisition plays an instrumental role to

connect the world’s professional cloud and the world’s professional network – creating new

experiences and new value for business users. With more than 1.2 billion Office users and 433

million LinkedIn members, the combined data graphs is expected to improve how Sales, HR, and

other professionals get work done.8 In 2018 alone, Microsoft completed 16 acquisitions of

companies ranging from video games producers to artificial intelligence to employee

engagement.

3. Focusing on augmented and virtual reality (VR). CEO Satya Nadella has placed augmented

and virtual reality at the core of Microsoft business strategy. It has been noted that “while a

4 Ward, J. (2017) “Microsoft leadership: Here's who is accountable for what in Redmond” Windows Central, Available at: https://www.windowscentral.com/whos-who-microsoft-success-or-failure-heres-whos-accountable 5 Evans, B. (2018) “#1 Microsoft Beats Amazon In 12-Month Cloud Revenue, $26.7 Billion To $23.4 Billion; IBM Third” Forbes, Available at: https://www.forbes.com/sites/bobevans1/2018/10/29/1-microsoft-beats-amazon-in-12- month-cloud-revenue-26-7-billion-to-23-4-billion-ibm-third/#510bdfb82bf1 6 Annual Report (2016) Microsoft Corporation 7 Annual Report (2016) Microsoft Corporation 8 Annual Report (2016) Microsoft Corporation

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majority of the augmented and virtual reality players are focused on consumer gaming,

Microsoft has spent considerable time and effort defining the potential business use cases for

HoloLens”9. Moreover, Microsoft has been able to demonstrate how VR could be used to

improve the shopping experience, in education and automotive design. It can be argued that

leadership in augmented and virtual reality in the global scale can become one of the solid

sources of Microsoft competitive advantage, similar to its leadership in cloud segment, with

positive implications on long-term perspective.

4. Promoting ‘Tech Intensity’. Focus on ‘tech intensity’ can be mentioned as a recent addition

to the business strategy of Microsoft. The term ‘tech intensity’ can be described as “ a fusion of

cultural mindset and business processes that rewards the development and propagation of digital

capabilities that create end-to-end digital feedback loops, tear down data silos and unleash

information flows to trigger insights and predictions, automated workflows and intelligent

services.”10

At the same time, it has been noted that “as encouraging as the buzzword "tech intensity" sounds,

it is not about empowering others for the sake of its own advancement.”11 Instead, the actual and

ultimate goal behind company’s ‘tech intensity’ idea is to make Azure world’s computer, by

adding increasing numbers of companies into this platform.

3. Leadership

Co-founder of the company, Bill Gates was at the helm of Microsoft leadership since its

inception in 1972 until 2000, when Steve Ballmer succeeded him as CEO. While Steve Job’s

leadership was rightly regarded as successful, Steve Ballmer was pointed to as the worst CEO of

a large publicly traded American company in 2012 by Forbes. This viewpoint is shared by many

business analysts and practitioners. It has been noted that Microsoft peaked at USD 60/share in

2000, just as Mr. Ballmer took the reins. By 2002 it had fallen into the USD 20s, and has only

9 Lopez, M. (2016) “7 Reasons to Give Microsoft's Strategy Another Look” Forbes, Available at: https://www.forbes.com/sites/maribellopez/2016/04/19/7-reasons-to-give-microsofts-strategy-another- look/#13558b4a7dd0 10 Evans, B. (2018) “Microsoft CEO Satya Nadella Unveils New Digital Strategy For Businesses: 'Tech Intensity'” Forbes, Available at: https://www.forbes.com/sites/bobevans1/2018/09/24/microsoft-ceo-satya-nadella-unveils- new-customer-weapon-tech-intensity/#14bed2124d2f 11 Ward, J. (2018) “Microsoft's 'tech intensity' is all about assimilating companies into its cloud” Windows Central, Available at: https://www.windowscentral.com/microsofts-noble-tech-intensity-push-really-about-building-its- global-cloud-computer

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rarely made it back to USD30s value, until Ballmer’s replacement by Satya Nadella as CEO in

2014.12

Currently, Microsoft leadership team comprises 21 members led by CEO Satya Nadella.

Specifically, there are 12 executive vice presidents responsible for various critical directions and

aspects of the business, along with chief technology officer, chief legal officer and CEO of

LinkedIn. Microsoft Board of Directors comprises 14 members, who are experienced senior

leaders across a range of industries.

Microsoft leadership practices are based on the following principles.

1. Focus on organizational culture. Leadership style exercised by Satya Nadella places a

great emphasis on developing and maintaining the right type of organizational culture.

Specifically, the leader of the tech giant cultivates the integration ‘learn-it-all’, rather

than ‘know-it-all’ mentality into Microsoft organizational culture.

2. Efficiency and practicality. Microsoft leadership at the most senior level has been

praised for being practical and CEO Satya Nadella told employees “to stop wasting their

times at pointless meetings”13.

3. Regular coordination of efforts across the departments and groups. CEO Satya

Nadella has 8-hour meeting with his leadership team every month and he runs 4-hour

meetings other three weeks.14 These meetings involve performance review of top

executives on the basis of dashboards and integration of activities according to the overall

business strategy.

4. Unrestricted path to leadership within the company. It is not unusual at Microsoft for

team members to step into leadership roles even if they weren’t already on that path. For

12 Hartung, A. (2012) “Oops! Five CEOs Who Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)” Available at: https://www.forbes.com/sites/adamhartung/2012/05/12/oops-5-ceos-that-should-have- already-been-fired-cisco-ge-walmart-sears-microsoft/3/#fdf3148783df 13 Yarow, J. (2015) “Microsoft's CEO is telling employees to skip pointless meetings” Business Insider, Available at: http://www.businessinsider.com/microsofts-ceo-is-telling-employees-to-skip-meetings-2015-2 14 Lebowitz, S. (2015) “The CEO of Microsoft has an 8-hour meeting with his leadership team every month” Business Insider, Available at: http://www.businessinsider.com/how-microsoft-ceo-satya-nadella-runs-meetings- 2015-10

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example, “employees from the hack team that created Learning Tools for OneNote are

now overseeing the product’s market expansion”15

Moreover, Nadella is an acknowledged and effective business leader, who can attain focus to

solve complex problems, knows how to give his team confidence and he announced his mission

to transform Microsoft organizational culture to infuse the values of innovation.

4. Organisational Structure

Microsoft organizational structure can be classified as divisional. In June 2015, the senior

management announced a change in Microsoft organizational structure to align to its strategic

direction as a productivity and platform company. This restructuring initiative resulted in

elimination of approximately 7,400 positions in fiscal year 2016.16 The current divisional pattern

of Microsoft organizational structure is the result of this restructuring initiative.

As it is illustrated in Figure 1 below, Microsoft organizational structure is divided into divisions

according to engineering groups and business functions. Specifically, on the basis of engineering

groups, the company is divided into three divisions, whereas according to business functions it is

divided into 9 divisions:

15 Dweck, C. & Hogan, K. (2016) “How Microsoft Uses a Growth Mindset to Develop Leaders” Harvard Business Review, Available at: https://hbr.org/2016/10/how-microsoft-uses-a-growth-mindset-to-develop-leaders 16 Annual Report (2016) Microsoft Corporation

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The latest restructuring of Microsoft organizational structure and shift to divisional

organizational structure offers the following advantages to the business:

Firstly, under the new organizational structure, heads of engineering groups directly report to

CEO Satya Nadella with positive implications on new product development initiatives and

innovation potential. This is particularly important to be able to introduce new products and

services to the marketplace in the short duration of time. Moreover, a clear distinction between

engineering groups and business functions, as illustrated in Figure 1 above, is an indication of

the technology giant ‘s focus on business directions under engineering groups such as cloud and

artificial intelligence.

Secondly, organizational restructuring eliminates bureaucracy in business processes and

procedures to a great extent, increasing the flexibility of the business to adapt to changes in the

external marketplace.

Thirdly, the initiative resulted in the elimination of approximately 7,400 positions, thus saving

considerable amount of financial resources that can be channelled for new product development

and increasing the competiveness of the business in many other ways.

CEO, Satya Nadella

Engineering Groups

Cloud and AI Group

Experiences + Devices

Artificial Intelligence and Research

Busines Functions

HR Group

Business Development Group

Global Sales, Marketing and Operations

Corporate, External, and Legal Affairs

Corporate Strategy & Planning

Finance Group

LinkedIn

Marketing Group

Worldwide Commercial Business

Figure 1 Microsoft Organizational Structure

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Another important aspect of corporate culture at Microsoft refers to a high level of dynamism.

Specifically, the CEO of the tech giant Satya Nadella is continuing with simplification and de-

layering initiative of Microsoft operations in the global scale and these initiatives are expected to

further impact Microsoft organizational culture.

5. Organizational Culture

The origins of Microsoft organizational culture have been laid by founders Bill Gates and Paul

Allen as an innovative, but performance-obsessed. From its founding in 1972, the technology

company became a market leader in a range of segments partially thanks to its corporate culture

associated with efficiency and creativity. However, this changed during Steve Ballmer leadership

era covering 2000-2014 with negative implications on company’s market share and stock prices.

After assuming the top job in 2014, rebooting Microsoft organizational culture was one of the

key tasks for the new CEO Satya Nadella.

Currently, the global technology company is actively placing One Microsoft concept at the core

of its organizational culture. Microsoft organizational culture combines the following three key

features.

1. Learn-it-all mentality. Nadella is credited with transforming Microsoft’s historical ‘know-it-

all’ culture into ‘learn-it-all’ curiosity.17 Nowadays, Microsoft corporate culture accepts that no

employee can know everything about the industry and their specialty. At the same time,

organizational culture at Microsoft encourages its employees at all levels to maintain an open

mind towards learning new skills and capabilities that will help them to do their jobs better in a

systematic manner.

2. Openness. CEO Satya Nadella told in an interview that anyone should be able to tell him

anything and that's the culture they strive for18. Moreover, industry analysts also note that “since

17 McCracken, H. (2018) “Transforming culture at Microsoft: Satya Nadella sets a new tone” In The Black, Available at: https://www.intheblack.com/articles/2018/06/01/satya-nadella-transforming-culture-microsoft 18 Lebowitz, S. (2015) “The CEO of Microsoft has an 8-hour meeting with his leadership team every month” Business Insider, Available at: http://www.businessinsider.com/how-microsoft-ceo-satya-nadella-runs-meetings- 2015-10

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chief executive Satya Nadella was appointed in February 2014, Microsoft has become a far more

open place”19

3. Value for innovation. Under the leadership of former CEO Steve Ballmer, the global

technology company was often criticized for the lack of innovations in its product portfolio.

Satya Nadella has announced his commitment to change this perception by integrating the values

of innovation and creativity into Microsoft organizational culture.

4. Diversity and inclusion. The company attempts to promote the culture of diversity and

inclusion to all organizational stakeholders through multiple communication channels. Microsoft

declares “we strive to create an environment that helps Microsoft capitalize on the diversity of

our people and the inclusion of ideas and solutions to meet the needs of our increasingly global

and diverse customer base”.20

6. Microsoft and Ansoff Matrix

Microsoft Ansoff Matrix is a marketing planning model that helps the multinational technology

company to select its product and market strategy. Ansoff Matrix distinguishes between four

different strategy options available for businesses. These business growth strategies are market

penetration, product development, market development and diversification.

19 Heffernan, M. (2016) “Microsoft has become richer through its culture shift” Financial Times, Available at: https://www.ft.com/content/82e6ff92-46c6-11e6-8d68-72e9211e86ab 20 The Business of Inclusion (2017) Microsoft, Available at: https://www.microsoft.com/en-us/diversity/business-of- inclusion/default.aspx

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Figure 2 Microsoft Ansoff Growth Matrix

Microsoft uses all four strategy options within the scope of Ansoff Growth Matrix in an

integrated way.

1. Market penetration. Market penetration refers to selling existing products to existing

markets. Microsoft uses market penetration strategy to sell its Windows software and devices

and other products in 116 Microsoft stores worldwide as well as through online channels and

authorised distributors. The multinational technology company uses Microsoft Rewards loyalty

program to pursue its market penetration strategy.

2. Product development. This growth strategy involves developing new products to sell to

existing markets. Microsoft engages in product development strategy systematically. The tech

giant’s research and development expenses increased USD 1.7 billion or 13% in 2018 compared

to the previous year.21

Microsoft develops most of its products and services internally through three engineering groups.

• Applications and Services Engineering Group, focuses on broad applications and

services core technologies in productivity, communication, education, search, and other

information categories.

21 Annual Report (2018) Microsoft Corporation 9

• Cloud and Enterprise Engineering Group, focuses on our cloud infrastructure, server,

database, CRM, enterprise resource planning, management, development tools, and

other business process applications and services for enterprises.

• Windows and Devices Engineering Group, focuses on our Windows platform across

devices of all types, hardware development of our devices, and associated online

marketplaces.

3. Market development. Market development strategy is associated with finding new markets

for existing products. Microsoft enters a new market whenever it sees there potential for its

products and services. For example, HoloLens was made initially available only in 10 countries

such as United States, United Kingdom, Canada, Australia and Germany. Once demand for this

product increased in the global scale, the company made HoloLens available to an additional 29

markets with comparably lesser purchasing power such as Croatia, Poland and Turkey starting

from November 2017.22

4. Diversification. Diversification involves developing new products to sell to new markets and

this is considered to be the riskiest strategy. Microsoft uses diversification strategy occasionally.

Entering the cloud business in 2006, the same year as its rival Amazon launched Amazon Web

Services can be mentioned as the most notable example of diversification strategy engaged by

Microsoft. This bet proved to be highly successful though.

By October 2018, Microsoft surpassed Amazon in 12-month cloud revenues, becoming an

undisputed leader in cloud in the global scale. Specifically, while Microsoft earned USD 26,7

billion revenues, Amazon’s revenues totalled to only USD 23,4 billion for the same period.23

7. SWOT Analysis

SWOT is an acronym for strengths, weaknesses, opportunities and threats related to

organizations. The following table illustrates Microsoft SWOT analysis:

22 Bowden, Z. (2017) “Microsoft is bringing HoloLens to 29 new markets starting today” Windows Central, Available at: https://www.windowscentral.com/microsoft-bringing-hololens-29-new-markets-starting-today 23 Evans, B. (2018) “#1 Microsoft Beats Amazon In 12-Month Cloud Revenue, $26.7 Billion To $23.4 Billion; IBM Third” Forbes, Available at: https://www.forbes.com/sites/bobevans1/2018/10/29/1-microsoft-beats-amazon-in-12- month-cloud-revenue-26-7-billion-to-23-4-billion-ibm-third/#510bdfb82bf1

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Strengths

1. Global leadership in cloud sector 2. Effective leadership by Satya Nadella 3. High profitability of the business and solid financial position 4. The most valuable company in the world 5. Diversified product portfolio

Weaknesses

1. Lack of innovation 2. Weak position of Microsoft Edge browser application 3. Occasional technical issues with Windows updates 4. Dependence on hardware manufacturers 5. Security issues of Microsoft products

Opportunities

1. Engagement in mergers and acquisitions 2. Developing innovative products and services 3. Focusing on smartphone segment 4. Developing mobile advertising 5. Enhancing security against cybercrime

Threats

1. Exchange rate risks 2. Emergence of new competitors 3. Anti-monopoly and other lawsuits 4. Economic crisis 5. Emergence of CSR-related scandals

Table 1 Microsoft SWOT analysis

7.1 Strengths

1. Microsoft is an undisputed leader in global marketplace in cloud segment. The technology

giant offers a wide range of cloud-based computing services that include Bing, Microsoft Azure,

Microsoft Dynamics CRM Online, Microsoft Office 365, OneDrive, Skype, Xbox Live, and

Yammer. In 2018, Microsoft had global datacenter footprint to 54 regions – more than any other

cloud provider. In the same year, the revenues of Azure hyperscale cloud grew 91 percent year-

over-year. Moreover, Microsoft added nearly 500 new Azure capabilities in 2017 alone.24

24 Annual Report (2018) Microsoft Corporation 11

2. Effective and visionary leadership by Satya Nadella is one of the factors that set apart

Microsoft from competition in positive terms. Since taking over from Steve Ballmer as

Microsoft CEO in 2014, Nadella has been bold and effective in restructuring and reinvention of

the company. Initiatives such as refocusing Microsoft 's mobile-based efforts and expanding

many of its services to be offered on other platforms like Mac introduced by Nadella has proved

to be effective up to date. It has been noted that leadership principles of Satya Nadella are based

on the values of learning, choosing to create a positive, impact, finding ways to innovate and

making meaning a priority.

3. High profitability of the business and solid financial position is a notable strength possessed

by Microsoft. During the fiscal year 2018 the company generated USD 110.4 billion in revenue

and USD 35.1 billion in operating income. Microsoft’s high level of profitability and solid

financial position of the company is a considerable strength from multiple points of view.

Particularly, solid financial position of the business can play an instrumental role in terms of

facilitating new product development with positive implications on the long-term growth of the

business.

4. Microsoft became the most valuable company in the world in 2018, getting the title away from

one of its main competitors – Apple. In November 2018, Microsoft briefly reached a market

capitalisation value of USD812.93 billion today, followed by Apple at a market capitalisation of

USD812.60 billion25. At the end of 2018, Microsoft's market capitalisation stood at USD779.7

billion as the stock closed at USD101.57 per share.26 A high level of market capitalisation is an

important strength for any business as it is an evident indication of trust of investors and

customers on the company.

5. Diversified product portfolio is another considerable strength possessed by Microsoft. Unlike

the portfolio of some of its direct competitors such as Apple and Samsung, Microsoft’s portfolio

of products and services is vast comprising operating systems for computing devices, servers,

phones, and other intelligent devices; server applications for distributed computing

environments; productivity applications; business solution applications; desktop and server

management tools; software development tools; video games; and online advertising.

Additionally, Microsoft designs and sells hardware including PCs, tablets, gaming and

25 Warren, T. (2018) “Microsoft briefly overtakes Apple to become the world’s most valuable company” The Verge, Available at: https://www.theverge.com/2018/11/26/18109784/microsoft-apple-market-cap-2018-valuable-company 26 Novet, J. (2018) “Microsoft closes out 2018 as the top public company” CNBC Markets, Available at: https://www.cnbc.com/2018/12/31/microsoft-finishes-2018-as-the-top-public-company.html

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entertainment consoles, phones, other intelligent devices, and related accessories. Such a

diversified portfolio protects and company against downturns in any specific product or service

segment.

7.2 Weaknesses

1. Lack of innovation is one of the Microsoft’s major weaknesses. It has been noted that “right

now people are sitting on a huge installed base of old Windows XP and Windows 7 computers.

These users seem to be happy right now even though Microsoft has virtually abandoned

Windows XP, their most solid operating system ever. They are temporarily happy because

nothing on the market has shown them a good reason to upgrade.”27

In other words, Microsoft has lagged behind of its major competitors such as Apple and

Samsung in terms of introducing innovative products and services and adding innovative

features and capabilities to its current portfolio of products and services. While competitors have

been busy to introduce innovative products such as Apple Watch and Samsung SMART TV,

Microsoft has not launched an innovative product or services during the past several years.

2. Loss of leadership position in internet browser segment is a noteworthy weakness associated

with Microsoft. Microsoft’s Internet Explorer was a leading browser application with market

share of more than 90% for about two decades since the beginning of the 1990s. However,

Internet Explorer was quick to lose its market share since the launch of Google Chrome in

September 2008. In 2015 the company launched Microsoft Edge, as a successor of Internet

Explorer, but this browser is also far behind market leaders such as Chrome, Safari and Firefox.

3. Occasional technical issues with Windows updates is another weakness related to Microsoft

brand. There are number of occasions where Windows updates caused technical disadvantages to

users with negative implications to their brand image. The most notable case is the Windows 7

update of KB 3004394 in December 2014 that automatically blocked the installation or update of

graphics drivers such as AMD’s new Catalyst Omega and caused difficulties in installing

27 HAVE HP, DELL, APPLE, MICROSOFT AND OTHERS FORGOTTEN HOW TO INNOVATE? HOW CAN STARTUPS BENEFIT? (2016) 3R Cubed Group, Available at: http://rcubedgroup.com/have-hp-dell- apple-microsoft-and-others-forgotten-how-to-innovate-how-can-startups-benefit/

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GeForce drivers and a set of other drivers and software.28 Such user inconveniences have

inevitable negative implications on brand image.

More recently, “Microsoft has advised Windows 10 users against downloading the Creators

Update before their computers become eligible for it. The company released the new software

two weeks ago, but has decided to roll it out to users in stages, partly because it doesn’t want to

overwhelm its servers.”29

4. Windows desktop operating systems is a significant source of revenues for Microsoft. The

sales of Microsoft Office system and Windows PC operating system constitute a significant

portion of Microsoft revenues. However, the volume of this specific source of revenue is

dependent on external hardware manufacturers such as Dell, HP, Asus, Compaq, Acer and

others. Specifically, Microsoft’s revenues decrease if hardware manufacturers do not ensure

compatibility of their products with the Windows desktop operating system. Moreover, it can be

argued that the popularity of traditional desktop computers as opposed to smart phones and

tablets are rapidly decreasing and this tendency can be specified as a considerable weakness for

Microsoft, taking into account dependence of considerable parts of its revenues on desktop PCs.

5. Security issues associated with Microsoft products remain as one of the major weaknesses of

the brand. In 2015, “the German-based testing firm pitted 28 antivirus programs (a mix of free

and paid offerings) against 153 pieces of zero-day malware and 12,327 pieces of known malware

on Windows 7 machines in a three-part test that scores on protection, performance and usability.

The tests, which were conducted in December, not only had Microsoft's free antivirus tool

(version 4.6) coming in dead last among 28 competitors, but it scored 0 out of 6 points in the

category of malware protection. It fared a better when it came to performance (4 out of 6) and

scored a perfect 6 points when it came to usability.”30

28 Evangelho (2014) Forbes, Available at: http://www.forbes.com/sites/jasonevangelho/2014/12/13/new-windows- 7-patch-is-effectively-malware-disables-graphics-driver-updates-and-windows-defender/ 29 Sulleyman, A. (2017) “Windows 10 Creators Update: Microsoft Warns Users of ‘Issues’”, Independent, Available at: http://www.independent.co.uk/life-style/gadgets-and-tech/news/windows-10-creators-update-issues-microsoft- user-problems-manual-download-a7705091.html 30 Paoli, C. (2015) “Microsoft's Security Essentials Fails Latest Antivirus Test” Redmond Magazine, Available at: https://redmondmag.com/articles/2015/01/27/security-essentials-fails-antivirus-test.aspx

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7.3 Opportunities

1. Microsoft has initiated a set of significant mergers and acquisitions that include acquisition of

Skype Global S.á r.l. (“Skype”), a leading global provider of software applications and related

Internet communication products for USD 8.6 billion in 2011, acquisition of Yammer, Inc.

(“Yammer”), a leading provider of enterprise social networks, for USD1.1 billion in 2012 and

Nokia’s Devices and Services business in 201431. Moreover, the list of the most notable recent

acquisitions include Nokia Corporation’s Devices and Services business for USD 9.4 billion in

2014 and Mojang Synergies AB the Swedish video game developer of the Minecraft gaming

franchise, for USD 2.5 billion.32

Nevertheless, there is an opportunity for Microsoft to further diversify its portfolio via engaging

in mergers and acquisitions with other businesses in consumer electronics industry. Specifically,

Microsoft should target companies that will assist in addressing weaknesses of the company as

discussed above.

2. Microsoft research and development expenses increased USD 1.7 billion or 13% in 2018

compared to the previous year, primarily due to investments in cloud engineering and LinkedIn

expenses.33 It has been noted that Surface, Surface Hub, and Microsoft HoloLens have pushed

the boundaries of how personal the computing experience can be, with Surface Book and Surface

Pro 4 released in the last year.34 Nevertheless, the company is rightly criticized for the lack of

innovative products and services on its pipeline. The company needs to increase the

effectiveness of its research and development initiatives via promoting the culture of creativity

and innovation, thus ensuring the launch of innovative products and services.

3. Despite increasing popularity of Smartphone market segment and its emergence as a substitute

to desktop computers, Microsoft is yet to offer competitive alternatives to Apple’s iPhone and

Samsung Galaxy smartphones. Microsoft is presented with an opportunity to satisfy growing

demand for smartphones by developing competitive products of this category.

4. Increasing popularity of smartphones as discussed above has triggered the surge of popularity

of mobile advertising. Microsoft’s direct competitors such as Apple and Samsung have been

successful in offering hundreds of thousands mobile applications free of charge thanks to mobile

31 Annual Report (2014) 32 Annual Report (2016) Microsoft Corporation 33 Annual Report (2018) Microsoft Corporation 34 Annual Report (2016) Microsoft Corporation

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advertisements integrated in those applications. Microsoft has an opportunity to also adopt this

strategy with positive implications on the volume of sales of its smartphones.

5. Enhancing security against cybercrime is an additional important opportunity to be explored

by Microsoft. The multinational technology company needs to invest considerable amounts of

resources of this purpose and attract highly qualified industry experts. The company already has

a Digital Crime Unit staffed by a 100-strong team of specialists.

“Set up in 2013, the Digital Crimes Unit has taken on the task of trying to fight the tide of online

crime, ranging from spam attacks spreading malware through zombie computer networks to

software piracy that impacts Microsoft’s own bottom line. Located in a restricted area of

Microsoft’s Redmond campus in Washington, the unit works with companies and organisations

to track down and eliminate threats.”35 Nevertheless, these initiatives may not be enough and

there is an opportunity for Microsoft to further invest in dealing with cyber crime with positive

implications on the brand image and the bottom line.

7.4 Threats

1. Microsoft has offices in more than 100 countries around the globe and it generates substantial

proportion of its revenues from international markets. Accordingly, Microsoft’s financial results

might be negatively impacted by the volatility in exchange rates between USD and local

currencies. Specifically, there is a threat that further strengthening of USD will decrease the

amount of reported profits generated by Microsoft in the global marketplace.

2. Emerging competition from east in general and from China and India in particular represent

substantial threat for Microsoft. Microsoft’s current and future competitors from emerging

economies will have a substantial competitive advantage associated with access to cheaper

resources and it might be difficult for Microsoft to address this issue. Moreover, taking into

account unique aspects of e-commerce and IT industry, it can be argued that any new market

entrant from any place can represent threat to Microsoft’s market share if they come with

innovative business idea and implement the idea in practice efficiently.

3. Microsoft is faced with a threat of being in a disadvantaged position due to the implications of

anti-monopoly lawsuits. For example, in China, the company was given 20 days by the State

35 O’Brien, C (2016) “Microsoft leading the fight to counter cybercrime” The Irish Times, Available at: http://www.irishtimes.com/business/technology/microsoft-leading-the-fight-to-counter-cybercrime-1.2566206

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Administration for Industry and Commerce “to explain what they called compatibility and

bundling issues with its software, putting pressure on the software maker as it faces an antitrust

probe into its business practices here”36. There is a threat for similar incidents to take place in

other international markets where Microsoft operates.

4. There are warnings of another economic crisis from a number of respected business

practitioners such as Chairman and CEO of JP Morgan Chase Jamie Dimon and Chairman of

Berkshire Hathaway Warren Buffett37. It has been noted that “the world’s banks are mostly

stronger now than they were on the eve of the last financial crisis, but there are important

exceptions. The stock of Deutsche Bank, Germany’s biggest, has fallen 62 percent from its 2015

high, and Chief Executive Officer John Cryan has so far resisted an obvious solution to shore up

the bank, namely raising money by issuing new shares, which would dilute the ownership of

current shareholders. The German government, having inveighed against bailouts for southern

European banks, is insisting it won’t reverse course now for its own bank. In Italy, meanwhile,

troubled loans on banks’ books equal about one-quarter of the nation’s GDP.”38. If materialized,

an economic crisis may have severe implications on Microsoft operations in the global

marketplace.

5. Emergence of CSR-related scandals represents another threat that can cause damage to

Microsoft at multiple levels. In the past, the multinational technology company had CSR-related

issues such as “use of permatemp employees (employees employed for years as "temporary," and

therefore without medical benefits), use of forced retention tactics, where departing employees

would be sued to prevent departure, as well as more traditional cost-saving measures, ranging

from cutting medical benefits, to not providing towels in company locker rooms.”39 The

company is not ensured in any ways against new CSR-related scandals and this fact constitutes a

major threat for the business.

36 Jie, Y. (2014) Wall Street Journal, Available at: http://www.wsj.com/articles/china-asks-for-explanation-from- microsoft-1409551006 37 Lenzner, R. (2015) “The Ten Reasons Why There Will Be Another Systemic Financial Crisis” Forbes, Available at: http://www.forbes.com/sites/robertlenzner/2014/12/08/the-ten-reasons-why-there-will-be-another-systemic- financial-crisis/ 38 Coy, P. (2016) “Where the Next Crisis Will Come From” Bloomberg, Available at: https://www.bloomberg.com/news/articles/2016-10-20/where-the-next-crisis-will-come-from 39 Troubling Exits At Microsoft (2005) Bloomberg, Available at: https://www.bloomberg.com/news/articles/2005- 09-25/troubling-exits-at-microsoft

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8. PESTEL Analysis

PESTEL is a strategic analytical tool and the acronym stands for political, economic, social,

technological, environmental and legal factors. Microsoft PESTEL analysis examines effects of

these factors on the bottom line of the multinational technology company.

8.1 Political Factors

There are many political factors within the scope of Microsoft PESTEL analysis at

governmental, regional and international levels. Apart from the impact of a regular set of

political factors such as political stability in the market, impact of activities of lobby groups and

the government attitude towards the organization and the industry, Microsoft activities during

the past years have brought upon the company other set of political issues.

Most notably, Microsoft has attracted the attention of governments and political parties due to

antitrust-related issues. A recent probe by China’s State Administration for Industry and

Commerce into the ways Microsoft distributes its Internet Explorer browser and Windows Media

Player and sells its Office and Windows software in China40 can be mentioned as a relevant

example of impact of a political factor.

Similar to major international corporations, Microsoft engages in political lobbying in order to

contribute to the formation of political environment favourable to its business. As illustrated in

Figure 3 below, the amount of annual political lobbying by Microsoft has ranged between USD

3,92 million and USD 7,25 million during the last 10 years.

40 Reuters (2014) Available at: http://www.reuters.com/article/2014/08/26/china-antitrust-microsoft- idUSL3N0QW1C520140826

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Figure 3 Annual lobbying by Microsoft Corporation41

8.2 Economic Factors

There is a range of economic factors that affect Microsoft revenues directly or indirectly. These

include economic growth or recession in the market, changes in interest rates and currency

exchange rates, changes in taxation rates and policies, inflation rates, changes of labour costs and

costs of other resources and others. Particularly, the global economic and financial crisis of 2007

– 2009 had proved to have highly detrimental impact on Microsoft, leading to layoffs of more

than 5,000 employees in 200942 and this illustrates the potential impact of economic factors on

business performance.

Furthermore, monetary and fiscal policies of the United States and other countries where

Microsoft operates can have direct or indirect impact on the performance of the multinational

technology company.

Changes in exchange rates between USD and other currencies is another significant factor

affecting Microsoft profit reports due to the fact that the company generates substantial part of its

revenues from international markets. Strengthening of USD relative to certain foreign currencies

throughout fiscal year 2017 negatively impacted reported revenue and reduced reported expenses

from Microsoft international operations. This trend reversed in fiscal year 2018. Strengthening of

foreign currencies relative to the U.S. dollar positively impacted reported revenue and increased

reported expenses from company’s international operations.

41 Open Secrets (2018) Available at: https://www.opensecrets.org/lobby/clientsum.php?id=D000000115 42 Goldman, D. (2014) CNN Money, Available at: http://money.cnn.com/2014/07/17/technology/enterprise/microsoft-job-cuts/

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Cost of labour can be mentioned as another economic factor with potential effects on the bottom

line for the technology company. Microsoft employs approximately 131,000 people on a full-

time basis including 78,000 people in North America.43 Accordingly, increases in the cost of

labour decrease the total net profit for the company.

8.3 Social Factors

Microsoft is greatly impacted by a range of social factors such as demographic changes, changes

in consumer attitudes and opinions towards consumer electronics products and services, media

perception of the brand and health and welfare of target customer segment. It can be argued that

the impact of the majority of modern social factors can be positive in relation to Microsoft

products and services.

For example, a social change of increasing popularity of same-sex marriages in the US and other

developed countries is causing heated debates and discussions around the globe. Engagement in

these debates and discussions involve extensive usage of products and services offered by

Microsoft and other businesses operating in internet and consumer electronics industry.

Specifically, millions of people around the globe use internet browsers including Microsoft Edge

to get information and share their opinions about social changes; use Windows Phone, Skype and

other related technologies for the same purpose. Similarly, a social change of increasing

popularity of alternative working patterns such as working from home involves an extensive

utilization of a range of products and services offered by Microsoft such as Microsoft Edge,

Windows Phone and Skype. Similarly, changes in consumer purchasing habits in general and

increasing popularity of online purchases in particular increases ten demand for a wide range of

products and services within Microsoft portfolio.

8.4 Technological Factors

Due to the technological nature of Microsoft products and services, the impact of technological

factors might be greater for Microsoft compared to businesses operating in other industries.

Generally, prominent technological factors that impact Microsoft include industry-specific

43 Annual Report (2018) Microsoft Corporation 20

technological innovations and breakthroughs, decreasing life cycle of technology, changes in

energy consumption practices, shifts in manufacturing maturity and capacity and others.

Moreover, information technology and consumer electronics industry is currently undergoing

massive changes that include shift from PC to tablets and other mobile devices, increasing

importance and popularity of cloud business, drive for product customization and personalization

of experiences and others. Microsoft’s long-term growth prospects depend on company stance

towards these dynamic changes in a direct manner.

Microsoft senior management duly acknowledge the importance of technological factors for the

long-term growth prospects of the business. Accordingly, the company engages in research and

development in an extensive manner. Specifically, research and development expenses increased

USD1.7 billion or 13% in 2018 compared to the previous year, primarily due to investments in

cloud engineering and LinkedIn expenses.44

Microsoft research and development efforts focus on three interconnected ambitions45:

• Reinvent productivity and business processes.

• Build the intelligent cloud platform.

• Create more personal computing.

8.5 Environmental Factors

Performance of Microsoft can be indirectly impacted by a set of environmental factors such as

global warming, air pollution, thickening of ozone layer and others. Moreover, the impact of

environmental factors on Microsoft performance can be direct as well in cases of environmental

disasters such as earthquakes, flooding, tornados etc.

For example, in UK a “natural capital” stress test found that flooding in 2050 on a similar scale

to the winter of 2013/14 would affect more than twice as many homes.46 Such a natural disasters

can have negative implications for Microsoft via damaging company’s properties in UK and

reducing customer purchasing power in this important market.

44 Annual Report (2018) Microsoft Corporation 45 Annual Report (2018) Microsoft Corporation 46 Johnston, I. (2017) “Extreme weather to cost UK billions and leave 2.5m homes at risk of flooding unless ministers take action, warns WWF” Independent, Available at: http://www.independent.co.uk/environment/climate- change-global-warming-extreme-weather-flooding-homes-drought-uk-economy-a7964851.html

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Similarly, air pollution is a serious environmental factor that can affect Microsoft via decreased

employee performance. It has been estimated that air pollution is responsible for 656,900 sick

days a year in Central London. Employee productivity across 190 Chinese cities would rise by

about 4 per cent per year if the amount of fine-particle pollution in the air was cut to fall within

World Health Organization standards.47

Any corporation of a size of Microsoft is expected by stakeholders in general, general public and

non-governmental organization in particular to behave in a socially responsible manner and to

illustrate commitment in dealing with a wide range of environmental issues. Neglecting this

expectation may result in damage to the brand image via negative online and offline press

coverage. Microsoft addresses this issue according to its corporate social responsibility (CSR)

programs and initiatives.

8.6 Legal Factors

Microsoft is directly impacted by a set of legal factors such as trade regulations, anti-trust rules

and regulations, data protection regulations and others. Additionally, there is a wide range of

rules and regulations related to employee health and safety, consumer protection laws,

employment laws, and competitive rules and regulations that need to be fully adhered to by

Microsoft. Changes in these rules and regulations are most likely to impact Microsoft

performance in direct and indirect manner and in ways that are difficult to predict.

Legislators and regulators may make legal and regulatory changes, or interpret and apply

existing laws or policies, in ways that make Microsoft products and services less useful to its

users, require the company to incur substantial costs, expose it to unanticipated civil or criminal

liability, or cause it to change its business practices.

Microsoft experiences the impact of legal factors in the areas of patent infringement, antitrust,

and monopoly in a regular manner. One of the most complex legal proceedings involves the case

where “a US judge has agreed that Microsoft should release under a US search warrant an email

that is being stored on servers in Ireland. Yet European Union (and thus Irish) law on such

47 Phillips, R. (2017) “Air pollution: The business concern” Eco-Business, Available at: http://www.eco- business.com/opinion/air-pollution-the-business-concern/

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matters says that only a court local to that jurisdiction can make such a decision”48. Additionally,

Microsoft had to deal with accusations on the grounds of antitrust in EU and China along with

many patent infringement cases either as a claimant or defendant during past years.

9. Marketing Strategy

Since the appointment of Satya Nadella as CEO, Microsoft marketing strategy has changed to

become less ‘hostile’ abandoning kinds of advertising that ‘attacked’ competitors in a direct

manner. For example, a marketing campaign known as ‘Scroogled!’ launched in 2012 informed

about Google’s decision to display paid advertisements to search results related to shopping

(Figure 4). ‘Scroogled’ was launched to ensure the shift of some Google users to use

Microsoft’s Bing search engine, but Nadella stopped this and some other similar campaigns as an

attempt to improve the image of the company.49

Figure 4 Microsoft's 'Scroogled' Marketing campaign

48 Worstall, T. (2014) Forbes, Available at: http://www.forbes.com/sites/timworstall/2014/08/01/us-judge-insists- microsoft-break-eu-law-to-obey-us-law-over-email-in-ireland/ 49 Hildenbrand, J. (2014) Windows Central, Available at: http://www.windowscentral.com/microsoft-s-scroogled- campaign-may-finally-be-coming-to-an-end

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In other words, since his appointment on the top job, Satya Nadella has been focusing on

humanising the brand and taking a customer-centric approach with direct implications on the

marketing strategy of Microsoft.

Microsoft sales and marketing expenses amounted to USD 17,469 billion, USD 15,461 billion

and USD 14,635 billion for the fiscal years of 2018, 2017 and 2016 respectively . In 2018 the

tech giant’s sales and marketing expenses increased USD2.0 billion or 13% compared to the

previous year.50

Microsoft marketing strategy is based on the following principles:

1. Investing in the communication of marketing message through various marketing

communication channels in an integrated manner. The technology giant uses a range

of marketing communication channels such as advertising, sales promotion, events and

experiences, public relations, direct marketing and personal selling in an integrated way

to communicate its marketing message to its target customer segment.

2. Focus on product element of the marketing mix. Microsoft 7Ps of marketing focuses

on the product element of the marketing mix to a greater extent compared to other

elements. Accordingly, the multinational technology company has accepted high level of

user convenience of its products and services as unique selling proposition associated

with the brand.

3. Targeting customers that value effectiveness and efficiency. Microsoft segmentation

targeting and positioning focuses on specific group among the population that value

efficiency speed of operations and advanced features and capabilities of technological

products and services.

9.1 7Ps of Marketing

Microsoft marketing mix (Microsoft 7Ps of marketing) comprises elements of the marketing mix

that consists of product, place, price, promotion, process, people and physical evidence. The

multinational technology company manipulates with elements of the marketing mix according to

its marketing strategy, as a part of its business strategy.

50 Annual Report (2018) Microsoft Corporation 24

Product

The majority of Microsoft’s products relate to productivity and business processes and to support

digital work and life of customers. The company also builds the platforms upon which others

build their own digital platforms. Some of Microsoft products are clear leaders in the global

marketplace.

For example, more than 135 million people use Office 365 commercial every month and Outlook

Mobile is installed into more than 100 million iOS and Android devices worldwide.51 Similarly,

Microsoft Teams is used by more than 300 organizations worldwide, including 87 of the Fortune

100 and nowadays there are nearly 700 million devices around the world with active Windows

10.52

Generally, Microsoft products and services can be divided into three broad categories as

illustrated in Table 2 below:

Category Products and services

Productivity and Business Processes

Microsoft 365, SharePoint, Skype for Business, Outlook Mobile, One Drive, Dynamics 365, Microsoft Teams, Linked In

Intelligent Cloud Server products and cloud services, including SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure Enterprise Services, including Premier Support Services and Microsoft Consulting Services

More Personal Computing Windows Devices, including Microsoft Surface (“Surface”), phones, and PC accessories. Gaming, including Xbox hardware; Xbox Live, Search advertising.

Table 2 Microsoft product categories and products

Place

Microsoft sells its products and services through the following three channels:

1. Official website: www.microsoftstore.com/store. Microsoft online store is a convenient

platform where customers can choose products and services according to categories such as

51 Annual Report (2018) Microsoft Corporation 52 Annual Report (2018) Microsoft Corporation

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Devices, Software & Apps, Games & Entertainment etc. The website also includes information

about special deals in relation to specific products or special dates and occasions.

2. Microsoft stores. There are 116 Microsoft stores worldwide: 106 stores in the USA, 8 stores

in Canada, 1 store in Australia and 1 store in Puerto Rico. Similar to Apple Store, in Microsoft

stores customers have an opportunity to use products helpful ‘technical advisers’ in stores are

happy to assist.

There are 3 types of Microsoft stores:

i) Specialty stores provide a limited selection of products, for a quick and convenient

shopping trip;

ii) Full line stores offer Answer Desk services, and complete product offerings;

iii) Flagship stores focus on more exclusive experiences and features. These are located in

are located in New York City and Sydney.