Microsoft’s
ambitions have been anything but small since its inception in the early 1980’s.
Microsoft’s is the world’s number one software company and has controlled an
overwhelming share of the personal computer operating system market.
Microsoft’s products do not stop at just an operating system; the company
supplies the world with a number of other products including their Office
Software Suite, their video game console Xbox, CRM Applications, server and
storage software, and Zune, their digital music player. The company has had
acquisitions to bulk its presence in markets such as online advertising, mobile
devices, and enterprise software. Throughout this paper, I will be discussing a
little history Microsoft, their Technological Strategy, the company’s core
competencies, industry dynamics, sourcing and innovation, and their strategy to
protect their innovations.
Microsoft’s
History
Bill Gates
founded Microsoft (originally named Micro-Soft) in 1975 after dropping out of
Harvard at the age of 19 and teaming up with High School friend Paul Allen to
sell a version of the programming language BASIC. Gates moved Microsoft to
Seattle in 1979 and began developing software that let other write programs,
thus the modern personal computer was born in 1980 when IBM choose Microsoft to
write the operating system for its new machines. The company went public in
1986, and Gates became the industry’s first billionaire a year later. In 1995
antitrust concerns cost Gates a $1.5 Billion dollar acquisition of his personal
finance. Later that year, Gates introduced the Microsoft Network that licensed
the Java Web Programming Language from Sun and introduced its Internet Explorer
Web browser, as well as launching
Expedia.com,
its online travel site. After settling a lengthy lawsuit from Sun in 2001 for
$20 Million dollars for allegations that Microsoft was creating an incompatible
version of Java in 1997, the company in 1999 agreed to invest $5 Billion for a
minority stake in AT&T as part of a move to acquire cable operator Media
One. In addition, the company also bought Windows technical drawing software
Visio for $1.3 Billion, and sold a stake in Expedia to the public.
In 2000
Gates named Ballmer the new CEO of the company and Gates remained chairman and
added the title of chief software architect to himself. Later that year, a
judge ruled that Microsoft used its monopoly powers to violate antitrust laws.
Microsoft agree to uniformly license its Windows operating system, cease to
offer exclusive contracts with manufactures, and allow competing software to be
included with its operating systems. Throughout the next couple of years
Microsoft still faced some bumpy roads, with a lawsuit from Netscape in 2002
and announcing in 2005 a reorganization designed to streamline its decision
making and speed up execution across its divisions. Microsoft put many of its
legal woes behind them after 2008 and partnered with mobile device makers such
as Hewlett Packard and Motorola to develop handheld computers and mobile
devices that utilize Microsoft’s Windows Mobile and Windows Media software. In
2009, Microsoft overhauled and rebranded its own search business Bing after
failure of acquiring Yahoo! in 2008.
Technology Strategy
Microsoft’s technology strategy service enables
business innovation and helps builds the company’s competitive advantage.
Microsoft’s technology strategy helps organizations improve IT service
excellence, lower costs, and build competitive advantage through the innovative
application of the Microsoft platform. Microsoft delivers its technology
strategy services through Enterprise Strategy Consultants and senior level
experts. Using the IT roadmap, IT advisors help organizations successfully
plan, deploy, operate, and optimize Microsoft technology solutions.
A Microsoft Technology
Strategy Service engagement offers significant ongoing benefits to large
organizations that run Microsoft Technologies. The company helps plan for IT
governance and compliance by establishing well defined procedures and clear
standards for acquiring, integrating, and maintaining IT systems over time.
Microsoft’s work can lead to:
MTSS BENEFITS:
Ø IT service excellence with help to improve
operational efficiency to lower total costs of ownership
Ø Help reduce redundancy and streamline IT processes
and service deliveries across regions and international boundaries
Ø Help ensure the success and reduce the risk of
future IT upgrades and systems
Ø Operate from a consistent and executable IT service
architecture and delivery plan
Core Competencies
A company’s
core competencies are typically considered to be more than a core technology, a
company’s core competencies differentiates them strategically from their
competitors. Several core competencies underlie an individual business and can
indicate an organization’s structure. Microsoft’s products can be divided into
seven main families; these products include Windows, Servers, Business
Solutions, Xbox Game Console and Games, MSN, Developer Tools, and Windows
Mobile.
Microsoft
delivers the right services at the right time by strengthening IT as a
strategically focused, business aligned organization. The company offers a
competitive advantage through their technological innovations. The company maps
IT applications, infrastructures, and operations into a consistent set of
services that support business goals. They help eliminate redundancies, service
delays, and inefficient processes for faster response times, and they also
seize the opportunity to take the competitive lead by applying technology in
innovative ways. For a variety of reasons it is difficult to imitate
Microsoft’s core competencies because customers perceive the benefits
associated with the Microsoft products.
Microsoft
currently has its own partner network where businesses can showcase their
expertise through Microsoft competencies. Microsoft has two types of
competencies that they can provide a new business. Gold or silver competencies
can help set a company apart from the competition by demonstrating a proven
skill set to potential customers. Consumers can easily identify a company’s
capabilities and expertise because Microsoft is aligned with how customers
actually buy a company’s products.
Industry Dynamics
Microsoft
offers a competitive advantage through technology innovation by delivering the
right services at the right time by strengthening IT as a strategically focused
and business aligned organization. From the use of Microsoft industry dynamics,
company’s can map IT applications and operations into a consistent set of
services that support business goals. They can also seize opportunities to take
the competitive lead by applying technology in innovative ways. Based on what
Microsoft states on their website, 2“When you
want CRM in the cloud that is flexible, scalable, and easy to use, and that
delivers outstanding value and business insights, there’s no comparison to
Microsoft Dynamics CRM.” Using industry trends, Microsoft can help a firm drive
sales productivity by tracking sales opportunity, boost customer satisfaction,
improve a firm’s marketing effectiveness, and help firm’s reach quarterly
goals. One of the most powerful features of Microsoft’s CRM dynamic business
management software is the native outlook client which allows users to access
the full capabilities of Microsoft dynamics CRM right within the Microsoft
Outlook interface. And because sales, marketing, and customer service tasks are
handled within a familiar application, any team can work smarter and be more
productive on any project that they are working on.
Technology Sourcing and Internal Innovation
By using the Microsoft
Dynamics CRM online application, firm’s have the ability to use a strategy to
source their methods. Firm’s can improve sales planning and management by
setting up territories and teams for optimal organizational efficiency. Firm’s can
also better coordinate tracking leads within one centralized system and assign
leads and tasks automatically based on predefined rules. Firm’s who use
Microsoft’s online CRM application can also mange opportunities effectively by
enabling a more effective sales team with team based ownership. They can also
create and monitor customized offers and pricing for each opportunity, by more
effectively positioning against competition with a seamless competitor tracking
tool. A firm can also streamline a proposal creation with embedded document
management capabilities and establish consistent sales processes with
predefined workflows.
Users of
Microsoft’s CRM dynamic tool have the ability to streamline account management
and enhance pipeline management by increasing the accuracy of revenue
projections with individual or rollup forecasting. Firm’s can leverage guided
dialogues across sales organizations to reduce training and speed up time to
simplify workflow processes. Users can also empower their sales force with real
time data from any web enabled device to get on the go leverage. And, the use
of CRM’s analytical tool helps firm’s gain visibility and exposure through
improved decision making using robust data for insightful trending analysis.
Using the intuitive report wizard helps firm’s take advantage of the
application to instantly create ad-hoc reports.
Product Development Strategy
During a professional developer’s conference in
2010, a Microsoft Executive addressed the company’s plan to incorporate HTML 5
and Silverlight together. HTML is the only cross compatible solution for both
Window’s and Apple platforms. Microsoft’s Silverlight strategy is Microsoft’s
development platform for their windows phone. While servers, desktops, and
mobile devices have arguably identical issues with compatibility, the solution
and answer lies within HTML 5, and the driver in both cases is user demand.
Thanks to the steady and regular market share gains, the Mac now has the upper
hand of the market, especially in the U.S, where Apple has already exceeded 10
percent of the market share. The problem Microsoft is having is that the demand
for Macs comes largely from the demands for I-Phones. If a user has a good
experience with an I-Phone, this will lead into repeated trips to the Apple
store on site and online, with more and more users considering and purchasing
Apple products, including Macs, I-Pads, and I-Pods.
Android has
also benefitted from a similar popular demand recently in the mobile device
world, and since Google has its own platform now, users have more choice with
both hardware and wireless carriers. The problem with these platforms is
compatibility, which was a bigger issue in the past than now, but still an
issue. No new major PC specific applications have appeared in the past several
years, instead, all new apps have been web based and run well on standard based
browsers on any desktop computer operating system including Windows, Mac, and
Linux.
Embracing
web standards can eliminate a lot of problems currently, and when it comes to
web standards, the industry is rallying around HTML 5, JavaScript, and CSS 3
(Cascading Style Sheets). Microsoft embraces HTML 5 because they feel it is the
future of web technology that they are exploring by using Internet Explorer 9
and within the next few months Windows 8. On the mobile side HTML 5 is leaned
more towards the future of mobile devices, but at the same time will bridge the
gap between disparate and incompatible platforms like the I-Phone, Android, and
Windows phones. Today’s smart phones all run on different operating systems
with incompatible apps for each, but if developers create mobile solutions instead
of native apps, there would be no need to develop three completely different
types of apps in different environments, and with several different languages.
Instead they can create and users would embrace a single web app that is cross
compatible on all operating systems. Microsoft is wise with its goals for
Silverlight, but at the same time the software giant is welcoming HTML 5 with
arms wide open as its path to the future of the company.
Microsoft’s
aim with Windows 8 is to make the user experience a natural extension of the
device. This attempt is a design that Microsoft hasn’t attempted since the days
of Windows 95. The new user experience also extends to how applications will
run on the Windows 8 software. Developers will also be able to use common web
technologies, such as HTML 5 and JavaScript to create applications for the PC
to further ease integration and adoption. To aid developers in building
applications for the new Windows 8 platform, Microsoft has opened a new
developer conference called BUILD which will take place in California later on
this year 2011. Needless to say, Microsoft is keeping up with technology and
innovation by embracing new technologies that can be implemented into their
existing platforms that will make the Microsoft brand even bigger and better
than it already is.
Strategy to Protect Innovations
Although Microsoft lags
behind Apple in innovation, during 2010 Microsoft was granted the third most
patents of all companies with almost 3,100 patents behind the leaders IBM and
Samsung. Apple checked in at number 46 with only approximately 560 patents, but
Apple was also cited with the greatest increase of patents in 2009, up by 94%.
Microsoft in general doesn’t release innovative products, except for the Kinect
gaming system for X-Box, which is an exception to that rule. Microsoft spends
approximately nine billion dollars a year in research, development, and
acquisitions, totaling over sixty nine billion over the last decade, which for
Microsoft has not brought the breakthroughs to the public like they wish they
could.
Innovator evangelists believe that Microsoft is
suffering from a innovator’s dilemma, which occurs when a company focuses on
protecting their existing markets, rather than trying to create new ones.
Although Microsoft never quite ranked among famous labs such as Bell Labs and
the Xerox Palo Alto Research Center, Microsoft itself still feels that they are
one of the few remaining companies that still do pure research and development,
including kinds that may not turn into products for several years to come.
Microsoft
has a problem when it comes to protecting innovations, Steve Ballmar, who is
Microsoft’s current CEO is not a visionary and simply does not have the vision
to create innovative products. But, when we look at the CEO of Apple Steve
Jobs, we can see that Steve Jobs is a brilliant forecaster and knows what
people want even before the public realizes it and then having great products
designed to fill their need. Another problem the company faces is corporate
culture. Apple focuses on new innovative products, while Microsoft focuses on
protecting their turf, which is no way to be innovative in today’s market.
Although
Microsoft does deserve a lot of credit for the amount of money it is willing to
put in their research and development, and their researchers also deserve
credit for the number of patents they receive, the company needs to rethink its
approach to innovation and product development, so that it can also reap the
rewards and benefits of their work.
In
conclusion, Microsoft will go down in history as one of the most innovative
companies that have changed the way people go about their daily lives.
Microsoft has come a long way from the days of settling lawsuits with numerous
companies to being the powerful software giant in the world today. With
technology comes innovation, and Microsoft has proven that it can be
technological innovative with all of the great products that we have seen from
them over the years. Given the company’s strategies, core competencies,
dynamics, and innovative breakthroughs, it is no wonder why Microsoft has
lasted this long, and will be around for many more years to come.
Microsoft Competitive Advantage
Microsoft
appears to offer decent value at it's recent price. You can find a decent
description almost anywhere on the web that says Microsoft (MSFT) is cheap.
To
summarize the idea, the entire company is selling for $208 billion. At
the end of Q1 they had slightly over $50 billion in cash equivalents, so net of
cash the company is selling for $168 billion. Over the trailing twelve
month the company has earned approximately $21 billion. So at today's
prices the whole company is worth about 8 times trailing earnings.
If
you take some time and look below the hood, the company has one division,
online services, that is a money loser. In the lastest quarter that
division lost $0.7 billion dollars. So excluding this unprofitable
division annual profits would increase by $2.8 billion, to nearly 24 billion.
So if that division could break-even the company would be selling for 7 times
earnings and annual profits would be over 13% higher.
Now 8
times earnings is good for an earnings yield of 12.5%. At 7 times
earnings the company is good for a 14.3% earnings yield. Regardless of
your future expectations about the economy that is a very cheap stock
especially for a company with large very profitable divisions.
If we
further tinker under the hood we find that they have absolutely huge gross
margins of 80% and net profit margins of 30%. There are so few companies
in the world that have such absolutely huge margins like that. Over the
last 10 years the revenue and profits PER SHARE have grown at 13.5% and 11%
respectively, not too bad for largecap. The market obviously does not
believe the company has a very strong future, I beg to differ. I think
the speculators have watched the P/E ratio come down from the nose bleed levels
of 50 times in 1999 to today's modest level and are frustrated by the flat
share price.
I
have even seen some analysis that suggest the market is currently pricing in
low single digit declines in earnings for the foreseeable future. If you
capitalize the earnings at 10%, assuming zero growth indefinitely, the company
is worth $25/share (it's current price). Now the company may well be
worth this amount, or significantly more or less depending on what the future
holds. If the company has a poor future, something like print newspapers,
the company may be worth much less. So what about Microsoft, does it have
any competitive advantages?
Competitive Advantage
Competitive Advantage
With
all that as introduction, I have been reflecting quite a bit lately on whether
Microsoft has a strong competitive advantage or not. First off, you don't
have to be all that intelligent to realize that if a company has gross margins
of 80% they clearly have a strangle hold on the market. Competition may
exist but they have a strangle hold on the market. That is a clear
starting point.
It's
funny much you hear people complain about Microsoft's products but what do you
really expect? In the PC market they have something like 95% market share
in operating systems. I don't know anyone that owns or uses a different
operating system (except maybe a few Mac's). So then it really doesn't
surprise me that you don't hear people complaining about other systems... what
other system is there to complain about? To be clear, if 95% percent of
people eat red apples over green ones, I would bet a very large percentage of
complaints would be about the red ones.
In
the same way I have read that many people are indifferent to Microsoft Office
suite. The biggest exception is Excel. It seems a lot of
individuals and companies couldn't live with Excel. At the company I work
at we are so tied to Microsoft Excel and Access databases we really couldn't
make a change to anything else. Excel is so embedded in so many
procedural and company processes it would require so much work to make any
change. I can only imagine how that is also the case at millions of other
companies. As a company, we are far more tied to Microsoft products than
we realize.
Beyond
these small examples... the other major issue with making changes to computer
software in the workplace is the huge amounts of work that would be require to
train everyone on the new system. I can think of one system, made by IBM,
that we use at work. A few years back a change was contemplated but
pulled at the last minute because of the problems that would be created from a
major change like this. Software and certain computer systems have more
competitive advantages that one realizes if you think about it. (We are
updating the IBM system this year, I will be watching the change-over with keen
interest)
In
the same way, I find it really interesting that Firefox so closely resembles
Microsoft's Internet Explorer. If you asked the average person what the
difference is between the two they likely would have a difficult time
explaining. I find that remarkable as Firefox has to essentially copy IE
and then begin to make minor changes to the browser so as not to upset the
apple cart. (I have tried Google's Chrome browser, but to be honest
"it just doesn't look right")
The
next reason why it is difficult to change from Microsoft is because of
widespread usage. Just think about it, can you really use ABC's generic
word processor in the business world? You wouldn't be able to communicate
with any other business or get anything done. Our company is still using
an older office version and the newer versions are just not compatible.
This has created numerous headaches for us, but thankfully for us Microsoft
allows free viewers for many programs. We have the same issues with other
software we use, you constantly have to stay up to date or you risk not being
able to communicate effectively with other companies. You just can't use
old or uncommon software.
Lastly,
many businesses simply cannot afford to have major interruptions with computer
issues. Change, if any, would have to be gradual so as not to interrupt
the normal course of business. I could go on but enough said.
Conclusion
We'll the case for the value in Microsoft is quite clear. The stock is selling very cheap. I like to say it's like buying a bond paying 12.5% interesting, whose coupons will likely increase in the future. I believe the company has numerous competitive advantages, but I wouldn't want to be lulled to sleep. Technology is constantly changing and things like cloud computing will change things no doubt.
In
the case of Microsoft, management is very shareholder friendly with current
dividends are running at 2.5% and the company is buying back 4% or better of
the share outstanding. I know David Einhorn is calling for the CEO's head
because he wants to make a quick buck. Many shareholders are frustrated
with the stagnant stock price but the the underlying performance of the company
has been good. The P/E has gone from 50 to the current 8 times, which
means despite the flat stock price the company has performed very, very well
over the past decade. What more does he want the company to do? All
they can do is keep buying back the cheap shares and growing the business as
they have with little to no capital. Management can't make people buy the
shares.
I
think if you gave a MBA student the last ten years of financial statements and
removed the name "Microsoft" from them all and asked for an appraisal
of the value of the company, they would all conclude the company is worth much
more than the current price. It's interesting how once you put the name
Microsoft out there the company gets an undeserved discount.
If I
could get one final dig in. Why would one waste time on such a difficult
and risky investment like PBN when a Free Cash Flow machine like MSFT is
available at a reasonable price? The answer is mental bias that believe
risk equals return (and overconfidence). It's why people buy lottery
tickets... what my brother calls a tax on the mathematically incompetent.
Investing
isn't difficult, but thinking clearly is. Thinking clearly is far, far
more difficult that you realize. You likely disagree, thus proving my
point. If you disagree, your probably the type of person who always has
the right answer. Anyway, enough for now.
Value Chain Analysis of Microsoft
Microsoft Corporation has been known to have an
efficient value chain and offering the customer great value with its products.
A value chain assists in creating competitive advantage, and this could be
achieved in different ways. The organization has to place itself in a
competitive position fist. The competitive position is a dynamic process, a
“process rendered even potentially more dynamic by the drivers underlying the
‘new economy’”
Demand Chain and Supply Chain
•
The value
chain which consists of the demand chain and the supply chain is what drives a
company.
•
The supply
chain is focused more on reducing costs, and the demand chain is leaning more
towards the needs of the customer.
•
Microsoft
Corporation considers that for consumer goods manufacturers, the key to
profitable growth is to evolve the enterprise into a demand-driven supply
network, moving from a "push" method of moving product, which is
based on incomplete or inaccurate demand information, to a "pull"
method, which is based on quick response to real-time demand signals.
•
Supply chain
management solutions from Microsoft and its partner network addresses the
realities of today's complex global supply chains and provide the needed
foundation on which to transform and improve supply chains, moving them into
more demand-driven models (Microsoft.com, 2011).
It is better to have an effective value chain rather
than an efficient value chain, and in order to achieve that organizations need
to be flexible. Microsoft is a flexible and dynamic organization which adapts
to changes in the industry, economic situations, customer demands, wants and
needs. Microsoft is a competitive company because it has a solid strategy and
it realizes that the most important factor is change and adaptability in its
supply chain management as well as in its demand chain management.
Demand Chain and Supply Chain
Cont’d
•
The demand
chain of a corporation allows it to create a clear vision of future demand and
to align all supplies and sales processes around that vision.
•
Microsoft
Corporation is able to support organizations in creating realistic and
achievable sales budgets, building reliable sales forecasts from detailed
market intelligence, managing promotions effectively, and establishing optimal
inventory levels for a maximum return on investment at stores and distribution
centers across the value chain.
•
There are
several value drivers for Microsoft Corporation, but cloud computing is one
area where customers and partners are able to take advantage and use this
technology.
Consumer driven planning at Microsoft can help
companies:
• Eliminate
out-of-stock conditions.
• Reduce
safety stocks and remainders.
• Decrease
stock levels and inventory costs.
• Cut
unnecessarily long lead times.
• Improve
promotion effectiveness.
• Increase
customer service.
• Drive
down costs.
How To Eliminate Waste in the
Value Chain
At Microsoft, the company is relying on feedback from
customers and partners. Through surveys the company is able to figure out the
satisfaction and trends that customers desire. Paying close attention to the
needs of its customers and partners makes it possible for it to deliver better
products, programs, and services.
From the product satisfaction surveys, online feedback
forms and research forums the customers and partners provide useful information
and insights that have a direct effect on Microsoft business processes,
products, programs, and services, and product design.
The Effectiveness of the Value
Chain
To have an efficient and improved supply chain,
companies need to be able to work across multiple systems with a common
interface to overview the entire enterprise. Microsoft has the ability to leverage a
collaborative environment across departments and supply chain partners to
enable both formal and informal collaboration. It is important for the company to respond
quickly to changes in the supply or demand that are of a short period only.
For a complete and effective value chain, the company
maintains a relationship between customers, vendors, and suppliers, which are
the external partners of the supply chain. It also needs to adapt to changes in
the value chain and market conditions or else it will not be as competitive.
Value Chain Components
•
Microsoft’s
supply chain platform provides the capabilities that consumer goods companies
need to improve supply chain performance while leveraging current IT
investments in the most effective way.
•
The ability
to provide a single platform for supply chain performance by role, with KPIs
and metrics linked throughout the organization, and an ability to drill into
root cause analysis and understand deviations.
•
The ability
to support structured and unstructured collaboration with partners—that is,
suppliers, distributors, and customers.
•
The ability
to present all this to the user in a role-based, exception-based workbench that
extends the reach of supply chain data across the entire organization, with the
familiar look and feel of Microsoft tools.
•
The ability
to support real-time, transactional visibility across systems and a
heterogeneous IT landscape, including capturing and integrating “real-time”
events in the physical layer of the supply chain.
•
Over the
years Microsoft has continually created innovative technology products that
have transformed the way people work, learn, play, and communicate.
•
In the
product development process the company is interested and is considering the
feedback of its partners and customer in delivering and building value into
every product they make.
According to Combs and Walker (2009) the Microsoft
supply chain platform provides the capabilities that consumer goods companies
need to improve supply chain performance while leveraging current IT
investments in the most effective way. These are some of the value chain
components.
Competitive Advantage My Self
I was the recipient of a full scholarship from
the STMT Trisakti, other than that I have a good academic record. And in High School I was a acceleration student.
As the recipient of a full scholarship I was often
invited to take
part in the promotion and training of STMT
Trisakti. In these activities I learned a lot about public
speaking and teamwork. Other than that, not long ago I was involved as a
committee of the
"SMART FC" held by
the STMT Trisakti
as Official.
Other than that I had
attended extracurricular scientific
work, and I was quite active during the
organization.
References
