Group Case Analysis

November 20, 2015

Paul Balcita
David Hatfield
Houston Pittman
Robert Tompkins
Kelsey Gayraud

Table of Contents

Executive Summary

Mission & Vision Statement

Strategic and Financial Objectives

Driving Forces

Industry Key Success Factors

Competitive Analysis

Competitive Strategy

12

Internal Analysis

13

External Analysis

17

Financial Analysis

21

Major Issues, Presentation and Analysis of Alternatives,

& Recommendation

26

References

42

Executive Summary
Microsoft has very little control over the market share for mobile phones. Microsoft has limited
direction to where it can go, either they grow and expand in the phone market or retract from the
phone market altogether. Some sources say that the Windows phone has the potential to have a
worldwide market share of 14.1% by 2019. Microsoft has enough capital and resources to
accomplish the task of gaining a reasonable share in the mobile phone market.
Microsoft Office 365, a subscription based option for accessing Microsoft Office with additional
features of cloud storage and Skype, had a growth of subscribers of 30% in the last quarter of
2014. Microsoft can use the growing mobile industry and marketing promotions to pursue two
alternatives for success. Microsoft should allow users to marginally increase the amount of
devices with accessibility in order to fit customer needs. Also, Microsoft should launch an
advertising campaign to spread awareness of Office 365.
Microsoft is not a producer of its own hardware, thus it has a weakness of dependence on
hardware manufacturers. They do already have numerous alliance, manufacturing, and
distribution partners across the globe, making it easy for them to continue outsourcing their
hardware production. Microsoft as a manufacturer of their own products believes they can design
their products now and in the future, which will set them apart from the competition. Also, they
plan to increase efficiency and reduce cost in manufacturing with cloud computing devices.
Microsoft must choose a point in time to discontinue services for outdated operating systems.
Meaning Microsoft must choose a date at which time automatic updates, technical assistance,
and Microsoft security essentials will not be available. The technology industry is always
evolving. It could be argued that support is no longer necessary on outdated operating systems.
It is essential to gain new users with attractive new operating systems, but it is also important to
keep existing users by providing updates and continued support.
Microsofts CEO, Satya Nadella, has recently given the company a new approach to security.
Microsoft has developed a new security platform that exceeds expectations. New hardware and
software security technologies provide outstanding protection for their customers. Microsoft has
also developed a security platform that helps an individual detect and respond to successful
cyber-attacks. Microsoft has now become the industry leader with their operating system
security.

Mission and Vision - Kelsey Gayraud

Microsofts official website provides three statements to summarize what they see for their
company. What they call their mission, strategy, and ambitions are listed as follows:
Our Mission
Empower every person and every organization on the planet to achieve more
Our Strategy
Build best-in-class platforms and productivity services for a mobile-first, cloud-first world
Our Ambitions
Reinvent productivity & business processes, build the intelligent cloud platform, and create more
personal computing (Ref 23)
The purpose of a companys mission statement is to convey how they will get where they
eventually would like to be as a business. Microsofts mission statement does exactly this, saying
they want to help achieve more through empowerment. On the other hand, a vision statement
should communicate where the company sees itself in the future. A specific vision statement isnt
provided, however their strategy and ambitions fulfill what a vision would. Together, both
statements effectively communicate that they want to be best-in-class in the future of
productivity, business processes, and personal computing.

Strategic Objectives - Kelsey Gayraud

Microsoft is a well-established corporation with the knowledge and resources to achieve any
reasonable objective. To remain ambitious, management has come up with numerous strategic
and financial objectives.
Strategic Objectives
1.
Establishing our Windows platform across the PC, tablet, phone, server, and cloud to
drive a thriving ecosystem of developers, unify the cross-device user experience, and increase
agility when bringing new advances to market (Ref 24).
As a software company, it is imperative that Microsoft sustain demand for their specific product.
By developing its own tablet, phone, cloud, etc., they are creating a motive to purchase their
products by showcasing one unified system for all aspects of the users lives.
2.
Delivering new high-value experiences with improvements in how people learn, work,
play, and interact with one another (Ref 24).
Being an innovative company is vital in the software industry. Competition is ruthless, which
makes staying ahead one of the most central strategic objectives of anyone in the industry.
3.
To be the worlds #1 provider of innovative technology solutions that help realize the
full potential of its diverse customers and partners around the world (Ref 25).
Microsoft places a high degree of importance on diversity within its company. They seem to
recognize the benefit of hiring employees with different backgrounds that can each provide a
unique skillset and mindset to help achieve the companys goals.
4. Building and running cloud-based services in ways that unleash new experiences and
opportunities for businesses and individuals (Ref 24).
All services using the cloud are seen as the wave of the future. Microsoft is investing many
resources into cloud-based services in hopes of becoming a leader in this emerging market.
5.

Eradicate Windows XP; replace with newer Windows/Office versions (Ref 26)

Perhaps a more specific strategic objective, but nonetheless important to the overall direction of
the company. Choosing to stop support of outdated software frees up resources for research and
development, as well as allows for increased focus on future innovations.

Financial Objectives - Kelsey Gayraud

Official transcripts of conference calls between Microsofts chief executive officer Satya
Nadella, chief financial officer Amy Hood, chief accounting officer Frank Brod, and deputy
general counsel John Seethoff reveal the following financial objectives for the company:
1. To earn $20 billion in commercial cloud revenue in fiscal year 18
Specific financial goals such as this help the company focus on ensuring necessary steps are
being taken to meet the needs of their customers and maximize revenues.
2. Keep cost of goods sold between $9.7 and $9.9 billion
A companys financial health greatly benefits from keeping a constant check on financial
resources spent on materials and labor. Reducing or maintaining estimated costs should always
be included in a companys objectives.
3. Increase licensing revenues from $3.4 billion to $3.6 billion
Microsofts goal of increasing licensing revenues stems from their push of Office 365
subscriptions.
4. Increase computer and gaming hardware revenue from $2.0 billion to $2.1 billion
This financial objective mainly reflects the companys hopes for the newly-launched Surface Pro
3, as well as the existing Xbox console.
5. Increase phone hardware revenue to $900 million
Microsoft has made the business decision to update and refresh their approach to the cellular
phone market. This investment is expected to increase more in future years, however they have
made it a financial objective for some growth in the fiscal year 16.

Driving Forces - Kelsey Gayraud

Changes in how products are used

For any software/technology company, how customers use their products is constantly evolving.
For example, uses for cell phones have drastically changed in just a few years. A phone that
simply makes ingoing and outgoing calls is no longer sufficient. The market demands devices
that far surpass those sold even just a couple years ago. This is true of most mobile electronic
devices, such as tablets and personal computers. It is vital that a company with such a presence
like Microsoft remain aware of these changes and continue to provide desirable products.

Market innovation

Every product or service Microsoft offers serves a rapidly changing market. Software has to have
innovative features, gaming hardware must boast impressive graphics, devices must be attractive
and function smoothly; everything Microsoft provides must keep up with the evolving demands
of its customers.

Entry of major firms

With such an established software market, it is unlikely a new firm will pose a major threat.
However, Microsoft has to remain innovative and relevant to ward off potential threats.

Changes in societal concerns

With increased consciousness of diversity, environmental impact, product safety, etc. it is

important to modify aspects of the company to coincide with the changing concerns of
customers.

Technological change

Similar to the effects of market innovation, it is vital to Microsofts survival that every product or
service it offers keep up or surpass technology thats already available.

Market shifts

Sometimes the demands from the overall market changes, such as the shift from standardized
products to more differentiated products. It is important to recognize these changes in the market
and adjust offerings accordingly.

Changes in cost

If a supplier hikes the price of an important component of a best-selling product, that can have a
significant impact on the company. A decision would have to then be made to either switch
suppliers, raise the sell price of the product, or eat the extra costs.

Key Success Factors of the Software Industry - Robert Tompkins

Technology-related:
Undertaking technical research and development
Access to latest available and most efficient technology and techniques
Software companies need to spend large sums of money on their research and development
departments in order to release more innovative products to a much broader customer base. High
quality research and development is important because it allows these companies to gain a
competitive advantage over their competitors in that aspect. Successful software developers are
able to take care of their customers by ensuring their employees use industry best practices,
which includes bug trafficking, efficient coding, and thorough stability testing. In 2013,
Microsoft spent $10.4 billion on their research and development, which is 13.4% of their revenue
(Ref 2). Because of this, Microsoft had a 30.1% share of the software market in that year (Ref
4). This is the perfect example of how allocating part of the budget towards research and
development can allow a software company to be successful in their industry (Ref 1).
Manufacturing-related:
Access to highly skilled workforce
Product advantage
Product concept and design
Successful software companies recruit very skillful employees to their firms in order to become
more innovative. Companies have access to the creative minds of these employees and can
implement various ideas and designs into their products. As of 2015, Microsoft has over 118,000
employees (Ref 5). Product superiority and differentiation are key in design and advantage. A
high quality product with high value to the customers allows a company to be more attractive in
the market and gain customers. It is important for software companies to have a clear target
market and positioning strategy. In a competitive market, such as the software market,
companies need to have specific goals and be able to implement appropriate strategies to reach
these goals. For a company like Microsoft, it starts with designing a product that is superior to
that of the competitors, and they can use their skillful employees to do exactly that (Ref 1, 2).

Distribution-related:
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 Organizational effectiveness
Project resources
In order to function effectively, software companies need cooperation and interaction between
internal cross-functional groups and external groups. External groups include the customers,
users, suppliers, and distributors of the company. Financial and tangible resources must be
readily available and allocated sufficiently between departments for a company to operate
efficiently (Ref 2).
Marketing-related:
Effective marketing
Having a high profile in the market
Market knowledge
In order for customers to find out about a product, effective marketing and advertising is
necessary for any company. Software publishers need to be able to present their own products in
terms that are more attractive to their customers. Customer needs are key when designing
advertisements. Companies want to design their products to fit the needs of customers, so
advertising specific features about a product can determine whether a customer decides to buy
their product or that of a competitor. Having a high profile in the market is important because it
makes the company look more attractive to investors, especially if there is room for growth. As
of May 2015, Microsoft is the second most valuable brand in the world, trailing Apple, with a
market cap of $340.8 billion (Ref 6). In order to gain knowledge of the market, internal and
external consultants to a company perform preliminary market assessments and technical
appraisals, detailed market studies, and thorough financial analysis. This allows them to prepare
for any changes that can occur within the software industry (Ref 1, 2).

Other:
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 Protection of patents
Risk analysis
Heavyweight teams and seniority of project manager and top management support
When an employee or manager comes up with a brilliant idea or a new piece of technology,
software companies want to receive a patent on it. The patent protects their idea or invention
from being copied by competitors and allows a company to maintain their competitive
advantage. In 2014, Microsoft earned 2,829 patents, which was fifth most among all companies
for the year. For one product alone, Microsoft earned nearly 600 patents (Ref 7). This shows
how secure they keep their intellectual property. Various consultants can examine a company or
market and determine the risks involved. This allows a company to implement controls where
necessary in order to moderate their risks. Management needs to be aware of the risks and
require full time team members and project managers, who are typically senior managers, to
ensure the controls are working and strategies are being executed as effectively as possible (Ref
2).

Competitive Analysis Paul Balcita

NAICS: 511210 - Software Publishers

This industry comprises establishments primarily engaged in computer software publishing or
publishing and reproduction. Establishments in this industry carry out operations necessary for
producing and distributing computer software, such as designing, providing documentation,
assisting in installation, and providing support services to software purchasers. These
establishments may design, develop, and publish, or publish only.
Threat of New Entrants
The threat of new entrants is relatively weak in the software industry, but can easily be turned
into a strong force if software technology shifts to a rapidly growing period. However,
significant barriers to entry exist in the industry.
Patents of existing competitors make it difficult for new entrants because ideas and functions of
the new entrant may already be legally patented, preventing the new entrant from legally
releasing their product.
The high cost of research and development is necessary in order to innovate new technology and
ideas not already patented. Research and development also contributes to finding lower cost or
differentiation methods in order for the new entrant to successfully compete in the market.
The smaller economies of scale for new competitors results in higher costs for the new entrant.
Existing competitors in the software industry already have higher economies of scale, allowing
them to achieve lower costs.
Brand loyalty to existing competitors makes it hard for a new entrant to gain customers, which
results in lower sales. Not achieving sales in conjunction with the higher costs due to a lower
economies of scale makes it difficult to turn out a profit.
The learning curve in the software industry also makes it difficult for new entrants to do well in
the industry. Technology is constantly changing in the software industry. New entrants must learn
what is prevalent at the time or figure out how to innovate a new idea. New technology creates
countless combinations and possibilities for advances.
Microsoft currently is one of the largest software developers. High amounts of sales allow
Microsoft to continue to research and develop innovative technology as well as enter new
markets. Microsoft also boasts a high economy of scale, resulting in lower costs. Microsoft is
also the primary publisher of almost all PC Operating Systems with a high brand loyalty.

Threat of Substitutes
Threat of substitute is relatively weak in the software industry, mainly due to how integral
software technology is to the world.

 Substitutes in the software industry include other forms of entertainment such as movies, music,
games, and books. However, the aforementioned substitutes are often used in conjunction with or
even on developed software. Other substitutes include pen and paper, which is not nearly as
convenient or easily accessible as things such as word processing or accounting software.
Even if the consumer does not use the substitutes in conjunction with software, the consumer has
probably already bought the necessary hardware in order to operate the software, which is
usually not something the customer will buy without taking into consideration their financial
position. This results in a high cost of switching, lowering the threat of substitutes to negligible
levels.
Microsoft has already integrated many of their substitutes into its software, such as Netflix and
Spotify, making the threat of substitute a weak force against them.
Rivalry within the Industry
Rivalry amongst the software industry is not as prevalent of a force as one might think in the
software industry due to a number of factors. However, it is still probably one of the strongest
forces in the software industry.
The large industry size of the software development industry means a large number of software
developers are competing for the same customers and resources. Brand loyalty also makes it
harder for software developers to gain existing consumers.
Despite this, the software development industry has not slowed in growth, allowing revenues to
continue to grow. This allows competitors in the software development industry to grow without
stealing market share from other competitors.
There is also a low amount of exit barriers in the software development industry, allowing
unsuccessful competitors to easily leave the industry. This makes things easier on existing
competitors that are allowed to stay in the industry.
Microsoft is at the top of software publishers, giving them a comfortable position in the rivalry
amongst software publishers. Microsoft continues to hold a large market share in the industry
while posting sizable revenues.

Bargaining Power of Suppliers

The bargaining power of suppliers is fairly weak due to the low cost of switching suppliers.
There are a large number of suppliers that supply the same thing. There are large numbers of
suppliers around the globe and Microsoft is the biggest customer in terms of purchase volume for

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the majority of its suppliers. Moreover, supplier switching cost is low for Microsoft for the
majority of its components and most of the suppliers do not provide unique set of products and
services. (Ref 19)
The aforementioned items are also fairly common items and are not in short supply, diminishing
the power of the supplier.
Suppliers are more likely to supply a competitor with a larger size and brand recognition. This
gives the supplier bargaining power over smaller competitors.
All supplies that Microsoft needs, such as blank media and processors, are widely available from
a large number of firms. Microsoft is also one of the biggest software publishers with very
significant brand recognition. Suppliers are also more inclined to sell to Microsoft due to
Microsofts high volume of purchases.
Bargaining Power of Buyers
The bargaining power of buyers is low due to how widespread software technology is in the
world today.
Most retailers such as Wal-Mart have realized the necessity to carry software products or
products that contain software (ex. laptops). Buyers should want to capitalize on the need for
technology.
Microsoft software is on nearly all PCs and laptops in which buyers buy, thus the bargaining
power of buyers is weak for Microsoft. Microsoft has had deals with almost every major PC
company (buyers in this instance) to include a copy of the latest Windows version as part of the
cost of a pre-built PC. This has become expected from people buying non-Apple computers and
if a buyer was to decide not to include this, it would probably lead to negative repercussions.
(Ref 20)

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Competitive Strategy - Robert Tompkins

Microsoft incorporates a competitive strategy of broad differentiation. Some of the
characteristics of this strategy are:

Broad range of buyers

Fulfilling diverse needs of target markets
Brand loyalty
Excellent customer service
Continuous product improvement and innovation.
Being a popular brand around the world, Microsoft has to appeal to a broad range of buyers.
They participate in various markets around the world. These markets include computer software,
tablets, laptops, desktops, video game consoles, and cell phones. Because of the participation in
various markets, Microsoft needs to be aware of customer needs for all of the products. By
paying careful attention to customer feedback and reviews of products of competitors, Microsoft
can design their products to appeal to potential customers and take business away from their
competitors. If customers are pleased with the product Microsoft is putting out, they can develop
brand loyalty towards Microsoft. When customers have brand loyalty, it is difficult for other
companies to lure them away from their preferred brand. Factors such as cost, quality, and
customer service, among others, allow a company to maintain their competitive advantage.
Having excellent customer service means consultants are available whenever a customer may
need assistance in downloading, updating, or troubleshooting a product. These consultants must
be able to effectively guide the customer to a solution in a timely manner. Microsoft provides
customer service through a telephone service or through their website. The company website
provides various ways for a customer to search for the support they need. The search bar and
Contact Us menu provides customers with the ability to quickly search the exact support they
need. Once the products are sold, continuous improvement and innovation is necessary.
Microsoft does a great job of updating their products. Services such as Microsoft Office,
Windows, and Xbox Live are updated at least once a year to accommodate for changes in
consumer needs. With the broad differentiation strategy, Microsoft is able to maintain their
competitive advantage in the software industry (Ref 8).

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Internal Analysis Houston Pittman

Strengths
1. Brand loyalty:
Over the years, Microsoft has been the leading OS and software provider, which resulted in
more than 90% market share for PC OS. This shows the Microsoft is the most relatable OS
brand on the market. Other than the person going to purchase an Apple computer, the likelihood
of having a Microsoft OS is almost a certainty. Most of us grew up using its easy to use OS, are
familiar with it and will keep using it. Few other brands are capable to compete with Microsoft
for this reason. The familiarity of the Microsoft OS product can also be considered one of the
companys best advantages. The ease of use of the product combined with its reputation allow it
to succeed easily over other operating systems. According to Jurevicius, Even open source OS,
which are completely free and well suited to use for common user, find it hard to attract users.
Its a known fact that people are resistant to change and this is a prime example. As long as
Microsoft and continues to stay strong in the court of public opinion, it will continue to thrive.
(Ref 12)
2. Brand reputation:
According to Interbrand, Microsofts brand is the 5th most valuable brand in the world, valued
at $ 57.8 billion. The reputation of Microsoft speaks for itself. Coming in at the $57.8 billion its
reputation is far above any other competitor in the operating system development industry.
Microsofts brand is known worldwide and the company has a good track record for its products.
Forbes listed the corporation as the 7th most reputable business in the world. Brand reputation
leads to higher sales and greater market share. Microsoft has been the front running of
developing operating systems since they existed and by not only being the first but also being the
best they can continue to have a powerful reputation. (Ref 12)
3. Easy to use software:
Windows OS and Office software products are so popular not just because Microsoft has great
monopolistic power, strong distribution channels and good brand reputation but also because its
products are of great quality and really easy to use. By constantly developing its operating
systems and the other software products it offers, Microsoft has done a great job of keeping them
user friendly. This strength is one of the many key reasons Microsoft dominates the operating
systems markets. Other operating systems such as Linux and Fedora are not as user friendly
which allow the typical user to not think twice about using a Windows operating system. (Ref 11,
12)

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4. Strong distribution channels:

The company works with all the major computer hardware producers such as Lenovo, Dell,
Toshiba and Samsung and major computer retailers to make sure computers would be sold with
already pre-installed Windows software. By dominating the distribution system Microsoft has
thrived. Other than Apple, Microsofts main competitor, almost every computer on the market
has a Windows operating system. Of course you have niche markets with tech savvy individuals
that look to other operating systems but as far as the overall market is concerned will constantly
see the Windows operating system on the majority of computers sold. (Ref 12)
5. Robust financial performance:
Microsoft grew its revenues by 20% from 2008 to 2012 and holds more than $63 billion of cash
and cash equivalents that can be used for acquisitions and substantial investments into R&D.
Microsofts financial department has continued to thrive over the past few years. By continuing
to develop their operating systems and other products Microsoft has managed to put out
consistent financial figures which will allow them to continually invest capital in numerous areas
to continue to develop the Microsoft brand. (Ref 12)
6. Acquisition of Skype:
Although getting away from the operating system focus a bit, the acquisition of Skype was huge
for Microsoft. With such a huge clientele they will be able to get more involved in the online
advertising market. Skype has almost 300 million users currently which allows Microsoft to
expand the brand image and advertise more through skype. (Ref 12)

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Weaknesses
1. Poor acquisitions and investments:
Few of Microsofts acquisitions were successful and brought not just revenues and products but
new skills and competencies to the company. Through the years Microsoft has made a lot of
good acquisitions that have allowed them to develop and grow. As far as operating systems go,
Microsoft has made minimal efforts to acquire other competitors. The monopolistic market has
allowed Microsoft to be the dominant force. Outside of the operating systems aspect, Microsoft
has acquired some questionable companies. Massive, LinkExchange, WebTV, Danger are just
few examples of multimillion acquisitions made by Microsoft but soon shut down or divested.
Although these acquisitions didnt work out the best for Microsoft, the stronghold on the OS
market allowed the overall company to thrive. (Ref 9, 12)
2. Dependence on hardware manufacturers:
Manufacturers such as Samsung for example have been developing in house hardware and
software for years. Microsoft being the software powerhouse that they are has never invested in
the hardware side of the business. This is a disadvantage as they could custom tailor the software
to the hardware and vice versa. According to Jurevicius, Microsoft is a giant software
corporation but it does not produce its own hardware and depends on computer hardware
manufacturers to develop products that run Windows OS. If cheap and popular alternative OS
would appear, hardware manufacturers may simply choose the alternative and Microsoft could
do little to change the situation. While I dont agree that the hardware manufacturers would
ditch Microsoft, it is plausible and the dependence on others for hardware is a disadvantage the
company. (Ref 12)
3. Criticism over security flaws:
With the recent cyber breach and cyber security issues with many companies Windows has not
been an exception. Windows OS, the main Microsoft product has been heavily criticized for
being so weak against various viruses attacks. Compared to other OS, Windows is the least
protected against such attacks. Apples operating systems through the years have had a much
better reputation of protecting from external attacks. This has been one of the major flaws in
Microsofts operating systems through the years. The company has managed to fix a good
portion of these flaws and over time the newly developed operating systems have been more
effective at stopping cyber-attacks. (Ref 12)

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4. Mature PC markets:
The evolution of technology is rapidly growing and Microsoft hasnt kept up in some areas of
the evolvement. Tablet PCs and smartphones are the most rapidly growing technology markets
and Microsoft has been lagging in this sector. Only recently has Microsoft entered the mobile
technology sector and still heavily depends on its OS and software sales for standalone and
laptop computers. The market for these products has matured and Microsoft will find it harder to
grow revenues in these sectors. The fact that Microsoft doesnt develop hardware in house has
hurt them in the developing technology market. With further R&D and strategic partnerships this
is a problem Microsoft can fix in the future. (Ref 11, 12)
5. Slow to innovate:
Relating to the point above about the mature PC markets, Microsoft hasnt keep up with the rapid
pace of technology in the industry. Entering the tablet market at a later date than most, Microsoft
has had trouble keeping up with the evolution of operating systems on Mobile devices.
Microsoft has huge R&D resources and great position to enter new markets with innovative
products but constantly failed to do so. It had an opportunity to be the first player in online
advertising but missed the opportunity. Its entrance to mobile OS was also too late, while Google
and Apple captured the market share. This is a huge weakness of Microsoft and will require
attention as the mobile device market is growing, and the PC market will eventually shrink as
technology evolves. (Ref 10, 12)

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External Analysis Houston Pittman

Opportunities
1. Cloud based services:
Cloud services are rapidly growing worldwide. As data increases so does the need for storage
and hardware is becoming less popular. Companies are offing cloud storage rapidly and people
are diving into the concept head first. The option to have all documents in one space for a few
dollars a month is a phenomenal deal. Microsoft currently offers Microsoft Office 365 with
limited free cloud storage. This is a huge opportunity for Microsoft to grow if they can
differentiate their services from others. (Ref 12)
2. Mobile advertising:
Mobile advertising markets are expected to grow in double digits over the next few years and
Microsoft has a great opportunity to tap into these markets with its mobile OS. This is a huge
opportunity for Microsoft to grow their products. With the mobile market growing advertising is
as well and will allow companies to market their products to everyone with a mobile devices.
Acquisitions such as Skype will allow Microsoft to grow their mobile advertising market and
will bring more profit to the company. Not only can they sell advertising slots to an almost
infinite amount of companies, they can also grow their own product by advertising new features
of their operating systems as well as other new products. (Ref 10, 12)
3. Mobile device industry:
The mobile device industry is booming. Googles operating systems paired with Samsung
devices and Apples iPhones are currently the top producers in the industry. Smartphones and
tablets markets will grow steadily over the next few years and Microsoft could exploit this
opportunity by introducing more of its own tablets and a new company phone. Although having
a bit of a late entry into the market, with a strong push Microsoft could develop their tablet and
mobile phone markets with strategic alliances. It will be impossible to take Samsung away from
Google, but if a 3rd mobile devices manufacturer comes to challenge the big two in the industry,
Microsoft could team with them to develop the ultimate smartphone and tablet combination.
(Ref 12)

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4. Growth through acquisitions:

Microsoft has managed to acquire many companies through the years. Some acquisitions have
been a huge success such as Skype and some that didnt go as well such as Massive. With a
huge reserve of cash Microsoft could start acquiring new startups that would bring new
technology, skills and competences to the business. By making smart acquisitions Microsoft can
continue to grow and have the opportunity to expand to a larger company than it already is.
(Ref 12)
5. Developing Innovative Products
Microsoft has an opportunity to develop their products further with the advancement of
technology. Over time Microsoft had developed their products consistently and have worked
well to make them more user friendly yet more interactive. Unlike Apple products, Microsoft
allows more flexibility in the way the user operates the system. If Microsoft continues this path
and evolves with technology they gain more market share on the PC OS market.

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Threats
1. Intense competition in software products:
Microsoft is more than ever on the pressure to introduce successful OS both in PC and mobile
markets as such competitors like Google and Apple have already established positions. Apple
has been a constant head to head competitor through the years with Microsoft but as technology
has evolved more competition has risen to challenge the two big companies. Google has begun to
evolve with their Android mobile operating software and have challenged Microsoft and Apple
continuously over the last few years. (Ref 9, 12)
2. Changing consumer needs and habits:
Customers shift from buying laptops and standalone PCs to buying smartphones and tablets,
the markets, where Microsoft has only a modest market share and may never establish itself. As
discussed in previous points, Microsoft hasnt evolved with the competition and has been lagging
in the mobile device sector of the industry. With this sector of the industry growing rapidly
Microsoft must invest capital into smartphones and tablets in order to stay relevant. Personal
Computers will likely be used for a good period of time to come in a large capacity, but the
mobile market is rapidly growing and with consumers attitudes changing Microsoft needs to
consider delving deeper into the mobile device sector. (Ref 12)
3. Open source projects:
Many new open source projects are coming to the market and some of them became quite
successful, such as new Linux OS and Open Source Office. Open source projects are free and so
they can become an alternative to expensive Microsofts products. Open source products are a
small threat to Microsofts bottom line, as they are offered at little to no cost. Unless one of these
operating systems catches on rapidly then I dont think youll see Microsoft having a terrible
issue with this and if so they would likely have the capital to acquire the company. (Ref 12)
4. Potential lawsuits:
Microsoft along with many of the other competitors in the technology industry deal with
lawsuits constantly. These lawsuits can severely weaken an organization. Microsoft must be able
to do adequately respond to potential lawsuits and handle them accordingly. Microsoft has
already been sued for many times and lost quite a few large scale lawsuits. Lawsuits are
expensive as they require time and money. And as Microsoft continues to operate more or less
the same way, there is high probability for more expensive lawsuits to come. (Ref 10, 12)

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5. Advancement in Technology
After learning a lot about Microsoft and the way they conduct business, its easy to see that they
are a magnificent company. They are one of the largest companies in the world and have a huge
market share on PC operating systems. The issue with all of this goes back to one of their
weaknesses, which is also a threat in another sense. One of Microsofts weaknesses is that the
company is slow to innovate. Microsoft has already shown that they have not been evolving at
the same rate the rest of the technology based companies have been over the last few years. The
rate of advancement in technology will continue to be a threat for Microsoft unless they learn to
innovate and move with the speed of technology.

20

Financial Analyses David Hatfield

Net Profit Margin
Year

2010

2011

2012

2013

2014

Microsoft

30.02%

33.10%

23.03%

28.08%

25.42%

Apple

21.48%

23.95%

26.67%

21.67%

21.61%

Industry

16.76%

16.83%

13.48%

15.08%

14.70%

Net Profit Margin

35
30
25
20
15
10
5
0
2010.0

2011.0
Microsoft

2012.0
Apple

2013.0

2014.0

Industry

Net profit margin, a profitability ratio, is calculated by dividing net profit by sales and multiplied
by 100 to reach a percentage. The net profit margin is intended to be a measurement of the
overall success of a firm and shows how much of each dollar earned by the company is turned
into profit. Net profit margin is an excellent metric to compare one firm to another. Its limitation
is that it should only be used to compare businesses within the same industry. (Ref 52)
Microsoft has an exceptionally high net profit margin in contrast with the industry average. The
reasoning for the near double net profit margins is that the industry average is compiled with a
few companies that consistently report low profit margins, some even reporting a negative
percentage. Comparing Microsoft with Apple Inc., a direct competitor, is a more reliable
benchmark for this analysis. It has exceeded their competitors net profit margin for four out of
the five years researched. The only year at a deficit being 2012 and it was short of their
competitor by three percent. Microsofts consistently high profit margins show that they are a
more profitable corporation that has better control over its costs, with consistent year-to-year
sales, compared to the industry and its competitors. (Ref 53)

21

Quick Ratio
Year

2010

2011

2012

2013

2014

Microsoft

1.90

2.35

2.41

2.53

2.31

Apple

1.72

1.35

1.24

1.40

0.82

Industry

1.74

1.79

1.58

1.67

1.55

Quick Ratio
3
2.5
2
1.5
1
0.5
0
2010.0

2011.0
Microsoft

2012.0
Apple

2013.0

2014.0

Industry

The quick ratio or acid-test ratio is a liquidity ratio that is calculated adding cash, marketable
securities, and accounts receivable, and then dividing that by current liabilities. The quick ratio
measures a firms ability to meet its short-term financial obligations with its most liquid assets. A
common guide is that companies with a quick ratio of greater than 1.0 can adequately meet their
short-term financial obligations. (Ref 54)
Microsoft Corporation maintained a quick ratio above or close to 2.0 for the five years from
which sample data was taken. This relatively high quick ratio demonstrates that Microsoft has
more than enough liquid assets to cover their short-term financial obligations. The competition,
for the years after 2010, reported a steady decrease enough to even bring the ratio under the
standard threshold of 1.0. This decrease could be a factor caused by several things such as too
much leverage, decrease in sales, paying bills too quickly, or collecting receivables too slowly.
Compared to the industry average Microsoft is generally more financially secure in the short
term based on the quick ratio. (Ref 55)

22

Return on Equity
Year

2010

2011

2012

2013

2014

5yr. avg.

Microsoft

43.76%

44.84%

27.43%

30.09%

26.17%

34.46%

Apple

37.16%

41.79%

42.15%

30.72%

33.70%

37.10%

Industry

31.04%

33.12%

24.72%

26.49%

30.40%

29.15%

Return on Equity
50
40
30
20
10
0
2010.0

2011.0
Microsoft

2012.0
Apple

2013.0

2014.0

Industry

Return on equity is another profitability ratio that shows, as a percentage, how much profit is
generated for each dollar of shareholders equity. The equation for return on equity is net income
divided by shareholders equity. For example using Microsofts return on equity for 2010, a
return on equity of 43.76% would mean that for every dollar of shareholders equity Microsoft
generates a profit of $0.4376. Return on equity is a measure of profitability from an investors
point of view rather than a firms. This ratio is important to investors because it can show how
efficient a firm is with the money provided to them from investors. (Ref 55)
Microsofts return on equity remains above the industry average except for the year 2014. The
decline of return on equity looks to be correlated with the industry, the competitors return on
equity declined as well. Along with the data for return on equity is a five year average of the
firms and industrys return on equity. This five year average displays a less volatile return on
equity compared to the year-to-year percentages. Investors are less likely to choose Microsoft as
a company to invest in with a declining return on equity and one that is below the industry
average. Although its return on equity may be higher than other industries Microsoft should work
on raising its return on equity back above the industry average so it is more attractive to
investors. (Ref 56, 57)
23

Inventory Turnover
Year

2010

2011

2012

2013

2014

Microsoft

17.01

14.75

13.97

13.17

11.72

Apple

52.51

70.53

112.12

83.45

57.94

Industry

22.21

24.06

29.71

28.98

22.49

Inventory Turnover
120
100
80
60
40
20
0
2010.0

2011.0
Microsoft

2012.0
Apple

2013.0

2014.0

Industry

The inventory turnover ratio is an activity ratio, it is calculated by dividing sales by finished
goods inventory. It can also be calculated by dividing cost of goods sold by average inventory.
This ratio measures how many times a companys inventory is sold and replaced. (Ref 58)
For each year of recorded data, Microsoft falls short of both the industry average and the
competition. Microsofts inventory turnover is low compare to the industry and extremely low
compare to Apple. The industry inventory turnover is inflated by Apples very high inventory
turnover rate. This is the reason why Microsofts is below the industrys average, excluding
Apple from the inventory turnover data would result in Microsoft having an average or above
average inventory turnover. (Ref 58)

24

Debt-to-Equity
Year

2010

2011

2012

2013

2014

Microsoft

0.13

0.21

0.18

0.20

0.25

0.14

0.32

0.40

0.64

Apple
Industry

0.30

0.41

0.51

Debt-to-Equity
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2010.0

2011.0
Microsoft

2012.0
Apple

2013.0

2014.0

Industry

The debt to equity ratio is a leverage ratio that is derived by dividing total debt by total
stockholders equity. The debt to equity ratio is a leverage tool that measures the amount of debt
a company holds compared to the amount of equity a company has. This ratio can show investors
how risky the company is based on how much leverage they have taken on. It is important for a
company to find its correct debt to equity ratio. Equity financing is expensive, but taking on too
much debt could lead to default if a company cannot make payments on its loans. (Ref 59)
Microsoft has a low debt to equity ratio compared to the industry average. This shows stability in
the company and that the company is less risky to invest in compared to the industry.
Information regarding Apples debt to equity is not available prior to 2013. That year Apple
issued a $17 billion bond, and the next year a $12 billion bond. These two bonds issuances
created a spike in the industrys average debt to equity ratio. Microsoft keeping their debt to
equity ratio lower and consistent may be in the best interest for shareholders, with the lower
levels of risk Microsoft can earn more consistent earnings for its investors. (Ref 60)

25

Issue #1 Microsoft OS Smartphone Market Share Houston Pittman

Microsoft has always had a stronghold on the PC operating systems market. Other than Apples
operating system that the company uses on their products exclusively, Microsoft dominates the
market like no other operating system. Microsoft has had a major issue and has been lagging
since the beginning of when it comes to the mobile market. The company has a measly 2.6%
market share worldwide and a 3.0% market share in the United States (Ref 17, 18). This has
raised a major red flag in Microsofts R&D department. With technology advancing rapidly
every day, Microsoft had been slow to innovate as stated in the weaknesses section of the SWOT
analysis. The company is at a crossroads on whether they should continue to develop and grow
the smartphone market share or cut their losses and retract from the market. There could be
several repercussions by choosing either option If the company retracts from the market they
will be solely in the PC and tablet OS market which is slightly declining due to technology
changes. In contrast, if they stay in the market it will take a lot of capital, innovation, and
marketing to gain market share on Apple and Samsung/Google. This all relates back to one of the
critical key success factors which is to be technology related by investing time in effort into
research and development. (Ref 17, 18)
According to PC World, Microsoft will gradually grow the smartphone and tablet market. A
new study released by IDC claims that Microsoft will make significant gains by 2019, boosting
the worldwide market share to 14.1% (Ref A). This would allow Microsoft to gain significant
ground on Android and iOS operating systems. In order for Microsoft to achieve this, the
company would have to differentiate their product from their competitors and form relationships
with application developers. Other sources have stated that Microsoft is giving up on the
smartphone market in particular. After acquiring Nokia in 2014, Microsoft just recently decided
to sell the company along with the Bing mapping system to ride sharing powerhouse UBER.
Microsoft CEO Satya Nadella has recently been quoted saying he wants Microsoft to focus on
what it can do well with mobile now and in the future (Ref 14). Between the IDC report and
information from Microsofts officials there are mixed signals concerning the future of
Microsofts smartphone market. Microsoft must make some swift decisions in the near future to
decide the fate of the companys smartphone market share and the direction they want to take it.
(Ref 13, 14)

26

Alternative 1 - Issue 1 Grow and Expand Smartphone Market

Microsoft has the capital, both fiscal and intellectual, to make the companys smart phone
segment grow to a new level. We dont foresee the Windows phone becoming a staple such as
the Android and iOS powered phones in the near future, but they still have a chance to make
some strong gains. The IDC report mentioned above stated that the Windows phone had the
potential to have a market share as high as 14.1% by the year 2019. If this were to occur the
Windows phone market share would increase by 500% in four years which would be a huge win
for Microsoft. If the company fixes certain weaknesses such as the lack of innovation mentioned
in the SWOT analysis, the opportunities for advancement in the market are certainly there.
(Ref 13)
Pros:
Will allow Microsoft to become a powerhouse for all forms of operating systems including
tablets, not just the PC operating systems market.
Will help Microsoft grow the companys tablet market share as well Consumers will want
smartphones and tablets alike similar to how many U.S. consumers have Apple iPhones and
iPads combinations.
Competing in this market will make Microsoft innovate and focus on their key success factors at
a higher level which will make the organization better for future technology advancement.
Cons:
Will require large amounts of capital and potential smart acquisitions of similar companies.
Will require Microsoft to shift people around in the organization and invest a lot of time and
effort into growing the market.

Alternative 2 - Issue 1 Retract from Smartphone Market

27

Microsofts CEO Satya Nadella has not shown much interest in growing the smartphone market
and has said numerous times that the company needs to focus on what it does best. This could be
a good option for Microsoft to do as well. While its a complete 180 degree turn from alternative
one, Microsoft does many things well and if they dont invest in the smartphone market it wont
hurt the organization. Being the fifth largest company in the world didnt happen overnight,
therefore it wont end overnight either. The company can invest the capital it has into improving
the PC operating systems and developing one of the best tablet operating systems on the market.
Pros:
Will allow Microsoft to have even more capital to invest in other projects, as smartphones arent
the only technology market of the future.
Will allow the company to focus on what it does well and can allow them to focus on the core
competencies at higher level.
Cons:
Will require Microsoft to sell smartphone technology and cut jobs in this sector of the company.
Could potentially lose Windows customers dedicated to the companys platform which could
affect the tablet market share.
Recommendation Alternative 1:
After discussing the issue of the smartphone market as a whole we decided that the best option
for the company would be to grow, expand, and develop the market share. The challenge the
company faced was more black and white than most; the options were limited and we viewed
this issue as more of an option A or B situation. The company can easily spend the money to
research and develop a superior phone. Once this is done, the company can market and distribute
the phone through multiple channels to get a solid path of growth started. The main goal would
be to develop a phone that could do more and be a step above the current leaders in Apple and
Samsung. This would also require Microsoft to develop and nourish its alliances with hardware
component manufacturers. The main reason we chose this option is that realistically this goal can
be accomplished. Microsoft has enough capital in all facets of the business to make a superior
product if the company puts the right professionals in the right positions and is dedicated to
developing one of the best smartphones on the market.

Issue #2 Subscription for Microsoft Office 365 Paul Balcita

Microsoft Office (which usually consists of Microsoft Word, Microsoft PowerPoint, Microsoft
Publisher, Microsoft Excel, and Microsoft Access) has been a mainstay in productivity tools for
28

the PC. In 2013, Microsoft introduced Microsoft Office 365, a subscription based option for
accessing Microsoft Office. Office 365 includes the main Microsoft applications. Along with the
main Microsoft Office applications, Office 365 includes Outlook, Microsoft OneNote, OneDrive
Cloud Storage, Skype with minutes to call mobile phones and landlines, and Microsoft Support.
Microsoft has been moving to make Office 365 the primary option for users to use Microsoft
Office. This aligns with Microsofts commitment to accessing the latest available and most
efficient technology and techniques because the convenience of cloud computing is rising and
more people are hopping on board. However, many users are still skeptical of switching to
subscription based Office 365 due to their casual use of Microsoft Office.
According to PC World, one of the main advantages of subscribing to Office 365 is that the
Office 365 Home Premium subscription can be shared across five different users and/or
devices, and the Office 365 Small Business Premium subscription enables each user to take
advantage of Office on up to five different devices simultaneously (Ref 21), rather than only
being able to install Office on one device with the standalone version. This allows Microsoft to
act on multiple industry opportunities, such as the rise of cloud based services and the mobile
industry. With the combination of being able to access Microsoft on multiple devices (in addition
to being able to store files on the OneDrive Cloud), users are able to more easily access their
files with great convenience. The rise of the mobile industry also may coincide with more people
choosing to subscribe to Office 365 in order for users to be able to access Microsoft Office on
their tablets and phones. Along with that, users will still be able to access Microsoft Office on
their computers due to Office 365 being usable on up to five devices. The convenience of Office
365 seems to have resonated with users. According to Gadget360, Office subscribers grew 30
percent to 9.2 million in the last three months of 2014 - the same period Microsoft released its
latest iPhone and iPad apps and made core features free (Ref 22)
Prices for Office 365 are currently $69.99 a year for a personal Office 365 subscription, $99.99 a
year for an Office 365 home subscription, and $150 a year for Office 365 Business Premium. All
subscriptions can be payed monthly. Being subscription based, users of Office 365 get the latest
updates as soon as they roll out. The standalone version of Microsoft Office is $149.99, can only
be installed on one device, and is not eligible for free updates. To match Office 365s ability to be
used on five devices, a user would have to pay about $750 to install the standalone version of
Microsoft Office. The user would also sacrifice up to 1 terabyte of OneDrive cloud storage and
60 monthly Skype minutes.
In order for Office 365 to continue to be a success, Microsoft must use their brand loyalty to their
advantage and establish a firm foothold in the mobile industry. More people are becoming
accustomed to having access to everything on a phone or tablet. Being able to access Microsoft
Office on mobile devices is convenient for users because most users of a mobile device probably
also have a computer in their home. Microsoft must also successfully market Office 365 to users
that would find the cost, accessibility, and update/maintenance advantages useful to them. The
main beneficiaries of Office 365 are users who are most likely to have multiple device such as

29

families, business owners, and users who travel frequently. Families often require Microsoft
Office for multiple computers or tablets that each member uses for assignments or projects.
Business owners and frequent travelers like to have their documents on multiple devices for
more accessibility. This is especially true for frequent travelers who would most likely find the
accessibility on mobile devices to be the most useful. To further increase the profitability of
Office 365, Microsoft can use the growing mobile industry and marketing promotions to pursue
two alternatives for success.

Alternative 1 - Issue 2 - Increase Devices Allowed

Microsoft should allow users to increase the amount accessibility from up to five devices for
Office 365. If a user of Office 365 reaches the five device limit, they will have to buy another
Office 365 subscription to increase the amount from five to ten, which also doubles the cost of
their subscription. Sometimes, a user doesnt need Office 365 on ten devices, but rather on seven.
Allowing a user to purchase an add-on to the subscription for a fraction of the cost would remedy
their limited access to Office 365 on the number of devices that they need.
Pros:
Adding an option to purchase the ability to use Office 365 on more than five devices can bring in
more revenue to Microsoft. As of now, some users just deal with being limited to five even if
they need more than that due to the cost of buying another subscription. If the user can purchase
the ability to use Office 365 on more than five devices, they can do that instead.
Microsoft will not have to distribute double the services offered in an Office 365 subscription if a
user has to buy two subscriptions, such as the 1 terabyte of cloud storage and the 60 monthly
Skype minutes. This will help Microsoft cut costs pertaining to those services.
Cons:
Microsoft might lose revenue from users who do not mind paying for multiple subscriptions of
Office 365.
Offering use of Office 365 on more than five devices for a fee may be seen as a cash grab by
some users. Microsoft may be pressured by users to increase the initial number of devices that
can access Office 365 up from five devices.

Alternative 2 - Issue 2 - Launch Ad Campaign for Office 365

Microsoft should launch an advertising campaign to highlight the benefits of Office 365. Ads are
everywhere. Even today, ads are becoming a common sight even on mobile devices (such as ads
on mobile apps for YouTube, Amazon, etc.). If Microsoft can effectively market Office 365, then
more people will be aware of the benefits and may even buy a subscription for themselves.

30

Microsoft should primarily advertise on TV, websites, and in stores where students often go
shopping (Staples, OfficeMax, Wal-Mart during back-to-school period, etc.).
Pros:
Microsoft is a large brand that has a large amount of capital to fund an advertising campaign
with. Microsofts advertisements will resonate with viewers simply because of how large and
well known the brand is.
Currently, Microsoft is advertising Surface Pro tablets. If Microsoft can highlight the
convenience of being able to access and use Office 365 on multiple devices including the Surface
Pro, viewers will be more inclined to buy both the Surface Pro and Office 365.
Cons:
An advertising campaign will cost money that could be used elsewhere, such as marketing things
such as Windows Phone which are critical to Microsofts future success.
Competitors may take notice of the advertisements and may try to outdo Microsoft with a
product that users would rather have.
Recommendation - Alternative 2
We decided that Microsoft can afford to launch an advertising campaign because it is the best
way to make more people aware of the benefits that Office 365 has. It is also a great time to
advertise Office 365 because of mobile devices and tablets becoming normal in the use of
workplaces and school. Since Microsofts Surface Pro tablets are one of products that Microsoft
is currently advertising, Office 365 can be advertised in conjunction with them, as they share a
mutually beneficial relationship with each other. With increased awareness of the convenience of
Office 365, sales of subscriptions should rise and also may even help the sales of the Surface Pro
tablets.

31

Issue #3 Outsourcing/Manufacturer Partnerships Robert Tompkins

One of Microsofts weaknesses is their dependence on hardware manufacturers. Microsoft does

not produce its own hardware. It has to depend on outside manufacturers to design products that
will allow Microsoft to run its Windows operating system. Outsourcing their hardware
manufacturing can be costly to a company like Microsoft because a cheaper, alternative
operating system can come about and cause hardware manufacturers to switch to this alternative.
If this situation were to arise, Microsoft would have no way of preventing it. Microsoft,
however, recently closed factories in China, stirring rumors that they will outsource even more
phone manufacturing to outside countries (Ref 29, 30). While outsourcing can reduce company
expenses, it can also lead to reduced quality. A software company does not have the opportunity
to fully monitor the controls and quality of a hardware manufacturer when production is
outsourced. It may take the company a long time to realize their product is not as superior as
they thought, which can hurt the company image (Ref 28). There are several advantages and
disadvantages to outsourcing hardware production that software companies need to evaluate
before deciding to outsource.

One of the key success factors of the software industry is the protection of patents. Any
intellectual property requires a patent because it allows a company to keep an idea as their own
and does not allow competitors to copy them in any way. Microsoft files between 2,000 and
5,000 patents per year. This amount of paperwork requires 30 full-time employees and 100 more
full-time outsourced employees, which Microsoft set up in India (Ref 27). If companies engage
in manufacturer partnerships, it can hurt the chance to get patents. If production is licensed to
third-party manufacturers, there is no control over design, style, features, marketing, and
pricing of the product. Microsoft tried designing their own tablet, the Surface, but it ultimately
failed (Ref 31). Microsoft needs to evaluate various factors in order to determine whether to
continue outsourcing and engaging in manufacturer partnerships or begin manufacturing their
own hardware.

32

Alternative 1 Issue 3 Continue Outsourcing

Microsoft can decide to continue outsourcing their hardware manufacturing. In March 2015,
Peggy Johnson, Executive Vice President of Business Development of Microsoft, announced an
expanded global partnership with Samsung. This partnership would deliver Microsoft mobile
productivity services to customers and businesses. Along with this partnership, Microsoft made
a deal with global OEM (original equipment manufacturer) Dell and various regional OEMs,
such as ones in Germany, Russia, Canada, among other countries. Johnson said this deal was
important because they address customer demand for top services by making them already
available on a device, instead of downloading separately (Ref 32). Outsourcing production to
Dell and the various regional manufacturers allows Microsoft to save capital because they are
paying for cheaper labor and other overhead costs, so they are able to sell their products at lower
prices, generating more revenues. Microsoft already has numerous alliance partners and
manufacturing and distribution partners across the globe, so it is easy for them to continue
outsourcing their hardware production (Ref 33, 34). With outsourcing, however, software
companies have to cut jobs in areas they decide to stop production. In March 2015, Microsoft
had to shut down two Chinese mobile phone factories acquired in the Nokia purchase. These
shut downs totaled accounted for 9,000 layoffs (Ref 35). In July 2015, Microsoft also cut 7,800
jobs and had a $7.6 billion write down on the Nokia phone production (Ref 36). Based on these
several scenarios, the decision to continue outsourcing is a difficult one.

Pros:
Results in lower labor/manufacturing overhead costs
Would be able to sell products at lower prices
Cons:
May be required to cut jobs/lay off employees
Limited control over production

33

Alternative 2 Issue 3 Begin Manufacturing Own Hardware

After the failure of the Surface, Microsoft has decided to reemerge in the tablet and PC market
by coming out with the Microsoft Surface Book. They are calling this the ultimate laptop.
This new product has several new features, such as a portable clipboard and detachable
keyboard. Features such as these are examples of how Microsoft is able to control the design of
a product and use it to their advantage. With the creativity of their employees and high quality
research and development, Microsoft can design products now and in the future that will set
them apart from the competition. Microsoft also believe they can bring more efficiency into the
business with cloud computing devices. Several benefits of this is reducing the cost and
complexity of running a data center and empowering employees to work across any device.
Microsofts vision for cloud computing is one consistent platform between Microsoft, the
customers, and the service providers (Ref 37, 38). Manufacturing hardware, however, would
cost more for Microsoft. It would lead to more real estate, building, maintenance, property
taxes, insurance, utilities, and other expenses, along with higher labor costs. With higher costs
comes the chance that the company may produce a product that has no guarantee of selling. This
would turn into a wasted expense (Ref 42). Selling, general, and administrative expenses were
over $10 million for the year ending on June 30, 2015 (Ref 41). Manufacturing hardware would
cause these expenses to increase. If manufacturing is done in the United States, and not in other
countries, the facilities are in compliance with many more regulations regarding labor
conditions, use and disposal of materials, right to work laws, among other things (Small
Business). The Department of Labor established the Occupational Safety and Health
Administration (OSHA) to provide standards for workplace health and safety. The Occupational
Safety and Health (OSH) Act of 1970 determined that employers responsibility is to make sure
the workplace is a safe environment (Ref 40). Microsoft reiterates the fact they comply with all
laws and regulations, including the international business, intellectual property, and anti-fraud
and anti-corruption, to name a few (Ref 39).

Pros:
Almost total control of the product from beginning to end
Opportunity to incorporate cloud services

Cons:
Can be more costly/add to SG&A expenses
More regulations to be in compliance with in the United States

34

Recommendation Alternative 1:
After careful consideration, it is better off for Microsoft to continue to outsource their hardware
production. Microsoft already has dozens of alliances and partnerships with manufacturers and
distributors around the globe, so it would be difficult to end business relationships with all of
them in favor on manufacturing hardware domestically. Microsoft also expanded global
partnerships in March by signing a deal with Dell and regional OEMs. Production facilities in
foreign countries allow Microsoft to spend less on labor and other manufacturing costs, leading
to higher revenues. There is risk of failure, which could result in huge job cuts and write downs
(Ref 35). Outsourcing also allows Microsoft to sell their products at lower prices. This is due to
the SG&A expenses being lower without inclusion of the extra manufacturing and labor costs.
Microsoft would not have to build more facilities in the United States, which would have to be in
compliance with OSHA regulations. Outsourcing makes it easier for Microsoft to maintain focus
on perfecting their software products, then incorporating it into the outsourced hardware.

35

Issue #4 When to discontinue service/support of old operating systems- Kelsey Gayraud

Discontinuing service of an outdated operating system means no more updates or technical
assistance. This not only creates a serious lack of security for anyone that uses Microsofts
software, but will also no longer be able to support downloads of new applications. However,
with such a minute number of users running outdated hardware, Microsoft sees benefit in
discontinuing their support of older software and allocating the extra resources into developing
better, updated operating systems. This could be a good business decision in response to the
companys reputation of being slow to innovate. The dilemma facing Microsoft is the backlash
from users on older operating systems. These users may feel they are being forced to spend more
money to either update their older computers or purchase a new one with a newer operating
system preloaded on it. So when is it a good time to discontinue support of a purchased product?

Alternative 1: Discontinue support after 6 years

Being that the software and technology industry is so rapidly changing, it could be argued that
support is no longer necessary on such a dated operating system. Most customers likely prefer to
run a more modern operating system and its more probable they wont wait 6 years before
replacing older hardware or software. A higher turnaround rate for software products could mean
more resources are allocated quicker towards research and development of new products.
Pros:

Faster turnaround of products could remedy Microsofts weakness as a slow innovator.

Software packages will have to be purchased more often, increasing the potential for
more revenue.

More focus can be placed on fewer products, likely improving quality.

Cons:

Customers may become upset they have to purchase expensive products more often.

Software developers have less time to create an application compatible with specific
operating systems.

36

Alternative 2 - Discontinue support after 12 years

Microsoft recently discontinued support for Windows XP after 12 years of service. In the
technology world, this is considered an extremely long time. At time of discontinuance, only
13% of users ran Windows XP. However, this small percentage represents nearly 200 million
systems (Ref 43). Most of these systems are run by businesses such as banks and doctors offices
(Ref 44).
Pros:

Businesses in possession of sensitive personal information wont have to worry about

quickly and securely transferring all data from one system to another.

Eliminating the necessity to purchase new operating systems more frequently saves
costs to customers.

Cons:

Microsoft may miss out on revenue opportunities from customers choosing not to
upgrade.

Less resources can be used to develop newer software.

Recommendation Alternative 2:
With large businesses and corporations making up such a big percentage of users, it would not be
a good business decision to distress them by requiring to update more frequently. Not only is it a
security risk to these businesses, but also extremely costly. In the software industry, it is
important not only to gain new users, but also to keep existing ones. When one system is
preferred over all others, it is more likely they will choose to purchase other devices running the
same software they know and trust. Although 12 years makes an operating system extremely
outdated, constant updates throughout that time makes it a very secure one.

37

Issue # 5 Microsoft Security Concerns David Hatfield

Microsoft historically has always been the technology leader when it comes to software systems.
The company is also the leader for security issues associated with their software. At one time its
products had far too many security vulnerabilities that Bill Gates, the companys co-founder,
ordered all Microsoft engineers to stop writing new code for a month and focus on fixing the
bugs in software they had already built (Ref. 45). Mikko Hypponen, the chief research officer for
F-secure, a Finnish security company states Theyve changed themselves from worst in class to
the best in class. Previously mentioned in the SWOT analysis, security has been a major
weakness that Microsoft has faced, it has such a negative effect that it soils the many strengths
the company possesses. Microsoft has the opportunity to capitalize on its security weaknesses
and create an industry leading security system.
Security of data and information for Microsofts clients, whether that is home, business, or cloud
services, needs to be a top priority. Improvement of security at Microsoft cannot be
accomplished by a one-time solution. As technology changes and evolves, the risk associated
with security grows in sync with the growth in system development (Ref. 46). Microsoft has
announced the building of its Cyber Defense Operations Center, a facility that will bring 24/7
monitoring to possible security threats. Bret Arsenault, Chief Information Security Officer at
Microsoft, stated, Microsoft invests more than a billion dollars in security research and
development, every year (Ref. 47).
Microsoft also faces security issues with their operating systems on global terms. For example,
the Stuxnet worm, an attack used against Irans nuclear facilities in 2010, relied on a critical
vulnerability in Windows. It was under the general understanding that Microsoft had fixed this
vulnerability in 2010 after the attack, but Microsoft just issued a patch for this flaw in 2015. To
limit government access to customer information Microsoft has given a challenge to the U.S.
authorities to obtain the emails of a customer whose data was stored on a server in Dublin,
Ireland. Microsoft argues if the U.S. government were able to succeed it would allow other
countries to be able to seize data of U.S. citizens (Ref. 48). Microsoft has been criticized for not
reacting fast enough to security issues. In 2014 researchers at Google discovered that Microsoft
took more than 90 days to fix several serious bugs in its Windows software. (Ref. 46)

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Alternative 1 Issue 5 - Proactive Perspective of Security

Microsoft should focus on security issues that will create a product that has strong security
standards that will prevent attacks and protect its users. Examples of proactive security measures
are described as follows. Windows 10s Microsoft Passport and Windows Hello use strong
biometrics to eliminate the need for passwords. Credential Guard protects from pass the hash
attacks, where hackers use one account to gain access to the credentials of another user, with
new virtualization technology. Windows 10 Device Guard uses a combination of hardware and
software features to prevent the installation of untrusted or malicious code. Windows Defender
provides built in protection for all Windows 10 users. Office 365s Advanced Threat Protection
helps protect against users inadvertently downloading and installing untrusted software (Ref.
47). Spending $1 billion per year on security research and development may not be a suitable
amount in relation to company growth and the accompanying security risk growth. If Microsoft
focused more of its R&D towards creating software systems that were less problematic, more
protected, and which require less patching then the company would be proactively solving its
security issues.
Pros:

Customers would feel more secure with their personal information using Microsofts
operating systems

Microsofts products would be more attractive to customers, increasing sales and brand
loyalty

Cons:

Microsoft would incur much higher costs of research and development

There will still be new attacks, threats, and technologies so even being proactive is not
enough

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Alternative 2 Issue 5 - Reactive Perspective of Security

Microsofts security problems are handled in a reactive way. Microsoft fixes security issues
brought to their attention by a competitor, cyber threat, or by its own research. Google believes
that changes it has made, will improve industry response times to security bugs, but will result
in softer landings for bugs marginally over deadline (Ref. 51). Googles researchers are finding
security problems and bugs in operating systems of Microsoft and Apple, and publicizing them,
after its 90-day exploit disclosure deadline, before the companies can even fix the issues (Ref.
50). Microsofts process of fixing a bug is too time inefficient. The new Cyber Defense
Operations Center gives Microsoft access to security problems in real-time (Ref. 49). This
centralized facility runs 24/7 and has access to thousands of security professionals, data
analysts, engineers, developers, program managers, and operations specialists throughout
Microsoft to ensure rapid response and resolution to security threats. Advanced Threat
Analytics, provided with Microsoft products, is a security platform that helps an individual
detect and respond to successful attacks. Also it speeds up the response by detecting anomalous
patterns and recommends configuration changes to protect from current and future attacks (Ref.
47).
Pros:

There is a 24/7 enterprise integrated monitoring center for security threats

Security threats are handled in real-time

Cons:

The cost of running a 24/7 monitoring system is very high

Even with access to this information in real-time, researchers and engineers have to react
to the security problem and then work to fix the problem which could still be a long
process

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Recommendation Alternative 1
The first alternative, proactive prospective of security, is the best option to ensure that Microsoft
will be protecting itself and its customers from security risks. Preventative security features
instilled into Microsofts products offer the best solution to the security concerns the company
faces. Users of the operating systems reap the most benefits from a hardware and software
security platform compared to a reactive monitoring and threat analysis team. The cost of the
security hardware and software is measurable and is a direct cost to the product. The cost of
running the Cyber Defense Operations Center is a much higher cost in comparison, and is an
indirect cost. The cost cannot be attached to a unit of product. The CEO of Microsoft, Satya
Nadella, delivered a keynote speech, on November 17, 2015, about the need for a new approach
to security. In his speech he explained the change of direction for Microsoft security. He changed
the strategy the company had for security on a large level and now Microsoft security is top of
the line.

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