Microsoft Strategic Analysis

To: Satya Nadella

Subject: Executive Summary: Microsoft Competitive Position Analysis

Industry Analysis:

Microsoft traditionally the company of Windows and Office is actually competing on a lot more fronts today. With Satya
Nadella taking over as CEO [4], Microsoft is focused on three primary areas – Reinventing productivity, Intelligent cloud and
more personal computing in the context of a mobile first and cloud first world. We could define the industry in multiple ways.
One way of looking at it would be to say Microsoft is in the Software industry in the broadest sense of the term. But we would
have to add to that its hardware efforts such as surface line, xbox, and lumia (from Nokia acquisition). Another way to look at it
would be to say it is in the productivity and platforms business[5]. This is a better definition because this will encompass all of
Microsoft’s products. One could argue that Windows and Office are both platforms and tools for people to use to realize their
full potential[6]. Similarly Azue, XBOX and all enterprise software is about platforms that allow other individuals and
organizations to build on and derive value.

This implies, at a broad level they compete with Apple and Google on Operating Systems and Devices, with Amazon in the
cloud, with Google and other startups on productivity, with Oracle and others on database software, with SAP and others on
enterprise software and Sony, Nintendo and others on gaming and living room devices.

Microsoft started out as a pure software company selling boxed products. Google upended that model by offering products for
free and making money from advertising. That has dramatically changed the structure of the industry. While Microsoft
continues to make money on Windows and Office, there are free alternatives to those and hence this is not a sustainable model
in and of itself. Microsoft has adapted to this reality by bringing out its surface line of products where it has created new
categories such as two in ones (laptop + tablet) and is starting to make profits from an integrated device + software. It has also
built search into windows and is trying to make money via advertising.
Looking at Exhibit 3 strategic groups we can see that Microsoft is completing in a lot of industries. Google is the only
competitor who is also participating in all of these strategic groups. Microsoft has other capabilities that google is not
currently participating in such as gaming and enterprise software, but these don’t necessarily build into the other aspects of
Microsofts strategy and hence this lack of focus may actually be a downside for Microsoft as compared to Google.

At the same time Microsoft is still making lots of money (Exhibit 1) and is second only to Apple in terms of operating income.
This revenue comes from its traditional Windows and Office businesses but also the newer cloud and enterprise business
comprising off Azure, Server and Database and enterprise software. Hence while the first category is not sustainable, the later
is the area of growth. Even in the Windows business moving to devices is a good strategic move given the synergies it can
bring and also the fact that it is hard for a new entrant to come up with both hardware and a new operating system to go along.

Looking at Exhibit 2, five forces analysis, we can see that the most important factors for the industry Microsoft is in are threat
of substitutes, threat of entry and intensity of rivalry. As noted in Exhibit 2, threat of entry is not high in some segments such
as Cloud and Operating Systems, but is so in apps and services. So a chunk of Microsoft’s revenue which is dependent upon
productivity software (office) is under threat. Because of the large number of start ups in the apps and services area intensity
of rivalry is also high. For most of Microsoft’s traditional business, threat of substitutes is worrisome - when people
substituted Ipad for a laptop or an Amazon kindle for a cheap notebook computer. On the other hand looking at Exhibit 5, we
can see that Microsoft has a dominant position in the desktop operating system and computer business and there is not threat
to that in the near term.

Looking at exhibit 4, the capabilities analysis, we can see that one of the biggest threats is loss of engineering talent to
competitors. Also Microsoft was known for traditional waterfall development model where as its more nimble competitors
were following agile methodology. Microsoft is catching up and its capabilities are well aligned to deliver integrated products
into the future.

Overall Microsoft has some strengths in that it is participating in businesses that require scale and user momentum and hence
difficult to unseat. It is also playing an upstart in many segments with promising early sings. The worry for Microsoft though is
it still makes money in traditional ways that are out of date (charging for OS and hefty sums for office) and has its energies
scattered in competing with multiple players at the same time. Compared to Google which is also participating in many of the
same industries but with fewer products. Microsoft can learn the art of focus to better align itself and move into the newer
revenue models quickly for its future growth.

Addendum
Exhibit 1 Competitor Analysis:

Performance Capabilities Objectives/Values Strategy

Metrics
Operating
and Net
Income are
GAAP
Microsoft Market Cap: - Provides highest volume operating Empower every Build best-in-
422 billion system (Windows) software for desktops person and every class platforms
Last quarter - Provides most used productivity software organization on
revenue: 20.4 (Office) and
the planet to
billion - Provides second most used Cloud productivity
Operating Computing Platform (Azure) achieve more.
services for a
Income:5.8 - Has a popular gaming platform and
billion device (XBOX) mobile-first,
- Also has offerings for server and database cloud-first
software (Windows Server and SQL world [1]
Server) and enterprise software
(Dynamics)
- To support the operating systems Reinvent
business, it has developer offerings both productivity &
in the cloud and tools(Visual Studio) and business
languages(.NET C#, etc).
processes,
 build the
intelligent
cloud platform,
create more
personal
computing[1]

Alphabet Market Cap: - Dominant search engine on desktops and Organize the But Alphabet
511 billion phones world’s also stands for
Last quarter - Dominant mobile operating system information and alpha-bets, i.e.
revenue: - Offerings for desktop OS including make it universally bets on alpha
18.68 billion hardware accessible and (investment
Operating - Free online productivity software. useful. returns above a
Income: 4.7 - Cloud Computing platform. benchmark).
billion We strive to maintain “Betting on
the open culture often alpha” refers to
associated with investing in
startups, in which
everyone is a hands- projects which
on contributor and may have a low
feels comfortable probability of
sharing ideas and success, but also
opinions. In our very significant
weekly all-hands
(“TGIF”) meetings— upside. Project
not to mention over Loon is such a
email or in the cafe— moonshot
Googlers ask project,
questions directly to providing
Larry, Sergey and
other execs about any internet access to
 number of company remote regions
issues. Our offices by equipping
and cafes are
designed to
balloons with
encourage wireless
interactions between capabilities.
Googlers within and
across teams, and to Page’s
spark conversation
about work as well as distinction brings
play. to life the idea
of strategic
ambidexterity: a
company’s
ability of
exploring new
practices,
products and
business models
while exploiting
existing ones at
the same time—
a capability
which is both
remarkably
valuable and
equally hard in
practice.

Apple Market Cap: - Dominant smart phone and tablet Apple designs
643 billion including hardware and software. Macs, the best
Last quarter - Climbing desktop share with integrated personal
 revenue: 51.5 hardware + software. computers in the
billion - Developer tools and platform in support world, along with
Operating of its mobile and desktop OS. OS X, iLife, iWork
Income and and professional
Net software. Apple
Income14.6 leads the digital
music revolution
with its iPods and
iTunes online
store. Apple has
reinvented the
mobile phone with
its revolutionary
iPhone and App
store, and is
defining the future
of mobile media
and computing
devices with iPad.

Amazon Market Cap: - E Commerce giant Our vision is to be

311.8 billion - Dominant Cloud provider. earth's most
Last quarter - Also provides consumer cloud apps for customer centric
revenue: 25.4 music, storage, etc. company; to build a
billion - Tablets and e-readers. place where people
Operating can come to find
Income 0.4 and discover
billion anything they might
want to buy online
Exhibit 2 Porters Five Forces Analysis
Forces Devices and Operating Systems and Apps and new Platforms
Cloud Services
Threat of Entry Threat of entry is low here because these This is high because a new upstart like uber or
require massive investment and also scale facebook can create new apps and platforms
to be sustainable. fairly easily.
Bargaining Power of Bargaining power is low since there are a This is low in the sense that an individual buyer
Buyers limited number of suppliers and the cannot bargain, however in the collective sense
buyers are huge. this is high because once users start picking
alternative the tide can shift quickly.
Threat of Substitutes Threat of substitutes is high since there This is also high because newer apps on newer
are always open source or less expensive platforms and form factors make older ones
alternatives. obsolete. Think various forms of messaging and
groups making email obsolete.
Bargaining Power of For software suppliers are essentially Suppliers again are really employees and their
Suppliers employees and they have high bargaining bargaining power is high.
power, but traditional suppliers such as
intel for chips and hardware component
makers, their bargaining power is low
because they only have a few buyers.
Intensity of Rivalry Intensity is both high and low. In the cloud This is intense since there are a large number of
computing market the intensity is high players coming at scenarios with unique points
since the players are still figuring out the of view.
respective positions. But for hardware and
operating systems it is somewhat low
 since they each have their own niche.

Exhibit 3 Strategic Groups:

Strategic Group Microsoft Google Apple Amazon
Integrated Hardware Surface and Lumia Chrome books and Macbooks, Iphones, Fire phone and Kindle
+ Software Devices Google Nexus devices Ipads, Imacs, etc. tablets and e readers
Cloud Computing Microsoft Azure Google Cloud Platform AWS
Platform
Operating Systems Windows Android and Chrome
OS
Productivity, gaming Office, XBOX, Skype, Google Apps, gmail, etc. IWorks and App Amazon Prime
and Apps Hotmail, etc Store Subscriptions

Exhibit 4 Capabilities Analysis:

Capabilities Apps and Software Hardware Cloud Services

Processes Traditionally waterfall, but Best practices from Nokia Well in the agile model and
moving to agile and striving who used to be the leader in striving to improve with
to improve with telemetry phone business some time telemetry and feedback.
and feedback. back.
People Great engineering talent but Not enough data to comment Great engineering talent but
poached by competitors. on this. increasingly poached by
competitors who have better
 market positions. Also
poached by other companies
such as Facebook and other
start ups who are not direct
competitors.
Systems Used to have best in class Bought nokia to ramp up Used to have best in class
engineering infrastructure phone and other hardware engineering infrastructure
but newer competitors using systems. but newer competitors using
open source systems have an open source systems have an
edge today. edge today.
Alignment Aligned with the OS and This is aligned with the This is aligned with the
overall mission mission of making people mission of making people and
productive if the software organizations more
and hardware come together. productive.
Sustainability Can be sustained in the short Windows hardware is Cloud business is sustainable
term (2-3 years), but need to sustainable in the medium given that there is only one
keep innovating to stay term (3-5 years) gives the other player with more
relevant. market position for desktops market share and Microsoft is
and the popularity of surface pushing for PAAS vision
line of products. versus Amazon’s IAAS focus.
Exhibit 5 Strategy Map:

Desktop Operating System and Devices.

Ecosy
stem Microsoft
Supp
Apple
ort = # of users
(Apps
,
Perip Goo
heral gle
s,
Partn
ershi
ps,
etc)

Popularity of current offerings

References:
[1]: http://www.microsoft.com/en-us/about
[2]: https://www.google.com/about/company/philosophy/
[3] https://hbr.org/2015/08/google-couldnt-survive-with-one-strategy

[4] Bold Ambition: Satya Nadella’s email to employees. http://news.microsoft.com/ceo/bold-ambition/index.html

[5] Sharpening Business Focus: https://news.microsoft.com/2015/07/08/satya-nadella-email-to-employees-on-sharpening-

business-focus/

[6] Satya Nadella Aligning Engineering to Strategy: https://news.microsoft.com/2015/06/17/satya-nadella-email-to-

employees-on-aligning-engineering-to-strategy/

[5] Nadella’s bid to Fix Microsoft: http://www.forbes.com/forbes/welcome/