There are many methods of analysing strategic management, such as the PESTLE analysis and SWOT analysis. This essay will demonstrate the Porter's five-force analysis by focusing on the strategic management of Microsoft.
IB 2180
International Environment of Business
Assignment 2
Student Number: 0300072
In general, strategy provides a company the direction over long-term and the goal to achieve by allocating resources efficiently. It maybe varied during different periods of the business operation and for different products or locations. However, the key question in strategic management is always that "how firms can gain and sustain competitive advantages that differentiates them from their competitors". (Baum, J. & McGahan, A. 2004, P.255) There are many methods of analysing strategic management, such as the PESTLE analysis and SWOT analysis. This essay will demonstrate the Porter's five-force analysis by focusing on the strategic management of Microsoft.
Microsoft's mission statement says that "we work to help people and businesses throughout the world realize their full potential". (www.microsoft.com) This clearly shows the company's intention to develop convenient computer soft-wares that would meet customers' various requirements, which corresponds with its key values including its market orientation, passion for technology, and the willingness of taking on responsibilities and risks. The statement points out the direction that the strategic management needs to focus on.
Porter's five-force analysis examines the following elements: the competitive rivalry; the threats from new entrants and substitutions, and the power of buyers and suppliers. It allows managers to better understand the industry context in which the firm is operating, helping the firm to develop an edge over its rival.
Determination of the existing competitive rivalry is crucial. It requires companies to consider the balance of competition i.e. the "intensity variation of firms in the industry" (Campbell, A. & Luchs, K. 1998, p.22); the market growth rate and market share; and most importantly, to realise their core competencies. Microsoft has been the market leader in the computer service industry ever since its establishment in the mid-1970s. Its success rooted in the first-mover-advantage across almost all product ranges. Microsoft, along with several other leading firms, take up most of the market share. Microsoft clearly sees its strength lying in its technological assets and the high level of innovation, allowing it to, as Bill Gates said :"...define the frontier of computer science", and stays in the dominating position in the industry. Its overall strategy is setting the firm as a differentiator.
Because of the industry nature that it is operating in-extremely dynamic, Microsoft is acting as the "Prospector", whose prime capability is to "find and explore new product and market opportunities". (Miles, R. & Snow, C. 2003, p.49) Microsoft has invested heavily to maintain the technological competitive advantage over competitors. Its computer laboratory projects have expanded from developed countries such as the US and UK, to emerging economies such as China and India. By identifying the movement towards globalisation, the strategic expansion has largely increased the firm's scope and brand recognition, further sustained the company's dominating position in the ...
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Because of the industry nature that it is operating in-extremely dynamic, Microsoft is acting as the "Prospector", whose prime capability is to "find and explore new product and market opportunities". (Miles, R. & Snow, C. 2003, p.49) Microsoft has invested heavily to maintain the technological competitive advantage over competitors. Its computer laboratory projects have expanded from developed countries such as the US and UK, to emerging economies such as China and India. By identifying the movement towards globalisation, the strategic expansion has largely increased the firm's scope and brand recognition, further sustained the company's dominating position in the industry.
The threats from new entrants that Microsoft faces is sever. Barriers of entry is the key issue to consider. Computer software industry has a relatively high level of barriers with high risk and uncertainty. Considering the technology required and the huge initial investment in R&D that may not be recovered, firms with smaller scale might be put off. Being the market leader, Microsoft enjoys its long-establishment and valuable brand. Its economies of scale is unlikely to be achieved by other new entrants. The extensive experience within the industry allows it to have relatively more certainty when introducing new products.
However, this does not mean that Microsoft is in the absolute safe boat. The "Golden Rush" (Bill Gates, Interview with TIMES) of the Internet phenomenon during 1997 and 2001 has provided great opportunity to every firm in or outside the industry, providing PC users more and more alternatives to choose from. As it is said before, as long as firms are able to generate innovative ideas and communicate products efficiently to customers, they are welcomed in the industry. Microsoft has suffered from the competition and eventually had to cut its divisions in 2003 to minimise costs, leaving only the three main divisions including the Platform division producing Microsoft's key products Windows and MSN; the Business solution division which has the key product MS Office; and the Entertainment & Devices division that has recently launched the Xbox, targeting at Sony's Play-Station 3. This de-scaling operation has well implemented Microsoft's strategy with the consideration of maximising the company's advantage. For the different business natures that each division is operating in, Microsoft approaches different strategies. Microsoft, with the development of the "Microsoft Business Frame" (MBF), is putting huge pressure on other competitors that are providing the same services.
The threats of substitutes comes from a product outside the industry. Entering the digital era, modern life is more and more dependent on computers and related software, online-simulation, and digital solutions. It thus seems to be difficult to substitute, at least in the short run, the service that Microsoft (and other firms within the industry such as Yahoo!, IBM, Apple and Intel) is providing. Additionally, in order to be able to replace the services that the current market is providing, extremely innovative product needs to be developed, on which huge technology constraints are attached. The mobile phone industry, with its everyday-improving digital technology, is probably the most perspective competitor for the industry. Some of the functions that used to be computer-only, such as emailing and internet surfing, can now be done through mobile phones. However, with millions of customers still comfortable with the services the computer service industry is providing, switching cost could be high, resulting in the reluctance to substitute. In this case, the threat of substitutes from outsiders is relatively small.
Microsoft's dominating position leaves buyers in the market relatively small bargain power. As mentioned before, the benefits that Microsoft's products provide, such as the convenience and trust-worthy quality, are very difficult to be substituted. Significant buyer switching costs maybe involved if consumers decide not to choose Microsoft's products, because that probably means the need to alter a whole chain of software, which is neither economical nor practical.
Supplier's bargain power on the other hand, is relatively higher. This essay identifies the employees, mainly the software programmers as the key supplier of Microsoft. This make sense because the success of Microsoft lies in the innovation and technology of its products. In order to achieve the quality, professional knowledge is vital. Employees with high level of profession ensure the success of the company and thus hold the strong bargain power. Decent education system also ensures the success in a similar way, which would be able to provide the company with high standard IT professionals to maintain its long-term technological advantage over its rivals.
All five forces are inter-related and should not be isolated during analysis. In the Microsoft case however, the key external factor that senior managers need to focus on may be the threats from new entrants. Considering the increasing level of competition and the extremely dynamic market nature, a flexible strategy that is able to adapt changes and easy to be implemented is vital to the company. As a relatively mature firm in the industry, it is important that how Microsoft could keep up pace. This industry continuous to be attractive and profitable for outsiders. The former CEO of Sina.com Mr. ZhiDong Wang has stated that no one firm in the IT service industry can enjoy long-term domination if it does not keep up innovative ideas, as there is always new firms with new ideas emerging into the market, trying to get a slice of the cake. Sustaining a good relationship with competitors may become a valuable asset in the future, as it maybe possible for them to develop some products jointly sharing each other's advantages.
Although Porter's five-force analysis has been widely accepted, there are certain limitations. Firstly, unlike PESTLE analysis, Porter's five-force fails to emphasis the legal issues, which are becoming increasingly important these days, especially for software industry where the patent protection is crucial. The scale of multi-countries operation is more and more common for firms nowadays, thus the different legal systems within different regions could have significant influence over firms' strategic decision making. It is vital for firms to consider how to maintain their competitive advantages under different legal systems without conducting any wrong doings. Microsoft's EU monopoly dispute has been a good example showing how legislation can influence a company's operation. Secondly, the analysis method only mentioned substitution threats but failed to identified the effect of supportive industry-the complementary opportunities. Without the extensive development of the internet, some of Microsoft's key products such as MSN and .NET platform would probably not be introduced. It is one thing that the company itself has the innovative idea, but another thing that whether the external environment can provide sufficient support and thus ready to accept the idea. Similarly, thanks to the massive expansion of PC users, and the support from PC manufacturers such as IBM and Dell, Microsoft is able to achieve the dominating position in the internet explorer market. Failing to examine the complementary support makes the analysis incomplete, and may provide only the partial picture when managers are trying to use it. Lastly, threats from existing competition also need to be considered. Especially for industries where there are only a few key players. Because these are the firms that are likely to have the ability to influence market price and structure, resulting changes in the industry.
To conclude, by studying the Microsoft case, this essay has demonstrated how the Porter's five-force method works in real life. It also stats that in terms of external factors, firm managers need to focus on newly established firms and even firms outside the company-potential competitors. These new entrants would normally have identified a profitable opportunity that existing market leaders may have ignored. Considering the highly dynamic nature of the industry, it is thus vital that the company is able to, not only analyse its own strengths and weaknesses, but also the movements of its competitors, existing or potential. Finally, the essay points out that although being a widely accepted analysis tool, Porter's five-force fails to consider the legal and complementary issues, which are becoming increasingly critical in influencing companies' strategic management nowadays.
(Total word count excluding reference: 1,648)
Bibliography and References:
Baum, J. & McGahan, A. Business Strategy over the Industry Life Cycle, Vol.21, 2004, Elsevier, Netherlands.
Buffa, E. Corporate Strategic Analysis, 1986, Collier Macmillan Publishers, London.
Campbell, A. & Luchs, K. Strategic Synergy, 1998, International Thomson Publishing Inc. UK.
Dicken, P. Global Shift, 2004, SAGE Publications, London.
Dyson, R. & O'Brien, F. Strategic Development: Methods and Models, 1998, John Wiley & Sons, UK.
Miles, R. & Snow, C. Organizational Strategy, Structure, and Process, 2003, McGraw-Hill, New York.
www.microsoft.com
