Decline in search engine market share. Security threat Threat of piracy Stringent regulations

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1 SWOT ANALYSIS Microsoft Corporation (Microsoft) develops, manufactures, licenses, and supports software products for many computing devices. Microsoft has shown a strong performance through its operations and return during the year Strong operating performance lends financial stability to the company which could be leveraged to seek more growth avenues for the company in future. However, intensifying competition could affect Microsoft s margins and market share. Strengths Consistent operating performance Strong returns Strong brand image Extensive product portfolio Strong research and development investment Opportunities Launch of new products Acquisition strategy Weaknesses Geographic concentration Decline in search engine market share Threats Intense competition Open source model Security threat Threat of piracy Stringent regulations Strengths Consistent operating performance Microsoft registered a robust growth in revenues for fiscal The company recorded a revenue growth of 15.5% to reach $51,122 million in fiscal 2007 as compared to Hewlett Packard Company s revenue growth of 5.7% during the same period. The company s revenue growth was driven by Microsoft Business division and the Client business divisions. The company also recorded a 12.5% increase in its operating profit in 2007, driven by strong revenue growth and also improved efficiency. Although the increase in operating profit was partially offset by increased expenses due to cost of revenue associated with Xbox 360 and Windows Vista amongst others, the operating margin of the company was 36.2%, which was well above the industry average of 25.2%. For the five year period , the company had an operating margin of 33.4% as compared to the industry average of 23.9% for the same period. Its competitor, Adobe Systems had Microsoft Corporation Page 5

2 an operating margin of 29.3% for the same five year period. Strong operating performance lends financial stability to the company which could be leveraged to seek growth avenues in the future. Strong returns Microsoft has recorded strong returns in the last five years. Its average return on assets, return on investments and return on equity during the five year period ending June 2007 were 14.3%, 18.5% and 20.2% respectively, higher than the industry averages of 11.7%, 16.5% and 19% for the same period. Also the returns generated by Microsoft were higher than some of its closest competitors such as Hewlett Packard Company (RoA: 3.9%, RoI: 6.2%) and International Business Machines (RoA: 7.16%, RoI: 11.2%) during the same period. Strong returns reflect the ability of the management to deploy assets in profitable avenues, which would enhance investor confidence. Strong brand image Microsoft has developed a strong brand image since its inception in Microsoft is the third largest brand after Google and General Electric (GE), with a brand value of $54,900 billion in Microsoft s brand image generates a large percentage of intangible earnings. Strong brand image makes Microsoft a preferred operating system over its competitors. In addition, strong brand image promotes greater trust in the company s product and services, which could boost the demand for the company s products. Extensive product portfolio Microsoft develops, manufactures, licenses, and supports a range of software products for many computing devices. Its product offerings comprise five segments: client, server and tools, online services business (combined together form platform products and services division); Microsoft business (business division); entertainment and devices (entertainment and devices division). Its software products include operating systems for servers, personal computers (PCs) and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; and software development tools. The company also provides consulting and product support services, and train and certify system integrators and developers. Moreover, the company sells the Xbox video game console and games, PC games, and PC peripherals as well. Online communication and information services are delivered through MSN portals and channels around the world. The above exhaustive list also includes the introduction of some new major products during the fiscal year 2007, which includes new online services such as, Windows Live Search and Live.com in 54 international markets, Live Local Search in the US and the UK., beta versions of MSN Soapbox (expansion of the MSN Video experience), Virtual Earth 3D, Windows Live Hotmail, etc. The breadth of Microsoft s product line up allows it to meet the requirements of a large number of customers and also reduces its risk associated with demand fluctuations for any particular product category. Microsoft Corporation Page 6

3 Strong research and development investment Microsoft maintains a strong focus on research and development (R&D) for introducing more innovative products. It invested about $7,120 billion in R&D in 2007, an increase of 8.2% over The company s R&D expenses accounted for 14% of its revenue during Microsoft employed around 39.2% of its total employees in R&D in The investment in research and development by the company would pay off in the form of new products and technologies geared to meet the ever changing customer requirements. Weaknesses Geographic concentration Microsoft has concentrated operations in the US. Microsoft has its business across the world and has offices in 103 countries. However, revenues from the US contributed to 62% of the total revenues of the company in While the other countries accounted for 38% of the total revenues in the same year. Heavy reliance on the US market exposes the company to adverse socio-political and economic changes in that region. Decline in search engine market share Microsoft s MSN search engine is witnessing a declining market share in search engine segment. In 2007, Google maintained its status of market leader with 52% of the global market share, while MSN search occupied the fourth place after Google, Yahoo and Google U.K. MSN had a market share of 4.3% in 2007, declined from its market share of 6.9% in In 2006, Google had a market share of 50%. The declining share of MSN search engine could hamper the company s future strategy of generating revenue through online services. Opportunities Launch of new products Windows Vista, launched in 2007, is a substantial advancement in Windows, with significant innovations in the developer platform. Windows Vista is expected to introduce improvements in user experience, security and reliability; enable customers to build applications that bring clarity to the user s complex world of information. Microsoft (Research) also expects that the new system will have several improvements, including better security features, more comprehensive search capabilities and a friendlier user interface. Several privacy capabilities, such as protected user accounts, have also been built into the new system. Along with Windows Vista other innovative products launched in 2007 include the 2007 Microsoft Office system, and Exchange Server These innovations are expected to contribute Microsoft Corporation Page 7

4 to the growth in the company s core business and could assist it in sustaining its double digit revenue growth. Acquisition strategy Microsoft continued with its aggressive acquisition strategy to increase its future growth by acquiring 5 companies in In July 2007, Microsoft acquired Medstory Inc., a provider intelligent web search technology specifically for health information. This move helps Microsoft in its long-term commitment toward the development of wider consumer health care solutions. In March 2007, Microsoft acquired Tellme Networks, a leading provider of voice services for everyday life, including nationwide directory assistance, enterprise customer service and voice-enabled mobile search. This acquisition will help Microsoft in introducing innovative services for its customers globally voice enabled web-services. This will help Microsoft in capturing larger market share in web-based search engine services. In May 2007, it acquired ScreenTonic, to expand its digital advertising solutions offerings with the mobile expertise. Further its acquisition of aqunative will help Microsoft in developing internet-based advertising platform to advertising companies. Similarly, Microsoft had acquired AdECN, Inc., an advertising exchange platform company to provide real-time for buying and selling display advertisements. All the acquisitions during 2007 are expected to enhance Microsoft s search engine (both wired and mobile) and online marketing and advertising solutions to global customers, which would have a positive impact on Microsoft s future growth. Threats Intense competition Microsoft continues to face intense competition across all markets for their products and services. The company s competitors range in size from Fortune 100 companies to small, specialized single-product businesses and open source community-based projects. Further, the Internet as a distribution channel and non-commercial software model has also reduced barriers to entry even further. Microsoft faces competition in the commercial software products, including variants of UNIX, which are supplied by competitors such as IBM, Hewlett-Packard, Apple Computer, Sun Microsystems and others, who are vertically integrated in both software development and hardware manufacturing. Microsoft Corporation Page 8

5 Google and Yahoo are the biggest competitors of the company in search engines. The trend of services migrating into the network is expected to continue, putting Microsoft s client-centric positioning at risk. These competitive pressures could affect the company s market share and margins. Open source model Microsoft s business model is based upon customers agreeing to pay a fee to license software developed and distributed by the company. However, in recent years, a non commercial software model has evolved that presents a growing challenge to the commercial software model. The open source model, whose source code is subject to a license allowing it to be modified, combined with other software and redistributed, poses significant threat to Microsoft. These open source softwares are produced by number of commercial firms who compete with Microsoft by using an open source business model through modifying and then distributing open source software to end users at nominal cost that earn revenue on complementary services and products, without having to bear the full costs of R&D for the open source software. The proliferation of the noncommercial software model poses a significant challenge to Microsoft s business model. To the extent open source softwares gain market acceptance, sales of the company s products could be affected. Security threat Maintaining the security of computers and computer networks is a critical issue in the company s business. Malicious hackers tend to develop and deploy viruses, worms, and other malicious software programs that attack the company s products. The company has been investing in mitigation technologies protecting its customers from attacks. However, the cost of these steps could adversely affect the company s operating margins. Despite these efforts, security vulnerabilities in the company s products could lead some customers to seek to return products, to reduce or delay future purchases. Threat of piracy The company faces stiff threat of piracy of their software products. In fiscal year 2006, nearly 60 million PCs were sold with pirated versions of Windows, which presents a major revenue loss to the company. The impact on revenues from outside the US is more significant, particularly in countries where the laws are less protective of intellectual property rights. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights. Though the company actively educates consumers about the benefits of licensing genuine products and obtaining indemnification benefits for intellectual property risks, the threat of pirated products still persists. Stringent regulations Government regulatory activity affects the way the company designs and markets its products. Two Lawsuits were filed by the US Department of Justice and the District of Columbia and were resolved through a final judgment entered in November This final judgement includes, limits Microsoft Corporation Page 9

6 on certain contracting practices, mandated disclosure of certain software program interfaces and protocols, and rights for computer manufacturers to limit the visibility of certain Windows features in new PCs. Some of these rules will stay in force until November 2009 or later. Incase, Microsoft fails to comply fully with these rules, additional restrictions could be imposed, which would adversely affect its business. In 2004, the European Commission determined that Microsoft must create new versions of Windows that do not include certain multimedia technologies, many of which are required for certain Web sites, software applications, and other aspects of Windows to function properly. Additionally, the company is required to provide its competitors with specifications on how to implement certain communications protocols supported in Windows. The availability of these licenses may enable competitors to develop software products that replicate the functionality of Microsoft s own products, which could affect sales revenues of the company s products. Unless reversed or limited on appeal, the ruling of the European Commission may limit the ability to continue to improve Windows by adding new functionality in response to consumer demand. This could hamper demand for the company s products. Microsoft Corporation Page 10

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