Microsoft Corporation's External Environment and its Corporate and Business Level Strategies

GLOBAL STRATEGY: MICROSOFT CORPORATION
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Table of Contents TOC \o "1-3" \h \z \u 1.Introduction PAGEREF _Toc65869034 \h 32.Microsoft’s Background PAGEREF _Toc65869035 \h 33.Analysis of the Outer Organisational Environment PAGEREF _Toc65869036 \h 63.1.Theoretical Framework PAGEREF _Toc65869037 \h 73.2.Application of PESTEL Framework PAGEREF _Toc65869038 \h 103.2.1.Political Factors PAGEREF _Toc65869039 \h 103.2.2.Economic Factors PAGEREF _Toc65869040 \h 113.2.3.Social Factors PAGEREF _Toc65869041 \h 113.2.4.Technological Factors PAGEREF _Toc65869042 \h 123.2.5.Environmental Factors PAGEREF _Toc65869043 \h 133.2.6.Legal Factors PAGEREF _Toc65869044 \h 134.Corporate-Level Strategies PAGEREF _Toc65869045 \h 154.1.Theoretical Framework PAGEREF _Toc65869046 \h 154.2.Application: Proposed Corporate-Level Strategies PAGEREF _Toc65869047 \h 184.2.1.Visionary Strategy PAGEREF _Toc65869048 \h 184.2.2.Growth Strategy PAGEREF _Toc65869049 \h 195.Business-Level Strategies PAGEREF _Toc65869050 \h 195.1.Theoretical Framework PAGEREF _Toc65869051 \h 195.2.Application of Business-Level Strategies PAGEREF _Toc65869052 \h 225.2.1.Cost-Leadership PAGEREF _Toc65869053 \h 225.2.2.Product Development PAGEREF _Toc65869054 \h 226.Conclusion PAGEREF _Toc65869055 \h 23References PAGEREF _Toc65869056 \h 24
1 Introduction
Multinational organisations compete on a global level and their survival is dependent on their competitive advantage. To gain a competitive advantage, companies need to make strategic decisions. According to Papulova and Gazova (2016, p.573,), strategic analysis plays a crucial role in strategic decision-making because it provides a detailed report on the nature of the internal and external business environment of an organisation. The focus is mainly on the organisation because as Durand et al. (2016, p.7) indicate, the primary analysis level in strategic management is at the organisation. Thus, effective strategic analysis is necessary for ensuring that organisations have the right strategies. Further, there are different levels of strategic management and each level is characterised by different strategies. Hiriyappa (2018) reveals that there are corporate, business, and functional levels of strategic management. The corporate level is characterised by corporate-level strategies, the business level is characterised by business-level strategies, and the functional level is characterised by functional-level strategies. The purpose of this paper is to provide a strategic analysis report by analysing the external environment of Microsoft Corporation, herein Microsoft. This analysis will also form the basis for recommending corporate- and business-level strategies for Microsoft.
2 Microsoft’s Background
Microsoft is an American multinational corporation that was founded in 1975 and incorporated in 1981 (Microsoft, 2021). Since its inception, Microsoft has been a leading developer and manufacturer of personal computers, computer software, and other technological applications. Microsoft’s mission is to “empower every person and organization on the planet to achieve more” while its values are respect, accountability, and integrity (Microsoft, n.d.). The mission and values indicate that Microsoft’s target market is not only individual consumers but also other organisations in need of technology-related products and services. As of December 2020, Microsoft’s subsidiaries were located in approximately 120 countries. Microsoft is an ideal multinational for this paper because it has been operational for over40 years and has survived some of the greatest global financial crises. Part of its success has been linked to strategic acquisitions. According to CB Insights Research, Microsoft’s strategic acquisitions are the reason why the company has survived in turbulent times. Most importantly, Microsoft’s acquisitions align with its core business, thus enabling it to prevail in a competitive industry.
In recent years, Microsoft has focused more on the intelligent cloud to empower consumers to digitally transform and gain an intelligent edge through cloud services (Microsoft, 2021). As a result, it has gained more market share in the cloud services segment. The company has even been able to overtake its main competitors namely Amazon and IBM in cloud-related revenues. By 2019, Microsoft was the leading provider of cloud services in terms of revenues, generating 11.7% of industry revenues ahead of Amazon (10.8%) and IBM (9.9%) (See Figure 1). However, Microsoft’s cloud service, known as Azure, took second place in terms of market share (Richter, 2021). Microsoft accounted for 20% of the total global cloud market share in 2020 (Figure 2) right after its key competitor, Amazon, which accounted for 32% of the total market shares. However, Microsoft’s cloud market share growth has been rapid and as a result, it is estimated that its stock will reach $300 by the end of the first quarter in 2021 (Daniel, 2021). To better understand how Microsoft has prevailed in the market and has continuously maintained a competitive edge, an analysis of the outer organisational environment will be carried out in the next section.
Figure 1: Global Cloud Computing Market Revenues by Provider (2015-2019)
Source: Statista (2021)
Figure 2: Global Cloud Market Share (Fourth Quarter of 2020)
Source: Richter (2021)
3 Analysis of the Outer Organisational Environment
Environmental analysis is a fundamental part of strategic management and plays a key role in the success of organisations and the industries they operate in. According to Ansoff et al. (2019, p.141), the environmental analysis provides organisations with a reality of the world they operate in by capturing information from the environment. As a result, companies can anticipate threats and opportunities and make decisions that safeguard their survival in a changing business environment. Lynch (2015, p.67) also indicates that environmental analysis enables firms to develop a competitive edge by providing information about the nature of competition within any given industry. Various tools are available for environmental analysis and some of them will be discussed and compared in this section of the report.
1 Theoretical Framework
One of the common techniques that are used in environmental analysis is the PESTEL analysis. PESTEL is an acronym that represents six factors that affect a business’s external environment. According to Mackay et al. (2020, p.168), PESTEL involves the analysis of the environment at the macro-level. Another technique is the industry life cycle, which analyses the external environment through the different stages in which an industry evolves. It examines how the present phase of the industry influences the behaviour of competitors, consumers, and suppliers (Mackay et al., 2020, p.180). . The five forces analysis is a framework that analyses the profitability and attractiveness of an industry based on how buyers, suppliers, competitors, substitute products, and new entrants interact in a market (Mackay et al., 2020, p.176). It was developed by Michael Porter and is used in examining the industry forces that impact business operations and survival. Table 1 provides a description of each of the three frameworks and table 2 provides a comparison.
Table 1: Theoretical Frameworks
Framework

Description

PESTEL Analysis

Political- This examines the impact of the government, political parties, legislation, among other political dimensions on the external environment concerning the business (Mackay et al., 2020, p.168; Lynch 2015, p.73).
Economic- This examines the various dimensions of the economy that could impact the business (Mackay et al., 2020, p.168; Lynch 2015, p.73). They include inflation, foreign exchange, and interest rates, among others.
Social- This examines the social aspects of the environment that could potentially impact the business. They include culture, age distribution, levels of education, and other demographic characteristics, among other aspects (Mackay et al., 2020, p.170; Lynch 2015, p.73). It allows companies to stay updated with changing social needs and trends.
Technological- This examines the level of innovation and technological development within the industry and how they affect/could affect the organisation (Mackay et al., 2020, p.170; Lynch 2015, p.73). This allows organisations to stay up-to-date with technological trends.
Environmental- This examines all the ecological aspects that can influence the business (Mackay et al., 2020, p.170). They include pollution, carbon footprints, and green initiatives/issues that impact an organisation.
Legal- This examines aspects related to the law and how the business is expected to operate from a legal perspective (Mackay et al., 2020, p.170). The legal factors include employment and consumer laws, business licencing, and other regulations within the industry/country of operation.
Industry life cycle

Industry Life Cycle

Introductory- In this stage, organisations are developing the products and consumers become aware of the product (Lynch 2015, p.78). This stage is characterised by low profits. The focus is on shaping the market through experimentation (Mackay et al., 2020, p.181).
Growth- In this stage, competitors, and consumers alike, become aware of the value offering of the product. Lynch (2015, p.78) indicates that there is high competition in this stage. It is also characterised by a growing demand for the product.
Maturity- This stage is characterised by slow growth. Consumers become satisfied with the value offering and competitors compete for market shares (Lynch 2015, p.78). However, barriers to new entrants increase as incumbent competitors become established in the industry (Mackay et al., 2020, p.181).
Decline- This stage is characterised by low demand for products and declining revenues. As a result, firms in this industry start exiting the market (Mackay et al., 2020, p.181). However, strong firms with sustainable competitive advantage can prevail as they look for a viable/ alternative business model.

Five Forces Analysis

Bargaining power of buyers- This refers to the ability of consumers to influence prices. Consumers have high bargaining power if they are few, when the product is standardised, among others (Lynch 2015, p.89). High bargaining power results in lower prices and low profits for firms (Mackay et al., 2020, p.176).
Bargaining power of suppliers- This refers to the ability of suppliers to influence the cost of inputs. A high supplier bargaining power drives the cost of production up, reducing the profit margins for the organisation (Mackay et al., 2020, p.176). High bargaining power can arise if there are few suppliers and if substitutes for their inputs are unavailable, among others (Lynch 2015, p.89).
Competitive rivalry among existing firms- This refers to the level of competition among existing firms and how it influences profitability. When there is high rivalry, the share of profits for an organisation will be low (Mackay et al., 2020, p.176). This is because firms have to spend more on advertising, differentiation, and so on. The rivalry is usually high if there are many players in the industry, if product differentiation is difficult, or if there are high fixed costs in the industry, among others (Lynch 2015, p.91).
Threat of substitute products-This refers to the ability of alternative products that serve the same purpose, impacting the demand of a company’s products. The availability of substitute products reduces profitability because the switching cost for consumers is low Lynch 2015, p.91).
Threat of new entrants- This refers to the possibility of new firms entering the industry. The threat of new entrants intensifies when there are no barriers to entry (Lynch 2015, p.89).

Table 2: Comparison of the Theoretical Frameworks

Level

Dimensions

PESTEL Analysis

Macro-Level- This is because the factors analysed through PESTEL are on a larger scale as they entail the broad environment in which the organisation operates (Mackay et al., 2020). They tend to affect firms that are also outside a specific industry.

Considers six aspects of the external environment namely: political, economic, social, technological, environmental, and legal aspects.

Industry Life Cycle

Market-Level- This is because they analyse the environment based on the stage the industry/ market is at present.

Considers four stages of an industry’s life cycle namely: the introductory stage, the growth stage, the maturity stage, and the decline stage

Five Forces Analysis

Micro-Level- This is because the factors analysed using this tool are immediate to the firm’s business environment. They are specific to the industry and affect the firm’s competitors, thus making a good tool for assessing a company’s ability to compete within the industry (Mackay et al., 2020).

Considers five aspects of the micro-environment namely: bargaining power of customers, bargaining power of suppliers, rivalry among existing firms, the threat of substitute products, and the threat of new entrants

2 Application of PESTEL Framework
This section will apply the PESTEL analysis tool to analyse Microsoft’s external environment.
1 Political Factors
As mentioned earlier, Microsoft operates in about 200 countries. As such, it would need to establish positive relationships with governments from each country for survival. This requires a lot of lobbying to influence the actions of the governments and their representatives. In America, where Microsoft was first founded, tech companies use lobbying as a means of influencing the political climate. As of 2020, the five major tech companies spent approximately $14.7 million on lobbying (Feiner, 2020). However, Microsoft had the second-lowest spending on lobbying activity (Table 3), which was attributed to the fact that it currently has a positive standing with the American government. Also, any hostility between the American government and any other government in the 200 countries can affect Microsoft’s business in those countries. For instance, the recent trade war between the American government and the Chinese government affected the tech industry in both countries. Zeballos-Roig (2019) reveals that Microsoft, together with other top tech companies, had to appeal to the US government in light of the trade war and how it would affect the companies and their consumers if the trade war was to continue. One of the key issues was that the prices of products would go up, which would affect demand and interfere with revenues. Through lobbying and such appeals, the tech companies individually and collectively influence the political climate. This is in line with Mackay et al., (2020, p.168) who reveals that organisations use individual or collective efforts as a strategy to influence the political process.
2 Economic Factors
Microsoft was founded in a country that has enjoyed substantial economic stability. The US has strong financial institutions that have allowed the tech industry to thrive over the years. Also, Henry-Nickie et al. (2019) indicate that the US has an established ecosystem that has supported innovation. As a result, the US is home to some of the greatest tech companies in the world, Microsoft included. China, another country that has provided tech companies with the economic stability to thrive, is home to Microsoft. In addition, the growth of the middle class, especially in developing countries, provides an economic opportunity for Microsoft to thrive in developing economies. According to Mackay et al., (2020, p.168), the economic growth of countries in which an organisation operates provides a healthy economic opportunity for a business to succeed. Formulating strategies that align with such growth is necessary.
3 Social Factors
Social factors such as demographic shifts in recent years need to be considered while analysing the external environment in which Microsoft operates in. According to Miller and Lu (2018), millennials are being outnumbered by Gen Z, indicating a shift in the demographic composition of consumers. With this shift, changes in consumer preferences concerning the tech industry are expected and companies such as Microsoft need to take appropriate action to ensure that as the consumer preferences change, the company is well-prepared to address the changes. Microsoft recognises this demographic change and understands that Gen Z is more tech-savvy than their predecessors and as such, has a higher purchasing power (Microsoft 2019, p.6). With this in mind, efforts are in place to ensure that this new group of consumers is well catered for. They also recognise that about 70% of parents attribute their purchasing decisions to the influence of Gen Z (Microsoft, 2019). Combined, Gen Z and millennials make up more than 40% of the population (figure 3) and are therefore the largest group of consumers. There has also been a shift in consumer attitudes towards technology and the need to access information without limitation of time and location. Microsoft (2019,p.10) indicates that consumers are interested in information now more than ever with a majority of them using their smart devices to research and gain knowledge about everything. Consumers have embraced technology in all aspects of their life, including mobile money transfers and access to health care. According to Mackay et al. (2020, p.170), such social changes and trends have led to the rise of new industries. They also present growth opportunities for tech companies.
4 Technological Factors
Some of the key technological factors that need to be addressed in relation to Microsoft and the tech industry are the rise in demand for technology and the growth of automated businesses in recent years. More businesses and individuals have rapidly adopted technology in the last decade and this adoption has even increased after the Covid-19 pandemic hit in 2020. According to a recent survey by McKinsey Global (2020), the pandemic has boosted the adoption of technology by businesses and consumers, accelerating the adoption by approximately four years. As more consumers adopt technology, tech companies such as Microsoft also need to increase their supply of tech-related products and services to meet the rising demand. Microsoft has identified the rising need for automated businesses. It has also recognised its role in business automation, especially through one of its consumers, UiPath (Microsoft, 2019) and as a result, recently decided to also focus on Robotic Process Automation (RPA) which eliminates repetition and redundancy in organisations (Taulli, 2020).
5 Environmental Factors
There has been a shift in focus to more sustainable business practices. Consumers are now more sensitive about how products are manufactured and how they are affecting the environment, especially with the current issue of global warming. Reducing the carbon footprint provides organisations in the tech industry with an opportunity to create sustainable competitiveness. Microsoft has focused on carbon removal as part of its green initiatives and hopes to be carbon negative through low-carbon business activities across the world (Microsoft, n.d.). As Mackay et al. (2020, p.170) posits, climate change has a huge influence on how companies operate and what sustainable business practices across the globe can be adopted.
6 Legal Factors
Companies operate in environments that are governed by laws and regulations. As mentioned earlier, Microsoft has prevailed in the tech industry for so long partly due to its mergers and acquisition strategy (CB Insights Research, n.d.). However, this strategy has also presented it with a series of legal issues. For instance, Jeans (2020) indicates that Microsoft was under heavy scrutiny for two decades because it failed to completely comply with the antitrust laws in the US. It faced the same scrutiny from European regulators and was fined 1 billion dollars for not complying with antitrust laws in the region. The company has also experienced legal issues with the Chinese government for non-compliance with the country’s anti-monopoly regulations (Bass &...