As one of the largest information technology companies in the United States and one of the most influential companies in the world, Microsoft Corporation was instrumental in popularizing personal computers and revolutionizing the digital information age.
The company is behind some of the most well-known and widely-used software products and services to include the Microsoft Windows operating system, the Microsoft Office suite of productivity applications, and the Internet Explorer and Microsoft Edge web browsers, as well as notable hardware products, to include the Microsoft Surface line of touchscreen personal computers and the Xbox gaming console.
Undeniably, the “Microsoft” brand is a household name. The success of the company stems not only from the initial leaderships of founders Bill Gates and Paul Allen but also from a business strategy that primarily revolves around developing and introducing technological innovations while maintaining and expanding further its market scope through aggressive marketing efforts and product diversification.
An Analysis of the Elements of the Business Strategy of Microsoft
Market Penetration through Licensing Agreements
Note that Windows remains the most popular desktop operating system in terms of market share. This success stems from a market entry strategy that involved aggressively securing software licensing agreements with computer manufacturers. More specifically, during its initial years since its first introduction in 1985, Microsoft aggressively negotiated with manufacturers to produce personal computers that came pre-loaded with Windows.
Licensing became a profitable distribution strategy for Microsoft. Over the years, Windows gained not only a considerable amount of momentum because third-party computer manufacturers were essentially distributing this operating system. Windows computers easily outcompeted the Macintosh brand of computers from Apple and the IBM Personal Computer from IBM in terms of market share.
The popularity of its flagship operating system also translated to a first-to-market competitive advantage. Although other PC systems emerged prior to Windows and despite the fact that other desktop operating systems emerged during its first few years, Microsoft already had a strong network of third-party distributors, a favorable response from hardware and software companies, and an emerging userbase.
Licensing is still critical to the business strategy of Microsoft. The top five largest PC makers in the world still produce desktop and laptop computers that come pre-loaded with Windows, as well as with other Microsoft software products to include the Office suite of applications. The same strategy applies to Xbox. The company continues to secure agreements that allow video game developers to produce game titles for the gaming console.
Proactive and Reactive Product Strategy of Microsoft
Innovation is at the core of every technology company. However, Microsoft demonstrates innovation through a proactive and reactive approach to product strategy. It is important to note that the company was not the first to develop and introduce a desktop operating system featuring a graphical user interface. It did not invent the computer, nor did it initiate the launch of personal computers. However, the company remains revolutionary.
Similar to the business strategy of Apple, Microsoft approaches research and development by taking insights or cues from existing products and emerging trends in the market to develop and introduce new products that are more usable and more innovative. Note that it positioned Windows not only for business users but also for household or personal use. It ensured that this software is accessible to the market through its licensing deals.
The company expanded further the capabilities of Windows by making it an ideal desktop operating system for media consumption and media creation. It is important to highlight the fact that this operating system has been regarded as the best platform for high-end video gaming according to enthusiast-level and professional gamers. Even macOS from Apple struggled to compete against Windows in this regard.
Of course, Microsoft has introduced the Xbox as its own gaming console product. However, it is also important to reiterate that this is not the first gaming console in the market. Nintendo used to dominate the market until the improved PlayStation 2 and the new Xbox came into the market. What made Xbox a viable video gaming platform was the use of powerful hardware components and the DirectX found in high-end Windows PCs.
The same proactive and reactive approach was demonstrated through the Surface line computers. Microsoft made Windows an ideal desktop operating system for touch-based inputs, as well as a mobile operating system for tablet computers. While it did not pioneer touchscreen computers and tablet devices, it extended the appeal of Windows to specific segments in the market who prefer convertibles and hybrid computers.
Market Diversification and Market Segmentation
Remember that part of the business strategy of Microsoft is to maintain and expand further a broad market scope. The company does this through numerous product and service offerings that are relevant to existing and future market trends. Of course, while it has become known for the flagship products Windows and Microsoft Office, it continues to research and develop new products aimed at catering to different segments of the market.
Xbox is a notable example. The Surface line of computers is another. However, aside from these two, take note that the company has recently introduced other software and services that are relevant today. The launch of Office 365 in 2011 signaled an attempt to embrace a subscription business model similar to the Google Workspace of Google LLC and other companies that utilize software-as-a-service licensing and distribution models.
The introduction of Azure in 2010 also marked an acknowledgment of the growing business trend directed toward cloud computing, as well as models based on platform-as-a-service and infrastructure-as-a-service. Note that Azure competes against cloud computing service providers such as Amazon Web Services of Amazon, Alibaba Cloud of Alibaba Group Holdings, Google Cloud Platform of Google, Oracle Cloud, and IBM Cloud, among others.
It is also obvious that the company offers products that competes directly with other technology companies. For example, similar to the Google Search of Google, the company has Bing. The company also competes against online video conferencing platforms such as Zoom and Google Meet through the Microsoft Teams app. To expand further its product portfolio and address barriers to entry, acquisitions have been part of the business strategy of Microsoft.
Nevertheless, by diversifying its products and services, the company ensures that it remains a relevant technology company. Remember that the industry is ever-evolving, and to stay at the top, a company must provide solutions that address the current and future needs in the market. Furthermore, diversification enables a business to reach different segments of the market. The company essentially has products for different customers and use case scenarios.
Maintaining a Multi-Stream Revenue Strategy
Related to diversification and market segmentation, Microsoft makes money through different income streams. For starters, its software licensing agreements enable it to earn through one-time licensing fees and royalty fees from computer manufacturers and software developers. Products such as Windows, Office, and the Xbox are the main income drivers under this specific revenue model. Note that the company also earns from these products through retail sales.
Subscription is another source of revenue. Through software-as-a-service, platform-as-a-service, and infrastructure-as-a-service models, the company generates a predictable and steady stream of income from its subscription-based software and technological services. Customers essentially pay recurring fees at regular intervals for these products. Earnings from recurring subscriptions are considerably greater than one-time purchases.
It is worth mentioning that a large chunk of its revenues come from business or enterprise customers that purchase server products and cloud computing services. Microsoft also earns from one-time sales to end-users. As noted, the Windows operating system and the Office suite of applications could be purchase as standalone products. In addition, the company also sells Surface devices and Xbox to retail consumers.
Advertising revenue is another source of income. Through Bing, the official search engine of the company, generates revenue similar to Google Search. Earnings from Bing and the entire Microsoft Search network account for 6 percent of the total revenue of the company. Note that the company has acquired the business-oriented and employment-centric social networking site LinkedIn in 2016, which earns through ads and paid sponsorship.