Microsoft Corporation is one of the largest technology companies in the United States and one of the most influential companies in the world. It was instrumental in popularizing personal computers and contributed to the expansion of the digital information age.
The company is behind some of the most well-known and widely-used software products and services. These include the Windows operating system, the Microsoft Office suite of productivity applications, and the Internet Explorer and Microsoft Edge web browsers, as well as notable consumer electronic products such as the Microsoft Surface and the Xbox.
Microsoft has become a household name. The success of the company stems not only from the initial leadership of Bill Gates and Paul Allen but also from a business strategy that revolves around innovation, market expansion, and product diversification.
An Analysis of the Elements of the Business Strategy of Microsoft
Market Penetration through Licensing Agreements
Take note that Windows is the most popular desktop operating system in the world based on market share. This success stems from an aggressive market entry strategy that involved securing software licensing agreements with computer manufacturers. Microsoft specifically approached these manufacturers following the introduction of its operating system in 1985. It convinced them to produce personal computers that came preloaded with Windows.
Licensing became the most appropriate, profitable, and effective distribution strategy for Microsoft. The reason Windows gained a considerable amount of momentum and an expansive global market reach is that personal computer manufacturers were distributing this operating system. Windows computers outcompeted the Macintosh brand of computers from Apple and the IBM Personal Computer from IBM in terms of market share with ease.
The popularity of its flagship operating system also translated to a first-to-market competitive advantage despite the presence of earlier operating systems and computer systems. This advantage came from the fact that Microsoft had a wide and strong network of third-party distributors, a favorable response from hardware and software companies, an emerging user base, and a usable operating system with an intuitive graphical user interface.
Licensing is still essential to the business strategy of Microsoft and its business model. The five largest PC manufacturers in the world still produce desktop and laptop computers that come preloaded with Windows and other Microsoft software products such as Microsoft Office. This same strategy has been applied to Xbox. The company continues to secure agreements that allow video game developers to produce game titles for this video gaming console.
Proactive and Reactive Product Strategy of Microsoft
Innovation is at the core of tech companies. Microsoft specifically demonstrates the capabilities to innovate 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 and was not the first to initiate the launch of personal computers. Microsoft was still considered innovative.
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. This is similar to the strategy of Apple. Microsoft developed and positioned Windows not only for business users but also for household or personal use. It ensured that this software was accessible in 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 has been struggling to compete against Windows in the PC gaming market
Microsoft has also introduced the Xbox as part of its attempt to enter the video gaming market. It is important to reiterate that this is not the first product of its kind in the market. Nintendo used to dominate the video gaming market until the improved PlayStation 2 and the Xbox entered 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 personal computers.
The same proactive and reactive approach was demonstrated through the Microsoft Surface line of laptop computers. Microsoft made Windows a suitable desktop operating system both for touch inputs and mobile computers. It is clear that it did not pioneer touchscreen computers nor it heralded an era of tablet computers but it succeeded in extending the appeal of Windows to a market segment with a preference for 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 its flagship products such as 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 Microsoft Office 365 in 2011 signaled an attempt to embrace a subscription business model similar to the Google Workspace of Google and other companies that utilize software-as-a-service licensing and distribution business models.
The introduction of Azure in 2010 also marked an acknowledgment of the growing business trend directed toward cloud computing and models based on platform-as-a-service and infrastructure-as-a-service. Take 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 compete 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 Microsoft Teams. Acquisitions have been part of its business strategy of Microsoft to expand further its product portfolio and address barriers to entry
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 remain at the top, it must provide solutions that address the current and future needs of the market. Diversification also enables a business to reach different segments of the greater market. Microsoft essentially has products for different customers and use cases.
Maintaining a Multi-Stream Revenue Strategy
It is also important to underscore the fact that Microsoft makes money through different income streams. 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. The company generates a predictable and steady stream of income from its subscription-based software and technological services through software-as-a-service, platform-as-a-service, and infrastructure-as-a-service models. It earns recurring fees from customers at regular intervals. The earnings from subscriptions are also more substantial than the earnings from one-time licensing agreements.
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 or retail customers. The Windows operating system and the Office suite of productivity applications can be purchased as off-the-shelf and standalone products. The company also earns from selling tangible products such as Surface devices and Xbox to end-user customers.
Digital advertising is another source of income. The Bing search engine generates revenues similar to Google Search. Earnings from Bing and the entire Microsoft Search network account for 6 percent of the total revenue of the company. Take note that the company acquired the business-oriented and employment-centric social networking site LinkedIn in 2016 which earns through a combination of digital advertisements and subscriptions.