Question

Read the case and then answer the following questions.

Surface tension
The tech giant’s decision to make its own tablet computer is a bold gamble

“WITHIN five years, I predict it will be the most popular form of PC sold in America.” When Bill Gates spoke at a trade show in 2002, the then chairman of Microsoft left nobody in doubt that what his firm called the “tablet PC” would one day take the world of personal computing by storm. His sense that an upheaval was coming was spot on, but his timing wasn’t. Only when Apple launched its wildly popular iPad in 2010 did computing tablets at last take off. Now Microsoft is scrambling to gain a foothold in one of the hottest markets in the IT industry.

On June 18th 2012, Microsoft unveiled Surface, a tablet that will bear Microsoft’s name and is supposed to be a showcase for its new Windows 8 operating system, due to be rolled out in the autumn. The new device will be available in two models: a basic version with a processor designed by ARM (which also powers the iPad) and a souped-up one with an Intel chip for business

users. Both models boast some innovative features, notably a built-in stand and a cover that doubles as a keyboard.

Microsoft’s decision to make its own tablet is another sign of how much the company is being buffeted by shifts that are transforming the world of IT. Just as momentous as the rise of social networking is the rapid growth of mobile computing (see Figure 1). This has softened sales of Windows-based PCs, the foundation of Microsoft’s fortunes. And it has boosted rivals such as Apple and Google, whose respective mobile operating systems, iOS and Android, power most smartphones and tablets.

A related threat to Microsoft’s business is the “consumerisation” of IT. Growing numbers of employees are now demanding to use their own phones and tablets at work. In many cases, companies are caving in. As a result, iPads and Android-based tablets are spreading rapidly through offices and factories – the heartland of Windows-based PCs.

Critics point out that Microsoft’s track record in hardware is mixed. Although it has produced hits such as the Xbox game console, it has also had some deeply embarrassing misses, including Zune, a portable music player that has failed to rival Apple’s iPod.

Microsoft entered into video games and game consoles in 2001. The launch of Xbox 360 in 2005 has proved extraordinary and also particularly interesting. The rationale behind its market entry into the video games industry comes with a good reason. It was designed primarily to keep their potential competitor, Sony, in check. Although Sony operated in a different industry, Microsoft recognized that Sony could emerge as its rival.

Microsoft’s Zune was launched in November 2006 and Microsoft believed that it could compete with the Apple iPod, which had been in the market since 2001 and dominated the multimedia player and music download business around the world. The Wall Street Journal reported that revenue from the Zune player was $85 million during the 2008 holiday season compared to $185 million in the same period in 2007. Apple’s iPod revenue during the last quarter of 2008 was $3.37 billion. Microsoft, which had access to as much hardware development expertise as any company in the world and the capital to support a massive marketing budget for new products, failed completely in its attempt to get a large part of the iPod market.

For the Surface, analysts worried that consumers may be confused by the two versions of the tablet, which will have very different price points. Microsoft has just indicated that the expensive model is likely to cost the same as thin laptops, which sells for around $1,000, whereas the cheaper version will be priced to compete with comparative ARM-based tablets, probably at around $500. Comparatively, the cheapest iPad with a high- resolution screen costs $499.

Another concern is that by making its own device, Microsoft risks alienating other firms that are working on Windows 8 tablets, such as Dell and HP. But the company’s main aim may be to show how its new operating system can best be used, thus setting a standard that other device makers will strive to exceed – and perhaps produce a Windows 8 iPad-killer.

If that is indeed the aim, Microsoft appears to have missed a key lesson from Apple. One reason why the iPad has been so successful is that it blends beautiful hardware with an amazing range of software. Microsoft has attractive assets, in particular Skype (an internet calling service), its alliance with Barnes & Noble (a big online bookseller) and its Xbox ecosystem. Yet other than the firm’s Office suite of productivity tools, none of these was shown at this week’s launch. “Microsoft has missed an opportunity to highlight things that can inspire people,” said Sarah Rotman Epps of Forrester, a research firm. Perhaps when its tablet hits the market later this year, the company will have found ways to bring more of these to the surface.

Microsoft has reaffirmed the strategy of having its own hardware devices recently. In September 2013, Microsoft agreed to acquire the handset business of Nokia for about US$ 7.2 billion. Thus, Microsoft will not only be making tablets but mobile phones as well. In a letter to all Microsoft employees, CEO Steve Ballmer, reiterated that “The form and delivery of our value will shift to devices and services versus packaged software.” In November, Microsoft launched the second generation of the tablets and an updated version of Windows. The device strategy is here to stay.

Unlike earlier ventures into devices, like the Zune music player and the game console Xbox, the motivation for getting into the hardware side of business in relation to mobile phones and tablets seems to be the strengthening of the Windows platform but the opening up of a new source of revenue is still in doubt.

Question A :

Explain the differences between diversification and vertical integration strategies in relation to the scope of business.

Question B :

Would you classify the following strategic moves of Microsoft as diversification or vertical integration strategy? Why?
A) Launching of the portable music player Zune
B) Launching of the Xbox game console
C) Launching of the Surface tablet.

Question C :

What are the major potential benefits and risks of Microsoft’s strategic shift from selling ‘packaged software’ (i.e. Windows operating system) to launching ‘devices and services’ (i.e. tablets and mobile phones)?

Answer 1

Question A :

Explain the differences between diversification and vertical integration strategies in relation to the scope of business.

Diversification is when the business take a new route to do business through a completely novel trajectory, which has hardly anything to do with the existing business, like a total new business area.

Vertical integration is the strategy where, the whole business of supporting the own product or service is done through own product extension, which is the raw material, the platform and devices to use ones services is being prepared by the same company. Like getting into hardware for a software business provider.

Question B :

Would you classify the following strategic moves of Microsoft as diversification or vertical integration strategy? Why?
A) Launching of the portable music player Zune : Diversification, as there was no presence in that market or related market of Music
B) Launching of the Xbox game console : Diversification, as there was no presence in that market or related market of Gaming console
C) Launching of the Surface tablet : Vertical Integration , as they had similar devices in terms of PCs and software for the PCs.

Question C :

What are the major potential benefits and risks of Microsoft’s strategic shift from selling ‘packaged software’ (i.e. Windows operating system) to launching ‘devices and services’ (i.e. tablets and mobile phones)?

Benefits are:

• It becomes self sufficient to some level as the devices can be self sufficient and can be sold as a bundle and at a cheaper rate
• Dependency on other hardware players is reduced
• This leads to different business models and hence de-risking of overall business
• It creates a platform for them to enter mobile market

The risks are:

• Alienating own hardware partners
• As it’s a new area, chances of stumbling is high, more so due to shorter product life cycle
• They had failed earlier in the same game, especially with devices