Team Members: Tim Mulligan, Kelly Bewley, Bryan Costreie, Ahmed Khawaja, Ryan Wyeth

Date of Submission: 10/1/2015

Team Number: 2
Case Number: 1

Overview:
Microsoft is facing an identity crisis, as more users switch from PCs to mobile and cloud based
devices. Microsofts cash cow for years has been its windows operating system, but this recent
mobile trend has forced them to reconsider their strategic goals. Their corporate culture created
political silos within the company, leading to a bureaucratic system of development that has not
fostered speed and innovation over the past decade. In order to compete in the market, Microsoft
must address two core problems that are jeopardizing the success of the company. First, the
overall culture of the company needs to be revamped in order to increase the speed at which
Microsofts products reach the consumer market. Next, they need to alter their current business
model.

Recommendation #1:
We recommend that Microsoft implement Googles practice of putting a time limit on
innovation.

Justification:
Within oligopolistic industries such as technology, the stakes are high. Steep barriers to entry and
high switching costs result in winner-take-all markets in which the speed to market alone can
mean the difference between success and failure. Microsoft has made a habit of being late to the
market with products such as Bing. According to Ali Farhoomands case study entitled
Microsoft: New Wine In An Old Bottle, Seven years after Google was incorporated, Microsoft
finally had its own search engine. Microsofts Online Services division, which houses Bing, the
companys search brand, was dwarfed by Google in many ways. Bings market share was 18% in
October 2013, trailing far behind Googles 67%. Googles dominance in the search engine
market is not due to its products superior capabilities, but instead to the simple fact that it was
first. Network externalities took hold, creating a powerful self-reinforcing feedback loop. Nir
Eyal, professor of consumer psychology at Stanford University, explains in his book Hooked that
In a head-to-head comparison of the efficacy of an incognito search, the products (Google &
Bing) are nearly identical. So why havent more Google users switched to Bing? Habits keep
users loyal. If a user is familiar with the Google interface, switching to Bing requires cognitive
effort. Habits are powerful drivers of behavior, and once ingrained in the basal ganglia (an area
associated with involuntary action), behavior is difficult to change. For Microsoft to compete,
they must increase their speed to market. Yet, with operations in over 100 countries, and human
resources of around 100,000 people Microsoft has struggled to innovate and stay agile. Google
has effectively addressed this problem of scaling innovation, and is universally considered to be
one of the worlds great innovators. Learning from Googles practice of putting a time limit on
innovation is a wise solution to their problem of speed.

Implementation:
We will model our practices very closely to those of Google. Most project at Microsoft will be
limited to two years, after which they will be killed, spun off into independent firms, or licensed
to others. In addition, the groups will remove project leaders after two years and hire outside
experts. This limited time as team leader will create a sense of urgency; each week is about 1%
of a leaders time in the group. If Microsoft executives deem a project in need of more time, they
may occasionally extent a project at their discretion. As Google Executive Chairman Eric

Schmidt explains in the March 2015 Wall Street Journal article entitled Google Labs Puts a Time
Limit on Innovation, We like this model because it puts pressure on people to perform and do
relevant things or stop.

Recommendation #2:
Microsoft should focus on acquiring the market share in BRIC countries for its new cross
platform Software (Azure, Office 365, etc.) in order to break into emerging markets.

Justification:
A recent study by IDC shows that global PC shipments are declining, down from 75.7 million
units in Q1 2014, to 71.7 units in Q1 2015 (Tilley) 1. This coupled with the fact that demand for
smartphones, tablets, and other smart connected devices is quickly shifting from developed
markets to the BRIC emerging markets, represents a great opportunity for Microsoft to be first
movers in these emerging economies (Investors) 2. According to a recent study by EMarketer,
These markets will represent 4 of the top 6 smartphone user markets by 2018 (Ghosh) 3. If
Microsoft is serious about expanding its user base, they must take advantage of these emerging
markets. Diversifying products in a large company like Microsoft will hinder the growth of the
company spreading its sources too thin. Microsoft should focus on software specifically so that
they can eventually grow their hardware sales. Studies have shown that superstar product
software (software that is unique and adds value) has a positive correlation in hardware sales
(Binken) 4.

Implementation:
The majority of Microsoft's revenue has come from their software development and its
application in the business community, which is used by 80% of the Fortune 500 companies (By
the Numbers). Their focus in these emerging markets should be revolved around creating a
secure R&D that will enable Microsoft to produce software that matches the needs of the desired
countries. We will cut the production of hardware goods and development by 20% and use that
money to implement Cross-Platform R&D. This will allow Microsoft to re-distribute its earnings
of close to $4 billion to invest in software development, R&D, and marketing (Nadella) 5. Since
the Xbox is sold $28 above cost it has generated relatively good margins due from video game
sales so we will maintain the production and distribution of that hardware (Business, I).
Microsoft will have more opportunity to gain income on subscriptions from software use by
small companies but still maintaining a share in the hardware market. By using Esomar, a worldwide marketing metadata base that finds the best business to business marketers, Microsoft can
quickly locate and develop our operating system in other starter businesses. We will use national
search engine optimization and National TV advertisements which will roughly cost $16.5
million in each BRIC economy Microsoft wants to enter (FIGURE 2) 6. So not only will we have
the best operating software, we can be used by companies that can produce hardware for a lot
cheaper. We can then stick to the already used subscription base method for our software and
catch all the new and emerging businesses to increase revenue.

Appendix
1.

Tilley, A. (2015). PC Market Continues Painful Plunge. Forbes.Com, 17.

Global PC shipments in the first quarter of 2015 declined 5.2 percent from the previous
year -- dropping from 75.7 million units shipped in the first quarter 2014 to 71.7 units in
the most recent quarter -- according to data released today by research firm Gartner.
Meanwhile, IDC found an even larger decline in the first quarter this year in fresh data it
released today. According to the new IDC data, global PC shipments reached 68.5
million, a decline of 6.7 percent over the previous year.

2. Investor's Business, D. (2013, June 11). BRICs boost smart devices. Investors Business
Daily. p. A02.
Demand for smartphones, tablets and other "smart-connected" devices is quickly shifting
from developed markets to the BRIC emerging markets, according to a study by market
tracker IDC. Global shipments of smartphones, tablets and other connected devices are
expected to surpass 1.7 billion units by '14, with 1 billion units delivered to emerging
markets. The BRIC countries Brazil, Russia, India and China will account for 662
million units, with a shipment value of over $206 billion. Investor's Business Daily.
3. Ghosh, M. (2014, December 23). 204M Smartphone Users In India By 2016. Will
Surpass US: EMarketer.

4. Binken, J., & Stremersch, S. (2009, March 1). The Effect of Superstar Software on
Hardware Sales in System Markets.
The Effect of Superstars on Hardware Unit Sales over Time A superstar achieves software
sales of 835,000 units on average during these first six months (see Figure 2), meaning
that during these first six months, on average, one in every five buyers of a superstar
software title also purchases the hardware required to use the superstar software title.
5. Nadella, S. (2014, October 9). Annual Report.

(In millions, except percentages)

2012

Percentage

Percentage

Change 2014

Change 2013

Versus 2013

Versus 2012

2014

2013

$18,803

$19,021 $19,495 (1)%

(2)%

Computing and Gaming Hardware 9,628

6,461

6,740

49%

(4)%

Phone Hardware

1,985

Total D&C Hardware

11,613

6,461

6,740

80%

(4)%

Other

7,258

6,618

6,203

10%

7%

Total D&C revenue

$ 37,674 $32,100 $32,438 17%

(1)%

$ 17,216 $17,044 $17,240 1%

(1)%

Revenue
Licensing
Hardware:

Gross Margin
Licensing
Hardware:
Computing and Gaming Hardware 893

956

2,495

(7)%

(62)%

Phone Hardware

54

Total D&C Hardware

947

956

2,495

(1)%

(62)%

Other

1,770

2,046

1,998

(13)%

2%

Total D&C gross margin

(8)%
$ 19,933 $20,046 $21,733 (1)%

6. Becket, X. (2013, July 30). Cost of Advertising. Retrieved from

http://www.webpagefx.com/blog/business-advice/the-cost-of-advertising-nationallybroken-down-by-medium/

Work Cited

1. Barr, A. (2015, March 31). Google Lab Puts a Time Limit on Innovation.
2. Beckett, X. (2013, July 30). The Cost of Advertising Nationally Broken Down by
Medium.
3. Binken, J., & Stremersch, S. (2009, March 1). The Effect of Superstar Software on
Hardware Sales in System Markets.
4. Business, B. (2015, July 21). After Nokia Writedown. Bloomberg Business.
5. Business, I. (2013, November 26). Microsoft Xbox One Hardware Cost Comes in Below
Retail Price, IHS Teardown Reveals.
6. Eyal, N. (2014). The Habit Zone. In Hooked (p. 27). New York, New York: Penguin
Group.
7. Farhoomand, A. (n.d.). Microsoft: New Wine In An Old Bottle? Asia Case Research
Center.
8. Ghosh, M. (2014, December 23). 204M Smartphone Users In India By 2016. Will
Surpass US: EMarketer.
9. Investor's Business, D. (2013, June 11). BRICs boost smart devices. Investors Business
Daily. p. A02.
10. Microsoft Corporation SWOT Analysis. (2015). Microsoft Corporation SWOT Analysis,
1-10.
11. Nadella, S. (2014, October 9). Annual Report.
12. News Center, M. (2011, November 16). Manufacturing Companies in BRIC Countries
Suffer Massive Competitive Disadvantage Due to Software Theft.
13. Schilling, M. (2013). Standards Battles and Design Dominance. In Strategic Management
of Technological Innovation (4th ed., p. 69). New York, New York: McGraw-Hill.
14. Tilley, A. (2015). PC Market Continues Painful Plunge. Forbes.Com, 17.