Environmental Factors Leading To Microsoft

Microsoft as a Company

Question:

Discuss about the Failure of Microsoft’s Smart Phone Business.

The paper is a case study of the environmental factors which lead prominent business organisations to incur significant losses or even closure due to business failure. The case study is based on the failure of Microsoft to takeover Nokia and capitalise smart phone market which led to the strategic withdrawal of the former from the international market including one of its biggest market, Australia. The paper before initiating a discussion on the business failure of the IT giant, introduces Microsoft as a company, then its ambitious entry into the smart phone market and subsequent failure. The study is divided into four primary parts which help delving deep into the smart phone debacle of Microsoft. The first section identifies and analyses the factors which led to the failure of Microsoft in the smart phone market. This section recognises various factors like rise of Android, its acceptance in the society and Nokia’s late entry owing to inappropriate decision making at the apex level. The second section discusses the macro environmental factors which are capable of impacting business organisations like Microsoft but remain out of their control. The third section explains the reasons of failure of the ambitious project in the light of the external market factors. The final section outlines the response of Microsoft to the failure including the much required restructuring.

Microsoft is an American multinational company headquartered in Washington which was founded by Paul Allen and Bill Gates in 1975. The company has a strong presence in North America, Europe, South America, Australia and Asia. Products of Microsoft include hardware, software, internet security services, skype, enterprise solution, internet explorer and cloud computing(microsoft.com, 2017). The customer segment of Microsoft consists of software business organisations, business organisations, IT developers and students and educators. Microsoft is a public limited company which is listed on NASDAQ and on stock exchanges in its host countries like it is listed on the Australian Securities Exchange under the code MCD.

Figure 1. Figure showing the share index of Microsoft on NASDAQ

(Source: Microsoft Corporation Common Stock (MSFT), 2017)

This listing on leading stock exchanges around the world and a global consumer base make Microsoft the largest information technology company in the world. Microsoft adopts acquisitions and merger strategies to acquire companies from diverse industries to gain more competitive advantage in the global market. One such acquisitions was the acquiring of the smart phone business of Nokia and forming a wholly owned subsidiary called Microsoft Mobile. The business suffered significant losses and finally led to the closure of the Microsoft-Nokia business venture. The business venture by the two multinational companies to rule the smart phone market fell through due macroeconomic environmental factors beyond the control of Microsoft like emergence of Google’s Android smart phones which overthrew Microsoft’s Windows OS. The failure had serious implications on Microsoft and its business like Steve Ballmer, the CEO held responsible for the debacle had to resign and the share price of Microsoft fell drastically(Day, 2017). Microsoft had to ultimately withdraw from the smart phone market and lose its profitable markets like Australia to its competitors like Apple. The last handset the company sold in Australia was Lumia 650 to capture Australian smart phone market but failed to holds its ground. Australia is dominated by Android phones and is a big market for smart phones running on Android platform(Turner, 2017).

Factors Leading to Failure of Microsoft in the Smart Phone Market

Steve Ballmer, the then CEO of Microsoft did not respond the shift in the market towards smart phones which was growing. This gave opportunities to its strong competitors like Google and Apple enter the smart phone market and capture leading positions.  When Microsoft entered the smart phone market Google’s Android was all ready dominating it and major mobile phones were running on Android platform. Thus, the failure of the apex management of Microsoft to capitalise on the booming mobile technology and smart phone market prevented the company from dominating the market(Thompson, 2017). Thus, faulty and late decision of Steve Ballmer resulted in failure Microsoft to overthrow or even compete with Google’s Android platform. This showed initial signs of the faulty acquisition of Nokia’s smart phone business by Microsoft under the leadership of Steve Ballmer.

Google dominated the smart phone market with its Android platform which was used by the major mobile smart phone companies. Google outsourced its mobile operating systems to device and software makers which lowered its cost of production. This allowed Google to offer Android phones at lower prices and gain cost leadership in the smart phone OS market. Android owned by Google allowed all the applications to use its platform which the Windows IOS did not(Rankin, 2017). The Nokia smart phones using Windows IOS were as a result not able to compete with its strong competitors like Samsung running on Android platforms. Thus, the incapability of Windows platform to support a wide range of applications compared to Android led to low demand of the Widows smart phones by Microsoft. This falling demand in the society for Windows OS led to failure of the smart phone business of Microsoft which caused losses around $ 950 million. The big markets like Australia are dominated by smart phones like Samsung and Sony which run Android platform. Apple and Samsung are two toughest competitors trying to command the market of the country (news.com.au, 2017).

The strong competitors of Nokia like Samsung use Android platform which allowed more applications to run compared to Windows phones. Thus, the consumers of smart phones preferred Android smart phones like Samsung. Thus, Nokia lost its market to its competitors due to its inability to meet customers’ demands(Yoffie & Cusumano, 2015).

The customers using smart phones are technologically aware and demand applications on their smart phones. The target customer segments of the smart phones are the middle and the upper class customer who are capable of buying technologically advanced phones. These customers are more aware about the advancements in the telecommunication market. The Android platforms allow running of all applications compared to the limited applications on the Windows platform. This limitation of Windows to run multiple applications led to the Microsoft smart phones failing to meet the growing demands of the smart phone customers. This led to fall in the demands for Windows smart phones which resulted in the fall of sales of Microsoft smart phones(Lee & Yazdanifard, 2015). Thus, it can be inferred from the discussion that fall its sales of Windows smart phone proved to a strong reason for failure and closure of Microsoft Mobile, the smart phone manufacturing subsidiary of Microsoft.

Macroeconomic Environmental Factors Affecting Microsoft

Microsoft with its Windows phone and Nokia hardware failed to compete with the Apple’s iPhone. The iPhones by Apple and running on Apple IOS are among the leading brands sought after by smart phone users. Microsoft invested a lot of capital to market its Windows phones but failed to compete with Apple’s. The falling demand, resultant fall in sales, falling revenue and increasing promotional cost to push up falling sales eroded the capital of the Windows Smart Phone company. Thus, the failure of Microsoft to compete with Apple to a great extent was responsible for the failure of the Windows phone business(Forbes Welcome, 2017).

The above discussion shows that Microsoft operates in an extremely dynamic macroeconomic environment. The macroeconomic environment in which Microsoft operates is extremely competitive and has strong players like Google and Apple. The technological advancements, the development of marketing strategies and expansion strategies of these competitors have strong impact on Microsoft. Their strategies affect Microsoft’s market performances and are even capable to leading to failure of its business ventures like Windows phone. It must also be noted that Microsoft has no control over the macroeconomic factors like aggressive strategies of the competitors or changing customer preferences(Liu & Huang, 2016). The following are the macroeconomic factors under whose influence Microsoft operates:

The political factors impacting Microsoft are government laws, policies, international laws and diplomatic bilateral ties. Microsoft is a leading information technology which is present in all the major market economies in the world like North America, South America, Europe, Australia and Asia. The home country of Microsoft, the United States of America is a politically stable country which promotes its business development. The company must follow the government laws, policies and directions the government of the US to operate in the country(Thow et al., 2015). Microsoft makes the use of the diplomatic bilateral ties the US has with the major market economies in the world like the United Kingdom, Canada, India and China. The bilateral trade agreements of the United States of America with the international bodies like the Transatlantic Trade and Investment Partnership(TTIP) with the European Union. Microsoft is working with several big organisations in its host countries like the government and armed forces of Bulgaria. It can also be pointed out that the strong bilateral ties the USA has internationally allows Microsoft to expand its business in the foreign countries, cater to a global base of customers and generate huge profits(European Union., 2017).. It must also be pointed that this global expansion brings Microsoft under the influences of the laws and policies of the host governments. Political factors like bilateral trade agreements promote expansion of business of Microsoft but these factors are also capable of hampering the business of Microsoft. For example, souring tensions between the home country(the USA) and a host country can force Microsoft to withdraw from the country. These factors causes heavy business losses Microsoft but the company has no control over the happenings. The other political threats to Microsoft are terrorism, instability in the governments and domestic violence. This analysis shows that political factors play a very significant roles on the success of business operations of Microsoft but the company has no control over the political factors(Gilpin, 2016). It is required to abide by the directives and laws formed by the political bodies irrespective of the outcomes on its business.

Reasons for Failure of the Ambitious Project

The economic factors impacting Microsoft consists of factors relating to the economic conditions both in the home country and the host countries. The home country of Microsoft, the United States of America is the world’s largest economy and experiences the highest GDP in the world of over $ 18 trillion. The average population of the United States of America earns high income which means they have more disposable income to purchase expensive gadgets like smart phones. This high disposable income among the people in America provide opportunities to the smart phone companies like Microsoft market and sell smart phones. The easily available technology, strong ancillary industry producing hardwares for smart phones and skilled technical labour promote large scale production of smart phones(Deresky, 2017). It must also be pointed out that Microsoft is a global employer and employs human resources in all its host countries. This necessitates the company to follow labour laws and to exploit the human resources of other countries ethically. The emergence of developing markets like India and Brazil characterised by increasing per capaita income provide Microsoft with new markets to sell its high end smart phones and accessories. This expanding market and consumer base to sell Windows phone has allowed the company to earn huge profits. The second economic influence acting on Microsoft is the available of capital. Microsoft and its subsidiaries are listed on all the major stock exchanges in the world(Grubel, 2014). This means that the company is able to raise capital by floating shares from a global population of investing. The company also has tie-ups with the financial institutions like banks and share trading houses in both its home and host countries. These global bases of investors and tie-ups with financial institutions ensure steady flow of capital to market smart phones. Thus it implies that economic factors like availability of capital and high per capital income act as drivers for the smart phone business Microsoft and result in high production. However, economic factors like inflation, intervention of trade unions and changing exchange rate impact the production of Microsoft smart phones negatively. For example, the trade unions in all the both the home and host countries compel Microsoft to raise the wages of the employees(Markusen, 2013). This increase in wages raises the cost of production of Microsoft phones which in turn raises their market prices. It must also be noted that Microsoft has no control over the economic factors and can incorporate these factors in its strategies.

Response of Microsoft to the Failure

The social factors like preferences of consumers, their disposable income and lifestyle impact Microsoft’s smart phone business but the company has no control over them. For example, the lifestyle of the consumers impact the sale of products like Windows phones and the consequent revenue generation of Microsoft. This is because smart phones are expensive lifestyle products which target the middle and the upper class consumers. The increase in income of the consumers increases the amount of disposable income which they can spend to buy smart phones. The growing preferences among consumers for high end smart phones promote the sale of smart phones(Sarwar & Soomro, 2013). Thus, this shows that social factors are responsible for growing demands for smart phones which allow Microsoft to sell its smart phone products.

The technological factors like level of technological advancements and facilities to conduct open innovations have very significant impact on the smart phone industry. Smart phones are high end technological devices which require highly technologically advanced environmental conditions like high degrees of automation. The United States of America is technologically advanced nations with multinational technology companies. These companies provide Microsoft with parts like screen and chips. The high level of technological advancement in the US allows Microsoft to conduct open innovations by collaborating with laboratories to conduct researches aiming towards product development(Fitzgerald et al., 2014). These factors allow Microsoft to improvise its products like mobile phones and software. The market of the USA also has presence of ecommerce firms which facilitate online sale of products to overseas market and generation of high revenue. Microsoft is an information technology giant whose product line consists of software, cloud computing and computer hardware items. Thus, it can be said that level of technological advancements impact the very productivity of the company. The technologically advanced market of the United States of America provides cheap hardware parts and software facilities to develop its product line(Hacklin, Battistini & Von Krogh, 2013). The United States of America has strong ties with the technologically developed market of Europe and developing market of Asia. This allows Microsoft to enter into collaboration with the technological companies in these markets to develop new products and improve the existing products. Moreover these markets have present of advancement production facilities which allows Microsoft to mass produce smart phones at lower prices. This discussion makes it clear that technological factors like level of technological development and production facilities act as drivers for companies like Microsoft(Archibugi, 2017). However, the advancements of technology also present certain challenges like increasing cyber threats over which Microsoft has no control. The threats like cyber threats and virus attacks require the company to invest huge amount of money to tighten its data security facilities. Thus on the basis of analysis of the discussion, one can infer that technological factors act as both drivers and challenges and require the companies like Microsoft form strategies to adapt to them(Watkins, 2014).

There are various environmental factors which led to the events which causes the Microsoft smart phone business to incur loss and opt for closure. The events are lack of decision making power of Steve Ballmer, the then CEO; the high market position of Google, stiff market competition Nokia faced, changing tastes of the buyers and Microsoft’s failure to compete with Apple. These events can be categorised into the four macro environmental factors namely political, economical, social and technological. While categorising it can be pointed out that no event can be categorised under single PEST factor and belong to multiple factors. For example, failure of Steve Ballmer to take correct decision t enter smart phone market led entry and strengthening of the position by Google and Apple(Wilcox, 2017). The open market policies of the both the government of the United States of America and the main trading partner nations of the USA encourage expansion and strengthening of Google and Apple in the smart phone market. Thus, this failure of Nokia to capitalise market opportunities due to faulty apex decisions can be categorised under political factors and technological factors. Again market capturing of Android and its expansion along with new increase in demand smart phones can be categorised under technological and political factors(Acs et al., 2016). Nokia’s loss of market due to growing customer preferences for Android smart phones can be categorised under technological and social factors. The above events are described after categorising them into macro economical factors(PEST):

The political factors like government policies and laws impact the companies but the latter has no control over these government laws. Companies are bound to abide by these laws and form their business policies according to them. It can pointed out from the previous discussion that the government of the United States of America maintains strong bilateral ties with governments of other countries and international bodies like the EU. This allows Microsoft to expand globally into the markets of Asia, Europe, South America and Australia. This allows the company to market its Windows smart phones to a global buyer population and generate huge profits. It must me pointed out again that the open market policies of the US also encourage global market expansion of the rival companies like Apple and Google(Brouthers, Nako & Dimitratos, 2015).. These companies have a strong presence in the countries where Microsoft is present and given stiff competition to the latter even outside the US. Again the open market policies of the US also attract foreign smart phone companies enter the American market which makes the competition for Microsoft stiffer. This stiff competition requires the competitors to take prompt decisions to take advantage market trends like advancement of smart phone technology. It must pointed out that Steve Ballmer, the then CEO of Microsoft was not able to exploit this emerging market trend of advancement smart phones and Microsoft made a late entry into the smart phone market. This gave opportunity to strong competitors like Google and Apple to strengthen their market position(Sleuwaegen & Onkelinx, 2014). Thus it can be inferred that government policies like open market policies allow both Microsoft and its competitors to strengthen their global position. This makes competition stiff and failure of take advantage of market opportunities by a company(like Microsoft) can result in losing market position and competitive advantage. This analysis shows that the political factors played indirect role in causing the smart phone business of Microsoft to incur losses and close.

The economic factors impacting Microsoft’s smart phone business are GDP, per capita income, availability of labour, availability of financial resources and so on. An analysis of the role of economic factors leading to the failure of the Windows phones shows that the positive economic factors like availability of labour and capital also promote growth of the competitor companies like Google. The competitor firms like Google and Apple acceded to the easily available human resources and capital in the global market(Deresky, 2017). The rising technological prowess of the emerging markets of Asia allowed these companies to conduct open innovation in collaborations with the laboratories in the host countries. Besides, they too like Microsoft entered into tie-ups with the financial institutions in their host countries and were able to source vast financial resources to fuel their research and development. This allowed them to present more customer oriented smart phones which helped them to gain more competitive advantage compared to Microsoft. Thus, it can be stated that availability of drivers like easily available financial resources fuelled innovations by the competitors of Microsoft like Apple which resulted in Microsoft smart phones losing out its market before these competitors(O'brien & Williams, 2016).

The society played a significant role in causing ascent of Google and Apple smart phones and fall of Microsoft Windows phone in the global market. The changing customer preferences and the increasing popularity of the Android smart phone platform among the consumers led to decrease in demand of the Windows smart phones. The Android platform owned by Google allowed more applications to run compared to Windows platform owned by Microsoft. Thus, the customers preferred Android phones to Windows phones(Filieri et al., 2017). This analysis shows that failure to meet customer requirements and loss of market to Android platform led to heavy losses incurred by Microsoft Smart Phone Company.

The technological advancements like availability of open innovation platforms allowed Google and Apple to develop their smart phone platforms. Steve Ballmer did not take fast decision for Microsoft to enter the smart phone market which helped Google and Apple to advance their platforms to allow most of the applications run. This resulted in the leading smart phone companies opt for Google platform while the iPhones ran on Apple IOS platforms. It can also be pointed out that when Microsoft entered the smart market, it was already under the domination of Google through Android and Apple through Apple IOS(Zheng, 2014). Windows platform could not capture the market due to its failure to allow all applications to run. The smart phone using Android platform like Samsung as a result stole customers from Nokia. Thus it can be inferred from the above discussion that both Microsoft and Nokia lost their markets to Android and smart phones using Android like Samsung respectively. This loss of market caused huge loss to Microsoft and ultimately led to the closure of its smart phone business(Zheng, 2014). This analysis shows that technological factors can result in market loss, financial loss to business organisations and eventually lead to their closure or strategic withdrawal from the market.

Microsoft suffered a loss of  over $950 million due to its failure to capitalise the smart phone market. the following are the ways in which Microsoft responded to this failure and closure of its smart phone business:

Microsoft wrote off billions of dollars it spent to acquire the intellectual property rights of Nokia phones and peripherals. The multinational company terminated its acquisition of Nokia and its patents. The smart phone market failure made it crucial for Microsoft to write off Nokia smart phone business to save its core business of hardware and software from loosing market(Smithers, 2013).

            The failure of Microsoft to capitalise on the smart phone market impacted its goodwill and led to the resignation of its then CEO, Steve Ballmer. Steve Ballmer was responsible for the failure of Microsoft to capitalise the smart phone market. it was under leadership that the company entered the market when it had already gone under the control of Google’s Anfdroid and Apple’s Apple IOS. It was evident that Steve by his inappropriate decision resulted in the huge losses incurred by Microsoft to compete against strong competitors like Google. It had caused a huge loss to the company, its market goodwill and its financial position(Thompson, 2017). This weakening financial position led to the shareholders withdrawing their support from the smart phone business. These factors forced Steve Ballmer to resign and submit his resignation letter to the new CEO Satya Nadalla.

Microsoft hired twenty five thousand Nokia employees and was forced to lay them off to recover from the loss. The failure of Microsoft in the smart phone market and its impaired financial position due to losses incurred from the failure required overall restructuring. The company left the smart market and decided to concentrate on its core products, hardware and software. The company underwent a total organisational restructuring and thousands of Nokia employees were terminated to reduce expenditure incurred towards their salaries(Tu, 2017).

Conclusion:

It can be concluded that macroeconomic environment plays significant roles in shaping the business of all organisations even the largest multinational IT companies in the world, Microsoft. The study reveals that even the multinational companies like Microsoft have no control over the external market environment and should adapt to it in order to sustain in the market. The inappropriate decision makings at the apex level and strong companies can cause failure of even the most ambitious projects like Microsoft Nokia collaboration. The discussion makes it very clear that failures and closures of business ventures have long term effect on employees of all levels. The failure of Microsoft smart phone venture led to the resignations its CEO, Steve Ballmer who was responsible for the failed takeover and sacking of twenty five thousand lower and middle level employees. Such failed business ventures erodes the coffers of even among the richest companies in the world like Microsoft which calls for restructuring and cost cutting to recover from the loss.

The issues which led to the failure of Microsoft’s smart phone project are failure of Steve Ballmer to make strategies to enter the smart phone market as a pioneer, strengthening of market position of Google and Apple and customers preferring Google’s Android platform over Microsoft’s Windows platform. This led to market leadership of smart phone manufacturers like Samsung using Android platform who stole customers from Nokia. A closure observation of the issues show that they point out that even the two of the biggest brands in the IT and telecommunication market, Microsoft and Nokia respectively could prevent the venture from failing. The impacts were first, resignation of Ballmer, retrenchment of twenty five thousand employees who were mostly of Nokia and restructuring of Microsoft to recover its market position from the failure. The following are the alternative solutions which can be recommended to Microsoft:

Microsoft can return to the smart phone market with Android phones which would allow multiple applications to run. The company can again tie up with Nokia to use its high quality hardware to make the smart phones sturdy. This combination of Android platform of Google and durable hardware of Nokia would allow Microsoft to achieve market differentiation. This dual strategy will help Microsoft to steal customers from its competitors like Samsung.

Microsoft as an alternative to sacking employees should reinstate the terminated twenty five thousand employees and this will have several positive implications on the company. First, entry into the smart phone market would require Microsoft to employ new employees. The employees of Nokia are skilled and experienced in the sector. Thus absorbing them once again would help Microsoft to win their loyalty back. They being skilful and experienced can help Microsoft to leverage production within a short time. Hence employing skilful employees of Nokia back would help Microsoft to kick start its production and quickly gain strong market position. Secondly, by entering the smart phone market, Microsoft would be able to attract experienced employees from its competitors like Google. These employees would use their skills and expertise gained with their previous employers to develop the smart phone products for Microsoft. Thirdly, reinstating the terminated employees would strengthen the corporate image of Microsoft. Fourthly, this enhanced corporate image will help the company to attract fresh investment from the market to support its smart phone business.

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