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Question :

Discuss about the Strategy in Digital Business ?
 
 

Answer :

Introduction:

The study is based on the analysis of the law and economics of Microsoft, forming a milestone of cases of antitrust intervention in the industries of network. The United States department of Justice bought a case against Microsoft by claiming that Microsoft monopolized the marketplace for “operating systems of personal computers” and undertook the anti-competitive activities to unlawfully uphold its policy (Gehani, 2013). The department of United States alleged that it monopolized the marketplace of internet browsers, as those browsers would produce rivalry for computer operating systems.

Strategies of Microsoft:

Accessibility, as a part of overall usability is considered as fundamental considerations for Microsoft at the time of designing developing, evaluating and releasing its product. Microsoft engages in the strategy of accessibility, planning, researching, testing and documentation. Microsoft accessibility strategy is considered as long standing commitment in developing innovative accessibility solution. Microsoft has formulated a simple strategy of earning greater amount of profits (Mukhopadhyay & Ye, 2016). The business of software is considered as natural monopoly business since the average total costs constantly falls with the increased output. One of the first and foremost strategies of Microsoft is network marketing. The reason behind this is that each windows product is compatible with other Microsoft window products.

One of the more intriguing strategies of Microsoft is that the market in which it operates leads to innovations of new operating systems and office suites leading to monopoly positions as the eventual outcome. Nonetheless, after analysing the strategy of Microsoft it is understood that it would do well to consider not just what is successful antitrust enforcement against Google might do for the Microsoft’s intermediate market position.

Product differentiation and pricing behaviour:

A disparity in the system effects has led to lower cost theory, which provides rapacious taste to Microsoft’s strategy. The pricing behaviour of Microsoft is to attract customers and produce effects of network; it also plans to amplify the cost in the future (Hoberg & Phillips, 2016). Such kind of presumption is considered as improbable since Microsoft rules the Personal Computer Market and over the years, its share in the market has double folded without raising the cost for the windows at the same time increasing its functionality.

Studies suggest that an organisation can exercise predation without even raising the cost however simply benefiting from the potential effects of network. Hence, such plan is impossible to differentiate from an accurate aggressive strategy and cannot be regarded as predatory. Ironically, the chief process, which Microsoft has used to smother rivalry, is predatory pricing by allocating its product at no obvious cost to the consumers. The software industry has transformed the business along with the people to co-ordinate and work (Chen & Huang, 2015). The global revenue software represents 16% share of the Microsoft. Oracle and IBM represented a share of 7%. SAP on the hand represented a share of 5% with Symantec had the share of 2%.  

Principally by “original equipment manufacturer” distribution (OEM) it can standardise its software as this can allow Microsoft to charge cost, which could yield highest proceeds on the outlay of consumer. The maximum amount of damage which is caused to the consumer is price gauging, an issue which is not even being addressed under the current antitrust trial.

One of the best facts that suggests that Microsoft is a monopoly and shielded from price rivalry is its excess amount of profit. Microsoft sets values with regard to the competitive prices, which is the reason where the products of Microsoft are regarded as the most expensive office suite (Baker, 2014). However, Microsoft products are value setter. Forced by the market opportunity Microsoft does not elevate prices therefore, it only preserves historically high prices while providing the least value for the money.

 

Product differentiation:

One of the important strategies of wining competition in the business is the differentiation strategy. This creates a strong emphasis on the certain brands in comparison to the competitive brands. There are several alternative office suites that has indulged themselves in the price discrimination bandwagon. Microsoft finds it difficult to indulge in product and price differentiation since they were generating huge amount of cash from their monopoly. Microsoft is considered as the monopolistic in the operating system for their products (Smith, 2014).

The marginal cost used to generate the incremental level of software and other goods is zero however the fixed cost remains substantial and Microsoft is price setter since they sell price products that covers their fixed cost but allows them to make large amount of profit without causing distress to several consumers. Microsoft Office provides a good-looking and simple to use interface (Wan et al., 2017). Several participants in the marketplace might have one or two abilities or features but Microsoft outperforms its participants by satisfying the needs of everyone from personal desktop usage to the usage of large corporations. They also had to offer certain kinds of market segments with lower prices since there was huge amount of privacy. Microsoft started to realize that they were leaving money on the table since they did not take dramatic steps to price discriminate with the help of product differentiation.

Microsoft Cost Structure:

The fixed cost of business is considered as the business cost that does not alter in total but varies for each unit when the quantity of production changes. The facility cost for instance are the depreciation, rent, salary, property taxes and insurance forms the example of fixed cost. The variable cost represents the changes in different proportion of cost of production. Upon analysing the variable cost and fixed cost of Microsoft, it provides operating leverage.

Organisations having higher amount of operating leverage are the organisations that have higher amount of fixed cost of operations in relation to the variable costs of operations. A massive amount of cost structure of Microsoft is fixed. Microsoft cost is also restricted to marketing costs and development (Hollensen, 2015). Whether Microsoft sells one copies of its software or over 100 million of copies of the latest version of its windows the cost for the company remains the same. Once the company sells the sufficient number of its copies of software to cover the fixed costs while the additional sales is identified as profits. This represents that Microsoft higher amount of fixed cost.

Were Microsoft indulged in competitive price or not?

On the findings of the fact, it is found that Microsoft dominated its x86 based personal computer operating systems market, which constituted monopoly, and Microsoft had initiated the act of crushing the threats to that monopoly (Gavil & First, 2014). The judgement was split in two parts. On 3rd April, 2000 the court issued conclusion of law which constituted that Microsoft had committed monopolization, attempted monopolization and tried to violate section 1 and 2 of the Sherman Antitrust Act. Economist have cited that the case of antitrust lodged against Microsoft set a hazardous example that indicated rising regulations of the government and the future of technological progress in the industry will get impeded.

 

Benefits from Bundling of IE and Browser Software:

The economic benefits of bundling can be assembled into two primary groups. One benefit arises from the manufacturing side and other coming from the consumption. Bundling efficiencies arises from the economic scope of consumption, which represents the advantage for the consumer in purchasing the products, which are complementary instead of purchasing from two separate suppliers. Consumers are provided typically provided with options of pre-installation of variety of Microsoft commodities along with few non-Microsoft commodities while ordering from OEM’s. If Internet Explorer or media players were unbundled, there would have been no difficulty in permitting the customers with an option amid the commodities of competing companies for each of the merchandise groups (Ferrell & Fraedrich, 2015).

Other arguments concerning the benefits of consumers arising from software bundling is not sufficiently supported. On few occasion it is claimed that effectiveness arises from higher amount of anticipated superiority or functionality during the time when constituents have functioned together. Customers might perceive that using the web browsers generated by the software firms causes the operating system to crash than those of competitors with less recognizable operating systems. Microsoft has put forward its argument that technical bundling of its internet explorer browser and its windows operating systems is an example of economies (Shao & Li, 2017). Therefore, it is widely accepted that designing programmes that can share codes amongst the two goods could hypothetically have possible benefits if the programmes performance is enhanced.  

Competition of Microsoft:

The software market demanded everyone to put emphasis on the single OS and Microsoft had well positioned itself to fill up that demand. Other competing firms such as Apple or Amiga focused working on computers whereas Microsoft emphasised greatly on making its OS available to every PC clones manufactured by several other companies. For example if consumers wanted the products of Apple OS they had purchase the Apple computer, which would only use Apple add-ons. All of these add on became very expensive than their PC counterparts (Moulin, 2014). On the other hand, if consumers bought MS-DOS they could use it on several other platforms and can purchase supplementary hardware under the competitive environment having lower price.

By keeping the price of unit very low and through aggressive Microsoft dominated the marketed as large number of people jumped with on the MS bandwagon so that it could enable users to inter-operators to connect with other users. Therefore, it can be said that when Microsoft initially produced MS Dos it was not monopoly instead it was just another company, which was trying to compete in the computer software market. With the introduction of Microsoft windows version 3.0 Microsoft cemented its position as a software monopoly.

 

Application of game theory and Nash Equilibrium:

Game theory and Nash equilibrium is a useful tool to study the decision of the managers. To explain the Nash Equilibrium it is important to have the concept of dominant strategy. A dominant strategy is that strategy which produces higher amount of payoff than any other strategy as the player can make the use of every possible combination of its rival’s strategy (Huisman, 2013). For example, considering a situation where Apple and Microsoft have an identical product, which they aspires to introduce in the market. One decision, which they need to consider, is the price of the product. Both Apple and Microsoft need to choose a higher price or a lower price.

Assuming that Apple OS software costs 1500 dollars while Microsoft software cost 900 dollars. The primary step in determining the pricing strategies, which both the companies is likely to use in the market, is the dominant strategy. If Apple makes the choice of high price then Microsoft will go for lower price as they will wish to make a profit of $1200 instead of $600. On the other hand, if Apple makes the choice of low cost, Microsoft will also choose lower price, since they will favour to generate a profit of $900 instead of $300.

Microsoft will select a lower price strategy regardless of what Apple chooses and therefore, it can be concluded that Microsoft has dominant strategy as it has lower price.

Benefits for Followers:

By virtue of their efforts in branding other following firms can determine the point of price which tends to be very high than the perfectly competitive firms. It will further enhance the ability of the organisation to improve the quality of the product through their branding (Moulin, 2014). Thus, branding provides the much needed strength to maintain quality depending upon the business financial stake of the followers. 

 

Conclusion:                                        

The antitrust trial has put Microsoft under huge pressure. If Bill did not control Microsoft, gates and his employees in the short term Microsoft may have compromised and may have harmed the interest of the shareholders in the long term. One of the major loss of Microsoft is the constant antitrust scrutiny which do not provides the opportunity of making noteworthy acquisitions in telecommunications and internet sectors in United States at the time of interest antitrust scrutiny. Despite the consequences of the ultimate outcome, the impact created by “U.S v. Microsoft” is more likely to be felt over a long period of time. However, if the break-up happens, it is most likely to inflict gloomy shadow of fundamental antitrust interference on the entire industry of computer.

 

Reference list:

Baker, M. J. (2014). Marketing strategy and management. Palgrave Macmillan.

Chen, F., & Huang, J. (2015). A study on the degree of product differentiation of the platform and the pricing strategy in two-sided markets. Review of Industrial Economics, 2(002).

Ferrell, O. C., & Fraedrich, J. (2015). Business ethics: Ethical decision making & cases. Nelson Education.

Gavil, A. I., & First, H. (2014). The Microsoft antitrust cases: competition policy for the twenty-first century. MIT Press.

Hoberg, G., & Phillips, G. (2016). Text-based network industries and endogenous product differentiation. Journal of Political Economy, 124(5), 1423-1465.

Hollensen, S. (2015). Marketing management: A relationship approach. Pearson Education.

Mukhopadhyay, S. K., & Ye, G. (2016). EFFECT OF CSR ON PRODUCT DIFFERENTIATION IN THE PRESENCE OF COST ADVANTAGE. In Economic and Social Development (Book of Proceedings), 17th International Scientific Conference on Economic and Social (p. 289).

Niyato, D., Hoang, D. T., Luong, N. C., Wang, P., Kim, D. I., & Han, Z. (2016). Smart data pricing models for the internet of things: a bundling strategy approach. IEEE Network, 30(2), 18-25.

Ray Gehani, R. (2013). Innovative strategic leader transforming from a low-cost strategy to product differentiation strategy. Journal of technology management & innovation, 8(2), 144-155.

Shao, L., & Li, S. (2017). Bundling and product strategy in channel competition. International Transactions in Operational Research.     

Smith, B. D. (2014). Capturing an elusive phenomenon: developing and testing a multiple perspective model of marketing strategy implementation. Journal of Strategic Marketing, 22(1), 16-40.

Wan, J., Zhao, L., Gupta, S., & Lu, Y. (2017). Evaluating App Bundling Strategy for Selling Mobile Apps: An Ambivalent Perspective. Information Technology & People, 30(1).

Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton University Press.

Huisman, K. J. (2013). Technology investment: A game theoretic real options approach (Vol. 28). Springer Science & Business Media.

Geckil, I. K., & Anderson, P. L. (2016). Applied game theory and strategic behavior. CRC Press.

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