Agenda

3. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

4. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

5. Founded in 1978, Microsoft grew to be the largest software corporation Key facts 2000 • Number of employees 31,996 • Net Revenue US$ 19.74 bn • Net Income US$ 7.79 bn Mission 2000: “Empower people through great software - anytime, anywhere, and on any device” Interesting facts • Gates sold his first programme by the age of 17. His school paid him $4,200 for a programme on time-tabling • Gates dropped out from Harvard to pursue his own business • Gates has donated many billions of dollars to charity through his Foundation • A spoof internet report that Gates had been shot dead knocked $3bn off the Korean stock market Initial mission: “PCs on every desk and in every home”

6. Internet and the change from Gates to Ballmer are milestones in Microsoft’s history Pre-Internet era Post-Internet era Founded by Bill Gates and Paul Allen .NET strategy for Web Services Earliest version of Office suite ActiveX technologies Windows 95 Windows 98 June 22 2000 1975 Aug 1 1989 Aug 24 1995 June 25 1998 1996 May 22 1990 Feb 17 2000 Aug 12 1981 Dec 7 1995 Sept 1997 Internet Explorer 4.0 Windows 3.0 Windows 2000 IBM introduces PC with 16-bit O/S, MS-DOS 1.0 Gates outlines Microsoft's commitment to supporting and enhancing the Internet Steven Ballmer becomes CEO

7. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

8. Software industry architecture is characterized by a multi-layer structure Layer Structure Server perspective Initial perspective Internet perspective Services Application Application Network Internet Application Operating System Operating System Hardware Hardware

9. Software bundling and hardware alliances are key elements of Microsoft’s strategy Although Microsoft would like to lock-in, it is just not possible (at the moment). Services The Application layer is more broad, although bundling applications has made Microsoft beat its other rivals. Application Bundling Internet Explorer to the Operating System, Microsoft pretends to lock-in customers to its own platform. Internet Operating System Microsoft and Intel from its origins have formed an alliance, WINTEL, where hardware is mostly related to software Hardware

10. Operating systems and bundling suite applications are Microsoft’s “cash-cows” 1) Growth-Share matrix 2000 (Market size in US$bn) Relative market growth rate 50% 2) ISP 0.9 Internet server Server OS 2.0 1.5 25% Desktop OS Office suite 7.8 8.2 0% 0% 50% 100% Relative market share 1) Data from Case, Microsoft financial reports 2) Internet Service Provisioning

11. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

12. When Microsoft entered the browser market in 1996, it owned 4% market share. 100% Netscape: 87% market share 80% Other 60% 40% Explorer: 4% market share 20% 0% 1996 1996 1996 1996 1997 1997 1998 1998 1999 Q1 Q2 Q3 Q4 Q1 Q3 Q1 Q3

13. Microsoft pursued an aggressive strategy establishing sustainable competitive advantage Strategy Microsoft’s strategic moves Pricing strategy • “Priced to sell” (free of charge) • Additional features (Internet Mail, News 1.0, Windows address book) • Continuous quality improvement, upgrades Quality strategy Product strategy • Once installed Internet Explorer cannot be completely uninstalled • Eventually full integration into Windows Distribution strategy • Compulsory conditional sales: Forced computer manufacturers (e.g. Dell) to install Internet Explorer • Influencing unexperienced users (cookie angst) • Automatic installation routines (MS Office updates) • Direct forward of customers to Microsoft services Service strategy

14. 100% Netscape: 22% market share 80% 60% 40% Explorer: 77% market share 20% 0% 1996 1996 1996 1996 1997 1997 1998 1998 1999 Q1 Q2 Q3 Q4 Q1 Q3 Q1 Q3 In 1999, Microsoft controlled 77% of the internet browser market Other

15. Microsoft strategy seems to work but is it legitimate from an ethical/legal point of view? …. Strategy Against For Pricing strategy • Price dumping • Legitimate pricing war • Legitimate cross subsidizing Quality strategy • Abuse of monopoly power to deliver low quality products • Customers benefit • Deprive consumers’ choice • Control over multiple aspects of our lives • Common standards • Ease consumers’ purchasing process Product strategy • Bullying behavior • “Others do it too” -Netscape • Not fair but still legal Distribution strategy • Manoeuvring and locking in customers • Customers have free choice • Over paternalism Service strategy

16. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

17. Market Leader Monopolistic Power Network Externalities Critical Mass Market Leader Microsoft is following a cyclical strategy to dominate the market New threats from new technology or competitors Development request from new customers Evaluate new technology and embrace industry standards Market new product with existing product lines Emulate competitors or acquire technology through M&A Bundle new software with more comprehensive and easier-to-use solutions

18. Microsoft’s strategic vision from Ballmer’s mouth These guys can be taken but the only way we are going to take them is to by studying them, know what they know, do what they do, watch them, watch them, watch them, look for every angle, stay on their shoulders, clone them, take every one of their good ideas and make it one of our good ideas.

19. Will the existing strategy work in today’s changing environment? Entering non-desktop PC markets (Smart Phone, PDA, Smart Appliances, Home Video, Game)? Fast growth, imitation and acquisition? Complex and heterogeneous markets, many niche players Ruling the OS Layer? Bundling strategy with other applications? No control of OS-layer, competitive standards (e.g. Symbian liberation army) Powerful competitors (Sony, Nokia) & anti-trust regulations

20. Introducing “Vision 2”, Ballmer changed organization and corporate strategy Before After • Product oriented organization • Centralized decision process • Main focus on PC and Windows • Customer oriented organization • Decentralization • Broaden company scope beyond PC and Windows

21. Following Ballmer’s strategy the company continues to grow successfully Key facts 2003 Change from 2000 • No. of employees 56,104 (+75%) • Net Revenue US$ 32.19 bn (+63%) • Net Income US$ 9.93 bn (+27%) Mission 2004: “Enable people and businesses throughout the world to realize their full potential”

22. Agenda • Company Introduction • Competing in the software industry • Small Case: Web Browser war • Microsoft’s Strategic Framework • Recommendations

23. Desktop OS Careful portfolio management will ensure future growth Recommendations Growth-Share matrix 2003 (Market size in US$ bn.) 1) • Maintain low end market • Disinvest in high end market Relative market growth rate 50% Internet server • Maintain the “cash cows” • Impose licensing agreements • Closely monitor competition 2) ISP 4.8 2.2 25% 0.3 Mobile devices Office suite • Maintain and build Server OS 12.4 0% 11.6 3.6 0% 50% 100% Relative market share • Aggressive growth strategy 1) Data from Case, Microsoft financial reports 2) Internet Service Provisioning

24. Thanks. Any questions?

26. BCG growth matrix - data