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Microsoft Corporation Case Analysis Essay

Industry Evaluation

Software is an integral part of today’s uncertain economy, as the push for greater globalization and efficiency drives much of the spending in business markets around the world. In order to maintain a competitive edge in an increasingly competitive global market, companies are spending more and more on hardware and software infrastructures (Yahoo!Finance, 2006).

Microsoft is among 413 companies that produce and distribute application software products and services. These companies are all part of the Application Software industry within the technology sector, which is dominated by one software giant; Microsoft. More specifically, Microsoft is categorized into the Developmental Tools, Operating Systems, and Utility Software subindustry, which includes companies that “design, develop, market, and support software for developing, testing, and debugging applications; for computer maintenance; and for desktop management” (Hoovers.com, 2006).

Microsoft, Oracle Corp, CA Inc., and SAP Aktiengesellschaft, with a four-firm concentration ratio of 39% dominate the industry. Most of the other 411 firms in the industry specialize in smaller niches, providing specialized software services such as accounting, business management, etcetera, and have profits under $1 billion per year. For this reason, the computer application industry has monopolistic competition (MSN Money, 2006).

The top-selling software company is currently Microsoft, with $41.4 billion in sales in 2005, and is joined in the competitive arena by other top sellers such as Oracle Corp. with $12.9 billion and SAP Aktiengesellschaft with $10.4 billion. Other industry leaders in sales include CA Inc., Intuit Inc., Adobe Systems Inc., B.M.C. Software, Compuware Corp., and Novell Inc., each experiencing revenues exceeding $1 billion during 2005. Within the Developmental Tools, Operating Systems, and Utility Software subindustry, top competitors include Microsoft, International Business Machines (IBM), SAP Aktiengesellschaft, and Computer Associates International, who ranked a respective first, second, third, and fourth in application software sales (Yahoo!Finance, 2006).

The Computer Software industry is largely dominated by Microsoft, which commands 54% of market sales among its top ten competitors, as listed above. The following chart details the market share of these ten main players in the industry (Yahoo!Finance, 2006):

Within the legal environment, the software industry has been shaken by several recent regulations that are revitalizing industries within the business market of the United States. Among them are the US Patriot Act, which dictates that companies providing financial services must have the ability to detect the occurrence of money laundering; the Sarbanes-Oxley Act, which mandates that companies provide “real-time disclosure of events that might affect their financial performance and deep records of e-mail and instant messages exchanged between employees” (Yahoo!Finance, 2006). Finally, antitrust laws have been an ongoing threat to the industry. Microsoft has finally reached a settlement after an ongoing antitrust investigation, and agreed to allow manufacturers to include competing software with Windows and uniformly license its operating systems (Antitrust Case Filings, 2006).

New technological developments are revitalizing the software industry. The most recent and significant development includes a new set of web-friendly applications that, as of yet, has no official name. These web services can be assembled from standardized building blocks, meaning that any number of applications may be assembled in a variety of ways. Because of this, companies are able to develop enterprise applications to run on a wide range of software and hardware infrastructures and cater to the specific demands of their respective market segments. The companies that will maintain market share in the up-and-coming web era are those that are able to develop products that will be compatible on a wide range of hardware platforms.

Massive consolidations have recently become characteristic of the software industry. Largely due to acquisitions, IBM’s software holdings have grown a great deal. Small specialists companies face the greatest danger from large software providers such as Oracle, who recently acquired PeopleSoft and Siebel for $10.3 and $5.9 billion, respectively. If growth slows in their subindustries, these small companies who cater to specific niches become vulnerable to large companies offering extensive suites of enterprise applications that serve a variety of functions such as the industry leaders (Yahoo!Finance, 2006).

Following suit after other mature industries such as electronics and apparel, a large number of IT and software providers have begun outsourcing much of their manufacturing and R&D functions to countries outside of the United States. Software companies are now able to hire manufacturers and product developers in countries such as India, Mexico, and China for much less than it would cost in the U.S. (MSN Money, 2006)

The tragedy of the September 11 terrorist attacks as well as other post 9/11 attacks prompted another significant trend in the software industry when the United States government cranked down on security. By restructuring their communication systems, they opened a door to struggling software providers who began to provide new, more secure applications to governmental departments and agencies (Yahoo!Finance, 2006)

A final trend reflects the popularity of Linux and other open-source code operating systems. While the Linux operating system is probably the most widely known and widely used open source code, the idea of open source is gaining momentum and popularity. Companies that provide their products for a nominal subscription fee and generate income based on training and support services have adopted the open source concept as a counter-intuitive business model, with which they counter the more traditional selling of products for profit model (Hill and Jones, 2005).

Once online collaboration and word processing applications are fully developed and grow in usage and popularity, the researchers predict that the software industry will see a rise in sales of those kinds of products, and possibly a decline in the sale of PC compatible product that serve the same types of functions. The reason for this is that once these tools are available, consumers will realize that they may access and edit their documents or projects from any computer or PDA with internet access, without having to worry about being on the specific machine or machines that contain the documents they need.

Currently, almost all users of open source software are computer-savvy programming professionals. In the future however, more consumers will use this type of software for business and personal use. This is forecasted by a growing number of applications developed from open source codes such as Linux, as well as increasing popularity of these programs. If this comes to pass, then Linux and other open source applications and operating systems may accumulate market share, thus depriving it from Microsoft and Oracle.

Strategic Evaluation

Microsoft supports a number of values that translate into goals that the company strives to attain. These goals include doing business with honesty and integrity; to have passion for customers, partners, and technology; to be open and respectful, to take on big challenges and see through them; constructive self-criticism, self-improvement, and personal excellence; to help foster growth and innovation, and to be accountable to customers, shareholders, partners, and employees for commitments, results, and quality. These goals, however, are immeasurable, intangible, and unspecific. There is no timeline for achieving them, and no way to determine whether or not they have been acheived.

There are, however, more specific goals that the company hopes to attain that are specific, measurable, attainable, realistic, and tangible. Goals for the future include making technology available to one quarter of a billion people by 2010. Another goal is to fuse together Windows development and Web development to enrich Windows applications (Stu, 2003).

By doing this, Microsoft may be able to convince consumes to use the rich application features of Windows. Another goal is to unify the disparate Windows communications and enterprise technologies into a common and simple framework that is competitive with Java Enterprise Edition. Microsoft needs to provide an alternative to this model unless it wants to see Java retain its lock on the server software market. This goal is consistant with Microsoft’s approach of taking the lead in developing a new computing standard. (Microsoft, 2006)

The mission statement of Microsoft Corporation is

“At Microsoft, we work to help people and businesses throughout the world realize their full potential. This is our mission. Everything we do reflects this mission and the values that make it possible.”- Microsoft, 2006

The mission statement is clear in representing Microsoft as dedicated in providing the best products to help its customers achieve and “realize their full potential”. The mission statement is strong, and is very personable by saying “At Microsoft”, and repeating that this is Microsoft’s mission statement. The statement repeats itself in the third sentence, saying, “everything we do reflects” helping everyone in the world understand his or her “full potential”. Using words to repeat parts of the mission statement makes it bolder to the reader.

The statement is broad enough to allow the company to expand into unfamiliar markets or businesses, or both. However, it is narrow enough that it focuses the company on aiding people in reaching their fullest potential. By adhering to this mission statement, employees at Microsoft look to the customers, not the shareholders, as the reason the company exists. It is clear to express that the company does not exist solely to make a profits or please shareholders. It reflects the desire of the management at Microsoft to make a difference in the world and help those who wish to success do so.

Functional Review

Marketing Analysis

Microsoft focuses on the development of software, which includes products such as Office, Project, Visio, FoxPro, and more. The software packages aide in the creation of business documents, databases, and projects, as well as helps consumers manage their day-to-day lives.

Microsoft has seven different product divisions: Client, Server and Tools, Information Worker, Microsoft Business Solution, MSN, Mobile and Embedded Devices, and Home and Entertainment (Microsoft, 2006). The Client segment has responsibility for engineering, product delivery, and technical architecture for the Windows product family. It also handles Microsoft’s relationships with personal computer manufacturers, including multinational and regional original equipment manufacturer accounts (SEC, 2006). Server and Tools is responsible for the server system products and all related services. These services include providing advice for requirements needed for the system to operate properly, custom solution services, and business application planning for the operating systems.

Information Worker involves licensing software to several types of users such as small to large corporations, homes, and specialized categories like students. This division releases a major change in software every two to three years. Microsoft Business Solutions deals primarily with “developing and marketing offerings to manage financial, customer relationship and supply chain management functions for small and midsize businesses, large organizations and divisions of global enterprises. MSN is accountable for delivering online services that look to empower users by bringing them to the people and information that matter most. The Mobile and Embedded Devices section is responsible for the marketing and development of products that extend the advantages of the Windows platform to many types of devices. The Home and Entertainment segment is in charge of production, development, and marketing for the Xbox video gaming system (SEC, 2006).

Another way Microsoft is continuing to broaden their customer base is by establishing itself into the gaming industry. An example of this is the innovative Xbox 360 Microsoft launched during the 2005 Christmas season. Microsoft has begun to explore new markets, like television, with the rising success of the Xbox 360 and the changing demographics. Microsoft realizes that demographics are changing to a younger generation and efforts must be made to accommodate their needs as well. (Wikipedia, 2006)

In the past, Microsoft’s target market has been men of the ages of eighteen through thirty-four. The company is currently expanding the market it targets by experimenting with two methods of reaching the seventeen and younger age group. The first is through the gaming industry, with the release of the Xbox gaming system. The company is also developing a television show to reach this age group (Goo, 2006). Another strategy Microsoft is pursuing involves meeting its global clientele where they are in terms of their economic and financial needs (Evers, 2006). These changes in strategy and products reflect Microsoft’s goal of expanding its target market. While there is risk involved with these changes, there is also the potential for returns above a normal profit.

Another way Microsoft is continuing to broaden their customer base is by establishing itself into the gaming industry. An example of this is the innovative Xbox 360 Microsoft launched during the 2005 Christmas season. Microsoft has begun to explore new markets, like television, with the rising success of the Xbox 360 and the changing demographics. Microsoft realizes that demographics are changing to a younger generation and efforts must be made to accommodate their needs as well. (Wikipedia, 2006)

Microsoft has established a presence in the international market. The headquarters, including most of the research and development centers, is located in Redmond, Washington. The company has several manufacturing facilities to meet supply needs on a global scale. These facilities are located in various places such as: Dublin, Ireland, Humacao, Puerto Rico, Reno, Nevada and Singapore just to name a few locations. Microsoft currently employees 40,081 in North America and 63,564 world-wide to help them meet growing demand for their products (Microsoft, 2006).

Microsoft uses a wide variety of media to influence the demand of their products. Traditional types of advertising are used for global campaigns including television, print, and Internet (Microsoft.com, 2006). The company uses computer magazines to compare companies or products such as the case of Linux versus Microsoft. Microsoft’s goal is to reach a certain target market. In addition, Microsoft is implementing a new advertising campaign using the Internet in competition with Yahoo and Google. In the campaign, customers will be asked to fill out a survey; from there the data will be used to display personal ads of interest to the consumer. If a consumer chooses not to fill out the survey the company will provide them with general ads that are generated from the search. The goal in the long-run is to learn the customers want and needs for future purchases (Oser, 2006).

The manufacturing function for most of Microsoft’s products is outsourced. A vendor supplies the parts needed to assemble the Xbox gaming system. This outsourcing strategy can be a drawback on two counts. Firstly, Microsoft relinquishes some control of the pricing of this product because it cannot control the manufacturing costs. Secondly, there is a threat of the manufacturer leaking product knowledge to Microsoft’s competitors. At the same time however, Microsoft has no legal obligation to the manufacturer, and can manufacture these products internally. Microsoft employs several vendors to supply parts that Microsoft manufactures. These components are purchased at a discount rate, and Microsoft keeps excess inventory in stock in case of shortages (Microsoft, 2006).

The company has decided to do an 18 month campaign to advertise the differences between Microsoft and Linux giving the benefits of using our products. Some advantages to Microsoft’s products include: being user-friendly software and applications, as well as having a strong reputation in that area. Therefore, the cost would be greater to retrained employee how to use Linux software in the business industry for server application use.

In dealing with more recent security issues, Microsoft Internet Explorer (IE) has a code-flaw in the browser that makes it vulnerable to hackers. This flaw can allow hackers to infect a system with various code-scripts, which puts the system under attack. To have security issues associated with the company’s name can produce a bad reputation. Microsoft’s goals are to have compassion for customers, for partners, and technology. The company wants to train and make technology available to a quarter of the billion people in the world by 2010. In addition, Microsoft shows passion towards customers by offering specialized advertisements to expose the varied selection of products to the consumer. Another goal is to exhibit openness and respectfulness, which will gain a huge amount of respect from the consumer.

This is achieved by receiving feedback from our employees, government agencies, and community leaders which will lead to improve Microsoft’s business. Microsoft is staying on task of taking on large challenges by endeavoring to change their demographics of customers. In addition, the company takes constructive criticism, and uses this as a way to improve; criticism in forms of comments and suggestions. Microsoft will accomplish this task through research and development and feedback. Other goals are to give personal excellence, and have accountability to customers, shareholders, partners, and employees for commitments, results, and quality. These achievable tasks would help Microsoft stay in the business for years to come (Microsoft, 2006).

Production Analysis

Microsoft alters its products to me needs of its global customers. The company translates the text and changes the appearance of its applications to make them understandable in that language. This is one reason Microsoft has a reputation for being developing user-friendly applications for its consumers. Other tasks the company is involved with include processing orders, payment options, processing needed information, and supplier management (Microsoft.com, 2006). These tasks are essential to maintaining good relations with Microsoft’s customers and suppliers. In addition, these tasks make it possible to make necessary changes when there are problems in distribution or manufacturing of Microsoft’s software.

Microsoft outsources all of its manufacturing function except for a few, including the assemblage of the Xbox 360. A vendor supplies the needed parts for this product. This action can be a drawback because it limits Microsoft in its ability to control pricing aspects of this product. There is also the threat that suppliers will share the knowledge of this product with Microsoft’s competitors. Although this is a threat, Microsoft is under the no legal obligation to continue working with that supplier. Several vendors supply parts for all other products Microsoft assembles. Components for these products are purchased at a discount. Microsoft keeps an inventory of spare parts on hand if needed (Microsoft, 2006).

Management Analysis

Bill Gates and Paul Allen founded Microsoft in 1975, and in a few years, they expanded to Bellevue, Washington from Albuquerque, New Mexico. From there, Microsoft began creating and developing new and revolutionary technology. In 1981, “IBM introduced its personal computer with Microsoft’s 16-bit operating system, MS-DOS 1.0” (Microsoft, 2006). Because of its quality, this operating system became popular. Microsoft’s stock went public. Over the next twenty years, Microsoft created more technical and versatile operating systems such as Windows 95, 98, and the current Windows XP.

This success has lead to worldwide expansion creating thousands of jobs. “Microsoft is the world’s largest software company with over 50,000 employees in various countries as of May 2004” (Microsoft, 2006). Microsoft has become a needed portion of the personal computing market in which many PC retailers have sold their machines pre-equipped with Microsoft’s software.

Because of its large and substantial business, Microsoft was found to be a monopoly among computer software and because of this, Microsoft has experience financial success. In 1998, a lawsuit found that Microsoft was using its “monopoly power to defeat its competitors” (Reference.com, 2006). Microsoft appealed and showed how changing their company’s operations would bring the financial success down increasingly.

A board of directors, who play a major role in decision-making and many fundamentals of the company, run Microsoft. The Chief Executive Officer is Steven Ballmer who “joined with Microsoft in 1980 and was the first business manager hired by Bill Gates” (Microsoft, 2006). In 1998, Ballmer was appointed President and this gave him full responsibility for running the corporation. 2 years later, he became CEO (in 2000) and this gave him full privilege over all the managers and staff of Microsoft.

Following Ballmer is James I. Cash, Jr, Dina Dublon, Bill Gates, Raymond V. Gilmartin, Ann McLaughlin Korologos, David F. Margaurdt, Charles H. Noski, Helmut Panke and Jon A. Shirley. A lot of talent and skill is required to work in any position at Microsoft. They seek out motivated individuals who are experienced in communications and leadership. The purpose for finding such trained individuals is to lower training costs of the company.

The “Corporate Operations is Microsoft’s backbone, constructing, managing, and running the various services that support the company’s 50,000 employees” (Microsoft, 2006). This statement shows that Microsoft is dependent on two sections of their management staff; the corporate and administrative services. These departments are responsible for management, public relations, providing company-wide administrative support, building new office space, and other tasks.

Financial Analysis

Microsoft Corporation has achieved excellence in since 1975 in the application software industry. They finished the 2005 fiscal year with a market capitalization of $288.20 billion, doubling the closest competitor, IBM which came in second in market capitalization with $131.00 billion, and an industry average of a low $136.51 million (Hoovers, 2006).

Microsoft Corporation has been enjoying a steady growth in revenue over the past three fiscal years. This has been achieved with the growing popularity of PC use in the world over this time period. Microsoft’s preliminary estimates showed a growth of worldwide PC shipments from 11% to 13%, “and total server hardware shipments grew approximately 13% to 14%” during the 2005 fiscal year compared to fiscal year 2004 (Yahoo! Finance). This has caused a growth in revenue of 8% from $36,835 million to $39,788 million from fiscal year 2004 to 2005 (U.S. SEC).

This revenue growth was “driven by growth in licensing of Windows Server operating systems and other server application, licensing of Windows Client operating systems through OEMs, and increased licensing of Office and other Information Worker products” (Yahoo! Finance). The 2004 fiscal year ended with an overall growth of $4,648 billion from the previous fiscal year 2003, an increase of over 12%. Over the past five years, Microsoft Corporation has generated revenue of over $162 billion. This is an increase of 73% and about $75 billion of this is derived from net cash flow from operations. Shareholders received a return of $69 billion of this revenue in dividends and stock repurchases. With the launching of the Xbox 360, Windows Vista, and newer versions of existing software in 2006 fiscal year, Microsoft expects to have an equal or larger increase of the past five years in the next five years (Microsoft, 2006).

Net income for the fiscal year 2005 was $12,254 which is an increase of $4,086 million from the 2004 fiscal year. This is due to small decreases in operating expenses from the previous year with emphasis on research and development, a decrease of over $1.5 billion. Although decreasing in fiscal year 2005, a large jump in expenses occurred from fiscal year 2003 to 2004. Microsoft increased their total operating expenses by $5,159 million to $27,801 million in fiscal year 2004. Although decreasing expenses worked for the fiscal year 2005, decreases in research and development in the future might cause the industry to get the edge on Microsoft and revenues decrease (Microsoft, 2006).

Operating income has also increased substantially during these two fiscal years with a total increase of 61%. Although it had a 5% decline from fiscal year 2003 to fiscal year 2004, operating income jumped from a marginal $9,034 million in 2004 to an excellent $14,561 million in fiscal year ending 2005 (U.S. SEC). According to Yahoo! Finance, the operating income increase for fiscal year 2005 was driven by a decline in stock-based compensation expense; increased revenue in Server and Tools, Client, and Information Worker; and a reduction in legal costs associated with major litigation.

Some key ratios will point out Microsoft’s position in accordance to the industry. Holding a total debt to equity ratio of 0.00, compared to 0.03 of the industry, Microsoft has showed that they have successfully controlled their assets without any debt, dating back as far as fiscal year 1996. The total debt to total asset ratio also confirms these successes with a low 0.33. This has a great statistic from an investor or shareholders eyes because there is potential for a high payout. Microsoft has a current ratio of 2.8, compared to the industries average of 2.3.

This shows us that Microsoft can pay off any debt that may occur, and can continue operating with cash left over. The quick ratio is currently at 2.5 with an industry average of 2.1. Because this number is so close in comparison with the current ratio, this tells us that Microsoft is not dependent on their inventory. These three financial ratios show us that Microsoft Corporation is achieving excellence in comparison to the industry (MSN, 2006).

Both the gross profit margin and the net profit margin percentages will show us the financial health of the company. Microsoft Corporation’s net profit margin is over 7% higher that the industries average, at 30.8% compared to 23.5%. This tells us that 31.6% of the company’s revenue can be kept as profit. Fiscal year 2005 is an increase of 8.6% from fiscal year 2004 and a small decrease of 0.2% from fiscal year 2003. Their gross profit margin is 87.3%, compared to 82.6% of the industries average. Although the industries average of these two ratios is healthy as well, Microsoft still holds better percentages (MSN, 2006).

The company’s price ratios will show some different trends in comparison to the industry from the other ratios presented. Although the earnings per share (EPS) are currently much higher than the industry average and the previous year, it is lower than some of the direct competitors. The EPS in the fiscal year 2005 was 1.13, which is considerably higher than the industries average of 0.15. This is not a bad ratio if you own share in the company, but two of the closest competitors is producing a much higher rate; Google’s EPS is at 5.021 and IBM’s is at 4.875.

Although this might turn some investors away, numbers have been improving over the past three years. Fiscal year 2003 had an EPS of only $0.70 but increased to $0.76 in fiscal year 2004. The large increase came in fiscal year 2005 when EPS increased almost $0.40 to $1.13. With the latest innovations Microsoft has developed, these numbers will increase as investors see the future of Microsoft. Microsoft price-to-earnings (P/E) ratio is more attractive than EPS with a ratio of 22.9. Although conservative investors may feel this number is too high, this ratio is much better than the industry average of 27.3 which might influence these investors to invest in Microsoft instead of the direct competitors (MSN, 2006).

Management effectiveness ratios like return on assets (ROA) and return on equity (ROE) will show us how well the management at Microsoft Corporation is doing. With an ROA of 19.4%, over 5% higher than the industry average of 13.9%, Microsoft is very profitable in relation to the total assets of the company. This is a substantial increase from 8.8% and 12.6% in fiscal year 2004 and 2003 respectively. The profit per dollar, or ROE of Microsoft, is 29.5%. This is close to 7% higher than the industry average of 22.6% and 18.6% than fiscal year 2004. This shows that Microsoft Corporation is achieving a higher profit from their investors per dollar in comparison to the industries. Although there was a large increase from fiscal year 2004 to 2005, a decrease of 5.5% occurred between fiscal year 2003 and 2004 (MSN, 2006).

The efficiency of the company is struggling in comparison to the industry in one way, inventory turnover. The inventory turnover is currently much lower than the industries. With a low 8.1 compared to 28.4 of the industry average, Microsoft’s inventory turnover might indicate poor sales. Both Microsoft and the industry average of asset turnover are 0.6, indicating that 0.6 of every dollar is revenue. Microsoft is doing a better job than the industry in comparing the accounts receivable turnover, but not a significant amount. The accounts receivable turnover is at 5.7 with an industry average of 5.2. Both Microsoft and the industry are collecting payments from its customers in a timely manner. They are, however, significantly behind S&P 500 which has an accounts receivable turnover ratio of 7.5 (MSN, 2006).

A thorough research of cash flows will show the company heading in the right direction. Net operating, investing, and financing cash flows all increased from the fiscal year 2004 to 2005. Fiscal year 2005 showed an increase of 14% to $16.61 billion in cash flow from operations. This is derived from an increase in cash receipts from customers driven by the 8% revenue growth of the company. Cash payments decreased by approximately $1.8 billion from the previous year from binding legal settlements. These factors played the major role in the increase of operating cash flow. Keeping operating cash flows down was payments to the 7% increase in full-time employees added during the fiscal year 2005. This is a great recovery from fiscal year 2004 considering operating cash flow dropped by $1.17 billion from fiscal year 2003. Over two billion of this was from the Sun Microsystems settlement and the European Commission fine.

The small offsetting gain is from increases cash receipts from customers. Net financing cash flow showed a large increase from $2.36 billion in fiscal year 2004 to $41.08 billion in fiscal year 2005. This increase is driven by an additional $34.38 billion of cash dividends paid, and an additional $4.67 billion in cash used for common stock repurchases in fiscal year 2005 from fiscal year 2004. Net financing cash flow did have a substantial decrease from fiscal year 2003 to 2004 of almost $3 billion.

However, this decrease is due the company not repurchasing common stock in the fourth quarter of fiscal year 2004 and an increase of $628 million from stock issuances of employee stock option exercises. An increase of $872 million in cash dividends during this fiscal year offset the numbers provided. Net investing cash flow for fiscal year 2005 was $15.03 billion, an increase of $18.37 billion from the previous year. Investment maturities that occurred to fund cash dividends paid increased by $23.59 billion in fiscal year 2005. Offsetting this figure was the decrease of $5.32 billion in cash from sale activity and investment purchases. Cash used for investing was $3.34 billion in fiscal year 2004, a decrease of $3.88 billion from fiscal year 2003 (Microsoft, 2006).

Model Analysis

The Boston Consulting Group Matrix is a representation of the status of Microsoft in the current market. There are four different categories that fall under the matrix, Stars, Cash Cows, Question Marks and Dogs. The highest category and most self-efficient is the “Stars” with very high growth and high share. Next in the matrix: “Cash Cows,” which are low in growth and high in shares. The third category in the matrix is the “Question Marks” which are high in growth and low in shares. Last are the “Dogs” which are very low in both growth and shares. Microsoft would be placed in the “Stars” category simply because the company is constantly growing and is very self-sustaining.

Strategic Alternatives

1. Develop a Microsoft version of open source software by exploiting Microsoft’s distinctive competency for developing software. This will give Microsoft an edge in the open market by allowing it to effectively compete with current alternatives to Microsoft products, such as Linux, Sun Systems, and other open source/free software products. This alternative will give Microsoft the opportunity to increase its revenues by offering support services and training for these products.

2. Acquire Red Hat Inc. or another successful Linux provider. By combining the rising popularity of the open source concept with the ongoing success of Microsoft’s application software, the image of Microsoft will improve and launch the company into the increasingly popular open source market.

3. Improve current product line. Increase research and development spending to improve the dependability and security of current products. Then, implement an advertising campaign through several mediums to stress the superior quality of Microsoft’s products.

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