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Homework answers / question archive / CHAPTER CASE 5 Part 2 GIVEN MICROSOFT'S lackluster performance in the 2000s, this former tech leader found itself in turnaround mode

CHAPTER CASE 5 Part 2 GIVEN MICROSOFT'S lackluster performance in the 2000s, this former tech leader found itself in turnaround mode



GIVEN MICROSOFT'S lackluster performance in the 2000s, this former tech leader found itself in turnaround mode. When a company is in turnaround mode, it has experienced a prolonged period of competitive disadvantage and needs to undertake significant changes in its strategy and/or business model to regain its competitiveness. Over time. Microsoft's competitive advantage turned into a competitive disadvantage, lagging Apple by a wide margin (see Exhibit 5.3). In 2014. Microsoft appointed Satya Nadella as its new CEO. He wasted no time moving Microsoft's strategic focus away from its Windows-only business model to compete more effectively in a "mobile first. Cloud first world," the mantra he used in his appointment e-mail as CEO. Under his leadership, Microsoft made the Office Suite available on Apple iOS and Android mobile devices. Office 365, its cloud-based software offering, is now available as a subscription service. Software applications can be accessed on any device, any time, with online storage, combined with Skype's global calling feature. Nadella still needs to work hard to en-sure Microsoft's future viability, however. Although Windows and Office were cash cows for so long, currently still generating some 40 percent of revenues and 75 percent of profits, both con-tinue to decline. The problem Nadella now faces (due to Microsoft's "monopoly" position) is that the gross margin of “classic" PC-based Office is 90 percent, while the gross margin for Office 365 is only around 50 percent. Nadella's strongest departure from the Windows-centric strategy is reflected in his attempt to return Microsoft to its early roots as a software firm, providing different yet open platforms for developers and consumers. To accomplish this strategic transformation, Microsoft acquired a string of successful start-ups including Mojang in 2014 (the maker of Mine craft), LinkedIn in 2016, and GitHub in 2018. (Before Nadella's tenure, Microsoft had also acquired Skype in 2011.) GitHub, which is akin to Facebook for developers, is a space for computer programmers to store and exchange code. This allows software developers to use and recombine existing code to create new products and services. Microsoft already uses GitHub for its own service development and hopes that GitHub developers in turn now will be more likely to write new software for Azure, Microsoft's cloud computing services. In this space, Microsoft also has already made significant strides. Its Azure cloud business reported $23 billion in sales in 2018, second only to Amazon's AWS with $27 billion in sales. In five years under Nadella's leadership as CEO, Micro-soft has enjoyed a successful turnaround and a stock market valuation that almost tripled from $301 billion in 2014 to $896 billion in 2019, thereby creating $595 billion in share-holder value (see also Exhibit 5.3).52

Questions 1. This chapter introduces several approaches to assessing a firm's competitive advantage. Using any one of these approaches, can you ascertain whether Microsoft has a competitive advantage over Apple? Why or why not? From which approach is Microsoft looking the best? Explain.

2. Microsoft CEO Satya Nadella has made drastic changes to Microsoft's strategy. What was Microsoft's strategy before Nadella was appointed CEO in 2014? What is it now under his leadership? Do you agree that Nadella has formulated a promising business model? Why or why not?

3. Looking three to five years into the future, who do you expect will have a competitive advantage: Apple or Microsoft? Explain.

NOTE: A live-year financial ratio analysis related to this Chapter Case is available in Connect.

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