Sustainable Competitive Advantage and Problem Solving: Microsoft (Essay Sample)

Sustainable Competitive Advantage and Problem Solving: Microsoft Name: Institution: Porter’s Five Forces Model and Microsoft Michael Porter’s model of the five forces is utilized to determine industry competitive intensity and provide the framework for subsequent strategy development (Porter, 1979). The model proposes an assessment of five key microenvironment factors, namely: the ‘horizontal’ threats of substitutes, new entrants, and rivals; and the ‘vertical’ threats from supplier and buyer bargaining power (Porter, 1979). According to Porter’s Five Forces, the most profitable organizations are those that enjoy high barriers to industry entry by competitors, low buyer power hence high markups, low supplier power hence lower production costs, no or least substitution, and minimal rivalry (Froeb, McCann, Ward & Shor, 2015). Airlines and pharmaceutical companies are among the least and highest profitable corporations respectively (Froeb, McCann, Ward & Shor, 2015). These structural characteristics confer an industry advantage in spite of individual firm differences. Microsoft has near total domination of the operating system (OS) and productivity software markets, with a commanding 95% market share. This dominance gives the company a strong competitive advantage as it increases the barriers to entry in the personal computing business and provides a defensible beachhead in the development and marketing of new products. Besides, technology markets have high barriers to entry due to the concentration of intellectual property in the form of patents and proprietary methods, strong brand equity, and significant capital requirements necessary to sustain prohibitively high marketing and research and development costs. Nonetheless, Microsoft faces threats from powerful buyers. Corporate purchases account for almost 80% of the firm’s yearly revenue and, consequently, enjoy immense contract and product cycle negotiation powers. However, this threat is ameliorated by the high product switching costs and Microsoft’s high reputation in the provision of mission-critical services. The firm also faces a threat from powerful suppliers who provide it with electronic components during the assembly of mobile devices, gaming consoles, among other devices. This threat is also conflated with the instability of commodity prices. However, due to the corporation’s sheer economies of scale, brand equity, and value capture, Microsoft arguably enjoys strong bargaining powers in negotiating supplying contracts. Also notable is the high threat of substitutes from other market players. The threat from rivals is a constant menace to Microsoft’s ecosystem of products. Competitors include the device manufacturers Apple or HTC Corporation, console makers Sony and Nintendo, and enterprise player IBM. However, due to customer lock-in, brand loyalty, high industry growth, and accumulated domain expertise, the latter has built a relatively sustainable moat around its revenue-generating divisions. Interestingly, since Microsoft is a multi-product company, it enjoys a lower threat of substitutes in its enterprise software market. Keeping from Becoming a Monopoly Since monopolies earn sustained outsized profits, companies strive to achieve the sort of market insulation that leads to their creation (Froeb, McCann, Ward & Shor, 2015). This superior insulation is derived from the provision of non-substitutable products, absence of market rivals, and unyielding barriers to entry. Although Microsoft has never entirely recovered from its anti-trust prosecution in the late 1990s, it is no longer the dominating force that it was once. Several factors prevent Microsoft from attaining the profit maximization inherent in monopolies. Firstly, the firm’s products are no longer non-substitutable. An important market player in the operating system and productivity software market is the open-source Linux system that famously invoked a fit of corporate panic at the firm. Secondly, the company now faces numerous rivals, some more successful than others, but nonetheless effective at chipping away at its market share. These competitors have also created a fragmented ecosystem of standards and software products, meaning that it is ever more expensive to ensure compatibility. Thirdly, despite Microsoft’s accumulated expertise, the barriers to entry have been lowered by a democratized market that has greater access to domain knowledge through the globalized labor market and efficient technologies to iteratively assess consumer demand. Slowing Profit Erosion The three generic strategies that companies use to sustainably enhance their performance in a competitive marketplace are cost reduction, product differentiation, and a deliberate strategy to reduce competitive intensity (Froeb, McCann, Ward & Shor, 2015). These factors are the building blocks of the resource-based view (RBV) theory of inter-firm differences (Barney 1991). To stem profit erosion, Microsoft continues to pursue a strategy that builds on its sustainable competitive advantages by deploying the following measures. These strategic thrusts are necessitated by declining demand, competitive rivals, and market saturation. Specific strategies to neutralize competitors include value addition in existing products, an accelerated pace of innovation, and product unbundling as part of a wider platform strategy. Value addition encompasses both a reduction in the cost of existing products and improvement in the value it creates for the user. Cost leadership provides a competitive advantage because it blunts the ability of competitors to make inroads, a critical advantage in the firm’s consumer markets where domination is essential. Microsoft has also accelerated its pace of innovation in product development and design. This differential strategy is supported by massive investments in effective marketing and advertising to individual consumers and enterprise clie...