Microsoft Corporation Analysis

Microsoft is based in Washington and was incorporated in 1993 and started as a
developer and a supporter for a wide range of software products including licensing of its
products. Additionally, Microsoft designs and trades hardware, as well as, delivering online ads
services to its customers. The company mission is to empower people and organizations on the
planet to achieve more (Microsoft, 2016). Additionally, its business strategy has a core target of
building best-in-class platforms and services for cloud-first and mobile-first world. Nevertheless,
Microsoft product line has been geared to reinvent business process productivity that is aimed at
building smart cloud platforms to enhance more personal computing. With its diverse product
line, Microsoft services and techs are common and diffusing in every emerging market and close
to 600 million users have actively interacted with at least one Microsoft product (Microsoft,
2016). Therefore, their products are of interest in exploring their macro and micro-economic
elements to determine how they perform.

Product Analysis

Product description and usage
Microsoft (2016) has identified different segments for its products including clients,
servers and tools, business solutions, information worker, Messenger, mobile and embedded
devices and entertainment products and services. Among its tools are the commonly used
applications that offer solutions to diverse business and personal needs while devices such as
Microsoft phones (including their current Lumia and Microsoft series), computers, and tablets
are the common tangible products that are diffusing and competing with other big companies
such as Apple, Samsung, and Sony. The devices and consumer segment produce, market and

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support products that increase personal productivity helping people simply work and improve
their decision-making processes. Part of the products includes computing, phone and gaming
hardware. The licensing products include its prominent Windows OS and the Microsoft Office
which have offered business solutions satisfactorily.
Globally, Microsoft OS and Office have been used in organizational levels in executing
complex tasks. Additionally, there are the Xbox 360 and Xbox one platforms that offer gaming
services to its subscribers. Moreover, its clouding based products include skype, Onedrive, Xbox
live, Bing, Office 365, Azure and the Microsoft CRM online. Lastly are the commercial segment
products that have been purposely designed for marketing and support to enhance team,
individual and organizational productivity, as well as, efficiency. Its SQL server, windows
server, Visual studio client access license and system center are used for commercial licensing.
The windows embedded products include Office for business, Exchange, Lync, and SharePoint.
Such products are used for making IT developers and professionals, as well as, their systems
productive and compete in the IT world (Microsoft, 2016).
Demand for Microsoft products

The demand for Microsoft products has continued to be high and the firm has recorded
increasing revenues over 2014 and 2015 financial years. The change in revenues has been
attributed by the changes in demand for the new technologies and models in business processes.
However, the demand for Microsoft products has been influenced by a number of factors
Price
For normal goods, an increase in price induces a reduced demand for a product while low
prices are considerably valued (Mudida, 2003). Before establishment of Apple products,

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Microsoft enjoyed a high demand for its products with about 95% of PCs powered by the Intel
processors running only Microsoft OS with little choice over any other existing. The Windows
OS was the cheapest among any other existing OS in the tech industry. Additionally, Microsoft
has successfully competed with Apple products but it has been competitive relatively lower price
than Apple products. Low prices have led to demand for Microsoft products than any other factor
(Economides, 2003).
Features and durability
Microsoft products such as its Windows have been having strong network effects that
have increased the market value for both Windows OS and Office than any other product.
Additionally, the abundance of apps that are written and compatible with Windows have
increased its demand. Additionally, durability for its products such as the Lumia phones is more
of quality as opposed to its competing iPhone 6 that was accused of bending.
Complement products
Products such as Microsoft Office, Office 365, Xbox Live, SharePoint and Exchange are
compatible with Windows indicating that they are complements and individuals using Windows
will automatically demand them. Switching to other competing products has a high cost since it
requires purchasing another product that is compatible with OS of desire and compatible with the
new product.

Supply of Microsoft products

Cost of production and technology

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MICROSOFT CORPORATION ANALYSIS
The business model used in production by Microsoft products influences its supply level.
High cost of production induces low supply levels and this is seen with technology products.
Additionally, the cost of labor (IT engineers) and capital used in R&D would influence the
supply level since Microsoft constantly keep on innovating new technology for its products.
Technology level
Technology is a key underlying factor in production and it denotes that a new tech
adopted in production level increases the supply of a product (Pen, 2015). The Acquisition of
Nokia Company increased the technology base in production of Microsoft phones hence leading
to increased supply of Lumia and Microsoft phones and tablets that led to almost 96% market
share of the windows phones (Windows Central, 2016).
Government policies
Government policies such as antitrust laws restrict the supply of a certain product. For
instance, Economides (2003) reflects on how antitrust law in US controlled the upcoming
monopoly of Microsoft with its OS. Allegations by the Department of Justices indicated that the
pricing policy by Microsoft was predatory and would lead to uncompetitive monopolization
leading to significant loss in supply for their OS.
Substitute products
Since Microsoft operates in a technology industry the level for substitutability of its
social software programs is high but for its Windows OS and commercial segment products such
as Exchange, Office, Office 365, and all other Microsoft compatible applications have very low
substitutability effect. Substituting the Intel-compatible OS would incur user’s significant costs

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MICROSOFT CORPORATION ANALYSIS
which is not the case with some of its other products. For example, it’s PCs, gaming hardware
and windows phone can be substituted by Apple PCs and other Sony, Samsung and LG products.
Additionally, Bing has been substituted by Google search engine, AOL and Yahoo. Additionally,
demand for Google services is higher than Microsoft while demand for Apple phones may be
lower than that of Lumia due to high-priced Apple phones.
Complement products
Microsoft products are complements since having its OS device; it requires the user to go
for the Microsoft compatible products and apps. For instance, owning a Lumia phone requires
downloading its Apps from its Windows store. Operating Windows 8 or 10 requires the user to
go for the latest version of Microsoft Office and update all other apps to run the software
effectively. The level of complementary is too high for users owning Microsoft devices. Of late,
Microsoft introduced a webcam, mouse pads and a keyboard to complement its Windows Vista
(Noda, 2016).

Demand elasticity

Price elasticity
Price elasticity measures the change in quantity of products demanded upon changing the
price (Pen, 2015). Price elasticity for Microsoft Windows is inelastic in the short-run since users
utilizing the products find it hard to switch to other substitutes. However, in the long-run people
may consider using other OS such as Mac and Windows XP for their cheaper costs, indicating
that the long-run price elasticity is perfectly elastic. Additionally, increase in price for windows
can act as a signal to rivals to produce alternative products. However, cheap devices such as

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MICROSOFT CORPORATION ANALYSIS
mobile phones have elastic elasticity of demand since switching costs for the cheap products may
be lower than in OS. The formula for calculating the PED is given as

, Where P0 and Q0 are initial prices and quantities, respectively,
while ∂Q and ∂P are changes in quantity and prices, respectively. The n is the PED. The formula
can be used in analyzing a single product performance (Werden, 2001).
Income elasticity of demand
Increment of income is associated with increased demand for normal products (Mudida,
2003). Additionally, in the tech world, increase in income induces an increased demand for the
expensive products such as the new Lumia series and the new E-series Windows phone that is set
to compete with the coming iPhone 7 mini-series. With the tech advancement, mobile phones are
shifting from luxurious products to normal products hence for Microsoft phones would be
expected to behave like normal goods with increment consumer income in the short-run.
Additionally, for luxurious products an increment of income tends to make consumers shift for
substitute, but high expensive phones in the long –run such as the iPhone 6 plus.
Nevertheless, for firms adopting cloud-based and ERP systems and Microsoft servers, an
increment of revenues and capital base induces advanced Microsoft products in the short-run
indicating a perfect elastic demand. However, with in the long-run they would tend to consider
switching to more sophisticated products such as servers from Apple, Mac and Google indicating
that increment in revenues (income) by the firms tend to be elastic in the long-run due to
switching costs that tend to be relatively high. Elasticity of demand resulting from income for a
product is given by the formula;

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MICROSOFT CORPORATION ANALYSIS

Where nI is income elasticity, Q1is the
new quantity, Q0 is the quantity before change while Io-I1 is the income change. The formula
assists in getting the elasticity of demand resulting from change in income (Werden, 2001).
Production level and technology
Microsoft has a capital intensive firm since it aims of establishing innovative products
that enhance business and individual productivity. With the rising competition of the tech world,
to sustain in the markets the tech firms have increased their R&D in their business processes
indicating that Microsoft strategizes to acquire the best IT engineers and business models to
come up with sophisticated products unique in the market to deliver customer experience. For
instance, sustaining the rivalry from other Server OS from Apple and Sony, Microsoft
implemented a unique business model through continued R&D and innovation to make rival
firms hard to simulate the same. Such an idea has led Microsoft Window lead in its market value
serving over 600 million users. Therefore, technology secures its role in R&D as well as,
implementing a sustainable business model.

Market structure

Microsoft operates under an oligopoly market structure for its PC products. Accordingly,
the IT industry for the OS it competes with Apple and Mac and other small entrants such as
Symbian, CentOs, ClearOs and Linux. An oligopoly market has very few firms with some firms
such as Apple and Microsoft dominating the market (Pen, 2015). In the commercial business

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MICROSOFT CORPORATION ANALYSIS
industry, it also operates under an oligopoly since it dominates with Apple, Mac and Google.
Apparently, in the phone industry it appears to be operating under a monopolistic competitive
market structure. It competes with Apple, Samsung, LG and Sony as biggest rivals but there are
thousands of entrants in the phone world indicating that the differentiation and non-identity of
the products determine their competitive advantage.

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MICROSOFT CORPORATION ANALYSIS

References

Economides, N(2003). The Microsoft Antitrust case. New York University.
Mudida, R. (2003). Modern Economics. Nairobi Kenya: Focus
Noda, T. (2016). Microsoft Launches Hardware to Complement Vista. PC World. Accessed from
http://www.pcworld.com/article/154027/vista_peripherals.html
Microsoft Inc. (2016). Annual Report 2013. Accessed from
https://www.microsoft.com/investor/reports/ar13/financial-review/discussion-
analysis/index.html
Microsoft Inc. (2016)About Microsoft. https://www.microsoft.com/en-us/about
Pen, J. (2015). Modern economics. Baltimore: Penguin Books.

Windows Central. (2016) Microsoft’s restructuring of their phone business was necessary,
obvious, and good for Lumia. Accessed from
http://www.windowscentral.com/microsofts-restructuring-their-phone-business-was-
necessary

Werden, G. (2001) Microsoft’s Pricing of Windows and the Economics Derived Demand
Monopoly. Review of Industrial Organization. Volume 18. 257- 262.