Microsoft Five Forces Analysis

Microsoft is among the world’s largest technology firms with a market cap of around $2.45 Trillion. The company enjoys a solid position in the tech industry based on its competitive edge. Over time, its position has continued to strengthen as it diversified its business and entered the cloud industry, social media and gaming sectors also. In the cloud sector, Microsoft has enjoyed solid growth. Its Microsoft Azure cloud platform has gained strong popularity and competes with Amazon’s AWS.

Microsoft is also a leading player in computing and software. Its Windows operating system enjoys a dominant position in the PC software market and so does its MS Office suite of products. In this way, Microsoft clearly has a strong competitive advantage. The company has also been investing aggressively in research and development to advance into new areas and to improve its existing set of products and services. Recently, LinkedIn which has been acquired by Microsoft has enjoyed solid revenue growth driven by the increased use of learning resources available on the platform.

In this five forces analysis of Microsoft, we will analyse the competitive position of Microsoft based on Porter’s five forces and how the company is positioned against its rivals as well as its overall bargaining strength. The five forces analysis is an analytical framework used to analyze the competitive position of a business in an industry based on five critical forces which determine the firm’s competitiveness and ability to survive in an industry sector. The framework was named after its creator – Harvard Professor Michael E Porter.

Bargaining power of suppliers:

The bargaining power of Microsoft suppliers is considerably low. It is because the company depends less on external suppliers for its business operations. Most of the business of Microsoft depends on technologies owned by the firm and the share of hardware products it makes is very small in its business. Whether in the cloud industry, Pc software or social media, the company has not much to do with external suppliers for operation.

Moreover the enormous size of the business and its financial clout also reduce the bargaining power of suppliers. The smaller size of supplying firms as well as their inability of forward integration also helps the company keep the bargaining power of suppliers under control. The suppliers of Microsoft are not concentrated in a particular sector and the company has several options for its supply chain. It can easily switch from one supplier to another. The supplier firms being smaller businesses depend on Microsoft for revenue and cannot risk losing business. It helps Microsoft maintain its control over the suppliers.
Another important factor that has helped Microsoft manage solid control over its suppliers is its brand equity. Overall, the level of bargaining power that the suppliers hold is very low in the case of Microsoft.

Bargaining power of buyers:

The bargaining power of buyers is higher in the cases where the buyers are large firms with strong financials. Moreover, when the threat of backward integration from buyers is high, the bargaining power of buyers is also higher. As in the case of Microsoft, its buyers are mainly OEMs like HP, Dell, Lenovo and others. While the large size of these OEMs gives them some bargaining strength, the threat of backward integration is very low. These companies cannot make the operating systems and software required to run their machines. So, they depend on providers like Microsoft. In the PC software sector, Microsoft is the leader holding the lion’s share of the market. The number of substitutes for Windows is low and in most cases, switching is impossible for customers. These factors keep the bargaining power of buyers under control.

Microsoft is a leading tech business and one of the largest companies globally. Its financial strength and dominant position in various sectors including PC software and cloud sectors, gives the company extra edge. The company owns several technologies that do not have many substitutes and buyers depend solely on Microsoft. Its strong brand equity also helps moderate the bargaining power of buyers.

Overall, the bargaining power of Microsoft’s buyers is low to moderate.

Threat of substitute products:

The threat of substitute products in the tech industry mainly comes from products and services by rival brands. Microsoft is operating in an intensely competitive environment and while in some areas it faces lower threat of substitutes, in the others the threat of substitutes is much higher. In the PC software industry, Microsoft is the most dominant brand. Its Windows operating system and MS office suite of products enjoy the lion’s share. They are installed on millions of PCs worldwide. In this area, the threat of substitutes is very low for Microsoft. However, in the cloud sector or social media, the company faces strong threat of substitutes from products by other brands. In the cloud industry, the threat comes from both Amazon and Google, the two other leading players, as well as several other smaller players. In the social media and gaming sectors the threat is even higher since there are several more social media and gaming platforms. Similarly, in search advertising and browser market, the company holds a relatively smaller market share compared to its leading rival Google.

However, there are various factors that help Microsoft mitigate the threat from substitute products including brand equity, product quality and the level of differentiation. Microsoft is a highly innovative brand and invests a major sum each year in research and development. Its cloud platform Microsoft Azure is enjoying strengthening demand each year. Xbox is a leading name in gaming and the social media platform owned by Microsoft – Linked In – is targeted mainly at professionals. Apart from these things, Microsoft is financially in a very strong position which allows the company to spend more on marketing and innovation, resulting in higher demand. Overall, the threat of substitute products is moderate for Microsoft.

Threat of new entrants:

The tech industry is marked by an intense level of competition and aggressive rivalry for market share. Companies invest billions of dollars each year into innovation and also spend billions on marketing and demand creation. So, the number of factors barring new players from entry is very high. The leading players in the tech industry are highly competitive brands that are quite aggressive about retaining their market shares. Microsoft is an established brand with strong brand equity and enjoying global popularity and strong demand. A new brand can enter the market only it has enough competitive strength, required knowhow, financial investment as well as the ability to gain brand equity faster. However, it is mostly not the case with new players.

If new players try to enter the market, they have to remain content with smaller market shares since it takes a lot of time and investment to grow into a market leading brand. Apart from that, due to the high level of competition, the focus on innovation is also required to be very high. Most new players lack the ability to invest billions in research and development. Financial, technological and marketing related barriers are not the only barriers before new players. There are legal and regulatory barriers also that prohibit the entry of new players into the technology sector. New businesses cannot pay millions or billions in fine.

The technology industry is currently ruled by some four or five brands that enjoy the highest market share. New players have to face several high barriers since they lack the resources and capabilities to grow into a global brand. Moreover, the competitive moat enjoyed by leading brands is too strong and the battle for market share is too intense. Overall, the threat of entry of new players that can challenge Microsoft’s position is minimal to nil.

Intensity of competitive rivalry:

The level of competitive rivalry in the technology industry is too intense. It is the most competitive industry sector in the entire industry where companies spend billions on marketing as well as research and development. The number of rivals of Microsoft is high and most of them are the largest players in the tech industry like Apple, Amazon, Google and Facebook. Microsoft is operating in an intensely competitive environment. Amazon and Google are two its main rivals in the cloud industry sector. Facebook is a leading rival in the social media sector. The company is also engaged in rivalry with Facebook and Google in the search advertising industry.

All of the leading competitors of Microsoft invest heavily in marketing and innovation. Amazon is the largest R&D spender in the world that spent more than $70 billion on R&D activities in the past year. Other leading brands like Apple, Google, and Facebook also invest billions in research and development as well as marketing to maintain their market shares and competitive edge. While these leading players are a constant threat before Microsoft, there are many smaller players too that pose some competitive threat before Microsoft. The company also provides Windows servers. However, the market share of Windows servers is much smaller compared to Linux.
Overall, the level of competitive rivalry faced by Microsoft is very high. However, the threat is moderated a bit by the global presence of the company, its dominant market position, brand equity and the company’s financial strength. Microsoft is also very aggressive about protecting its leadership position and market share.

Conclusion:

Microsoft is a global leader in the tech industry. It has a strong competitive edge over its rivals in several areas and the company has continued to improve its competitive advantage through a sharp focus on innovation. The company holds strong bargaining power against both suppliers and buyers which is a sign of its strong competitive position. It also faces minimal threat from new players. Over the past several years, very few such players have emerged that have been able to gain some market share in the tech industry and most of them do not pose a direct and strong threat to Microsoft.

The threat of substitutes is high for Microsoft in some areas but very low in the others where it enjoys a dominant position and very strong market share like PC software. In the cloud industry too, Microsoft’s position has strengthened year over year. Overall, the competitive position of Microsoft based on this five forces analysis is very strong and the company is poised for faster growth in the future.