Microsoft (NASDAQ: MSFT) was founded in 1975 by Bill Gates. The company has enjoyed stellar growth over the past several years, driven by the tech industry’s fast growth and increased digitization worldwide. Microsoft is among the tech industry’s leading players rivaled by Amazon, Apple, and Google. Its position in the cloud industry is just second after Amazon. During the pandemic, the cloud industry was one of the few industries that enjoyed rapid growth.
It also signals a lasting change and that the cloud industry will be seeing higher sales and revenue in the coming years. Over these years, the company has diversified its user base and revenue sources through various acquisitions and entered diverse fields, from gaming to social media. What started as a software business years ago has expanded to include OS, mobile and gaming hardware, cloud services, and a large array of other products and services.
The tech industry is marked by heavy competition, and each of the leading players is quite aggressive about growth. As a result, the leading tech players invest a heavy sum in research and development each year. During the pandemic and the worldwide lockdowns that followed to contain its effect, Microsoft focused on changing its business model to an entirely digital one. As part of its sales and distribution channels’ full digitalization, the company closed its physical stores worldwide. It also introduced a nice range of services to help businesses transition to a digital operating model that could endure even after the pandemic.
The company is known the most for its Windows operating system, and the Microsoft Office Suite is used worldwide by a large segment of businesses and professionals for productivity. Microsoft’s commercial cloud business generated more than $38 billion in revenue in 2019 and is among its fastest-growing segments. However, in 2020, its cloud revenue grew higher than $50 billion, as the company disclosed in its 2020 fourth-quarter (ending June 30, 2020) financial results. Microsoft is set against some formidable competitors like Amazon and Google in the Cloud industry. While AWS is currently ruling the cloud industry, Microsoft’s Azure has also seen its popularity and sales surge faster.
In this post, we will review the main pillars of Microsoft’s business growth strategy. However, before that, we will take a look into Microsoft’s target market or who its customers are.
Microsoft’s Target Market:
Microsoft is a global business that targets both individual users and business customers. It has introduced a large and highly diversified array of products and services that target customers from various segments. Unlike Apple, which targets users mainly from the higher-end market, Microsoft targets users from all classes. With its growing base of cloud services, Microsoft targets a large segment of businesses in various industries, including Manufacturing, real, telecom, education, travel, finance, and several more industries. Microsoft Azure customers include Walgreens, Macy’s, Jet.com, Vodafone, and several more products and services companies of all sizes from around the globe.
The company is eyeing a large pie of the cloud industry and has continued to refine its services to suit its corporate customers’ evolving needs. Across nearly all industries, from finance to education and even fashion and food, businesses are now heavily relying on digital technology to carry out their daily operations. This has led to sharper growth in the user base of Microsoft’s Azure services. Since the commercial cloud accounted for more than one-third of its revenue during fiscal 2020, the corporate customers will be Microsoft’s main focus in marketing and outreach efforts in the future.
Apart from its cloud services, the company targets a large segment of professional and individual users through its Windows and productivity software range. The Windows and Microsoft Office products cater to the commuting needs of individuals and organizations worldwide. A large segment of Windows customers are students, including school, college, and university students. The PCs with Windows also include a large segment of gamers. Worldwide the craze of gaming has grown a lot, and a large segment of the gamers are PC gamers that mainly use Windows PCs for gaming. Windows users lie mainly in the 15-50 age group and come from all classes, including the middle class, upper-middle-class, and upper class. The number of premium and gaming PCs that come with Windows on them has also grown in recent years as companies like HP, Dell, Acer, and Microsoft have introduced several premium models for the higher end market.
Business Growth strategy of Microsoft:
The tech industry is marked by heavy competition, and companies in the industry are highly aggressive about acquiring growth. They invest large sums in marketing as well as research and development. Their growth depends on the pace of innovation inside the company. Microsoft is a leading technology brand, and like the other tech leaders, it too invests heavily in research and development. The company has focused on creating an organizational culture of innovation that fosters creativity among employees and drives faster growth.
The company’s research and development expenses grew to $16.9 billion in 2019 compared to $14.73 billion in 2018. From 2018 to 2019, the company’s research and development expenses grew by $2.2 billion or by 15%. The company’s focus on growing its strength in the cloud industry has grown, as has its income from the cloud segment. Commercial cloud generated more than $50 billion in fiscal 2020 for the company, which has resulted from its focus on innovation in this area (Microsoft Annual report, 2019).
Apart from the cloud segment, Microsoft also focuses on research and development in the other segments, including Windows and other software. The result has been faster growth in user base driven by higher user satisfaction and superior customer experience.
In the tech industry, where the competition is intense, research and innovation are also essential for several other factors, including differentiation. Whether in the cloud or the other segments of its business, Microsoft also focuses on innovation to differentiate its products from those rival brands offer. Overall, innovation is a key driver of Microsoft’s competitive advantage and, therefore, a core pillar of Microsoft’s business strategy.
Growing product range:
Over time, Microsoft has highly diversified its product range and revenue base. Instead of focusing only on the PC or cloud segment, it has continued to expand the array of products and services it offers. The company has acquired several businesses that have helped it enter new business areas and expand its user base. The company generates revenue from several sources from its Windows products to a large range of software and productivity products, social media, gaming, and cloud. Microsoft Azure offers a large range of cloud computing services that cater to clients’ needs in several industries, from finance to travel, electronics, consumer goods, fashion, retail, education, and more industries.
According to Statista, the revenue Microsoft generated from Linked In in 2020 has reached higher than $8 billion rising from $5.3 billion in 2018. In its 2019 annual report, Microsoft had stated that its revenue from LinkedIn grew by 28% compared to 2018. Microsoft had acquired LinkedIn in 2016 and Github in 2018. In 2020 alone, it has made at least 8 acquisitions. The company has continued to grow its range of products and services through acquisitions, and the overall list of acquisitions made by the company its history is quite long. Apart from the failed acquisition of Nokia, which did not bear fruitful results, many of its acquisitions were quite successful. Back in 2011, the company acquired Skype, the video calling app, and Hotmail in 1997.
A large product range does not necessarily ensure high revenue growth, but it still helps the company expand its user base and supports its strategy of diversifying into new areas. All the products or brands that the company has acquired are not necessarily major revenue sources, but they have helped the brand strengthen its position in the tech industry and grow its user base globally.
Focus on cloud computing and latest technologies:
Microsoft’s focus on the latest technologies, including cloud computing and AI, has grown in recent years, driven by faster growth across the cloud segment. Microsoft is in the second position in the cloud industry, following Amazon. AWS and Azure rule the cloud industry, and Google Cloud Platform has also seen its market presence grow significantly in 2020. The annual revenue run rate of Microsoft from its cloud business grew past $50 billion in 2020.
Azure serves clients from diverse industries, including retail, banking, fashion, travel, education, automobile, and other industry sectors. The popularity of Azure has grown driven by the efficiency and pricing of Azure products and services. Apart from cloud computing, the company is also investing in other latest technologies like AI, machine learning, and other technologies. While this has allowed the company to establish itself as a highly innovative and competitive brand, investing in the latest technologies also brings new growth opportunities. Microsoft is positioned against leading tech brands, including Google, Apple, and Amazon. To ensure that Google and Amazon do not take away a significant market share, it should continue to focus on the latest technologies driving higher growth and transformation industrywide.
Leading in PC software segment:
Until some years ago, PC software used to be Microsoft’s core business segment, driving most of its sales and revenue. While the company has diversified its revenue base in recent years and focused on expanding into clouds, gaming, and other segments, the PC software segment remains its stronghold. The company has continued to maintain its focus on the PC software segment to maintain its superior position in the industry. The company has divided its business into three main product segments: productivity & business processes, intelligent cloud, and more personal computing.
The ‘More Personal Computing’ segment of the business generated $45.7 billion in revenue in 2019, which was more than 35% of the company’s revenue for the year. This segment enjoyed an 8% YoY growth in 2019 (Microsoft Annual report, 2019). It shows that while Microsoft’s personal computing products are still a significant source of revenue for the brand, the company has maintained its dominance in this area successfully. Apart from Windows, Microsoft’s Office productivity suite is also a highly popular worldwide.
While Google has brought some competing products, Microsoft’s PC suite’s popularity has remained very strong overall. In this area, since Microsoft has not been able to acquire a strong position as a PC manufacturer, the company depends on OEMs like HP, Dell, and other PC brands for its sales despite many attempts. However, Microsoft’s strong position also becomes clear from the fact that the only significant competitor of Windows is the Mac OS.
While Google released its own Chrome OS, it is still very far from tasting significant success. So, Windows does not face significant competition since the Mac OS can be used only on Apple products, whereas Microsoft Windows can be installed on any PC or laptop. The same is true about its Office productivity suite that can also be installed on Mac. Microsoft’s dominance in this area continues and will most likely continue since users worldwide have grown so used to Windows that building a strong substitute remains difficult for rival brands. Overall, Microsoft’s leadership in the PC software segment remains unchallenged.
According to Statscounter, Windows enjoyed a higher than 77% market share in Pc and laptop operating systems in September 2020, which was the highest of all operating systems in the market, followed by Mac OS at around 17.6%. Google’s Chrome OS has been able to gain only a 1.52% market share in the meantime. Windows is clearly the undisputed leader among operating systems, and due to the higher accessibility and ease of use, the popularity of Windows continues to remain strong.
Marketing is a critical area for tech businesses that want to achieve after growth. However, despite its aggressive focus on market growth, Microsoft had stayed stuck in a rut for several years. In recent years, after the company changed its focus in terms of marketing, it emerged from that rut and gained faster growth momentum. It has repositioned itself as an innovative company aspiring to help its clients worldwide grow their productivity using Microsoft tools and find faster business and professional growth. Overall, the company has also managed to change its image a lot. Instead of remaining only a software solutions company, it has emerged as a partner for individuals and businesses worldwide that understands their needs and offers solutions that can drive higher growth rates for people and firms.
However, this has not come easily for the company. Satya Nadella, the Microsoft CEO, focused on bringing a cultural change inside the company that drove faster innovation organization-wide and a higher focus on customer needs. The company is also investing in marketing and promotions and using mainly digital channels to grow brand recognition worldwide. Apart from promotional material, the company is also offering a wide range of educational material and tools for its clients to engage them better and manage stronger customer relationships.
Windows, Azure, Microsoft Office, Linked In, and other products made by Microsoft enjoy strong brand recognition and higher brand recall worldwide. The company invests an enormous sum in marketing each year. Its sales and marketing expenses in 2019 grew by 14% as compared to the previous year. Microsoft spent $18.2 billion on sales and marketing compared to $17.5 billion in 2018. The company mainly uses digital channels for marketing and promotions. Its increased focus on stronger branding has also resulted in higher brand recognition worldwide. Apart from that, Microsoft has managed a strong social reputation, and its focus on CSR (philanthropy) has also helped the company build a strong social image.
Investing in emerging markets:
Microsoft has increased its focus on the emerging markets worldwide including India and Mexico. These markets are of strategic importance for the company and offer a large customer base for its various products including PC products, gaming products and cloud computing.
India has emerged as a large market for Microsoft products, so the company has maintained a special focus on the Indian economy. A digital transformation has been underway in India for several years, driving higher growth for the economy. In the coming years too, IT will continue to remain the main pillar of growth for the Indian economy, making it one of the largest markets for products made by Microsoft, Google, and Amazon, the three leading cloud and digital technology players.
According to media resources, Microsoft has planned to invest more than $1.1 billion in Mexico in the coming five years, seeing its potential as a market for IT products and services. Microsoft is eyeing to grow its Latin American presence, and Mexico could play a key role in its Latin American expansion strategy. Currently, the company has only one data center operating in the region, which is in Brazil. By establishing a data center in Mexico, the company could boost its Azure capabilities and gain more customers from the Mexico and Latin American regions. This will also widen the competitive moat of Azure and help it gain after against Amazon AWS.
A Few Last Words:
Microsoft has acquired enormous growth over the past five years. Its gross margin has also expanded a lot in the meantime, driven by an increased focus on innovation and higher growth across the cloud segment. While Microsoft has emerged as a leading player in the cloud industry and continues to strengthen its position in the cloud segment, it is set against tough competitors like Amazon and Google. The company will have to maintain an acute focus on R&D as well as marketing to retain its competitive edge in the cloud market.
The company is eyeing the emerging markets to find faster growth while acquiring new businesses to strengthen its overall position and product range. It already enjoys a strong competitive moat in the PC software and OS segment, where its market share is the highest of all. However, there are some challenges ahead, the main challenges being competitive and regulatory. Despite that, the company has a strong cash flow, and its intelligent cloud business has demonstrated stronger performance in 2020. The pandemic is driving transformative changes industry-wide, and the cloud brands have benefited the most from these changes. The outlook for the coming years is bright, and Microsoft, with its continued focus on innovation, could successfully thwart the competitive challenges in its way.