Editor’s note: Matthew Casey is a Software Analyst with Technology Business Research. He analyzes Microsoft’s go-forward strategy in wake of Thursday’s earnings news and recent reorganization.
HAMPTON, N.H. - Microsoft’s year-plus transformation will enable the company to better serve customers and solidify competitive positioning.
While Microsoft (Nasdaq: MSFT) has had recent success in sustaining growth across both revenue and profit (5.6% year-to-year revenue and 23.0% operating profit growth in FY2013), increasing pressure from competitors and shifting market trends spawned by shifting customer adoption (growth of mobile devices in both the home and workplace) threatened the longevity of this strategy.
The former organization of Microsoft’s software-focused portfolio around specific product families such as Windows and Office were not sustainable in the current competitive landscape. With Microsoft’s new strategy focused on services and devices, rather than software, to deliver end-user value, the recently announced organizational changes will better position the company to sustain long-term competitive positioning and maintain the presence of its cash-cow business in both the consumer and enterprise spaces.
Although Microsoft announced the vast reorganization of the company last week, the transformation of the company from a software vendor to a services and devices company started over a year ago. Product refreshes and announcements over the last year and a half, that included the Surface Tablet, Windows 8 and Office 2013, positioned Microsoft’s portfolio to better align to the recently announced initiatives.
With 2Q13 in the books, a quarter in which Microsoft recorded 10.2% revenue growth year-to-year (to $19.9 billion), the back half of 2013 and beyond will be about executing on the realigned company mission to deliver better value to customers and solidify positioning against competitors. Microsoft’s realignment around key go-to-market areas including Operating Systems, Devices and Studios, Applications and Services, and Cloud and Enterprise will ultimately help map Microsoft solutions to better meet the needs of customers and solidify the company’s competitive position across its broad market.
Portfolio integration and consolidation of operations around end-user aspirations will help Microsoft stave off competitors
Fundamentally, the core of Microsoft’s business, grounded by Business and Windows divisions (combined comprising 58.4% of Microsoft’s revenue in 2Q13) will not change. Solutions including Windows, Office and the rest of the company’s productivity suite will continue to leverage core functionality and an established customer base to sustain Microsoft’s business. The changes that will be felt across customers, partners and competitors as a result of the reorganization will be from tighter integration and incorporation of solutions across the portfolio and increased focus on end-user experience and services. Highlighting the integration of Microsoft’s portfolio to improve end-user experiences was the 2Q13 announcement of Skype and Lync integration. The move to integrate Lync and Skype will sure up Microsoft’s defenses against top competitor, Google, whose Google Apps have been nipping at Microsoft’s heels in recent years.
With the announcement to consolidate the productivity, search and collaboration businesses under “one roof” in the Applications and Services Group (to be headed by former Online Services head, Qi Lu) TBR anticipates Microsoft to continue integrating these disparate services to provide a seamless end-user experience.
Partner business models will shift the channel remains an integral piece of Microsoft’s business
There were mixed emotions from partners following the organizational realignment announcement at the Worldwide Partner Conference last week. Though partners are concerned over the future of their Microsoft-based businesses, they will remain a central piece of Microsoft’s business; the focus on service delivery and end-user experience will ultimately drive partner opportunity. While Microsoft will continue to provide services for enterprise customers, the opportunity for partners will lie within new business development and service and support delivery for midmarket and SMB customers.
Declining PC sales (stemming from increased mobile adoption and extended PC lifecycles) are changing the landscape for both Microsoft and its partners. For partners to sustain successful businesses based on Microsoft products, increased focus on service delivery and support for Microsoft solutions across devices will be necessary. As partners begin to transition their businesses from generating Microsoft product refresh to a more service-oriented approach, both Microsoft and its partners will retain their positions in the shifting marketplace.
(C) TBR
