Research Paper: Microsoft Company Background Microsoft Is a U.S

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Microsoft

Company Background

Microsoft is a U.S.-based provider of personal and business software solutions, video game consoles and Internet media. The company's core product has long been its Windows operating system, which has seen a number of variants over the years. Microsoft's marketing share in operating systems is very high as a result of licensing to a broad range of computer manufacturers and the tie-up with Intel, who have provided the best processors in the industry for many years. In 2009, the company recorded $58.4 billion in sales and a net income of $14.5 billion.

The last two iterations of Windows were Vista, with a retail launch in January 2007 and Windows 7, with a retail launch in 2009. This paper will analyze Microsoft's global organizational structure over the past few years in attempt to learn lessons about how the structure affected the launch of these two Windows products, and what the impact has been on the company's margins.

Microsoft Organizational Structure

Microsoft is a highly centralized company, with a significant proportion of employees situated at the firm's Redmond, WA headquarters. International operations are generally sales and support functions, with senior management almost exclusively located in Redmond. As such, the company's organizational structure is designed around products lines rather than geography or a matrix structure. Geographical regions are subordinated within each product division. The major divisions of the company are the Business Division, Online Services, Server and Tools and Windows (known as Client in the annual reports).

The use of the product-oriented system is congruent with the nature of the Windows product. Windows, in its architecture, function and even marketing, changes little in each individual market. The primary changes to Windows are cosmetic (languages, for example). Windows has its own division for two main reasons. The first is that it is a critical revenue driver for the company. In 2009, for example, Windows generated $14.7 billion, 25% of the company's total revenues (Microsoft 2009 Annual Report). The second reason Windows has its own division is because at any given point in time, there are multiple Windows products on the market. As of the 2009 Annual Report, Windows offerings on the market were Vista Business, Vista Home Premium, Vista Ultimate, Vista Enterprise, XP Professional, XP Media Center and XP Tablet PC. To this, the company has now added the Windows 7 family. The multiple concurrent iterations of Windows each have their own subdivision concerned with marketing and development within the context of the overall Windows division. The division itself is governed only by the most senior executives, such as the head of programming and the CEO.

This organizational structure lends Windows significant autonomy within the larger organization. It also ensures that Windows receives a significant amount of capital and human resources. These resources enable the company to continue to develop and support multiple versions of the Windows product simultaneously. When a new Windows product is in the development stages, a new team will be created within the Windows group in order to work on the project. These multifunctional teams operate with code names until the project is officially announced. In general, the fact that Windows has its own group and its own resources allows for these teams to be well-supplied in terms of both personnel and finances.

Windows Vista

The Vista project was announced in July of 2005 and was completed in November 2006, three months prior to the release of the product to the public. The project had been initiated under a code name several years previous. In 2001, Microsoft announced a corporate re-organization in order to help facilitate the development of the next generation of Windows products. The company had a string of successful products in the late 1990s, but realized that the next generation of Windows was going to have to function differently in order to remain competitive in the marketplace. The reorganization was intended to promote improved service function on Microsoft's products, one element of which was going to be functionality on any device, anywhere. At the time, the move put Jim Allchin in charge of what was known as the Platform Products Group that oversaw both Windows and server applications (Microsoft, 2001).

This development helped to spearhead the development of Vista in its early stages. The original reorganization had left the company with seven business groups. This was changed in 2005, with the seven groups being condensed into three groups. Windows became the flagship product of the Platform Products and Services Division. At the time, Allchin announced his intention to retire and leadership of the group was split between him and Kevin Johnson until Vista was completed (Microsoft, 2005).

Vista was a moderate success for Microsoft. It was unable to overtake XP as the operating system with the highest market share, but has been able to gain 400 million users. The company's financial performance for fiscal 2007 reflects only five months of Vista but revenues increased from $44.2 billion in 2006 to $51.1 billion in 2007, an increase of 15.6%. In the first full year of Vista, 2008, revenues were $60.4 billion, an increase of 18.2%. Gross margins fell over the course of the Vista launch, from 82.8% in 2006 to 79% in 2007 and 80.8% in 2008 (MSN Moneycentral, 2010). Gross margins in the Windows division were 76.6% in fiscal 2007 and 77.7% in 2008 (2009 Microsoft Annual Report).

Ultimately, Vista has not had a positive impact on the gross margins for the firm. While margins improved slightly during the first full year of Vista, margins for the company declined, in part due to the high cost of marketing Vista. In addition, the brand value of Vista was relatively poor due to a high level of criticism. As a result, the retail price of Vista has dropped significantly over the course of the product's life. Further, Vista failed to overtake XP, meaning that the old operating system has still required full support from the company, adding to Microsoft's cost burden.

Windows 7

Following the completion of Vista, Allchin retired leaving Johnson as the leader of the Platform Products and Services Division. As with each of Microsoft's divisions following the 2001/2002 reorganization, Windows operated as a standalone profit center within the Microsoft organization. This approach facilitates the pursuit of profit in the operating group - specifically it discourages the tendency to use tied products (Windows and Office, for example) as loss leaders to sell more of the other. The divisions work in cooperation -- tying new Office versions to new Windows versions -- but both seek to maximize profits on their own. This strategy compels both to maximize their margins. Given that both products have significant margin flexibility, the organizational structure removes the temptation to leverage that margin flexibility to increase market share.

The organizational structure that was created in 2005 and was fully implemented by the time of the Windows launch is still in place at Microsoft. Windows 7 is the first product to be fully developed and marketed under this organizational structure, which at the time of launch was billed as being innovation-centric. Windows 7 came through the pipeline more quickly than did Vista, and has been given a better critical reception. After the difficulties with Vista, senior management took a more active role in the launch of Windows 7, which may have accounted for the better reception. It is also considered to be a refinement of Vista, improving on several key areas.

Windows 7 was not launched in the 2009 fiscal year, but was released during the second quarter of the fiscal year instead. The financial results for Windows 7, therefore, are preliminary. The second quarter of fiscal 2010, which saw the launch of Windows 7, saw Microsoft record robust sales of $19 billion, up 14.5% from $16.6 billion in Q2 of fiscal… [END OF PREVIEW]

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