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Try to identify the major effects of each of the eight factors (complementary products; technological change; general economic conditions; demographic forces; ecological/natural environment forces; global forces; political, legal, and regulatory forces; and social/ cultural forces) on industry profitability.
The general environment of the industry has an impact on the profitability of a company. The general environmental factors play a considerable role in the growth and profitability of the company. In this case, we will be looking into the general environment’s effects on Microsoft’s profitability.
The first environmental factor, which is complementary products and services, has played a significant role in affecting Microsoft’s profitability. The existence of complementary products in the market, which is cheaper and substandard, makes it difficult for Microsoft to sell its products since most individuals purchase complementary goods more than Microsoft’s goods. Thus this affects the profitability of Microsoft. For instance, most people prefer Android mobile applications, unlike Windows mobile application, which is due to the Android applications’ easy availability (Efrati and Ante, 2011,p.A3). This is the primary factor that led to windows losing the monopoly of being the major mobile application store, so Android has a monopoly over Microsoft. The table below indicates how Android took over the monopoly from Microsoft and Apple.
Another issue is that of Windows Operating Systems. The majority of the people have chosen to use Ubuntu, which is free to use and doesn’t require purchasing like the Windows Operating System. This factor of complementary products has impacted Microsoft’s profitability, unlike in the past where Microsoft products used to lead in the market and thus have substantial profit margins.
Global forces also impact the profitability of a company. Microsoft was a global provider of software services and internet technologies in the computing world. As of 2009, Microsoft had sales worth $2.3 Billion, which has since reduced over the years (Sinha and Noble,2008,p.952). The global forces also play a role in Microsoft’s profitability, like, for instance, the effects of trade barriers or even laws that bar the use of Microsoft products and services. For example, China passed laws that favor the use of products and services made in their own country, which also applies to South Korea, among other countries. This has made it difficult for Microsoft to sell its products and services in these countries, which has affected its profitability margins.
General economic conditions include factors like the income of individuals, unemployment rate, and interest rate. These factors significantly impact companies and other consumers’ purchasing power, so they affect Microsoft’s profitability when they occur. The majority of companies prefer to purchase and use less expensive products than Microsoft’s products (Levy, 2006). Households are most likely to spend less cash on a computer and other software products due to the current economic recessions and also due to this pandemic. When this happens, it leads to Microsoft having lower sales and thus its profitability dwindling.
Technological changes also impact the profitability of a company. Microsoft depends mainly on its technologies. The current market is experiencing growth in technological advancement; most consumers in the market prefer to use advanced technologies, which has led to many choosing other types of technologies rather than Microsoft technologies (Lavie,2006,p.159). Companies with advanced technologies like Apple have seen an increase in consumers using their products because their operating system is not vulnerable to virus attacks like Microsoft’s operating system.
The market has been structured with technologies compatible with all devices; for instance, Google web browsers like Chrome can be used on any device. In the recent past, smartphones have become very popular. Thus, Microsoft converted its Windows ten operating system to smartphones to satisfy customer needs, which helped it remain relevant and improve its profitability. The table below indicates how buyers are purchasing Apple products more due to their invulnerability to virus attacks.
Another factor environmental factor that can influence profitability is political, legal, and regulatory forces. Political factors do affect the profitability of Microsoft on a large scale-like. For instance, in 1998, the United States Justice Department filed antitrust charges against Microsoft on claims that Microsoft had stifled internet browser competition (Oliver and Holzinger,2008,p.507). In 2004, the European Union also fined Microsoft and ordered the company to remove all its media software from the European Windows Version. Even though Microsoft handled the first case, these legal actions almost led to Microsoft’s splitting. Microsoft’s several lawsuits and fines led to Microsoft paying vast sums of money that have affected its profitability as the penalties dig into the company’s profits.
Population demographics have also played a role in the profitability of Microsoft. Due to the increase n population, there is an increased demand for IT products worldwide, which has led to an increase in Microsoft sales, which has also translated to a rise in profit margins. In countries like Asia, where there are many internet users, they are a potential market for Microsoft products. Thus this factor has led to Microsoft producing more IT products to curb the rising demand. This has led to a drastic increase in sales and revenues, which has also translated to a rise in Microsoft’s profitability.
Ecological/natural environmental forces also play a significant role in the profit margins of Microsoft. The impact of Microsoft’s activities on the environment leads to it being penalized for the destruction of the environment (Shira, 2013). When Microsoft’s activities affect the environment, it is usually penalized for that, which leads to Microsoft paying vast amounts of money for the damage conducted. This leads to Microsoft paying amounts, which could have helped in increasing its profitability.
Identify and predict any short-term to medium-term changes in any of the eight factors that might alter average profitability in the industry. Address how those changes will affect industry profitability in the future.
There are some changes which have been made which can affect the profitability of the company soon. To begin with global forces, the majority of the countries are passing laws that are favoring their domestic companies for them to mint more profits and gain market share in their own country. This is evident from China and South Korea, among other states that have passed laws that favor domestic companies (Naina, 2012). When this happens, companies like Microsoft who sell their products and software to those countries, are likely to lose vast amounts of money, which will affect Microsoft’s profitability in the long run.
On the other hand, technological changes are also prone to affect the company’s profitability in the future. Due to the growth in technology, if a company doesn’t step up its game and improve its technology to produce better products, they will be affected. The majority of the consumers will have to pick products with technologies that suit them (Kushida and Zysman, 2009,p.182). This will lead to some of the companies not putting up enough sales, which will lead to their profitability being affected. Companies that have adopted new technologies are prone to gain more market share and thus increase their profitability in the future as compared to those that didn’t. The following table indicates how technological changes can impact a business’s profitability; in this case, Google and Apple are used as a case study.
The introduction of complementary products into the market is prone to lead to other companies being out of business. In this instance, a company producing products that perform one function is inclined to be out of place as others will be delivering goods that can serve more than one part. Hence, companies producing goods that are performing a single task are prone to fall below their profits in the future as the complementary products companies will take their market share and thus increase their profitability.
As part of the analysis, consider how the general environmental factors may affect each of the five industry forces (rivalry, buyer power, supplier power, the threat of new entrants, and the threat of substitutes).
The general environmental factors can affect each of the five industry forces. To begin with, the changes in technology will lead to an increased rivalry between companies. This will be a massive challenge since new companies that are making entry to the market are prone to develop diversified technologies that will make the majority of the individuals like their products, thus leading to people abandoning companies that don’t have technologies that suit them (Frost and Sullivan, 2013). This will lead to an increased rivalry between companies since the companies with a market share will lose their market share to the new companies that have come with diversified technology. This was evident when new technologies came into the market and displaced Nokia, which was a Microsoft brand, as shown below.
The coming up of complementary products into the market can affect the purchasing power of buyers. In the recent past, most companies are introducing goods that are operating as complementary products to others. This factor will most likely make the purchasing power of buyers to be affected. This is because most buyers are likely to purchase products while performing more than one task at the same time to save money.
Economic conditions, on the other hand, affect the supplier power. When the economy is in a recession like it is currently, it is prone to make buyers’ buying power reduce, affecting the supplier power. Interest on loans also plays a crucial role in the demand for loans used in purchasing various products. When the interest rates become unfavorable, they make it difficult for individuals and businesses to take loans to buy products of their choice, which leads to the reduction of supplier power.
Global forces play a significant role in affecting the threat of new entrants. This happens since multinational companies tend to produce goods and sell them to different parts of the world (Porter,2008,p.82). The selling of products that have a considerable market share globally acts as a threat to the new entrants to the market as most buyers are prone to purchase products of companies they are well familiar with. When this happens, it becomes difficult for the new entrants to penetrate the market and gain market share.
The introduction of complementary products into the market is becoming a threat to substitute products. There are currently several companies producing the same goods, and thus some have gone to the extent of producing goods that can perform more than one task, which has led to the outdoing of goods that were acting as substitutes. For instance, some electronic companies like it is in Microsoft’s case are producing headsets and ear pods that can play music, receive phone calls, and at the same time, the ear pods can read your message for you. This renders companies manufacturing earphones facing a couple of challenges as they will have to develop new strategies to remain relevant in business.
References
A. Efrati and S. E. Ante(2011), “Google’s $12.5 Billion Gamble,” The Wall Street Journal, pp. A1 and A4.
C. Oliver and I. Holzinger,(2008) “The Effectiveness of Strategic Political Management: A Dynamic Capabilities Framework,” Academy of Management Review 33: 496–520.
D. Lavie,(2006) “Capability Reconfiguration: An Analysis of Incumbent Responses to Technological Change,” Academy of Management Review 31: 153–174.
Frost and Sullivan (2013) “Global Analysis of the Smartphones Market.”
K. Kushida and J. Zysman,(2009) “The Services Transformation and Network Policy: The New Logic of Value Creation,” Review of Policy Research 26:173–194
M. E. Porter,(2008) “The Five Competitive Forces that Shape Strategy,” Harvard Business Review 86 (1): 78–93.
Naina Khedekar,(2012). “Timeline: The fall of Nokia,” Tech 2. Available at http://tech2.in.com/ features/mobile-phones/timeline-the-fall-of-Nokia/444992
R. Sinha and C. Noble,(2008) “The Adoption of Radical Manufacturing Technologies and Firm Survival,” Strategic Management Journal 29: 943–962.
Shira Ovide,(2013). “Microsoft in $7 Billion Deal for Nokia Cellphone Business,” Wall Street Journal.
S. Levy,(2006) The Perfect Thing: How the iPod Shuffles Commerce, Culture, and Coolness. (New York: Simon and Schuster, 2006).
