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Is network theory going to save Microsoft?

Deepak Jangid(PGP/16/080) Business Research Methodology

Indian Institute of Management Kozhikode

Abstract

Table of Contents
Abstract ......................................................................................................................................................... 2 Introduction ................................................................................................................................................... 3 Problem Structure: ........................................................................................................................................ 4 Stakeholders map:........................................................................................................................................ 5 Causal Loops:................................................................................................................................................ 6 Literature review ........................................................................................................................................... 7 Research Objective ..................................................................................................................................... 10 Research Questions: .................................................................................................................................... 10 Proposed methodology for research:........................................................................................................... 10 Significance of the Project: ......................................................................................................................... 11 Limitation of the study ................................................................................................................................ 12 References:.................................................................................................................................................. 13

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Abstract

Abstract
Purpose- This project is to examine the success of Microsofts strategy of leveraging network effect in the launch of its latest windows 8 which has been launched as an ecosystem instead of just another operating system for individual devices. Design/ methodology/approach- The paper considers statistical figures of current market performance of windows across the major countries in the world. A thorough study of literature has been incorporated to find the analogues/anti-analogues of Microsofts strategic move of offering the customers a highly personalized windows-ecosystem experience instead of a limited scoped operating system. The analysis does not involve much of data-mining and uses relevant examples/theories to come to conclusive remarks. Findings- The report finds out that although present performance of Windows 8 can be gauged through its current market share statistics, a better picture would be obtained by resorting to a primary research that obtains consumer responses about their acceptance of windows 8 and their extent of dependence upon windows 8 platform. Greater the dependence, more likely is going to be network effect on the sales of windows 8. Limitations/ Implications - Microsoft is the first company to launch a common OS. This strategy is aimed at using the traditional strength of Microsoft in the OS for PCs to gain market share in tablet and mobile segments. This research holds high significance in terms of assessing future scope of new innovations based on the network theory induced by the success/failure of Microsofts strategic move.

Keywords- Network theory, Microsoft, Windows 8, Strategic innovation

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Introduction

Introduction
Starting its journey in mid-1980s, Microsoft has traversed a long path in transforming the computer era ever since. While its earlier versions of operating system laid the foundation for its future success, the subsequent versions maintained its competitive edge over others. As of Dec. 2012 windows covers around 92.2% of market leaving its nearest competitor iOS (Apple Inc.) far behind in numbers. A major part of Microsofts revenue comes through its operating systems products. In such case it is imperative for Microsoft to keep bringing innovations in its core product. This series of innovation has brought Microsoft to the launch of Windows 8 which is targeted to serve as an ecosystem for devices of all the segments it is present in, for example PC, Smartphone, tablet etc. For a giant corporation like Microsoft, it is must to explore new boundaries where it can enter and make its market. Growing presence of tablet and smartphones were the next target for Microsoft. To capture all the segments (i.e. PC, tablet and smartphones) together Microsoft envisaged Windows 8. Windows 8 was launched in October 26, 2012 along with Microsoft surface, followed by the launch of windows phone 8. Launch of windows 8 was also accompanied by a total makeover of Microsofts branding. Rebranding efforts were made to change the products, logos, services and websites so as to make it more contemporary in terms of looks and user interface. Windows 8 is a step towards developing an ecosystem where all the three devices (PC, tablet and smartphones) will have a common platform to communicate and interact. Idea of an ecosystem instead of just an OS is more like a strategically innovative step which has its foundation in the network theory and network externalities. Motivation comes from the expectation that dependence on anyone of the device is more likely to influence the purchase of other devices operating on same platform. Moreover, how much successful would windows 8 be, is a debatable question.

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Problem Structure:

Problem Structure:

Windows market share in total

Dependence on Microsoft services Market Share

Growing PC market

Smartphone market share

Past years have witnessed a healthy growth in world market share of windows in total i.e. windows product portfolio- windows xp, vista, windows 7, windows 8. Same trend could be seen for the usage of Microsofts other service applications such as Microsoft office, skype etc. However, this does not go true for the market share of windows 8. In countries like US windows 8 has seen some downfall in market share in ending quarters of 2012 from 3.6% to 2.9 % (smartphone market ). Growing dependence on windows in PC market was unable to draw sales for smartphone market. This could lead a rethinking over the strategic move of leveraging network effect.

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Stakeholders map:

Stakeholders map:

Competitors

Laptop companies

Microsoft

VendorsTablet

Windows 8

Employees

Mobile companies

App developers

Consumers

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Causal Loops:

Identifying the stakes


Microsoft Inc.
Need to gain market share

Competitors
Respond to market share of Microsoft

Employees

App developers
developers

growing Well-being of Microsoft is Application

going to have trickle-down find an opportunity in effect for employees growing markets

Consumers
Better/worse through platform

Mobile companies

Vendors- tablet parts Laptop companies


in Laptop companies have to consumer

experience Mobile companies have to Increase/decrease 8 accommodate

windows

consumer demand for tablet is going accommodate to affect their business

demand for windows 8

demand for windows 8

Causal Loops:

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Literature review

Literature review
The Demography of Corporations and Industries by Carroll, G. and M. Hannan (2000) demonstrate high chances of survival of Microsoft in newly entered industries i.e. tablet and smartphones. An organizations size and tenure in old as well as in new industry increase the chances of survival in new environments. The literature also highlights that it imperative to study what firms do after they enter a new industry so that their actual performance outcomes can be measured.

Innovations are the necessary drivers of market. Motivation for the same could be to disrupt the market or sustain the current presence/dominance by any organization. According to "When is a disruptive innovation disruptive" by Glen M. Schmidt, Cheryl T. Druehl windows 8 platform could be an attempt to sustained innovation by Microsoft. However, ability of windows 8 to cannibalize the sales of other windows OS leads to High-end to encroachment which flows towards low-end segment. Here, highend and low-end refer to consumers willingness to pay for the product. High-end segments are willing to pay more for the product while low-end segment consumers have low willingness to pay.

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Literature review

Software industry is one of the most dynamic industries where a series of innovations keep rising every when and so. In such a case, Microsoft is trying to minimize the effect of competitors innovations by making the consumers more and more dependent on its ecosystem. "Product Strategies and Firm Survival in Technologically Dynamic Industries" by Barry L. Bayus and Rajshree Agarwal highlights that diversifying entrants into an industry have greater access to resources that give them an upper hand over organizations which are new and entrepreneurial in nature. The document also suggests that an established firm like Microsoft is more likely to grow through market penetration. With resource disposals at their side, diversifying agents (in this case Microsoft) would be able to develop collateral assets needed to create consumer demand in new markets. The article is in agreement to Microsofts ecosystem development strategy as it suggests that single product architecture has greater acceptance level in the industry. This also enables the firm to enjoy some network effects to enhance market penetration. As information technology is rapidly growing as one of the high-technology sector, in certain industries, network effects occur, which changes the competition. These effects play a major role during product launch that might differ from what usually is effective (New Product Launch Strategy for Network Effects Products- Yikuan Lee and Gina Colarelli O'Connor). The New Rules for bringing Market Innovations to Market Bhaskar Chakravorti demonstrate a need to offer coordinated switching benefits to the consumers in order to gain the wide level acceptance of innovations. It should incentive the consumers to switch to the new offering made by the firm. However, the tough game is to get consumers to adopt innovations. By understanding how social, physical and commercial networks interact the innovators can develop new methods to adopt innovation. From the User Interface to the Consumer Interface Melissa Cole, Robert M. O'Keefe and Haytham Sial strongly supports the need of more customer friendly environment in order to influence the

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Literature review

purchasing behavior of a consumer. A consumer is more likely to be affected by product offering when they are in sync with the needs such as ease of use and ability to communicate with other devices. Theory of network externalities suggests the exponential growth in consumer base with more dependency on any device for communication. At the center of Microsofts strategy lies the Network Effects or externalities which in other words can be said as economies of scale. Windows 8 is a platform which has almost same kind of applications and service offered through each of the devices (PC, tablet and smartphones). Routine usage by the consumer tends to make him accustomed to the existing platform. With time, the psychic cost of switching to some other user platform increases at disproportionately high rate. This psychic cost restricts the consumers from buying a device which has a different platform while the psychic cost acts as perceived benefits when consumer chooses to buy another device which has the same kind of usage pattern. This psychic cost also comes into play while communicating with other people. Better ability to share and communicate between devices on same platform is fairly understandable. With same kind of userinterface people are more willing to obtain psychic benefits instead of costs. Hence, once a chunk of members have entered into the networked market, everyone elses motivation to do so become stronger. Thus, it can be seen that network effect is present in controlling an individuals as well as collective behavior. (Comparative innovation cases of Apple and Microsoft - The Journal of High Technology Management Research Volume 23, Issue 2, 2012)

Hacking into an ecosystem like windows 8 is a comparatively costly affair for hackers to break into. Windows 8 has been equipped with some never before security features that leverage its complex network to make it difficult for hackers to hack (Ken Johnson, Matt Miller 2012).

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Research Objective

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Research Objective
-To evaluate the post-launch performance of Windows 8 in all the segments (i.e. PC, Tablet and smartphones) its future prospects in reviving Microsoft Incorporation in OS market

-To suggest what the next steps of Microsoft could be in order to leverage more on the network effects, if
present any.

Research Questions:
1. What factors contribute to a customers buying behavior in choosing an OS? 2. To what extent consumers are willing to accept Windows 8? 3. What potential does network effect has to increase overall growth of Windows 8

ecosystem?
4. What factors contribute to Windows in gaining competitive advantage in OS industry? 5. Does Windows 8 meet a consumers networking needs and provide a better experience? 6.

What are the threats posed to Windows 8 in meeting its strategic goal of making Microsoft market leader in all segments?

Proposed methodology for research:


To assess the present performance of Microsoft Inc. secondary data collection would present a good sense of conclusive idea. However, considering the fact that network effects do take some initial time to come into effect, it is imperative to assess future scope of growth for windows 8 platform. For this, primary data collection would be a necessary requirement to come to any conclusion.

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Significance of the Project:

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The research would seek consumer responses to identify the amount of success/failure Microsoft has achieved in its attempt to impact the consumer behavior. Consumer insights would be solicited to gauge the extent to which they are ready to accept windows 8. The research would be focused in measuring the effect of network externalities on the purchase of windows products. The methods for recording the consumer responses would be a mix of focus group interviews, indepth interviews, online surveys etc. The population for the primary research should be chosen from the major markets. The report would summarize the consumers behavior and recommend additional steps that Microsoft can take in order to improve its position.

Significance of the Project:


The growing mobile and tablet markets as well as a slump in the sale desktops have strained the traditional markets of windows. Also the growing competition from open source has eaten into the revenues of Microsoft. Therefore the move of Microsoft to go for a common platform across the various devices from mobiles to laptops to personals computers assumes significance. This strategy is aimed at using the traditional strength of Microsoft in the OS for PCs to gain market share in tablet and mobile segments. This would give Microsoft competitive advantage over Apple Inc. which uses different software for the laptop and mobile and segments. This move is also aimed at reviving the sales of windows phones.

The market share of android phones is currently 68.3% and is expected to have a value of 63.8% by the year 2016, with an expected CAGR of 16.3%. While market share of Windows phones are expected to grow from 2.6% to 11% between these years with a CAGR of 71.3%. This research is intended to understand and evaluate the fundamentals behind such an expected growth.

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Limitation of the study

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Recommendation derived through research would be a set of guidance to leverage network effects in software industry. This might be helpful for any new firm willing to enter into this industry and make an impact in the market.

Limitation of the study


The success of the research depends on the amount of primary research carried out. Every country has a different demography and geography that affect the consumer behavior. The research is supposed to obtain data from population of major markets. However, a better approach would be consider the emerging markets as well but due to resource constraints and fear of failure of data collection it is not suggested. The better picture would be obtained when a more extensive research is being carried out across the major and emerging markets. One of the major threats to a software firm is use of its own pirated version( Benjamin Tan, 2002). Understanding of consumers ethical behavior in using a pirated version of the software has a significant impact on the sales of Windows 8. Moral intensity can clearly influence the purchase intention of pirated software that in spite of presence of network effect, is not going to help Microsoft.

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References:

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References:
1. Glen M. Schmidt, Cheryl T. Druehl. "When is a disruptive innovation disruptive". The Journal of Product Innovation Management 2. Melissa Cole, Robert M. O'Keefe and Haytham Siala. (2000). From the User Interface to the Consumer Interface 3. Barry L. Bayus and Rajshree Agarwal, (May 2006). "Product Strategies and Firm Survival in Technologically Dynamic Industries". 4. Yikuan Lee and Gina Colarelli O'Connor. New Product Launch Strategy for Network Effects Products. Journal of Academy of Management Science Summer 2003, Volume 31, Issue 3, pp 241-255 5. Bhaskar Chakravorti (March 2004). The New Rules for bringing Market Innovations to Market. Harvard Business Review 6. Benjamin Tan. Understanding consumer ethical decision making with respect to purchase of pirated software. Journal of Consumer Marketing 7. Technology strategies and standard competition Comparative innovation cases of Apple and Microsoft The Journal of High Technology Management Research Volume 23, Issue 2, 2012, Pages 90102 8. Benjamin Tan , 2002. Understanding consumer ethical decision making with respect to purchase of pirated software. Journal of Consumer Marketing 9. Howard JA. Buyer Behavior in Marketing Strategy. Second Edition,London: Prentice-Hall, 1994 10. Ken Johnson, Matt Miller(2012). Exploit mitigation improvements in Windows 8. Black Hat USA

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