Mandatory Case Study 1 PDF

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Dr. Ekeledo 02/04/15 Emerging Markets: Microsoft’s Evolving China Strategy

Question 1: From an industry-based view, why does Microsoft feel threatened by Linux in China and globally? Within the software (or technology) industry, Microsoft’s caution regarding Linux is not unsubstantiated both in China and around the world. The threat Linux poses to Microsoft can best be seen utilizing the framework provided by Porter’s “Five Forces Model of Competition”; the first of these forces is the threat of new entrants. This specific force is characterized primarily on the barriers to entry within a given market. Taking the Chinese market as an example, Linux did not face any noticeable barriers to entry when entering the market and also did not have foreseeable problems if it continued to operate within the market. Microsoft was not given this same luxury. In fact, Microsoft faced several issues when entering the Chinese market; with the biggest barrier being the Chinese government. Microsoft, being from the U.S. and vigorously pursuing litigations on pirated software, was not taken kindly by Chinese government. These reasons (among others i.e. for thinking they had placed “spyware” into their product), the Chinese government openly supported Linux, a free and open-sourced operating system. This support could prove to put Microsoft had a large disadvantage. Being a public infrastructure meant software developers would be more inclined to produce for Linux, which would create an alternative avenue for future software development; thus reducing the dependence users had on Microsoft’s operating system Windows. This development in Linux also had the potential to spread into other countries, reducing the global

dependence on Windows as well. The government-sponsored operating system also had negative effects on Microsoft in terms of competitive rivalry. This support made Linux a more viable option for Chinese consumers, thus increasing their competitiveness within the market. Microsoft’s operating system was also priced exceptionally high globally ($560). When compared to the free Linux operating system, this price tag has the potential to appeal to consumers around the world, not just those with less disposable income such as in emerging economies. Microsoft also had been under a fairly negative stigma within the Chinese market as being a sue-crazed company, hurting its brand and ultimately its competiveness. The grounds for these lawsuits were based on pirated versions of Windows, another problem for Microsoft as it was. This problem, inadvertently, was also threat in terms of a substitute good. PC retailers within China, along with other foreign companies, often sold their machines “naked”. Consumers would regularly seek out cheap alternatives, be it pirated versions of Windows or the free system of Linux. This also means that consumers also have more authority (or bargaining power) within the industry. With both Linux and Microsoft competing within the market (not just China), consumers are able to choose which operating system they want, going so far as to force Microsoft to lower the price of Windows to compete with the aforementioned free price of Linux. However, bargaining power was not limited to solely consumers. Suppliers, similar to consumers, also had more authority when it came to operating systems. Linux being supported by the Chinese government meant that they had access to the resources need to distribute its operating system i.e. marketing agents, business organizations, or even government legislation. Microsoft was not given these key

network relationships and therefore was forced to develop alternative and often more expensive means.

Question 2: From a resource-based view, what valuable and unique resources and capabilities does Microsoft have in the eyes of the Chinese users and the government? Utilizing a SWOT analysis, Microsoft had several strengths and opportunities, in terms of resources that proved advantageous to the company within Chinese market. The first of these resources being reform within the industry the Chinese government itself in the mid-2000. Government agencies were required to use legally obtained software and PC manufacturers were mandated to install legal software prior to selling their product to consumers. This, however, came only after Microsoft changed in strategy when operating in China. This restructuring first came with their policies towards piracy. Microsoft became lenient on the idea of those in China pirating its software, thus allowing more consumers to be exposed to their software and reconstruct their brand’s image among Chinese consumers. To promote itself further and establish a bigger user base, Microsoft discounted its operating system along with its Office software to ridiculously low prices ($3). These restructuring continued within the Chinese market, as Microsoft also began offering the Chinese government the source code to its operating system and allowed them the rights to change certain portions of that code. By aligning their strategic goals with those of the Chinese government, Microsoft began to develop a harmonious relationship with both the Chinese citizens and the Chinese government....