Business, Management

Microsoft Five Forces Analysis & Recommendations (Porter Model)

Updated on Updated on by Edward Ferguson
Microsoft Five Forces Analysis, recommendations, competition, customers, suppliers, substitution, new entry, Porter, computer business case study
Microsoft Argentina Headquarters in Buenos Aires. This Five Forces analysis of Microsoft stresses competitive rivalry, considering external factors in the IT, consumer electronics, and online services industry environment. (Photo: Public Domain)

Microsoft Corporation strategically addresses the issues highlighted in this Five Forces analysis of its business. Michael Porter developed the Five Forces analysis model to understand the external factors significant to an organization’s industry environment. In the case of Microsoft, these external factors are an effect of the activities of other firms in the information technology and online services industry. Such factors are also based on the decisions of customers and suppliers. Moreover, substitutes influence Microsoft. To maintain its market position as a major competitor, Microsoft considers the issues outlined in this Five Forces analysis of the technology business.

This Five Forces analysis of Microsoft shows that competition is the force with the highest intensity in the industry environment. This situation affects business growth in furthering the goals of Microsoft’s vision statement and mission statement. However, a variety of issues affect the IT and consumer electronics business, as shown in the details of this Five Forces analysis.

Summary & Recommendations: Five Forces Analysis of Microsoft

Microsoft must develop appropriate responses to overcome the impacts of competitive factors identified in this Five Forces analysis. The ability to strategically address these concerns influences the company’s resilience. The intensities of the Five Forces in Microsoft’s industry environment are as follows:

  1. Competitive rivalry or competition: Strong force
  2. Bargaining power of buyers or customers: Moderate force
  3. Bargaining power of suppliers: Moderate force
  4. Threat of substitutes or substitution: Weak force
  5. Threat of new entrants or new entry: Moderate force

Recommendations. The results of this Five Forces analysis of Microsoft put focus on competitive rivalry as the strongest force affecting the business and the information technology industry environment. This Five Forces analysis also shows that the company must include the bargaining power of buyers, the bargaining power of suppliers, and the threat of new entry in strategic formulation. These three forces have a moderate and significant effect on Microsoft’s performance. The threat of substitutes is a minimal consideration, although it also affects the technology business. Based on the factors in this Five Forces analysis, the following are recommendations for Microsoft:

  1. To boost competitive advantages, Microsoft can increase its research and development efforts, along with improved product development, to maximize competitiveness against other firms’ products. Innovation through R&D also supports Microsoft’s generic competitive strategy and intensive growth strategies.
  2. To address competition, buyer power, new entry, and substitution, Microsoft can expand its ecosystem of computer systems, consumer electronics, and online services. This recommendation aims to improve customer loyalty and reduce customer attrition despite the competitive challenges noted in this Five Forces analysis. The competitive advantages and business opportunities discussed in the SWOT analysis of Microsoft can facilitate the expansion of this product ecosystem.

Competitive Rivalry or Competition with Microsoft (Strong Force)

Microsoft needs to effectively compete to remain successful. This aspect of the Five Forces analysis determines the effects of firms on each other and the related conditions of the industry environment. In the case of Microsoft, the following external factors contribute to the strong force of competition against the company:

  • Customers’ moderate switching costs (moderate force)
  • High aggressiveness of consumer electronics and IT firms (strong force)
  • High diversity of firms (strong force)

Moderate switching costs have a corresponding moderate influence on Microsoft’s business. For example, customers have a moderate tendency to shift to other firms’ products. While such shifting is not easy, customers upgrading their systems could opt to use products from Microsoft’s competitors, including Apple, Google (Alphabet), Amazon, IBM, and Samsung. On the other hand, the high aggressiveness of firms leads to a strong force that significantly affects the company’s industry environment. These technology firms are aggressive in terms of their rate of innovation and their marketing campaigns. Microsoft must also consider the strong force based on the high diversity of firms. For example, the company must innovate products that compete based on a wide variety of features present in other firms’ products. In this aspect of the Five Forces analysis of Microsoft, external factors support the strong force of competitive rivalry, which is a priority issue in strategic decision-making.

Bargaining Power of Microsoft’s Customers/Buyers (Moderate Force)

Microsoft needs to continue satisfying customers, who significantly determine the company’s performance. The impact of customers or consumers on the information technology industry environment is evaluated in this aspect of the Five Forces analysis. Microsoft must respond to the moderate force of the bargaining power of customers, based on the following external factors:

  • Low substitute availability (weak force)
  • Customers’ moderate switching costs (moderate force)
  • High quality of information on IT firms and their products (strong force)

The low substitute availability represents the difficulty of access to effective substitutes to Microsoft’s products. For example, customers face difficulties in finding non-computer-network solutions that are as effective and efficient as the company’s online services. In the Five Forces analysis model, this external factor exerts a weak force on Microsoft and its industry environment. However, the moderate switching costs create a considerable force on Microsoft’s business. Because of this intensity of switching costs, customers have a considerable tendency to shift from the company’s products and start using other firms’ products instead. The external factor of the high quality of information further empowers buyers in terms of adequate information that they can use to compare Microsoft’s hardware and software products to competitors. For instance, such information is easily available from online sources. Based on the external factors in this aspect of the Five Forces analysis, Microsoft must include the moderate force of the bargaining power of customers as a significant concern in its business strategies.

Bargaining Power of Microsoft’s Suppliers (Moderate Force)

Microsoft’s business depends on supply conditions. This aspect of the Five Forces analysis outlines the influence of suppliers on the computer hardware and software industry environment. The following external factors maintain the moderate force of the bargaining power of suppliers on Microsoft:

  • Moderate size of suppliers (moderate force)
  • Moderate population of suppliers (moderate force)
  • Moderate overall supply (moderate force)

The moderate size and population of suppliers enable them to impose a significant but limited influence on Microsoft’s business. For example, some moderately sized suppliers of computer hardware components can change their pricing, which ripples to a potential adjustment in the company’s prices. The moderate overall supply also creates a significant but limited force on Microsoft. The intensity of this force could increase if the overall supply decreased. Thus, the external factors in this aspect of the Five Forces analysis of Microsoft points to the moderate force of the bargaining power of suppliers as an important strategic consideration in the computer technology industry environment.

Threat of Substitutes or Substitution (Weak Force)

Substitutes can reduce Microsoft’s market share. The effects of substitutes on firms and their industry environment are determined in this aspect of the Five Forces analysis. In Microsoft’s case, the following external factors impose the weak force of substitution on the business:

  • Low performance of substitutes (weak force)
  • Low availability of substitutes (weak force)
  • Customers’ moderate switching costs (moderate force)

Substitutes, such as non-online or manual-mechanical processes, have lower performance compared to Microsoft’s current products. In the Five Forces analysis model, this external factor weakens the threat of substitution against the company. In relation, the global adoption of increasingly advanced technologies reduces the availability of substitutes and further weakens the threat of substitution that Microsoft experiences. While moderate switching costs help facilitate substitution, this external factor is not enough to significantly strengthen substitutes. Based on this aspect of the Five Forces analysis, the weak force of the threat of substitution is a minor issue in Microsoft’s industry environment.

Threat of New Entrants or New Entry (Moderate Force)

In this aspect of the Five Forces analysis, the focus is on the influence of new entrants on the information technology industry environment. The external factors that lead to the moderate force of the threat of new entry against Microsoft are as follows:

  • High cost of IT and consumer electronics brand development (weak force)
  • Moderate cost of doing business (moderate force)
  • Customers’ moderate switching costs (moderate force)

The high cost of developing the brand of a technology business weakens the effects of new entrants on Microsoft. However, the moderate cost of developing such a business presents considerable chance for new entrants to find success in competing in the computer hardware and software market. The moderate switching costs also partly contribute to the potential success of new entrants in competing with Microsoft. These external factors moderately contribute to the competitive concerns of the company. Overall, such a condition corresponds to the moderate force of the threat of new entry against Microsoft. This aspect of the Five Forces analysis shows that new entry is a significant issue affecting Microsoft’s industry environment.

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