Read the case and then answer the following questions.

Surface tension
The tech giant’s decision to make its own tablet computer is a boldgamble

“WITHIN five years, I predict it will be the most popular formof PC sold in America.” When Bill Gates spoke at a trade show in2002, the then chairman of Microsoft left nobody in doubt that whathis firm called the “tablet PC” would one day take the world ofpersonal computing by storm. His sense that an upheaval was comingwas spot on, but his timing wasn’t. Only when Apple launched itswildly popular iPad in 2010 did computing tablets at last take off.Now Microsoft is scrambling to gain a foothold in one of thehottest markets in the IT industry.

On June 18th 2012, Microsoft unveiled Surface, a tablet thatwill bear Microsoft’s name and is supposed to be a showcase for itsnew Windows 8 operating system, due to be rolled out in the autumn.The new device will be available in two models: a basic versionwith a processor designed by ARM (which also powers the iPad) and asouped-up one with an Intel chip for business

users. Both models boast some innovative features, notably abuilt-in stand and a cover that doubles as a keyboard.

Microsoft’s decision to make its own tablet is another sign ofhow much the company is being buffeted by shifts that aretransforming the world of IT. Just as momentous as the rise ofsocial networking is the rapid growth of mobile computing (seeFigure 1). This has softened sales of Windows-based PCs, thefoundation of Microsoft’s fortunes. And it has boosted rivals suchas Apple and Google, whose respective mobile operating systems, iOSand Android, power most smartphones and tablets.

A related threat to Microsoft’s business is the“consumerisation” of IT. Growing numbers of employees are nowdemanding to use their own phones and tablets at work. In manycases, companies are caving in. As a result, iPads andAndroid-based tablets are spreading rapidly through offices andfactories – the heartland of Windows-based PCs.

Critics point out that Microsoft’s track record in hardware ismixed. Although it has produced hits such as the Xbox game console,it has also had some deeply embarrassing misses, including Zune, aportable music player that has failed to rival Apple’s iPod.

Microsoft entered into video games and game consoles in 2001.The launch of Xbox 360 in 2005 has proved extraordinary and alsoparticularly interesting. The rationale behind its market entryinto the video games industry comes with a good reason. It wasdesigned primarily to keep their potential competitor, Sony, incheck. Although Sony operated in a different industry, Microsoftrecognized that Sony could emerge as its rival.

Microsoft’s Zune was launched in November 2006 and Microsoftbelieved that it could compete with the Apple iPod, which had beenin the market since 2001 and dominated the multimedia player andmusic download business around the world. The Wall Street Journalreported that revenue from the Zune player was $85 million duringthe 2008 holiday season compared to $185 million in the same periodin 2007. Apple’s iPod revenue during the last quarter of 2008 was$3.37 billion. Microsoft, which had access to as much hardwaredevelopment expertise as any company in the world and the capitalto support a massive marketing budget for new products, failedcompletely in its attempt to get a large part of the iPodmarket.

For the Surface, analysts worried that consumers may be confusedby the two versions of the tablet, which will have very differentprice points. Microsoft has just indicated that the expensive modelis likely to cost the same as thin laptops, which sells for around$1,000, whereas the cheaper version will be priced to compete withcomparative ARM-based tablets, probably at around $500.Comparatively, the cheapest iPad with a high- resolution screencosts $499.

Another concern is that by making its own device, Microsoftrisks alienating other firms that are working on Windows 8 tablets,such as Dell and HP. But the company’s main aim may be to show howits new operating system can best be used, thus setting a standardthat other device makers will strive to exceed – and perhapsproduce a Windows 8 iPad-killer.

If that is indeed the aim, Microsoft appears to have missed akey lesson from Apple. One reason why the iPad has been sosuccessful is that it blends beautiful hardware with an amazingrange of software. Microsoft has attractive assets, in particularSkype (an internet calling service), its alliance with Barnes &Noble (a big online bookseller) and its Xbox ecosystem. Yet otherthan the firm’s Office suite of productivity tools, none of thesewas shown at this week’s launch. “Microsoft has missed anopportunity to highlight things that can inspire people,” saidSarah Rotman Epps of Forrester, a research firm. Perhaps when itstablet hits the market later this year, the company will have foundways to bring more of these to the surface.

Microsoft has reaffirmed the strategy of having its own hardwaredevices recently. In September 2013, Microsoft agreed to acquirethe handset business of Nokia for about US$ 7.2 billion. Thus,Microsoft will not only be making tablets but mobile phones aswell. In a letter to all Microsoft employees, CEO Steve Ballmer,reiterated that “The form and delivery of our value will shift todevices and services versus packaged software.” In November,Microsoft launched the second generation of the tablets and anupdated version of Windows. The device strategy is here tostay.

Unlike earlier ventures into devices, like the Zune music playerand the game console Xbox, the motivation for getting into thehardware side of business in relation to mobile phones and tabletsseems to be the strengthening of the Windows platform but theopening up of a new source of revenue is still in doubt.

Question A :

Explain the differences between diversification and verticalintegration strategies in relation to the scope of business.

Question B :

Would you classify the following strategic moves of Microsoft asdiversification or vertical integration strategy? Why?
A) Launching of the portable music player Zune
B) Launching of the Xbox game console
C) Launching of the Surface tablet.

Question C :

What are the major potential benefits and risks of Microsoft’sstrategic shift from selling ‘packaged software’ (i.e. Windowsoperating system) to launching ‘devices and services’ (i.e. tabletsand mobile phones)?