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MICROSOFTS SEARCH

STRATEGIC MANAGEMENT
ASSIGNMENT # 04

Submitted by: 1. Sheheryaar Mahmood 2. Amna Aslam 3. Madeeha Tahir Class: MBA-IV (F) Submitted to: Sir Suhaib Baluch Date: 12.03.2012

MICROSOFTS SEARCH
SUMMARY In September 2008 the executives at Microsoft looked at alternatives to improve the companys position. The company got serious about search five years back, made great progress, but still lacks behind Google. The division leader is looking for a new game changer move which helps then catch and pass Google.

Microsoft in 2008: Since its origin, Microsoft has grown to sell a complex line of software, services, and hardware. The historical heart of the company was its line of operating systems for PCs, which was introduced in 1980. IBM had come to Bill Gates looking for someone to build a PC operating system. Gates purchased an OS and modified it to meet IBMs needs, and named it MS-DOS. Rights to use this system were sold to IBM. During the 1980s this system dominated a rapidly growing market for PCs. By 1990, clone makers (Compaq, Dell, etc.) were licensing MS-DOS for $15 per PC. Microsofts OS ran 90% of the worlds PCs, while Apple had a 7% share. Apple launched Macintosh in 1984, and Microsoft introduced Windows 1.0. In 1990 Windows 3.0 was introduced, then Windows 95, 98, XP and finally Vista in 2007. Development costs rose from $500 million for Windows 95 to $10 billon for Windows Vista. By mid 2000s, Microsoft sold 95% of all OS, while Apple had a share of 3%.

Application Software: 1980s: Microsoft entered the business of making application software. 1983-84: They released word processor and Excel spreadsheet. WordPerfect and Lotus were still dominant, but word and excel soon became successful. 1990: They bundled Word, Excel, and PowerPoint into Microsoft Office. 1995: They were the leading provider of such softwares, and continued to be.

Internet Browsing: Mosaic was the first widely used browser, produced by NCSA. They sold licenses to more than 20 companies, including IBM but not Microsoft. In 1994, Netscape released its browser, Netscape Navigator, & had a 70% share of the browser market by the next year. Bill Gates assigned the highest level of importance to Internet, and as a result Microsoft released Internet Explorer in 1995. Soon a newer version was also introduced, and IE was offered for free, coming bundled with windows on new PCs. Soon versions of IE were also made available for Apple and UNIX.
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They also made deals with Internet Service Providers to promote IE. By late 2002, Microsofts browser market share went above 95%. U.S. department of justice made an antitrust case against the company in 1998, for which a settlement was reached in 2001, which also banded the company from bundling other applications with Windows in the future.

Java: An online community of programmers developed open-source software. Linux, an open source version of the UNIX OS, was gaining popularity in 1998. It was especially attractive to price sensitive customers. Microsoft launched a multi-pronged response to Linux and also produced a stripped down version of its server OS and sold them at low prices to emerging economies. They set up an internal lab which had two motives: 1. To look for competitive weaknesses in Linux, 2. And, to find ways to make Windows interoperate with Linux. In 2006, they made a deal with Novell to make windows server OS compatible with Novells version of Linux so that servers could run both. From 2006 to 2007, Linuxs share of the server OS market went from 10% to 20%, and Microsofts share went from 50% to 70%.

Search and Rise of Google: Search was emerging as a major activity, and automated search engines were becoming common. By late 1990s, many search engines changed into portals. Search engine had three parts: web crawler, index and a user interface. Sergey Brin and Larry Page founded Google in 1998. It soon had a search engine that could generate better results than rival engines. By 1999, they had a nice technology, but no clear plan. They started focusing on the idea of Bill Gross. They launched their AdWords service in 2000, switching from CPM to cost-per-click in 2002. Advertising was different on Google as they allowed only text based adds and they ranked adds according to a combination of the bid per click and frequency with which users clicked the ad. The firm soon overtook Overture.

Growing Google: They introduced AdSense in 2003, which intensely increased their revenue. They expanded their activities in search; Google book search, Google news, Google maps, Google scholar, etc. In 2000 they provided search engine in10 languages. Their other projects were Desktop search, Google toolbar, Gmail, Google notebook, Google Talk, Picasa, Google Chrome, etc.

Their new products and market entries werent planned. They say that they would rather have people confused than them knowing what theyre doing. Yahoo bought Inkotmi & Overture, & Microsoft began to develop technology for search and search based advertising, but Google was in lead still.

The State of Search: By 2007, search advertising had grown into a $20 billion business globally. Googles index grew from 1 billion in 2000, to 40 billion pages in 2008. Search engines often designed customized operating system for their servers, as did Google. By 2008, Google claimed to use more than 2000 signals to define the status of a site.

Microsoft in Search: Microsoft developed Slate Magazine, migrated its Encarta encyclopedia from CDs into an online site, and launched MSN (whose search engine was powered by Inktomi and Overture served up advertisements). Through 2003, MSN generated no profits. Eventually the team decided to build a search engine from scratch. They gradually grew their index to 5 billion in 2005, and stopped using Inktomi. They also developed a network, Ad Center, and stopped using Overture. Googles share of active searches was much greater than its share of all searches, whereas MSN felt that their share was driven by Passive searches. Microsofts search team tried improving the quality of their search as well. Google deployed twice as many engineers as Microsoft did in its developmental efforts. Google had 15 data centers, while Microsoft had 4. In 2008, Google catered to 400,000 advertisers, yahoo catered to 175,000, and Microsoft catered to 60,000. Microsoft tried to distinguish its service in several ways: integrating with Encarta encyclopedia, switching to live search, launching a Live Search Club. For advertisers, live search offered the ability to target by using demographics. Special efforts were made to make it effective for product sale. In 2008, they launched the cashback program, where advertisers would only pay Microsoft when a consumer purchased a product. In august 2008, the company purchased Power set (semantic search). In January 2008, Microsoft offered a bid of $45 billion to buy Yahoo. However, the CEO declined the bid arguing for a higher price. Microsoft withdrew the bid in May.

QUESTION # 02: Does Microsoft have a competitive disadvantage in Internet search and search related advertising in 2008? Competitive advantage can be gained only by two factors: the Willingness of customer to pay and the cost incurred by the form to produce or offer the respective product/ service Competitive advantage is the only way that a company can ensure its profitability, no matter what set of tactical choices or business model it has selected. The higher Price per click (PPC) that Google had i.e. $0.71, as compared to Microsoft, $0.59, was the reason it was more profitable, which put Microsoft at a competitive disadvantage. The advertisers were willing to pay more to Google than to Microsoft, indicating the latter having a lower WTP for advertisers. The cost to suppliers being the same, Google has a wider gap between cost and WTP resulting in competitive advantage, while Microsoft having competitive disadvantage. Google was the market leader with 63. 5% share and Microsoft only had an 8.3% share of the market. Exhibit 6 clearly shows under Revenue per search relative to Google that Microsoft (MSN) lags far behind Google and this indicates that Microsoft is at a competitive disadvantage as well. The figure below shows some of the tactical choices that Google made, which reinforced one another, resulting in its competitive advantage.

Google also had more number of data centers and higher no. of engineers under its umbrella which resulted in continuous improvements to its search engine.

Where Microsoft took 200 milliseconds to retrieve some information, Google did the same in half that time of 100 milliseconds again resulting in higher profitability and more users. The above virtuous cycle was responsible for the competitive advantage of Google, as Google created a higher WTP and higher revenue along with being the market leader in terms of market share On the other hand as mentioned in the case Microsoft in terms of its search advertising business had a highly vicious cycle which also added with in to its competitive disadvantage.

So we see the deduce and conclude that Yes Microsoft does in fact have huge competitive disadvantage in 2008 in its search and search advertising business, the reasons having been elucidated above.

QUESTION # 03: Why is Microsoft pursuing the market for search and search-related advertising? Contrary to previously held beliefs, search was turning into a commodity with high potential for profit. As mentioned in the case (pg 8) search advertising had grown into a $20 billion business and it was predicted that it would still grow further, yet parallely becoming more complex and sophisticated. Search marketing Industry
2007 2012 40% 20%

$ billion Business

It is believed that the reason why Microsoft pursued this market even though it was suffering losses and losing money in it, in 2008, as shown by Exhibit 1 from the case, is that this market showed a lot of future potential for profitability and was a highly attractive business opportunity for any organization. As stated by Search was still in its early days - Yusuf Mehdi, a senior VP at Microsoft: This indicated the potential of this aspect of the internet services business. Another reason why we believe that Microsoft pursued this strategy was due to the competitive necessity of the prospect. As project management divides various projects into categories, one of them is of those projects termed competitive necessity projects1 These projects are required to be undertaken by an organization in order to remain competitive in the market against its rivals. Microsoft being one of the major players in the industry had to walk down this path, because if it failed to do so it might very well drop out of the competitive race. Summarizing: We believe these were the reasons Microsoft ventured into this business as it was an attractive & potentially profitable. Microsoft had to keep itself in the running, and had to follow and replicate the moves of other organizations in order to offer to its customers the same and try to pursue a further unique ability to gain competitive advantage.

Project Management: A Managerial Approach. 7 th Edition by jack R. Meredith and Samuel J. Mantel Jr.; Types of Project Selection models, chap: 02, Non-numeric projects, Pg 45