Microsoft's organizational structure and Windows product launch strategy

Microsoft

Company Background

Microsoft is a U.S.-based provider of personal and business software solutions, video game consoles and Internet media. The company's core product has long been its Windows operating system, which has seen a number of variants over the years. Microsoft's marketing share in operating systems is very high as a result of licensing to a broad range of computer manufacturers and the tie-up with Intel, who have provided the best processors in the industry for many years. In 2009, the company recorded $58.4 billion in sales and a net income of $14.5 billion.

The last two iterations of Windows were Vista, with a retail launch in January 2007 and Windows 7, with a retail launch in 2009. This paper will analyze Microsoft's global organizational structure over the past few years in attempt to learn lessons about how the structure affected the launch of these two Windows products, and what the impact has been on the company's margins.

Microsoft Organizational Structure

Microsoft is a highly centralized company, with a significant proportion of employees situated at the firm's Redmond, WA headquarters. International operations are generally sales and support functions, with senior management almost exclusively located in Redmond. As such, the company's organizational structure is designed around products lines rather than geography or a matrix structure. Geographical regions are subordinated within each product division. The major divisions of the company are the Business Division, Online Services, Server and Tools and Windows (known as Client in the annual reports).

The use of the product-oriented system is congruent with the nature of the Windows product. Windows, in its architecture, function and even marketing, changes little in each individual market. The primary changes to Windows are cosmetic (languages, for example). Windows has its own division for two main reasons. The first is that it is a critical revenue driver for the company. In 2009, for example, Windows generated $14.7 billion, 25% of the company's total revenues (Microsoft 2009 Annual Report). The second reason Windows has its own division is because at any given point in time, there are multiple Windows products on the market. As of the 2009 Annual Report, Windows offerings on the market were Vista Business, Vista Home Premium, Vista Ultimate, Vista Enterprise, XP Professional, XP Media Center and XP Tablet PC. To this, the company has now added the Windows 7 family. The multiple concurrent iterations of Windows each have their own subdivision concerned with marketing and development within the context of the overall Windows division. The division itself is governed only by the most senior executives, such as the head of programming and the CEO.

This organizational structure lends Windows significant autonomy within the larger organization. It also ensures that Windows receives a significant amount of capital and human resources. These resources enable the company to continue to develop and support multiple versions of the Windows product simultaneously. When a new Windows product is in the development stages, a new team will be created within the Windows group in order to work on the project. These multifunctional teams operate with code names until the project is officially announced. In general, the fact that Windows has its own group and its own resources allows for these teams to be well-supplied in terms of both personnel and finances.

Windows Vista

The Vista project was announced in July of 2005 and was completed in November 2006, three months prior to the release of the product to the public. The project had been initiated under a code name several years previous. In 2001, Microsoft announced a corporate re-organization in order to help facilitate the development of the next generation of Windows products. The company had a string of successful products in the late 1990s, but realized that the next generation of Windows was going to have to function differently in order to remain competitive in the marketplace. The reorganization was intended to promote improved service function on Microsoft's products, one element of which was going to be functionality on any device, anywhere. At the time, the move put Jim Allchin in charge of what was known as the Platform Products Group that oversaw both Windows and server applications (Microsoft, 2001).

This development helped to spearhead the development of Vista in its early stages. The original reorganization had left the company with seven business groups. This was changed in 2005, with the seven groups being condensed into three groups. Windows became the flagship product of the Platform Products and Services Division. At the time, Allchin announced his intention to retire and leadership of the group was split between him and Kevin Johnson until Vista was completed (Microsoft, 2005).

Vista was a moderate success for Microsoft. It was unable to overtake XP as the operating system with the highest market share, but has been able to gain 400 million users. The company's financial performance for fiscal 2007 reflects only five months of Vista but revenues increased from $44.2 billion in 2006 to $51.1 billion in 2007, an increase of 15.6%. In the first full year of Vista, 2008, revenues were $60.4 billion, an increase of 18.2%. Gross margins fell over the course of the Vista launch, from 82.8% in 2006 to 79% in 2007 and 80.8% in 2008 (MSN Moneycentral, 2010). Gross margins in the Windows division were 76.6% in fiscal 2007 and 77.7% in 2008 (2009 Microsoft Annual Report).

Ultimately, Vista has not had a positive impact on the gross margins for the firm. While margins improved slightly during the first full year of Vista, margins for the company declined, in part due to the high cost of marketing Vista. In addition, the brand value of Vista was relatively poor due to a high level of criticism. As a result, the retail price of Vista has dropped significantly over the course of the product's life. Further, Vista failed to overtake XP, meaning that the old operating system has still required full support from the company, adding to Microsoft's cost burden.

Corporate Solution/Action Taken

During the development of these two latest iterations of Windows, Microsoft has gone through two reorganizations. Both of these placed emphasis on the creation and refinement of the Windows operating group as an independent profit center. The stated goal in both instances was to spur innovation and product development. Windows 7 came to market much more quickly than Windows Vista, which may indicate that the strategy worked. However, Windows 7 represented a refinement over Vista, whereas Vista was significantly different from XP, meaning that 7 would naturally require a shorter lead time.

For Microsoft, the current strategy has been largely successful. Windows receives a tremendous amount of focus within the company and rightfully has its own unit. The marketing of Windows is conducted both globally (to OEMs) and at the national level. This structure is congruent with the high degree of standardization among Windows products worldwide.

The Windows 7 experience shows a trend towards more senior executive involvement in the Windows franchise. For the future, it is recommended that this support continue, primarily on a marketing basis. The fact that Vista was only a moderate success indicates that while the Windows development is indicative that while the reorganization has been a success in terms of product development, there may still be some marketing issues that need to be resolved. Senior management involvement, however, is a panacea for genuine change. At some point, Microsoft will need to find a way for its global marketing arms to have more influence on Windows. These arms right now are not empowered to any length, and are expected to sell whatever product is delivered to them. In future, a higher status should be given to the marketing element, to ensure that Windows receives a level of marketing support as high as the development support it receives.

Works Cited:

2009 Microsoft Annual Report. (2009). Retrieved April 10, 2010 from http://www.microsoft.com/msft/reports/ar09/10k_fr_dis.html

No author. (2001). Microsoft fine-tunes organizational structure to pursue software services for customers and business users. Microsoft press release. Retrieved April 10, 2010 from http://www.microsoft.com/presspass/features/2001/apr01/04-05reorg.mspx

No author. (2005). Microsoft realigns for next wave of innovation. Microsoft press release. Retrieved April 10, 2010 from http://www.microsoft.com/presspass/press/2005/sep05/09-20ExecChangesPR.mspx

MSN Moneycentral: Microsoft Corporation. (2010). Retrieved April 10, 2010 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=MSFT