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GOVERNMENT OF THE RUSSIAN FEDERATION

NATIONAL RESEARCH UNIVERSITY HIGHER SCHOOL OF ECONOMICS

FACULTY OF WORLD ECONOMY AND INTERNATIONAL AFFAIRS

MASTER OF INTERNATIONAL BUSINESS PROGRAM

Strategic acquisition vs internal development as a growth strategy for international technology companies: The case of Microsoft.

Student: Rasuljon Kobuljonov

Research Advisor: Vladimir Lissniak

Moscow 2018

Table of Contents

• Introduction
• Chapter 1. Theoretical aspect and previous research on growth strategies
• 1.1 Growth strategies of international companies
• 1.2 Growth strategies of international technology companies
• 1.3 Dilemma between acquisition vs internal development to achieve growth internationally
• Chapter 2. Acquisition vs internal development of Microsoft
• 2.1 Evolution of growth strategies by Microsoft
• 2.2 Internal development
• 2.3 Acquisition and “One Microsoft” strategy
• Chapter 3. Results, suggestions, limitation and future study directions
• Bibliography
• Appendix

Introduction

In the technology industry, all of the major players have the potential to impact all other industries in the international business. Considering the pace of innovations and technology companies' ambitious strategies to dominate the market, required attention to a growth of a company is at the highest level yet.

The tech industry and its market definition has evolved and changed over the past decade. Companies like Facebook, Google, Microsoft, Apple and Oracle entered their respective markets by producing different types of products and services (which will be analyzed and defined later on) from each other yet, find themselves competing against each other today.

Innovation in products and services in the technology industry has the ability to impact not just other sectors and markets but international business as a whole. According to IT Expert Voice (2017), information technology market has surpassed $3.75 trillion mark and growing each year. Fierce competition and actions executed by leading technology companies should be closely monitored and interpreted by all businesses whether it is a small start-up or large international company. Strategies and business decisions are derived from the actions of tech companies.

This paper will focus on Microsoft, one of the leading players in the tech industry. Microsoft and its evolution of growth and market penetration has been made possible with unique and bold strategies. Competition in the technology industry has forced all of its leading players and businesses to constantly make decisions to stay ahead and maintain, or increase, its market share. Giant international technology companies and their strategies will be analyzed to determine their purpose and motives.

To narrow our research field, we will focus on a growth strategy through the comparison of internal development (research and development) and strategic acquisitions (mergers and acquisitions). Picking Microsoft as the company to focus on was due to its frequent activities in mergers and acquisitions. To maintain its lifecycle against intimidating companies like Apple, Google and Facebook, Microsoft had to execute audacious, yet head scratching, actions to compete in the fast-changing technology industry.

The main purpose of this paper to give enough information and analysis to support that strategic acquisitions provide better path for Microsoft to achieve their growth strategies and compete against other companies within the technology industry. The technology industry is changing at an incredibly fast rate that executives need to make decisions that might differ from other industries. The object of this paper is growth strategies of international companies. Previous strategies and actions among international companies need to be brought to attention to give the reader a clearer view before diving into in-depth information regarding growth. The subject is the growth strategies of international technology companies. Strategy in the technology industry has proved to be different in comparison to other industries over the past decade. Technology in the international business is shaping, or at least, impacting various companies across all markets.

As one of the biggest companies in the tech industry, Microsoft's actions with research and development (R&D) and strategic acquisitions shapes their growth and prepares them to compete against their counterparts. One of the main goals of this paper is to provide reasonable answers and/or solutions to the dilemma between acquisition vs internal development to achieve growth internationally. The paper will also aim to answer questions like why do companies merge or develop internally? What effects the decision of mergers and acquisitions (M&A) in today's technology industry? What are pros and cons of M&A? What shaped Microsoft's strategies in R&D and M&A?

Methodology used mostly consisted of qualitative case studies and analysis of actions taken by Microsoft. Limited quantitative data researched was also provided regarding some aspects in comparison of technology companies' performance and M&A activities in the industry.

Chapter 1. Theoretical aspect and previous research on growth strategies

1.1 Growth strategies of international companies

In today's world of intense and fast-growing competition, keeping a business relevant and alive mostly depends on specific growth strategies and their results and outcomes. Daunting competition environment in market conditions has boosted the importance of scale in business. Growth has switched from an aim of the company to a necessity. Businesses look to utilize their sources to its highest potential so that they can try to achieve advantages to compete in their markets and maintain life cycle of the company. Achieving an objective by a company is becoming more and more difficult due to evolving factors. Factors that include competition, technological improvements, consumers, economical, judicial and innovations that are serving as barriers for companies in the way of realizing objectives. Businesses apply research and thorough analysis that consider the competition environment when building their growth strategies to minimize the effects of barriers and factors.

Globalization movements and information technologies have boosted developments across all markets and business. Rapid changes lead to companies rely on growth to stay competitive in their markets against competition. Growth has always been a natural part of businesses but due to cutthroat level of competition, it has become an absolute necessity. Businesses, national and international, are forced to do analysis of external and internal environments to have a clear strategy and execute it accordingly. To survive in developing industries, growth strategy contributes to businesses' competitive state and outlines the performance in the industry (Wheelen & Hunger, 2012).

Quantitative and qualitative development is required when approaching growth strategy of businesses. An increase in sales revenue, output, range of product and investments are considered in quantitative growth. Qualitative growth directed towards improving and developing business elements and their quality. Both are interconnected with each other thus, quantitative growth can influence qualitative growth (Isoraite, 2009).

Griffin and Pustay (1999) described international growth strategies are equity-based expansions by corporations to acquire ownership in foreign firms that can be used to further the corporate goals. These equity-based strategies are also referred to as direct investments where the parent multinational corporation (MNC) acquires sufficient equity in an existing or newly established foreign company, to incorporate the affiliate within the parent MNC's global strategies (Griiffin & Pustay, 1999) International growth can be accomplished by means of new start-ups, expansion of existing affiliates, partial or complete acquisitions, mergers with other companies, or joint ventures.

Growth strategies of international companies, or any companies in that matter, have to thought out carefully and thoroughly. Effective strategy will ensure company's success and sustainability. Growing a company or a business has numerous approaches and purposes depending on the company's state and circumstance. According to past research conducted by Doz & Hamel, business intentions, related to its goals and objectives, can be described by its growth strategy execution (Doz & Hamel, 1998). They also state that increase in size and amount of business elements such as property, technology and assets can be justified by a company's growth.

Dating back to 1975 research carried out by Buzzel, there are several important driving factors behind growth of a business or a company. Providing businesses with advantages that helps to compete against rivals considered to be the most important growth (Buzzel, Bradley, & Ralph, 1975). To gain advantage in the market, environment should be analyzed very closely so that managers and CEOs can make the right decisions to adapt the business to the development and changes in the future. Buzzel also highlighted that growth will result in maintaining the status of a business and is in close relation with productivity.

Development of growth strategies are constructed under the Ansoff model strategic tool. The growth matrix of Ansoff is composed of two axes, which are product and the market. Products is defined by which products the company offers along with which new products it would like to offer in the future. The market is defined by which markets does the company currently serves and which markets would it like to provide for in the future (Ansoff, 1957). The definition of the market can be tricky in the technology industry due to companies increasing the types of products and serves it provides at a very fast rate. The products of the technology industry will be defined and explained more in the second subchapter.

There are four main types of growth strategies which are implemented by international companies to drive their business into success or into the ground. As a company becomes larger, decisions regarding growth will become more fragile, in other words, elasticity and effects will increase. While a company is small and starting to increase, mistakes and few wrong decisions in the growth strategy can be ignored or recovered and replaced along the way. Large companies have to spend more time analyzing and planning each decision. One wrong decision could cause them to lose significant market share or give the competition a chance to capitalize.

First type of growth strategy is market penetration. Companies are always looking to increase their market share or increase sales in their respective market. In order to achieve this goal, customers need to be attracted away from the competition. Some actions that aid in market penetration include decrease in product price, acquisition of a competitor, more promotions and modifications of products. Market penetration and its description is easier said than done. Each action will lead to increase in cost for the company. The amount of that cost will depend on the size and the market and the company.

Product development is the second type of growth strategy. Purpose of product development is to start selling new products or service in the existing market. Main goal of this particular strategy is to increase turnover or luring away costumers from the competition. Gaining these products are possible via several ways but the one that is favorable for big companies is the “branding” strategy. It is simple as it sounds, a company buys a product and releases it under its own brand. The reason it is favorable for big companies is because they already have huge brand name that has the trust of their customers. Releasing a new product under its own brand will provide assurance for the customers since the reputation of the company is at stake. Other product development actions include increasing budget for R&D for additional products, producing other company's product after acquiring rights and joint development with ownership of another company who need access to the firm's distribution or brands (Brussels group, 2017)

Market development comes as the third type of growth strategy. Synonym for this strategy is market expansion and it is self-explanatory, expand your market and horizons in selling your product. Moving your product to unexplored markets will require thorough analysis of how existing product can be sold on the new markets. According to analysis by Brussels group in 2017, market development for a company can be reached by entering to foreign markets after setting up a precise strategy that will adapt to that market. They also mentioned other approaches like focusing on different costumer segments like industrial buyers for a certain product that was sold strictly to households before. Before going to a foreign market, exploring new regions or different areas of the country in which the company is producing in.

Diversification strategy is the fourth type of strategy that is commonly used by companies. The definition can be simple but the process itself can be complex, especially in the technology industry which will analyzed later in the paper. Diversification strategy is also another strategy that is frequently used in large multinational companies. The main reason for the frequency of diversification activities by leading companies is the capital. When a company has enough budget, it can invest more into R&D and launch a new product into a new market to increase their revenue, stocks and share prices or to expand their portfolio. Simple definition of this strategy is launching of a new product or service on previously unfamiliar market. This strategy is considered to be the riskiest because it involves research and marketing by the companies' strategic managers of new services and products on an unknown market. To broaden the understanding of diversification, it can be further divided into four categories to provide enough information to apply it to the current action executed by companies like Microsoft, Google, Facebook and Amazon.

Since diversification is one of the main focus points of strategies executed by Microsoft, more in-depth look into this particular strategy should be presented. Most commonly used growth strategies breakdown the diversification strategy into four parts:

Horizontal diversification engages in the acquirement or elaboration of new products by a company, that is looking to sell them to existing customer groups. The new acquired or developed products are usually technologically or commercially differ from the current products but that may appeal to customers. An example of horizontal diversification is when a company that was making phone case product earlier may also enter the headphone or phone charging market with its new product.

Vertical diversification is when a company enters the sector of its suppliers or of its customers. As an example, we can look at a business that offers construction service and they start to sell tools like cement and other products that might be used.

Concentric diversification involves the development of a new line of products or services with technical and/or commercial similarities to an existing range of products. This type of diversification is often used by small producers of consumer goods, e.g. a bakery starts producing pastries or dough products.

Conglomerate diversification is when a company starts to produce new products or services that have correlation with current services and products but might be appealing to a whole new group of clients. The company's motive behind this particular move is to increase revenue or get a return on their investments in the new chosen market or industry. Only large companies with enough cash usually choose conglomerate diversification to broaden their portfolio.

Conglomerate diversification can be used to describe most actions in growth by big companies in the technology industry, particularly Microsoft. M&A in the Microsoft strategy might suggest that the company is looking to focus on its core product while at the same time, looking to expand its portfolio to have leverage in competing against its competitors.

Growth strategies will always depend on the motive and the budget of the company. However, when focusing on companies in the technology industry, it is safe to say that the capital is not the issue. Amazon, Microsoft, Google (Alphabet), Facebook and Apple are worth more than $3 trillion (Monica, 2017). Motives behind growth of these companies derive off their intentions to compete for the market share in their respective fields. Even with sufficient amount of capital to carry out any strategy in terms of growth, companies have to be careful in building their strategies for the long term. Each decision will have a significant impact on the company, whether it is positive or negative (Bruner, 2004).

1.2 Growth strategies of international technology companies

Growth strategies are mostly common and similar when executing among companies in various industries. Analysis of the market and the company with Porter's five forces and using it as a building block for strategies has been executed by managers and CEOs. Strategies for giant technology companies has had a change in tendency over the past two decades. Strategies are being built and changed much faster than ever before. Separating the growth strategy for technology companies and defining some characteristics is vital to further understand their actions and analysis in this paper.

Going into the particularities of this industry, definition of technology should be highlighted to better understand term and what it presents. According to Jakki Mohr in his book about marketing high technology products, Technology is a broad concept that relates to how people use tools and knowledge--usually the product of science and engineering--to create solutions to problems. He also states that technology generally refers to cutting-edge or advanced technology that changes over time. An example provided by Mohr was “high tech” in the 1960s--for example, a color TV--would be considered primitive technology by today's standards. Due to this indistinct definition, companies began to describe almost all of new products as high tech.

Innovation is also an important term that needs to be defined because technology is driven by innovation. To define this term, we refer to Mohr again. In his book, Mohr defines Innovation as commencing something different and new with the purpose of to increase value (either to customers or producers) or to solve some problem. By new and different it is meant that anything from ideas, content, unique methods to devices.

The traditional domains of “high tech” include areas such as information technology, com- puter hardware, software, telecommunications and Internet infrastructure, and consumer electron- ics, among others. (Mohr, 2010).

Technology market was easier to define and outline late in the 20^th century. As innovation started to boost, the market itself started to change in a dramatic speed. Growth strategy for technology sector has become different compared to other sectors and industries like finance, retail, consumer goods and energy & utilities. Technology industry went far as becoming a crucial factor for other industries to build their strategy on. Building strategy in this industry is requiring managers to take an unorthodox approach to cope with instant changes.

Companies shape their plans and execution accordingly to their surroundings to succeed while protecting themselves from future uncertainty and technological disruptions. Bold decisions are made with exploiting innovative technologies, focusing on data analytics and taking strategic view of risk. The gap is growing among the industries and between the competitors within the industry. Improvement in technology is making it very difficult to close the gap. If a company does not want to lose its market share or competitiveness, strategic and new initiatives need to be made.

KPMG dug deep into the technology industry to outline what significant factors set them apart from other industries. In their report in 2015, they highlighted three significant factors that make the technology industry different than other industries when it comes to building a growth strategy. The first factor was how fast the companies and the technology industry are growing. Other industries are not very threatened by the time factor which can let them take a different approach in building growth strategies. Second factor that has a significant impact on the technology industry is how innovation in value propositions, products, technologies and services is driven by growth. Third factor is the rate at which these particular innovations need to transpire to drive the growth.

These unique factors set a different bar and requirements for companies to achieve not only to compete but also to survive. Companies are required to turn their attention to innovation, so they can try to capture the business value of their own unique growth strategy. In order to realize this task, technology companies need to constantly evaluate their assets, organization, potential, capabilities, talent and operation to make sure that built growth strategies are interconnected with their operating models. However, aligning operating models with growth strategies are easier said than done. Companies face daunting challenges when trying to execute the alignment.

According to KPMG report, some challenges include failure to create a seamless connection between strategic growth aspirations and operations execution. Complexity that is presented with alignment can produce complexity which leads to inactive performance. Diversification of approaches in achieving growth strategy is also an important challenge that poses to technology companies. Strategy-through-execution approach, suggested by KPMG report, needs to be deployed which will help companies deal with fast changing environment and take the necessary steps to achieve their growth strategies.

Later in the second chapter of this paper, we will look more into how Microsoft is executing its strategy and evolving to cope with challenges that are presented by the industry itself and the competitors. Microsoft has adopted the linking strategy with execution that is helping to realize business value from their growth. The future is never a certain for any industry, especially for tech industry since it is constantly transforming and presenting new barriers for managers and CEOs to keep up. New leaders enter the market and emerge while current ones may be weakened and fall behind. Reverting to M&A has become more frequent for companies to maintain their status and their market share.

Figure 1: Innovation Cycle Time by Industry (Concept to Launch) Source: KPMG LLP (US) analysis of industry articles and reports, 2014.

Figure 1 that was presented by KPMG LLP, highlights the innovation cycle time for various industries. The technology industry is among the industries with that has the lowest time for innovation cycle. R&D and acquisition rate has been noticeably increased in the past decade to keep up with the cycle. Since the life cycle is projected to decrease in the future, growth strategies are built to focus more on increasing budget for R&D and M&A.

Strategy is obviously important for tech companies and their ability to cope with the rate of change, technology and innovation will decide the fate of their future. Executing a wrong strategy could lead to significant share loss and damage the company's status moving forward. Stakes are extremely high and dangerous since the elasticity is very high. Competitors of Microsoft including Alphabet inc, Apple, IBM, Oracle all have over 50% share in most of their portfolio markets and were able to maintain them throughout many years due to their ability in outbidding their smaller competitors since they have enough capital to go up against any competition. It might not be the case now since they are in fierce competition with each other and having a large amount of capital has become less effective. Knowing how to use the capital and building the right strategy to execute will help companies to stay ahead and maintain their current state against competitors. This does not mean they will always enjoy the economic profits that they enjoy now. Complacency showed to be dangerous for companies which did not evolve with innovation. Technology companies with dominant market share in the past like IBM company in personalized computer, Kodak which produced cameras, Osborne computer in operating system and Wang company which had a decent share in the word processor sector eventually gave up their position due to poor growth strategies (Monica, 2017).

To define the `tech industry', we refer to Investopedia to categorize the products. Categories include personal computers, mobile computers, smartphones, mobile payments and entertainment media & applications (Investopedia, 2017). One of the major omissions that we came across when researching past studies in this area is analysis of strategies by competitors of Microsoft and how they impacted their growth strategy.

It is also worth mentioning that integration process of products in various sectors across the industry has been lacking. Rapidity of the technology industry development is impacting the market thus, forcing researches to constantly conduct new studies to make sure that information does not fall behind.

1.3 Dilemma between acquisition vs internal development to achieve growth internationally

There are several ways of growing a business. Growing a business is strictly to increase a company's success, increase market share and to support competition against other rivals. Firms typically enter new markets or base their growth strategies on internal development, a common alternative is to acquire other business that is already established. Both of the choices can be compared and contrasted with their costs, risks and speed of execution. Success of growth will depend on the choice of mode. Organic growth is when a company grows via increased output, new product development or costumer base expansion. Organic growth excludes merging or partnering with other firms or businesses. Inorganic growth does not result from everyday organic business operations. It is the result of acquiring new businesses via mergers, acquisitions and take-overs.

Both of the modes present different kinds of pros and cons for companies and will entirely depend on the industry. Referring back to Ansoff's matrix, four choices market penetration, market development, product development and diversification can be achieved through organic and inorganic modes. Decision usually are made depending on the atmosphere, state of the company and the industry. For technology industry and the leading companies, budget and the capital can allow them to execute organic growths as they see fit. However, the time and speed factor of the technology industry sometimes are forcing them to rely on inorganic growth to achieve their goals.

Previous researches have outlined some factors that help companies make decisions between organic and inorganic growth. It is important for a company to identify its primary business domain, in other words, what are they producing and what is their market. The base product or domain will help them determine which mode of growth should be executed. Businesses are likely to follow potential acquisition chances within its primary business domain and when an opportunity arises to acquire a firm with a similar product, it will likely choose so to widen or fill its resource gaps or replicate it by going with organic growth. By comparison, outside the primary business domain, businesses may turn to inorganic growth to acquire firms with different products. Thus, the choice between acquisition and internal development is likely paint a different picture when considering the inside and outside the initial business domain.(Lee & Lieberman, 2009).

If the new product market is related to a company's existing product then organic growth would decrease the cost of growth (Yip, 1982). The less related a new product market is to the business' product then higher the chance of acquisition as a mode of growth. It can be applied to technology firms today. Giant companies do not feel threatened by the cost of growth but rather the time and innovation requirements have a higher impact. The definition of technology industry is changing year by year and domain products are becoming different compared competition products. Since core products are important but not enough to maintain status and market share, we will later analyze how Microsoft and other tech companies focusing more on inorganic growth.

Both modes have their own advantages and disadvantages for a company and their path to achieving growth. Internal growth can have fewer disadvantages compared external or inorganic growth. Previous studies emphasize the importance of the industry and state that even if a mode poses more disadvantages, it can be beneficial for a company in the long term. Focusing on internal growth, it can require time and nurturing to fully execute. It might pose fewer risks and decrease cost, but the time factor can be crucial in the long run. Some advantages in the internal growth include:

· Strategic mobility: growing internally will not limit strategic choices a company wants to execute whereas acquisitions and alliances might constraint on certain activities.

· Further knowledge: direct involvement for a company in new market or technology development will provide first-hand knowledge.

· Cost reduction: gradually growing internally will aid in reduction of cost and gives mobility to change strategies with ease.

· Independent: the company will not depend on other firms and its availability for possible M&A

· Culture management: Organic growth can allow new activities take place in existing cultural environments and reduce the risk of culture clash. Culture clash is a very common difficulty in inorganic growth.

Disadvantages for organic growth can be:

· Slow rate of growth which causes a company to stick to sustainable pace even if it is slow

· Competitive edge may decrease over time as competition can overtake the company with now M&A activity

· Reaction to competition's M&A; growth can be difficult with only organic growth.

Inorganic growth may be costly for firms in different industries. Company needs to have respectable market share and sufficient budget to execute inorganic growths as they can be expensive. Inorganic or external growth can be defined as increasing output or business reach with the aid of resources and capabilities that are not internally developed by the company itself. Mergers and acquisitions with other companies provide these resources. Advantages of inorganic growth include:

· Speed of growth is extremely faster compared to organic growth. Most businesses nearly double or triple their client base with a business merger.

· One of the most beneficial advantages for a company via inorganic growth is the instant gain of increased market share. Company's prior sales, market share and client base are instantly transferred over.

· Increase in knowledge and combination of two companies' experience will help build stronger strategy and increase decision making abilities.

· Creates stronger line of credit due to the combination of values of the two businesses.

· Competitive edge can be achieved with new resources, market share and assets. Setting new pace for growth can result in being ahead of the competition and having strategic advantage in pricing, purchasing, volume and overall reach.

Disadvantages include:

· Huge upfront costs can be difficult to fund M&As and might cause the company to turn to taking debt. Debt might present negative view for the investors.

· As mentioned in the advantages of organic growth, managing cultures and personnel from two different companies may present a difficult challenge in the integration process. (Vance, 2017)

The choice of organic or inorganic growth has started to have bigger impact for companies in the short and long terms. Factors of each industry and the state of the company determines the choice of growth. For the technology industry, one of the most important factors is the time factor that drives the choices in growth. The industry is evolving at a fast pace causing companies to focus on products outside of their domain or core business. Innovation dictates the market for technology and all other industries. Grant Thornton (2007) summarized in their research that companies face the buy-or build decisions in growth. In technology, the companies that invest wisely in R&D and build the next generation of a products instantly have first-mover advantage. The buy decision generally becomes a defensive move of catch-up through M&A (Grant Thornton, 2017).

To further analyze the motives of M&A, we will rely on documents from Microsoft and specialized press to attribute the characteristics in terms of contribution to end-product, business segment, core product, resource and competences. We also referred to the structure presented by Prahal and Hamel (1990) to analyze competencies and acquisitions made by Microsoft (Appendix 1 Appendix 1 provides the framework by Prahal and Hamel).

Chapter 2. Acquisition vs internal development of Microsoft

2.1 Evolution of growth strategies by Microsoft

As we mentioned in the first chapter, technology industry evolving at an incredible speed and is forcing the companies in the industry to constantly monitor innovations and growth opportunities. Anticipating and adapting to change is easier said than done and making necessary strategic decisions will determine the future of the company. Like all major companies in the tech industry, Microsoft evolved its growth strategy according to the environment and competition in the industry. Microsoft has the assets and enough capital to grown organically or inorganically but the question and decision depends on whether the mode is right for the business.

External growth through mergers, acquisitions, and joint ventures, market share and assets are instantly increased for the company. Innovative skills and knowledge become available and become useful and provide aid in growth and making strategic decisions. Challenges that comes with sudden increase in size presents challenges in management like personnel and branding. Companies need to take the right approach to make sure the integration process goes smooth. While M&As and joint ventures might look good on paper, it can still fail if it is not blended effectively. Poor integration can ruin a perfectly good acquisition, even if the analysis shows promising numbers for the company in the future. Efficient strategy and management can open new doors for a company and accelerate growth (EY Voice, 2014).

In this chapter we will pay more attention to growth strategies executed by Microsoft. The evolution of the strategy has changed over time to provide Microsoft with best possible ways to grow and compete against other companies. The technology industry and its definition has changed over time, making the growth strategy for Microsoft extremely vital to maintain its status. Industry saw new competitors emerge with different domain products compared to Microsoft which caused the company to increase its activities in M&A activities.

Microsoft company overview can be defined as an American multinational technology company. It initially entered the operating system (OS) in 1980 and broadened its products to consumer and enterprise software, hardware, services, and electronics. The company was founded by Bill Gates and Paul Allen in 1975 originally in Albuquerque, New Mexico, and it is currently based in Redmond, Washington (Statista, 2017).

Microsoft's mission is to integrate technology in our everyday lives, so it can benefit us the most while the company itself utilizes all of its assets in achieving this goal. Microsoft employs approximately 114,000 people on a full-time basis; 63,000 in the US and 51,000 internationally. Its business strategy can be classified as product differentiation. The company develops advanced technology products and services and sells them for premium prices (Research Methodology, 2017)

Looking back at the history of the company, Majority of the revenue of its revenue came from software and PC sectors.

SWOT analysis of Microsoft, according to Research Methodology (2017), has outlined strengths, weaknesses, opportunities and threats.

Strengths include:

· Effective leadership by current CEO Satya Nadella

· Leadership in cloud sector

· High profitability and financial state

· Diverse portfolio

· Active collaboration with other companies in the information technology industry.

Weaknesses that could be extracted from the Research Methodology report are:

· Anemic Internet Explorer browser application position

· High dependency on manufacturers of hardware

· Deficiency in innovation

· Technical issues with program updates regarding Windows

· Occasional security issues with Microsoft products

Opportunities:

· Giving more attention to smartphone segment

· Engagement in M&As

· Development of innovative services

· Security directed towards cybercrime

Threats:

· Fast emerging new competitors

· Lawsuits including anti-monopoly

· Exchange rate risk

· Economic crises in certain markets.

1972-1990: The founding and internal growth

Growth strategy for Microsoft early in the 1970s was mostly directed at developing their core products. Core products was their operating system called Xenix. The OS was directed at developing systems for personal computers. First major contract that was awarded to them by IBM to develop OS that will eventually be used to release IBM PC. This contract led to Microsoft's first major growth decision to purchase a CP/M clone called 86-Dos from Seattle computer Products and branded as MS-DOS. They went on to improve this system by spending more on R&D to develop organically (Allan, 2001).

Microsoft retained ownership of MS-DOS after the release of the IBM PC in August 1981. Since IBM had copyrighted the IBM PC BIOS, other companies had to reverse engineer it in order for non-IBM hardware to run as IBM PC compatibles, but no such restriction applied to the operating systems. Due to various factors, such as MS-DOS's available software selection, Microsoft eventually became the leading PC operating systems vendor. The company expanded into new markets with the release of the Microsoft Mouse in 1983, as well as with a publishing division named Microsoft Press (Allan, 2001).

Microsoft released Microsoft Windows, a graphical extension for MS-DOS in 1985. This was another mark of internal growth. They invested more into their core product and looked to further establish their position in the operating system business. Microsoft moved its headquarters to Redmond on February 26, 1986, and on March 13 went public, with the resulting rise in stock making an estimated four billionaires and 12,000 millionaires from Microsoft employees (Bick, 2005). This sudden capital meant that the company had to further increase their grip on the market and focus more on organic growth. Inorganic growth was not on their agenda as their vision for the future was not shared by other competitors and believed that they could only further improve their product. Microsoft turned their attention to a new product that would be developed from within and set them apart from other competition. This product is still one the most profitable product Microsoft offers today.

In 1990, Microsoft introduced its office suite, Microsoft Office. The suite bundled separate productivity applications, such as Microsoft Word and Microsoft Excel (Allan, 2001). This launch would help them maintain market share in their industry as there was no other program/app that was similar. Since no other competition could pose a threat, Microsoft was able to set itself apart and dominate the market. On May 22, Microsoft launched Windows 3.0, featuring streamlined user interface graphics and improved protected mode capability for the Intel 386 processor. Both Office and Windows became dominant in their respective areas.

1995-2007: Focus on core product and growing via product relativity

Start of 1995 year was also an important time period for Microsoft and its growth. The company decided to expand into the new market not by acquiring or partnering but rather Microsoft began to redefine its offerings and expand its product line into computer networking and the World Wide Web. First major alliance came with the launching of news channel MSNBC. This growth was inorganic due to the strategic alliance Microsoft executed brought them into the new market of news and TV entertainment. The new market was not the same market as operating system market or other core product markets like apps and internet. This strategic alliance can be defined as diversification from the company's stance. It used its assets and capital to go into a new market and increase its portfolio. This era of Microsoft strategy was driven by the objective of increasing revenue and broadening the company's portfolio.

2000 saw the company to further increase its strategic alliances with various companies to form the Trusted Computing Platform Alliance to (among other things) increase security and protect intellectual property through identifying changes in hardware and software. This move was to further develop their core product of hardware and software via inorganic growth. This inorganic action then changed to internal development when Microsoft released Windows XP, unifying the mainstream and NT lines of OS under the NT codebase.

Next major internal development that launched the company into a new market was the development and the release of Xbox. Xbox is a home video game counsel that allowed costumers to play games with purchase of discs while connected to their TV set. The game console market was initially dominated by Sony, which produces game counsel name PlayStation, and Nintendo. We have to highlight that the time factor in this period was not as fast as today within the technology industry. Microsoft was allowed to comfortably develop a video game counsel without acquiring or making alliances with other firms or companies. Its R&D and internal development allowed the company to enter a new market and eventually gain enough market share to compete with other competitors. Microsoft later further evolved and improved its Xbox product to maintain its decent market share.

The period from 1995-2007 did not see many acquisition or alliance activities but rather focused more on its own product development, organic growth and diversification via internal development. Main product of Microsoft, personal computers and software, was providing enough revenue to focus on R&D to grow. Entering into the World Wide Web also presented new opportunities for Microsoft to capitalize on, which it did later in the next period of growth. Competition and industry was not as demanding and intense as it is today due competitive advantage that was shared by only few technology companies like IBM, Sony, Nintendo, Macintosh and Microsoft. This allowed all of the companies to stick with organic growth.

2007-2011: The spike in the technology industry

Beginning of 2007, the growth strategy of Microsoft was mostly focused on organic growth and internal development. Core products were receiving enough R&D to stay relevant and compete against rivals. Example if major internal development can be shown in the new version of Windows which was Vista. Issues with security was rising in the tech industry during this time and Microsoft focused on features, security and a redesigned user interface dubbed Aero. Microsoft Office 2007, released at the same time, featured a "Ribbon" user interface which was a significant departure from its predecessors. Internal development allowed the products of Microsoft stay up-to-date with its rivals. Relatively strong sales of both products helped to produce a record profit in 2007 (The Scotsman, 2007). That year also saw the creation of a multi-core unit at Microsoft, following the steps of server companies such as Sun and IBM (Robb, 2007).

Cloud computing was starting to take off in 2007 and it was a product that directly related to Microsoft's core product and was an innovation in the technology industry. Cloud computing is a paradigm of information technology that enables ubiquitous access to shared pools of system resources and higher-level services that can be rapidly provisioned with minimal management effort over the internet (Amazon Web Services, 2013). It was one of the biggest technology innovations and it was predicted to be worth around $130 billion worldwide by 2018 by Statista. Microsoft launched its cloud computing service under the name Azure Services Platform in 2008.

Next year saw Microsoft take another huge step in its growth by announcing the intent to open Microsoft-branded retail stores. This growth decision came via internal growth and as an answer to Apple (Fried, 2009). The first retail Microsoft Store opened in Scottsdale, Arizona. On the same day, Microsoft released new and revived product with an intent of product development. This internal growth decision proved to effective as the new product, Windows 7, focused on refining Vista with ease of use features and performance enhancements, rather than a large reworking of Windows.

One industry that Microsoft did not devote enough attention to was the smartphone industry. Lack of attention to this promising industry later led to Microsoft turning to M&As to enter the market and compete against juggernauts like Apple, Samsung and Google. The company's growth strategy into the smartphone industry will be analyzed in the third subchapter. This industry experienced a spike in terms of innovation and continued to develop year by year. This development created a huge barrier for new companies to enter while separated the competitors within the industry. If the competitors did not devote enough to R&D, their market share would later be lost to companies with new innovations.

The time period of 2007-2011 saw innovation drive the technology industry and the time factor started to take its toll on companies. Up until this period, Microsoft's decision in growth mostly consisted of organic growth and internal development. Its core products were relevant enough to maintain market share and R&D provided enough competitive edge. As innovation took over, Microsoft's internal growth was not enough to keep them relevant in their respective markets and had to change it strategy.

2011-present: New strategy

Increased competition environment and innovation in all sectors of the technology industry presented new challenges for Microsoft. Introduction of new competitors, new products and the expansion of the industry itself presented barriers for the company. Microsoft already had a decent portfolio which consisted of products in various markets like computer cloud, application, operating system, personal computers and game counsels. 2011 led Microsoft to focus on the development of its core products by internal development. Time factor and launching a new product for Microsoft prevented it from coming up with a product of its own. Diversification growth strategy started to rely on inorganic growth and external development. Since Microsoft was a multi-billion-dollar company, spending money for M&As was not that big of a problem. Making the right decisions were more important than ever.

As the technology industry expanded, new competitors started to gain more market share. Originally, Microsoft was competing companies like Oracle, IBM, Macintosh (Apple) and Sony. Products mostly consisted of software, hardware, game counsel, applications and personal computers. Innovation of each company played their role in their market share. Price differentiation was one of the biggest advantages it had against leading competitors. Microsoft had to rely less on personalized computers and focus more on different aspects of the technology industry. Since innovation is very scarce, external development and inorganic growth had to implemented to maintain the company's status in the technology industry.

Technology industry being so intense and demanding due to high number of competitors and innovation, they continued to look for new ways to how competitive advantage and differentiation can be achieved in an innovation driven environment. To make up for the lost time in not launching new products in the technology industry, Microsoft adapted acquiring approach to gain large portion of the market share and further develop acquired products via R&D. Microsoft also built its strategy where they act according to the changes in the industry and audible their strategy as they fit or as it is compatible for them in achieving a certain goal follow the changes in the market and improvise where accordingly. Many companies within the software industry have limited resources and thus, struggling to make profit. Microsoft has its brand which can be utilized to commercialize its innovation. Microsoft has successfully managed to make returns through licenses and patents as well as establishing industry standards.