Project Title
”Which sales strategy could Microsoft employ to its sales to improve its disappointing market share on the European game console markets?
To
Managing Director,Microsoft Xbox promotion team.(Steven Balmer and Bill Gates)
Microsoft’s European Xbox boss Chris Lewis
Author
I.B. Candidate #
Date
Word Count
Research Proposal: 300 words
Acknowledgement:
Introduction:
Acknowledgments
In the process of compiling the data for this research project, I was fortunate to be guided by helpful souls. I wish to express my gratitude to those who have enabled me to complete this project and also to learn new skills and techniques in working on an individual basis.
First to mention is my internal assessment guide Mr. Maguire, head of the business department study at the International School of Stuttgart. He was willing to give me useful advice iand his personal time n improving my thesis and focusing my research. His council was indispensable.
I came to terms with the evident fact that microsoft or any other of the large companies under observation were not able to spend their time on helping me however that was not a problem which endangered the success of my research. I found plenty of other data from secondary sources. Interviews with sales agents and the results of my questionnaire provided me with suffiveint insight.
1.Research Proposal
I) Action Plan
The Essay on Course Project Questions Microsoft Project Lab
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2.Introduction
I) Company Background
II) Services Offered by Microsoft
III) Xbox Background
IV) Present Situation
V)[Research Question]
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3.Procedure and Methods
I) Primary Research
II) Secondary research, desk research
III)Methods and techniques for obtaining information
IV)validity assesment of data
4.Main results and findings
I) Xbox Sales Worldwide
II)
1) Research Proposal
Research Proposal
Internal Assesment, B&M HL
27th June 2005
Supervisor: Mr. Maguire
Research question:
”Which sales strategy could Microsofts employ to improve its market share on the European game console market? From which mistakes could Microsoft learn from (Xbox) considering the launche of their next generation game console Xbox 360.
Background:
I mean to investigate the causes of Microsofts failure to meet expectaions on its entry into the game console markets since 2003,
Primary Research:
Secondary Research:
I assume it will be my most important source of information in the making of this project as their is only little insider knowledge I expect to receive.
The shareholder reports and sales figures of different console manufacturers should be easy to find. Most sites of plc’s host sections for public notices and annual reports.
Their are aslo countless game portals on the web giving information on the latest happenings in the gaming scene and product enhacement.
To prove my simple theory of lower price higher sales I will make use of the collective knowledge of acclaimed business authors and their proven strategies. Books are an indispensable source of knowledge!
Ethical Issues
The information I will have gathered, will very likely be all public giving no reason to worry about confidentiality matters.
With my project I do not intend to harm the image of any company, my primary objective is to find a solution to an apparent problem Microsoft is experiencing.
I do not only see the research as a task to fulfill but as a serious project aimed at having an impact. I aslo see the research as an opprtunity to grow academically and learn vital information seeking skills.
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Webster defines "efficient" as acting or functioning competently, with minimum waste or extra motion. The term retains this meaning in the context of efficient markets. An efficient market must function competently, without waste or extra movement. What do we mean by functioning competently, however? One way to address this question is by looking at examples of markets that do not function ...
I feel my project title is moraly justifiable as it is not derogatory.
I) Action plan for Project:
ActionDate
Start of project1st May 2005
Investigate contacts (Mr. Knorr, Sony)2nd May 2005
Collect secondary data (Internet)20th May 2005
Ask supervisor about project requirements1st june 2005
Review exemplar material for practice10th june 2005
Carry out desk research/research proposal27th June 2005
Present findings10th September 2005
Consultation with supervisor9th October 2005
1st draft30th October 2005
2nd draft20th November 2005
Final draft8th December 2005
Due date8th December 2005
2) Introduction.
I, Company Background)
Microsoft was founded in 1975 by Bill Gates and Paul Allen. Microsoft is the worlds largest software producer and accumulates annual revenues of over 40 billion US$. It has a workforce of 55,000 workers in 85 countries. The headquarters of the department under investigation are in Redmond, USA.
Microsoft entered the game console market three years ago, in 2002/2003. The Xbox did not sell as intentionally predicted, in particular on the European market for numerous reasons which will be mentioned in the course of this dissertation.
II) Services offered
Microsoft produces a wide range of different computer related products and services. Home entertainment, software development and production, server providers etc. Their most successful product is the Microsoft windows work station software for personal computers. Microsoft holds a monopoly on in this field. An approximated 90% of the world’s computers run on MS.
The Xbox accommodates an Internet service called Xbox live by which users with internet connection can play together, Microsoft has done true pioneer work in this field and has managed to topple its biggest rival Sony in this respect. An approximated 11 gamers are on one gamers ‘buddy list’ and 15 million units of the Xbox live components have been sold. There is an extensive website with updates and free demos and news of new products enhancing the consumer relations.
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III) Xbox Background
The plans to build the Xbox date back to 1999, and was finally introduced in 2002. Xbox accounts for a near 20% of revenues of Microsoft since 2002. Plans were made when the market for computer game consoles was less exploited than today. More than three years of research ( 6.6, 7.78, 6.18 bil$ 2002-2004)produced a machine which was thought to suit consumer demands the best. High quality of picture and sound, compatibility with other computer devices, net gaming, multi screen gaming and even an own league for platinum games. By outsourcing to third parties such as the CPU to NVIDIA and the DRAM to TCSM makes Microsoft independent due to non exclusive manufacturing contracts
Microsoft not only planned to challenge Sony’s reign in the game console market but to take over control with the Xbox which in based on facts is superior to its competitors, it has a hard rive and grants the a wide range of usage.
IV) Present Situation
Microsoft failed to succeed in the multi-billion-dollar game console markets of Europe, the Xbox is only the third most successful console in 2004 after the Play station 2 and Nintendo’s on a global comparison. In total the Xbox runs annual trade deficits of 4bil$ after sales, research expenditures, and overhead costs.
In the USA Microsoft is the second largest console producer. In Europe the Xbox is accountable for 26% of home consoles. Microsoft develops and publishes its own video games for this console but also outsources to third parties
[V) Research Question]
Which strategy can Microsoft employ to improve its market share on the German game console market with its Xbox.
3) Procedure and Methods
3.1 Data collection
# My research project included both primary and secondary field research. Primary research was primarily based on questionnaires I had distributed to a stratified sample of 100 gamers in the area of Stuttgart. Covert and overt observations in flagship stores, electronic retailers, web forums and discussion groups allowed me to get a deeper insight into the consent of the actual consumer on the product. It was always my priority to employ a sample which would be representative of the population.
The Research paper on Outsourcing Of Xbox Production By Microsoft And Flextronics
... the following case was about Microsoft’s quest to enter the video game market with its Xbox gaming console. Microsoft’s history of having a small ... they were looking for with their product. If Microsoft had decided to manufacturer the gaming console on their own, they would ... the video game market because they looked at their ability as a company to manufacturer the product and how the product could ...
3.2 Questionnaires
Questionnaires are often regarded to be highly vulnerable to personal bias, as ones language can give words an altered connotation. I joined a qualitative and quantitative questionnaire, answer possibilities which were closed and open. The questions for the quantitative information were simple yes or no question concerning more factual issues about the Xbox.
The last parts were open questions leaving the test taker enough space to give his true opinion. The questionnaire was structured simply; I avoided technical language to make sure that I do not exclude any one in the questionnaire.
A secondary objective was to avid leading questions to receive a true picture of what the consumer thinks, questions were short and unbiased.
The questionnaires were distributed in front of the largest electronic retailing shop in Stuttgart on Saturday 23rd July 2005 at 1300hrs. This timing is significant as pilot observations have shown that many of the potential shoppers of product such as the Xbox spend their leisure time strolling in town, granting me exactly the audience I required to conduct
3.3 Interviews
I interviewed sales agents at electronic shops to find out how experts observed the sales of Xbox. I hoped to receive a different perspective as to what the reasons were for the failure of the Xbox. I tried to interview as many clerks as possible (10 tries), only three actually agreed to be interviewed.
3.4 Contacts
I tried to contact the company’s specific departments via telephone but no one was willing to connect me further to someone who could give me information.
Only a receptionist from the Sony call center Europe lead me to a link to public company figures on the net
2 Business Tequniques and Strategies
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Current Strategy
Microsoft is using a functional strategy trying to achieve an economy of scale by outsourcing most of its production to foreign manufacturers. The graphics and sound chips are produced by NVIDIA, the market leader on the field.
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The strategy is very much market orientated trying to convince costumers with the mere image of the brand; it has a high presence on insider events such as the games convention in Las Vegas.
Microsoft tried to localize its service by operating costumer care centers in the respective countries it offers its service in. European transactions are being managed in Dublin Ireland. The games are area coded and translated into the regional language to increase user compatibility. Management of the Xbox product was transferred to the areas of sale in hope of better supply of local demands which obviously failed as they were not able to establish a ‘working’ image.
According to the companies statement innovation is a key strategy, for the Xbox many new features were patented such as the revolutionary controller.
2.1 PEST analysis
Political
vMicrosoft must comply with the legislations of German law. It restricts Microsoft to legal sales methods. The restrictions on advertisement are more rigorous in Europe than in the USA.
vThe newly introduced GAAP accounting standard excludes certain revenues and expenses dropping the price of the share, further lowering the image of the brand.
vHigher depreceation of capital such as buildings and machinery have forced Microsoft to make increasing use of its extra terrestrial posts in Hyderabad, I : Haifa, ISR : Venbek, DN: Cambridge, ENG.
Economic
vThe launch of the Xbox was delayed due to September 11 and the crash of the electronics market
vGeneral uncertainty about the future of the European economy caused consumer consent to fall to a historic low. Consumers are more aware of price and value, many people revised their purchase priorities, fast moving electronic consumer goods are the first to feel the effects of such economic implications.
vEuropes largest market for games Europe has been in a consecutive recession for the last five years. GDP growth has been under the EU requirement of 3%, levelling at a mean of less than 1.8% annually unemployment has been steadily rising (9.8%) since the privatising of the public sector in the 90’s minimizing the potential market for buyers.
vThe high value of the Euro in comparison to the dollar makes it less profitable for American investors such as Microsoft to sell products in Europe
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... market the Xbox product in the second year of its launch in Canada. Specifically, Microsoft needs to determine how to position the Xbox and which market segment ... 50% of the console market. Microsoft also faces competition from Nintendo and their Game Cube. Microsoft's goal is to become the market leader in the ...
Social
vEurope is suffering of a declining population, the birth rate is lower than the death rate, and the annual population growth is at 0.2%. The percentage of the population under 30 is 27% and declining.
vThe recession has resulted in a decrease of state subventions to the health system and insurance system in Germany; the expenditures on this level have flattened consumer spending power.
vThe cost for electricity, gas and petroleum on the world market has furthermore decreased consumers willingness to spend as the hopes for reliable oil shipments from the east are sinking.
Technological
vThere have been new developments in the area of wireless communication such as wireless lan and Bluetooth which are aimed at increasing product utility in terms of simplicity in connecting devices to the internet and to other devices.
vNew mediums have been developed with higher saving capacities (three dimensional saving HDDVD, Blueray etc) allowing games of much higher quality and level sizes and enabling producers to incorporate features such as movie trailers updates demos etc. on their gamediscs.
vThe capability of the internet has reached amazing standards, at some localities broad band connections have transmitting capabilities of over 100m/bit per second. Movie makers have long started to sell movies of DVD quality via the internet.
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2.2 SWOT Analysis
Strengths
vThe quality of the product is high, components of the products are up to date because outsourced. Cummulaitve research is the effect, Microsoft programming team works together with producers of the electronic chip providers.
vFlexibility in production and supply because of outsourcing and numerous sources
vXbox has relatively high market share on gaming market of the US (because deeply embedded into the collective consent of American consumers)
vThe company has been shaving down the console’s cost , and it currently sells at 199 in value pack form.
v- European sales have taken “Halo” well past the one million sales milestone worldwide ( 2004)
vDecentralised organisational structure, better reactions to local needs.
vWidely ranged utility of product, internet, gaming, work station and DVD player
vNon exclusive sources, best buy
Weaknesses
-Product life cycle on bear trend
-Range of games is farily limited (50 games)
-Low market share in Europe
-Relatively low awareness among core buyers (Parents)
-Still expensive in comparison to its competitors
-Chronically low stock supply due to in time production
– Many European stores have resorted to selling only expensive bundles with the Xbox as they found that only certain clientel buy the product
– Retailers such as GameStop ended up taking more pre-orders in certain stores than there were available
Opportunities
‘Xbox empowers gamers by giving them the technology to fulfill their creative visions as never before, creating games that blur the lines between fantasy and reality’
vAccording to recent figures, the total number of Xbox Live members has exceeded 15million world-wide and analysts are certain that this number will grow as price redundancies are expected with the launch of the next generation Console Xbox 360
v6.4 million copies of Halo 2 have now been sold( 1,620,000 in Europe), Xbox games receive some of the heighest ratings amongst users and have a depth of gameplay which has become legendary.
vGrowing income in the former eastern block can open a whole new market if marketed right as they are eager to posses high technology
vBy cutting costs in transportation by relying more on large shipments rather than on time shipments the economy of scale can be better utilised.
vBy introducing redundancies and flattening the hieararchy of the Home Entertainment Department Microsoft can increase its rentability.
vIntroducing new corporate strategy which allows employees to react more
vBetter use of existing technology ie better compatibility with home computers and electronic devices at home
vUse of new and cheaper materials to produce the Xbox
Threats
vSony’s PS3 will be competing with Microsoft’s Xbox 360 and Nintendo’s Revolution in the next-generation console wars. The PS3 is believed to have a HDTV resolution chip and the Blueray storage medium allowing a even greater depth of gaming.
vThe current oil crisis is having an effect on the price of raw plastic pellets their has been a steady increase in the cost of raw material which is passed on to the consumer. Polymerase, a synthetic produce without oil extracts may change cost structure for production.
vLess Flagship stores in expensive locations, focusing more in the sales via internet
2.3 Porters Five Forces Model
The risk of entering new Markets
Any company needs to identify its market and the potential of its product. The approach Microsoft used was the Market orientated asset led strategy, aiming at core gamers who set high demands on their equipment. The design of the product was according to my opinion neglected; the Xbox is truly just a black box with no particular design idea.
As supposed to its rivals Microsoft could not build a reputation in this sector and could not convince consumers about the strength of its product. The unique novelties of its products were not marketed effectively enough. There have not been any major modifications to the platform, the introduction of the Xbox live service was not a product.
The external environment i.e. Political, economical, social and technological issues are not to be underestimated.
Competitively
The gaming sector is highly competitive and features countless providers which are less known in the United States and even less known in Europe (Neo geo, Gizmo mondo, Wonderswon, Sega)
The most successful rival of Microsoft is undoubtedly Sony with more than 80,000,000 sold units world wide. Nintendo ranks second on this field with over 20,000,000 sold units of its GameCube; it has also tried to diversify its range of products by introducing the Ngage system which is a portable game console on a mobile phone basis. Nintendo’s Game Cube made its debut in 2001 at 25,000 yen ($231)–the lowest launch price of the three current-generation home consoles. The Game Cube continues to be the lowest priced console on the market, Nintendo has never priced any of its past consoles higher than 25,000 yen at launch, which could well be the same case for the Revolution. During E3, Nintendo president Satoru Iwata stated that he hopes to “keep the Revolution at a price range that anyone can reach out for, and nothing as high as 50,000 yen ($463).”
European consumers have enthusiastically embraced the recent price reduction.
The different brands represent different genre of game play and gamers. The high volatily of demand and development decreases the costumers binding to the product, the choice of purchase depends greatly on trends and reviews.
Bargaining power of buyers
Potential buyers of products such as the Xbox in Europe are mainly in the age group of 15-25 years. Electronic devices are purchases which need to be thought over because they are expensive. In the process of deciding the purchase parents are greatly influential, the present economical situation does not allow many people to include such expenditures in their budget.
The economic situation has not changed the high demand for last moving leisure prodct; recent history has shown that buyers are more eager than ever before to purchase products on sale and in value packs. Out of the interviews with sales agents I found out that buyers are attracted the most when they see that products have been reduced, even if it is minor. Price reductions have a psychological effect on the buyer, he feels empowered having made the best purchase.
The mentality of German buyers must not be underestimated, it is historically a market of very alert costumers who compare prices and values. Web sites such as geizkreagen.de are booming, these are sites which search for the least price of a product.
Bargaining power of suppliers
Suppliers are under great pressure and are in reality the losers of this crisis. The demand for low prices is passed on to them and the pressure to produce is high because companies threaten to change suppliers if they fail to comply with demands of Microsoft. They are not able and willing to further cut costs, the demands for high quality low price is causing suppliers not only to move production plants to low labor cost country but also supply packaging etc.
The threat of substitute products
The rise of the eastern economies has developed a large local market with the similar demands to those in the west. Microsoft’s Xbox is however less copied because Microsoft has laid great emphasis on piracy control it is part of their strategy to increase revenues. It is also uninteresting to copy the Xbox because the range of games is limited and the encryption of data is on the latest level. The components of the Xbox are of higher quality than those of its competitors making it more difficult to copy.
In this respect Microsoft has been successful
Summary
According to Porter if one of the above mentioned points overweighs it will have far reaching implications on the general market causing a vicious circle of price reductions amongst competitors in search of new markets.
Microsoft’s strategy did not acknowledge the power of price reductions in the interest of the buyer. The product was initially sold at 350 euros in Europe, first reductions were introduced after 2 months, the expected run on the Xbox did not fulfill Itself, consumers decided in favor of cheaper products with more e”Our strategy is to give outstanding value to as many consumers as possible, and the increased Xbox sales since the price reduction indicate that strategy is on track. The new price allows us to be more competitive and make serious inroads into the hearts of European gamers leading up to Christmas, 2002. “
Results and findings
Sold unitsGames per console
Reginal sales of Xbox
Region ( Dec. 2005)Sale figures (million units)
America13.1
Japan/Asia1.7
Europe5.2
South America0.4
TotalWorldwide24
Game Console Market Europe
PlayStation29.0676%
Xbox513%
GameCube4.1310.80%
Total38.19
Xbox5.2
PlayStation3.8
GameCube3.2
Because of our integrated business structure, operating costs included in one segment may benefit other segments, and therefore these segments are not designed to measure operating income or loss directly related to the products included in each segment. Inter-segment cost commissions are estimated by management and used to compensate or charge each segment for such shared costs and to incent shared efforts. Management will continually evaluate the alignment of product development organizations, sales organizations, and inter-segment commissions for segment reporting purposes, which may result in changes to segment allocations in future periods.
Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment and it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.
Reconciling amounts include adjustments to conform with U.S. GAAP and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, quarter end cut off timing, and accelerated amortization for depreciation, stock awards, and performance-based stock awards. In addition, certain revenue and expenses are excluded from segments or included in corporate-level activity including certain legal settlements and accruals for legal contingencies.
Home and Entertainment. The Home and Entertainment segment is responsible for development, production, and marketing for the Xbox video game system, including hardware, third-party games, games published under the Microsoft label, Xbox and Xbox Live operations, marketing, research, and sales and support. The segment also leads the development efforts of our Home Products Division (HPD) product lines. In addition, it carries out all retail sales and marketing for Microsoft Office (for which it receives an inter-segment commission), the Windows operating systems, Xbox, PC games, and HPD products. It is also responsible for the development, sales, and deployment of Microsoft’s TV platform products for the interactive television industry.
Microsoft Xbox, released in fiscal year 2002, is a video game console system that delivers high-quality graphics and audio experiences. Xbox 360, unveiled in May 2005, is our next-generation video game and entertainment system that we expect to be available in the first half of fiscal year 2006 in Europe, Japan and North America. In addition to Xbox, we offer several types of entertainment products, including PC software games, online games, and console games. HPD includes Microsoft’s line of consumer software and hardware products, such as the Encarta line of learning products and services, application software for Macintosh computers, the Works productivity suite, and Microsoft PC hardware products such as mice, keyboards, and game controllers. The MSTV group develops the MSTV Foundation Edition and Internet Protocol TV (IPTV) products.
OPERATIONS
To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we “localize” many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text. Our research and development facilities are located primarily in
Redmond, Washington with smaller facilities located in Mountain View, California; Fargo, North Dakota; Beijing, China; Dublin, Ireland; Vedbaek, Denmark; Hyderabad, India; Haifa, Israel; and Cambridge, England.
We have regional operations centers in Ireland; Singapore; Reno, Nevada; Fargo, North Dakota; and Redmond. The centers support all operations in their regions, including customer contract and order processing, credit and collections, information processing and vendor management and logistics. The regional center in Dublin, Ireland, supports the EMEA region; the center in Singapore supports the Japan, Greater China and Asia-Pacific region; and the centers in Reno, Fargo, and Redmond support North America and Latin America.
We contract most of our manufacturing activities to third parties. Outside manufacturers produce the Xbox, various retail software packaged products, and Microsoft hardware. Our products may include some components that are available from only one or limited sources. Key components that are currently obtained from a single source include the Xbox central processing unit (CPU) from Intel Corporation and the Xbox graphics processing unit (GPU) from NVIDIA Corporation. Similarly, our upcoming Xbox 360 console will also include certain key components that will be supplied at least initially by a single source: the CPU which will be purchased from IBM Corporation and the graphics chips and embedded DRAM chips for the GPU which will be purchased from TSMC and NEC, respectively. Though we have chosen to initially source these key Xbox 360 components from a single supplier, we are under no obligation to exclusively source components from these vendors in the future. Beyond the exceptions noted, we generally have the ability to use other custom manufacturers if the current vendor becomes unavailable. We generally have multiple sources for raw materials, supplies, and components, and are often able to acquire component parts and materials on a volume discount basis.
PRODUCT DEVELOPMENT
During fiscal years 2003, 2004, and 2005, research and development expense was $6.60 billion, $7.78 billion, and $6.18 billion respectively. Those amounts represented 20.5%, 21.1%, and 15.5%, respectively, of revenue in each of those years. We plan to continue significant investment in a broad range of research and product development.
Most of our software products are developed internally. We also purchase technology, license intellectual property rights, and oversee third-party development and localization of certain products. We believe we are not materially dependent upon licenses and other agreements with third parties relating to the development of our products. Internal development allows us to maintain closer technical control over our products. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. Product documentation generally is also created internally. We strive to obtain information at the earliest possible time about changing usage patterns and hardware advances that may affect software design. Before releasing new software platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing.
