Microsoft (MS) is losing money in PRC, partly because of the lack of intellectual property protection in that market and partly because its product (Windows 3.1) can not meet local customers” needs due to low level of localization. Since localization of Window 3.1 seems indispensable for MS to succeed in the promising PRC market, the question for MS is choosing the best localization solution from the available three choices. These choices are either leaving the market open for Software Vendors (SV) to localize the product, doing all of the localization by MS itself in Taiwan (headquarter of Greater China), or adopting an intermediate solution such as localizing in PRC. Suggestion: In addressing this question, I used several criteria as listed in Exhibit 1 to evaluate these alternatives (Exhibit 1 also listed detailed analyses of each criterion used).
My conclusion, therefore, is that localizing in PRC will be the best choice for MS among all alternatives as it helps build good government relationships that in turn benefit sales and competitiveness.
Meanwhile, Microsoft can acquire the best product quality by localization in PRC due to familiarity with the market and convenient technical support. (Exhibit 2) Among all the criteria used, the political issue, i.e. relationship with the Chinese government plays the most crucial role, as it has the biggest impact on other factors. Specifically, a good relationship with the government could: 1) Get the power from PRC government to build a better legal environment, as piracy software is rampant in PRC market and it seriously affects MS”s profit. 2) Increase sales, as SOEs and government organizations account for a big percentage in MS”s total sales. 3) Help MS standardize the software industry to guarantee its long-term profits. 4) Be decisive in securing Microsoft a competitive 2 advantage, as PRC is still not a totally free market in terms of degrees of government intervention.
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Implementation: Why will localizing in PRC bring government support? As Exhibit 3 shows, Chinese government needs technology in PC industry badly, it also needs employment opportunities, foreign capital, management and industry expertise, and other intangible assets such as company image, all of which can be met by MS”s local investment. Therefore, MS can acquire bigger bargaining power in dealing with the government and then utilize this power to receive government supports in combating piracy software in PRC and setting up a standard in the industry. Following its decision to localize in PRC, Microsoft still has two choices available, namely, localizing by itself or by allying with one local SV. I think that Microsoft should have partnered with one of the key software vendors, preferably Great Wall, that is closely connected to the government and also the local market leader for localization process.
By partnering with local SV Great Wall, Microsoft can have gained some other advantages besides a good government relationship that include: 1)Smooth the distribution channel to deal with poor logistic infrastructures in PRC. 2) Further increase sales by bundling the operation system and future application software with SV”s hardware sales. 3) Save training cost in developing software and technical supports by sharing the partner”s IT experts. However, MS also takes the risk of losing control of timing and localization quality and leakage of its advanced technology. To reduce the risk to the least, MS should have participated actively in the localization process to reduce the risk of “hold-up” effects by its partner. By keeping control on the technical part, Microsoft can also learn from its partner to contribute to its learning curve and thus pave the way for future software development for PRC market.
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3 Exhibit 1 Criteria used for localization decision Political § Central government plays a key role in combating piracy software. § SOEs account for a big percentage in revenue. (PC market grows at 32% and 40% of large or medium-sized SOEs are computerized) § Supports from government are also crucial in setting up a standard for operation systems in PC industry. § Distribution is also affected by government opinions. § Taiwan is a political sensitive area to PRC. § PRC government needs investments in technologies. It also welcomes MNCs to invest in China to bring foreign currency and employment opportunities, especially big names like MS. Product Quality § Many versions of translation software used in the market affect the product quality negatively. (Using parallel software involves many technical problems. Due to lack of knowledge, normal end-users may address these problems to MS )
Localization process also needs developers to understand local cultures and customer needs. § Technical support needs the involvement of original software developers. § Very few local SVs are available for partnership. Bargain power is low and cost may be high. Legal § Directly affecting sales (overall losses due to piracy of computer programs is over $300 M in PRC) Sales § Customers include SOEs, government organizations, institutions and family users. § Other than small percentage of personal PC users, SOEs and other organizational users prefer standardized PCs in both hardware and software. Normally orders are made in bulk. § First mover is important, as SOEs will order standardized PCs and software for compatibility and more convenient technical support. § Penetration of operation system affects future sales of application software. Cost (Technological process)
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Taiwan has MS”s technical base, as it is headquarter of Greater China. § Developers” wages in PRC are only 20-40% of their Taiwan counterparts, but the training costs can be very high. MS is also not sure about the competence of developers in PRC. Time to Market § Can be very long if localized by SV in PRC (training is time-consuming and it is impossible to give the task to more than one SV) § Taiwan has well-established software development infrastructure needed. Competition § Lotus, the main regional competitor only has basic localization but it”s much cheaper than MS in localization efforts. § There is a trade-off of product quality (extend of localization) and time to market. § Unix has already allied with local SVs for localization. Distribution § Main target markets are SOEs and organizations. § Software are normally sold with bundling of hardware. Standardization § Is important for long-term profits considering of repeat SOE customers and compatibility problem.
