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Investing in Microsoft: A comprehensive primer and key analysis

Part 2
Investing in Microsoft: A comprehensive primer and key analysis (Part 2 of 7)

Must-know: Will Microsoft’s new “one Microsoft” strategy pay off?

“One Microsoft”

Microsoft previously operated its business under five segments: the Windows Division, Server and Tools Division, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. In July 2013, management announced a change in organizational structure as part of its transformation to a devices and services company under the “one strategy, one Microsoft” banner.

According to outgoing CEO Steve Ballmer’s announcement in July 2013, “Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do.” The realignment is expected to enable Microsoft to innovate with greater speed, efficiency, and capability in a fast-changing technological landscape. The company’s goal is to become more nimble, collaborative, communicative, motivated, and decisive.

MS businessEnlarge Graph

The realignment aims at improving revenues due to declining PC sales and reducing the duplication of efforts across various divisions. Although Microsoft revenues increased for the year ending June 2013, a fall in PC sales continued to impact earnings. For fiscal year 2013, the company’s revenue grew 6%, to $77.85 billion. Microsoft said 2013 revenue increased, primarily due to higher revenue from Server and Tools as well as revenue from new products and services, including Windows 8, Surface, and the new Office. These gains were offset in part by the impact on revenue of a decline in the x86 PC market. Industry observers believe Microsoft is trying to end its dependence on the saturated and now declining PC market by shifting to new markets such as mobile, cloud services, gaming, search, and tablets.

In September, Microsoft announced a new segment-reporting framework. The five new reporting segments tightly align with the company’s focus on delivering innovative devices and services for both its enterprise and consumer customers. This framework was designed to give valuable insight into the company’s progress in its key business transformations in order to drive long-term growth.

Microsoft has also collapsed its eight product divisions into four divisions, which will align around functions rather than products. The company will have four engineering teams—namely, Operating Systems, Application and Services, Cloud and Enterprise, and Devices and Studios.

New Segment MappingEnlarge Graph

The realignment announcement met with skepticism, as the company’s previous reorganizations have had a mixed track record. Post–Bill Gates, Microsoft has reorganized itself in 2002, 2005, 2006, 2007, 2008, 2010, and 2012 to attempt to improve its competitive position. The new segment divisions were also initially considered confusing, as a number of individual products such as Bing, MSN, Windows Phone, and Skype were lumped together with some other unconnected products and services, making their performance difficult to determine. Experts have compared Microsoft’s new model to that of its peer Apple (AAPL), which has been successful in offering users a complete ecosystem across a range of devices and platforms.

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