Microsoft Pursues Strategy for Penetrating Large Organizations

Case Type: math problem; organizational behavior; operations strategy.
Consulting Firm: PricewaterhouseCoopers (PwC) final round job interview.
Industry Coverage: software, information technology (IT).

Case Interview Question #00200: The client Microsoft Corporation (NASDAQ: MSFT) is a multinational corporation headquartered in Redmond, Washington, USA. Microsoft develops, manufactures, licenses, and supports a wide range of software products and IT services predominantly related to computing through its various product divisions.

One particular division of the client makes a software product called Microsoft System Manager (MSM) that manages desktop applications across different machines. There are 2 broad categories of customers — large organizations (with 1000 + computers) and small organizations (with 100 — 1000 computers) that use the MSM software. Microsoft has a strong presence in the small customer segment but has not been able to penetrate the large segment. Question: 1. Why is Microsoft not able to have a footprint in the large segment? 2. What recommendations would you have — stay or exit the large segment? 3. What tactics would you use if the client decides to stay/exit?

Additional Information:

Note to case giver/interviewer: This is a quantitative numbers case — so guide the candidate appropriately.

• The Microsoft System Manager (MSM) desktop application software reduces system crashes and calls to system administrator. It is a background application so the end-user does not even know that it exists on his / her computer.
• Microsoft sells the software through computer retail stores that sell software products. There are over 2,000 such retail stores across the country.
• Large segments are more profitable than small segments, and currently the small segment market is almost saturated. So from the client’s perspective, they clearly need to sell more to large segment. The question is: How do we sell more?
• No other player operates in this niche market — however an open source system application manager is in the cards.
• Microsoft’s MSM software is extremely stable and has clear benefits because of reduced system outage. These benefits are more for large companies than for small companies.
• Client sells the software, retail stores sell support services at time of sale. Retail stores sell using a direct sales force that visits the large / small companies.
• The average license price for small firm is $2,000. Stores sell 100 licenses a year and get a 10% margin. In addition, retail stores sell support services 100% of the time for each license, each of which produces another $2,000 in revenue with a total margin of 10%.
• The average license price for large firm is $20,000. Stores sell 12 licenses to get a 25% margin. In addition, retail stores sell support services 20% of the time for each license, each of which produces another $20,000 in revenue with a total margin of 25%.
• The actual sale is made by sales representatives who get 1% of every $1 in revenue they bring in to the store. A sales representative can either make 8 small company sales or 2 large company sales in a given month.

Possible Answer:

While a 3-C approach works, a faster approach is to contrast the large versus small company and look at the client’s product, competition and features in these 2 segments. The candidate should quickly determine that the problem is in the channel, the open source application is just a distraction. Candidate should realize that large companies will not go in for open source product until the product matures. To compare small company v.s. large company:

1. Small company:
Revenue = 2000 * 100 = 200,000
Profit to store = 200,000 * 0.1 = 20,000
Profit from support services = 200,000 * 0.1 * 100% = 20,000
Net profit to store / company = 40,000

2. Large company:
Revenue = 20000 * 12 = 240,000
Profit to store = 240,000 * 0.25 = 60,000
Profit from support services = 240,000 * 0.25 * 20% = 12,000
Net profit to store / company = 72,000

Therefore, retail stores get more profits if they are able to sell to large companies.

3. Sales representative incentive:
Small firm = 8 * 40,000 * 0.01 = $3,200 per month
Large firm = 2 * 72,000 * 0.01 = $1,440 per month

Sales reps therefore tend to favor searching for small firms — which is okay if they can continue to make 8 sales a month, but this market is maturing, so they are potentially going on fruitless searches. The sales rep incentives should reflect the margin per sale and not just the net margin.

Outstanding Answer

After the candidate gets the numbers, an outstanding answer will just have to be creative:

• Examine merits / demerits of moving away from channel partner towards having a dedicated direct sales force.
• Piggyback on another software vendor’s direct sales force.
• Partner with computer vendors (Dell, HP, etc) to have software installed in OEM (Original Equipment Manufacturer) fashion, etc.