Sydney Business School

INTI Subang Campus

International Business Strategy

TBS 984

Case study 1

Name & Student ID : Li Zhe 4910515 /J14016848

Lee Zhou Wei 4940155/J14016858
MaMingzhou 4948099/J10007960
Seoh Yee Kam 4928374/J14016844
Kuo Min Yee 4922207/J14016921

Lecturer Name: Dr. Michael Jones

Subject Coordinator : Dr Poh Phaik See

Submission Date: 20 June 2015

Table of Contents
Case Introduction ................................................................................................................................. 1
Question 1 ............................................................................................................................................ 1
Question 2 ............................................................................................................................................ 3
Question 3 ............................................................................................................................................ 5
Question 4 ............................................................................................................................................ 5
Question 5 ............................................................................................................................................ 6
References ............................................................................................................................................ 8
Case Introduction
The case discusses about Microsoft’s strategic development in China in order to open and occupy
Chinese market. However, the first decade of Microsoft is terrible due to the competition from
‘Shanzhai culture’ and the pressure of security reasons of government. How to translate market share
into revenue and how to gain trust and build a strong relationship with Chinese government were the
main problems that Microsoft had to face at that time. Based on the ‘international business strategy’,
this report analyses the strategies of Microsoft and solutions to open Chinese market.

Question 1

Threats of New Entrants (Low to medium):

The barrier of entry is medium to high but the threat to new entrants is low to medium. Microsoft has
penetrated the China market and obtains their market share however there is no guaranteed revenue.
The open-source operating system of Linux is authorized and supported to use by Chinese
government, which means the market share is guaranteed and government does not trust Microsoft
in order to avoid spyware from the US government.

In order to sustain the market share and gains revenue returns in China market, Microsoft changed to
localized parts of its products to meet the China government requirement.

Threat of Substitutes (Medium to High):

Due to China’s low intellectual property rights, the threat of substitutes in the industry is medium to
high. There are many local PC manufacturers selling “naked machines” and encourage the use of
pirated software. They provide alternatives to the Chinese by practicing low price strategy.

In addition, Linux and other low cost IT producers have leverage on the development of public
infrastructure of software industry as it creates alternatives to the Chinese who demand for low price
products.

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Intensity of competitive rivalry (High):

The illegal software in China has jumped to $7.6 billion in 2009. The competition within IT and
software industry is high. There are many IT and software companies which offer the Chinese with
low price products or the download of illegal software.

Chinese prefer to use cheap pirated version rather than expensive legal software. Linux offers a free
open-source operating system and leverage on low cost production in order to win a price battle. In
mid 2000s, one of the low cost PC producers, Lenovo maintain shipping its naked machines to China
to promote its use of illegal software although China government has increased the consumption of
legal software within the government agencies and locals. (Kluyver, 2010)

Microsoft facing intense competition in the China market by generating awareness of the patent of
its products and raising more profits return. (Whitney, 2010)

Bargaining power of suppliers (Low)

The main suppliers of Microsoft are the blank media, processors and so on. Suppliers can easily be
found by Microsoft and therefore the scale of suppliers is very large. Microsoft will choose the
suppliers who offer them the lowest price. Consequently, Microsoft will then become the price
controller of the materials and this leads to a decrease in suppliers’ bargaining power.

Bargaining power of buyers (Medium)

Majority of the customers in Chia are still in favour of Microsoft and therefore it has become the key
leader in the market. Customer would like to use pirated software due to it is cheaper than Microsoft’s
legal software. In recent years, there are a lot of new competitors such as IOS and Android Oss in the
Chinese market and this has created a threat to the Microsoft. Therefore, the switching cost of buyers
is relatively low.

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Question 2
For this question, it should base on VRIO framework to analyse.
Tangible resource: In Beijing, Microsoft has a research center. Besides that, Microsoft cooperates
with the Chinese government and funds together to builds the labs and computer classroom.
Intangible resources: The brand name of Microsoft is world famous. Besides that, Microsoft has a
world class R&D capability. The human resource of Microsoft is very outstanding. Microsoft
invested the Chinese local firm with more than $100 millions to train local professional aims to
improve its R&D capabilities in Chinese market.

Value:
The world class R&D capabilities and excellent human resource are the key valuable resources and
capabilities Microsoft has. First, the world class R&D capabilities help Microsoft differentiate itself
from its competitors-Linux and gain most of the market share in Chinese market. Second, the new
business strategy led by the new CEO: Tim Chen successful help Microsoft resolves the threat in the
Chinese market.

Rarity:
Microsoft has labs and research centers not only in Beijing but also in other area the business covered.
Thus, Microsoft can base on the research of the local market to design the localized software. No
other software companies have such large scale of labs and research centers. Besides that, the world
class R&D capabilities enable the Microsoft has many features that other software doesn’t possess
such as the capability of continuous improvement and personalized.

Imitate:
Being early to the industry, Microsoft already aware the importance of the innovation. Thus,
Microsoft spends millions of dollars in the development of R&D capability and innovation every
year. It is impossible for the competitors imitate the product of Microsoft because it requires millions
of dollars to build the research centers and labs to analyse the product of Microsoft and develop the
software with the same capability. Besides that, Microsoft has a very fast speed of innovation, it is
impossible for the competitors to imitate the product of Microsoft in a short time. Thus it is costly for
the competitors to imitate the product of Microsoft.

3
Organization:
In order to capture the Chinese market, Microsoft cooperates with the Chinese government and adopts
the Chinese policies. Such localized business strategy successfully helps Microsoft exploits it’s
valuable, rare and costly to imitate resources. By cooperate with the Chinese government; Microsoft
has become the partner and legal official software of Chinese government which help Microsoft
defeat other competitors such as Linux. Besides that, Chinese government require all PC
manufacturer must install the legal Microsoft software before selling to customers which helps
Microsoft gain more market share. Microsoft cooperates with the Chinese government to build the
labs and research centers also help Microsoft improve its R&D capability, although in Chinese
market, the price of the Microsoft software is much cheaper than other countries.

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Question 3

From an institution-based view, we need to consider the effects of formal and informal policies of the
China’s local industry.

From a formal aspect of institution-based view, the protection of Intellectual Property Rights is
considered low in China. Many Chinese consumers are using the pirated software, and the violators
of IPR seldom get punished.

Beside, China has strictly restricted the press freedom, Microsoft need to adhered to the government’s
Internet censorship policies. The state control and intervention of business activities is high in China,
thus Microsoft realized they need to work closely with government in order to success in the business.

From an informal aspect of institution-based view, the Chinese preferred to use the pirated and illegal
software than the legal software from Microsoft as the price are cheaper. In addition, Chinese
government is always suspicious of the foreign firm and their products. They will only support that
foreign firm, which the firm’s strategy consistent with their development agenda. In order to gain
trust from Chinese government, Microsoft has provided them the Window’s fundamental source and
the authority to substitute particular portion with domestic adaption. China is a high context culture;
relationship and trust are important elements for conducting business in China.

In the end, Microsoft tolerated piracy and quit suing people; they are compromising with the market
share.

Question 4

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Microsoft is multinational technology company who committed to the global intellectual property
management and the formation of healthy patent ecosystem around the world that promotes software
innovations. (Microsoft, 2012) Strategic theory is hard to change for Microsoft as their organization’s
strategies have been integrated from headquarters to the subsidiaries around the world.

In the case of Microsoft first decade in China, Microsoft penetrated China market by implementing
global strategy as they look the world market as a whole. Microsoft promotes their products in China
by emphasizing on antipiracy law due to pirated versions and low IP rights in the China market. The
confrontational strategy which succeeds in other countries does not create revenue to Microsoft in
China but create barriers to the company growth in China market. (Xing, 2010) China government
started to intervene into the industry due to protection of local industry and national security reason.
(Defensive Rationale of Government Intervention, 2014)

By considering the market condition and threat of protectionism that affect the company revenue,
Microsoft changed global strategy to localization strategy. (Peng, 2013) In order to satisfy the China
government demand, Microsoft loosens the IP rights of their software and diversifies their software
to be responsive to local demand. In order to get China to improve IP rights for their own sake,
Microsoft promised China to promote IT industry by collaboration with local authorities and local
web Service Company. The success of the company strategies depends on the analysis of the industry
competition, firms’ capabilities and institution conditions.

Question 5

6
Free speech can be defined as the right for a human to voice out his or her point of views and
suggestions. In addition, human rights can be explained as the status and speech equalisation despite
one’s sex, nationality, religion, language and many more.

Understanding a country’s cultures, laws, politics plays a significant role in doing business in a new
market. China, as one of the most stringent internet control countries in the world, scrutinizes and
filters all the website contents and also the internet users. In this connection, Microsoft has the
responsibility to learn the country’s cultures and obey all the rules and regulations in order to show
its sincerity and willingness to serve the public. Furthermore, Microsoft accepts criticism and
opinions raised by other companies as this will progressively remind Microsoft to make ethical
decisions. Building good relationship with the Chinese government may not only help in brand
development, but also exchange of business information and strategies which can potentially benefit
the global markets. It is believed that China has its own views to regulate the country as it is one of
the most influential and powerful countries in the world. Microsoft, as roles of an investor and a
student in China, will coordinate with every decision made by the Chinese government and take the
great opportunities to learn from this leading country.

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References
Cavusgil, S. K. (2014). Defensive Rationale of Government Intervention. In S. K. Cavusgil, International
Business, The new realities (p. 218). n/a: Pearson Australia.
Kluyver, C. D. (2010). Fundamentals of Global Strategy: A Business Model Approach. In C. D. Kluyver,
Fundamentals of Global Strategy: A Business Model Approach (p. 270). n/a: Business Expert Press.
Microsoft. (2012, November 12). Microsoft. Retrieved June 10, 2015, from Legal Resources:
http://www.microsoft.com/en-us/legal/intellectualproperty/patents/default.aspx?Search=true
Peng, M. (2013). Corporate Level Strategies. In M. Peng, Global Strategy (p. 298). n/a: Cengage Learning.
Whitney, L. (2010, n/a n/a). Piracy costs software industry $51billion in 09. Retrieved June 20, 2015, from
Piracy costs software industry $51billion in 09: www.cnet.com/news/piracy-costs-software-industry-
51-billion-in-09/
Xing, W. (2010, December 20). China Daily. Retrieved 12 June, 2015, from The Man Behind Microsoft:
http://www.chinadaily.com.cn/cndy/2010-12/20/content_11724266.htm