Microsoft-Sendit case A

• Entering a new (vertical) market/segment (intra-

industry diversification)
– Attractiveness: stand alone revenue growth vs stand
alone profitability vs synergy (Porter, 1987; C&M) vs
strategic/industry shift
• How to enter? 4 main development modes (DM)
– Position in the internalization continuum (link to TCT)
• Criteria for evaluating DM
• Comparing DM
– In general
– Application to Microsoft
• Which one to choose?
Msc Mgmt Fall 2018 Strategy & Dev Modes 1
Professor Xavier Castañer
 Entering a New Activity Market – Stand-alone

• For Microsoft in 1999/2000 mobile software is a new (‘vertical’)

market/segment (product diversification, still software – intra-industry
diversification)

– Revenue growth potential for mobile software given expected

diffusion of mobile devices (standard-based, dominant design ,
winner-takes-all market where early dominance thru installed base,
network externalities/effect), but profitable?

• Can Microsoft get a competitive advantage?

• More profitable than existing products? More attractive? (relative business

attractiveness)

Msc Mgmt Fall 2018 Strategy & Dev Modes 2

Professor Xavier Castañer
 Entering a New Activity Market – Stand-alone
• Expected competitive advantage? High profitability?
– M has software competence in general, but not in
mobile – a resource need
• Mobile software development: important cost (of entry)
based on technological investment (R&D cost), but
quickly declining marginal cost (embryonary phase of the
mobile software development, S-shaped form of P/I Life
Cycle, market structure, Yin & Shanley, 2007 AMR)

– Experience in entering new markets?

– Development mode (organic, alliances, acquisitions)

experience? (Wang & Zajac, 2009 SMJ)
Msc Mgmt Fall 2018 Strategy & Dev Modes 3
Professor Xavier Castañer
Entering a New Activity Market – Synergies

– Synergy based on complementarities (bundling):

• Greater potential techno compatibility across different

software programs thanks to being developed in same
firm &
• Lower transaction costs for customers who can now
buy an integrated software suite from same supplier

• Can M appropriate part of this greater customer value

thanks to premium price?
Msc Mgmt Fall 2018 Strategy & Dev Modes 4
Professor Xavier Castañer
1: Send & receive calls, as well as M-S Product Complementarity
have access to internet
2: By having access to data servers,
Server software Mobile software
mobile operators become also
internet service providers (ISP)
MICROSOFT SENDIT
3: Connect to the World Wide Web Back Office & Internet Cellular
4: Microsoft & Sendit provide the
technology to manage data servers Windows NT Smart Access
and transfers
for IT (ICSA)*
Technology compatibility based on Windows NT

Mobile Equipment Mobile Operators Data Servers (involved in

Manufacturers (signal transmission; data manipulation and The internet
(Nokia, Ericsson, e.g. Swisscom) indexing thanks to
etc.) require to integrate ICSA in Windows NT specific for
integrate ICSA in their digital servers MO)
SIM cards, to become ISP/No
firmware or DSP major investment
Msc Mgmt Fall 2018 required Strategy & Dev Modes * Assembly outsourced to OEM 5
Professor Xavier Castañer
 Entering a New Market – Strategic
Shift/Disruption (Renewal)
• But mobile software also redefining computing
& communication – addition of a new platform,
potential shift from PC (fixed) to mobile
computing
– Strategic shift – ‘disruptive’ innovation (Christensen,
1997)? Does it make PC software obsolete?
– Another mobile software platform is being
developed thru an alliance (Symbian) based on
Unix. Sendit is the only firm with mobile software
based on Microsoft DOS

Msc Mgmt Fall 2018 Strategy & Dev Modes 6

Professor Xavier Castañer
 How to Enter? Development Modes
• 1. Internal/organic venturing/development
• External:
– 2. Licenses (mostly based on sequential interdependence, arms’
length, might involve some licensor training of the licensee)

– 3. Alliances (joint action, based on reciprocal interdependence),

including non-equity alliances and JVs

– (Minority investments/acquisitions, CVC)

– 4. Acquisitions of complete (or at least majority of) companies,

businesses or resources
Msc Mgmt Fall 2018 Strategy & Dev Modes 7
Professor Xavier Castañer
 How to Enter? Development Modes

• Internal venturing and acquisitions represent internalization

(hierarchy - TCE)

• Alliances are hybrids (Williamson, 1991): combine contract

with joint-decision making (some hierarchy particularly in
the JV case)

• Multiple modes at the same time possible – see discussion

of the plural form or tapered integration

Msc Mgmt Fall 2018 Strategy & Dev Modes 8

Professor Xavier Castañer
 Choosing among Modes

• Clearly define the firm’s goal/s for the expansion:

– Microsoft: product diversification into telco/dotcom

mobile software, catching up on potential strategic
shift

– Sendit: global commercial expansion and profitability

• Evaluate relative importance of the criteria below

depending on the goal/s

Msc Mgmt Fall 2018 Strategy & Dev Modes 9

Professor Xavier Castañer
 Criteria for Choosing among Modes
• Control (power/decision rights over resource allocation), has
an influence on the other 3 factors

• Speed/time to achieve objective, has an influence also on

• Costs (investment/expenses to be made)
• Negative Risks:
– Project/business techno & commercial risk
– Imitation/replication of internal strategic resources (RBV)
– danger in alliances
– Potential appropriation hazards (TCE) – danger in
alliances
– Potential winner’s curse in acquisitions (Barney, 1988) –
unique combination needs to be private (only known to the
acquirer)
Msc Mgmt Fall 2018 Strategy & Dev Modes 10
Professor Xavier Castañer
 Comparing Development Modes (based on Teng, 2002; see also C&M)
Acquisitions
Criteria Internal development
(of entire firms)
• Function of target firm
availability, ownership
structure and anti-trust
• Function of existing restrictions (negotiation
Time
internal ability time)
• Acquisition objective
implementation: target
motivation & collaboration
Resource acquisition in factor
Alliances
market (such as license)
• Partner firm availability
(bargaining power)
• Negotiation time • Market availability
• Implementation time • Tradability (market failure)
(function of effective
collaboration)

• High: • Relatively low start-up cost

• Purchase price (premium) (lower than internal &
High (time
• Integration costs acquisition) Low transaction cost (if low
Cost compression
• Inability to divest • Ex-ante and ex-post asset specificity)
diseconomies)
unneeded assets transaction costs (f of asset
specificity)

Control (decision Total but potential power

rights thanks to Total struggles (resistance to Shared (limited) Total
ownership) integration)

• Shared
• 100 %
• Partner opportunism and
• Risk of a “lemon” (bad
competitive replication
purchase)
(whether by actual
Risk High • Loss of key target High
incumbent or through
personnel due to mis-
forward/backward vertical
imposition of acquirer
integration in vertical
practices
alliances)

Msc Mgmt Fall 2018 Strategy & Dev Modes 11

Professor Xavier Castañer
 Comparing DM for Microsoft – assuming lack of technological
knowledge in the new domain (mobile software)
Determining Acquisitions Alliances (assuming partners Resource acquisition in
Internal development
factors (of Sendit or others) have the required knowledge) factor markets (license)
• Fast in principle but:
• F of target firm • Moderate given:
availability (bargaining • Low partner firm availability • Fast if:
power/premium) and (low bargaining power) • Market availability
Time/speed Slow anti-trust restrictions • Implementation time • Tradability (market failure
(negotiation time) (function of effective – Arrow’s info paradox:
• Time to implement collaboration – cross-cultural pricing)
acquisition objective issues)
(integration)
• Moderate given:
• Relatively low start-up cost
• High as a f of:
(lower than internal & * Lowest (royalties)
• Purchase price (premium)
acquisition) particularly if low
Cost High • Integration costs
• Ex-ante and ex-post transaction cost (if low
• No unneeded target
transaction costs (f of asset asset specificity)
assets to be divested?
specificity) & coordination
costs
Control (decision Total but potential power
Total (limited in the case of
rights thanks to Total struggles (resistance to Shared (limited)
license)
ownership) integration, compatibility)
High failure risk:
• Moderate/Shared failure
• Of a “lemon” (bad
risk
purchase, too expensive) High failure risk
Risk High failure risk • Replication/imitation risk as
• Of loss of key target
f of partner opportunism
personnel (compatibility,
(reputation)
motivation)
Msc Mgmt Fall 2018 Strategy & Dev Modes 12
Professor Xavier Castañer
 Which Mode to Choose?
• Again, it depends on the goal:

– not all modes rank in the same way across all criteria,
trade-offs to be made (Castañer et al, 2014):

• More sales thru collaboration but takes longer – relative

importance of first-mover advantage (e.g. Lieberman, 1987)

Msc Mgmt Fall 2018 Strategy & Dev Modes 13

Professor Xavier Castañer