Thursday, January 22, 2009

Microsoft cuts jobs in cutting-edge profitable strategy

It was just this morning that Microsoft released their earnings report for the second quarter ahead of schedule. Originally, they were supposed to release the report later today, but they came out with the report and have announced a job cut of 5000 positions. It seems that the rumors about a 17% job cut were in fact wrong, but Microsoft has indeed suffered slightly in this depressing economy.
Yesterday, I wrote a post on how Microsoft couldn't possibly lay off 17% of its workforce, and it appears that I was slightly correct, and also slightly wrong.

While Microsoft has blasted ahead with profits from its Xbox division, and sustained profits from many other divisions while retaining investment, they too have suffered from the bleak economy. Due to businesses and consumers cutting their spending, Microsoft's Windows sales have been going down, and caused Microsoft's earnings per share to be $0.02 lower than analysts' expectations.
Microsoft managed to obtain slight revenue growth, despite the economic conditions. Throughout this quarter, Microsoft has showcased plenty of new software innovations and continued to invest in new products. From what we can see, although Microsoft was affected, they will continue investing in the long term, and has practically 0 chance of failing.

I said yesterday that it was highly unlikely for Microsoft to really cut massive amounts of jobs, however, the figure of 5000 jobs is still slightly disturbing. But Microsoft also says that they will continue to hire more, so in actuality the amount of workforce they are reducing is about 3000 positions. 1400 jobs will be cut immediately, and the rest will follow over an 18 month period. From my opinion, Microsoft has made an excellent choice. Cutting 1400 jobs right now will help them to sustain profits in the short term. Meanwhile, cutting the rest over a long period of 18 months will help Microsoft to make themselves more profitable, while keeping less staff. The announced hiring by Microsoft will also help Microsoft continue their position as the industry leader, because Microsoft definitely has enough cash to invest aggressively in new products, while competitors are in weaker positions. Microsoft should take this time to invest heavily in their existing product lines, and invest more into their new ventures. Even though in the short term they may have a lot of spending to do, this will undoubtedly put them in far better position in the long run.
The strategy Microsoft should take right now is to invest in products, while cutting down on marketing and other similar expenses. Microsoft doesn't have to market its products heavily right now, because there are far less people trying to buy new things, but they should resume heavy marketing as soon as the economy lights up just a little, and especially when they release Windows 7. From what Microsoft has done so far, it appears they are following this strategy quite well.

An interesting fact I noticed was that Microsoft started their massive advertising campaign just before and during the start of the major depression we're experiencing right now. Whether this was intended or not, this definitely helps Microsoft, by having marketed right before the depression, and not many other companies will be advertising during or even a little after, thus, Microsoft has gained an advantage here. Plus, from what I can tell, the use of Seinfeld in the ads while the ads weren't exactly perfect, may also contribute to reminding customers of Microsoft during dark times. It's unlikely for other companies to start massive ad campaigns during the depression, so as customers go through the depression, they will be reminded of Microsoft's ads that don't necessarily target Microsoft products in general. Then Microsoft can resume mass advertising after the depression and continue their marketing without further problems.

The outlook for Microsoft is highly positive over the next few years, from my point of view, seeing as Windows 7 is a huge improvement from Vista, and will ultimately net Microsoft some serious cash. Then, with their strategy in place, Microsoft will be in a strong position as they emerge from the depression. The only problem is we don't know how long the economic turmoil will last, so the rebound may take quite a while, and outlast the release of Windows 7. But I'm confident that customers will be itching to get Windows 7 regardless of the economy, after what happened with Vista's image (even though it wasn't all that bad as an OS).

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