Writing/Ecomonics

This is a team project and this is my part. In 300 …

• Describe the current global economic conditions and their effect on local macroeconomic indicators for your good or service.

 

For your reference here are the details of the project.

 

Revise the chosen business proposal using the feedback provided by your peers and facilitator as necessary. In addition
to your week four paper, the second part of your paper will use the revised information torecommend appropriate pricing and nonpricing strategies for your new or existing good or service based on the projected economy’s stage in the business cycle and the prevailing projected economic conditions for one or more macroeconomic factors. Explain the evidence that supports these recommendations. (Please be aware that you need to submit a revised version of your Week 4-5 proposal as well as adding the following elements and putting both parts into ONE integrated final proposal
.)

Required Elements:

Describe the current global economic conditions and their effect on local macroeconomic indicators for your good or service. 

Describe the local economy’s stage in the business cycle.Describe how current credit market conditions affect your planning or operating decision for your good or service.

• No more than 2100 words (in addition to the 1400 word paper completed in week four, an additional three pages at most is needed)

    

Microsoft Surface Tablet Venture

Doug Peterson

ECO/561

August 19th 2013

Xiaodong Wu

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Microsoft Surface Tablet Venture

Microsoft has been a household name for its Windows software application package since 1975. Since becoming public in 1986, the company has become the largest software maker in the world, and a fortune 10 company. Competition has become fierce since initially owning the market. There has been a steady decline in PC computing, and consumers have become increasingly demanding for the latest innovation. Microsoft is now battling for market share in multiple industries from competitors such as Apple, Sony, Google, and Samsung. This is a new frontier, and Microsoft is shaking up there go to market. Examples include creating a search engine called Bing, acquiring Skype, and creating the Windows Phone. One of the largest steps in turning the corner to being seen as the innovative juggernaut that Microsoft once was, began with creating a tablet pc. Microsoft responded with launching the Microsoft Surface Tablet.

Identification of Market Structure

The tablet industry has been the rage in computing since Apple first introduced the iPad in 2009. The market structure would be considered an oligopoly because the top four competitors constitute more than 40% of the total market share. According to Yahoo! Finance, the market share of the top four players of Apple, Samsung, AsusTek and Lenovo, are 60%, 18%, 3% and 2% respectively. Microsoft is not currently in the top four but is making headwinds recently. The tablet industry has done nothing but speed up. Yahoo also shows us that tablet sales for the most recent quarter (April – June) increased 60% year over year (worldwide-market-share, August). Microsoft is a leader in the software industry, however the hardware industry they have clearly been a laggard.

Elasticity of the Product and How Pricing Relates to Elasticity

Price elasticity of demand shows the relation of demand in response to a change in price. This means if the price of a tablet computer is changed whether up or down, will consumers buy more, less, or the same (McConnell, Bruce & Flynn, 2009). Numbers show that the Microsoft Surface is a highly elastic product. A drop in the total price will be reflected by an increase in total sales. The original price of the Microsoft Surface Tablet (64GB – base model) was $700. The total number sold was 1.4 million units. The original sales were dismal, and far below analysts’ expectations. The larger price tag was primarily a way to price up to its competitors; however the model did not justify the premium price tag (Information Week, July). Microsoft has recently made a series of cuts in total cost and now the model is sold at $518 with most retailers. Total sales increased to 2.3 million units.

When evaluating the elasticity of demand formula, a value less than one means the good is inelastic. This would infer that there is very little, if zero change in quantity demanded with a change in price. A value greater than one means the good is elastic and responds heavily to price. This formula can be seen as; Price Elasticity of Demand = % change in quantity / % change in price.

Percent change in quantity (Q1 = 1.4, Q2 = 2.3) = 64.3%

Percent change in price (P1 = 700, P2 = $518) = -26%

Ed = 64.3/26 = 2.47

A value of 2.47 further proves that the Microsoft Surface tablet is an elastic good, and Microsoft must evaluate their cost structure in order to evaluate and estimate total sales of its product.

Using Marginal Cost and Marginal Revenue to Increase Revenue and Determine Profit Maximizing Quantity

Marginal cost and marginal revenue is a key metric to evaluate and consider when a company is evaluating whether to pursue or cease operation. Marginal cost is seen as the “additional” cost created by one more units, and marginal revenue is the “additional” revenue generated by one more unit. In other words, what additional costs will Microsoft incur by producing the Surface tablet, and will it be worth the resources, time, and effort to continue. Examples of marginal costs incurred by creating the Surface tablet have been additional retail space needed to promote the Surface (as well as the Windows Phone). The strategy for Microsoft has been quantity rather than quality in order to enter the market quickly, and reach its target audience efficiently. Other marginal costs have been the additional workers hired to showcase the product, additional labor hours creating and licensing the product, and also the costs of the product itself.

Marginal revenue has been the increase in sales of the Surface tablet. Since the Surface is a new product for Microsoft, then all of the sales are additional and new sales at this point. Marginal revenue is measured not only in the additional revenue gained from the Surface tablet, but also the revenue generated within the product on application and software sales. The tablet will consistently generate new revenue once it is in the user’s hands. The idea is to cease production once marginal cost exceeds that of marginal revenue. Currently marginal costs far exceed the additional revenue generated with the Surface tablet, however Microsoft is continuing to evaluate alternative to promoting its products to shift this trend.

Pricing/Non-Pricing Strategies and Barriers to Entry

Since Microsoft’s entry into the tablet industry, and its oligopoly market structure, they have worked to differentiate themselves with product quality. Customers have more choices than they have ever had before, therefore it will take a strong differentiation in product to move from a potential buyer to buyer. Key industries Microsoft has been targeting are students, doctors, and business professionals. Examples of differentiation include highlighting that the Microsoft Surface is a tablet that could take the place of an entire lap top. They can run any Windows 8 or 7 software including Microsoft Word and Excel. Surface also provides a convenient pen coupled with applications that translate handwriting into a text conversion viewable and storable on the Surface. This is can be seen especially useful to these three markets, considering the amount of notes they may take.

Barriers to entry have been numerous. One such barrier is lack of brand name in the tablet field. Rather than being on the forefront as Apple was (they literally created the industry), Microsoft was far behind, and are currently paying dearly for this. Another large barrier is the lack of retail development for tablet exposure to target consumers. Most consumers in target areas have seen the Apple store, and have had the opportunity to experiment on a potential purchase. Microsoft was again late to this frontier, and has just recently begun popping up brick and mortar retails stores across the US. The last major barrier for Microsoft in the tablet industry has been the amount of competition. Microsoft has been able to dodge competition for many years, in multiple fields, as they have been the industry leader. Now they are in the position of the underdog, creating a very new experience and feeling for the blue chip company.

Conclusion

Microsoft’s entry into the tablet field has been anything but smooth. Other players such as Apple have been able to stay in the forefront, making Microsoft most continue to reevaluate their product, price, and differentiators, in order to gain market share.

References

Information Week. (July 13th, 2013). Microsoft Surface. Retrieved from http://www.informationweek.com/hardware/handheld/microsofts-cheaper-surface-tablet-8-key/240158353

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies (18th ed.). Boston, MA: McGraw-Hill Irwin

http://finance.yahoo.com/news/worldwide-market-share-tablet-computers-213603283.html. (August 5th, 2013). Worldwide market share for tablet computers. Retrieved from http://finance.yahoo.com/news/worldwide-market-share-tablet-computers-213603283.html