One of the most important learnings from the current COVID-19 pandemic is that the quality and level of your IT has a big impact on the robustness of your processes, your ability to change or survive, and the resilience of your business. Now comes the big question - are you working with the right IT strategic vendor/partner? As a Microsoft Partner, we want to have a look at how Microsoft is doing.
Microsoft, which is one of the largest companies in the world, operates globally with popular product suites like Azure, Office, and Windows. Its primary competitive advantages include brand strength, intellectual property, regulation, and network effect.
A few years back, Warren Buffett developed and popularised the concept of an economic moat. It is described as a competitive advantage that helps a company generate an economic profit for the foreseeable future. Without an economic moat in place, the margins of a company will erode eventually until they become equal to return on invested capital (ROIC).
Moats can be established by network effects, intellectual property, legal exclusivity, economies of scale, or brand identity. The strategy of Buffett revolves around identifying organisations with sustainable moats that generate cash flow while ascertaining the present value of future cash flows and purchasing stock when the prices dip below the present values of those cash flows.
Microsoft's Business Presence
The business of Microsoft consists of three segments: personal computing, productivity and business processes, and intelligent cloud. The productivity and business processes segment includes subscription and licensing revenue for LinkedIn solutions, Office and Office 365 for commercial and consumer customers, and Dynamics business solutions. This segment generated approximately 32% of all revenues in 2020.
The personal computing segment includes Windows OS licensing, search advertising, devices, and gaining, and this accounts for approximately 34 percent of gross revenue. The intelligent cloud segment includes the private, public, and hybrid server offerings and related services that contribute another 34 percent of gross revenue.
Competitive moat's quantitative tests include margin stability and return on invested capital (ROIC) relative to the weighted average cost of capital (WACC). The 12-month ROIC of Microsoft as of June 1, 2021, was 26.4 percent while its WACC was approximately 6.8 percent. The ROIC of Microsoft measures its ability to generate a return on invested capital. Conversely, WACC represents the minimum return required by the equity and debt capital providers of the company.
Today, Microsoft is seen as one of the most trusted and successful names in the segment of digital transformation. The company has a powerful vision to help every individual and organisation to achieve more and that's exactly what Microsoft does.
Microsoft is ready to help your organisation. What are you waiting for? Call us at C.I.G Consultants now!