Microsoft case study strategic management
The revenue and operating income loss amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U. GAAP" and include certain reconciling items attributable to each of the segments. Segment information appearing in Note 21 — Segment Information and Geographic Data of the Notes to Financial Statements is presented on a basis consistent with our internal management reporting. Certain corporate-level activity has been excluded from segment operating results and is analyzed separately.
In July , we announced a change in organizational structure as part of our transformation to a devices and services company. As we evolve how we allocate resources and analyze performance in the new structure, it is possible that our segments may change. Windows Division develops and markets operating systems for computing devices, related software and online services, Surface RT and Pro devices, and PC accessories. This collection of software, hardware, and services is designed to empower individuals, companies, and organizations and to simplify everyday tasks through seamless operations across the user's hardware and software.
The general availability of Surface Pro started February 9, The remaining Windows Division revenue is generated by commercial and retail sales of Windows, Surface, PC accessories, and online advertising. Partially offsetting these increases was a decrease in OEM revenue. Windows Division operating income decreased, primarily due to higher cost of revenue and sales and marketing expenses, offset in part by revenue growth. Windows Division revenue reflected relative performance in the PC market segments.
Server and Tools develops and markets technology and related services that enable information technology professionals and their systems to be more productive and efficient. We also offer developer tools, training, and certification. Server and Tools revenue increased in both product sales and Enterprise Services. Server and Tools operating income increased, primarily due to revenue growth, offset in part by higher cost of revenue and sales and marketing expenses.
Headcount-related expenses increased due mainly to higher Enterprise Services headcount supporting revenue growth, while datacenter expenses grew primarily to support our online services offerings.
Server and Tools operating income increased primarily due to revenue growth, offset in part by higher costs of providing products and services and increased sales and marketing expenses. Online Services Division "OSD" develops and markets information and content designed to help people simplify tasks and make more informed decisions online, and help advertisers connect with audiences. Bing and MSN generate revenue through the sale of search and display advertising, accounting for nearly all of OSD's revenue.
Search revenue grew primarily due to increased revenue per search, resulting from ongoing improvements in ad products, while display advertising revenue decreased primarily due to industry-wide market pressure. Operating loss was further reduced by higher revenue and lower cost of revenue and operating expenses. Search revenue grew due to increased revenue per search, increased volumes reflecting general market growth, and share gains in the U. According to third-party sources, Bing organic U. Bing-powered U. The non-cash, non-tax-deductible charge related mainly to goodwill acquired through our acquisition of aQuantive, Inc.
Microsoft Business Division "MBD" develops and markets software and online services designed to increase personal, team, and organization productivity. The general availability of the new Office started on January 29, We evaluate MBD results based upon the nature of the end user in two primary parts: business revenue and consumer revenue.
Business revenue includes Office revenue generated through subscription and volume licensing agreements with software assurance, license-only agreements for Office, and Microsoft Dynamics revenue. Consumer revenue includes revenue from retail packaged product sales and OEM revenue.
MBD revenue increased reflecting growth in business revenue, partially offset by a decline in consumer revenue. MBD operating income increased, primarily due to revenue growth, offset in part by higher sales and marketing expenses and cost of revenue. MBD revenue increased primarily reflecting sales of Office. MBD operating income increased, primarily due to revenue growth, offset in part by higher cost of revenue and research and development expenses. Research and development expenses increased, due mainly to an increase in headcount-related expenses.
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Entertainment and Devices Division "EDD" develops and markets products and services designed to entertain and connect people. We acquired Skype on October 13, , and its results of operations from that date are reflected in our results discussed below. In June , we announced that we expect our next generation console, Xbox One, to be available for purchase in the second quarter of fiscal year EDD revenue increased, due to higher Windows Phone and Skype revenue, offset in part by lower Xbox platform revenue.
Skype revenue increased, due primarily to including a full year of results in fiscal year We shipped 9. EDD operating income increased, primarily due to revenue growth and lower cost of revenue, offset in part by higher operating expenses. EDD revenue increased primarily reflecting Skype and Windows Phone revenue, offset in part by lower Xbox platform revenue.
We shipped Video game revenue decreased due to strong sales of Halo Reach in the prior year. EDD operating income decreased reflecting higher cost of revenue and operating expenses, offset in part by revenue growth. Certain corporate-level activity is not allocated to our segments, including costs of: broad-based sales and marketing; product support services; human resources; legal; finance; information technology; corporate development and procurement activities; research and development; costs of operating our retail stores; and legal settlements and contingencies.
Corporate-level expenses increased due mainly to full year Puerto Rican excise taxes, higher headcount-related expenses, and changes in foreign currency exchange rates. Cost of revenue includes: manufacturing and distribution costs for products sold, including Xbox and Surface, and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by OEMs, to drive traffic to our websites, and to acquire online advertising space "traffic acquisition costs" ; costs incurred to support and maintain internet-based products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized research and development costs.
Cost of revenue increased reflecting higher headcount-related expenses, payments made to Nokia, and changes in the mix of products and services sold. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code.
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel and the costs of advertising, promotions, trade shows, seminars, and other programs. General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees. We test goodwill for impairment annually on May 1 at the reporting unit level using a fair value approach.
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No impairment of goodwill was identified as of May 1, Our goodwill impairment test as of May 1, , indicated that OSD's carrying value exceeded its estimated fair value. We use derivative instruments to: manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income expense.
Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains losses are generally economically offset by unrealized gains losses in the underlying available-for-sale securities, which are recorded as a component of other comprehensive income "OCI" until the securities are sold or other-than-temporarily impaired, at which time the amounts are reclassified from accumulated other comprehensive income "AOCI" into other income expense.
Dividends and interest income decreased due to lower yields on our fixed-income investments, offset in part by higher average portfolio investment balances. Net recognized gains on investments decreased primarily due to lower gains on sales of equity and fixed-income securities and a gain recognized on the partial sale of our Facebook holding in the prior year, offset in part by lower other-than-temporary impairments. Net losses on derivatives decreased due to gains on equity derivatives in the current fiscal year as compared with losses in the prior fiscal year, and lower losses on commodity and foreign exchange derivatives as compared to the prior fiscal year, offset in part by losses on interest-rate derivatives in the current fiscal year as compared to gains in the prior fiscal year.
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Interest expense increased due to our increased issuance of debt in the prior year. Net recognized gains on investments increased, primarily due to higher gains on sales of equity and fixed-income securities and a gain recognized on the partial sale of our Facebook holding upon the initial public offering on May 18, , offset in part by higher other-than-temporary impairments.
Net losses on derivatives increased due to losses on commodity and equity derivatives in the current fiscal year as compared with gains in the prior fiscal year, offset in part by fewer losses on foreign exchange contracts in the current fiscal year as compared to the prior fiscal year. Changes in foreign currency remeasurements were primarily due to currency movements net of our hedging activities.
Our effective tax rate was lower than the U. Changes in the mix of income before income taxes between the U. We supply Windows, our primary Windows Division product, to customers through our U.
In fiscal years and , our U. The primary driver for the increase in the U. This increase relates primarily to transfer pricing, including transfer pricing developments in certain foreign tax jurisdictions, primarily Denmark. While we settled a portion of the I. In February , the I. As of June 30, , the primary unresolved issue relates to transfer pricing which could have a significant impact on our financial statements if not resolved favorably.
We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months because we do not believe the remaining open issues will be resolved within the next 12 months. We also continue to be subject to examination by the I.
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We are subject to income tax in many jurisdictions outside the U. Our operations in certain jurisdictions remain subject to examination for tax years to , some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements. Our effective tax rates were lower than the U.
In fiscal year , we settled a portion of an I. The primary driver for the decrease in the U. Our short-term investments are primarily to facilitate liquidity and for capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices.
The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities. While we own certain mortgage-backed and asset-backed fixed-income securities, our portfolio as of June 30, does not contain material direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral.
We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. Our gross exposures to our customers and investments in Portugal, Italy, Ireland, Greece, and Spain are individually and collectively not material.