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Strategy: Assignment 1Microsoft, 1995

Code for Course: MBL324-5Assignment Number: 01

Name: Richard ByromStudent number: 750-163-3

Group Code Number: BOT1000

MBL 324-5 Student No: 750-163-3

Table of ContentsAssignment task: Critically evaluate Microsoft's strategy from 1995 to 2001...............4

Introduction...................................................................................................................4

Competitive Advantage................................................................................................6

Competitive advantage through Positioning.................................................................7

Drawing the boundaries........................................................................................................7

Horizontal Scope...............................................................................................................7

Vertical Scope....................................................................................................................7

Geographic Scope.............................................................................................................7

Mapping Key Relationships...................................................................................................7

Competitive Dynamics.......................................................................................................7

Dynamic thinking – future view........................................................................................10

Analysis of input costs and willingness to pay.................................................................11

SWOT Analysis................................................................................................................11

Shaping or adapting to the business landscape..................................................................12

Microsoft’s Strategy.........................................................................................................12

What drives this strategy..................................................................................................12

Product Market Mix..........................................................................................................13

Competitive Advantage Through Resource Based Strategies...................................14

The extent of competitive advantage established................................................................15

Sustainability of Resource Based Advantages....................................................................16

Appropriability of Resource Based Advantages..................................................................18

Final Considerations...................................................................................................20

Bibliography and References.....................................................................................21

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Table of FiguresFigure 1: The Business Model Mediates between the technical and Economic Domains

(Source Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value

from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies,”

Harvard Business School, pp 32.).....................................................................................5

Figure 2: The relationships among resources, capabilities and competitive advantage.

(Source: Grant, R.M. 1998. “Contemporary Strategy Analysis.” Blackwell Publishers Inc.)

........................................................................................................................................... 6

Figure 3: Some Common Long Run Dynamics (Source: Jan W. Rivkin)..................................8

Figure 4: A framework on types of competition to manage emerging technologies. (Garraffo,

F. 2001. “Types of Coopetition to Manage Emerging Technologies”. University of Catania

– Department of Economics and Business Management. Available from:

www.sses.com/public/events/euram/complete_tracks/coopetition_strategy/garraffo.pdf.

Accessed [29 July 2002].)..................................................................................................9

Figure 5: Porter's Generic Strategies (Source: Michael Porter, Competitive Strategy,1980). .12

Figure 6: Ansoff's Matrix (Ghemawat, P. 1999. “Strategy and the Business Landscape”.

Addison Wesley Longman Inc.).......................................................................................13

Figure 7: A framework for analyzing resources and capabilities (Source: Grant, R.M. 1998.

“Contemporary Strategy Analysis.” Blackwell Publishers Inc.).........................................14

Figure 8: The Rent Earning Potential of Resources and Capabilities (Source: Grant, R.M.

1998. “Contemporary Strategy Analysis.” Blackwell Publishers Inc.)...............................15

Figure 9: Responding to Threats to Sustainability (Ghemawat, P. 1999. “Strategy and the

Business Landscape”. Addison Wesley Longman Inc.)...................................................16

Figure 10: Organizational Designs for Corporate Entrepreneurship (Source: R.A.Burgelman,

“Designs for Corporate Entrepreneurship in Established Firms,” California Management

Review (Spring 1984), pp. 154-166.)...............................................................................20

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MBL 324-5 Student No: 750-163-3

Assignment task: Critically evaluate Microsoft's strategy from 1995 to 2001

Introduction

The history of Microsoft can be divided into four stages: the startup (1975 - 1980), the MS-

DOS (Disk Operating System) era (1980 – 1990), the Windows era (1990 – 1995) and the

Internet era (1995 –2000)1.

According to Bill Gates, “You have to have as much of a single strategy as possible. There

are separate businesses and there are separate competitive battles2.” Initially Microsoft was a

traditional software business that sold packaged software. It’s strategy and vision was very

clear, “to place a PC on every desk and in every home running Microsoft software3”.

Coinciding with the departure of Bill Gates as CEO in January 2000 to be replaced by Steve

Ballmer, this strategy appears to be evolving. Microsoft is now beginning to transform itself

into a software service company that will rent rather than sell it’s software to users. Their new

vision and strategy is to “empower people through great software – any time, any place and

on any device4.” These two different strategies have very different business and revenue

models.

The Microsoft Network’s (MSN) strategy of delivering software services over the internet will

be instrumental in helping Microsoft achieve it’s latest vision. Certainly MSN’s development

into a major portal gives the impression that Microsoft is also joining the battle to control the

gateways to the internet. More recently, with the release of the Xbox, Microsoft has turned it’s

attention to also controlling the living room.

In analysing the company’s performance over the last decade it is clear that the main reason

for their success is the adoption of appropriate business models for bringing their

technologies and products to market. Certainly their products and technologies have never

been superior, in fact Microsoft developed a reputation as an imitator whose products were

too complicated to learn and not quite up to market leader standards, especially in it’s earlier

releases. Industry pundits joked about never buying a Microsoft Product if it was called “1.0”.5

A good example of where Microsoft’s technology was inferior but where they gained

dominance is the Windows operating system, which now run’s on 90% of PC’s worldwide.

Certainly Apple was ahead of Microsoft in the development of it’s operating system. However,

they failed to license their technology and operating system to obtain maximum value.

Microsoft effectively copied this operating system and licensed it to run on all IBM-

compatibles. It also contracted with Hardware suppliers of personal computers to have the

1 Johnston, C., Rukstad, M. and Yoffie, D. 2000. “Microsoft, 2000.” Harvard Business School Case #9-700-071.2 Greene, J. “Microsoft’s Big Bet,” Business Week, October 30, 2000, p.152.3 Johnston, C., Levine, T., Rukstad, M. and Yoffie, D. 2001. “Microsoft in 2002.” Harvard Business School Case #9-702-4114 Johnston, C., Rukstad, M. and Yoffie, D. 2000. “Microsoft, 2000.” Harvard Business School Case #9-700-0715 Johnston, C., Rukstad, M. and Yoffie, D. 2000. “Microsoft, 2000.” Harvard Business School Case #9-700-071.

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operating system pre-loaded on their machines when they were distributed. This is an

example of how a superior business model overcame superior technology and Microsoft has

consistently managed to do this over time.

This can be illustrated diagrammatically as shown in Figure 1.

Technical Inputs: e.g., feasibility,

performance

Economic Outputs: e.g., value, price,

profit

Business Model:

- Market- Value Proposition

- Value Chain- Cost and Profit- Value Network

-Competitive Strategy

Figure 1: The Business Model Mediates between the technical and Economic Domains (Source Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies,” Harvard Business School, pp 32.)

The business models used by Microsoft together with the appropriate resources have enabled

them to achieve their vision and this will be discussed in more detail in the proceeding

paragraphs.

Competitive Advantage

Microsoft has mixed it’s superior resources and positioning capability in such a way as to

ensure that it maintains and sustains it’s competitive advantage in the industry.

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True, Microsoft is a monopoly, which gives it unique advantages; but what really makes it

lethal is how it combines that brute power with some of the better brains in business.

Microsoft has figured out how to execute on things that other companies talk about but often

don't do: It innovates relentlessly, strategises tirelessly, and, when the time calls for it, shows

limitless patience. Microsoft just keeps coming -- and it has nearly $40 billion in cash that

allows it to fling money at problems ... and to wait for opponents to stumble6

The figure below how a company should combine it’s resource capabilities and positioning to

maintain create a competitive advantage.

Figure 2: The relationships among resources, capabilities and competitive advantage. (Source: Grant, R.M. 1998. “Contemporary Strategy Analysis.” Blackwell Publishers Inc.)

6 Schonfeld, E and Mount, I. 2002. “Beating Bill.” Business 2.0 http://www.business2.com Available from: http://www.business2.com/articles/mag/0,1640,40438,00.html Accessed [29 July 2002].

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COMPETITIVE ADVANTAGE STRATEGY

INDUSTRY KEY SUCCESS FACTORS

ORGANIZATIONALCAPABILITIES

RESOURCES

TANGIBLE-Financial-Physical

INTANGIBLE-Technology-Reputation

-Culture

HUMAN-Specialised skills and knowledge-Communication and interactive abilities-Motivation

http://www.business2.com/articles/mag/0,1640,40438,00.html

http://www.business2.com/

MBL 324-5 Student No: 750-163-3

Competitive advantage through Positioning

Drawing the boundaries

Horizontal Scope

Microsoft’s core products and services are operating systems/languages and software

applications. The two product streams accounted for close to 90% or revenue as at the end of

1999.

Vertical Scope

Microsofts operating system Window’s is sold through both retail and OEM (original

equipment manufacturer, such as Compaq) channels, but their sales volume comes

predominantly from OEM’s. This means that most of it’s operating system software is

pre-loaded onto the appropriate PC’s before it is even sold.

Software applications is a different market altogether. Whilst operating systems are

sold mainly through OEM’s, applications are sold through a myriad of channels,

including computer companies, corporate site licences, various retails channels and

the internet.

Geographic Scope

Microsoft is a global player. Their revenue comes from a variety of channels

worldwide with the South Pacific and American region accounting for 40% of their

revenue as at 2001. OEM sales accounted for another 30% whilst the rest of the

globe accounted for the other 30%.

Mapping Key Relationships

Competitive Dynamics

An analysis of Microsoft in relation to Porter’s five forces adapted by Rivkin (to include

complementor’s) as shown in fig. 3 reveals the following

Threat of new entrantsIn this particular industry the threat of new entrants is extremely high. This is largely due to

the fact that new technologies are constantly emerging and any company that embraces such

new technologies can become successful very quickly. Two examples that come to mind are

Netscape and Linux. At the beginning of the period under analysis, namely 1995, Microsoft

looked as though it might miss the Internet Tidal wave. However a now infamous memo from

Bill Gates started the turnaround of the company. Microsoft was able to effectively obliterate

Netscapes market share by amongst other things ensuring that it’s version of the browser

called Internet Explorer was bundled with it’s Windows operating system (which was running

on most desktop computers in the world). How it appears to compete with Linux remains to be

seen but it certainly looks as though they will have to move towards a more open source

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software7 development model rather than controlling the code of it’s software so that it cannot

be shared. Control of distribution channels and established market share has build barriers to

entry but stopping a new technological development can be very difficult even if these barriers

are in place.

Figure 3: Some Common Long Run Dynamics (Source: Jan W. Rivkin)

Bargaining Power of Suppliers I would rate this as low. Microsoft’s main supplier is labour. Being a successful software

development house like Microsoft usually means that there is no shortage of people who want

to work for you. This places Microsoft in a good bargaining position.

Bargaining Power of CustomersI would rate this as low. When your desktop computer comes loaded with Windows there is

not much you can do. Microsoft relies on the fast that it has much more control over the

distribution network than the consumer and has leveraged this very effectively. Most people

who receive a PC preloaded with Windows will not take the time and effort to load a new

operating system such as Linux. Following on from this, when you now need a spreadsheet

package you are most likely to choose Office since it operates on the Windows platform and

everyone else is using it. The main reason for low customer and buyer power, however, is

fragmentation and low concentration levels.

Availability of complements/coopetitionAn addition to the original Porter’s five forces is the availability of complementors. The

relationship between Windows and Intel referred to as Wintel illustrates how two major

7 A method and philosophy for software licensing and distribution designed to encourage use and improvement of software written by volunteers by ensuring that anyone can copy the source code and modify it freely.

The term "open source" is now more widely used than the earlier term "free software" but has broadly the same meaning - free of distribution restrictions, not necessarily free of charge.

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Threat of new entry-Decline in economies of scale+ customer heterogeneity > fragmentation of market into niches-Escalation of sunk costs > concentration-Emergence of switching costs > entry deterred

Rivalry among existing competitors-Shift in Industry Growth-Change in mix between fixed and variable costs-Emergence of dominant design or product-Consolidation-Fragmentation/new entry

Threat of Substitutes-Emergence of a new substitute-Improvement or decline in the relative price performance of a substitute-Increase in buyer comfort with a substitute-Change in barriers to entry in substitute market

Bargaining Power of Suppliers-Concentration or fragmentation of suppliers-Forward-integration-Improvement in supplier information-Surge or decline in supply-Emergence of substitute inputs-New means for coordinating with suppliers

Availability of Complements-Emergence of new complements-Change in barriers to entry in complement market

Bargaining Power of Customers-Concentration or fragmentation of buyers-Backward-integration-Improvement in buyer information-Surge or decline in demand-Emergence of new distribution channels-New means for coordinating with suppliers-Shifts in customer tastes

MBL 324-5 Student No: 750-163-3

competitors co-operated with each other so as to obtain dominance in the PC market . Intel

wanted to bring its hardware in the form of Microchips to market whilst Microsoft wanted to

bring it’s software to market. This resulted in a relationship spanning more than a decade

between two competitors

Microsoft continues to effectively use coopetition as an effective tool for establishing and

maintaining it’s competitive advantage. An interesting application of this are it’s efforts to set a

standard for mobile Wireless operating systems based on Windows (Ancarani, 2001).

Microsoft’s goal is to transfer the standard of Windows, Windows CE and Windows Pocket

PC into the wireless multimedia applications. It has formed a “network of innovators”

consisting of Microsoft, AT & T, British Telecom and Qualcomm. It has found itself competing

with another “network of innovators” or co-opetition/joint venture called Symbian which

comprises Nokia, Ericsson, Motorola and the leading company in mobile digital computing,

Psion. This is a typical example of how Microsoft is developing alliances with competitors to

set standards for technology developments

The framework in figure 4 shows how these types of coopetitive exercises can be ranked. In

terms of the Wintel agreement I believe that Microsoft has moved through 3 different stages

of coopetition with Wintel as shown in the diagram by the arrow

Figure 4: A framework on types of competition to manage emerging technologies. (Garraffo, F. 2001. “Types of Coopetition to Manage Emerging Technologies”. University of Catania – Department of Economics and Business Management. Available from: www.sses.com/public/events/euram/complete_tracks/coopetition_strategy/garraffo.pdf. Accessed [29 July 2002].)

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High Standard Setting Business Integration

Low Knowledge Exchange Cooperative R& D

Low High

Level of Commitment on technology Developments

Leve

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Rivalry amongst existing competitorsI would rate this as high. Although Microsoft has obtained dominance in the in the operating

system and software applications market this dominance is continually being threatened.

Microsoft has responded to these threats ensuring that it is increasingly difficult to switch to its

products but not from them.

Some interesting examples or industry rivalry are now discussed. Apache Web Server

software continues to hold it’s own in the market for Web server software. It’s success is

based on the open source model. Microsoft has once again responded to this by bundling

Internet Information Server free with Windows NT and 2000 Server

The emergence of Linux in 1998 also raised a new threat to Microsoft operating systems and

they have gained significant market share in the server market. Microsoft has responded to

this with it’s .NET strategy which is aimed at trying to develop an operating system for the

internet. Star Office, Sun systems new office suite which also operates on an open source

model is also beginning to make inroads into the market. The advantage that this office suite

has is that it can work on multiple different operating systems. However there are still

compatibility issues. E.g. can users who develop a spreadsheet in Star send it to Excel users.

This may seem a trivial issue, however, the implications are important since most Office users

used Microsoft. I believe, however, that in order for Microsoft to respond effectively to this

rivalry they will have to adapt their office software model to allow customers to choose office

products tailored to their individual needs. This would mean someone only wanting word

should only have to pay for that software rather than the entire suite.

Threat of imitation/substitutesI would rate this as high. New business models are constantly being adopted all the time and

software design ideas are often copied. One practice that Microsoft has implemented is to buy

up new technologies, products and new business models before they become a threat. A

prime example of this was it’s attempted acquisition of Intuit.

Dynamic thinking – future view

With the emergence of Linux this has made the market realise that Microsoft can be

challenged. Cracks are now beginning to appear in the Wintel relationship. Intel is now

gearing it’s chip development to work with other operating systems rather than just Microsoft.

This has a ripple effect in that ISV’s (independent software vendors) will now tailor their

software to work on multiple platforms rather than just Microsoft. The impact on software

applications such as Office is that it will lose market share due to the fact that it runs only on

Windows. Initially Office gained Market share when users who were moving from DOS to

Windows needed Office software that ran with Windows. Ironically the very reason for Offices

success may now cause it’s demise. However, one option left to Microsoft is to make office

compatible with other operating systems. Applications such as Star Office will by default

increase market share since it can run on Multiple different platforms not just Windows.

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Analysis of input costs and willingness to pay

Microsoft is very effective at driving down the cost of its products and at the same time

increasing the customers willingness to pay. Driving down costs is particularly evident in the

way that it distributes its software on OEM hardware. Although Microsoft sold Os’s (operating

systems) separately in the early days of the industry most computer manufacturer’s would

load the program on the computer’s hard disk and reproduce the relevant documentation.

Microsoft’s only variable production costs after initial development was to ship a single master

copy of the software for the OEM to reproduce. The actual realized price to Microsoft for MS-

DOS and Windows averaged about 15$ a piece.

In my opinion the willingness to pay is most increased by the way bundles and packs its

products with additional software and utilities. Again an interesting comparison is Windows

and Linux. Windows comes bundled as an entire software package. Linux is effectively a set

of components that a user has to put together to form an operating system. The user can

choose from more than ten different types of drive explorers whereas in window’s you have to

use Windows explorer. Although Linux is free, ISV’s put together there own versions of Linux

by assembling a certain set of open source components. This results in different breeds of

Linux such as Red Hat and Suse Linux for which the user has to pay. The underlying benefit

to the consumer of open source systems is that you have a choice, with Microsoft you don’t.

SWOT Analysis

My assessment of Microsoft’s strengths, weaknesses, opportunities and threats is as follows

Strengths Strong leadership

Good skills

Large installed base or market share in operating systems and applications software

Large reserves of cash – means it can grow very quickly through acquisition and also buy

up new technologies

Weaknesses Proprietary Software – code not open

Being large sometimes makes it difficult to move quickly

Revenue model does not result in sustainable growth – once a product has been sold that

is it, the only way to make more money is by selling upgrades

Opportunities Internet and Web Services

Proliferation of devices

Media Convergence

Improved Communications

New revenue models such as renting software.

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Threats Open Source Movement – means that most software will become free and delivering

good service will be where the money comes from.

DOJ (Department of Justice). Microsoft is perceived by the United States Government as

being a monopoly. This means it’s every move is being watched.

Shaping or adapting to the business landscape

Microsoft’s Strategy

Based on the discussions above my perception of Microsofts existing strategy for their two

core product groups, operating systems and software applications is indicated in the matrix

below. The arrows indicate where I believe Microsoft will need to move in the future in order

to sustain the success that they have had so far

Figure 5: Porter's Generic Strategies (Source: Michael Porter, Competitive Strategy,1980)

What drives this strategy

In the future there will be a need for highly customisable software applications that can be

tailored to the individual needs of the user. Software will be “componentised” so that users

can choose the individual components and make their own bundle of software. This will apply

to operating systems as well as other software applications.

Product Market Mix

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Broad Target COST LEADERSHIP BROAD DIFFERENTIATION

Narrow Target COST FOCUS DIFFERENTIATION FOCUS

COST DIFFERENTIATION

COMPETITIVE ADVANTAGE

CO

MP

ETI

TIV

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CO

PE

OPERATING SYSTEMS SOFTWARE APPLICATIONS

MBL 324-5 Student No: 750-163-3

Figure 6: Ansoff's Matrix (Ghemawat, P. 1999. “Strategy and the Business Landscape”. Addison Wesley Longman Inc.)

The above matrix shows what product and market strategy will be needed to achieve the

strategies outlined in Fig. 5. In order to make Microsoft products more open and customisable

considerable product development will be necessary. Microsoft’s .NET strategy which

involves effectively developing an operating system for the internet falls under new market

and new product. I suspect that at then end of the day it’s existing operating systems and

software applications will become merged into .NET. This means that software will be a set of

components distributed over the internet that are platform independent i.e. they can run on

Linux, Windows and Unix. As with the internet tidal wave that it faced in 1995, if Microsoft

does not adhere to this type of strategy there existence will come under considerable threat.

Their commitment to Product Development for the future is evidenced by the departure of Bill

Gates as CEO to focus on Product Development.

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PR

ES

EN

T

MARKET PENETRATIONCONSOLIDATION

LIQUIDATIONPRODUCT DEVELOPMENT

NE

W MARKET DEVELOPMENT DIVERSIFICATION

PRESENT NEW

PRODUCT/SERVICE

MA

RK

ET

Existing OS and Software Applications

.NET

MBL 324-5 Student No: 750-163-3

Competitive Advantage Through Resource Based Strategies

In addition to the Microsoft’s ability to position itself in a certain way to achieve competitive

advantage it also has certain resources which it should leverage in order to achieve and

sustain it’s competitive advantage. As indicated in fig. 2 one should use a resource based

approach or positioning or both to achieve a competitive advantage.

Figure 7: A framework for analyzing resources and capabilities (Source: Grant, R.M. 1998. “Contemporary Strategy Analysis.” Blackwell Publishers Inc.)

1. Resources – The companies main resources are intangible rather than tangible as it does

not have much in the way of physical resources. Tangible resources are their strong

financial and cash position. Intangible resources consist of technological resources,

reputation and Human Resources. Technological resources include stock of technology in

the form of proprietary technology (patents, copyright, trade secrets) and expertise in the

application of technology (know-how) as well as resources for innovation: research

facilities, technical and and scientific employees. Their reputation consists of the strong

brands that Microsoft has developed for their software. Human Resources consist of

training and expertise (considered high), adaptability of employees (also high) and

commitment and loyalty of employees – high due to large stock offerings given to

employees.

2. Capabilities – Microsofts strong cash position means that they can spend incredible

amounts on Research and Development. They have consistently spent 10 –15% of their

revenues on research and development. Their cycle time as well as speed for

development of innovative and new products is high as a result of high demand in the

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1.Identify the firm's resources; appraise strengths and weaknesses

2.Identify capabilities

3.Appraise the rent earning potential of resources/capabilities

4.Select a strategy

RESOURCES

CAPABILITIES

POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

STRATEGY

5. Identify resource gaps that need to be filled.

MBL 324-5 Student No: 750-163-3

market . This was evidenced by the quick release of numerous upgrades to their browser

in order to catch up with Netscape. By leveraging their skilled level of employees as well

as their power to buy small new companies with great ideas, Microsoft has come up with

comprehensive product designs. Their low distribution costs due mean that the company

has more money to spend on marketing and sales activities on which the company spends

approximately 35-40% of its revenues. Microsoft also has a strong leadership and

management team.

3. The bottom line is “The company’s power rests with the quality of it’s people and the style

of management8”. The profit earning potential of these resources and capabilities has

proved to be extremely high. Microsoft has continued to return consistently high profit

margins as a result of keeping costs of production down whilst maintaining willingness to

pay. The profit earning potential of the firm should be assessed using the model outlined in

fig. 8 below

Figure 8: The Rent Earning Potential of Resources and Capabilities (Source: Grant, R.M. 1998. “Contemporary Strategy Analysis.” Blackwell Publishers Inc.)

The extent of competitive advantage established

Scarcity - The skilled people combined with a large R& D component and effective

management and leadership is certainly a hard mix to come by and maintain.

8 Yoffie, D., Khanna, T and Ganot, I. 1995. “Microsoft, 1995.” Harvard Business School Case #9-795-147.

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THE PROFIT EARNING

POTENTIAL OF A RESOURCE OR

CAPABILITY

APPROPRIABILITY

SUSTAINABILITY OF THE COMPETITIVE

ADVANTAGE

THE EXTENT OF THE COMPETITIVE

ADVANTAGE ESTABLISHED

Scarcity

Relevance

Durability

Transferability

Replicability

Property Rights

Relative Bargaining Power

Embeddedness of Resources

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Relevance – The resources and capabilities mentioned above are certainly relevant to

Microsofts success within the industry.

This unique combination of skills has resulted in Microsoft attaining a high competitive

advantage within the industry but this is only useful is this can be sustained and appropriated

which strangely enough Microsoft has managed to do as outlined below

Sustainability of Resource Based Advantages

The diagram below will be combined with fig.8 to explain the sustainability and appropriability

of Microsoft’s competitive advantage. My initial comment is that Microsoft has been extremely

good at maintaining a competitive advantage. They have used all the tricks in the book and

invented new ones. However, this has resulted in them getting into trouble with the DOJ and

they are now also facing a lot or resistance from the public at large as its recent trials in the

courts have highlighted their control and domination tactics.

Figure 9: Responding to Threats to Sustainability (Ghemawat, P. 1999. “Strategy and the Business Landscape”. Addison Wesley Longman Inc.)

DurabilityThe increasing pace of technological is shortening the useful life of most software products.

Despite this Microsoft’s flagship product offerings Windows and Office have maintained their

dominance in the market over the last 5 years. This is due to the fact that Microsoft regularly

upgrades its products. It has to do this to survive as once the market is saturated the only way

to make more money out of an existing product offering is upgrade it. Microsoft upgrades its

products every 2-3 years. These upgrades are as a result of introduction of new technologies,

such am moving from a 16bit to 32 bit architecture as well as due to numerous requests from

it’s customers for enhanced functionality. In between these periods Microsoft releases patch

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Added Value

Appropriated Value

Responses to ImitationBuilding Barriers-Economies of scale and scope-Learning/Private Information-Contracts and Relationships-Network Externalities-Threats of Retaliation-Time Lags-Strategic Complexity-Upgrading

Response to Slack-Gathering information-Monitoring Behaviour-Offering Performance Incentives-Shaping norms-Bonding Resources-Changing Governance-Mobilizing for changer

Responses to substitution-Not responding-Fighting-Switching-Recombining-Straddling-Harvesting

Responses to Holdup-Contracting-Integrating-Building Bargaining Power-Bargaining Hard-Reducing asset specificity-Building Relationships-Developing Trust

MBL 324-5 Student No: 750-163-3

sets which do not significantly upgrade the product but are mainly aimed at fixing bugs.

Despite it’s maintaining product durability, the new product distribution architecture brought in

by the internet has not yet been sufficiently tapped by Microsoft. This architecture is client

server or thin client where very little software sits on the client and most of the software sits

on a server. A typical example of how this architecture would benefit Microsoft and it’s users

is the Y2K scenario. Upgrades performed on PC’s necessitated upgrade software having to

be run on every single client machine. In an organisation with +/-200 this could be very

difficult. However, with a web based architecture model in place an upgrade would only have

to be done on the server that all the clients were accessing. With it’s move into web services

and .NET we should see an improved model for supporting and distributing software evolving.

TransferabilityAlthough staff can easily transfer the option of having shares in the company has been a very

attractive one until the recent stock market slump. I believe the value of employees’

shareholdings and the introduction of such a scheme by Microsoft was a brilliant move to

ensure employee retention and enhanced motivation.

Firm specific resources such as the significant number of knowledge bases built up by

Microsoft over years of Research and Development is not easily transferable and this would

tend to increase the sustainability of their competitive advantage.

ImitationI believe that the software development process in use by Microsoft has build up capabilities

based on complex organisational routines. The efficiencies in software development will be

very hard to replicate unless bought. Microsoft has been very effective in developing contracts

and relationships that ensure it’s business model it not replicated by it’s competitors these

include contracts with major OEM’s as well as chip manufacturers such as Intel. Microsoft has

often threatened with retaliation when competitors have entered their space. This became

evident in the recent testimony of Steven D. McGeady (Vice President of Intel) who took the

stand in the U.S governments antitrust suit against Microsoft. The Intel exec told the court that

in August, 1995, weeks before the launch of Windows 95, Microsoft threatened not to support

future Intel processors unless the chipmaker stopped writing multimedia software that

Microsoft saw as competitive with its own. The threat, McGeady said, ''was both credible and

fairly terrifying.'' Intel, McGeady noted, dropped its software soon after. But he conceded that

Intel also was late to market9.

SubstitutionMore broadly substitution should be envisioned as the threat that new business models will

replace old ones. Microsoft has stuck to the same business model for the past 10 years.

Although they managed to make a significant turnaround in their internet strategy in 1995 I

believe they have been to slow in adopting a web based open source architecture model.

9 Reinhardt, A. 1998. “The Wintel of their discontent”. Businessweek.com. Available from: http://www.businessweek.com/1998/47/b3605086.htm Accessed [29 July 2002]

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Their .NET strategy launched in 2001 is a slow response to the release of Linux in 1998 and

the web services architecture that is platform independent and has been used by other

competitors such as Oracle and Sun for several years.

The Java platform and programming language represent threats to Microsoft’s platforms and

developer-tools businesses, for example, and open source (and quasi-open source) initiatives

threaten to redefine the traditional business models for categories such as productivity suites

(e.g., free Sun StarOffice versus Microsoft Office) and application servers (e.g.,

Apache/Tomcat versus Microsoft IIS).

Some people believe the future of the PC itself is in doubt, with Microsoft arch-rivals

promoting a "Post-PC" vision, in which PCs are relegated to rudimentary roles as mere

Internet endpoints, cumbersome cousins to svelte, emerging Internet appliances. Microsoft,

unsurprisingly, envisions a "PC plus" future, in which PCs evolve to complement emerging

device types but continue to hold their central roles in the computing and communication

landscape10.

Appropriability of Resource Based Advantages

There are two systematic threats to value appropriation over time: Holdup and Slack. Holdup

threatens to divert value to buyers, suppliers, complementors, or other players in the firm’s

network. Slack, in contrast, threatens to dissipate value over time11. Microsoft taken several

effective measures to remedy the threat of holdup and slack

HoldupOf all the different tactics used by Microsoft in responding to holdup, most of which have been

mentioned, probably the most widely used one is bargaining hard. Microsoft has used it’s

dominance in the marketplace to in turn dominate the players in it’s value chain. Although this

has helped sustain it’s competitive advantage the DOJ now sees it as a monopoly. This was

amongst other charges leveled against Microsoft such as: -

Attempted Collusion – trying to get Netscape to divide the market for Internet browsing

software.

Product Linking – trying to stifle competition by bundling a separate product – its Internet

Browser – to its Monopoly product, the windows operating system.

Exclusionary Contracts – using it’s market power to prod internet service providers (ISP’s)

like America Online (AOL) and personal computer makers like Compaq into exclusionary

agreements that prohibited them from promoting or distributing Netscape’s browser12.

Slack

10 Patricia Seybold Group, 2001. “Understanding Microsoft's Strategy: .NET, XP and Beyond.”11 Ghemawat, P. 1999. “Strategy and the Business Landscape”. Addison Wesley Longman Inc.12 Johnston, C., Levine, T., Rukstad, M. and Yoffie, D. 2001. “Microsoft in 2002.” Harvard Business School Case #9-702-411.

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Slack can be defined as the extent to which the value appropriated by an organization falls

short of the amount potentially available to them. Although late in it’s response I believe that

Microsoft’s most effective responses to this have been: -

1. Changing governance

The stepping down of Bill Gates as CEO has sent a clear message to the market that

Microsoft is serious about new product development and moving into the new era of web

services and open source software with it’s .NET strategy.

2. Mobilizing for change

The replacement of Bill Gates by Steve Ballmer has begun to prepare the organisation for

changing it’s business model and has presented the organisation with a new vision.

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Final Considerations

It is my belief that in line with Miscrosoft moving to a new business model they should re-

assess the viability of all of it’s businesses. There is definitely a need for them to focus on

their core business whilst continuing to exploit new products that have offerings which

complement it’s already successful operating system and software applications business.

Since the value of intellectual property that Microsoft owns is extremely high they need to

ensure that they leverage the value of this property in such a way that they stay focused on

their core business

Unrelated

3Special Business Units

6Interdependant Business

Units

9Complete Spinoff

Partly Related

2New Product Department

5New Venture Division

8 Contracting

Strongly Related

1 Direct Integration

4Micro New Venture

Department

7Nurturing

Very Important Uncertain Not important

Ope

ratio

nal R

elat

edne

ss

Design Alternatives

Strategic Importance

Figure 10: Organizational Designs for Corporate Entrepreneurship (Source: R.A.Burgelman, “Designs for Corporate Entrepreneurship in Established Firms,” California Management Review (Spring 1984), pp. 154-166.)

The figure above suggests different alternatives for projects or business operations currently

underway by the company. Each business area should be assessed in relation to it’s

operational relatedness and strategic importance and a decision taken as to how that

business should be dealt with.

A typical example is the Home computing division. My personal belief is that this business is

not strategically important to Microsoft and at the least is Partly related in terms of operational

relatedness. Hence, this division should be contracted out or completely spun-off.

Other business areas where a clearer strategy needs to be defined are the SQL – server

database and the Great Plains Accounting Software package. Microsoft has approximately

US$ 40 billion in cash at it’s disposal so it can easily grow it’s business via acquisition rather

than organically. As it enters into the new era where web services (effectively developing an

operating system for the internet) are now going to dominate there is a need for it to focus on

and develop it’s core competencies.

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Bibliography and References

Burgelman, RA., Maidique, MA. and Wheelright, SC., 2001. “Strategic Management of

Technology and Innovation.” McGraw-Hill Irwin.

Carroll, P. 1996. “Inside Microsoft: The Untold Story of How the Internet Forced Bill Gates to

Reverse Course.” Business Week, July 15.

Chesbrough, Henry, 2000. “The Role of the Business Model in Capturing Value from

innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies.” Harvard

Business School

Garraffo, F. 2001. “Types of Coopetition to Manage Emerging Technologies”. University of

Catania – Department of Economics and Business Management. Available from:

www.sses.com/public/events/euram/complete_tracks/coopetition_strategy/garraffo.pdf.

Accessed [29 July 2002].

Ghemawat, P. 1999. “Strategy and the Business Landscape”. Addison Wesley Longman Inc.

Grant, R.M. 1998. “Contemporary Strategy Analysis”. Blackwell Publishers Inc.

Greene, J. “Microsoft’s Big Bet.” Business Week. October 30, 2000. p.152.

Johnston, C., Rukstad, M. and Yoffie, D. 2000. “Microsoft, 2000.” Harvard Business School

Case #9-700-071.

Johnston, C., Levine, T., Rukstad, M. and Yoffie, D. 2001. “Microsoft in 2002.” Harvard

Business School Case #9-702-411.

Kwak, M. and Yoffie, D. 1998. “The Browser Wars: 1994 – 1998.” Harvard Business School

Case #9-798-094.

Levinson, G and Nanda, A. 1997. “Vermeer Technologies (D): Making Transitions.” Harvard

Business School Case #9-397-082.

Munro, N. 2000. “A Window in Microsoft’s Strategy.” National Journal, 32(43): 3336.

Patricia Seybold Group, 2001. “Understanding Microsoft's Strategy: .NET, XP and Beyond.”

Pelline, J. 1998. “Coopetition Gaining Acceptance.” Cnetnews.com. Available from:

http://news.com.com/2100-1001-209388.html?legacy=cnet. Accessed [29 July 2002].

Reinhardt, A. 1998. “The Wintel of their discontent”. Businessweek.com. Available from:

http://www.businessweek.com/1998/47/b3605086.htm. Accessed [29 July 2002]

Schonfeld, E and Mount, I. 2002. “Beating Bill.” Business 2.0 http://www.business2.com.

Available from: http://www.business2.com/articles/mag/0,1640,40438,00.html. Accessed

[29 July 2002].

Schonfeld, E and Mount, I. 2002. “New Rules for Battling a Goliath.” Business 2.0

http://www.business2.com. Available from:

http://www.business2.com/articles/mag/0,1640,40459,FF.html. Accessed [29 July 2002].

Van Slambrouck, P. 1998. “Friend, foe or both? Microsoft Case highlights coopetition”. The

Christian Science Monitor. Available from:

http://www.csmonitor.com/durable/1998/11/24/p2s2.htm. Accessed [29 July 2002].

Yoffie, D., Khanna, T and Ganot, I. 1995. “Microsoft, 1995.” Harvard Business School Case

#9-795-147.

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microsoft, 1995 - richard byrom · web viewfigure 5: porter's generic strategies (source:...

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