Strategy: Assignment 1
Microsoft, 1995
Table of Contents
Assignment 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
Table of Figures
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.) 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
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 battles[2].” 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
software[3]“. 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 device[4].” 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 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.
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.
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 stumble[6]
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.)
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 entrants
In 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 software[7] 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 Customers
I 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
