Microsoft Case Study - Competition

In 1975 Microsoft was founded by Bill Gates and Paul Allen, who believed there was tremendous potential in providing software for the personal computer. A key turning point for the company came in 1981 when IBM approached Microsoft to provide an operating system for their forthcoming personal computer release. Although Microsoft did not have an appropriate operating system, they licensed and eventually purchased another company’s version that was later re-branded as MS-DOS. Microsoft sold MS-DOS at a sixth the cost of the competing Digital Research, Inc’s CP/M operating system and continued to easily outsell it. The company repositioned itself during the explosive growth of personal PCs in the early 1980s to become the industry standard.

Microsoft gradually diversified into other technology areas. It targeted market leaders such as WordPerfect in the word processing space and Netscape Navigator for Internet browsing. Although many “Version 1.0” products were poorly received, the company rapidly incorporated new features and quickly released improved versions. By providing general solutions at a low price Microsoft quickly expanded its market share. In addition to developing its own software, Microsoft also acquired over 50 companies when the cost of buying a company was cheaper than the cost of developing its own product.

Despite Microsoft’s dominance in the software market the company continues to keep a keen eye on competition. Even well established product groups within the company such as Microsoft Office do extensive competitive analysis across the market spectrum before beginning development of their next version. Bill Gates has repeatedly asserted that his company is not unassailable and “the next Windows” could allow someone else to usurp Microsoft’s position.

Microsoft has established a mass patenting approach to help protect its market position. With over 3,000 patents in the US and nearly 500 in Europe, Microsoft’s broad intellectual property ownership has caused many companies to inadvertently infringe. The company selectively uses the threat of legal action to protect itself.

Key Lessons on Competition:

• You always have competitors. Be prepared to address new sources of competition. It is almost impossible to predict new trends or new companies that could change a market.
• Learn from your competition. Even if you think you have established a dominant position think critically about what you can learn from competitors. However, competitor-awareness must be balanced with building your own original ideas.
• Defend your market. Patenting is an expensive but powerful means of blocking competition. Evaluate your options carefully and decide if patenting is right for your company.

Other Lessons

• Microsoft seized an explosive growth market. Not only was the personal computer market expanding but the percentage of IBM PCs and clones (which Microsoft provided operating systems for) quickly grew to obtain a majority share of the market by the mid 1980s.
• Although originally working on developing programming languages for the early PCs, the reputation that Microsoft developed put them in the unique position that IBM actually approached them about providing an operating system.
• Microsoft’s focus on providing general software solutions for broad markets made the company highly scalable. This allowed for the company to grow rapidly.