The Secret of How Microsoft Stays on Top

Critics say Microsoft's incredible two-decade run at the top of the computer industry has less to do with innovation than it does with bully tactics. But new research from Harvard Business School professors Marco Iansiti and Alan MacCormack suggest a different reason: the company's ability to spot technological trends and exploit key software technologies.
by Sean Silverthorne

Perhaps no technology company outside of IBM has been able to keep on top of the industry as much as Microsoft. What's more, Bill Gates & Co. have achieved this success during times of incredible technological transformation, usually just the period when titans are vulnerable to being knocked off by disruptive technologies.

Critics often argue that Microsoft can't innovate its way out of a paper bag—instead it has used its monopoly position to stamp out competition and force an industry to bend to its standards. But now comes a serious and much-to-be discussed study of the inner workings of the company from Harvard Business School professors Marco Iansiti and Alan MacCormack. Their take: Microsoft wins through effective management of its intellectual property and an ability to spot and react to important trends before they take hold.

In this e-mail interview with HBS Working Knowledge editor, Sean Silverthorne, Iansiti and MacCormack discuss their findings.

Silverthorne: Although many large companies have been swamped by so-called disruptive technologies, Microsoft has remained at the top of its game for more than two decades—a time of tremendous technological innovation. What are the "dynamic capabilities" that contribute to its long lasting success?

Iansiti and MacCormack: The essence of our argument is that the key to Microsoft's success is the way it manages its intellectual property. By this we don't just mean patents, but the broad base of knowledge that the company has built over time, which is largely embedded in its software code libraries. This base is critical to internal innovation, as it makes product development more efficient and powerful. Additionally, it spawns external innovation, in Microsoft's large community of partners, which now numbers almost 40,000 firms.

To understand the way Microsoft manages IP, you have to go back to the roots of the company. Back in the late 1970s, its first products were aimed at helping other programmers develop applications for the computing hardware of the day. It focused on developing programming platforms, in contrast to most other firms who focused on stand-alone applications. It was an approach that permeated both their tools business—the software they provided to other programmers for developing applications; and the operating system business—the software upon which these applications would run.

It was during these early days that Microsoft began to invest in creating libraries of programming "components": building blocks of intellectual property that could be used to develop different software applications. The original impetus was the need to provide programmers with pre-defined interfaces through which they could access commonly used functions and features. Why reinvent the wheel if someone else had already worked out what it should look like? In essence, Microsoft began codifying knowledge and embedding it in a form that could be leveraged, both by itself and others. But it got to decide which components to "expose," and which to keep hidden, providing a mechanism through which its core intellectual property could be protected.

As the company expanded, Microsoft formalized this component framework and developed a "programming model" to go along with it—in essence, defining the way that applications should interact with its preexisting software components. It extended the model to its application business, sharing increasing amounts of code between products like Word and Excel. Over time, as more and more partners signed up to use the model, developing applications for Microsoft's operating systems and using Microsoft's tools in the process, the power of the platform became evident. It was a win-win relationship—the community of development partners received benefits in terms of enhanced productivity, while Microsoft's position was strengthened through the deployment of products that were complementary to its own. This made it tough for competitors. They were not just going head-to-head with Microsoft's products—they were also competing against the repository of knowledge accumulating in Microsoft's component libraries.

By now, you will see that Microsoft was building a rather unique resource. Its approach to software "componentization" allowed the firm to leverage intellectual property across multiple product lines. And it also made it attractive for third-party firms to leverage Microsoft's platform, as opposed to others. But how did this allow the firm to respond effectively to technological change? First, it had an established base of knowledge that could be brought to bear on newly emerging opportunities. Second, it had a well-defined process through which new intellectual property could be codified and integrated into this knowledge base in a way that ensured compatibility with its existing components. And third, it established processes to evolve this knowledge base to ensure it reflected changes in the broader technological context. For example, the programming model was updated in the early 1990s to reflect the increasing use of networks. Then later in the 1990s, Microsoft once again began "re-architecting" its component base to facilitate the delivery of "Web services," applications that can be activated remotely over the Internet.

Only once in fifteen years did Microsoft products fail to win more than 50 percent of these reviews.
—Marco Iansiti and Alan MacCormack

Putting this all together, we see that much of Microsoft's long-term success can be attributed to investments that have created "dynamic capabilities" for responding to technological change. These investments include: the process of software componentization through which it captures and embeds intellectual property in an accessible form; the component libraries that result from this process, which form a vast repository of knowledge that can be leveraged across its product lines; a programming model that allows developers, both inside and outside the firm, to access these components through well-defined interfaces; and the process through which both its software components and programming model are updated to reflect developments in the broader technological context.

Q: Microsoft has been criticized as a company that relies more on predatory tactics than great products and innovation to succeed. What can you say about Microsoft's product development performance over the years?

A: We analyzed the development performance of Microsoft products for the past fifteen years. Our aim was to come up with an objective measure of performance—one that was unrelated to arguments about market power, monopoly position, or predatory tactics. This meant we excluded any consideration of measures like market share or profitability, and focused instead on the ratings given to Microsoft products by independent reviewers. We found that Microsoft products were consistently rated highly when compared to competitive offerings, a result that held true across different product categories and over time. On average, Microsoft products "won" more than two-thirds of the competitive reviews we examined. Indeed, only once in fifteen years did Microsoft products fail to win more than 50% of these reviews. Given the number and diversity of competitors they faced in each different product category, this consistently high performance is striking.

When developers find attractive alternatives to Microsoft technologies as they did when the Internet first emerged—it's not long before the tools division starts to hear about it.
—Marco Iansiti and Alan MacCormack

We also evaluated Microsoft's response to a "technological transition"—a major change in the industry that required the firm to rethink its strategy. We chose to examine the rise of the World Wide Web, given that this transition brought about the rise of a new product category—the Web browser. Microsoft therefore needed to develop a product based on technologies with which it had little previous experience. Our analysis focused on Microsoft's first two internal browser development projects, comparing their performance to a sample of Internet software projects completed at the same time. We discovered that Microsoft's projects exhibited significantly higher productivity than the sample average. Furthermore, we found that the resulting products were rated as equal to or higher in quality than competitive offerings. These results often surprise people, given the perceived wisdom that incumbents have difficulty responding to major technological changes.

Q: Microsoft was originally late in its embrace of the Internet. Yet Bill Gates was able to quickly change strategy to allow the company to become a top competitor in selling Internet-related technologies and services. How did Microsoft accomplish this?

A: In any industry subject to rapid technological change, a firm faces two big challenges. The first is in recognizing the threats (and opportunities) presented by newly emerging technologies. The second is in mounting an effective response to these threats. Microsoft appears to have solved these problems, giving it the ability to quickly adapt to changing circumstances. The way they have tackled each however, differs in nature.

In terms of recognizing potential threats, Microsoft has built-in "sensing" mechanisms to keep abreast of what is happening in the broader technological context. Much of this ability comes from their tools division, which tracks the needs of the many developers worldwide who write for Microsoft platforms. When these developers find attractive alternatives to Microsoft technologies—as they did when the Internet first emerged—it's not long before the tools division starts to hear about it. You also have to realize that Microsoft has several thousand developers inside the company who are constantly examining the potential of new technologies—"lead users" if you like. When all these sources start telling you the same thing, it's hard not to pay attention. Even if it takes a while to work out exactly what should be done.

In terms of responding to potential threats, Microsoft consistently plays to its strengths—its overall platform strategy, its existing knowledge base, and its process of componentization. For example, when developing the new Internet Explorer browser, the development team opted to leverage its existing programming model, despite the fact that this would initially slow the project down. From this point on, competitors in the browser space faced a formidable challenge—they were competing not only against the Explorer team, but also against the continual improvements made to Microsoft's underlying platform over its many years of existence.

Q: What should company leaders everywhere take away from your research in terms of how to compete in the middle of a technological revolution?

Our research highlights two major themes. The first is the importance of taking a proactive approach to managing the development of a firm's intellectual property. We're not talking about patenting strategies here, but rather the set of processes that contribute to building and evolving a firm's knowledge base. These processes fall into four categories: creation/codification; integration/assimilation; application/exploitation; and evolution/adaptation. Inside Microsoft and other successful firms we've studied, managers give careful consideration to how each of these activities is conducted. In doing so, they pay explicit attention to the way these activities interact with processes that leverage the resulting intellectual property assets (e.g., product development).

We're not talking about patenting strategies here, but rather the set of processes that contribute to building and evolving a firm's knowledge base.
—Marco Iansiti and Alan MacCormack

The second theme that emerges from our work is the importance of architecture. This theme emerges at multiple levels—in the design of Microsoft's products, its platforms, and its intellectual property. At the product and platform level, the key idea is that in today's networked economy, no firm can remain an island. Technological innovations are increasingly brought to the market by networks of firms, each focused on only specific pieces of the overall puzzle. Competition takes place both between competing platforms and between products that build on top of these platforms. Managers must therefore make explicit choices about the technology architectures they adopt, deciding what to "design/make" themselves, and what to rely upon others to provide.

With regard to developing intellectual property, our work demonstrates the need for an architectural framework that defines how the various building blocks of IP should fit together. Without such a framework, these efforts are likely to be fragmented and difficult to integrate. At Microsoft, this role is performed by its programming model, which describes the interfaces through which its software components can be accessed. Critically, this model is designed to be flexible enough to facilitate future evolutions in content, as required to reflect changes in the broader technological context.

Q: Gates has said, and history suggests, that Microsoft one day will fail. What will be the company's downfall?

A: If we knew the answer to this question, we'd be rich!

Slightly more seriously, the main threat probably comes from competing platforms—alternative systems that enable large numbers of developers to form competing innovation ecosystems. These other platforms, promoted by competitors such as Sun and IBM, are currently strong alternatives to Windows and the Microsoft Developer Network. One of the most interesting is the Linux/open source platform. This platform has recently become associated with IBM, which has invested resources in its development and extension, and used it to promote complementary hardware, software, and services. However, this is less a story of sudden dramatic failure and more a story of ongoing competition at the platform level. The presence of competing platforms like Linux requires that Microsoft continue to invest in its IP base and integrate new innovations into its own platform. If it fails to do this, it will be certain to lose out to alternatives.

Q: What is the next stage of your research?

A: We have two ongoing streams. The first is additional work with Microsoft and others in the software industry that have adopted similar approaches to managing intellectual property. The aim is to develop a blueprint for the most important processes (e.g., componentization) as well as to assess how we can measure the resources created and the changes subsequently made to these resources to reflect the broader technological context. Our hypothesis is that if we look at the evolution of Microsoft's component base, we'll see greater amounts of change around the time of major technological change, such as the rise of the Internet.

The second stream of research seeks to extend our work into non-software industries, to understand how the dynamics might differ. For example, how would Microsoft's approach translate to the semiconductor industry or the biotechnology industry? Both industries share similarities with software, in that firms codify their intellectual property into libraries that can be reused and extended over time. But do we observe the same dynamics in terms of firm performance? And can we identify similar processes and resources inside these firms? As you can see, we have a long way to go. But we believe that this stream of research has the potential to change the way we think about how firms develop capabilities for competing in environments of rapid technological change.