Jean-Jacques PLUCHART December 2008

University professor

University of Paris I Panthéon-Sorbonne

17 rue de la Sorbonne
75005 PARIS
[email protected]

Case study

THE STRATEGIC TRAJECTORY

OF MICROSOFT Corp

Summary

1. Case study text, pages 1 to 12

2. teaching note, pages 13 to 22

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 THE STRATEGIC TRAJECTORY OF MICROSOFT Corp

Case study

The objective of this case study is to trace the evolution of the environment and the transformation.
organizational and cultural of Microsoft Corp, in order to assess the efficiency of its
managerial model and the robustness of its identity scheme.

pages
the development of large systems 2
1.1. From MS-DOS to Windows
1.2. from Windows to Office
1.3. the NT generation

2. the race for technological integration 4

2.1.The emergence of open source software
2.2. the mobile battle
2.3. the challenges of trust

3. the valuation of human resources 7

3.1. a universe of 'smart people'
3.2. management of skills
3.3. the development of leadership

Suggested questions 10

Table 1. Patented products marketed by Microsoft

Table 2. The simplified organization of Microsoft

Bibliographic references

Bartlett C.A., "Microsoft: competing on talent", HBS case study, 2001.

Brynjolfsson E., "Frictionless Commerce", Management Science, March 2000.
Champeaux J & Bret C, The Cyber-enterprise, Dunod, 2000.
Ettighoffer D, The Virtual Company, O. Jacob, 1992.
Goshal S & Bartlett C, The Individual Enterprise, Maxima, 1998.
Hedberg B & others, Virtual Organizations: Discover Imaginary Systems, Wiley, 1997.
Kalika M, E-Management, Ed. Liaisons, 2003
Master B & Aladjidi G, The Business Models of the New Economy, Dunod, 1999.
Magee M, 'Microsoft Longhorn to cost as much as a man on the moon project, Gates says', The Inquirer
October, 2003.
Pluchart J.J., master's strategy, ed. Eska, master collection, 2009.
Rukstad M.G., Yoffie D.B., Johnson C, 'Microsoft in 2002', HBS case study, 2002.
Yoffie D.B., Mehta D.M., Seseri I.S, 'Microsoft in 2005', HBS case study, 2006.
Microsoft annual reports, 1976 to 2006.
Sitesmicrosoft.com; news.com; directionsonmicrosoft.

Keywords

Software engineering, operating systems, software, internet services, leadership.

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 THE STRATEGIC TRAJECTORY OF MICROSOFT Corp

Microsoft Corp has been one of the most value-creating groups for its shareholders since
its foundation in 1975 in Albuquerque. Its capitalization, which reached 338 billion $ at the end of
2007 (three times more than IBM), is one of the highest in stock market history. According to the
Most observers believe that the global leader in personal software owes its profitability
exceptional in the relevance of its research & development strategy, in attractiveness
commercialization of its 180 products - including Windows and Office - and the originality of its
company culture. More than thirty years after its creation by Bill Gates and Paul Allen,
Microsoft Corp continues to pursue its goal of remaining "the global leader in solutions and
computer and communication systems dedicated to individuals and
professionals. However, its engineers seem to be encountering increasing difficulties in
to design, launch, and maintain new systems (like Vista in 2006
etOfficeen 2007); its managers face the complexity of managing an organization
international linked to several hundred partners and employing more than 63,000 employees;
his thousand lawyers struggle to defend the interests of a group regularly accused
of breaches of competition; the departure of its founder in July 2008 calls into question the
group leadership...

The aim of this case study is to trace the evolution of the technological environment
and the organizational and cultural transformation of Microsoft Corp, in order to appreciate
the efficiency of its strategic management.

1. THE DEVELOPMENT OF LARGE SYSTEMS

The construction of Microsoft Corp's competitive advantage relies on the simple vision of a
equipment of all households with personal computers equipped with software
Microsoft. Its cooperation with IBM, both the world's leading computer manufacturer and
the leading publisher of professional software allowed him to establish himself in the 1980s,
in more than three quarters of households, its standards MS-DOS, Windows and Office. But, at
during the following decade, the development of the internet, the emergence of free software,
The advances in multimedia convergence... have increasingly threatened its entrenched position.

1.1. from MS-DOS to Windows

The first software designed at the end of the 1970s by the young team at Microsoft was a
concentrated version of the Basic language intended for the first personal computer (PC) launched by
IBM. After having developed several versions, the founders of Microsoft were tasked
by IBM to design the operating system (OS) for its new PC. Gates transformed
an existing program in a new system - called MS-DOS - running on micro-
intel processor. In 1981, Microsoft engineers developed a first interface
graphical interface (GUI), called Windowset inspired by that of Apple. In 1985, a new system
(OS/2) was launched on the market, usable on both IBM and Macintosh equipment.
Microsoft products thus covered 85% of the global demand for software.
personnel. The value of Microsoft's stock, introduced on the Nasdaq in 1986, doubled in
a few months and surpassed that of IBM in the early 1990s. That same year, the new
the group's headquarters was established on the Redmond campus, near Seattle (the birthplace of
Bill Gates.

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In the early 1990s, continuing the same strategy, the Seattle company launched
simultaneously the Windows 3.0 'IBM compatible' and 'easy-to-use' versions for Apple
Mcintosh OS. The most important part of its production was then sold to assemblers.
from PC (Original Equipment Manufacturers or OEMs); Microsoft's salespeople
They then made efforts to diversify the sales channels by working with major distributors.
of computer equipment (general or specialized), through the granting of exploitation licenses
to companies and administrations equipped with servers, and then by e-commerce sites.
Redmond marketers favored frequent version upgrades.
existing (sold by subscriptions) to the launches of new systems. The costs of
the development of these latter ones continued to increase, rising from a few dozen
millions $ for Windows 3.0, over 500 million for Windows 95 and 2 billion for the
Windows Vista system, launched in 2006 after 5 years of development. Bill Gates
declared that the development of this system had cost as much as the conquest of the moon
(Magee, 2003). At the same time, license prices for OEMs were raised from $15
for Windows 3.0, at $40 for Windows 95, and $50 to $55 for Windows 98 and XP. Current
In 2008, a first revision of Vista (Service Pack 1) was released.

1.2. From Windows to Office

In the 1990s, Microsoft gradually expanded the practice of selling at price

suiteOffice software discounts, in order to cope with the competition of
Independent Software Vendors (ISV) - such as Lotus, WordPerfect, Borland...
developed their own Application Programming Interfaces (APIs or Hooks) at prices of
increasingly competitive. Under the effect of these price reductions, functional applications
(mainly, word, excel, powerpoint...), which represented two-thirds of the turnover
Microsoft's business at the beginning of the 1990s covered only a third by the end of
the decade. This weakening of margins on large systems compelled the group to
diversifying its activities.

A new version of Windows XP (codenamed Longhorn then Vista) was released at the end of
2006 after 5 years of design and testing. This version includes the most solutions.
technically advanced (graphic creation tools, file sharing, secure access
to mobile internet, digital rights management, DVD creation...). Despite a
mixed reception from the professional press, which overall judged it
Insufficiently innovative and flexible, the market adopted Microsoft's new offering.
The following year, the group launched the 2007 version of the Office suite, which focuses on
its latest technological advances in office automation.

1.3. the NT generation

In the early 1990s, Microsoft engineers became interested in network software.

of servers connected to a central computer (host) and to the 'network of networks' (web). After
some adjustment difficulties, they launched the Windows NT system, adapted in
principle to all types of processors, and intended to compete with Unix systems (IBM) and
Netware (Novell's), then the market leader. Version NT 4.0, launched in 1996, experienced a
commercial success. The Redmond teams then developed the Windows 2000 version1,
to equip both PCs (at a price of $200) and servers (for $1000 to $4000 depending on the
network size). In early 2008, the group launched Windows Server 2008 and SQL Server 2008.
1
the Windows 2000 system required 35 million lines of code written by 5000 engineers and
tested by 750,000 users.

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After these launches, Microsoft covered two-thirds of the professional software market.
standard intended for Small and Medium Business.

The internet network developed rapidly from the late 1980s onward, to reach
a community made up of 1.1 billion internet users in 20072It amplified in three
successive waves: web 1.0, based on the TCP/IP protocol, allows for interconnection of the
technical networks; web 1.5 contributes to exchanges between commercial networks; the
Web 2.0 promotes links between social networks. Browsers allow to ensure
interoperability between communication standards; the hypertext transfer protocol (http)
allows requests and the hypertext markup language (HTML) contributes to presentations.
Microsoft engineers integrated Explorer 3.0 into Windows 98, thus conquering more than
80% of the market, despite the competition from Firefox, Netscape, and free software based on it.
on its Mozilla code.

2. THE RACE FOR TECHNOLOGICAL INTEGRATION

Until the turn of the century, Microsoft's competitive advantage was primarily based on its
undisputed leader position in the personal software market. However, this advantage has
crumbled under the effect of both technological, commercial, and legal threats.

2.1. the emergence of "open source" software

In the early 1990s, Linus Torvalds put an adapted version online.

of Unix, called Linux, both freely accessible (open source) and easily adaptable. This
the launch was all the more a threat to Microsoft as its most users
price-sensitive goods were situated in the promising markets of emerging countries. According to the
leaders of Mandriva and Fedora (networks working for Red Hat, market leader), the
free software developers operate in communities, "whose facilitators
receive hundreds of software proposals every day by email from
volunteers (the "hookers"); these contributions are integrated by salaried "maintainers"
of publishers. The new language was described in a report, dubbed "Halloween," intended
to the leaders of Microsoft, of 'cancer likely to disrupt the software industry.'
But a survey revealed in 2004 that two thirds of American firms were using it.
Less a free software and that its development was encouraged by IBM. Although its
access should be free and its exploitation easy, open source does however incur costs
maintenance raised; its total cost of ownership (TCO) is often considered
equivalent to that of standard software. In order to counter the offer of Linux ('free system and
open"), Microsoft wanted to break the image of its "expensive and closed system" by disclosing
the source codes of some of its applications as part of the Shared Source Initiative
(SSI).

In the early 2000s, many public administrations engaged in a

modernization of their IT parks; several of them, particularly in countries
emerging, opted, at least in part, for Linux solutions, in reaction to the
Microsoft's domination. The group then proposed a simplified version of Windows.
Office, named "Windows XP Starter Edition" (at prices of about $36, compared to $300 for
a complete version).

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210 million
33 million...

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In the late 1990s, Sun Microsystems launched a new platform concept called
Java Virtual Machine, adapted to all types of OS and allowing to capture and develop - via
internet or an intranet network - functional mini-programs (or 'applets'). This type
application - called middleware (intermediate between the OS and the applications) - promotes
the interoperability between different types of computers. The engineers from Redmond
programmed a specific version of Windows from an operating license of the
Sun's patent, but the latter initiated legal action against Microsoft, which
the outcome concluded with a compromise.

Starting in 2001, Microsoft developers launched several applications of

middleware baptized with the suffix '.NET' (or 'dot.net'), grouped within a plate-
exclusive form. In order to develop these data transfer programs exploiting the
XML (eXtensible Markup Language), Microsoft joined forces with IBM as part of the
WS-I (Web Service Interoperability organization). IBM nonetheless continued.
its strategy of "coopetition", while simultaneously developing its own grouped products.
.NET framework 3.0 and then 3.5 associated with
Visual Studio 2008. The group also took control of the companies aQuantive (specialist
interactive marketing) and Fast Search & Transfer (specialized in document search
on the internet-intranet).

2.2. the conquest of households

The search for convergence between the major media led Microsoft to exploit the
mobile phone networks, controlled by operators, manufacturers
Device Manufacturers (OEM) and specific mobile solution publishers.
Microsoft Corp enters into cooperation agreements with several operators (Verizon,
Vodafone, Cingular, T-Mobile), in order to impose its mobile version of Windows, against the
competition between Palmsource and Symbian, a platform controlled by a consortium
telecommunications equipment manufacturers (Nokia, Ericsson, Panasonic, and Samsung). The engineers of
Redmond sought to promote the PC emulated by Microsoft systems to the rank of
new entertainment platform

The Microsoft group has also diversified its web services, notably by creating MSN.com.
e-mails
MSN BC (cable channel in partnership with NBC), MSN search (search engine)... Its
latest messaging services (Windows Live) and operating for mobile phones
(Windows mobile) have 420 million and 10 million users respectively at the end
since 2008. He has established partnership agreements with content providers such as
ABC, Disney, and MGN). The revenues from these activities come from advertising (approximately
50%), traffic (40%) and subscriptions (10%). In the search engine market
(internet and desktop), MSN mainly faces Google, created only in 1998, but
undisputed leader with 4.6 billion pages accessed and 67 million unique visitors in
2006, against 816 million and 40 million for MSN respectively.

The Seattle group established a subsidiary in Mountain View in Silicon Valley in 1999.
(for a cost of $3.8 billion), in order to develop new products allowing to
respond to various information, communication, and entertainment features
now necessary for households. It entered the market in 2001 at full speed.
expansion of video games, with its consoles Xbox then Xbox Live, accessible both by
internet, CD, DVD and MP3, which was then controlled by the Japanese publishers Sony and Nintendo.

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He took the risk of acquiring two video game creators, buying 1.5 million consoles and
to launch its new product on a large scale. With more than 18 million Xbox sold
From 2001 to 2007, he was able to rise to 3.eworld ranking after Sony (77 million Playstations)
but before Nintendo (22 million game cubes). At the end of 2005, he launched the 'central of
entertainments Xbox 360, in order to compete with Sony's PS3 and introduced the Xbox Live Service
TM
a subscription formula for interactive games via the internet, whose operation is under-
treated at Electronic Art. The subsidiary of Mountain View also sought to enrich its
offer bouquet by proposing a music download program and rental of
videos on demand (iTunes), in partnership with Fox.

Microsoft Corp also took an interest in the advertising market by acquiring in 2007 a-
Quantum Inc, specialized in the development of new advertising platforms and
creating Adviser and Publisher Solutions (APS) group, responsible for managing operations
planning and advertising publishing. The group is attached to the Platforms Division and
Services (PSD) of the group. The goal of the APS is to capture a significant part of the market.
global online advertising (with consolidated revenue estimated at $40 billion
in 2007).

Microsoft's research also focused on functions as diverse as

imaging systems, automotive navigation (Windows automotive technology), of
multifunctionalities of watches (Smart watch)... Through a continuous flow of patent filings
of invention in several countries, Microsoft aims to demonstrate the capacity for innovation of
his teams and disarm the criticism of his detractors. The initial vision of the leaders of
Microsoft ('equipping every household with a PC') has thus become 'enabling everyone to do'
what he wants, from where he wants, with any system.

2.3. the control of professional solutions

Starting from the 2000s, Microsoft leaders considered the software market.
SMEs/SMBs (Small and Medium-sized Businesses) as a priority. At that time,
relatively neglected by professional solution publishers, such as SAP and Oracle,
oriented towards large accounts (Large Enterprises or LEs). The Redmond group acquired
the companies Great Plains and Demark's Navision, in order to create MBS (Microsoft Business)
Solutions), with the aim of creating a platform for the development of new tools
management mainly intended for SMEs. It formed partnerships with several
research laboratories like Inria (National Institute for Research in Computer Science and
in Automation), in order to develop new analysis and security software
scientific data.

Despite investments of nearly $2 billion, the profitability of MBS remains fragile.

seven years after its creation, and its leaders are studying the opportunity for a merger with
another publisher.

At the end of 2007, Microsoft's product catalog was as follows:

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 Table 1. Main patented and marketed products by Microsoft (2007)

Product families Main products

Windows client Windows NT 4.0, Windows 2000, Windows NT,
Windows XP, Windows Vista, Windows Server
2003...
Databases and middleware SQL, server, Visual Studio, content management
server, share point portal server, commerce server
commerce server, frontpage, biztalk server, host
integration server…
Professional applications Office Suite 2007, Visio, OneNote, Project Server
exchange server, live communications server…
Functional applications, software Systems management server, Microsoft operations
interoperability and security manager, application center, identity integration
server, services for unix, services for netware
internet security, acceleration server…
Microsoft Enterprise Software Roadmap, in directions on Microsoft

2.4. the challenges of trust

The dominant position of Microsoft's systems quickly attracted predators (hackers),

who, for various reasons, multiplied viruses and spies at an accelerated pace,
trojans, worms, robots, malwares..., in the context of internet transactions. In 2005, the cost
Internet hacking was estimated at $29 billion worldwide. The teams from
Seattle group multiplied anti-virus parades based on solutions
developed by specialized companies like Ge, Cad, Sybase, Grant Software,
Transworthy Computing... Vista, the latest version of Windows, is thus equipped with a
Next Generation Secure Computing Base (NGSCB) architecture, allowing for the management of the
digital rights of users (logins, passwords, certificates…). In order to limit the
hacking and dealing with competing versions (Apple OSX, linux 64...), the engineers of
Redmond also launched the 'Windows Genuine Advantage' program preventing the
hacked updates.

Starting in 1998, Microsoft Corp was the target of several accusations of infringement.
concurrence, mainly for violation of Sherman antitrust regulations
Antitrust Act, in the context of actions conducted by the Federal Department of Justice
(DoJ), the attorneys general of 18 U.S. states and 27 groups of plaintiffs
mainly Californians (class actions). After several years of proceedings, the lawyers
Microsoft negotiated a compromise with the DoJ. They compensated other plaintiffs.
like AOL-Time Warner, Be, Sun Microsystems, Intertrust, Realnetworks... In 1999, the
The European Commission also accuses the Redmond group of anti-competitive practices.
competitive (notably for sales of the software Media Player related to Windows), the
threatening dismantling, and imposed on him, after long proceedings, a fine of 350
millions $ as well as the obligation to distribute some of its source codes. The whole of these
actions, some of which are not yet extinguished, mobilized more than a thousand lawyers during
nearly ten years, and forced Microsoft accountants to set aside provisions for
fines and procedural costs exceeding 2 billion $.

3. THE VALORISATION OF INTANGIBLE RESOURCES

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The group leaders took various initiatives to preserve practices and the
socio-professional values, which had brought him success during the 1980s, while
stimulating new values allowing it to adapt, during the 1990s and 2000s,
to the environment that is both more complex and more competitive of new technologies
information and communication.

3.1. a universe of 'smart people'

The founders of the group recreated an environment at the headquarters in Redmond, near Seattle.
architectural and social reminiscent of those of large American university campuses. The site
behaves with many cafeterias whose supplies are free for the staff (the
the company spends nearly $8000 annually on consumables per employee). Each manager
You technician have a closed and personalized office of approximately 12 square meters, designed
to 'sit down and reflect'. In the pioneering era, he was encouraged to 'work 14
"hours per day", "weekends included", and to equip his apartment with a PC equipped with the
the most advanced Microsoft solutions.

In order to maintain the spirit of a research laboratory, the founders of Microsoft Corp have
constantly reconfigured the group into small relatively autonomous units of 30 to 200
people, organized into profit centers and broken down into project teams to a greater or lesser extent
rivals. This intensive use of project management has gradually compartmentalized
the organization and weakened the transversality of procedures, the sharing of knowledge and
the interactivity between project groups. In order to energize the whole
the organization, one of the major principles of human resource management applied by the
Microsoft's management has been to remain constantly understaffed (the "n
less 1), even during periods of overactivity, and not to leave actors little
high performers occupy the key positions of the company. In 2003, the group's organization was
restructured into divisions by trades and operations:

Table 2. Simplified organizational chart of Microsoft Corp (early 2004)

Chairman & Chief Software Architect Chief Executive Officer

Bill Gates Steve Ballmer

Business divisions Operations Sales organization

Strategy & policy Microsoft Services -General counsel & Worldwide sales,
Platform technology Net secretary marketing & services
& strategy Productivity & Finance, planning &
Engineering Strategy business services treasury
Microsoft research Windows, servers &
mobiles
technology
-Home &
entertainments
Source: site "directions on Microsoft"

3.2. skills management

Microsoft's leaders attributed the group's success to its ability to detect and recruit.
age to retain young talent. Originally, Bill Gates and Paul Allen hired their first

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collaborators among their "smart friends", coming from a limited number of major
American universities - notably Harvard, Yale, MIT, Carnegie Mellon, Stanford...
then Canadian, Japanese, and European. Bill Gates stated in 1992: "we are
in knowledge-based professions; our success relies on the effectiveness of our
developers...; if we lost our twenty best members, Microsoft would become a
"a company like any other." At all levels, the staff is convinced of "changing the
world" and to belong to an intellectual elite with its own customs and its
somewhat esoteric language, formed of "techno-concepts". But the founders
faced increasing difficulties in maintaining this spirit, as the group's size
progressed spectacularly to reach in 2007, around 63,000 employees (of which 8,000
researchers) of various nationalities and backgrounds.

With an equal diploma, creative and communication skills are always preferred over
the experience of the profession. Job candidates are subjected to multiple questions and
tests (notably coding tests), as part of 3 to 10 interviews with
the group executives. After each interview, each recruiter sends an email to the next ones.
introduced by the formula 'to recruit' or 'not to recruit', with precise indications
on the candidate's weaknesses, in order to guide the following interviews.

Internal promotions depend on potential, experience, and performance.

candidate. The performances must be 'smart', meaning 'Specific, Measurable,
Attainable, Results-based, Time-bound. A reporting procedure (the 'bill meetings')
allows for an annual report on the progress of ongoing projects. The decisions of
pursuing or stopping projects leads to 'knife fights'. A certain
balance is sought between the careers of computer scientists (analysts, developers,
programmers...) and those of operational and functional managers. Each of the two
branches include five main hierarchical levels (from assistant to executive manager), and
each level corresponds to a profile of tasks and responsibilities within the company. A
young recruit stays on average from 6 to 18 months in their first position, then from 24 to 30 months
in the second, access to higher positions is more difficult. The hierarchy indeed fears
the application of the 'Peter Principle', according to which the members of an organization try
always to rise to their threshold of incompetence. In order to contain the drifts, a
internal coaching (or mentoring) of young managers is provided (with uneven success) by
older frames.

As in most start-ups, the compensation for Microsoft staff has largely

based on the company's stock option distribution.
In 1986, a rating system from 1 to 5 for performance was introduced, inspired by that of Intel.
which served as the basis for the distribution of bonuses. Employees were generally divided into three
groups of equal importance rated respectively from 1 to 3 (insufficient), 3 to 4 (average) and 4
at 5 (excellent). In 2007, more than ten thousand employees held a portfolio of options valued
At over $1 million, four executives were billionaires in dollars and the 22 highest
posts controlled 31% of the company's capital (including nearly 10% for Bill Gates and 3.5%
for Steve Ballmer). The drop in Microsoft stock prices in 1999 and 2000 led to a
devaluation of stock options distributed to all employees in previous years
of the group. Steve Ballmer then decided to increase fixed salaries, to limit the share of
stock options in compensation and partially replacing it with the distribution of bonuses in
cash and shares of the company. In order to boost the stock price, the board of directors
decided to distribute $3 billion in dividends in 2005 and to proceed with the buyback of 30
billions of shares to limit the dilution effect.

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 3.3. a culture of leadership

The culture of the Redmond group is deeply influenced by Bill's personality.

Gates, whose charisma, energy, and spirit of competition inspire, among all the staff,
both respect and fear. He has always strived to combine at all levels the sense of
innovation, customer service mentality, and results-oriented culture. In accordance with the rules
of the 'disease model of management', to which he is particularly attached, the right to error
is tolerated, provided that failures are recognized and lead to real reviews
questioning, corrective actions, and new training.

In 1998, Steve Ballmer, recruited directly by Bill Gates in 1980, was appointed president of
group, while the latter took the title of 'chief software architect', dedicating himself
parallel to its charitable foundation, established in partnership with Warren Buffett, founder
of one of the first American investment funds. The following years were
difficult, marked both by the burst of the 'internet bubble' (1999) and the recession of
markets of software and e-business. Several dozen experts and managers
resigned from the group, both disappointed by the increasing complexity of the structures3and there
bureaucratization of procedures, but also attracted by the opportunities offered by the
new e-business jobs. The employee turnover rate at Microsoft was
about 7% of the workforce in 1990, which is half that of its competitors; it
doubled between 1990 and 2000. A survey was conducted among senior executives on the
key success factors for the renewal of Microsoft's cultural identity. It resulted in a
mapping of five core values: the pursuit of long-term value creation
terms, the passion for technology, the customer spirit, the sense of results, teamwork. A
A toolbox was then made available to the leaders in order to implement these values in the
different management situations they commonly face. A culture
less "Stakhanovite" was also infused throughout the company,
engineers from Redmond and Mountain View are encouraged to seek a better
balance between their professional and private lives.

A former director of Procter & Gamble sought to introduce a culture of leadership to

Microsoft's. In 1994, the 'bench program' was launched to detect future
leaders and to define their career profiles. In the first year, 90 leaders or future leaders
were recorded, but, a few years later, only a few of them had
responded to the hopes of the program's initiators. The leaders concluded that the
the group recruited and trained more experts than true managers. From the moment of its appointment to
the presidency in 1998, Steve Ballmer relaunched the stock: three waves were selected to
the global scale, concerning respectively 100 executives immediately promoted (list
approved by Bill Gates), 200 potentially promotable, 300 to 400 considered as
"high potential". Meanwhile, in 1997, the "terminator study" was launched, intended to measure
the health index of the organization, based on responses to questions of the following type,
asked to several thousand employees: are your objectives clear? Do you comply with the
Decisions of the Management? Do you share the company's values? Do you have enough
resources to successfully carry out your missions?… The first report was overall
positive.

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The group's organizational chart includes, under the authority of the Chairman and the CEO, Group Vice-Presidents (VPs),
the senior VP, VP, General managers, managers...

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Despite the difficulties and various threats faced over the course of its 32 years
In 2007, Microsoft Corp reported results considered satisfactory by the market.
financier, since its revenue (58 billion $4, don't 17% dedicated to R&D)
increased by 26% and its net income ($16.5 billion) by 13%. Its P/E ratio of 5 19 is
slightly below the industry average (23 to 24). But its performance relies
largely on its core business, based on its major Windows and Office systems, and the
engineers from Redmond and Mountain View, now on the defensive, seem more than ever
more confronted with the challenge of integrating information technologies and the
communication.

Suggested questions

1. analyze the evolution of the strategic vision of Microsoft leaders.

2. define the job(s) and segment the competitive field of Microsoft.
3. assess the distinctive competencies of Microsoft.
4. create a mapping of the different strategic groups to which Microsoft belongs
you are faced with, and deduce the strategic trajectory of the Redmond group.
5.show the evolution of the characteristic traits of Microsoft's socio-cultural identity.
6. Identify the risks associated with the launch of the 'Terminator Study' campaign.
Evaluate the scope and limits of the leadership culture developed within Microsoft.

4
Distributed among individual clients (18), servers and tools (12), online services (3), businesses (18)
and leisure and materials (7).
5
Price Earning Ratio: stock price to earnings per share ratio.

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 Educational note on the case study

THE STRATEGIC TRAJECTORY OF MICROSOFT Corp

The study of the Microsoft case is part of a series of introductory cases dedicated to
organizational and cultural changes of major information technology companies and
communication (Amazon.com, Business Objects, Cap Gemini, Cisco, eBay, Google,
Motorola, Oracle, SAP, Time Warner-AOL, Yahoo!

1. theoretical fields covered and observed areas

The case study of Microsoft mainly covers the fields of strategic management and
the theory of organizations.

2. educational objectives

The objective of the case study is to analyze the influence of the technological environment on the
strategy, the organization and culture of Microsoft Corp. The study shows that the intelligibility
a strategic trajectory is based on a retrospective of competitive advantages of
the company. It contributes to the mastery of diagnostic methods for organizations and
audit of the practices in software engineering professions, of the provision
of applications and management information systems consulting.

3. case management

The Microsoft case study has been tested in business schools, in universities (levels
bachelor's and master's degrees) and in company training centers, in order to be processed, either
individually in writing (test of about 3 hours), or collectively orally, with
preparations in workshops of responses to the suggested questions, followed by presentations in session
plenary session (approximately 3 hours). Answers to the questions are attached (in the form of
adjustable visual aids) in the annex.

4. sources of the case study

The Microsoft case study was built from sources:

-academic, related to methods of strategic diagnosis and organizational audit,
applied notably in American case studies,
professionals, mainly made up of studies from American monitoring agencies
from the IT sector and by the annual reports of enterprise software publishers.

5. concerned public

The study of the Microsoft case is particularly intended for:

to the management science students of 2eand 3e management school cycles and
Francophone universities,
to company executives facing issues with choosing software solutions.

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7. Answers to the suggested questions

The pedagogical note aims to provide teacher-trainers with elements of

answers to the questions suggested by the author of the case study.

Questions pages

1. analyze the evolution of the strategic vision of leaders

Microsoft.
2. Define the (or the) profession(s) and segment the competitive field of 15
Microsoft.
3. evaluate the distinctive competencies of Microsoft. 17
4. map the different strategic groups to which
Microsoft belongs to or is confronted with, and deduce the trajectory 18.
strategic of the Redmond group.
5.show the evolution of the characteristic traits of socio-identity
Microsoft's culture.
6. identify the risks associated with the launch of the 'terminator20' campaign
study.
7. assess the scope and limits of the developed leadership culture 21
within Microsoft.

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 Analyze the evolution of the strategic vision of Microsoft's leaders.

COURSE REMINDERS

The core (or nucleus) of competencies must be built from the

strategic vision (or 'intention') of leaders (according to Hamel & Prahalad, Selznick)
the company: a coherent vision of the technological environment and positioning
long-term competitive strategy of the company, with an anticipation of technological disruptions
exploitables (Foster).
The deployment of core competencies must contribute to the construction of advantages.
sustainably defendable competitive (Porter), based on sources of
differentiation (product innovation, patented technology, brand image, quality,
actionable networks...) or cost domination (learning effect, economies
scale, process innovation...)
The construction of a strategic vision also aims to guide the
development of intangible resources (skills, knowledge, capabilities)
dynamics of the employees) of the company and its network of partners. It constitutes a
necessary prerequisite for the definition of a forward-looking skills management plan and
jobs and a program of internal and external communication.

ELEMENTS OF RESPONSE

In relation to clients:

More than thirty years after its founding by Bill Gates and Paul Allen, Microsoft Corp continues
its goal to remain "the world leader in computer solutions and systems and
dedicated communication for individuals and professionals.
2. The initial vision of Microsoft's leaders ('to equip every home with a PC') is
became "to allow everyone to do what they want, where they want, with anyone
system", and "create an integrated and connected world, everywhere and for everyone". This new
vision includes multiple technological, organizational, and social implications
cultural: a development of open computer architectures (to solutions
owners and free), a mastery of multi-media convergence (internet and extranet networks
and intranet, PC, radio-television...), reaching a critical mass in the economy of
the internet (notably portals and search engines), the transformation of a culture of
leader (in the proprietary software engineering market) to a challenger culture (in the
service-oriented architectures and e-business sectors ...

In relation to the employees:

The strategic realignment of Microsoft involves an enrichment of the portfolio.

initial skills (core competencies) of its employees, long specialized in
personal computing and now required to quickly master everything
technologies of the digital economy.
This change is all the more difficult as it must be combined with a
flexibilization of the organization of employees' work: in the pioneering era, each manager
the technician was encouraged to "work 14 hours a day," "including weekends," and to
furnish his apartment with a PC equipped with the most advanced Microsoft solutions. After the year
2000, they are encouraged to seek a better balance between their professional lives
and private.

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2. define the (or the) profession(s) and segment the competitive field of Microsoft.

COURSE REMINDERS

strategic business (Porter): a set of activities sharing technological resources

homogeneous
complementary.
relevant competitive field (Bidault): universe of organizations, resources, outlets
and values, in which the company will carry out its (or its) trades and develop its strategy; field
structured in activity sectors, technological sectors and networks of economic actors; field
dynamic influenced by innovation systems, competitive systems, and migrations of the
expected value by customers; global (globalized), local (regional) or 'glocal'.

O O O The sector: activities with resources and outlets

homogeneous (e.g., BtoB software publishing)

O O O sector: a set of transformation sectors of a

primary resource into a final outlet (e.g. telecom sector)

O O O network: businesses and administrations linked by

sustainable contracts (e.g. Cisco)

- strategic segment (Strategic Business Area or SBA) according to Porter: activities performed on
of (macro-)markets (homogeneous groups of customers and geographical catchment areas)
presenting key common success factors (cost economy, innovation capacity, mastery
quality, brand image, distinctive service pattern…); activity having key success factors
specific successes.
- key success factor: factor of value creation for the customer (usage, service, price, image...) and
competitive advantage factor for the supplier (innovation, quality, cost savings,

ELEMENTS OF RESPONSES

Microsoft's technological foundations are becoming increasingly complex. Their

development implies mastering a learning and open organization, which requires a
diversification of the portfolio of skills and dynamic capabilities of employees.

periods environments Microsoft technological bases

Software editor
1970 Personal computers Personnel (operating systems, suites
office automation
1980 Servers and networks Professional (operating systems,
business solutions
1990 Internet and software open Middleware, web services
source
2000 Multi-media integration Home & business devices (platforms of
Content convergence**- development and exploitation of
containers various solutions for households
and for SMEs)
PC, servers, internet, radio-TV data, images, sound

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Possible strategic segmentations of the competitive field of Microsoft

1. "Professional" or "technology" approaches: business units based on specific software

classic PCs, servers, the internet, mobile devices, other media (cable TV,
consoles…)

2. 'Market' approaches: DAS based on:

21. features of systems: exploitation, databases & middleware,
applications*)
22. status of target clients (households, businesses, administrations,
local authorities, associations
23. of their sizes (large accounts, SMEs/SMIs, individuals)
24. of their target areas (North America, Europe, Asia-Pacific, other areas)

decomposed, for example, into management, security, web services, entertainment

The relevant segmentation must combine both approaches, for example:

1. systems for PC 4. open source platforms/middleware

2.professional solutions (for servers) 5. other services or "devices"
3. web service solutions for mobile (entertainments...)

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3. identify Microsoft's distinctive competencies.

CLASS REMINDERS

Distinctive competencies cover a specific portfolio of skills allowing for

building sustainable competitive advantages. In the ICT sector, these skills are
based on:
intangible resources6controlled by the organization (Nelson & Winter),
-incompetences: abilities (or know-how) to develop and mobilize these resources (Barney),
-unknowns: validated, transferable, and actionable knowledge (Nonaka).
dynamic capabilities: individual and collective abilities to create, to communicate and to
negotiate (Teece, Pisano, Shuan)
-organizational routines: collective attitudes of the actors in an organization or actions
strongly saturated by the 'taken for granted' and deeply buried (Giddens)
- static routines: recurring attitudes 'simple loop' or simple interact;
- dynamic routines: learning attitudes "double loop" or double interact, according to
Nelson & Winter.

ANSWER ELEMENTS: the evolution of 'distinctive competencies' of

Microsoft.

Microsoft's distinctive competencies rely on an original combination of

intangible resources whose coherence is becoming increasingly difficult to maintain.

fragile human abilities and skills weakened by the disappearance of the leader
charismatic, through a corporate culture moving away from the original 'start-up spirit', by a
the work capacity of developers and managers weakened by the search for a balance
between professional life and personal life, through a less clear organization, through a
compensation system contested because it is based in particular on stock options;

recognized technical skills in the office sector (systems

office windowset), but contested in the professional computing sectors and
especially, internet services (MSN);

proven marketing skills demonstrated by brand recognition and strength of

alliance networks (especially with IBM) and cooperation with OEMs, but limited
in the growing fields of e-business;

a high financial capacity, based on low debt and a good stock price
oriented (except from 2000 to 2003), which encourages the group's management to prioritize growth
external, as illustrated by the attempted takeover of Yahoo in 2008.

6
Business assets, lease rights, patents, trademarks, signs, processes and systems, knowledge...

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 4. map the different strategic groups to which Microsoft
is confronted, and deduce the strategic trajectory of the Redmond group.

Course reminders

Mapping of 'strategic groups' (Rumelt):

Identification, in each business sector, of homogeneous groups of companies (or groups
strategic) based on their strategic trajectories.
Segmentation of strategic groups based on criteria adapted to each Strategic Business Unit (SBU):
degree of integration/diversification, degree of specialization/diversification, degree of
localization/ internationalization, degree of technological dependence/ independence...
Measurement of the strengths and weaknesses of the company based on those of
"benchmarks" (leading firms, firms "barometers"...) of its strategic group.
Strategic trajectory (Rumelt):
Genealogy of the strategies engaged by a company and its positions
concurrent successive in a business area (strategy of success or failure in the)
gaining competitive advantages based on the life cycle of a technology.

RESPONSE ELEMENTS: strategic groups of software publishers

globalization
Group 1 1

2 2

3 3a 3b 3c 3d

4
4
THE 1 2 3 4 5
Technological integration

THE
1. systems for PC 4. Open source/middleware platforms
2. professional solutions (for servers) 5. other services or "devices"
3. web services solutions for mobile (entertainments...)

Strategic groups
1. global software publisher (Microsoft) 3. specialized publishers (examples: AOL,
2. professional software publishers (SAP, Google for DAS 4 and Sony, Nintendo for
Oracle…) THE 5
4. Linux communities (Redhat...)
all DAS except large business software.

The competing strategic groups of Microsoft are mostly driven by spirit.

pioneer (or "start up"), which had allowed the "smart people" of the Redmond group to
dominate the office automation market and what seems to be missing in their quest for
new computing architectures and business models of the internet economy.

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 5. show the evolution of the characteristic traits of socio-cultural identity of
Microsoft.

COURSE REMINDERS

The culture of the enterprise (Hofstede, Schein, Morgan, Smircich) is defined as a set
of representations and values constructed in social interactions and expressed by
metaphors, in the form of symbols and images. The culture of a company is influenced
by :
the global culture (business culture) of the company's ecosystem,
the local or geographical cultures (national or regional) of its markets,
the professional culture of his or her profession(s),
the cultures of these dominant groups,
the cultures of his leaders.

The socio-cultural identity of a company is defined as:

a set of distinctive cultural factors of the company (Schein);

a coherent set of social norms (Cialdini), based on the principles of consistency
social, social proof (opinion of others), reciprocity (Mauss) and social commitment;
a structured set of values giving the company its specificity (‘ipseity’), its
continuity ('sameness') and its coherence ('moral contract');
- staging (enactment) of the company's representations by its internal actors and
external (Weick);
the institutionalization of the collective action by the leaders of the enterprise (Reitter);
- des réponses aux questions: -qui sommes nous? -pourquoi sommes nous ensemble?
- de quoi avons nous hérité?, -que cherchons nous à être et à faire?
How are we and how will we be different?

ELEMENTS OF RESPONSES: the socio-cultural identity of Microsoft

Dimensions of Dominant values Dominant values in 2007-2008

identity pioneers

Cultures North American International

geographical

Cultural professions or micro software engineering New technologies of

professional computer science the information and of it
communication (ICT)
Network cultures smart people from universities
or ecosystems American worldwide; recognized practitioners of
majors of ICT
Cultures of leaders Personality of 'Bill Gates' Personalities of leaders
and the founder's myth (image of
father

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6. identify the risks associated with the launch of the 'terminator study' campaign.

COURSE REMINDERS

The process of acculturation (integration or assimilation of the subcultures of the country)

of origin, trades, leaders...) must converge towards a set of values that are both
global, shared, transmissible and evolutionary. By changing the relationships of the actors to their
environment, it helps to ensure a certain coherence of attitudes and
behaviors within the company and its networks.
This process can be the subject of cultural diagnostics or audits, which allow
to analyze the distance between the respective perceptions of the value systems of a
organization by its leaders and by its internal stakeholders (social partners,
employee groups) and/or external (suppliers, clients, partners, public opinion), and of
propose a communication plan aimed at reducing this distance.

RESPONSE ELEMENTS: Microsoft's health index.

In 1997, the "terminator study" was launched throughout the group, aimed at
measure the organization's 'health index' based on responses to questions from the
type following, posed to several thousand employees: are your goals clear? Adhere
Do you agree with the decisions of the Management? Do you share the company's values? Do you...
enough resources to successfully carry out your missions?… The first report was
judged generally positively.

The mere fact of feeling the need to measure 'the health of the organization', by a
questionnaire clearly biased by effects of 'adverse selection', constitutes a
revealer of its leaders' questions about the motivation of its actors.

Despite the judgment - deemed 'overall positive' by the Management - made on

the organization and the culture by the employees of the group, a certain loss of confidence in
the group's ability to conquer new markets using only its skills
and dynamic capabilities (without resorting to the absorption of new resources).

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7. assess the scope and limits of the leadership culture developed within
Microsoft.

Course reminders

Business leaders play essential roles in driving change.

The leaders of the organization 'drive the change, while the managers steer.
the organization" (Kotter).

The leader is generally defined as a:

charismatic or visionary actor, tasked with building a vision of the future of
the company (while the manager plans it) and to promote change
organizational (while the manager controls it), according to Hamel & Prahalad,
legitimate actor embodying the symbolic universe of the company and influencing its rituals
(Certificate)
complex set of organizational behaviors (Mintzberg), portfolio of
roles (Quinn).
actor responsible for supporting the change of an organization (leader
transformational of Burns

According to the authors, leaders can therefore present rather charismatic profiles,
traditional, legitimate, moral...

leadership within Microsoft.

The culture of the Redmond group is deeply influenced by Bill's personality.

Gates, whose charisma, energy, and competitive spirit evoke, among everyone
staff, both respect and fear. He has always strived to combine at all levels
the sense of innovation, the spirit of service to clients, and the culture of results. In accordance with
to the rules of the 'disease model of management', to which he is particularly attached, the
The right to make mistakes is tolerated, provided that failures are acknowledged and lead to real ones.
questioning, corrective actions, and new training.

2. The co-founder of Microsoft has been perceived by the group's employees as being:
a charismatic leader, through his ability to embody the vision and fundamental values of
the company, and its qualities as a communicator,
a legitimate leader, through his work power, his reputation as a software designer, his
ability to inspire trust
a moral leader, through his spirit of tolerance, his sense of fairness, and his ethical concern,
attested by the creation of its philanthropic foundation,
but he does not seem to be perceived as a transformational leader (in the sense of
Burns.
The announced departure of the leader therefore limits the group's capacity to:
restore its pioneering values,
to train men through new myths, desires, and emotions,
initiate a process of radical change.

The "bench program", intended to identify the future leaders of the group, has thus proven to be a
semi-failure.

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