The Inner Workings of Microsoft

Microsoft, a software powerhouse, earns its revenue by selling software for computer usage.

While that's a solid summary, it barely scratches the surface. It overlooks the fact that Microsoft is a business empire with no equal, that its software runs on nearly every computer worldwide, and that the company is still climbing toward its peak of influence and reach. Microsoft stands as a symbol of both the triumphs and pitfalls of the digital age.

Though you might grumble about the 'evil empire' when your system crashes or when you're forced to buy another upgrade, there's no denying that Microsoft leads the way in powering the world of information technology. Whether through strategic moves, relentless innovation, or sheer persistence, Bill Gates' Microsoft has shaped the way we use computers ever since the first IBM PC was introduced in 1981, equipped with Microsoft's MS-DOS.

Microsoft may dominate the tech world, but what exactly does it do? In this article, we will dive into Microsoft's history, explore how it competes in the marketplace, and examine how its corporate culture contributes to its success. Lastly, we will take a closer look at Microsoft products and see how they leverage the company's key strengths.

The Rise of Microsoft

In 1975, Bill Gates and Paul Allen co-founded Microsoft as the quintessential 'garage start-up.' They were part of the early wave of personal computing pioneers. Unlike Apple, whose founders Steve Jobs and Steve Wozniak created both hardware and software, Microsoft focused solely on software development.

A significant distinction between Microsoft and other 'garage start-up' companies was that Gates and Allen were not naive about the business world. While many of their contemporaries were hobbyists or part of the 'Home Brew Computer Club,' a group more focused on community than commerce, Gates and Allen (along with Steve Ballmer) were running a competitive business. If there was a rival product, they had two options: buy it or crush it. Their first major victory was also their most important: DOS (Disk Operating System).

To simplify a long and dramatic tale, IBM was developing its first personal computer and required an operating system to run it. The company reached out to Microsoft, believing it had an OS ready. However, Microsoft wasn't in the business of making operating systems – they specialized in computer languages. Bill Gates directed them to the makers of CPM, the dominant OS at the time. The clash between IBM's corporate culture and the laid-back style of the CPM creators nearly derailed the IBM PC... until Microsoft stepped in.

In a move that would later become typical for the company, Gates and Ballmer bought an OS for $50,000 and then licensed it to IBM for $80,000. Even in the early 1980s, $80,000 wasn't a huge sum. So, what was Gates' thinking? It turns out, he was thinking far beyond the immediate gain. He explained during an interview for the PBS series 'Triumph of the Nerds': 'The key to our... deal was that IBM had no control over... our licensing to other people.'

Microsoft understood that the IBM PC would create a mass market for personal computers. Gates bet that the business cycle would mirror the mainframe model, leading to the rise of clones. These clones would, out of necessity, have to pay Microsoft for the right to use DOS, positioning Microsoft as the essential gatekeeper in the personal computing world.

It worked.

From that point forward, Microsoft would outsmart, dominate, surpass, and absorb every competitor. It was simply a matter of replicating the successful business model and the profits it brought. The transition from DOS to the Windows operating system, based on the Graphical User Interface (GUI), marked the completion of the cycle.

Next, we will explore how Windows came into existence and the reasons behind Microsoft's split with IBM.

A GUI Opportunity

Apple's groundbreaking Macintosh, released in 1984, was the first commercially successful personal computer to feature a graphical user interface (GUI), making it more accessible to users. Today, GUIs are the standard for interacting with computers and networks.

Bill Gates quickly recognized the Macintosh as both a threat and an opportunity. The GUI had the potential to take computing to a wider audience, far beyond the mass market established by the IBM PC and its clones, which posed a risk to Microsoft's dominance. However, it also offered a chance to deal a final blow to IBM and secure Microsoft's future leadership in the tech world.

IBM and Microsoft had been locked in a fierce struggle over the future of the PC's operating system. IBM was working with Microsoft on OS/2, a successor to DOS. IBM needed an OS that couldn't be easily copied by other hardware makers. Microsoft played along until it became apparent that the companies had diverging goals: Microsoft wanted to leverage IBM's market dominance, while IBM aimed to restrict the reach of DOS. This led to a split, leaving Microsoft to forge its own path.

If Microsoft could develop its own GUI to run on top of DOS, Bill Gates would kill two birds with one stone. From a business perspective, the impact of Windows was as powerful as the Macintosh’s influence on users. Almost instantly, a dull, outdated PC could be transformed into something resembling a Mac, at a fraction of the cost of purchasing a Macintosh.

Bill Gates once again adapted to reshape the computer market, just in time. Before the launch of Windows 95, a company named Netscape went public. Microsoft was also facing a new challenge: the Internet. How would Microsoft tackle a vast global network that seemed to be fueled by well-meaning creators who were intent on giving away their products?

Simple, Microsoft replied – we’ll give our products away too. The 'browser wars' were short-lived and overwhelmingly one-sided, with Internet Explorer ultimately emerging victorious over Netscape.

In the next section, we will examine what gives Microsoft the competitive edge in almost every business venture it pursues.

Microsoft's Keys to Success

In its 2005 annual report, Microsoft highlighted its financial performance. The 'Cash & Short Term Investments' section stands out, with the company holding nearly $38 billion in liquid assets. This wealth provides Microsoft with flexibility. While most dominant firms would focus on defending their market share, Microsoft does the opposite. It can quickly shift its focus and leverage its immense financial power to outpace industry giants like IBM and crush smaller competitors such as Netscape.

Part of this unique ability comes from the nature of software production: Unlike the challenges of constructing an airplane or skyscraper, software is created simply by writing code. As long as you have the skills and ideas, software can be developed anywhere.

Microsoft also had a head start. Not only have they 'been there and done that,' but they also possess the market position and financial resources to take full advantage of opportunities and dominate the market.

One of the key factors in Microsoft's success is its organizational structure. Bill Gates never really focused on centralizing the company after its early days. Instead, he aimed to replicate the most effective parts of Microsoft's original team. The company deliberately designs its teams to operate under pressure. Project managers determine the required number of staff members for a task and then reduce it, creating teams that must act quickly or risk being overwhelmed.

Microsoft is also meticulous about selecting the 'right' people. The company has specific criteria for its employees, and they’ve developed a unique approach to evaluating candidates: asking riddles. A company that thrives on improvisation and high-energy demands needs problem solvers who can handle working 72-hour shifts. While such employees are hard to find, Microsoft has a knack for identifying them.

All empires eventually fall, and organizations tend to weaken with age, like muscles in the human body. Typically, the charismatic leader isn’t around to witness this decline because they wouldn’t allow it to happen. Bill Gates is unlikely to break this pattern, so Microsoft’s dominance is expected to continue for many years.

In the meantime, let’s take a look at what Microsoft has planned for the future.

Microsoft's Product Segments

In its annual report, Microsoft organizes its operations into several "Business Units" or "Product Segments". These segments represent its primary product lines: Client, Server & Tools, Information Worker, Microsoft Business Solutions, MSN, Mobile & Embedded Devices, and Home & Entertainment.

Here’s how Microsoft explains these segments to its investors [source: 2005 Microsoft Annual Report, Business Description, Page 2: Product Segments]:

Microsoft has come a long way since the days of DOS. Windows, now part of the MS Business Solutions segment, remains the company's largest seller. In fact, Windows continues to provide Microsoft with a competitive advantage across nearly all of its segments, except one: Xbox. Video games, it seems, follow their own unpredictable path, even at the corporate level.

Since Windows is installed on the majority of PCs in some form, Microsoft enjoys a unique advantage when marketing new products. Whether it's part of a system update or featured on the Internet Explorer homepage, Microsoft’s new offerings are likely to reach you before its competitors have the chance to make their mark.