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Case Study on "Microsoft Corp." - Increasing or decresing returns?
Transcript of Case Study on "Microsoft Corp." - Increasing or decresing returns?
Diminishing or Increasing Returns ?
Microsoft is founded by William H. Gates and Paul G. Allen
They developed Microsoft BASIC, a programming language.
Microsoft releases DOS 1.0 for the IBM personal computer.
Later, it recognized the vast market potential and incorporated and established a national sales network.
Microsoft comes up with Windows 3.0
It also launches MS Office in October.
Microsoft introduces Office 2000, a program that include Word, Excel, PowerPoint and Access to general retail customers.
Microsoft releases Windows 95 with an upgraded version of Office, MS Office'95
Microsoft releases MS Office'97, which is loaded with features.
Economies of Scope
Other Firms in Other industries in same position of Microsoft
Siemens experiencing increasing returns to scale w.r.t. their MRI scanner with patented TIM technology
However at the same time it experienced diminishing return w.r.t. their Imaging software
Develop Office 2003 with features like speech recognition
Market the existing features
Bundle MS Office with Windows
Spend more on Promotional Activities
Economies of Scope
Office 2003 came with improved user friendly interface and design
It increased its promotional activities
Service Pack Upgrades
Digital Media Authoring
Cash Flow over a Software life cycle
Bio Medical Equipments
What Actually Happened
Microsoft - The way ahead...
Microsoft gained in considerable advantage as MS Windows became an"Industry Standard".
With more promotion and marketing its market share increased.
Also, with introduction of additional applications by independent developers, the adoption increases.
However to gain more dominance it constantly innovated creating new "Industry Standards" & introducing technological upgrades.
MS-Office 97 was succeeded by Office 2000 with more advanced features, such as, easier collaborative work for firms using an intranet.
Limited scope for users to take advantage of the improvements as they could not exhaust the possibilities of Office 97.
While enjoying the increasing marginal returns due to Windows, Microsoft still had to face the diminishing returns on MS Office.
Injection of new technology and increase in promotional expenditure
Sales increase due to adoption as "Industry Standard"
Network Effect - high volume of customer base
Less competition - Up front costs
Increasing Returns w.r.t. Windows
Increasing or Diminishing Returns
MS Office 97 already saturated with features
Customers could not experience its full possibilities
Diminishing Marginal utility
Limited scope for users to take advantage of upgrade
More promotional cost bringing less return
Variable Factor Input
Revenue (in billion $)
For keeping its Monoploly power MS resorted to
"Tying" and it also leveraged its existing customers.
Anti trust Case against MS
So, what is causing the diminishing returns for Microsoft?
Introduction of MS Office 2000
Understanding the network effect.
The diminishing returns being faced by Microsoft due to Office.