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Case Study on "Microsoft Corp." - Increasing or decresing returns?

This presents an analysis of the case on Microsoft Corp. based on the concept of increasing & diminishing returns in managerial economics framework. It was presented at DoMS, IISc, Bangalore as a part of Managerial Economics coursework.
by

Gaurav Khanna

on 24 February 2014

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Transcript of Case Study on "Microsoft Corp." - Increasing or decresing returns?

Case Facts
Case Facts
Diminishing or Increasing Returns ?
1975
1990
1981
1999
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.
1995
Microsoft releases Windows 95 with an upgraded version of Office, MS Office'95
1997
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
Not recommended
Market the existing features
Bundle MS Office with Windows
Spend more on Promotional Activities
Pricing Strategies
Economies of Scope

Office 2003 came with improved user friendly interface and design
It increased its promotional activities
Service Pack Upgrades
MS Office
Digital Media Authoring
Developing Software
Video Games
Cash Flow over a Software life cycle
Bio Medical Equipments
What Actually Happened
Road 1
Road 2
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.
Development
Introduction
Growth
Maturity
Decline
Revenue
Profit
Cash
Time
Revenue
Input
Revenue
Input
Revenue
Input
Revenue
Input
Revenue
Input
Revenue
Input
Revenue
Input
Revenue
Input
Injection of new technology and increase in promotional expenditure
Factor Input
Returns
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Sales increase due to adoption as "Industry Standard"
Network Effect - high volume of customer base
Less competition - Up front costs
Monopoly
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
Promotional Expenditure
Diminishing Returns
Input Factors
Developmental Cost
Developmental Cost
Promotional Expenditure
Return
Variable Factor Input
Year
Revenue (in billion $)
Sales
FY '99
For keeping its Monoploly power MS resorted to
"Tying" and it also leveraged its existing customers.
Anti trust Case against MS
Fixed
So, what is causing the diminishing returns for Microsoft?
(Developmental Cost)
Introduction of MS Office 2000
(Promotional Expenditure)
Pricing Strategy
Before
Pricing Strategy
After
Understanding the network effect.
The diminishing returns being faced by Microsoft due to Office.
By:
Arka Chakraborthy
Gaurav Khanna
Full transcript