Scribd
Upload
289 views1 page

Microsoft: Returns on Software Investment

1) Microsoft's Windows operating system exhibits increasing returns to scale, as more users lead to more third-party software being developed, fueling further adoption. However, individual products typically face diminishing returns as the market becomes saturated. 2) Microsoft introduced Office 2000 with new internet and collaboration features, appealing to large firms willing to pay $230 for upgrades. 3) However, Office 97 already had so many features that most users did not utilize its full capabilities. With Office 2000, smaller businesses and home users may not value additional features, raising questions about Microsoft's future development path given high costs.

Uploaded by

Angel Gonda
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
289 views1 page

Microsoft: Returns on Software Investment

1) Microsoft's Windows operating system exhibits increasing returns to scale, as more users lead to more third-party software being developed, fueling further adoption. However, individual products typically face diminishing returns as the market becomes saturated. 2) Microsoft introduced Office 2000 with new internet and collaboration features, appealing to large firms willing to pay $230 for upgrades. 3) However, Office 97 already had so many features that most users did not utilize its full capabilities. With Office 2000, smaller businesses and home users may not value additional features, raising questions about Microsoft's future development path given high costs.

Uploaded by

Angel Gonda
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Case study 5: Microsoft – increasing or diminishing returns?

In some industries, securing the adoption of an industry standard that is favorable to


one’s own product is an enormous advantage. It can involve marketing efforts that grow more
productive the larger the product’s market share. Microsoft’s Windows is an excellent example.2
The more customers adopt Windows, the more applications are introduced by independent
software developers, and the more applications that are introduced the greater the chance for
further adoptions. With other products the market can quickly exhibit diminishing returns
to promotional expenditure, as it becomes saturated. However, with the adoption of new industry
standards, or a new technology, increasing returns can persist.3 Microsoft is therefore willing
to spend huge amounts on promotion and marketing to gain this advantage and dominate the
industry. Many would claim that this is a restrictive practice, and that this has justified the recent
anti-trust suit against the company. The competitive aspects of this situation will
be examined, but at this point there is another side to the situation regarding returns that should
be considered 
Microsoft introduced Office 2000, a program that includes Word, Excel, PowerPoint and
Access, to general retail customers in December 1999. It represented a considerable advance
over the previous package, Office 97, by allowing much more interaction with the Internet. It
also allows easier collaborative work for firms using an intranet. Thus many larger firms have
been willing to buy upgrades and pay the price of around $230.- 
However, there is limited scope for users to take advantage of these improvements.
Office 97 was already so full of features that most customers could not begin to exhaust its
possibilities. It has been estimated that with Word 97 even adventurous users were unlikely to
use more than a quarter of all its capabilities. In this respect Microsoft is a victim of the law of
diminishing returns.4 Smaller businesses and home users may not be too impressed with
the further capabilities of Office 2000. Given the enormous costs of developing upgrades to
the package, the question is where does Microsoft go from here. It is speculated that the next
version, Office 2003, may incorporate a speech-recognition program, making keyboard and
mouse redundant. At the moment such programs require a considerable investment in time and
effort from the user to train the computer to interpret their commands accurately, as well as the
considerable investment by the software producer in developing the package. 

Common questions

Powered by AI

Despite developing upgrades with extensive new features, Microsoft encounters diminishing returns because most users do not require or utilize all new functionalities. Specifically, as Office software evolves, existing features remain underused by the average consumer, especially those beyond basic requirements, thus limiting the perceived value of continuous upgrades against their development cost .

The analogy of being a "victim of the law of diminishing returns" applies to Microsoft's software development as it highlights the point where adding more features results in lesser incremental benefits to users. As Office 97 already offered more capabilities than were typically used, further enhancements in Office 2000 provided diminishing perceived value relative to development costs, especially for non-corporate customers .

The progression from Office 97 to Office 2000 exemplifies Microsoft's innovation approach by focusing on enhancing connectivity and usability in business environments through internet integration and collaborative capabilities. This reflects a strategic direction towards supporting enterprise needs even as consumer use-cases with less demand for these complex functionalities experience a plateau. Microsoft's focus on pushing technological frontiers despite established feature-rich products shows a forward-looking innovation ethos .

Microsoft's strategy of ensuring broad adoption of industry-standard products like Windows contributes to market dominance by establishing a platform where other applications thrive, entrenching its position and creating barriers to entry for competitors. This strategy can be perceived as restrictive and anti-competitive, which has been a basis for antitrust lawsuits. The legal implications include increased scrutiny and regulatory actions that may require Microsoft to alter its business practices to ensure fair competition .

Larger firms justify the expense of upgrading to Office 2000 due to its enhanced features that support collaborative work and internet integration, which are advantageous for companies using intranets. These firms value the efficiency and productivity gains from improved collaborative capabilities despite the law of diminishing returns as not all features may be utilized by every user .

The adoption of Windows by more customers creates a cycle of increasing returns due to network effects. As more people use Windows, it becomes more attractive for independent software developers to create Windows-compatible applications, thus expanding the software ecosystem. This increased availability of applications further incentivizes new users to adopt Windows, perpetuating a cycle where the product's market share continues to rise along with its value proposition .

Microsoft might weigh considerations such as market readiness for speech recognition technology, potential to enhance user experience, competitive differentiation, and alignment with future market trends. They must also evaluate the financial implications, including the cost of development versus expected return on investment, and anticipate how widespread adoption might be influenced by these features. Additionally, user training and adaptation costs need to be factored into the decision .

Microsoft may face challenges such as the substantial time and financial resources required to develop effective speech recognition technology that accurately understands diverse user inputs. Moreover, users need to invest considerable effort to train such systems to recognize their specific speech patterns. Additionally, integrating speech recognition could necessitate rethinking user interface design and ensuring seamless compatibility with existing features, potentially complicating development and adoption .

The transition from Office 97 to Office 2000 involved advancements such as enhanced internet interaction and improved collaborative tools via intranets. These upgrades primarily influenced adoption among larger firms that could take advantage of these capabilities, thereby encouraging their investment. In contrast, smaller businesses and home users, who largely did not need such enhanced features, were less incentivized to switch, highlighting differing adoption rates across user categories .

Smaller businesses and home users may be less inclined to upgrade to Office 2000 because the additional features primarily target larger institutions that require advanced functionalities such as internet integration and collaborative tools. Since Office 97 already offered a multitude of features that most users could not completely utilize, the marginal benefit of upgrading to the more expensive Office 2000 package may not justify the cost for these smaller-scale users .

You might also like