In its heyday, the company seemed to dominate market segments effortlessly. From humble beginnings developing BASIC language interpreters for the early hobbyist computers, it developed the operating system that powered the platform that became the standard for nearly every computer sold in the world. It watched from the sidelines in the mid-1980s as graphical user interfaces were first developed. And, seeing the potential, they built the foundations for the second (and third) mass-market GUIs for PCs. Their CEO turned his comprehensive analytical powers on determining where else software dollars were being spent and decided to add “productivity suite” to its existing portfolio of programming tools and operating systems, going from 0% market share to 90% in five years.
That company was — and is — Microsoft. And for nearly 20 heady years they dominated every aspect of software. Microsoft was not an innovative company in the classic sense of the term. In the short, eventful history of personal computers, innovation has come from just a handful of companies, most of whom failed to capitalize on those breakthroughs. Laser printers, Ethernet and point-and click interfaces would not exist if not for Xerox PARC, yet HP, Cisco, and Microsoft are far more closely associated (and have made far more money) with each invention.
Like those companies, Microsoft prospered through the product strategy of “embrace and replace.” A pithy way of saying that you wait for a first mover to prove there’s a market and then sweep in with superior speed and resources to build a mass-market version of that technology. Xerox invented the idea of “windows” as we know it. Apple commercialized it first, but Microsoft made the product everyone used. They leveraged their domination of the desktop to displace WordPerfect and Lotus 123 with their integrated Office suite. Again, Microsoft wasn’t first but they recognized integration between productivity applications would be valuable and they used their existing arrangements with hardware vendors to pre-install their software. Embrace and replace works when a focused company “gets” the technology and figures out how to its essential elements and make a lot of the product quickly to overtake the first mover. It’s certainly not unique to high tech — just ask Henry Ford.
So it was well into the 1990s. Rarely first at innovation, but almost always first in bringing something to the masses. That model was virtually impregnable until the advent of the Word Wide Web and an upstart company called Netscape.
The speed at which consumers and businesses — Microsoft’s customers — took to the Web was staggering by the measure of adoption of previous technologies. Seemingly overnight people wanted to be “online,” to send emails and surf the embryonic sites of 1995 and 1996. Netscape Navigator wasn’t the first Web browser (that was Mosiac) but they were the first to bring it to a large number of users. Microsoft responded, quickly buying a Web browser and building small Internet-based features into their products. In the first real competition for market share in a decade their product ultimately won out over Netscape’s.
In many ways Microsoft never fully recovered from that first shock. Before the Web, software mostly came bundled with the computer; sometimes you purchased it in a store. And it was comparatively expensive. After the Web, software could be downloaded. It was often free — part of the growing ethos of the Web which Netscape propelled by giving away their product. And, the wide reach of the Web meant that new software and new ideas could come from anywhere and quickly enter mainstream thought.
One could easily argue that other companies now hold the technology “embrace and replace” mantle. Apple didn’t invent the MP3 player, but has sold more iPods than all sales of all other MP3 players combined. Google wasn’t the first company to develop a search engine for Web sites, but today handles two-thirds of all searches. These companies both mastered “embrace and replace” but did it for a niche. Rather than attempt to dominate all aspects of technology, they identified segments they could exploit and trained on it all their energies. One could also argue that both had little to lose. Apple was hanging onto a shred of the PC market; Google was a college-kid’s startup. They could focus on “the new thing” because there was no “old thing” to be beholden to.
Perhaps these are the lessons of the change in fortunes with Microsoft of late. At a time when information is cheap and democratized, where ideas reach mass acceptance quickly, embrace and replace works in a more narrow band. And companies when they become overly-tied to an existing market or product idea miss opportunities. No company had more money or more resources to spend when MP3 players and search engines became popular, but Microsoft has struggled to find a meaningful place in either market. The moved too slowly to be “second to market.”
When IBM’s business began to shrink in 1992 — buckling under the twin burdens of the unwieldy Lotus acquisition and the steep decline of “big iron” hardware sales — Bill Gates prophetically observed that Microsoft would one day suffer a similar fate; that many successful companies become complacent and cautious. This is the trap in building a lasting product strategy: it’s hard to take risks when things are comfortable. But calculated risk taking is essential to embrace and replace, and through that to long-term mass-market success.
