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Case Study 5: Microsoft - Increasing or Diminishing Returns?

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.

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447 views1 page

Case Study 5: Microsoft - Increasing or Diminishing Returns?

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
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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. 

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