Value Creation by Windows

Soumenjit Mitra Value Creation Paper MBUS 627 Introduction The history of Microsoft is a textbook case of the power of broad vision. In the early days, Microsoft's MS-DOS competed head to head with IBM's OS/2. Where IBM was myopically fixated on large customers as the only part of the market, Microsoft saw the market more broadly as every person in the world. This allowed them to take market share and become the monolithic corporation they are today by making their operating systems cheaply available to everyone.

This was an early example of their value creation, since that time they have taken to a different method, but they still continue to create value for their customers. Value Creation Methods Microsoft uses a very simple method of designing products. This starts with reverse innovation, or starting with what the customer wants. They simply ask customers what is missing from previous operating systems and attempting to incorporate the ideas in new products. This is one part of the empathic design process which they employ.

The second part is to make heavy use of prosumption. For example, the typical way a software company operates is to develop an “alpha” version of the software, work it over in house until it is mostly stable, then release to select members of the market a “beta” version for further testing. This allows the remaining bugs to be worked out of the program so that the final version requires little if any patching. When Microsoft released Windows ME, they took a different approach.

They released for sale what most companies would have considered the alpha version of Windows ME, which resulted in numerous technical difficulties and complaints, which they took and worked the fixes into Windows XP, which was released in its beta version. In this way, Microsoft saved the cost of alpha and beta testing, beat the competition to market, and had the general public pay for the privilege of finding all the bugs in the program (Tynan). They used the same technique with Windows Vista. This process is also closely related to their use of mass collaboration.

This combines with the experience of their employees the needs of the consumer. Microsoft also has various applications which are modifiable with their . net programming language, which allows end users to create their own applications. They also partner with other companies such as IBM, Dell, Hewlett-Packard, and others to have Microsoft operating systems come standard in many product bundles. In this way, the development team for their products extends far beyond the limits of Microsoft. It is this very process which has allowed them to be in more contact with the market than the competition.

When the personal computer market was just beginning to grow, Digital Research was far larger than Microsoft in both number of employees and market share. Yet while that company was focusing on developing the best operating systems and assuming everyone would be able to see how good they were, Microsoft was agreeing to work with IBM to produce an operating system which would interface with just about every piece of hardware IBM could build. This was then offered to a new market, the personal computer market, a market comprised of customers who knew little about computers and just wanted them to work without effort.

Microsoft's product provided that flexibility to accommodate virtually everything an average customer could want to do with a computer. This attention to what the market desired, combined with a dash of anti-competitive behavior, allowed Microsoft to bring a product to market which better matched the needs of most consumers and thus dominate the personal computer industry early on. Since then, their attention to the customer needs has allowed them to continue to provide the level of value seen early on. The Value of Microsoft's Operating Systems: Benefits Value is benefit minus cost.

As previously stated, the main benefit of Microsoft's operating systems is that they allow average users to unlock as much potential of the computer as they are likely to want. This fits with the benefits of using Microsoft's products falling into two categories, performance and perception. The performance aspect of the operating system refers to what it allows the end user to actually accomplish. The perception aspect refers to what it makes the market believe it allows the end user to accomplish as well as how the customers view Microsoft in relation to the rest of the market. The Value of Microsoft's Operating

Systems: Performance To begin with, the performance is acceptable. For most users who want to browse the Internet, write papers, use spreadsheets, track expenses, play games, etc, Microsoft's operating systems allow them to take a computer off the shelf turn it on and have it work. This is especially useful for organizations, such as universities, who require many computers and want them all the same and easily managed. In terms of physical efficiency, that will be discussed in depth in the cost section, but for now it is sufficient to say the Microsoft operating systems unlock a moderate amount of the true potential of a computer.

That said, because Microsoft products account for roughly 80% of the operating system market, the network effects allow the users to be fairly confident that their computers will all interact with each other without too much difficulty and they can easily find people who can support the computers. Thus for the ordinary person the Microsoft product allows them to realize a sufficient level of performance to keep them happy. Perception The perception of Microsoft products in the market place is vastly different than its actual performance.

Windows is seen by many as the operating system of the common person. This came about in large part because Microsoft set out with the intention of making an operating system which could be all things for all people, a “plug it in and let it go” operating system. As a consequence, the average user sees Windows as what “everybody uses,” because with an 80% market share most everyone does use it. This in essence builds a brand community which encompasses the vast majority of the market and allows the users to feel connected to everyone else who also uses Windows.

There is also the perception that any program worth using must work on Windows, and thus many programs are written for the operating system. Compared to the other operating system's users, Windows users feel they are saner than the alternatives. Mac users are seen as being “snobs,” or at least outsiders while Linux users are seen as being “geeks” and “hackers” while those operating systems are seen as being too expensive or too difficult to use. Compared to both of these groups, Windows users then feel like “regular,” “normal” people by being in the mainstream.

Costs The life cycle cost of running Microsoft products is more complicated than most people realize. To begin with, there is the price of the operating system, which varies based on which version but is somewhere between $119 and $300. This price is usually bundled in with new computers on which Windows comes preinstalled rather than a separate line item. The second part of the price is in the form of the Office Suite usually required to make a computer usable for most people.

This costs $150, which brings the total dollar price of Microsoft's operating system to somewhere between $269 and $450 for the single computer customer. Microsoft often offers discounts to larger customers and regularly donates their product to schools and other not-for-profit organizations. The second cost, the acquiring cost, is the computer system requirements to run Microsoft's products, meaning the minimum physical specifications a computer must have to be able to run the operating system.

In the case of Microsoft's latest operating system, Windows 7, this means a 1 gigahertz processor, 1 gigabyte of random access memory, 16 gigabytes of hard drive space, and a DirectX 9 graphics device (Windows System Requirements). While none of this “technical speak” may seem like an issue, or even make sense to the common person, it is fairly simple to put this in monetary terms. The processor and memory will cost approximately $20 each, an 80 GB hard drive is $50, the video card will cost $12 and the motherboard to complete the computer will cost an additional $20 for a total hardware cost of $122.

This makes a grand total for the computer of $572. Of course this price is assuming the customer bought the parts separately; many manufacturers have price discounts with Microsoft and parts suppliers thereby reducing the price. These numbers are just to provide a more concrete example of how system resources requirements cost the customer extra and to allow comparison to other competitors later. The ownership cost of Microsoft’s operating system is more difficult to calculate. This refers to the amount of time spent fixing bugs or calling technical support because of problems.

One part of that is the price they place on customer support, which in 2007 was $59 per incident after the first 90 days of ownership (Lai). The rest of this cost is difficult to quantify because people who have down time but fix the problem themselves do not report this. For the most part, that accounts for all the costs of using Microsoft operating systems. The final piece of the life cycle cost, disposal costs, varies from place to place, but for the most part being rid of old computers is not costly. This allows the estimation of the product's value. The Value of Microsoft Operating Systems

Due to the perception value of Windows, total value is difficult to quantify. For the most part, the functionality does cover its cost for most users because of the one-size-fits-all ability. This creates value, and when that value is combined with the perceptions customers hold, Windows does create value for the customer. How much value is impossible to put a number to, but there is value being created. The question however is not whether there is value created, but whether there is economic value created. The Economic Value of Microsoft Operating Systems

To calculate the economic value of Microsoft's operating systems, the value from above is subtracted from the value of the competition. This is difficult to do because there are no actual numbers, and market perception makes a large difference. However, it is fairly easy to compare performance and price. MacBooks provide the most serious competition to Microsoft. They come as a bundle of software and hardware for a cost of $999. In terms of performance, they are equivalent to Microsoft's offerings for many users, though Mac owners might disagree with that statement.

For certain applications, such as video processing, the Mac operating system is far superior to Windows, but for most users the difference is hardly noticeable. Thus when compared to Mac, and for the general market, Microsoft's offering creates a value of approximately $427 because the performance value is the same but the cost is lower. Obviously, these two products are targeted towards slightly different users, but for the average user needing an average computer, this would be the value of Microsoft over Mac.

Comparing Microsoft to its other competitor is much more challenging and less kind to Microsoft. Ubuntu is a distribution of Linux, which is an open-source operating system. It is a free download, so there is no cost associated with price. Further, its system requirements are a 300 megahertz processor, 64 megabytes of random access memory, 4 gigabytes of hard drive space, and a video card (Ubuntu System Requirements). Components with these specifications are no longer in production and can often be obtained by collecting computers which are being discarded by Windows users as obsolete.

Thus the cost of obtaining the components is also virtually free. If a person feels like paying for the computer, Dell sells Linux computers which are the same as the Windows computers only without the operating system cost and likely to last almost twice as long. Linux is also virtually virus free, meaning the cost of virus protection associated with Windows is absent in Linux, and because the computer lasts longer the total life cycle cost is spread out over more years. Linux, like Mac, provides approximately the same level of performance as Windows for the average user.

For the advanced user, it unlocks far more potential than Windows can, as evidenced by its considerably lower system requirements. This aspect is difficult to quantify, but for most people, Linux can satisfy all their requirements, though the perception in the market clearly does not agree. Where Linux falls short of Windows, aside from the perception aspect, is its lack of network effects. Finding people who know how to install Linux on a large scale is difficult, though Linux is much better at forming networks of computers.

The only actually quantifiable cost to running Linux which is greater than the comparative cost of running Windows is in down time. If there is a problem with Linux, it can be more time consuming to fix because assistance is more difficult to find and the end user often must fix the problem, though often the advice on how to fix it is also free. Thus from a purely technical aspect, Microsoft's offering has a negative value. Against this competitor, perception is the source of the value creation.

Because the market sees Linux users as “geeks” and Linux as far too difficult to use, Microsoft holds itself out as a better choice. This perception is slowly being overcome, however, by distributions of Linux such as Ubuntu by Canonical and SuSE by Novell both being developed with the goal of being as user friendly and “geekless” as Windows. This helps explain why Linux is slowly eroding Microsoft's market share; but for now, the perception aspect and network effects of Windows still allow Microsoft to create value over Linux. How to Improve the Situation

The “everything for everyone” design has allowed Microsoft to take a vast majority of the market share, but at the same time it has created numerous technical difficulties, many of which result in what is colloquially known as the “blue screen of death. ” One way for Microsoft to increase its value creation is to reduce the number of instabilities and crashes thereby reducing downtime and technical support calls. This would mean reducing their use of prosumption because putting products into the market when they have so many defects, while cheaper for the company, does not create as much value for the customer.

If they released their operating systems at the level of Windows XP or Windows 7 instead of at the Windows ME or Vista level, that would improve their value offering to the market. Secondly, reduce the price of the operating system. Once the research and development is done, the marginal cost of producing the next unit is less than $5 (CD costs) each yet they sell for almost $300. This indicates there may be room to decrease the price and still make a profit, which would also increase the value to the market. They are in the same place IBM was with OS/2.

IBM held such a high price for the operating system that even though it was technically superior to MS-DOS, it lost because the market moved towards the cheaper alternative. With competitors like Linux out there, Microsoft should strongly consider reducing prices to create more customer value or it risks losing customers to the competition as the perception of the market shifts. Conclusion Microsoft's value creation and competitive advantage is largely based on market perception. As they enter the next decade where more people will be more technically savvy, this advantage could well be eroded.

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