Academic journal article The McKinsey Quarterly

On the Origin of Strategies

Academic journal article The McKinsey Quarterly

On the Origin of Strategies

Article excerpt

Evolution across a population is nature's trick for mastering uncertainty. Businesses can use it, too.

In 1988, I was wandering around the floor of Comdex, the computer industry's vast annual trade show, and could feel the anxiety among the participants. Since the birth of the IBM PC, six years earlier, Microsoft's Disk Operating System (DOS) had been the de facto standard for PCs. But DOS was now starting to age. Everyone wanted to know what would replace it.

Apple Computer, at the peak of its powers, had one of the largest booths, showcasing the Macintosh graphical operating system, which made DOS look antique. Meanwhile, two different alliances of major companies, including AT&T, Hewlett-Packard, and Sun Microsystems, offered graphical versions of the Unix operating system. And IBM, determined not to let Microsoft overtake it again, was touting its new OS/2, an operating system that was said to combine DOS compatibility with the power of Unix and the Mac's ease of use.

Amid the uncertainty, there was something very curious about the Microsoft booth, which was hardly the show's largest; despite the success of the company, almost all of its competitors were much bigger. But while most booths focused on a single blockbuster technology, Microsoft's resembled a Middle Eastern bazaar. In one corner, the company was previewing the second version of its much-delayed and much-criticized Windows system, which had as yet gained little market share. In another, it touted its latest release of DOS. Elsewhere, it was displaying OS/2, which it had developed with IBM. In addition, Microsoft was demonstrating major new releases of Word,

Excel, and other applications that ran on Apple's Macintosh; indeed, they were the most popular programs for it. Finally, in a distant corner, Microsoft displayed SCO Unix, a PC-compatible version of that operating system, developed by a firm that had a marketing agreement with Microsoft.

"What am I supposed to make of all of this?" grumbled a corporate buyer standing next to me. Columnists wrote that Microsoft was adrift, that its chairman and CEO, Bill Gates, had no strategy. Reporters told stories of infighting at the company as one group of programmers worked furiously on Windows and DOS while others poured their energies into OS/2, Mac applications, and Unix.

Although the outcome of this story is well-known, to anyone standing on the Comdex floor in 1988, it wasn't obvious which operating system would win. In the face of this uncertainty, Microsoft followed the only robust strategy: betting on every horse. Bill Gates wanted Windows to win. Yet if DOS had continued to dominate, he would have continued to supply it. If OS/2 had triumphed, he would have shared the wealth with IBM. Had the Mac emerged victorious, he would have lost the war for operating systems but won in applications. Had Unix become the standard, Microsoft would also no longer be the major player in operating systems, but with its hand in SCO Unix, it could at least have remained a contender. Besides betting on all these horses, Gates took steps that would pay off no matter which of them came in first--investing heavily, for example, in graphical-interface design skills and object-oriented programming.

The same pattern is evident today in Gates's approach to the Internet. Microsoft's ever-shifting portfolio of development projects, investments, and acquisitions--as well as the company's many joint ventures with software, cable, telecommunications, and communications media companies--looks confusing if you ask, "What is Microsoft's strategy?" It makes more sense to ask, "What are Microsoft's strategies?"

Predicting the unpredictable

Strategy has traditionally been a high-stakes game that starts when a management team develops a vision of the company's future environment. The team then makes big, hard-to-reverse decisions about where the company will focus its energies, its capital, and its people. …

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