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Microsoft Business Model

Microsoft is one of the most famous and successful tech companies worldwide — just as well-known as its founder Bill Gates. However, since its foundation, more than 45 years ago, the Microsoft business model has changed over the years. Let’s understand how the business has grown for the third-largest company in the United States.

A brief history of Microsoft

Microsoft was created in 1975, by Bill Gates and his friend Paul Allen. The computer was nothing like what we know today, and the internet was a strange network limited basically to academic institutions. But Gates and Allen decided to produce something like an operating system for the Altair 8800, the first “personal computer” . Some years later, MS-DOS would become the regular operating system for computers. But the turning point would come when Windows was launched in the market, with its innovative interface.

In 1986, Microsoft got into the stock market, thus making money to build its empire of PC operating systems. Nowadays, besides those, the Microsoft line includes Microsoft Office, Azure (cloud and AI), Xbox Games, LinkedIn, GitHub, productivity applications, management tools, browsers, and more. Bill Gates still owns some shares in Microsoft, but he sold or gave away most of them. He also dropped out of the board in 2020, in order to have more time for philanthropy projects.

What is the Microsoft Business Model?

Since Microsoft provides systems and software for both entertainment and business, its core operations involve sale, distribution, and support for those solutions. But its business model actually encompasses a few types, in order to sustain all products and services, which include:

• Razor and Blade : Apps, software, and Xbox games work specifically for each operating system, and they don’t run in different ones;
• Lock-in : Due to high switching costs, customers keep using Microsoft software and apps;
• Freemium : LinkedIn, for example, is a free business social network, but some resources are only available for premium subscribers;
• Subscription : Besides LinkedIn, Microsoft applies this business model to Office 365 and cloud services, to mention a few;
• Hidden Revenue : For instance, both LinkedIn and Bing (Microsoft search engine) show the users ads on their platforms;
• Ingredient Branding : Despite being just built into computers, Microsoft brands are flagrantly shown in the products.

Who Owns Microsoft

Microsoft is still owned today by Bill Gates . While Satya Nadella is the current Chairman and CEO and Brad Smith is the current President (plus, Vice-Chairman), Gates holds the position as the company’s Technical Adviser.

Microsoft’s Mission Statement

Microsoft’s mission statement is “ To empower every person and every organization on the planet to achieve more “.

How Microsoft makes money

Microsoft makes money through three core business segments:

Productivity and business processes

The segment consists of products and services developed for productivity and information, and represents about one-third of Microsoft’s revenue. Its flagship is the Microsoft Office software suite. Besides, there are LinkedIn, the professional social network, and Dynamics, the cloud-based solutions for business apps, such as ERP or CRM.

• Intelligent Cloud

The other third of Microsoft’s revenue is made up of its public, private, and hybrid cloud services, such as Microsoft SQL Server, Windows Server, and Azure. Besides, there are enterprise services, like Microsoft Consulting, to help customers plan and implement Microsoft products.

• Personal Computing

The final third comprises the products and services created to improve users’ experience. The main example is, of course, Windows, with the licenses in devices. Other solutions include Xbox games and consoles, advertising in Bing (the search engine), and sales of devices and PCs.

Risks in Microsoft business model

• Competition : Microsoft faces some strong competitors, with a great variety of business models. Some of them provide users with free apps and/or content and make money from advertising. Others distribute open-source software at little or no cost, and these products are very similar to Microsoft’s;
• Cloud computing: Microsoft has to afford high costs in building and maintaining the whole infrastructure to support its cloud computing services, and seeks a sufficient market share in order to achieve a profitable scale. All of that against brands like Amazon and Google .

Microsoft’s Business Model Canvas

Let’s take a look at the Microsoft  Business Model Canvas  below:

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Microsoft’s Customer Segments

Microsoft’s customer segments  consist of:

• Commercial and corporate clients : Server management, IT support, and consulting services, for example, besides the regular tools and solutions, such as cloud computing, Office, and Skype;
• General customers : All the common solutions (Office, Outlook, Skype, cloud, etc.) and mobile phone and video game platforms;
• Advertising agencies and big brands : Ads at MSN portal and Bing search engine.
• Server developers: a suite of development tools.

Microsoft’s Value Propositions

Microsoft’s value propositions  consist of:

• A reliable market leader that provides software solutions, many of them for free;
• Compatible apps and software on many platforms, from phones to computers;
• A trusted source of expertise for consulting and a large user base for advertisers.

Microsoft’s Channels

Microsoft’s channels  consist of:

• Desktop, iOS, and Google Play apps
• Sales and marketing team

Microsoft’s Customer Relationships

Microsoft’s customer relationships  consist of:

• Software and hardware products are self-service, so, they don’t need much personal interaction with staff;
• Corporate products and services, consulting, support, and advertising require personal assistance from the Microsoft team and representatives;
• Social networking profiles are used to interact directly with end customers (e.g. Facebook and Twitter).

Microsoft’s Revenue Streams

Microsoft’s revenue streams  consist of:

• Productivity and Business Processes

Microsoft’s Key Resources

Microsoft’s key resources  consist of:

• Intellectual property
• Proprietary technology
• Data centers
• Human resources

Microsoft’s Key Activities

Microsoft’s key activities  consist of:

• Developing, licensing, and supporting software products and services;
• Designing and selling hardware products;
• Delivering online advertising solutions;
• Providing IT consulting and support services.

Microsoft’s Key Partners

Microsoft’s key partners  consist of:

• Companies that provide app development, data analytics, data management, digital advertising, distribution, internet hosting services, manufacturing, marketing, system integration, telecommunications, etc.;
• Resellers and independent software vendors.

Microsoft’s Cost Structure

Microsoft’s  cost structure  consists of:

• Research and development
• Maintenance and security of data centers and servers
• Office and general expenses

Microsoft’s Competitors

• Apple: Steve Jobs’ gigantic company competes with Microsoft since the good old days. They not just contend with hardware — such as computers, tablets, and smartphones —, but also with software, or their operating systems: It’s the eternal rivalry between Windows and macOS;
• Google: Alphabet’s major company also competes with Microsoft with hardware — as their Chromebooks contend with Dell, Acer, Lenovo, LG, Sony, and other many computer manufacturers that produce notebooks — and software in the way that Google Chrome has beaten Internet Explorer since day zero. Now, with Microsoft Edge, it’s been a whole new combat;
• IBM: The competition with IBM, a multinational technology corporation, comes from the fact that they both produce and sell computer hardware and software. Although many partnerships have come and gone throughout the years, making IBM an indirect competitor, it is, officially, the very same market that they both walk in;
• Oracle: Oracle Corporation though is a computer technology corporation focused exclusively on software development — which includes cloud-engineered systems, customer relationship management (CRM) software, and more —, which makes it another indirect competitor of Microsoft.

Microsoft’s SWOT Analysis

Below, there is a detailed  swot analysis  of Microsoft:

Microsoft’s Strengths

• Office 365: Definitely, the most famous productivity software on the market, Microsoft Office’s tools and services are one of Microsoft’s flagships;
• Windows: Another Microsoft flagship, Windows is simply the most used operating system on the planet, with a vast majority of computers using it globally.

Microsoft’s Weaknesses

• Need for a license: Life is not a bed of roses. Microsoft Office’s applications require a license to be used, especially when it comes to companies using them for their employees to collaborate. Plus, it is a relatively high price;
• Non-modifying features: Most features cannot be modified, which forces the user to look for new alternatives for their needs;
• Incompatibility: Often, Microsoft Office’s tools become incompatible with previous versions of software, including not only older Windows’ versions but macOS’ as well.

Microsoft’s Opportunities

• Professional qualification: As big as it is, Microsoft can always offer specialization courses and professional qualifications, based on its own software and applications, to clients anywhere in the world;
• Promotional packages: For both its software applications and operating system, Microsoft can come up with trials and promotional packages, especially for enterprises and large companies.

Microsoft’s Threats

• Competition: It faces strong competition in several areas of technology, with other major companies in the industry, such as Google, Apple, IBM, and Oracle, suffering from competitive pressure;
• Free similar apps: The competition is also with small developers, that often create similar applications to Microsoft Word or OneNote, for example, and offers them for free in stores for platforms such as iOS, Android, macOS, and Windows itself.

-> Read More About Microsoft’s SWOT Analysis .

The next steps of Microsoft can be seen through its acquisition plan. Some of the most important and recent ones have been LinkedIn and GitHub , just to mention some.

Daniel Pereira

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Microsoft’s business model: How Microsoft makes money

It’s safe to say that you have heard of Microsoft and used many of its products. Indeed, Microsoft is one of the most successful technology companies worldwide since it was founded 45 years ago by the legendary Bill Gates. It is also the third largest company listed in the U.S. (as of 2 September 2020).

Microsoft’s success intrigues me, so I proceeded to dig up more about the company’s business performance from an investor’s perspective. In this article, I’ll also cover the company’s economic moats, growth drivers, and some of the business risks it faces. Through this, I hope to give you a good overview of Microsoft’s business model and how it generates its revenues.

Business model

Microsoft is a technology company that provides software products and services to its consumers. It reports three business segments:

1. Productivity and Business Processes

This segment comprised 33% of Microsoft’s revenue in 2019. It consists of products and services in Microsoft’s portfolio of productivity and information services which include:

• Office Commercial/Consumer — Revenue is derived from users subscribing to Microsoft’s Office software suite. Services in this segment are intended to enhance personal and organisational productivities. This segment is a key driver of revenue in this business segment of Microsoft.
• LinkedIn — The professional social network makes money by offering three categories of monetised solutions : Talent solutions, marketing solutions, and premium subscriptions.
• Dynamics — This business provides cloud-based and on-premises business solutions for business applications like enterprise resource planning (ERP) and customer relationship management (CRM). Dynamics revenue is driven by the number of users licensed, expansion of average revenue per user. and the shift to Dynamics 365 — the cloud component of Dynamics.

2. Intelligent Cloud

This segment comprised 31% of Microsoft’s revenue in 2019. It consists of Microsoft’s public, private, and hybrid server products and cloud services that power modern businesses:

• Server Products and Cloud Services — Microsoft’s server software provides integrated server infrastructure and middleware designed to support software apps built on Windows. Server products include Microsoft’s SQL Server and Windows Server . Server products revenue is driven through volume licensing programs, licenses sold to original equipment manufacturers, and retail packaged products. Microsoft also provides a comprehensive set of cloud services through Microsoft Azure. This is in line with the secular growth of cloud computing as opposed to managing on-premises hardware and software. Azure makes money through users subscribing to its service.
• Enterprise Services like Microsoft Consulting Services are project-based engagements to help customers plan and implement Microsoft products so they can reap as much value from Microsoft’s products as possible.

3. More Personal Computing

This segment comprised 36% of Microsoft’s revenue in 2019. It consists of products and services mainly catered to improving the user experience:

• Windows – the operating system is still the most used desktop operating system in the world. Windows original equipment manufacturers’ (OEMs) revenue is derived from the purchase of Windows licenses by OEMs, which they pre-install on the devices they sell.
• Devices — including Surface, PC, and other Microsoft intelligent devices. Revenue is derived from this segment from the sale of these devices.
• Gaming — Microsoft’s generates gaming revenue from the sale of Xbox consoles and games.
• Search – Microsoft’s search engine, Bing, generates advertising revenue.

Here’s a breakdown of Microsoft’s segmental revenue for FY2019:

As you see from the chart above, Microsoft’s server products, Office, and Windows comprised more than 69% of Microsoft’s revenue in FY2019. Microsoft’s success lies in its ability to form economic moats around its key business segments/products.

Economic moats

Let’s examine some of the economic moats Microsoft has established.

High switching costs

This is due to the industry standard Microsoft has created with its Microsoft Office software. Business functions like accounting procedures are often centered around Microsoft Excel. Thus, it would take a lot of work for users to transfer their financial spreadsheets to another platform and get used to the unfamiliar tools on the new platform (even if there were a superior alternative to Excel in the first place). Thus, it makes economic and psychological sense for companies to continue using Microsoft Office.

Microsoft’s Windows Server also forms the IT backbone of many of the world’s largest companies today. Given that it would be extremely costly for any company to replace any part of an enterprise’s IT environment, we can expect many companies to continue using Windows Server. Microsoft’s high switching costs lock customers into its unique ecosystem of Microsoft software.

Network effect

For starters, Microsoft’s network effect is established with the increased number of participants of Microsoft products, which improves the value of Microsoft’s platforms for users.

For example, with an estimated 750 million people in the world using Excel , it gives software developers the financial incentives and economies of scale when they create a variety of add-ins for Excel – such as integrating popular finance platforms like Bloomberg and Capital IQ into Excel. When the financial community wants to analyse financial figures via Bloomberg or Capital IQ, they would have an easier time doing so with Excel.

Moreover, Microsoft’s ability to move clients from an on-premises Microsoft environment to a cloud Microsoft environment via Azure has led to a wide variety of developers joining the ecosystem with applications and development tools. This has led Microsoft Server to become very attractive for CIOs and IT managers with a large installed base of users, which attracts developers which in turn attracts more users.

Growth drivers

Cloud computing.

The secular growth in cloud computing presents growth opportunities for Microsoft’s cloud business, Azure. With benefits like cost savings on hardware and automatic software integration, many companies are moving to the cloud. According to Gartner , the global cloud computing market size is expected to grow at a CAGR of 15.9% from 2018 to 2022, making it a US$354 billion industry by then. Gartner added that, by 2022, up to 60% of organizations will use an external service provider’s cloud-managed service, double that of 2018.

Seizing on the cloud computing trend, Azure’s revenue grew at an astounding year-on-year rate of 91% and 72% for FY2018 and FY2019 respectively. However, as Amazon entered the cloud computing space much earlier than Microsoft did, Amazon Web Services (AWS) still dominates the industry with 32.3% of market share in 2019. Azure is just behind AWS at second place with 16.9% of market share.

However, Microsoft is slowly closing on the gap. Just late last year, Azure pulled off a stunning upset to win a US$10 billion Pentagon technology contract , beating AWS. This underscores Azure’s growing reputation in the industry.

The top three cloud providers today — Google Cloud, Azure, and AWS — will be competing fiercely to capture market share in the cloud computing industry in the years to come. The cloud business is very technical, so here is an article to help you understand the competition in the cloud industry better.

Microsoft is the pioneer in office-related products and Microsoft Office 365 is part of CEO Satya Nadella’s vision for remaking Microsoft into a company where customers rent rather than buy software. Customers benefit as they no longer have to manage software on their own computer or data centers. Rather, Office 365 ensures that users are always on the latest Microsoft versions without having to upgrade anything.

The steadily increasing number of monthly active users on Office 365 indicates that Microsoft have been successful in convincing enterprise customers to upgrade to the subscription-based Office 365 licenses.

Financial performance

Microsoft is a very profitable company with steady revenue and net income growth over the past five financial years. This displays Microsoft’s ability to expand its user base and increase its average revenue per user.

Microsoft’s net income fell in FY2018 due to the Tax Cuts and Jobs Act which was enacted in December 2017. This required Microsoft to incur a one-time net charge of $13.7 billion on the repatriation of deferred foreign income not previously subject to U.S. income tax.

Microsoft also displays good earnings quality with its operating cash flow comfortable trending above its net income over the past five years. In FY2020, Microsoft generated $1.37 in cash for every dollar of profit.

Microsoft has also generates a high return on equity (ROE) relative to its peers.

Microsoft’s ROE of 40.16% as of June 2020 is higher than the FAANG stocks bar Amazon. Microsoft is also able to achieve this with a reasonable amount of debt – its debt/equity ratio in FY2020 is just 0.54.

Business model competition

Microsoft competes with companies with a growing variety of business models. Some of Microsoft’s competitors offer free applications and content by making money from selling third-party advertising. Hence, the products of Microsoft’s competitors are provided to its users at no cost, competing directly with Microsoft’s revenue-generating products.

Competitors also compete by modifying and then distributing open source software at little cost to users without having to bear the full R&D costs for the open source software. These products are very similar to the functionality and features of Microsoft’s products.

Cloud computing risks

Microsoft’s increasing focus on cloud-based services also presents execution and competitive risks. Microsoft incurs costs in building and maintaining infrastructure to support its cloud computing services. It needs to establish sufficient market share to achieve scale necessary to reap profits from its cloud business. This depends on its execution in several areas.

For example, making its suite of cloud-based services platform-agnostic, available on a wide range of devices; and ensuring its cloud services are secure and reliable for its customers. Not to mention Microsoft’s ability to distinguish itself from the fiercely competitive cloud computing market, notably Amazon and Google.

The fifth perspective

Microsoft is clearly a high-quality company. It scores highly on profitability, has wide economic moats and is venturing into new growth areas. Yet, Microsoft is a company that is heavily involved in the software space with technical concepts that can be hard to understand for the layman.

The technology sector is also a hugely competitive one, so an investor needs to conduct deeper-than-usual analysis of Microsoft’s competition, and assess whether Microsoft can remain relevant and profitable in the many years to come.

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May I know how do we evaluate intrinsic value of Microsoft? If one decide to enter a position in this counter, what should be the fair value price? Thank You

One way is to compare Microsoft’s current P/E ratio against its long-term historical average. All things equal, a stock that’s trading below its historical valuation average can be consider undervalued.

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How does Microsoft make money: Business Model & Strategy

Founded in 1975, Microsoft develops and supports software, services, devices, and solutions. Microsoft offers an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content. Microsoft also provides solution support and consulting services. Microsoft also delivers relevant online advertising to a global audience. 

Microsoft’s products include operating systems, cross-device productivity and collaboration applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. Microsoft also designs and sells devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. 

Microsoft is innovating and expanding its entire portfolio to help people and organizations overcome today’s challenges and emerge stronger. Microsoft combines technology and products into experiences and solutions that unlock value for its customers. 

In a dynamic environment, digital technology is the key input that powers the world’s economic output. Organizations of all sizes have digitized business-critical functions, redefining what they can expect from their business applications. Customers are looking to unlock value while simplifying security and management. 

Microsoft is building a distributed computing fabric – across the cloud and the edge – to help every organization build, run, and manage mission-critical workloads anywhere. Artificial intelligence (“AI”) capabilities are rapidly advancing in the next phase of innovation, fueled by data and knowledge of the world. 

Microsoft is enabling metaverse experiences at all layers of Microsoft’s stack, so customers can more effectively model, automate, simulate, and predict changes within their industrial environments, feel a greater sense of presence in the new world of hybrid work, and create custom immersive worlds to enable new opportunities for connection and experimentation. 

In this strategy story, we analyzed the business model and strategy of Microsoft while learning how does Microsoft make money.

What is the Business Strategy of Microsoft?

The business strategy and hence the business model of Microsoft is based on three pillars:

Reinvent Productivity and Business Processes : Microsoft provides technology and resources to help its customers create a secure hybrid work environment. Microsoft’s family of products plays a key role in how the world works, learns and connects. Microsoft’s growth depends on securely delivering continuous innovation and advancing Microsoft’s leading productivity and collaboration tools and services, including Office 365, Dynamics 365, and LinkedIn. 

Build the Intelligent Cloud and Intelligent Edge Platform : For enterprises, digital technology empowers employees, optimizes operations, engages customers, and in some cases, changes the very core of products and services. As part of its business strategy, Microsoft continues to invest in high-performance and sustainable computing to meet the growing demand for fast access to Microsoft services provided by Microsoft’s network of cloud computing infrastructure and data centers. 

Microsoft’s cloud business benefits from three economies of scale: datacenters that deploy computational resources at a significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs. 

Create More Personal Computing : The business strategy of Microsoft in cloud computing is to make computing more personal by putting people at the core of the experience, enabling them to interact with technology in more intuitive, engaging, and dynamic ways. 

How does Google make money? What is Google’s Business Model?

How does Microsoft make money? What is the business model of Microsoft?

Microsoft made $212 billion in 2023 . The business model of Microsoft operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations. They provide a framework for the timely and rational allocation of resources within businesses. 

Productivity and Business Processes 

Microsoft’s Productivity and Business Processes segment consists of products and services in Microsoft’s portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. Productivity and Business Processes contributed $69.2 billion to Microsoft’s revenue in 2023. This segment primarily comprises:

• Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva. Office Commercial revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Office 365. 
• Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises and other Office services.  Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype, Outlook.com, and OneDrive, largely driven by subscriptions, advertising, and the sale of minutes.
• LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.
• Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.  Dynamics revenue is driven by the number of users licensed and applications consumed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications, including Power Apps and Power Automate.

Intelligent Cloud 

Microsoft’s Intelligent Cloud segment consists of Microsoft’s public, private, and hybrid server products and cloud services that can power modern businesses and developers. Intelligent cloud contributed $87.9 billion to Microsoft’s revenue in 2023. This segment primarily comprises:

• Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services and per-user-based services such as Enterprise Mobility + Security. 
• Enterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services.

More Personal Computing 

Microsoft’s More Personal Computing segment comprises products and services that put customers at the center of the experience with Microsoft’s technology. More Personal Computing contributed $54.7 billion to Microsoft’s revenue in 2023. This segment primarily comprises:

• Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender for Endpoint, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”) as advanced security offerings.
• Devices, including Surface and PC accessories.
• Gaming, including Xbox hardware and Xbox content and services, comprises first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services. Xbox revenue is mainly affected by subscriptions and first- and third-party content and advertising sales.
• Search and news advertising that delivers relevant search, native, and display advertising to a global audience.

Microsoft also classifieds its revenue into products and services. 

• Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories. Product contributed $64.7 billion to Microsoft’s revenue in 2023.
• Service and other revenue include sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also include sales from online advertising and LinkedIn. Service and others contributed $147.2 billion to Microsoft’s revenue in 2023.

How Microsoft became cool by making others cool

Microsoft Financials

As per Microsoft’s 2021 Annual Report,

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Microsoft’s Business Model

For decades, Microsoft has reigned as an industry titan, continually adapting to the ever-changing technological landscape while solidifying its global market dominance.

As we delve into the intricacies of Microsoft’s business model, a clear picture emerges: the company’s success rests upon a profound comprehension of market trends, an unwavering commitment to innovation, and a remarkable ability to deliver seamless user experiences through an extensive portfolio of products and services.

In this blog post, we embark on a journey to explore the diverse components that constitute Microsoft’s winning formula, conducting an in-depth analysis of the key drivers that propel this dynamic organization toward long-term prosperity.

Microsoft: Tracing the Evolution of Technological Innovation

Empowering progress: microsoft’s vision and mission, decoding the microsoft business model, reinvent productivity and business processes, build the intelligent cloud and intelligent edge platform, microsoft’s cloud: three economies of scale, create more personal computing, unveiling microsoft’s revenue generation methods, microsoft’s business model overview, a swot analysis, risks in microsoft’s business model, competitors.

Microsoft traces its roots back to 1975 when Bill Gates and his friend Paul Allen embarked on a journey to create something revolutionary. In those early days, computers were vastly different from what we know today, and the Internet was a nascent network mainly confined to academic institutions.

Undeterred by the limitations of the time, Gates and Allen set out to develop an operating system for the Altair 8800, considered the first “personal computer.” This endeavor laid the foundation for what would later become Microsoft’s groundbreaking legacy.

Fast forward a few years, and MS-DOS emerged as the go-to operating system for computers, establishing Microsoft’s presence in the technology landscape. However, the true turning point came with the introduction of Windows, a game-changing operating system that revolutionized the industry with its innovative interface.

Windows catapulted Microsoft to new heights, setting the stage for its future endeavors.

In 1986, Microsoft made a momentous decision to go public, offering shares on the stock market. This strategic move allowed the company to amass the financial resources needed to build its empire of PC operating systems. Over time, Microsoft’s product line expanded to encompass much more than operating systems.

Today, it encompasses Microsoft Office, Azure (cloud and AI services), Xbox Games, LinkedIn, GitHub, productivity applications, management tools, browsers, and an array of other cutting-edge technologies.

While Bill Gates still retains some ownership in Microsoft, he has divested much of his stake through sales and philanthropic efforts. In 2020, he stepped down from the board to dedicate more time to his philanthropy projects, furthering his commitment to making a positive impact on the world.

Microsoft’s journey from its humble beginnings to its current position as a technological powerhouse showcases a remarkable evolution marked by groundbreaking innovations and a relentless pursuit of excellence.

At the heart of Microsoft’s purpose lies a powerful mission statement: “to empower every person and every organization on the planet to achieve more.” This succinct declaration embodies Microsoft’s unwavering commitment to leveraging technology as a catalyst for transformation and improvement across the globe.

Microsoft envisions a future where innovative and accessible technology serves as the driving force behind seamless collaboration, enhanced productivity, and impactful problem-solving.

By creating cutting-edge software, hardware, and services, Microsoft aims to equip individuals, communities, and businesses with the tools they need to unlock their full potential.

Through their comprehensive portfolio of offerings, Microsoft seeks to drive human progress and facilitate lasting, positive change on a global scale.

Their mission goes beyond technological advancement; it is rooted in the belief that technology can be a powerful force for good, enabling individuals and organizations to achieve more, innovate, and address complex challenges.

With their relentless pursuit of innovation and their commitment to empowering individuals and organizations, Microsoft continues to shape the future of technology and make a meaningful difference in the lives of people around the world.

The Microsoft business model encompasses a diverse range of strategies to support its extensive portfolio of systems, software, and services. While the company operates in both the entertainment and business sectors, its core operations revolve around the sale, distribution, and support of these solutions.

Let’s explore the various components that make up Microsoft’s multifaceted business model:

• Razor and Blade: Microsoft develops apps, software, and Xbox games that are specifically designed for its operating systems, ensuring optimal performance and compatibility;
• Lock-in: Microsoft has established high switching costs for customers, making it more likely for them to continue using Microsoft software and apps due to the investment in familiarity and integration;
• Freemium: Certain Microsoft offerings, such as LinkedIn, follow a freemium model. While the platform is free to use, additional resources and features are available exclusively to premium subscribers;
• Subscription: Microsoft has successfully implemented a subscription-based model for various products and services, including Office 365 and cloud services. This model allows customers to access Microsoft’s offerings through recurring payments;
• Hidden Revenue: Platforms like LinkedIn and Bing generate revenue through advertising, displaying targeted ads to users while they engage with these platforms;
• Ingredient Branding: Microsoft’s branding is prominently displayed on products, even if they are just built into computers. This ingredient branding strategy ensures that Microsoft’s presence is readily visible to consumers.

Microsoft’s Business Strategy

The business strategy of Microsoft revolves around three fundamental pillars that underpin its success and shape its business model. Let’s delve into each of these pillars to gain a deeper understanding of Microsoft’s strategic focus:

Microsoft is dedicated to empowering its customers by providing them with the technology and resources needed to create secure and efficient hybrid work environments.

Microsoft’s diverse portfolio of products, including Office 365, Dynamics 365, and LinkedIn, plays a vital role in transforming the way the world works, learns, and connects.

Continuous innovation and advancement in productivity and collaboration tools and services are at the core of Microsoft’s growth strategy.

Microsoft recognizes the immense power of digital technology in empowering employees, optimizing operations, and engaging customers, sometimes even reshaping the very core of products and services in the enterprise landscape.

To cater to the increasing demand for fast and reliable access to its services, Microsoft continues to invest in high-performance and sustainable computing infrastructure.

By leveraging its extensive network of cloud computing infrastructure and data centers, Microsoft delivers the intelligent cloud and intelligent edge platform, providing the foundation for digital transformation.

Cost-efficient data centers that deploy computational resources at a significantly lower cost per unit, data centers that coordinate and aggregate diverse customer demands and usage patterns to optimize resource utilization, and multi-tenancy locations that reduce application maintenance labor costs.

Microsoft’s business strategy in cloud computing extends to making computing more personal and user-centric. By placing people at the core of the computing experience, Microsoft aims to enable users to interact with technology in intuitive, engaging, and dynamic ways.

This includes developing user-friendly interfaces, intuitive interactions, and personalized experiences that empower individuals to harness the full potential of technology and enhance their productivity.

Through these strategic pillars, Microsoft is committed to driving continuous innovation, delivering secure and cutting-edge solutions, and enhancing the productivity and experiences of individuals, organizations, and communities worldwide.

With a focus on productivity, intelligent cloud solutions, and user-centric computing, Microsoft continues to shape the future of technology and drive positive change in the digital era.

Microsoft’s revenue is derived from three fundamental business segments:

• Transforming Productivity and Business Processes

This segment encompasses a wide range of products and services designed to enhance productivity and information management, representing approximately one-third of Microsoft’s revenue. At the forefront is the renowned Microsoft Office software suite, which remains a flagship product.

Additionally, this segment includes LinkedIn, the prominent professional social network, and Dynamics, a suite of cloud-based solutions for business applications like ERP and CRM.

• Empowering with Intelligent Cloud Services

Comprising another significant one-third of Microsoft’s revenue, this segment focuses on the delivery of public, private, and hybrid cloud services. Microsoft SQL Server, Windows Server, and Azure are among the notable offerings. Furthermore, enterprise services such as Microsoft Consulting play a crucial role in assisting customers with planning and implementing Microsoft products effectively.

• Enhancing Personal Computing Experience

The remaining one-third of Microsoft’s revenue is derived from products and services aimed at enriching users’ overall experience. The cornerstone of this segment is undoubtedly Windows, with licenses for devices serving as a primary revenue source. In addition, Microsoft offers a diverse range of solutions, including Xbox games and consoles, advertising through Bing (their search engine), and the sales of devices and PCs.

Let’s examine Microsoft’s business model using the Business Model Canvas framework. The different components of Microsoft’s business model are outlined below:

Customer Segments:

• Commercial and corporate clients: Offering server management, IT support, consulting services, as well as cloud computing, Office, and Skype solutions;
• General customers: Providing common solutions like Office, Outlook, Skype, cloud services, and mobile phone and video game platforms;
• Advertising agencies and big brands: Offering advertising opportunities on the MSN portal and Bing search engine;
• Server developers: Providing a suite of development tools.

Value Propositions:

• Reliability as a market leader offering software solutions, including some free offerings;
• Compatibility of apps and software across multiple platforms;
• Trusted source of expertise for consulting services and a large user base for advertisers.
• MSN portal;
• Desktop, iOS, and Google Play apps;
• Sales and marketing team.

Customer Relationships:

• Self-service for software and hardware products, requiring minimal personal interaction;
• Personal assistance for corporate products, consulting, support, and advertising;
• Direct interaction with end customers through social networking profiles (e.g., Facebook and Twitter).

Revenue Streams:

• Productivity and Business Processes;
• Intelligent Cloud;
• Personal Computing.

Key Resources:

• Intellectual property;
• Proprietary technology;
• Data centers;
• Human resources;
• Bill Gates (as a notable figure).

Key Activities:

• Developing, licensing, and supporting software products and services;
• Designing and selling hardware products;
• Delivering online advertising solutions;
• Providing IT consulting and support services.

Key Partners:

• Companies providing various services such as app development, data analytics, distribution, marketing, system integration, telecommunications, and more;
• Resellers and independent software vendors.

Cost Structure:

• Research and development;
• Maintenance and security of data centers and servers;
• Marketing and sales;
• Office and general expenses.

Microsoft, a renowned technology leader, can be effectively evaluated through a SWOT analysis, shedding light on its strengths, weaknesses, opportunities, and threats from a business perspective.

• Wide range of technology products, including Windows OS, Office Suite, Azure, and Xbox gaming platform;
• Strong market presence and established brand recognition;
• Vast R&D budget and diverse income sources;
• Strong reputation for innovation and technological expertise.

Weaknesses:

• Delays in product launches and challenges in addressing all customer segments with premium pricing;
• Over-dependence on Windows OS;
• Previous antitrust issues affecting its reputation and legal challenges.

Opportunities:

• Growth potential in the hybrid-cloud market and leveraging strength in cloud computing services;
• Development of advanced security features to address increasing cybersecurity concerns;
• Strategic collaborations to enhance offerings in gaming, artificial intelligence, and quantum computing.
• Intense competition from tech giants like Google, Apple, and Amazon;
• The need for continuous adaptation to rapidly evolving technological advancements;
• Challenges arising from global economic and regulatory changes.

Microsoft’s business model faces several risks that need to be considered. Two key areas of concern are competition and cloud computing.

Microsoft faces competition from several key players in the technology industry. Let’s take a closer look at some of its major competitors:

• Apple: Apple, led by Steve Jobs, has been a long-standing rival of Microsoft. The competition between the two companies extends beyond hardware, encompassing computers, tablets, and smartphones. They also compete in the realm of operating systems, with the perpetual rivalry between Windows and macOS;
• Google: Google, a prominent subsidiary of Alphabet Inc., competes with Microsoft in both hardware and software. Google’s Chromebooks directly compete with computer manufacturers like Dell, Acer, Lenovo, LG, and Sony. Additionally, Google Chrome has surpassed Internet Explorer in the web browser market. The introduction of Microsoft Edge has sparked a new wave of competition between the two companies;
• IBM: IBM, a multinational technology corporation, presents competition to Microsoft due to its involvement in computer hardware and software. While there have been partnerships between IBM and Microsoft in the past, they operate in the same market and are considered competitors;
• Oracle: Oracle Corporation primarily focuses on software development, including cloud-engineered systems and customer relationship management (CRM) software. Although Oracle’s offerings differ from Microsoft’s broader product range, they still represent an indirect competitor in the software development space.

Microsoft’s business model plays a crucial role in the company’s ongoing success and growth. Through diversification, innovation, and a customer-centric approach, Microsoft has established a strong presence in the highly competitive technology market.

Their strategic partnerships and effective monetization strategies exemplify a resilient and adaptable business model that positions them for long-term success.

By cultivating a comprehensive ecosystem of hardware, software, and cloud services, Microsoft has demonstrated its ability to navigate the ever-changing technological landscape.

As the company continues to evolve and expand its offerings, one thing remains evident: Microsoft’s business model serves as a shining example for those aspiring to build thriving and sustainable enterprises in a fiercely competitive market.

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Microsoft: Business Model, SWOT Analysis, and Competitors 2023

Inside This Article

Microsoft is one of the biggest tech giants in the world, with a business model that has transformed over the years. From its early days as a software development company, it has expanded to include hardware, cloud computing, and other innovative products. In this blog series, we will conduct a SWOT analysis of Microsoft and its competitors, and explore what the tech giant's business model might look like in 2023.

In this blog post, you will learn:

Who owns microsoft and the history behind the company's ownership..

• The mission statement of Microsoft and how it guides the company's decisions and actions.
• How Microsoft generates revenue and profits through its various business segments and product offerings. Additionally, we will explore the Microsoft Business Model Canvas and how it helps the company maintain a sustainable competitive advantage.
• The top competitors of Microsoft in the technology industry and how they stack up against the company's offerings.
• A detailed SWOT analysis of Microsoft, highlighting the company's strengths, weaknesses, opportunities, and threats. This analysis will provide insights into the factors that influence Microsoft's success and help readers understand the challenges and risks that the company faces in the market.

Who owns Microsoft?

Microsoft is one of the biggest names in the tech industry, and it's natural for people to wonder ## Who owns the company. The answer is not straightforward, as Microsoft has gone through several changes of ownership over the years.

The company was founded by Bill Gates and Paul Allen in 1975, with Gates holding a 64% stake and Allen owning 36%. Over the years, the company grew and went public in 1986, with Gates becoming the youngest self-made billionaire at the time.

In 2000, Gates stepped down as CEO and was replaced by Steve Ballmer. Gates remained as the chairman of the board and the largest individual shareholder, with a 12.5% stake in the company. However, Gates gradually sold his shares over the years, and as of 2021, he owns less than 1% of Microsoft.

Today, the largest shareholders in Microsoft are institutional investors, including Vanguard Group, BlackRock, and State Street Corporation. These investors hold a significant portion of the company's shares, but none of them own a controlling stake.

The current CEO of Microsoft is Satya Nadella, who has held the position since 2014. Nadella owns a relatively small number of shares in the company, but his leadership has been instrumental in driving the company's growth and success in recent years.

In conclusion, while Bill Gates was the original founder and largest shareholder of Microsoft, the company is now owned by a diverse group of institutional investors. Satya Nadella is the current CEO, and his leadership has been vital in the company's continued success.

What is the mission statement of Microsoft?

Microsoft is a company that has been around for over four decades. It has evolved from a small start-up to one of the world's largest technology companies. Despite this evolution, Microsoft's mission statement has remained relatively consistent throughout the years. The company's mission statement is to "empower every person and every organization on the planet to achieve more." This mission statement emphasizes the company's commitment to creating technology that helps people achieve their goals and improve their lives.

At its core, Microsoft's mission statement is about empowering people. The company believes that technology can be a powerful tool for improving people's lives, and it is committed to creating products and services that help people achieve more. This mission statement is reflected in the company's products, such as Windows, Office, and Microsoft Teams. These products are designed to make it easier for people to communicate, collaborate, and get work done.

Microsoft's mission statement is also reflected in its corporate culture. The company is known for its focus on employee development and empowerment. Microsoft encourages its employees to take risks, innovate, and push the boundaries of what is possible. This focus on employee empowerment has helped the company attract and retain some of the best talent in the industry.

In conclusion, Microsoft's mission statement is to empower every person and every organization on the planet to achieve more. This mission statement reflects the company's commitment to creating technology that helps people improve their lives and achieve their goals. It is a powerful statement that guides the company's products, services, and corporate culture.

How does Microsoft make money?

Microsoft is one of the biggest tech companies in the world, and it has a diverse range of revenue streams that it utilizes to generate income. Here are some of the main ways that Microsoft makes money:

Product Sales: Microsoft sells a variety of products such as Windows operating system, Microsoft Office suite, Surface devices, and Xbox gaming consoles. These products are sold through retail stores, online stores, and original equipment manufacturers (OEMs).

Cloud Services: Microsoft's cloud computing services, Azure and Office 365, have been a major source of revenue growth. Azure is a platform for building and deploying applications on Microsoft's cloud infrastructure, while Office 365 is a subscription-based service for Microsoft Office applications such as Word, Excel, and PowerPoint.

Advertising: Microsoft's search engine, Bing, generates advertising revenue through search ads and display ads on its website. Microsoft also has a digital advertising agency, Microsoft Advertising, that provides ad solutions to businesses.

Gaming: Microsoft's gaming division, Xbox, generates revenue through the sale of gaming consoles, games, and subscriptions to Xbox Live, a service that allows gamers to play online with each other.

Enterprise Services: Microsoft offers a range of services to businesses, including consulting, support, and training. These services generate revenue from enterprise customers who need assistance with deploying and managing Microsoft products and services.

In conclusion, Microsoft's revenue streams are diverse and varied, ranging from product sales to cloud services, advertising, gaming, and enterprise services. This allows the company to remain profitable and continue to innovate in the tech industry.

Microsoft Business Model Canvas Explained

The Business Model Canvas is a tool that helps businesses to map out their strategy and create a visual representation of their business model. Microsoft, being one of the biggest tech companies in the world, has a well-defined business model canvas that has contributed to its success. Here's an in-depth explanation of Microsoft's business model canvas:

Value Proposition - Microsoft's value proposition revolves around creating products and services that improve the lives of individuals and businesses through technology. The company offers a wide range of software, devices, and services that cater to different customer needs.

Key Partnerships - Microsoft has partnerships with various companies and organizations to enhance its product offerings. For example, it partners with hardware manufacturers to create devices that run on its software.

Key Activities - Microsoft's key activities include research and development, marketing, sales, and customer support. The company invests heavily in research and development to create innovative products and services.

Key Resources - Microsoft's key resources include its talented workforce, intellectual property, and brand reputation. The company's brand is globally recognized and trusted, which helps it to attract customers and partners.

Customer Segments - Microsoft caters to several customer segments, including individuals, small businesses, and large enterprises. The company tailors its products and services to meet the specific needs of each customer segment.

Channels - Microsoft's products are sold through various channels, including its online store, physical retail stores, and partnerships with other retailers.

Cost Structure - Microsoft's cost structure includes research and development expenses, marketing and advertising expenses, and the cost of goods sold. The company also invests heavily in data centers to support its cloud services.

Revenue Streams - Microsoft generates revenue from the sale of its software, devices, and services. The company also generates revenue from subscriptions to its cloud services, such as Microsoft 365 and Azure.

In conclusion, Microsoft's Business Model Canvas is a well-designed strategy that has enabled the company to remain competitive in the tech industry. By focusing on creating innovative products and services that cater to different customer needs, investing in research and development, and building strong partnerships, Microsoft has continued to grow and expand its business.

Which companies are the competitors of Microsoft?

When it comes to technology, Microsoft is a household name. However, it's not the only giant in the industry. Here are some of the biggest competitors of Microsoft:

Apple Inc. - Apple is Microsoft's biggest competitor, especially in the consumer electronics market. Apple's products, such as the iPhone, iPad, and MacBook, compete with Microsoft's Surface, Windows, and other software products.

Google - Google is a major competitor of Microsoft in the search engine and productivity software markets. Google's search engine and Chrome browser compete with Microsoft's Bing and Edge, while Google's G Suite productivity suite competes with Microsoft Office.

Amazon - Amazon is a competitor of Microsoft in the cloud computing market. Amazon Web Services (AWS) competes with Microsoft's Azure cloud computing platform.

Oracle - Oracle is a competitor of Microsoft in the enterprise software market. Oracle's databases and enterprise software solutions compete with Microsoft's SQL Server and other enterprise software products.

IBM - IBM is also a competitor of Microsoft in the enterprise software market. IBM's enterprise software solutions, such as its Watson platform, compete with Microsoft's enterprise software products.

Overall, Microsoft faces stiff competition from some of the biggest names in the tech industry. However, Microsoft's diverse product offerings and strong brand reputation have helped it remain a dominant player in the market.

Microsoft SWOT Analysis

Microsoft is one of the largest and most successful technology companies in the world. However, like any company, it has its strengths, weaknesses, opportunities, and threats. A SWOT analysis can be a useful tool to evaluate a company's overall position in the market. Here is a breakdown of Microsoft's SWOT analysis:

Strong brand recognition: Microsoft is a well-known brand that has been around for over four decades.

Diverse product portfolio: Microsoft offers a wide range of products such as Windows, Office, Xbox, and Surface, which helps it cater to various customer segments.

Strong financial position: Microsoft has a healthy financial position, with a revenue of over $110 billion in 2018, making it one of the most valuable companies in the world.

Large customer base: Microsoft has a massive customer base that includes individuals, small businesses, and large enterprises.

Weaknesses:

Dependence on Windows and Office: Microsoft's revenue heavily relies on the sales of Windows and Office, making it vulnerable to market changes and competition.

Limited presence in mobile: Despite its efforts, Microsoft's mobile presence is limited, with only a small market share.

High entry barriers: Microsoft's products require significant investment, which can be a barrier for small businesses and individuals.

Opportunities:

Cloud computing: Microsoft's Azure cloud platform is growing rapidly, offering significant opportunities for the company.

Emerging technologies: Microsoft is investing heavily in emerging technologies such as AI, VR, and IoT, providing it with opportunities to innovate and create new products.

Diversification: Microsoft can explore new business areas and diversify its product offerings to reduce dependence on Windows and Office.

Intense competition: Microsoft faces intense competition from companies such as Google, Apple, and Amazon, which can limit its market share and revenue growth.

Cybersecurity threats: Cybersecurity threats are increasing, making it essential for Microsoft to invest heavily in security measures.

Changing market trends: Technology trends are continuously changing, and Microsoft must stay ahead of the curve to remain relevant and competitive.

Overall, Microsoft's SWOT analysis highlights its strengths, weaknesses, opportunities, and threats, providing valuable insights into the company's position in the market. By evaluating these factors, Microsoft can make informed decisions to address its weaknesses, capitalize on opportunities and mitigate threats.

Key Takeaways

Key takeaways:

• Microsoft is a publicly traded company, meaning it is owned by shareholders who can buy and sell its stock.
• The mission statement of Microsoft is to "empower every person and every organization on the planet to achieve more."
• Microsoft primarily makes money through selling software and cloud services, as well as hardware such as the Xbox gaming console and Surface line of computers.
• The Microsoft Business Model Canvas breaks down the company's key activities, resources, and partnerships that enable it to deliver value to customers and generate revenue.
• Some of Microsoft's main competitors include tech giants like Apple, Google, and Amazon, as well as companies focused specifically on software and cloud services like Oracle and Salesforce.
• A SWOT analysis of Microsoft reveals strengths such as its strong brand and market position, weaknesses such as its reliance on a few key products, opportunities such as expanding its cloud services offerings, and threats such as increasing competition and cybersecurity risks.

In conclusion, Microsoft is owned by its shareholders, and its mission statement is to empower every person and organization on the planet to achieve more. Microsoft makes money through various business segments, including productivity and business processes, intelligent cloud, and more personal computing. Through its business model canvas, Microsoft has been able to optimize its resources and create value for its customers. However, it faces stiff competition from companies such as Apple, Amazon, and Google. Despite this, Microsoft's strong brand, innovative products, and extensive resources position it well to continue dominating the technology industry. A SWOT analysis of Microsoft reveals its strengths, weaknesses, opportunities, and threats, which the company continues to leverage to remain relevant and competitive.

What are the strength and weaknesses of Microsoft?

Strengths: • Microsoft is a leader in the software and technology industry. • It has a strong brand name and customer base. • It has a large library of software and hardware solutions. • Microsoft has a strong presence in the cloud computing market. • Microsoft has a large and varied selection of products and services. • Microsoft offers a wide range of support and training options.

Weaknesses: • Microsoft is heavily reliant on its Windows operating system and Office suite of applications. • Microsoft’s products are often expensive and require significant upfront investments. • Microsoft is vulnerable to competition from other software and technology companies. • Microsoft’s products can be difficult to use and require significant training. • Microsoft’s products are vulnerable to security threats and malware.

Does Microsoft have a SWOT analysis template?

Yes, Microsoft does have a SWOT analysis template. It is available as part of Microsoft Word, Excel, and PowerPoint, and can be accessed via the Office.com template library. The template helps users create a comprehensive analysis of their organization's strengths, weaknesses, opportunities, and threats.

What is Microsoft main weakness?

Microsoft's main weakness is its slow adoption of new technologies and services. Microsoft often takes a long time to incorporate newer technologies into its products and services, which can lead to a slower response time to customer needs. Additionally, Microsoft has been known to be slow to react to changing market trends, which can also hinder its growth and development.

What are the 5 elements of SWOT analysis?

• Strengths: Identify the internal strengths that can be used to help reach strategic goals.
• Weaknesses: Identify the internal weaknesses that might hinder progress towards strategic objectives.
• Opportunities: Identify external opportunities that can be taken advantage of to help reach strategic goals.
• Threats: Identify external threats that could impede progress towards strategic objectives.
• Outcomes: Identify the desired outcomes of the SWOT analysis and how these can be achieved.

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The Apple Business Model

The microsoft business model.

• Special Considerations: Google
• Tech Stocks

Apple vs. Microsoft Business Model: What's the Difference?

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Apple Business Model vs. Microsoft Business Model: An Overview

More than any other American companies, Apple, Inc. (NASDAQ: AAPL ) and Microsoft Corporation (NASDAQ: MSFT ) dominate the intersection of technology and consumer access. Even though they compete across a huge range of sub-industries, such as computing software, hardware, operating systems, mobile devices, advertising, applications, and web browsing, each firm takes a different approach from an organizational and philosophical perspective.

As of Jan. 2022, AAPL had a market cap of around $2.61 trillion. Microsoft briefly edged out Apple as the largest company in the world riding on the strength in the growth of its cloud computing business, but MSFT has now fallen to second at $2.17 trillion.

Key Takeaways

• As of 2021, Apple and Microsoft are two of the biggest companies in the world, alternating the title of the world's most valuable company.
• Both companies have boasted a market cap of over $2 trillion.
• Apple's business model is based on innovation and consumer-centric devices. They are able to keep their base due to easy-to-use designs and data migration to new product lines.
• Microsoft built its success on the licensing of software such as Windows and Office Suite. Their business model has shifted, and they are releasing their own devices to compete with Apple's.
• Both companies are run differently with different end purposes. They are both extremely successful and have revolutionized their respective industries.

It is difficult to recall a modern American business so thoroughly dominated by the ideas and personality of one individual as Apple was under the tutelage of Steve Jobs . Jobs' remarkable innovations propelled Apple to unprecedented heights until his passing from cancer in 2011.

During Steve Jobs' second reign—he was fired in 1985, returning in 1997—Apple returned to relevancy and revolutionized multiple subindustries. In 2001, the company released the iPod, a pocket-sized device that could hold 1,000 songs, and it soon took over the Sony Walkman. A few years later, Apple completely redefined mobile phones when the iPhone was released in 2007.

Apple easily bests its competitors in terms of hardware sales and high-end gadgets. Thanks to the company's early 2000s reputation as a nonconformist response to Microsoft, millennials grew up using Macs in large numbers. This is buoyed by the company's brilliant insistence on integrating its products, making it easier to keep using new Apple products and thus more difficult to switch to a competitor's interface; this is sometimes referred to as the "Apple Ecosystem Lock."

The weakness in the Apple's business model lies in the historic success of the company's golden invention: the iPhone. Nearly half of all Apple revenue comes from iPhone sales, and no new, comparable innovation has taken off since its former CEO died and was replaced by Tim Cook. However, Cook has done a good job of preserving Jobs' legacy and has propelled Apple stock to all-time highs.

For years, Microsoft dominated the computer industry with its Windows software; Apple was an afterthought for more than a generation of operating products. Before Google Web browsing began to dominate the market, Microsoft gave away Internet Explorer for free, driving Netscape and other similar companies out of business.

The Microsoft revenue model historically relied on just a few key strengths. The first, and most important, is the licensing fees charged for use of the Windows operating system and the Microsoft Office suite. After a few years of increasing irrelevance in the race against Google and Apple, Microsoft unveiled a new vision in April 2014, instantly shifting focus to make Windows software more compatible with competitor products, such as the iPad. Microsoft also has a few successful products, highlighted by the Microsoft Surface and Surface Pro, that battle Apple devices such as the iPad.

Moving forward, however, Microsoft realized that paid software is a more difficult sell in an age of low-cost alternatives. Additionally, tablets and phones are replacing PCs. A newer Microsoft business model has been telegraphed by CEO Satya Nadella, one that emphasizes product integration, a "freemium" software package, and a concentration on its cloud computing business.

For example, Microsoft wants customers to be more engaged and fixated on its products.

Special Consideration: Google's Business Model

Unsurprisingly, the heart and soul of the Google revenue stream is its search engine and web advertisements. While Google is not the only company to give away free services and bundle them with other goods, few do it as well or as successfully.

Google services did not originally cost the user anything. Google would lure in users and collect their data, and then sell access to eager buyers across the planet. Every marketing firm in the world wants the kind of information and repeat usage Google enjoys. Moreover, the company keeps getting better and more sophisticated at targeting consumers and businesses, syncing preferences and playing economic matchmaker. In recent years, some fees have been added for storage and other services.

This no-fee model is not just profitable, it is very disruptive to Apple and especially to Microsoft. While Apple and Microsoft keep competing to find better and more innovative products to charge consumers, Google is all too happy to find a way to monetize activities for which users are eager to stop paying.

Google does not charge for Android in the U.S., which is one of the chief reasons manufacturers are so drawn to it. The Google Web apps, which bear a striking resemblance to Microsoft Office programs, are also free. Since Google began offering a free operating system and computer software, sales for Microsoft Windows and Office have slowed.

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The business model of Microsoft.

We dive into the challenges Microsoft has overcome to grow, how leveraging new technologies has helped them stay future-proof, and where it all started. We have all used Word at some point in our lives, many of us even produced an Excel spreadsheet or two. Microsoft has evolved into an international digital powerhouse, a far cry from its humble beginnings. Now the company ventures in cloud computing, with Azure; and Artificial Intelligence, with their billion-dollar investment in OpenAI – the company behind ChatGPT- and the development of CoPilot.

The origins of Microsoft.

In 1975 Bill Gates and Paul Allen founded Microsoft. Their interest in technology and programming brought them together to shake up the tech world of the 70’s. By this time, computers were predominantly used for business purposes, operated by IT specialists. Their user interfaces, nothing like what we are used to today, functioned on Octal or HEX code. The machine that would function as the fire starter for Microsoft would emerge in the early 70’s. The MITS Altair 8800 was sold as the first commercially available personal computer (PC). Gates and Allen recognized the potential of this machine and saw an opportunity to create a version of the BASIC programming language for it, turning the pc into something average consumers would be able to use. They developed Altair BASIC, which became one of the first programming languages available for personal computers. Commercializing on the success of this language, the two founded Microsoft, in 1975. Their first major deal: Licensing BASIC for the Altair 8800. 

Rise of Windows.

Ten years later, in ‘85, Microsoft was competing with another tech company, founded in ‘76, Apple. Both companies were focusing on bringing the pc to the masses, however Microsoft focused on software alone, while Apple’s focus was on hardware, supported by their proprietary software. Steve Jobs, Apple’s then Chairman, brought this combination to life through project Lisa and the Macintosh. Both projects started development around the early ‘80s and were quick to pop up on Microsoft’s radar. As these machines provided a user-friendly Graphical User Interface (GUI), Apple was to take ground on Microsoft’s market share. To stay future proof, Microsoft started leveraging the emerging technology of GUI. And in 85, Microsoft launched Windows, a GUI for MS-DOS. 

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Expansion and evolution..

Over the years, Microsoft developed many services and products, ranging from productivity suites to development tools, and server software. Under the leadership of CEO Satya Nadella, from 2014, Microsoft made a significant push into cloud computing with its Azure platform and Office 365 suite. This shift has been largely successful, with Azure emerging as one of the leading cloud service providers globally. It was Microsoft's early investments in cloud computing and its recognition of the growing importance of cloud services in the technology industry. This provided them with new opportunities and created new revenue streams. With Azure, the company was now able to offer more than Software as a Service (SaaS) as it scaled up to Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

Navigating the shift to cloud computing.

Following the launch of Azure, Microsoft expanded its competitive landscape beyond Apple to engage with the titan of cloud computing, Amazon Web Services, challenging the established dominance of Amazon in the cloud domain. Microsoft strategically focused on its existing enterprise customers and continued to invest in its platform. By prioritizing the end-user and creating a developer-friendly environment, Microsoft managed to secure a noteworthy market share.

“Languages evolve; ideas blend together. In computer technology, we all stand on others' shoulders.”

- paul allen., ai and research group..

Following the introduction of Azure in 2010, Microsoft marked another significant milestone in 2016 with the launch of its AI and Research Group, aiming to accelerate its AI innovations and integrate AI into all its products, a clear sign of its commitment to the emerging field of artificial intelligence.  While Microsoft’s journey has been marked by remarkable innovations, it faced competition in the AI space from other tech giants like Google and Amazon, and public scrutiny over ethical concerns with AI deployments. To stay ahead, Microsoft made a one-billion-dollar investment in OpenAI positioning itself as a leader in ethical AI development and collaboration. Read more about the business model of OpenAI in our blog. This strategic move underscores Microsoft’s commitment to responsible AI and enhances its competitive edge by aligning with emerging technology and thought leadership in AI. By embracing this challenge as an opportunity for growth, Microsoft continues to evolve and adapt, ensuring its place at the forefront of the technology landscape. 

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Future-proofing business..

Their strategic partnerships, like the significant investment in OpenAI, showcase a commitment to ethical AI development, keeping them at the forefront of technological advancements. By continuously evolving and adopting forward-thinking technologies, Microsoft not only secures its position but actively shapes the future of the tech industry. The ability to recognize and exploit the potential of emerging technologies is a critical takeaway from Microsoft's strategy, offering a blueprint for future resilience and growth. As the world is changing below our feet and new technologies emerge daily, it is up to us to recognize and exploit these technologies and further grow our businesses. Seeing emerging technologies as a business opportunity, exploring their worth and understanding their role in the world and our businesses to leverage them and become future proof is one of the most valuable lessons learned from Microsoft. However, we have learned more from Microsoft.

Three learnings from Microsoft.

Recognize and seize opportunities. Identify emerging trends. Act swiftly to innovate and capitalize on them. Microsoft capitalized on the emerging market of cloud computing by launching Azure, positioning itself as a leader in providing cloud solutions. 

Adapt to market trends. Stay updated on market shifts. Adjust your strategy to meet evolving demands. Microsoft identified AI as a critical future trend and integrated AI capabilities into Azure, enabling businesses to build intelligent applications, and showcasing foresight into technological advancements. 

Invest in emerging technologies. Stay ahead of technology. Invest in and integrate emerging tech for business growth. By transitioning from primarily offering software products to providing cloud services and AI solutions, Microsoft has adapted its business model to align with market demands for more flexible and scalable technology solutions. 

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How does Microsoft make money?

By David Boyd   |   Verified by Andrew Boyd   |   Updated Aug. 17, 2023

• Microsoft is the industry leader in desktop operating systems, with a 75% market share.
• In the 30-years since its IPO, Microsoft saw a 71,000% increase in its share price.
• Microsoft makes money by selling computing devices, cloud services, software, and other tech-related products.

Bill Gates and Paul Allen founded Microsoft in April 1975 in Albuquerque, New Mexico. The duo got the name for the company by combining the words "microcomputer software." Gates and Allen converted the BASIC mainframe programming language to create the first personal computing system, known as "Altair."

Microsoft had its IPO on the NASDAQ stock exchange on March 13th, 1986, under the ticker $MSFT . At the time of the IPO, Microsoft opened at a share price of $21, closing its first day of trading with a share price of $27.75. Gates sold $1.6 million in shares, retaining a 45% stake in the company worth $350 million. In 1987, Microsoft founder Bill Gates became the world's youngest billionaire.

Coming up next

What does microsoft do, how does microsoft work, how microsoft makes money, future growth engine, competitors.

The Microsoft Corporation is a leading developer of PC software operating systems and apps. The company publishes multimedia titles and manufactures a range of hybrid tablet devices, laptops, and smartphones.

The company offers email services, and it owns the "Xbox" gaming platform. The company has sales offices around the globe, and it operates an R&D center at its corporate headquarters, based in Redmond, Washington.

Microsoft operates R&D labs at other global locations in Cambridge, England; Beijing, China; Bengaluru, India; Cambridge, Massachusetts; New York, New York; and Montreal, Canada.

Bill Gates stepped down from his role as the company's CEO in 2000. Gates handed over the reins to Steve Ballmer , who he met during his tenure at Harvard University in the 1970s. He nominated Ray Ozzie as the chief software architect in 2006.

Gates remains chairman of the board, but he has not had a direct role in company operations since 2006. Ray Ozzie left the company in 2010, and Ballmer retired in 2014, leaving current CEO Satya Nadella to run the company.

Microsoft retains its market-leading position in the consumer and business segments of PC operating systems, online gaming, and productivity software. Microsoft introduced its range of "Surface" tablets in 2012.

Microsoft makes money by selling digital devices, operating systems, productivity tools, cloud services, and gaming platforms to the consumer and corporate markets.

The company's largest revenue source is its cloud computing business, and it's the fastest-growing segment of its business model.

Productivity and business processes

Microsoft offers a productivity software suite to businesses and private users (Microsoft Office). The software has the goal of improving personal and corporate productivity and communications.

The productivity suite is available to commercial partners on license and personal users. The company charges a subscription fee for accessing its tools. This segment of the business accounts for approximately 35% of its revenues.

Cloud services

Microsoft's intelligent cloud services division includes Microsoft's private, public, and hybrid server offerings. It also covers its cloud computing and storage services for its business partners.

Its cloud services include Microsoft Azure, Windows Server, SQL Server, Enterprise Services, GitHub, and others. This division of Microsoft's business accounts for 37% of its total annual revenues, and it's the fastest-growing segment of the Microsoft business model.

Personal computing

The Microsoft personal computing division consists of products and services that place its customers at "the center of the Microsoft experience with its technology."

This division of the business includes its Windows OS, Surface devices, Xbox gaming products, and search and news advertising. This business segment accounts for approximately 29% of Microsoft's annual revenues.

In early 2022, Microsoft acquired Activision Blizzard for a record $68.7 billion, making it the company's most expensive acquisition. The company intends to use AB as its foothold into the "Metaverse."

Microsoft intends to close the deal in 2023, making it the third-largest gaming company in the world by revenue, behind Tencent and Sony.

Microsoft has a chokehold on the OS segment of the market, and it's the most prominent OS in the world.

However, it faces stiff competition from tech companies competing in the space. Some of the company's top competitors include the following organizations.

• International Business Machines Corp (IBM)
• Oracle Corp (ORCL)
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More From Forbes

How microsoft’s digital transformation created a trillion dollar gain.

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Microsoft CEO Satya Nadella at Microsoft's Annual Shareholders Meeting

At a time when most digital transformations are falling short , last week’s appointment of CEO Satya Nadella as chair of Microsoft’s board is a shout of confidence in Nadella’s leadership and in the digital transformation that he has led since 2014. After having split the CEO and chairman’s roles in 2014, rejoining them is an unusual governance move .

The appointment reflects confidence in Nadella’s combination of technical expertise, business savvy, inspirational capability, and dazzling financial results. The seven-fold increment in Microsoft’s market capitalization of some $1.5 trillion makes Microsoft one of the world’s few digital giants, leaving most other companies in the dust, as shown in Figure 1.

Starting Position: Grim

It’s hard to remember now that in 2014, Microsoft was on the ropes. PC sales were falling. Microsoft’s software products were in decline. Its static, old products lacked pizzazz and personified ‘boring’. Windows couldn’t compete with Google’s free operating system. Microsoft’s investment in the Nokia phone was disastrous. Microsoft’s share price was stagnant. Few saw a viable path forward.

Moreover, Microsoft’s corporate culture was notoriously combative, both inside and outside the firm. It was personified in the prior CEO, Steve Ballmer . (I had visited Microsoft in 2004 and experienced it first-hand.)

Staff were demoralized and even saw Nadella’s appointment as disappointing: only an outsider could re-energize the tired old giant.

Microsoft seemed a relic of an industrial-era company that, like so many other big firms, had failed to grasp the meaning of the emerging digital economy.

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Although each firm is unique, many CEOs could learn from Nadella’s successful six-step playbook.

1.   Kill Losing Business Models

Most firms undertaking a digital transformation soldier on with their losing, industrial-era business models, while they dabble in digital innovation on the side. The common result: the loss of energy that is sucked into the losing business models prevents the firm from ever putting its heart into digital innovation. The firm muddles along, cutting costs to make money, as the stock market punishes its lackluster performance and lack of growth prospects. In due course, the firm’s board loses patience and a newcomer CEO is hired to restart the cycle.

Nadella did the opposite. At the outset, he did the unthinkable. He gave Windows away for free and dropped the Nokia phone. In so doing, he freed up energy for promising domains.

2.   Establish A Customer-Focused Purpose

Given the popular cry for firms that have a purpose beyond making money, many CEO’s blunder into declaring some high-sounding goal (like ‘we save the environment’) unrelated to the firm’s business. The result is a PR disaster that undermines trust. Customers see immediately that it’s just a stunt. Internally, it causes mass confusion.

While the search for purpose is worthwhile, seeking it in some alternative arena is misguided. In the customer-driven digital age, Peter Drucker’s dictum —“there is only one valid purpose for a corporation: to create a customer”—is still the guiding star.

What CEOs can do, as Nadella did, is to spell out how the firm will create customers. Microsoft would not waste time chasing Apple’s iPhone or replacing Google’s search. Instead, Microsoft’s mission is help empower people wherever they are, whatever device they are using. Nadella’s simple purpose of empowering everyone on the planet inspired staff. They could see how it applied to their daily work, whether they were a coder, designer, marketer, or customer-support technician. Nadella also talked about the environment, but he did so without distracting from Microsoft’s core purpose of empowering customers.

3.   Define Areas Of Opportunity

Nadella defined the two main areas of opportunity—mobility and the cloud. While Microsoft’s competitors defined their products as mobile, Microsoft was about the mobility of human experiences , experiences made possible by Microsoft’s cloud technologies. Microsoft’s cloud could make working on Apple’s iPhone more useful. It also led to innovative hardware products like the Surface PC and gaming products that won the hearts of hip customers who wanted something cool. Microsoft would only be in the phone business if it had something that really differentiated.

4.   Address Culture Up Front

Many firms attempting digital transformation shy away from the issue of culture, thinking it too “mushy” and “touchy feely” to achieve anything meaningful. They may believe that “if we do things right, culture will adjust of its own accord.” If only it were so.

Nadella recognized that culture, as the unspoken—sometimes unconscious—set of values, habits and assumptions about ‘how things are done around here,’ is hard and tangible, not soft or mushy. Microsoft’s confrontational culture of ‘us versus them’ and ‘take no prisoners’ had deep historical roots in the firm. It was the antithesis of what was needed to succeed in the digital economy.

So Nadella confronted culture on day one and announced that from then on, the culture would be one of collaboration and finding mutually profitable solutions. Instead of ‘us vs them’, it would be ‘us with them.’

Nadella had no idea what the response would be. Cynics feared the worst. But they were wrong. Leaders who agreed with the vision were invited into Nadella’s leadership team and staff responded positively. Those at the top who disagreed were not dismissed, but they soon saw that their future lay elsewhere and left. The result? Little time lost on unnecessary culture wars.

5.   Make Empathy Central

Nadella took another risk in making empathy the centerpiece of his culture initiative. His personal philosophy is to connect new ideas with empathy for other people. “Ideas excite me. Empathy grounds and centers me.”

Making empathy the keynote concept of a major corporation is almost unprecedented. But Nadella saw that without empathy, Microsoft would never succeed in understanding customer needs—particularly needs customers themselves didn’t know they had—and delivering solutions to meet those needs. The bet paid off, as Microsoft’s staff found ways to upgrade and enhance products that had users exclaiming, “I didn’t know I could do that!”

6.   Inspire and Unleash The Hidden Agile Army

Six years before Nadella became CEO, around 2008, many lower-level teams began exploring Agile software development practices , without top support. Nadella himself had found in 2008 that “the key was agility, agility, agility. We needed to develop speed, nimbleness, and athleticism to get the consumer experience right, not just once but daily. We needed to set and repeatedly meet short-term goals, shipping code at a more modern, fast-paced cadence.” ( Hit Refresh, p.51)

By 2014, there was an army of thousands of enthusiastic Agilists who remained stifled by the warlike culture at the top. Nadella’s culture of collaboration enabled this army to come out of the shadows and perform their magic with official, top-management blessing. They became Microsoft’s mainstream, rather than fighting daily battles as renegades.

Many big firms have similar hidden armies of enthusiastic Agilists, but they remain imprisoned in their IT departments, working at odds with the top of the firm. Those firms have yet to do what Nadella did: set the Agilists free.

The net result of these six moves? A $1.5 trillion gain in market capitalization. The question is: why don’t the CEOs of other struggling big companies shown in Figure 1 do what Nadella did?

And read also:

Surprise! Microsoft Is Agile

Why Digital Transformations Are Failing

FIGURE 1: Financial landscape: 55 large firms as of June 2021

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Business Models

Microsoft Business Model: 5 Powerful Takeaways To Learn

The Microsoft business model has created one of the most powerful companies in the world. In this article, you’ll discover how the Microsoft business model has changed, evolved and what the future of this tech giant looks like. Did you know Microsoft is worth over $2900 billion dollars! You can see from the market capitalization

The Microsoft business model has created one of the most powerful companies in the world.

In this article, you’ll discover how the Microsoft business model has changed, evolved and what the future of this tech giant looks like.

Did you know Microsoft is worth over $2900 billion dollars!

You can see from the market capitalization chart that there have been ups and downs in how investors viewed the future potential of Microsoft.

However, Microsoft went through some remarkable changes and has regained its position as a leading technology company.

We’ll explore how the Microsoft business model fundamentally changed as we go through the article.

Table of Contents

What is Microsoft?

Core Value Propositions

The First Few Years To Success

In 1975, a youthful 20-year-old Bill Gates and his friend Paul Allen formed Microsoft, the company that we all know today.

Back in those early days, computing was in its infancy and the internet was just a small and largely unknown network mostly used by academic institutions (very limited).

Bill Gates and Paul Allen spotted an opportunity to produce basic operation system (interpreter to be exact) for the Altair 8800.

By the early 1980’s MS-DOS, a simple operating system became the go-to operating system for computers. But it was Windows that was the breakthrough, a visual interface that quickly captured the market.

In 1986, Microsoft was launched on the stock market creating billionaires and multiple millionaires.

After that, Microsoft had the money and resources to build its empire and consolidate its position as the main operating system used in PC’s.

However, other entrepreneurs like Steve Jobs also spotted the opportunities associated with personal computing. He stepped into the market, created Apple Mac’s and the Apple business model we all know today.

Who owns Microsoft?

Bill Gate still owns shares in the company, but he has sold or given away the majority of his shres over the years since the company was floated.

Microsoft’s 2023 Annual Report indicates that as of July 24, 2023, there were 83,883 registered holders of record of its common stock. The company boasts 7.43 billion outstanding shares, according to Nasdaq.

Institutional investors predominantly hold Microsoft’s shares, representing 69.14% of the outstanding stock as recorded by Nasdaq on February 9.

If you want to find more interesting facts and to explore the key milestones in Microsofts histroy take a look at their storyline at Microsoft .

I worked with Microsoft on the launch of the Xbox and developing their retail presence. During that time I learned a lot about Microsoft’s business strategy, long-term focus and the great culture that has propelled Microsoft successfully through its different stages.

The Microsoft Business Model

The core business involves the sale, distribution and support of software solutions. Although Microsoft sells hardware this is a relatively small part of the business.

The business model patterns used in the Microsoft business model are:

• Solution Provider : Microsoft provides a full range of solutions for a business to operate e.g. ERP, CRM as well as development platforms for bespoke and customized requirements.
• Razor and Blade : apps and other software won’t work unless specifically developed for the different operating systems. Another example is the Xbox games only working on the Xbox.
• Lock-in : Customers get lock-in to using Microsoft software because of large switching costs.
• Freemium : Linkedin is free to use as a business social network. However, to get the full value from the platform e.g. Linkedin Learning you need to be a premium member.
• Subscription model : Linkedin premium membership is a subscription model. Moreover, Office 365 and most of the cloud services provided by Microsoft are in fact, subscription models.
• Hidden Revenue Model : Bing is the search engine that you can use from Microsoft. While it is free advertisers are using the platform to push ads to you based on the keywords you use. A further example is Linkedin, although there is a free version of Linkedin, both free and premium users are shown Ads in their newsfeed. These ads are a significant source of revenue for Linkedin.
• Layer Player : Microsoft provides the core operating system as well as applications that then work with it such as Microsoft Office. Although Microsoft does sell some hardware, e.g. Surface laptops, it is a limited range compared to its software.
• Ingredient Branding : Microsoft branding is built into the use of laptops and PC’s. Although an ingredient, e.g. you buy the PC, Microsoft has already ensured that its brand is prominently shown.

More Information on Microsoft Business Model Patterns

Razor And Blade

Subscription

Layer Player

The Evolution Of The Microsoft business model

Operating systems like Mac OS and Windows are unique and apps that work with one operating system will not work the other. That creates a form of lock-in effect making it hard for customers to switch.

This form of lock-in works for developers and customers. Both have to invest time and effort into getting used to the operating system and understand how it works.

A developer does this so he can make money from selling apps that work with Microsoft operating systems. Users need to be able to get work done and use it in their day-to-day life.

Switching costs are a form of competitive advantage because they create barriers to change for customers – in other words, people do not want to invest time to learn something new.

However, the Apple business model lowered the switching costs by making its operating systems easy to use through attention to design.

Despite heavy competition, Microsoft has evolved beyond operating systems and has made some critical changes over its time, not to mention a staggering amount of strategic acquisitions .

Next, I’ll break down how the Microsoft business model and reveal some of the underlying business model principles used.

What is Microsoft’s business strategy?

The Ambitions That Drive Microsoft

To achieve our vision, our research and development efforts focus on three interconnected ambitions:

• Reinvent productivity and business processes.
• Build the intelligent cloud and intelligent edge platform.
• Create more personal computing.

Microsoft produces software solutions for businesses and consumers.

Microsoft’s strategy is heavily focused on integrating platforms and apps and using Artificial Intelligence to drive the next evolution of computing, productivity and business innovation .

The AI capabilities are also echoed in ‘ Create more personal computing ‘. AI will drive new ways to personalize experiences in real-time as the interface with customers becomes more liquid enabling personalized content and customer journeys.

From distributing software on CD’s, customers now simply download the software or in the case of many enterprise software use it as a SaaS platform.

Customers have moved from buying the software as a single cost transaction to now now ‘renting’ the software through subscription business model .

This shift in the revenue model has resulted in a significant jump in profits (see below) as Microsoft now shifting towards a global platform business .

The Move To Cloud Services

What is azure.

Azure is a cloud computing platform that provides Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). Azure offers services such as computing, storage, networking, and Artificial Intelligence (AI). 

What Is ProjectX?

Microsoft is producing a global platform for gaming that will allow gamers to play a multitude of games on any device, anywhere. Xbox games will also be hosted and delivered to Xbox gamers via Project xCloud . This move gives Microsoft a greater depth and breadth of opportunities to interact and engage with gamers.

The Microsoft Business Model Canvas

You could produce a business model canvas for each of the market offers. To make it simple I’ve just focused on the core business.

What are Microsoft Customer Segments?

The core customer segments of the Microsoft Business Model are:

• Corporates : These are the companies that have account managers and support teams.
• SMB’s and SME’s : Small to medium-sized businesses will usually deal with VAR’s for support and services.
• Value-Added Resellers : VAR’s distribute and support SMB’s and SME’s in the use of Microsoft products. Many VAR’s have teams of highly trained IT professionals who advise and work with companies. Microsoft supports VAR’s with training and accreditation schemes to ensure that they are able to keep up to date with the latest software releases and technical know-how.
• Original Equipment Manufacturers : OEM’s produce the hardware and install Microsoft Windows and Microsoft Office on the PC/Laptop. Hp, Samsung and Dell are examples of some of the larger OEM clients.
• Developers : Microsoft Azure is a platform that provides developers with the capabilities to design and develop applications. Other developers produce apps for operating systems such as Microsoft Windows phones and Xbox games. The increasing focus on developers is one of the reasons that Microsoft purchased GitHub.
• Consumers : Home users of PC’s, laptops and cloud services such as Microsoft 365 and Microsoft Office and Xbox gaming.

The Bing Advertising Business Model

Bing  is a web search engine owned and operated by Microsoft. The service has originally was Microsoft’s search engine MSN Search. Bing is the third largest search engine globally, with a query volume of 4.58%.

The Bing business model is based on the hidden revenue model. Users can search on Bing for free while advertisers can use Bing to promote products or services.

The Linkedin Business Model

LinkedIn is the number one social network for business professionals with more than 645 million members and growing.

The platform has three main propositions:

• Talent Solutions
• Marketing Solutions
• Premium Subscriptions

Talent Solutions is comprised of two elements: Hiring, and Learning and Development. Hiring is a service for recruiters to help them attract, recruit, and hire talent. Learning and Development provide subscriptions to enterprises and individuals to access online learning content (Linkedin Learning).

Marketing Solutions enables companies to advertise to LinkedIn’s member base.

Premium Subscriptions enables professionals to manage their professional identity, grow their network, and connect with talent through additional services like premium search. Premium Subscriptions also includes Sales Solutions, which helps sales professionals find, qualify, and create sales opportunities and accelerate social selling capabilities.

How Microsoft Makes Money?

Microsoft employs several different revenue models in its operations. In this section, I’ll show you where the Microsoft business model makes money and how it generates profits.

How is Microsoft growing?

Key growth areas in FY 2023 as reported by Microsoft:

Financial Performance Summary

• Productivity and Business Processes : This segment saw a revenue increase of 10%, driven by a 13% growth in Office 365 Commercial products and cloud services.
• Intelligent Cloud : Revenue in this segment grew by 19%, highlighted by a substantial 29% increase in Azure and other cloud services.
• More Personal Computing : Revenue in this sector increased by 8%. Specific areas such as Windows and Surface saw a decrease, with Windows OEM revenue down by 25% and Devices revenue down by 24%. However, the decrease was offset by gains in other areas.

Key Financial Figures

• Annual Revenue : Microsoft reported an annual revenue of $211.915 billion for 2023, representing a 7% increase from the previous year.
• Net Income : The net income 2023 was approximately $72.361 billion, showing a slight decrease of 1% from the previous year.
• Market Highlights : Key drivers for growth included significant contributions from cloud services and a strategic focus on integrating artificial intelligence into their offerings.

How much money does Bing make?

In the fiscal year 2023, Microsoft reported approximately $12.2 billion in revenue from search and news advertising, including Bing’s revenue. This figure represents a 5.26% increase over the previous year’s revenue in this category .

How much money does LinkedIn make?

In 2023, LinkedIn, owned by Microsoft, generated approximately $16 billion in revenue. This represents a 10% increase from the previous year, driven by growth across all major lines of LinkedIn’s business, including Marketing Solutions, Talent Solutions, and Premium Subscriptions.

How much revenue does Microsoft make a year?

Microsoft business model relies heavily on the core revenues from operating systems, servers products and Microsoft Office.

In 2023, Microsoft reported an annual revenue of approximately $211.915 billion. This represents a 7% increase from the previous year, highlighting the company’s continued growth across its various business segments, particularly in cloud services and productivity applications.

How Profitable Is Microsoft?

Microsoft’s profitability can be assessed by looking at its net income and the performance across its main business segments. In the fiscal year 2023, Microsoft reported a net income of approximately $72.361 billion, which indicates a slight decrease of 1% from the previous year.

Breakdown by Product/Service

• Revenue : $18.291 billion for the quarter ending June 30, 2023 (an annual increase of 10%)
• Key Contributors : Office 365 Commercial products and cloud services growth of 13%.
• Revenue : $23.993 billion for the quarter ending June 30, 2023 (an annual increase of 19%)
• Key Contributors : Azure and other cloud services, with a growth of 29%.
• Revenue : $13.905 billion for the quarter ending June 30, 2023 (an annual decrease of 4%)
• Key Areas : Despite the decrease, there are significant areas of activity, such as Xbox content and services and Windows Commercial products. However, Windows OEM and Devices saw a substantial decline.

Overview of Profitability

• Microsoft Cloud : This area, which includes Azure, is a significant driver of profitability, with robust growth reflecting the increasing reliance on cloud infrastructure and services.
• Office Products : Both consumer and commercial sectors of Office products continue to show strong performance, contributing positively to Microsoft’s overall profitability.
• Windows OEM and Devices : These sectors faced challenges, affecting their profitability due to a decrease in revenue.

240 Acquisitions Later!

To understand more about the future of Microsoft and its plans, it is worth looking at its recent acquisitions. I’ll explore this shortly in the next post on Microsoft.

Microsoft bought Linkedin on December 8 2016, for $26.2-billion – Linkedin Business Model for more details.

Microsoft bought GitHub on June 4, 2018 , for $7.5 billion in stock .

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Microsoft Business Model (2023) | How Does Microsoft Make Money

5 minutes read

Most people with access to computers and the internet must have used at least one of Microsoft's products. It is a given as the company is one of the largest tech companies in the world. Microsoft started as a small company before conquering a massive customer base worldwide like any other company. It might even surprise some to know that the company created its first product when the internet and computers were not yet widespread.

Microsoft opened opportunities for other companies to explore technological advancements to create innovative products and services. It is right to look closely at the Microsoft business model canvas to understand better how the company markets its products to generate millions of revenues.

Continue reading this article to learn more about this giant company and its strategies to keep its position as a leading provider of software solutions despite tight competition.

A Brief History of Microsoft

Bill Gates and Paul Allen spearheaded Microsoft in 1975. During this time, computers were nothing like the ones you see today, and the internet was a relatively strange network and was limited to academic institutions. However, they decided to create something that seemed like an operating system for a microcomputer named Altair 8800.

Years passed, and most computers have used the same operating system. However, Microsoft's turning point happened when they introduced Windows to the market, which they considered an innovative interface. Microsoft entered the stock market in 1986, which paved the way for the company to build its empire of computer operating systems.

Microsoft Business Model Canvas

The Microsoft business model canvas involves distribution, sales, and system and software solution services support. However, its business model diagram can also be complex as it has introduced new products and services to its target markets. Here is how the Microsoft business model canvas looks.

Value Propositions of Microsoft

Microsoft provides its target customers with operating systems like Windows and a productivity suite through Office. The software aims to improve personal and corporate communications and productivity. Microsoft's productivity suite is also available to commercial entities through licenses and individual users. It works by charging subscription fees for accessing specific Microsoft tools.

Cloud services is another division of Microsoft that generates revenues for the company. They offer public, private, and hybrid servers. Microsoft's business partners can also use storage and cloud computing services. Those using the company's products know that its cloud services include Windows Server, Microsoft Azure, Enterprise Services, SQL Server, and GitHub.

Customer Segments of Microsoft

Generally, Microsoft's customer segments are divided into two categories - the consumers and enterprise. Most businesses now need productivity tools for an efficient workflow. This is where Microsoft's productivity suites come in. Furthermore, the company's server management, consulting services, and IT support are essential for this customer segment.

Microsoft caters to the general customers. Its consumers generally utilize all its standard solutions, including Skype, Outlook, Office, cloud, and more.

Key Partners of Microsoft

There is only one significant partner under the Microsoft business model canvas: the company's app developers. Besides them, the company also partners with companies providing data management, analytics, digital marketing and advertising, telecommunications, system integration, and internet hosting services. All these external stakeholders ensure Microsoft's software and product solution works perfectly for every consumer.

Key Activities of Microsoft

Microsoft is a tech company, so it is just fitting that one of its key activities includes software development. The company might be a giant in the industry. However, competition is still challenging, so its R&D team must also ensure that innovative Microsoft products and services provide customers with the latest technological updates. Along with it are the company's marketing efforts to ensure Microsoft stays at the top, regardless of competition, generating sales and revenue.

Customer Relationships of Microsoft

Microsoft gives its consumers the freedom to navigate software and hardware products. They don't have much personal staff interaction as most of its products are self-service. Meanwhile, corporate services and products need personal assistance from Microsoft teams and representatives, especially regarding support, advertising, and consulting. The company's social media accounts on Twitter and Facebook are also used to interact with Microsoft customers directly.

Key Resources of Microsoft

The Microsoft business model canvas encompasses essential key resources, with a focus on the company's expansive user base and its proprietary software products. Given Microsoft's diverse customer base and wide-ranging market segments, it's reasonable to anticipate additional key resources and inputs that contribute to the company's overall success and innovation. These resources collectively support Microsoft's position as a global technology leader.

Channels of Microsoft

Microsoft employs multiple distribution channels to market its products, encompassing retailers, the official Microsoft website, OEMs (Original Equipment Manufacturers), and direct sales and resellers. These channels play a vital role in ensuring the accessibility of Microsoft's offerings to its target customers. Through strategic partnerships and marketing efforts, Microsoft products reach a wide audience, further contributing to the company's success. 

Cost Structure of Microsoft

As previously mentioned, Microsoft must innovate its services. This is why one of its significant expenses goes to software and development. A considerable cost is also spent on cloud infrastructure and workforce. Besides the productivity tools, Microsoft also offers intelligent cloud services, which are essential for customers using other Microsoft tools. Of course, people are behind all these processes; hence, the company also provides a budget for its human resources.

Revenue Streams of Microsoft

Microsoft generates significant revenue by licensing its Windows operating systems and productivity tools. Licensing fees serve as one of the company's primary income sources. Furthermore, subscriptions play a pivotal role in driving sales and revenue for Microsoft. The combination of licensing and subscription-based models ensures a steady income stream for the company.

How Does Microsoft Make Money?

The Microsoft business model canvas enables the company's alignment of strategies and goals across various segments and processes. Microsoft provides a structure for a rational and timely allocation of essential resources within the company.

Microsoft is making money through business and productivity processes, which comprise the company's communication, productivity, and information services, accommodating a vast range of platforms and devices. In 2021, this segment generated $63.4 billion in revenue. It comprises Office Commercial, Office Consumer, LinkedIn, and Dynamics 365.

The other segment where Microsoft gets considerable revenue is its Intelligent Cloud, which contributes about $75.2 billion. The services in this segment include cloud services and server products, Enterprise Support Services, Nuance professional services, and Microsoft Consulting Services.

Finally, the third segment is More Personal Computing, which puts Microsoft consumers at the center of using its services. It generated approximately $59.7 billion in revenue for the company in 2021. Some products offered under this segment include Windows OEM licensing, PC accessories, Surface, XBox content, services, and hardware.

Key Takeaways

It's fascinating how the creators of Microsoft perceived that the company would be this big. Remember that the company and its first product were made when only a few people knew about the internet and computers. Microsoft indeed created innovative technological solutions so the newer generations can maximize technology advancements. This time, the competition is more challenging, with various innovators introducing newer products and services to similar target markets with Microsoft. However, the Microsoft business model canvas allowed the company to align its strategies designed to fulfill company goals.

It's also the same for your company and other businesses. A business model is an essential visual tool to see the necessary segments and processes to achieve business goals. While your business model might not be as diverse as Microsoft's, you can still get insights and inspiration from it.

As you structure your diagram, maximizing online diagramming tools like Boardmix is best. It's accessible; you only need to create an account to map your business mode. In fact, Boardmix provides a pre-designed business model canvas template, so you need not start from scratch. Check the template through this link and customize its colors and shapes. You can include images and stickers if necessary. Your workspace lets you share the business model canvas template with your team and colleagues remotely. Besides the viewing access, the creator can authorize someone to edit the template. This makes collaboration more efficient and innovative.

References:

https://finty.com/us/business-models/microsoft/

https://thestrategystory.com/2023/02/02/how-does-microsoft-make-money-business-model-strategy/

https://businessmodelanalyst.com/microsoft-business-model/

Join Boardmix to collaborate with your team.

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I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

September 13, 2018 By Denis Oakley

What is the Microsoft Business Model

What is Microsoft’s business model? In this video I describe how Microsoft makes money by working through all 9 components of Microsoft’s business model canvas.

Microsoft makes money by selling operating systems and office software to millions of consumers. It also sells the same products to major enterprises allowing both sets of customers to use computers cheaply and effectively to do thousands of everyday tasks

That’s the secret of Microsoft’s business model

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Business Model of Microsoft & How Does Microsoft Make Money?

June 9, 2023 | By Hitesh Bhasin | Filed Under: Business

Microsoft , an American multinational technology company , is the leading company of technology in the world. The business model of Microsoft develops, designs, supports, licenses, and sells computer software, personal computers, consumer electronics, and related services.

Microsoft was founded by Bill Gates and Paul Allen shortly after 1975 when they developed BASIC on the Altair. It is a multi-faceted software and full-service technology company.

The best-known software products of Microsoft Business Model are the Microsoft Windows line of operating systems along with Microsoft Office suite, Internet Explorer and Edge web browsers.

It also releases its flagship hardware products such as Xbox video game consoles and the Microsoft Surface lineup of Touch-screen PCs. It provides efficient, reliable, and accessible home and business software solutions and innovative consumer electronic products and secure online storage and search services.

Microsoft comes in the league of the Big Five Technologies companies, together with Amazon , Google , Apple , and Facebook . This article aims to delve deep into the mechanism of how Microsoft makes its money to understand it is functioning and working process better.

Table of Contents

Introduction to the business model of Microsoft

Microsoft was founded a little while after 1975 by two friends, Bill Gates and Paul Allen. In 1975, they developed a system through which they could use BASIC, a popular mainframe programming language on Altair, an early personal computing system.

The word Microsoft comes from a combination of the two words, microcomputer and software. The leading company in technology and software, Microsoft offers a wide range of services. It was developed for several more years. Many other programming languages were also created.

After that, IBM approached Microsoft to create an operating system for its first personal computer. Microsoft acquired an existing operating system from a third party and modified it to form MS-DOS.

It was released in 1981 and became a big hit. It led to Microsoft launching its Windows operating system series and other office software. This ultimately provided the kickstart it needed, and soon enough, Microsoft became the world’s leading technology and software company.

What exactly is Microsoft?

The word Microsoft comes from the combination of the words microcomputer and software. It is an American multinational software and technological corporation.

It offers various services, including software products, hardware products, cloud-based solutions, and training and certification services and consulting and product solution support services.

Products offered by Microsoft Business Model

• Visual Studio
• List of software

Services provided via Business Model of Microsoft

• Microsoft Store
• Windows Update
• Xbox Game Pass

A timeline describing the growth of Microsoft Business Model

• 1972–1985: The founding of Microsoft
• 1985–1994: Windows and Office
• 1995–2007: Foray into the Web, Windows 95, Windows XP, and Xbox
• 2007–2011: Microsoft Azure, Windows Vista, Windows 7, and Microsoft Stores
• 2011–2014: Windows 8/8.1, Xbox One, Outlook.com, and Surface devices
• 2014–present: Windows 10, Microsoft Edge and HoloLens

Contemporary Global Presence of Microsoft

Microsoft has its headquarters in One Microsoft Way, Redmond, Washington, United States.

There are about 210 countries in the world where Microsoft operates and has its presence. It ranked number 30 in the Fortune 500 rankings of the largest United States corporations by total revenue.

Revenue – $143 billion

Operating income – $53 billion

Net income – $44.3 billion

Number of employees – 151,163

Total assets – $301,3 billion

Total equity – $118,3 billion

The numbers and data represented above speak for the massive and impressive presence of Microsoft around the world. It has made itself a global presence and is justifiably the most renowned and top technological company in the world, which makes it all the more fascinating to explore the intricacies of the functioning of this organization.

In November 2018, Microsoft got a $480 million military contract with the U.S. government for incorporating augmented reality (AR) headset technology in the weapon repertoires of American soldiers.

Decoding the Business Model of Microsoft

Microsoft generates its primary revenue and income by developing, manufacturing, licensing , supporting and selling a variety of software and hardware products, cloud-based services and services that integrate with it and by producing the relevant online advertising that reaches out to a global audience, thus maintaining and growing its scope and base.

The software products include operating systems for computing devices, servers, phones, etc., server applications for distributing computer environments, cross-device productivity applications, desktop and server management tools, business solution applications, video games, software development tools, and online advertising.

The hardware products include PCs, tablets, phones, gaming and entertainment consoles, other such devices and accessories.

Microsoft’s customer base can be divided into two main categories broadly –general consumers and commercial consumers. It offers the general software and cloud computing solutions through the Office 360 productivity suite email platforms such as Outlook and Exchange and online calling platform called Skype. This is generally used by both types of consumers globally.

Apart from that, its IT and consulting services are targeted more towards businesses and commercial consumers. Simultaneously, mobile and PC and gaming technologies are directed towards the general consumer and produced to the mass market to make it available for them.

This customer base includes individual consumers, organizations, original equipment manufacturers (OEMs), and application developers. All these elements of the customer base are interlinked and connected in many ways.

For example, individual customers and organizations obtain Microsoft software and services for their personal and business devices through retailers, distributors, original equipment manufacturers, etc.

Working of Microsoft in three steps

Microsoft serves organizations of various sizes and meets their different purposes to generate revenue.

• It offers its services to organizations of different sizes and meets their demands accordingly by providing tailored license programs, enterprise wise consulting services, and support, and other specialized services.
• It distributes through OEMs that pre-install Microsoft’s software on different devices that they sell to their customers.
• It also generates revenue from different application developers by providing developer tools and training certification on various Microsoft products.

Microsoft attracts various major advertising agencies that have big brands by providing multiple advertising opportunities through its MSN portal and Bing search platforms.

Microsoft has established its reputation as an efficient, reliable, and authentic provider of software technologies. It is regarded as a market leader. On top of that, many of its products are available to the users free of charge and can be accessed through its MSN and Bing portals, which only serves to increase its popularity.

The content can also be synced across multiple platforms using Microsoft’s different devices, which makes it easier and effortless for the user in many different ways. It has done a great job of establishing itself as a trustworthy source of manufacturing software and providing various services. As a result of which, it has a loyal customer base around the world and many partners as well.

Main Partners of Microsoft

Microsoft has a Microsoft Partnership Network. It organizes and manages all the partnerships of the company. This network aims to enable different multinational and technology-based companies to build their businesses around the Microsoft Company and obtain its services to an as great extent as possible.

These partner companies provide various services, including systems integration, application development, data analytics, digital marketing , manufacturing, data management, distributions , telecommunications, and internet hosting services. This network also includes authorized resellers and software retailers.

These partners receive support tools directly from Microsoft and a great discount on its products and services. They can also achieve gold and silver memberships that have additional benefits.

Gold membership allows companies to access various Microsoft tools for free. It is considered to be the best one in that category.

Significant Resources incorporated by the Business Model of Microsoft

The primary resources of a company or business crudely refer to the essential services and products it provides to its customer, which makes it authentic and accessible. For Microsoft, this includes its line of technological devices, including PCs, tablets, Smart-phones, gaming and entertainment consoles, and other such intelligent devices used broadly by the general and commercial consumers.

Microsoft makes sure to design and program these products accordingly as well. Another one of its primary resources is its line of software and server management products.

Microsoft ensures to hire only the best and most qualified of the employees. It takes measures to develop its personnel within the company, especially the research and development teams that ensure the company’s position in the market.

In some ways, the founder Bill Gates is also viewed as a critical asset to the company. He is regarded as a forward-thinking leader and the basis and origin of the whole corporation, which makes him very important.

The latest product of Microsoft Business Model

The Windows 10 operating system is the latest product of the Microsoft Corporation, and it is one of the best ones so far. It has a wide range of features that make it unique and fascinating and famous in the market.

The company has made many different wholesale changes to the way it monetizes windows with the launch of this product to the market. Most of the details of this change are kept confidential. This change is not sudden, rather a product of trends in the revenue systems that have been prevalent for many years.

This is affecting Microsoft in many ways. It used to dominate the global economy at one point in the tie. Compared to that, of course, the value is declining. Thus, this is the reason for making all these changes to the way this system functioned.

Revenue Generation of Business Model of Microsoft- How does Microsoft make money

Microsoft has diversified revenue streams, and it comes under the top 100 companies listed by their revenues in the world. Three main segments of Microsoft Revenue Generation are-

1. Productivity and Business Processes

It includes the revenues generated by sales and licensing of its different software products and cloud services for different devices and platforms. Some of such products and services are Office 365 Suite, Outlook.com, Email Platforms Exchange, Content Management Tools OneDrive and SharePoint, Call Services Skype, etc.

2. Intelligent Cloud

It includes revenues generated through Microsoft’s server products and cloud storage services.

Sales and licensing of Windows Service, Visual Studio, Microsoft SQL Server, System Center, and Microsoft Azure, etc. enable the business model of Microsoft to make money.

3. More Personal Computing

It comprised the revenues associated with the Microsoft products and services offering cross-platform utilities to the professionals, developers, and end-users. Licensing of Windows OS, Windows Phones, Microsoft patents along with sales of mobile phones, PC accessories let Microsoft generate its revenues.

It also makes money through the sales and licenses of Microsoft Xbox gaming platforms together with Xbox live subscriptions, transactions, advertising, and 3 rd part video game royalties. Revenues from display advertising via the MSN portal and search advertising via Bing Search Engines are also included in this segment.

Concluding Thoughts!

These are the basic features and key details of Microsoft’s business model, one of the leading technology-based companies in the world.

It is one of the most talented and most authentic models. This article consists of all the necessary information that you need it to know to understand the formation of this company and the working mechanism of its business model.

It is comprehensive and aptly arranged for your convenience and benefit to gain the most out of it.

What products and services of Microsoft do you use?

How pivotal do you find the role of the Business Model of Microsoft in changing the use of technology in today’s world?

Share your experiences with the M91 team in the comment section below.

Liked this post? Check out the complete series on Business Models

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About Hitesh Bhasin

Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.

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How Microsoft Makes Money? Understanding Microsoft Business Model

This post is about how Microsoft makes money. Firstly, we explain the key elements of Microsoft business model . Then, we provide the revenues, the profits, and the profit margins of Microsoft for FY 2015 (fiscal year ending June 2015). Then, we provide information on Microsoft business segments. Finally, we provide Microsoft revenues by its business segments and key product groups for the year FY 2015.

About Microsoft

Microsoft is the world’s leading technology company. Microsoft offers a wide range of software products, services, and devices. Microsoft offers:

• Software products , including operating systems for computing devices, servers, phones, and other intelligent devices; Server applications for distributed computing environments; Cross-device productivity applications; Business solutions applications; Desktop and server management tools; Software development tools; Video games; and Online advertising.
• Hardware products , including PCs, Tablets, Gaming and entertainment consoles, Phones, Other intelligent devices, and Related accessories.
• Cloud-based solutions .
• Consulting and product solution support services .
• Training and certification services .

Key Elements of Microsoft Business Model

Microsoft generates revenue by developing, licensing, and supporting a wide range of software products, by offering an array of services, including cloud-based services to consumers and businesses, by designing, manufacturing, and selling devices that integrate with its cloud-based services, and by delivering relevant online advertising to a global audience.

Microsoft customers include individual consumers, organizations, OEMs ( original equipment manufacturers ), and application developers.

Individual consumers make own buying decisions for the devices they use at work or home. They obtain Microsoft products through distributors, re-sellers, and OEMs. Microsoft generates revenues from individual consumers through Office Consumer, Devices, Gaming, and non-volume licensing of Windows operating system.

• Office Consumer  includes Microsoft Office applications sold through retail or through an Office 365 Consumer subscription. Office Consumer services include Outlook.com, OneDrive, and consumer Skype services.
• Devices  include Lumia and other non-Lumia phones, Surface devices and accessories, and Microsoft PC accessories.
• Gaming includes Xbox hardware and Xbox Live. Microsoft generates revenue from Xbox Live through transactions, subscriptions, and advertising. Microsoft also earns revenues through the sale of first-party video games and third-party video game royalties.

Microsoft serves organizations of different sizes, including large global enterprises, small- and medium-sized organizations (SMEs), public sector institutions, Internet service providers, and Academic institutions. The company offers tailored license programs, enterprise-wide support, consulting services, and other specialized services to the organizations. Microsoft generates revenues from organizations through Office Commercial, Volume licensing of Windows operating system, Microsoft Dynamics business solutions, server products and services, enterprise services, and advertising.

• Office Commercial  includes volume licensing to Microsoft Office for business and subscriptions to Office 365 Commercial and services such as Microsoft Office, Exchange, SharePoint, and Skype for Business, and related Client Access Licenses (“CALs”).
• Microsoft Dynamics’ business solutions  include Dynamics ERP products, Dynamics CRM on-premises, and Dynamics CRM Online (“Microsoft Dynamics”).
• Server products and services  include Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related CALs, as well as Microsoft Azure.
• Enterprise Services  include Premier Support Services and Microsoft Consulting Services.
• Advertising includes MSN Display advertising and Bing Search Advertising.

Microsoft distributes software through OEMs that pre-install software on new PCs, tablets, servers, phones, and other intelligent devices that they sell. The largest component of the OEM business is the Windows operating system pre-installed on computing devices. Along with Windows OEM licensing (“Windows OEM”), Microsoft also generates revenue through Windows Phone licensing, patent licensing, and Windows Embedded.

Microsoft serves two broad categories of OEMs. There are “Direct OEMs” such as Acer, ASUSTek, Dell, Fujitsu, Hewlett-Packard, Lenovo, Samsung, and Toshiba. Microsoft manages relationships with these OEMs through a direct agreement. Then, there are lower-volume PC manufacturers, which source Microsoft software for pre-installation and local distribution primarily through the Microsoft distributor channel rather than through a direct agreement with Microsoft.

The company also generates revenues from application developers through developer tools and training and certification on various Microsoft products. Creating a strong developer community is an important element of Microsoft’s business model. This helps them create platform-based ecosystems that can benefit from the same-side and the cross-side network effects among users and application developers. The network effects help in accelerating growth and creating a strong competitive advantage.

To advertise their products and services to the appropriate target audience, all forms of businesses need advertisement. Advertising is the method of informing, educating, and reminding people about such goods and services through advertisements.

The following diagram shows the key elements of the Microsoft business model. It shows how the money flows in from the different customer segments and the key cost elements where the money flows out to.

Microsoft’s most significant expenses are related to compensating employees, designing, manufacturing, marketing, and selling its products and services, data center costs in support of its cloud-based services, and income taxes. The details of the key cost elements are as follows:

Cost of revenue include:

• manufacturing and distribution costs for products sold and programs licensed;
• operating costs related to product support service centers and product distribution centers;
• costs incurred to include software on PCs sold by OEMs and drive traffic to its websites;
• costs incurred to support and maintain Internet-based products and services, including data center costs and royalties;
• warranty costs;
• inventory valuation adjustments;
• costs associated with the delivery of consulting services;
• the amortization of capitalized software development costs.

Research and development (R&D) expenses include:

• payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development;
• third-party development and programming costs;
• localization costs incurred to translate software for international markets;
• the amortization of purchased software code.

Sales and marketing (S&M) expenses include:

• payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel;
• the costs of advertising, promotions, trade shows, seminars, and other programs.

General and administrative (G&A) expenses include:

• payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources, and other administrative personnel;
• certain taxes, and legal and other administrative fees.

Impairment, integration, and restructuring expenses include:

• costs associated with the impairment of goodwill and intangible assets related to Microsoft’s Phone Hardware business;
• employee severance expenses and costs associated with the consolidation of facilities and manufacturing operations related to restructuring activities;
• systems consolidation and other business integration expenses associated with Microsoft acquisition of Nokia Devices and Services (NDS) business.

Microsoft profits and profits margins FY 2015

Of the $93.6 billion of Microsoft’s total revenues in FY’15 (fiscal year ending June 30, 2015), $33.0 billion were the cost of revenue. This resulted in $60.5 billion of gross profit and a gross margin of 64.7%. Microsoft’s other operating costs were $42.4 billion. These include research and development, sales and marketing , general and administrative, and impairment, integration, and restructuring expenses. This resulted in $18.2 billion of operating profit and an operating margin of 19.4%. After interest and other non-operating income and expenses and income taxes, Microsoft had a net profit of $12.2 billion and a net margin of 13.0%.

Microsoft Business Segments

Up until its last fiscal year (FY ending June 30, 2015), Microsoft had six business segments organized into two business groups: Devices and Consumer (“D&C”) and Commercial. The Devices and Consumer (“D&C”) segments included D&C Licensing, Computing, and Gaming Hardware, Phone Hardware, and D&C Other. The Commercial segments included Commercial Licensing and Commercial Other. These business segments are represented in the following diagram.

On September 28, 2015, Microsoft announced changes in the reporting of its financial results. Microsoft consolidated six operating segments into three.    The new segments are Productivity and Business Processes, Intelligent Cloud , and More Personal Computing. The different product groups were moved around to fit under the three reporting segments. The new structure, with the same product groups, is represented in the following diagram:

Below is a simplified version of Microsoft’s new financial reporting structure and the product groups within them.

Microsoft FY 2015 Revenues by Business Segments – As per Old Financial Reporting Structure

Of the total revenues of $93.6 billion in FY’15, Microsoft generated

• $15.0 billion in revenues, 16.0% of the total, from the D&C Licensing segment.
• $10.2 billion in revenues, 10.9% of the total, from the Computing and Gaming Hardware segment.
• $7.5 billion revenues, 8.0% of the total, from the Phone Hardware segment.
• $8.8 billion in revenues, 9.4% of the total, from the D&C another segment.
• $41.0 billion in revenues, 43.9% of the total, from the Commercial Licensing segment.
• $10.8 billion in revenues, 11.6% of the total, from the Commercial another segment.

Microsoft FY 2015 Revenues by Business Segments – As per New Financial Reporting Structure

• $26.4 billion in revenues, 28.2% of the total, from the Productivity and Business Processes segment.
• $23.7 billion in revenues, 25.3% of the total, from the Intelligent Cloud segment.
• $43.0 billion in revenues, 45.9% of the total, from the More Personal Computing segment.

Microsoft FY 2015 Revenues by Key Product Groups

• $23.5 billion in revenues, 25.2% of the total, from the Microsoft Office System.
• $18.6 billion in revenues, 19.9% of the total, from the Server Products and Tools.
• $14.8 billion revenues, 15.8% of the total, from the Windows PC Operating System.
• $9.1 billion in revenues, 9.7% of the total, from the Xbox business.
• $7.7 billion revenues, 8.2% of the total, from the Phone business.
• $5.1 billion revenues, 5.4% of the total, from the Consulting and Product Support Services business.
• $4.6 billion revenues, 4.9% of the total, from the Advertising business.
• $3.9 billion revenues, 4.2% of the total, from the Surface devices business.
• $6.2 billion revenues, 6.7% of the total, from the Other products.

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Microsoft Organizational Structure In A Nutshell

Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.

Table of Contents

Understanding Microsoft’s organizational structure

Microsoft has a product-type divisional organizational structure , with each division focusing on a specific line of goods and services. Furthermore, each has a separate research and development arm and dedicated sales and customer support staff.

Since current CEO Satya Nadella was appointed in 2015, the company has undergone several structural changes. Presently, Microsoft has two core engineering (product development) divisions:

• Cloud and Artificial Intelligence Platforms.
• Experiences and Devices.

Functional structure

Microsoft has a further seven functional divisions:

• Business Development and Evangelism.
• Human Resources.
• Legal and Corporate Affairs.
• Engineering (operating systems, devices, studios, applications, services, and cloud and enterprise units).
• Advanced Strategy and Research.

Despite each division having some autonomy, divisional heads must still report directly to Nadella.

Geographic divisions

Microsoft also contains two geographic divisions: United States and International.

Other characteristics of Microsoft organizational structure

Span of control.

Microsoft has a wide span of control (SOC). This means the company has a comparatively higher number of subordinates under a single manager.

Centralization

Unlike Apple – where decision-making is made by all levels of management – Microsoft remains predominantly centralized with decisions made by those with authority.

Instituted by Bill Gates, centralized decision-making standardizes work output and removes the potential for personal biases. This creates a unified company with universal standards of performance and progression.

Advantages and disadvantages of Microsoft’s corporate structure

• Streamlined innovation . With a product-based divisional structure, employees work on projects that suit their skills and expertise. Supportive leadership with access to the CEO gives product specialists the freedom and resources to innovate. This ties in nicely with Microsoft’s core strategy of creating a family of integrated devices and services.
• Minimization of internal conflict. With little overlap in the scope of each division’s activities, there is little chance for conflict over resources or skills. 
• Flexibility and responsiveness. Each division operates as a pseudo-entity, equipped with the functions and resources necessary to accomplish its mission . As a whole, this makes the divisional structure of Microsoft more adaptative. Divisions can be added, removed, or merged as required and do not impact other units.

Disadvantages

• Incompatibility. The divisional structure has led to a scenario where Microsoft’s own products were incompatible with each other. This occurred when the business software division was unable to integrate Microsoft SharePoint with Windows Live.
• Minimal consideration for international markets. Microsoft has a sole geographic division for the rest of the world sans the United States. It could be argued that a single geographic division fails to capture the nuanced differences of regional markets.

Comparison with Top Related Companies

• Apple : Apple employs a more centralized, product-based divisional structure . Unlike Microsoft’s matrix structure, Apple’s approach focuses more on integration across its product lines, resulting in tightly coordinated product development and marketing strategies.
• Google (Alphabet Inc.) : Google, under Alphabet, operates with a hybrid structure that blends elements of a functional organization with those of a divisional structure based on projects or products (like Google Cloud, Ads, YouTube). Google’s structure is less formal and more fluid compared to Microsoft’s, allowing for more innovation and flexibility in new project development.
• Amazon : Amazon uses a hybrid divisional structure , where each business unit operates almost like a separate company (e.g., Amazon Web Services, Amazon Retail, and Amazon Devices). This structure is similar to Microsoft’s in terms of divisional autonomy but differs in the scale and scope of operations per division.

Similarities and Differences

• Similarities : All these companies use elements of divisional structuring, allowing specialized teams to focus on specific product areas or market segments. There is also a common emphasis on geographical divisions to cater to global markets effectively.
• Differences : Microsoft’s matrix structure is designed to balance between functional expertise and product specialization, which contrasts with Apple’s more centralized approach and Google’s fluid, project-based structure. Amazon’s divisional autonomy is broader in scope compared to Microsoft’s more integrated approach across functions.

Implications

• Innovation : Microsoft’s matrix structure promotes both specialization within product groups and collaboration across functional units, potentially leading to more integrated and innovative solutions compared to structures with less cross-functional interaction.
• Responsiveness and Flexibility : The matrix structure allows Microsoft to be responsive to both technological changes and market demands. However, this structure can sometimes lead to conflicts or slower decision-making compared to more centralized structures like Apple’s.
• Operational Efficiency : While providing benefits in innovation and responsiveness, Microsoft’s matrix structure can also create challenges in terms of management complexity and alignment among different units.

In conclusion, Microsoft’s organizational structure reflects its strategy to maintain leadership and foster innovation in a competitive and rapidly evolving technology landscape. The matrix structure supports a balance of specialization, collaboration, and global reach, which is essential for a company of Microsoft’s scale and diversity of offerings. Comparing these structures sheds light on how each company’s organizational design supports its business goals and market strategies.

Key takeaways:

• Microsoft has a product-based divisional organizational structure . The company has sought to streamline product development over the years, with current CEO Satya Nadella creating just two product divisions. These are Cloud and Artificial Intelligence Platforms and Experiences and Devices.
• Microsoft has a further seven functional divisions, with each divisional head reporting directly to Nadella.
• Microsoft’s divisional structure helps it streamline innovation and support a core strategy of integrated products and services. Divisions also help the company operate as a collection of flexible and adaptive entities with separate missions and access to resources.

Key Highlights of Microsoft’s Organizational Structure:

• Product-Type Divisional Structure : Microsoft employs a divisional organizational structure based on products and services. Each division focuses on specific goods and services, with its own R&D, sales, and customer support teams.
• Engineering Divisions : Under CEO Satya Nadella’s leadership, Microsoft has two core engineering divisions: Cloud and Artificial Intelligence Platforms, and Experiences and Devices.
• Engineering (operating systems, devices, applications, etc.).
• Geographic Divisions : The company has two geographic divisions: United States and International.
• Span of Control : Microsoft employs a wide span of control, meaning a higher number of subordinates report to a single manager.
• Centralization : Decision-making at Microsoft is predominantly centralized, allowing for standardized work output and a unified company approach.
• Streamlined Innovation: Divisional structure allows specialists to focus on projects that match their expertise.
• Minimized Internal Conflict: Limited overlap between division activities reduces conflicts over resources.
• Flexibility and Responsiveness: Each division operates as a semi-independent entity, enhancing adaptability.
• Incompatibility Issues: Divisional structure led to cases of Microsoft products being incompatible with each other.
• Limited Consideration for International Markets: Single geographic division might not fully address regional market differences.
• Microsoft’s structure includes product divisions, functional divisions, and geographic divisions.
• Nadella’s leadership streamlined the company’s structure to enhance innovation and adaptability.
• The divisional structure supports Microsoft’s strategy of integrated products and services.
• However, incompatibility issues and limited regional market considerations have been drawbacks.

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Evolution of Microsoft and its Business Model

It all started with two computer geeks who were fascinated by the world of computers. Microsoft Corporation is an American multinational technology company with headquarters in Redmond, Washington.

Microsoft develops, manufactures, licenses, supports, and sells computer software, personal computers, and related services. The best-known software products of Microsoft are the Windows line of Operating Systems, the Microsoft Office suite, and the Internet Explorer.

Its flagship hardware products are the Xbox video game consoles and the Microsoft Surface lineup of touchscreen personal computers. In 2016, it was the world's largest software maker by revenue. Microsoft ranked #21 in the Fortune 500 rankings 2020 of the largest United States corporations by total revenue.

In 2018, Microsoft surpassed Apple Inc . as the most valuable publicly traded company in the world after it was dethroned by Apple in 2010. In April 2019, Microsoft reached the trillion-dollar market cap, becoming the third U.S. public company to be valued at over $1 trillion after Apple and Amazon respectively.

The mammoth American multinational technology corporation has steered past Apple on October 29, 2021, to become the world's most valuable company, which is publicly traded. The market cap of Microsoft was recorded at $2.45 trillion , while that of Apple was at $2.41 trillion as of November 1, 2021.

Microsoft is among the largest tech giants, which in 2018 made over $110 billion in revenues. While Microsoft Office remains the most successful product. Other parts of the business are related to advertising,  accessible home and business software solutions, secure online storage, and search services. Microsoft business computers also occupy a central part of the current popularity that Microsoft enjoys today. As a dominant tech company, Microsoft tries to keep innovating and acquiring companies that allow it to enter new markets, quickly. If you are looking for Microsoft company information, then you can take a dive into the Evolution of Microsoft and its Business model that StartupTalky brings here in teh article ahead.

Microsoft - Latest News History of Microsoft Evolution of Microsoft Microsoft's Major Acquisitions Revenue of Microsoft FAQ

Microsoft - Latest News

January 20, 2022 - Microsoft seals deal with the Telangana government to set up a data center in Hyderabad. The Microsoft data center is estimated to be built with around Rs 15,000 crore worth of funds in an area spanning over 50 acres of land. The Microsoft building is estimated to be creating 300+ jobs.

January 18, 2022 - Microsoft announced that it is acquiring gaming giant Activision, the world's 3rd largest gaming company . The deal to acquire Activision Blizzard , as announced by Microsoft CEO and Chairman Satya Nadella , would be an all-cash transaction of $68.7 billion . Cleaning up the culture after the biggest tech acquisition in history now seems to be a mammoth task ahead !

October 29, 2021 - With a market cap of $2.45 trillion , Microsoft becomes the world's most valued publicly-traded company , passing Apple's market cap of $2.41 trillion .  

June 28, 2021 - Microsoft's code-sharing service GitHub launches GitHub Copilot, which is meant to be an AI-driven pair programming tool that will help coders with invaluable suggestions to complete their codes easily.

June 24, 2021 - Microsoft reveals the much-awaited release of Windows 11 will happen late this year, 2021 . The update to this latest version of Windows will be free for the existing Windows 10 users via Windows Update .

History of Microsoft

Before Microsoft was founded, Paul Allen and Bill Gates were just two friends in an age where computers were not a frequent sight. They were avid geeks, which once led them to hack into their school’s computer. Instead of being expelled, the school asked them to help in strengthening the school’s computer performance. Maybe this kindled the spirit in them to one day serve the world with the most preferred Operating System.

After this, both moved separate ways with Gates going to Harvard to pursue law in 1973 and Allen to Boston as a computer programmer. This is where faith stepped in. In January 1975, Allen read an article in Popular Electronics magazine about the Altair 8800 microcomputer and showed it to Gates. Gates called Micro Instrumentation and Telemetry Systems MITS, makers of the Altair, and offered his and Allen's services to write a version of the new BASIC programming language for the Altair.

After eight weeks, Allen and Gates demonstrated their program to MITS , which agreed to distribute and market the product under the name Altair BASIC. The deal inspired Gates and Allen to form their own software company. Thus, Microsoft was started on April 4,1975 in Albuquerque, New Mexico with Gates as the first CEO.

On July 29, 1975, Gates used the name "Micro-Soft" - which had been suggested by Allen—in a letter to Allen referring to their partnership. The name, a portmanteau of "microcomputer" and "software," was registered with the New Mexico secretary of state on Nov 26, 1976.

In August 1977, the company opened its first international office, located in Japan, which was called ASCII Microsoft. In 1979, the company moved to Bellevue, Washington, and two years later it was incorporated under the name Microsoft Inc. Gates was President of the company and the Chairman of the Board, and Allen was the Executive Vice President.

Evolution of Microsoft

Microsoft operating systems.

As a newly formed company, Microsoft's first operating system product to be publicly released was a version of Unix called Xenix, released in 1980. Xenix was later used as the basis for Microsoft's first word processor—Multi-Tool Word—a predecessor to Microsoft Word.

Microsoft's first wildly successful operating system was MS-DOS (Microsoft Disk Operating System), which was written for IBM in 1981. In the deal of the century, Gates licensed MS-DOS to IBM but retained rights to the software. As a result, Gates made a fortune for Microsoft, which had become a major software vendor.

Microsoft Windows

Also in 1983, Microsoft's crowning achievement was released. The Microsoft Windows operating system had a novel graphical user interface and a multitasking environment for IBM computers. Windows is constantly evolving with Windows 11 recently launched on June 24, 2021, which is deemed to be the successor of 2015 released Windows 10.

In 1986, the company went public, with the resulting rise in stock making an estimated four billionaires and 12,000 millionaires from Microsoft employees. The success meant that Gates became a billionaire at 31.

Microsoft Office

1989 marked the release of Microsoft Office, a software package that is a collection of programs for use in an office. Still used today, it includes a word processor, spreadsheet, mail program, business presentation software, and more.

Internet Explorer

Following Bill Gates' internal "Internet Tidal Wave memo" on May 26, 1995, Microsoft stepped into the world of the web. Other than Netscape, Microsoft was the only major and established company that acted fast enough to be a part of the World Wide Web practically from the start.

The other companies acted slow, giving Microsoft a market dominance. The company released Windows 95 on August 24, 1995, featuring pre-emptive multitasking. Windows 95 Plus was bundled with the online service MSN, and Internet Explorer, a Web browser.

In 2001, Microsoft introduced its first gaming unit, the Xbox system. Xbox faced stiff competition from Sony's PlayStation, and eventually, Microsoft discontinued the original Xbox in favor of later versions. In 2005, Microsoft released the Xbox 360 gaming console, which was a success.

After this, from 2007-2010, Microsoft launched a variety of services and products like Windows Vista, which focused on features and security. Azure Services Platform , the company's entry into the cloud computing market for Windows, launched on October 27, 2008.

On February 12, 2009, Microsoft announced opening a chain of Microsoft-branded retail stores , and on October 22, 2009, the first retail Microsoft Store opened in Scottsdale, Arizona; the same day Windows 7 was officially released to the public.

Windows 7's focus was on refining Vista with ease-of-use features and performance enhancements, rather than an extensive reworking of Windows. As the smartphone industry boomed in 2007, Microsoft struggled to keep up with its rivals Apple and Google in providing a modern smartphone operating system.

As a result, in 2010 it came up with Windows Phone OS. The strategy was to work more closely with smartphone manufacturers , such as Nokia . The new user Interface introduced the idea of minimalism.

Microsoft launched Windows 8 on October 26, 2012, an operating system designed to power both personal computers and tablet computers. The Surface was also launched, becoming the first computer in the company's history to have its hardware made by Microsoft.

In 2015, Microsoft began an advertising campaign centering on Windows 10, "Upgrade Your World” with the tagline "A more human way to do" , emphasizing new features and technologies supported by Windows 10 that sought to provide a more "personal" experience to users.

Other than this products like HoloLens, mixed reality headsets, acquisitions of platforms like LinkedIn , GitHub have made Microsoft a pioneer in the Tech industry.

On Tuesday, June 29, 2021 , Microsoft announces the launch of an AI-driven tool that will suggest codes for the world of software developers while they are busy coding. This new system, called GitHub Copilot , is named after GitHub because it draws upon the source code shared on Microsoft's code-sharing service GitHub. Microsoft and GitHub developed this pair programmer with the help of OpenAi , an AI research startup that was backed up by Microsoft in 2019.  

Microsoft's Major Acquisitions

With more than 250 companies under its belt of acquisition, Microsoft is nothing more than a giant, when it comes to acquisition. The latest acquisition of Microsoft came in on January 18, 2022, when it acquired Activision Blizzard, the 3rd largest gaming company, in the world's largest tech acquisition deal that amounted to $68.7 billion. The all-cash deal that the CEO and Chairman of the American software giant, Satya Nadella announced, is expected to close the deal in FY23. However, Microsoft will face a major challenge in cleaning up the culture of Activision, a company that is facing numerous accusations of sexual harassment and misconduct.

Microsoft's acquisition till now has largely meant that the acquired company will work autonomously. It has been so with the companies like Linkedin, GitHub, Skype, Mojang, and more, but to handle the situation of Activision, which is currently marred by a lawsuit from California regulators that allege that the company "fostered a sexist culture" along with many other investigative stories that detail the allegations of sexual harassment internally, will require a heavier hand. Here's a list of the last 10 acquisitions by Microsoft:

Revenue of Microsoft

Microsoft has branched its revenue and is routinely ranked among the world’s top 100 companies organized by revenue. The Company’s revenue is divided into three principal segments:

Productivity and Business Processes

This includes revenue gathered by the sale and licensing of its various software products and cloud services across a range of devices and platforms. This comprises commercial and consumer licensing of Microsoft’s suite of productivity products and cloud services, including those pertaining to the Office 365 suite, content management tool OneDrive, and call services provider Skype.

Intelligent Cloud segment

Comprises all revenue generated by its server products and cloud storage services, including the sale and licensing of Windows Server, Microsoft SQL Server, Visual Studio, System Center and Microsoft Azure services to commercial clients and general consumers. Revenue from the support and consulting services to develop innovative IT solutions for businesses – are also grouped into this segment.

More personal computing

This relates principally to its products and services that provide cross-platform utilities. This includes licensing of Windows operating systems, Microsoft patents, and Windows phones; the sale of Microsoft devices, including mobile phones and PC accessories, products relating to the Microsoft Xbox gaming platform, including Xbox Live subscriptions, transactions, third-party video game royalties, and advertising.

Microsoft revealed that it has earned $168 bn in revenue in FY21, marking an 18% year-on-year increase. Furthermore, the American software company's CEO and Chairman, Satya Nadella also mentioned that its operating income grew by 32% to $70 billion. Besides, Nadella also mentioned in the Annual Report 2021 that LinkedIn and the security business of Microsoft both crossed the $10 billion mark in annual revenue for the first time.  

What was Microsoft's first product?

Microsoft Operating Systems was Microsoft's first product.

When was Microsoft started?

Microsoft started was started on 4 April 1975, in Albuquerque, New Mexico, United States.

Did Bill Gates start Microsoft in his garage?

In 1975, Bill Gates and Paul Allen founded Microsoft, with just a few resources and an available garage space.

What is the Microsoft company?

Microsoft is a software giant, a multinational technology company founded by Bill Gates and Paul Allen, headquartered in Redmond, Washington, United States.

Who were the original founders of Microsoft?

Paul Allen and Bill Gates are the original founders of Microsoft.

The key takeaway from the above analysis of Microsoft as a company and its revenue models is that it has constantly evolved with the market and user requirements.

It strives to innovate and adapt to market scenarios from time to time. For an instance, when the industry switched to mobiles from PCs, Microsoft didn’t take a step back, instead, it brainstormed to set its foot by merging with Nokia.

Another time when we saw its determination to stay in the stocks was when the company knew that Android is dominating the phone industry, it came up with platforms for cloud computing, explored the less traveled road of mixed reality by supplying HoolLens headsets.

Microsoft also stepped into active advertising, which used catchy themes to attract more people to its core home PC values. It held strong to its belief in the requirements of a normal computer user with simple yet varied expectations. This is what made it stand out from its competitors like Apple and Google.

At the rate at which both of its competitors are succeeding, it must be a task for Microsoft to stay in the race, but surely it hasn’t let the market or the customers get used to its absence.

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Maturity Model for Microsoft 365 - Cognitive Business Competency

• 9 contributors

This is an open-source article with the community providing support for it. For official Microsoft content, see Microsoft 365 documentation .

Overview of the Concepts [tl;dr]

Artificial intelligence (AI) and machine learning (ML) are rapidly evolving fields, with new breakthroughs, services, and capabilities seemingly every week.

In many ways, this revolution is following a similar track to other world changing technologies, creating opportunity, threat, FUD, excesses of imagination and paranoia and more. While the technology and its monetization are fearsomely rapid, forward-thinking organizations should be anticipating the roles of various forms of cognitive business and incorporate these into their culture, ways of working, processes and thinking. While pessimists may be concerned about these technologies displacing ‘white-collar’ / knowledge worker roles, pragmatic organizations will be considering the impact of the changes and planning how they can be integrated into their cognitive functions – knowledge creation and access, analysis and assessment, task planning and decision making.

Definition of this competency

Cognitive businesses are those that actively employ thinking in its many forms across operational activities and decision making. They are characterized by having significant numbers of ' knowledge worker ' staff in operational roles, not just management roles.

This Cognitive Business Competency considers how and where organizations might deploy advanced, computer based cognitive services across their teams and operations.

The technologies used will encompass (narrow and generalized narrow) AI, ML and other advanced technologies that simulate or mimic human intellectual, analytical and creative activity. For convenience, these will be referred to simply as AI in the rest of this article; from a Microsoft 365 perspective, we also will refer to Copilot, in its many forms. There are several hundred different Copilots in development across Microsoft 365.

The technology scope includes pre-built AI, including those integrated into off the shelf products and suites, ‘invisible’ technologies that don’t provide an apparent user interface, direct human-machine interfaces (such as voice assistants & chat bots), AI platforms and services and custom-built engines for the using organization’s own data. The competency also acknowledges the continued and essential role of human cognition and the relationship between how people and AI work together.

Cognitive Business maturity describes the extent to which organizations have understood, adopted and embedded AI-related capabilities in the right combination to improve and, ultimately, optimize the business.

Terminology

There are several new terms used within the AI space and these will be described briefly to help the digestion of this competency.

Retrieval Augmented Generation (RAG) is used to improve the output of a large language model. It is the process of taking a user's input and using it with an external knowledge source to provide relevant information. It can be applied to natural language processing tasks such as question/answering, summarization and dialogue generation. The main reason is to use the external knowledge source to obtain the most relevant information and then use the large language model to process the response and give a more informative and digestible response to the user. For more information, read Retrieval Augmented Generation in Azure AI Search .

Where are we today?

Cognitive business and AI developments are primarily in the Enthusiasts and Visionaries stages. As noted, AI-related technology is changing quickly and use of this competency should reflect that.

ChatGPT has this to say about Cognitive Business:

"Cognitive business is a term used to describe the integration of cognitive computing technologies, such as artificial intelligence (AI), machine learning, natural language processing, and robotics, into various business processes and decision-making frameworks. It involves leveraging the power of these technologies to enhance business operations, automate tasks, and gain insights from data to drive innovation, improve customer experiences, and increase efficiency.

The goal of cognitive business is to create a more intelligent and adaptive organization that can quickly respond to changing market conditions and customer needs. By using cognitive technologies to analyze vast amounts of data and make better decisions, businesses can gain a competitive edge and create new opportunities for growth.

Cognitive business can be applied across a range of industries, including healthcare, finance, retail, manufacturing, and more. Examples of cognitive business applications include chatbots and virtual assistants for customer service, predictive analytics for supply chain management, and autonomous vehicles for transportation and logistics."

Evolution of this competency

There are many aspects to cognitive business, but an important consideration is how cognitive business enables people and 'intelligent machines' to work together. The maturity model considers this alongside the deepening capabilities, integration, and governance of AI in organizations.

As Satya Nadella has said, AI is moving from Autopilot to Copilot:

See the Maturity Model for Microsoft 365 - Introduction for definitions of the Maturity Model levels.

Level 100 - Initial

Organizations at this level are unaware of, uninterested in or dismissive of AI supported cognitive business. They rely on their staff to maintain their competitiveness and do not perceive an opportunity or threat to the way they currently operate. Knowledge worker tasks are delivered by staff.

Initial level characteristics include:

100 General

• AI is not knowingly used. It may be unknowingly used in standard products and services.
• Internal technology teams are not aware of or have not evaluated any the add-on services which provide AI capabilities, like Copilot.
• Organizational content is not centrally stored and available for AI ingestion.
• There is no strategy for a cognitive business beyond the capabilities of employees, nor is there any intent to explore it. The cognitive nature of the business is not considered.
• AI may be looked on with disdain, as a passing fad or as unable to outperform members of staff.
• People are doing almost all the cognitive activities across the business, perhaps supported by 'ordinary' technology. These may be efficient and effective, and, as such, they see no reason to change.

100 Technology

• AI embedded in applications and suites is not noticed or used by most staff; no attempt is made to adopt, adapt, or explore it.

100 Governance, Risk, Compliance and Security

• No consideration is given to governance or risks associated with cognitive business activities. Staff are unaware of intellectual property (IP) implications where AI tools are used.
• Some part of the organization may be using unsanctioned AI capabilities in multiple platforms, leading to a lack of data sovereignty.

100 Impacts

AI has no direct, measurable impact, which may mean that disruption, when it comes, is unanticipated. Competitive advantage arises through investments in the skills or staff; human limitations may create intractable challenges.

100 Next Steps

• Inventory - as best as possible - the ways people in the organization are using AI functionality.
• Begin to identify some simple use cases to use for testing and piloting cognitive business capabilities.
• Identify processes with significant repetition where human action could be replaced by AI. At the same time, identify instances where content generation might get a jump start from using AI.
• Begin evaluating the AI capabilities which are available in in Microsoft 365.

Level 200 - Managed

There is some appreciation of the emergence of potent cognitive tools and there may be some experimentation with narrow forms of these to enhance processes or address needs, mostly through the configuration of platform-based services and some use of proprietary data for training. This is Proof of Concept work, with limited process design and little to no consideration of governance and risks initially. Most staff do not have an accurate understanding of the capabilities and limitations of the tools and there are unreasonable expectations of perceptions of risk.

Managed level characteristics include:

200 General

• AI to support a cognitive business is speculated about, often with unreasonable or incorrect assumptions about what it can and cannot do.
• Staff and management are largely unaware of the AI tools built into their everyday off-the-shelf tools. Where they do, they use it to get answers to questions and copy the answers verbatim.
• There is no strategy for introducing AI, though some staff, in isolation, may identify possible areas where existing processes might be improved using AI approaches. A few staff experiment with the tools that are readily available, perhaps using in-house data; management support for this is limited or may be occurring without their knowledge.
• There is no plan for who should get what licenses, subscriptions or tools.
• There is a tendency to think that technology can solve the problem, without rigorously defining the needs. Where cognitive tools are used, they are taken at face value, without critical assessment or integration into business processes and staff response.
• Staff with knowledge about how to build cognitive models, create appropriate training sets or choose better AI processing models and methods, are largely absent.
• Content is vital to successful Generative AI solutions and at this level, there will be parts of the organization that are not all-in with their content not in the cloud. They therefore cannot get the value from Embedded AI. These parts of the organization will start ingesting content into the cloud platform so that they can take advantage of Embedded AI tooling.
• Source and training data is not well structured, clean and of sufficient quality and there are few metrics for the quality of this.

200 Technology

• Content and document management uses some automated classification, though largely with the default configuration and limited training on topics etc. Categorization may be used to improve existing processes, often in a narrow way, usually with out-of-the-box capabilities.
• AI may be in active use by the platforms used in the organization, such as protecting against security risks or supporting web searches. Only a few people recognize that this is the case.
• No technology-stack choices have been made and different platforms and services are being played with different parts of the organization at different depths.
• Cognitive capabilities are not designed into applications, products and services.

200 Governance, Risk, Compliance and Security

• There may be instances of content that is overshared and therefore the AI has access to information that it should not have. The organization will start to address this when these are found.
• Training data sets are used as-is, without considering ethics, bias or errors that may result from the data.
• Limitations are not considered, and no safeguards are in place to correct poor AI decisions.
• Intellectual Property implications are not considered.
• Understanding the costs of implementing Cognitive Business tools.

Level 200 Impacts

At this level, Cognitive business remains the domain of staff, with a few ‘mavericks’ extolling the virtues of AI and playing with the capabilities, usually with no oversight by technology, governance or management functions. AI is not contributing to productivity other than through ‘invisible’ AI that is built into off-the-shelf applications and services.

200 Next Steps

To be able to move towards Level 300, there must be sufficient people bought into the competency. To do this, think about the low-hanging fruit where Generative AI can help your organization to transform quickly. Look at departments which provide services to the rest of the organization such as Human Resources. Use Embedded AI to address self-service needs and 'quick-wins'. Share the 'quick-wins'; and success stories across the organizations to show the value of Cognitive Business solutions. Additionally, to be able to move to Level 300, your data needs to be accessible by the Embedded AI models and secured to ensure that the right people have access to the right information when using AI.

Level 300 - Defined

At level 300, the organization is actively considering how to enhance its knowledge worker activities using AI. While the scope of this may be narrow, with point solutions rather than transformative projects and adoption, there is an outline strategy and intent to enhance the organization through cognitive services. Staff use AI to support their knowledge worker activities, taking advantage of built-in tools and some standalone services to assist their day-to-day activity, while the organization begins to research or invest in bespoke business solutions.

Defined level characteristics include:

300 General

• Staff are trained in embedded AI tools in general applications (office apps, browsers, desktop etc.) and encouraged to use them productively. Training includes a requirement to check for veracity and 'real-person' language.
• There is some attempt to manage who gets what tools and licenses; this is not especially rigorous or monitored; some staff who would benefit may struggle to justify license and training investments, while others (often in positions of influence) may be allocated these resources without robust justification.
• There is some understanding that AI benefits can be around productivity gains, new capabilities, quality improvement, levelling up of less capable staff, enhanced accessibility and cost reduction. There are attempts to assess the nature and impact of the benefits of each of these in AI projects or allocation of tools and licenses.
• AI use tends to be on a per-application basis; staff don't routinely think about multi-application interactions (for example, using email content to create a presentation).
• Chat-based AI for answering questions about the organization are embedded in intranets, collaborative workspaces and elsewhere the staff spend their time to ensure they can obtain answers rapidly.
• Attempts are made to ensure source and training data for custom AI is well structured, clean and of sufficient quality. The quality of the training input to cognitive models is managed, with attempts to minimize bias and errors. A set of metrics is established to confirm this.
• Staff have some understanding of how to ask questions of the AI tools to get useful outputs.
• The limitations of the insights, knowledge and behaviors of people as the benchmark for AI ‘accuracy’ are considered.
• The organization has laid out a broad strategy for AI setting out their aspirations. Elements of this may be naïve, lacking actionable detail and measurable objectives, and may lack resources and senior sponsorship, but it acts as an important starting point and touchstone.
• The technology is not treated as internally or externally disruptive.
• Built-in AI tools in applications and services are actively used by staff.

300 Technology

• A range of AI services are used to improve existing processes, with multiple areas of improvement. Mostly these improve human-driven knowledge activities and support existing staff, however some areas no longer require human intervention.
• Content categorization is used to improve existing processes, often in a narrow way, usually with out-of-the-box capabilities; often this makes things easier for staff later in the process.
• Content and document management actively uses automated classification, configured and trained with the organization's information and document set.
• Most developments are focused on the application of pre-trained models. There are some tools developed using existing narrow organizational content to address narrow needs, creating Narrow Language Model solutions.
• True custom AI models, using data sourced or created for key organizational purposes, are beginning to be used and the effort and effectiveness are being evaluated for wider application.

300 Governance, Risk, Compliance and Security

• It is understood that AI needs some level of governance and oversight. This activity is probably vested in the IT team and is not aligned with broader business strategy and policies.
• The organization develops and models rules of engagement and governance to take advantage of the benefits of the cognitive systems.
• Governance of all aspects of the cognitive tools is proportionate to the impacts the system has on business and individuals.
• There is a content governance policy implemented to secure sensitive content and eliminate out-of-date content in order to ensure that AI using content in general business repositories provide appropriate and current responses.

Level 300 Impacts

At this level you can expect the following:

Staff have use public tools, such as AI-driven internet search, saving time allowing them to focus on more creative and valuable activities. Some processes are improved through AI and an appetite has developed for doing more, with some limited funding. AI supports staff in their cognitive tasks. Risks and concerns are emerging that the organization is unsure how to address.

300 Next Steps

To progress to level 400, the organization should work on driving adoption, creating an understanding of effective prompts and sharing success stories to drive productivity. In parallel developing critical thinking and expertise around AI prompts and interactions in key staff, across cross-functions and across multiple apps Effective practice, skills and learning need to be identified and shared together with their benefits. This might be combined with enhanced training.

The organization would publish and enforce a Responsible AI policy and framework. There should be processes for capturing new AI development ideas. This might include where AI might be allowed agency to act without human initiation, but with oversight. Staff will be expected to use AI tools and productivity gains will be measured.

Level 400 - Predictable

There are processes to build, deploy, integrate, and manage AI alongside staff in many areas of the organization. A clear process exists to accelerate AI integration into existing processes, along with budget commitments. There are mechanisms to manage and monitor AIs that are similar in importance and effect to those used with staff. Feedback processes and performance metrics drive improvements. The organization’s culture accepts and understands the role of AI and the relationship between staff and their AI tools. The organization uses its skills as a flexible cognitive business to create efficiency and business advantage.

Predictable level characteristics include:

400 General

• Staff are trained and competent in interacting with tools to optimize their useful outputs.
• There is a well defined process for allocating AI licenses, with training, to appropriate staff. Use and benefits are routinely assessed, with intervention and reallocation as required.
• The different potential benefits and costs or AI are well understood and underpin investments and licensing decisions. These align with strategy and culture, not just cost and productivity. Value extraction from AI use is well understood.
• Policies exist and are widely understood regarding AI transparency, ethics, performance, and scope. These policies are regularly reviewed and updated in recognition of the pace of change of the technology and regulatory environment.
• AI services frequently work alongside human staff, with each complementing the other. Areas that do not require human intervention have human and AI oversight, with both reviewing feedback.
• AI that replaces staff roles have line management processes, performance reviews, code of conduct guidelines, etc., that perform the equivalent role to the staff they replace.
• There is board level oversight of the cognitive business approaches, ensuring they support the organizations values, ethics, and strategy.
• Cognitive AI outputs are routinely audited and subjected to quality control in the same way as other quality processes. Methods have been developed to validate that training, queries and other inputs produce 'correct' outputs.
• Cognitive business approaches enable the activities that could not have been done without the tools. Processes are transformed rather than simply enhanced.
• The level of trust in the tools is understood, continuously re-evaluated and deficiencies addressed.
• The limits of AI are well understood, and ‘unusual’ cases are handed off to experts. There is a coherent approach to people and AIs working together, with well-defined hand-offs.
• Source and training data are actively managed to ensure quality, with metrics and active feedback.
• Expert knowledge workers compile content covering their knowledge so that their AI partners can access this and use it to personalize the content they create for individuals

400 Technology

• The cognitive business landscape is scanned, and changes and improvements are previewed and incorporated into the business roadmap; the tools are actively 'upskilled' as technology advances.
• Sources and training data are robust, updated, assessed and managed against quality and ethics standards.
• Technology limitations are well understood; safeguards and feedback loops are in place.
• Voice interfaces, natural language processing and other human-centric UIs are present across staff workspaces. There is some use of 'always-on; monitoring within the workplace and process areas.
• New applications developed within or for the organization actively incorporate cognitive elements, and these incorporate AI ethics and governance by design. Budget commitments are in place to support development using AI tools.
• Development using custom AI models have a well-established process which includes data quality security, responsible use, and audit.
• A generalized narrow AI, capable of performing many different types of tasks and with a holistic view of the organization, starts to replace many discreet cognitive services.
• AI is capable of identifying issues and carrying out auto remediation, handing off to a person where necessary.

400 Governance, Risk, Compliance and Security

• There are policies that define how cognitive business should be introduced, assessed, performance managed and monitored for effectiveness and fairness. Responsible AI initiatives and standards form the basis for this.
• The implications of compliance around AI use are broadly understood and actions are taken to minimize risks relating to regulations, Human Resource obligations etc. A board level role has accountability for responsible, ethical and fair application of AI, ensuring compliance with regulations and values.
• Training in Cognitive business for staff, management and the leadership team are maintained. This ensures understanding of ethics, compliance, best practice and drives trust. Assessment is used to improve the training and identify staff competency.
• Training data is reviewed regularly for historical bias and gaps that might compromise the ethics of the AI. There is special care taken with externally sourced and public data that may include such bias.
• Attention is given to national and organizational culture and how this might create bias in the cognitive business. Systems are reviewed against clearly stated values and principles in place in the organization.
• There are processes to hand off ethically complex issues or outliers from the systems to human arbiters.
• Inputs to cognitive systems are recorded so that they can be used to validate outputs.
• The risks of cognitive business tools deskilling staff are understood and addressed appropriately, such as through actively retaining skills or accepting that these are lost to the organization and external expertise is used when required.

Level 400 Impacts

At this level you can expect widespread adoption and acceptance of AI-based tools in many areas of an organization and that these create good competitive advantage. Staff are engaged with the tools and use them to great effect, whilst also watching for unexpected behaviors or under-performance.

Staff and processes are productive, though there may be concerns about resilience of the technology and exposure to regulatory change.

Level 400 Next Steps

• Many AI-supported processes may be at a departmental level, so consider places where AI can monitor other AI-driven processes
• Think of ways to use AI to monitor metrics and make process suggestions in real time
• Capture knowledge gained in cognitive business work and contribute to the organization's knowledge bases

Level 500 - Optimizing

Cognitive business has reached the stage of being a natural, continuous flow of interaction between staff and machines. Ethical and GRC issues are effectively monitored against a well-established framework and feedback, retraining and horizon scanning maintain this. Highly capable AIs interface with most parts of the organization and are capable of a large range of tasks working in collaboration with human staff.

Optimizing level characteristics include:

500 General

• Resources and capabilities in the organization are sufficient to drive rapid and effective cognitive business value. This is supplemented by a broad range of partners and associates with expertise in specific applications of cognitive business. The organization uses these to both rapidly react to changing needs and proactively advance the business in response to strategy and vision.
• Role and activity analysis identifies optimal allocation of AI tools and licenses to staff, tracks impacts and outcomes and initiates training, upgrades and changes in allocation across the organization.
• The cost-benefit impact of the spectrum of AI use is understood and tracked across the organization, allowing nuanced changes in line with strategy and values. Broad AI use is seen as a strategic asset and differentiator.
• Content and document management actively uses automated classification, configured and trained with the organization's information and document set, with continuous retraining and active redesign to incorporate future-looking strategic and tactical changes in the business
• AI assistants, versed in the knowledge and processes of the organization, are available to all staff to assist with their activities. They also have ‘a seat at the board table’ where they can retrieve relevant information, capture decisions and actions and provide summaries and feedback on the state of both the organization and previous meetings.
• AIs are used in the board room to advise directors/VPs, capture and track decision and actions and summarize and analyze information
• Advanced human-machine interfaces are in careful use, which may include active monitoring of conversations and activities, prospective advice and insights.
• Cognitive business is built into the organization by design. It pervades staffing criteria, product and process development, sales and marketing strategy and pervades operations.
• There are active processes for personal and organizational knowledge transfer to AI assistants and partners. This ensure the AIs can use expertise embodied in people and the organization to create more informed content, take better decision and act on behalf of people in the system. This may involve something akin to AI Apprenticeships.

500 Technology

• State of the art technologies are proactively reviewed and incorporated into the Cognitive Business strategy and roadmap. AI services may be used to help identify these.
• Active experimentation takes place, and the learning is used internally and shared with partners and aligned vendors to drive future improvements.
• The generalized narrow AI has reached a level of capability that exceeds the sum of the parts and becomes a core strategic platform specific to the organization. Most discreet cognitive services are now incorporated into this service, increasing its reach and reducing the overhead of training and integrating individual tools.
• Cognitive systems exhibit proactive interfaces; not just reactive. They will prompt humans as and when appropriate. The use of such systems follows policy and values, with appropriate safeguards.
• AIs are routinely capable of autonomous action. Where they make mistakes or choose to involve a person in the decision making, the output of this is fed back into the AI to improve it.

500 Governance, Risk, Compliance and Security

• Innovations and inventions that both drive Cognitive Business and result from it are effectively protected and secured; this includes IP, the data they access, the outputs they generate and the code and models they rely on.
• People and AIs work together harmoniously as a team. Feedback loops and oversight ensure this remains effective, upskilling both as required.
• AI approaches are used to review the performance of other AIs, of data quality and identify anomalies in data and behaviors. These might use SPC or other statistical tools
• Cognitive systems document their decision-making process, to a standard comparable with people being held to account for their accounts and decisions, enabling trust in the judgments being made.
• Cognitive processes don’t just rely on pre-training, but also embed iterative feedback to continually enhance the quality. This includes ‘Chain of Thought’ prompting. (The user prefixes their question with text that includes a couple of examples of questions and solutions, including the reasoning — illustrating a typical chain of thought — that led to the answers).
• Proprietary cognitive systems and 3rd party systems all comply with Responsible AI initiatives and standards.
• Designers of cognitive systems are held to account and assessed on their decisions to minimize and control bias.
• The outcomes from hand-offs of ethically complex issues or outliers to human arbiters are then used to retrain and improve the system.

Level 500 Impacts

At this level the organization fluidly adopts AI alongside staff in order to excel at many activities. Productivity is high and staff are given significant amounts of time to be creative in exploring how to further improve the organization, with a range of cognition tools to aid them. Staff are happy with the nature of the interactions with their AI counterparts and with the improvements to their work and quality of life.

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• MS - Governing AI: A Legal and Regulatory Blueprint for the Future
• Responsible AI

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Microsoft: A Case Study in Strategy Transformation

If you’re leading your team through big changes, this episode is for you.

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In early 2015, Microsoft’s senior leaders were facing a set of difficult decisions. The firm had been struggling to innovate and grow as fast as its competitors. Now they were considering new opportunities that would yield higher growth but lower margins — like shifting away from perpetual licensing to focus on subscription sales.

Harvard Business School professor Fritz Foley studied this period of transformative change at Microsoft for a business case study he wrote. In this episode, he shares how Microsoft’s leaders analyzed different options and worked to get both investors and employees on board with new ideas about growth. He also explains how the company’s risk-averse culture evolved in order to execute such a huge transformation.

Key episode topics include: strategy, growth strategy, business models, corporate governance.  

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the original Cold Call episode: The Transformation of Microsoft (2018)
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HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand selected to help you unlock new ways of doing business.

In early 2015, Microsoft’s senior leadership team was facing a set of difficult decisions. The firm had been struggling to innovate and grow as fast as its competitors. Now, they were considering new opportunities that would yield higher growth, but lower margins like shifting away from perpetual licensing to focus on subscription sales.

Today, we bring you a conversation with Harvard Business School professor Fritz Foley, who studied this period of transformative change at Microsoft for a business case study he wrote. In this episode, you’ll get a window into how Microsoft’s leaders analyzed different options and got both investors and employees on board with a different idea of growth. You’ll also learn how the company’s risk-averse culture had to evolve in order to execute such a huge transformation.

This episode originally aired on Cold Call in July 2018. Here it is.

BRIAN KENNY: Electronics enthusiasts in the 1970s looked forward to it every year: the January issue of Popular Electronics . That is because that issue was known for featuring the coolest up-and-coming products in the world of electronics. And when the January 1975 issue hit newsstands, it did not disappoint. The cover was adorned with the first available image of the Altair 8,800, the world’s first mini-computer kit. It may not have been the shot heard around the world, but many say that it was the spark that ignited the home computer revolution. That very magazine inspired a young Paul Allen and Bill Gates to turn their passion for computers into a business that subsequently became an empire.

Today, Microsoft Corporation is the third most valuable company in the world and the world’s largest software company. But after four decades of buffeting the headwinds of the very industry it helped to create, Microsoft is at a turning point and the way forward is not entirely clear. Today we’ll hear from Professor Fritz Foley about his case entitled “The Transformation of Microsoft.” I’m your host, Brian Kenny, and you’re listening to Cold Call .

SPEAKER 1: So, we’re all sitting there in the classroom.

SPEAKER 2: Professor walks in.

SPEAKER 3: And they look up and you know it’s coming. The dreaded cold call.

BRIAN KENNY: Professor Fritz Foley’s Research focuses on corporate finance. He’s an expert on investment capital structure, working capital management, and a range of related topics, all of which probably factor into the case today. Fritz, thanks for joining us.

FRITZ FOLEY: Thanks so much for having me.

BRIAN KENNY: So, everybody pretty much knows who Microsoft is, and I think people will be really interested in getting a glimpse into where they were at this turning point in the company’s history. Still a very, very important company in the landscape of the technology industry and beyond. So, I think people will relate right away to this, but let me ask you, if you could start just by setting the stage for us. How does the case begin? Who’s the protagonist and what’s on her mind?

FRITZ FOLEY: Yeah, so the protagonist is Amy Hood, who is Microsoft’s CFO. She also was a student here at HBS at the time that I was in the PhD program. So, I’ve known her for some time and she’s facing a set of choices that really revolve around whether or not Microsoft should try to pursue increased margin or increased growth.

BRIAN KENNY: Okay. What prompted you to write the case? Your connection with Amy obviously is part of that, but why Microsoft and why now?

FRITZ FOLEY: I think I have been struck by the transformation that they are in the midst of. This is a company that… I mean, it’s hard to remember this. In the early two thousands, the stock price was stuck in the 20 to $30 a share range. And there was a group of people who were calling for the firm to be managed essentially for cash distributions and for increased margins. And then there were some growth opportunities that the company faced simultaneously. So, there was a real choice as to what direction to head. And I think this is a compelling choice that many other companies face. So, it’s a powerful example for me to highlight in course I teach about chief financial officers.

BRIAN KENNY: Microsoft was the first player on this stage really, but then Apple came along and I think many people look at these two as fierce competitors. But can you just talk about the difference between these two companies in terms of how they manage their financial strategy?

FRITZ FOLEY: Yeah, I can say a bit about that. So, at one level, they certainly are similar. They’re in tech space and in fact, many things that Microsoft was attracted to phones in particular, is something that Apple has excelled at. And I think that at the time of the case, they were quite different in the eyes of investors, I would say. I would say that investors still viewed Apple as having a lot of a growth emphasis of a commitment to innovating new products and solving problems that people weren’t even sure they had. Whereas Microsoft was the older, more established tech firm that I think, in the eyes of some, had become not a relic of the past, but less relevant when thinking about future innovations. And in some sense, the cases about how Microsoft tried to shed that view and become a relevant growth-oriented entity again.

BRIAN KENNY: And they’d certainly been criticized over the decades for not moving quickly enough to innovate and getting caught up in their own. And you think about IBM maybe as a company that faced similar criticisms getting caught up in just their size and the bureaucracy of the place. What did Microsoft’s business look like in 2012? Because that seemed to be the beginning of the turning point?

FRITZ FOLEY: Yeah. I mean, it was one where there was varying performance across divisions. There was interest by value activist investors given the large cash holdings that the firm had. Obviously, their market share when it came to the office suite of products and windows, those were quite high. And they were obviously very successful in continuing to provide versions of that to a whole variety of users. They had emerging cloud business, but it wasn’t clear that they would win in that space and had really struggled in other spaces.

In search, Bing never got traction relative to Google. In phones, they were really struggling in 2012 right before they tried to make more headway in phones by buying Nokia, which also subsequently didn’t work out as well as they had hoped. So, I think along a series of dimensions, they were really trying to get some traction, trying to get footing in new spaces. And there were a group of investors that actually felt like that wasn’t what they should do. That they should just focus on Office, focus on Windows, enjoy the high margins that came with their on-premises server and tool business offerings. So, they faced some really hard choices.

BRIAN KENNY: And they were also, in terms of just the organization itself up against some issues, what were some of the things they were encountering culturally at the time?

FRITZ FOLEY: Yeah. I mean, it’s a fascinating story from a cultural standpoint. It was an environment where there were high returns to showing that you were the smartest person in the room. Some of the stories that I have heard are a little jarring. I am not sure I would’ve survived in this environment. There were these very long mid-year reviews that took place and were incredibly demanding. It was an environment that was beginning to really emphasize the desire to be efficient, to be right, and in fairness to them, and Microsoft was coming from a culture or their culture came from a place where they were selling a product that couldn’t really fail. People had very high expectations for the performance of everything Microsoft provided them. And unlike today where there’s more room to update things through online updates, a lot of the software, it shipped and it had to be close to perfect when it shipped.

BRIAN KENNY: Actually, I can remember a time when the launch of a new Windows system was similar to the launch of a new iPhone. People were really excited to get the new system, but inevitably there were bugs and those were highly publicized, and so they fell under a lot of criticism. They were really operating under a microscope for a long time.

FRITZ FOLEY: For sure. And we’re keenly aware that time to fail in their products, which is a measure of how long it took for some product or process to break down, had to be very long. Otherwise, they would meet with a lot of customer dissatisfaction.

BRIAN KENNY: Yeah. Okay. So, let’s move into the transformation phase for them. What was the fundamental shift they made in terms of changing or restructuring the organization?

FRITZ FOLEY: In my view, I think that they did a variety of things to adopt more of a growth orientation. And some of this dealt with their metrics. Some of it dealt with very explicit changes to the culture, and I think some of it also dealt with a realization that pursuing growth would enhance value much more than trying to increase margins and have large dividend payouts or larger dividend payouts to shareholders. So this was, I would say in the 2012, 2013 timeframe, we began to see pieces of this. And they also faced significant managerial changes at that time. That’s when Steve Ballmer retired and they needed to pick a new CEO and could have gone a variety of directions there. And by picking Satya Nadella, effectively we’re committing to more of a growth path.

BRIAN KENNY: Can you think of an example of a company that chose the margins path? And I mean, these are both potentially successful choices, but I would guess.

FRITZ FOLEY: For sure. And it’s a very hard trade-off to make. In teaching my MBA students and executive education students I’m always struck, when I ask them, “Would you sacrifice some margin for growth,” how hard that question can be and how many people don’t have much intuition for it. So, other companies did go the margin route.

BRIAN KENNY: Yeah. Is it a situation where the margin choice is one that’s probably more comfortable and the returns are going to come sooner and the growth choice is a little riskier, and for a risk-averse culture probably harder to implement and you’re betting on the future? Is that fundamentally what the choice is?

FRITZ FOLEY: Yeah. I think that’s a really good way of putting it. Many people find it easier to see the benefits that come with cutting costs and looking for efficiencies and worry that what may come with growth could be elusive. And in some regards, I have heard senior finance managers say that they had to earn the permission to go after growth. They have to get the buy-in from a group of investors who feel as if the senior leadership team has credibility in pursuing growth.

BRIAN KENNY: So, here we have Microsoft, an enormous company, 130,000 or so employees, something like that, large by any measure about to pursue an option that is in many ways counter to the culture of the organization. How do you do that? How do you cascade this kind of a change through an organization of that size?

FRITZ FOLEY: On the cultural side, one thing that they did was very explicitly dropped a growth mindset culture. And Satya Nadella writes about this in his recent book, Refresh. The story is, for me, very compelling. It’s incredibly hard to get any organization to change its culture. Whenever I’ve been a part of an organization that tried to engage in a cultural shift, whatever the tagline was, quickly became the punchline for a set of office jokes.

BRIAN KENNY: I’ve been on the other side of that. I’m the guy who writes the punchlines most often.

FRITZ FOLEY: Yeah. So, you know how hard this is. And I think that they were very wise in picking Kathleen Hogan who had led one of the divisions of Microsoft to head up the charge to describe and roll out this cultural change. They brought senior leaders on board, and ultimately, I think there was a lot of demand for it that many people who were working at Microsoft were innovative engineers and a very creative set of employees who wanted to pursue growth. And when given the choice to move away from review processes and given the opportunity to go to meetings where they didn’t feel like they had to be exactly right in making a point, but could stimulate the beginning of a discussion set of ideas that could lead to something that was new, people embraced that.

BRIAN KENNY: And here we are in the age of the millennial worker. Millennials don’t want to work for the old Microsoft for sure. And Microsoft is competing with the likes of Google and Apple and other firms that are definitely perceived as open and innovative, and they want people with energy and ideas. So, they have to adopt that same personality, I guess.

FRITZ FOLEY: Yeah, I agree with that. I think there’s a new buzz about Microsoft, at least among my students, they’re much more intrigued by what it would mean to work there and what opportunities exist to do some things that would be truly novel and have a big impact on how people get work done.

BRIAN KENNY: So, let’s go back to our protagonists. Amy Hood in the case actually delves into her mindset a little bit. She’s getting ready to communicate these changes to the financial community. What are the kinds of things a CFO would have to think about? Because I can imagine the financial probably is more comfortable with the margin choice than the growth choice

FRITZ FOLEY: Yeah, for sure. It’s fun for me to imagine her faced with this choice really of, okay, I can go this path of growth, but if I do this, I am going to have to go to my investors and say, our margins are going to go down for some period of time, and you’re not going to like that. But there’s going to be some upside and it will take some time for that upside to show up. So, I think she needed to find ways to communicate or signal what that upside would be and how big it might be to the investors so that she wouldn’t lose credibility with them and would have the permission essentially to pursue growth.

BRIAN KENNY: Yeah. Now we hear it all the time about the emphasis on the short-term, short-termism in the financial community, and people want returns and they want them right away. In your experience, are you seeing a shift in the financial community, or are the analysts getting a little more comfortable with this notion of you can’t always go for the margins, you’ve got to find some sustainable growth in the long term?

FRITZ FOLEY: Yeah. It’s a great question. It’s one that troubles me or is something I think about our financial system generally. I happen to be probably more optimistic relative to many when it comes to how short-term-oriented, or really how financial markets aren’t as, as some might worry, or that concern about short-termism doesn’t resonate as much with me. I do think there is a big burden on senior finance teams to explain how value is created by thinking long-term and embracing growth opportunities. And in some sense, when I look at what Amy has been doing at Microsoft, I applaud her and her team for taking on that challenge. They quite explicitly set a target of a $20 billion run rate for their commercial cloud business, and once analysts had that number, they could begin to build off of it and get a feel for how much value could be created if Microsoft succeeded at pulling this off.

So, by having the courage to commit to that path and help analysts understand what the path meant, I think that they have been effective in pursuing it. More generally, I do worry that there are some analysts that simply take an earnings-per-share number and apply some current multiple and don’t think much about what the future will look like. I am hopeful that finance teams and organizations will play a role in educating analysts as to how they should think about the future, when growth opportunities do exist and are attractive.

BRIAN KENNY: Yeah. You mentioned earlier that you’ve talked about this in class, and I’m just curious, do the MBA students come at this differently than the executive education students who have been in fiduciary roles and organizations already?

FRITZ FOLEY: Yeah. That’s an interesting question. Let me reflect on that for a moment. I think the approach is fairly similar. I would say that some MBA students are probably less aware of the constraints that capital markets may put on senior management teams to pursue growth. They’re less aware of what an activist who wants cash now might push management to do, whereas executive education students tend to be keenly aware of those pressures. If anything, I find that MBA students, it’s a little bit harder for them to articulate what is the case for pursuing margin for Microsoft in 2012, 2013. Many executive education students are quick to come up with lists of things that could be done strategically financially in picking leadership.

BRIAN KENNY: Yeah, it’s interesting. And anybody who’s worked in an organization for any period of time, going back to that whole notion of how hard it is to change a culture, it’s pretty easy to think of reasons why not to pursue that path. So, I thought maybe some of the exec ed students might come at with those constraints already wrapped around themselves.

FRITZ FOLEY: Yeah, I agree.

BRIAN KENNY: Yeah. Fritz, thanks for joining us today.

FRITZ FOLEY: Thanks very much for having me.

HANNAH BATES: That was Harvard Business School Professor Fritz Foley in conversation with Brian Kenny on Cold Call . We’ll be back next Wednesday with another handpicked conversation about business strategy from Harvard Business Review.

If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. And when you’re ready for more podcasts, articles, case studies, books, and videos with the world’s top business and management experts, find it all at HBR.org.

This episode was produced by Ann Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you, our listener. See you next week.

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It's dangerously easy to 'jailbreak' AI models so they'll tell you how to build Molotov cocktails, or worse

• A jailbreaking method called Skeleton Key can prompt AI models to reveal harmful information.
• The technique bypasses safety guardrails in models like Meta's Llama3 and OpenAI GPT 3.5.
• Microsoft advises adding extra guardrails and monitoring AI systems to counteract Skeleton Key.

It doesn't take much for a large language model to give you the recipe for all kinds of dangerous things.

With a jailbreaking technique called "Skeleton Key," users can persuade models like Meta's Llama3, Google's Gemini Pro, and OpenAI's GPT 3.5 to give them the recipe for a rudimentary fire bomb, or worse, according to a blog post from Microsoft Azure's chief technology officer, Mark Russinovich.

The technique works through a multi-step strategy that forces a model to ignore its guardrails, Russinovich wrote. Guardrails are safety mechanisms that help AI models discern malicious requests from benign ones.

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"Like all jailbreaks," Skeleton Key works by "narrowing the gap between what the model is capable of doing (given the user credentials, etc.) and what it is willing to do," Russinovich wrote.

But it's more destructive than other jailbreak techniques that can only solicit information from AI models "indirectly or with encodings." Instead, Skeleton Key can force AI models to divulge information about topics ranging from explosives to bioweapons to self-harm through simple natural language prompts. These outputs often reveal the full extent of a model's knowledge on any given topic.

Microsoft tested Skeleton Key on several models and found that it worked on Meta Llama3, Google Gemini Pro, OpenAI GPT 3.5 Turbo, OpenAI GPT 4o, Mistral Large, Anthropic Claude 3 Opus, and Cohere Commander R Plus. The only model that exhibited some resistance was OpenAI's GPT-4.

Russinovich said Microsoft has made some software updates to mitigate Skeleton Key's impact on its own large language models, including its Copilot AI Assistants .

But his general advice to companies building AI systems is to design them with additional guardrails. He also noted that they should monitor inputs and outputs to their systems and implement checks to detect abusive content.

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