Leading Software Implementation Projects: Best Practices and Lessons Learned

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How AI affects Microsoft’s strategy for Microsoft 365: a case analysis

Microsoft, since the 1980s, has been one of the most dominant software suppliers in the world, its products being used by over a billion people every day. In the past, it was praised for its ability to create a standardized, user-friendly operating system and productivity applications that individuals and businesses could take advantage of with minimal training. It has since been criticized for focusing on profits over innovation in the past two decades. From the acquisition of Skype to that of Nokia and its underwhelming Windows phone, Microsoft fell behind its fiercest competitors, such as Google and Apple, in shipping new, exciting products for its customers. However, Satya Nadella helped pave a new strategy for Microsoft. He correctly predicted the importance of owning a robust cloud-computing platform that supported artificial intelligence (AI) research and development. This case analysis uses the Strategy Diamond framework to explore how the rise of AI has changed Microsoft’s strategy to expand the value proposition and customer base of Microsoft 365.

ARENAS

The Microsoft Office Suite consists of a range of productivity applications such as word processing (Word), spreadsheets (Excel), presentations (PowerPoint), email (Outlook), and data management (Access). These products are powerful yet intuitive enough to be staples in countless households, companies, and academic institutions around the world, with most of them recognized as industry standards. Microsoft was level to get a first-mover advantage in these applications back in 1989 but also has continued to execute well. Since 2017, it has transitioned Office to a cloud-based model with Office 365 and last year seamlessly integrated AI assistants, called “Copilots”, on top of many of its Office applications. These Copilots serve as creative, personal assistants that enhance users’ productivity and task efficiency by learning and making predictions about any task at hand. Through Microsoft 365, the whole Office Suite is already integrated and lets users seamlessly share and store data using SharePoint and OneDrive.

VEHICLES

Nadella-led Microsoft understood the value that AI could add to its business and its products. It built its Azure Cloud Platform to foundationally support machine learning and cognitive services like AI APIs for vision, speech, and language. It also invested in its AI R&D lab to help advance key technologies like natural language processing and machine learning algorithms. However, through prior AI product attempts like Clippy and Tay, it learned that its size and layers of bureaucracy over its multi-hundred-thousand headcount made it “ill-equipped for the nimbleness that AI development demanded.” It also had enough callouses to climb the steep learning curve of seeking alternative expansion modes. This led to billions of dollars being spent on joint ventures and acquisitions to help them in their pursuit of becoming an AI-centric company. The most impactful of their investments was their partnership with Sam Altman and OpenAI. To revamp and, for the first time in a long time, create a new value proposition for its Office products, Microsoft bought the rights to commercialize past and future OpenAI inventions into the Microsoft 365 Suite.

DIFFERENTIATORS

Microsoft sets itself apart from its competitors by capitalizing on its colossal, pre-existing customer base that it has steadily accrued since the 1980s. Even before the Copilots went live, it already had over 300 million paying customers who recognized the Microsoft 365 Suite as a reliable industry standard, owning the majority of the productivity software market. To further set themselves apart from others, Nadella and Scott integrated Copilots into the Suite in a way that no other company could replicate. Owing to their earlier efforts in integrating the various Office applications together, the AI Copilot layer became more seamless and powerful. It also allowed for a more personalized user experience. With the help of Azure, it can scale faster and wider than its competitors could. Also, since Microsoft 365 is cross-platform, this makes their total addressable market essentially the entire global productivity software industry. As ChatGPT became the most popular AI language model, Microsoft’s partnership with them, blending Microsoft’s core Azure capabilities with their powerful GPT-4 engine, was generally well-received by the public and set Copilots on a pedestal.

STAGING

Nadella did not steer Microsoft towards AI earlier than its competitors had done, but it was his timing and execution that set him apart. When Microsoft first discovered the potential of OpenAI in 2018, they formed deep relationships with Altman, and this positive relationship is what allowed Microsoft to cut its 49% stake in OpenAI’s for-profit arm. Google could have better utilized Google Cloud to form a similar partnership. Nadella and Scott also understood that even though they had performed countless internal iterations before releasing the Copilots, they needed to create rollout phases to help them gauge industry feedback. Initially, it was only large companies, and only after significant feedback-driven iterations and new safety guardrails did they release the Copilots en masse. Microsoft also allowed customers to gradually learn about how AI could help them before releasing groundbreakingly new and unfamiliar features. It was timed to be released when most people had already heard of and used OpenAI’s Dall-E and ChatGPT and had a base understanding of what an AI assistant could do. Cautiously and with a continuous feedback and iteration loop, Microsoft added Copilots to most of their Suite’s applications.

ECONOMIC LOGIC

In 2017, Microsoft shifted to a subscription model with its Microsoft 365 launch, allowing it to collect recurring revenue while it searched for ways to improve its Suite offering. It had previously struggled to launch any new and exciting features to the applications, so incorporating AI features within Office applications was a key value proposition that helped it gain and retain more customers while charging more for features no competitor was able to offer. Since Azure is the main cloud provider to OpenAI, Microsoft also scales and saves money with more users’ adoption decreasing the marginal cost of delivering those services. Indirectly, it also sells and advertises more of its Azure platform, since it now has a better brand image as an innovative, forward-thinking company. This is a positive reinforcement loop that allows Microsoft to ultimately win and retain more Microsoft 365 subscribers while also increasing prices.

FINAL WORDS

Nadella oversaw the building of Azure and implemented a “cloud-first” strategy that redirected Microsoft’s own services to the cloud and encouraged customers to follow. As his right-hand man and CTO, he appointed Kevin Scott, who was instrumental in revamping the company’s engineering and pivoting into AI. The company today leverages AI across most of its prominent products, and Microsoft 365 is one of its leading businesses driving revenue growth and boosting the company’s image and public relations. The Copilots are the sign that demonstrate what direction the company is heading, and what its priorities are when thinking about designing a winning strategy for growing Microsoft 365.

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REFERENCES

• Microsoft. (2014, March 27). Satya Nadella’s mobile-first, cloud-first world: Press briefing. Microsoft News. https://news.microsoft.com/2014/03/27/satya-nadella-mobile-first-cloud-first-press-briefi ng/

• Content Detector. (n.d.). Microsoft 365 suite statistics. Content Detector. https://contentdetector.ai/articles/microsoft-365-suite-statistics/

• Metz, C. (2023, December 11). The inside story of Microsoft’s partnership with OpenAI. The New Yorker. https://www.newyorker.com/magazine/2023/12/11/the-inside-story-of-microsofts-partner ship-with-openai

• Microsoft. (2023, January 23). Microsoft and OpenAI extend partnership. Microsoft Blogs. https://blogs.microsoft.com/blog/2023/01/23/microsoftandopenaiextendpartnership/

Intel’s success & competition, from 1968-2003: a case analysis

Intel Corporation between 1968 and 2003 was the most dominant force in the semiconductor industry and enjoyed the greatest market share. During this period, it also faced numerous pressures from competition, rapid technological advancements, and managing its more aspirational, venture-focused segments. Despite the challenges it faced, its executives have continuously focused on innovation, strategic product pivots, and responses to market and technological changes, and diversified Intel’s interests to transform it into a computing behemoth worldwide. That alongside its robust defense of its intellectual property enabled Intel to sustain its growth and remain a key player in the global technology sector. This case analysis explores Intel’s strategies in its rise and global success through the perspective of Porter’s Five Competitive Forces.

DEALING WITH NEW ENTRANTS

Throughout Intel’s history, the company never stopped innovating or settled for anything other than the best possible, becoming the leader in performance for decades. Only AMD was ever able to come close in microprocessor performance. Its executives, however, also understood that they did not have enough resources to invent everything they cared about in-house, and outsourced work that lay in their business interests to other companies through Intel Capital and strategic technological investments like Wi-Fi, cellular, and server platforms. This may strike some as divided attention, especially since Intel never lowered its production in client platforms, its main cash cow. However, this degree of aggressive technological innovation is what helped Intel become the dominant and trusted brand in the computing world..

Furthermore, thanks to its co-founder’s observation of Moore’s Law, Intel has had a performance map to follow in its microprocessor improvements over the decades. It has helped it achieve its size and strong market share and allowed it to mass produce its microprocessors. With economies of scale and its strong supplier relationships, Intel saved money per microprocessor, achieving distribution channels and agreements that were impossible for others to replicate. It also understood the power of its patents and mightily defended them with its team of litigation

lawyers. It has a longstanding record of being an R&D-driven company, but this was never clearer than in the late 1990s and early 2000s. In a period when its competitors cut back on their R&D spending, Intel still prioritized its R&D departments and was able to stay cutting-edge with new products like the Pentium III, Pentium 4, and the Centrino platform for mobile computing. This generally made entering fields that Intel played in extremely challenging for new companies.

INTEL AS A SUPPLIER

Intel, as the inventor of x86, thrived when Microsoft decided to write its operating systems for x86 microprocessors. It also used its muscle to grant its closest competitor, AMD, a subpar x86 license for decades while it profited. This alone is a difficult mountain for other chipmakers to enter the CPU market. From a PC consumer’s standpoint, it virtually meant that if you were buying a PC at the time, you were “tied” to the Intel microprocessor inside as well. Intel’s immediate customers were OEMs, charging them 10-20% of their total manufactured costs of a PC for an Intel microprocessor. Its role in the price of PCs was critical being the main supplier during that period, and it was not shy in spending on bold and statement-making marketing programs to push its agenda. Through its considerable total assets in 1990, it could even afford to create a fund to reimburse up to 50% of its OEM customers’ advertising costs if they used the “Intel Inside” logo in their advertisements and the sticker on their products. Initially, some, like Compaq, resisted but eventually caved as they realized that they could not stay competitive in their product lines without Intel’s premium microprocessors. Intel’s executive team believed in innovation for the future, which led them to direct capital and resources toward entering new markets like server platforms, communications, and networking. They had their hands in various markets that were extremely high growth at the time, building chips and microprocessors that serviced all. Such a diverse portfolio with both breadth and depth of experience gave Intel the driving seat.

INTEL AS A BUYER

Intel helped speed up innovation from its suppliers through its considerable buying power and pressure for next-generation products. This attitude helped Intel maintain its leading position in the market, able to invest more in its suppliers for “dibs” on the most cutting-edge solutions. The companies it competed with just did not have that dominance at the time and this allowed Intel to

always take the largest piece of the pie. It negotiated the best lucrative agreements with suppliers for products and services it needed. However, Intel having its own foundries meant that it had less reliance on a supplier for semiconductor manufacturing, a benefit it had over AMD at the time.

THREAT OF SUBSTITUTES

For Intel to be worried about losing its customers to its competitors, there would have to be an incentive for customers to make the fundamentally complicated switch. Intel did an excellent job of protecting itself from competitive threats because it has achieved a very low threat of substitutes during this period. An alternative company would need to build microprocessors that performed the same or better than Intel’s and execute with such efficiency and economies of scale to provide that product at the same or more competitive price. This was unlikely to happen during 1968-2003 and Intel’s powerful acquisitions and R&D made the likelihood that competitors could compete at that technological pedigree very low. Furthermore, since Intel microprocessors were developed with x86 assembly, something Intel itself invented in 1971, the cost to switch to another architecture, such as ARM, would be colossal for any business to incur. At the time, the grand PC market was almost entirely geared towards x86 assembly, so this would not be a fruitful investment even if it could be afforded. AMD still posed a risk because it also sold x86 microprocessors and constantly innovated to close the gap with Intel, but through licensing strictness and an R&D department that generally stayed one step ahead of the rest of the market, Intel prevailed as the don of microprocessors. This leads to the point that industry profitability suffers a little but since the threat of substitutes is also low, Intel generally enjoyed controlling the industry profit potential and price ceilings.

INDUSTRY RIVALRY

Intel is a fiercely competitive company. It needed to be to soar to the heights that it achieved. Its obsession with being the highest-performing microprocessor company led it to constantly invest in R&D to maintain its leadership, doubling down on Moore’s Law which it used as its compass. It understood that complementary software and hardware could reap the strongest market share, so it kept its powerhouse ally Microsoft very close, and through Intel Capital, it had a systematic way of acquiring new companies and investments. Each acquisition and venture investment strategically had to fit into Intel’s business strategy besides just offering a return on investment,

and the portfolio grew to include a breadth of startups ranging from broadband and wireless cellular to corporate technology and server platforms. Although AMD wished to capture more of the market, it just could not compete with the pace at which Intel was innovating and spreading its brand. However, by the mid-1980s, as a result of Intel ending their agreement for second-source manufacturing with AMD (among other companies), an eight-year legal battle ensued and cost both hundreds of millions of dollars. This was counterproductive and limited the industry’s profitability at the time.

FINAL WORDS

Intel faced a wide array of challenges from its inception up to the post-dot-com era of computing across the various business sectors it operated in. Its executives made it part of the company culture to be constantly innovating and investing in the future, whether that is in its core Client Computing Group (CCG) business segment or in avant-garde technologies like Wi-Fi. It sometimes meant that capital and resources got split too thinly, but casting its investment and acquisition net that wide also allowed Intel to be aware of the greatest new technologies being developed, and how it could benefit from them in its long-term strategy. It stayed ahead of the curve with marketing programs that differentiated it from others and correctly identified Microsoft to be the company with which it should most closely partner to turn the PC industry horizontal. It never stopped innovating, and it expected the same of its suppliers and buyers. As such, it controlled the barriers to entry for microprocessors and kept the threat of customers switching to alternatives low.

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REFERENCES

• Casadesus-Masanell, R.; Yoffie, D.; Mattu, S. (2010) ‘Intel Corporation: 1968-2003’ [Case Study], Harvard Business School 9-703-427

• COLLELO, BRIAN. “Intel Is Making Proper Strategic Moves but Faces Core Business Risks.” Morningstar, Inc., 28 May 2024, www.morningstar.com/company-reports/1227477-intel-is-making-proper-strategic-move -but-faces-core-business-risks. Accessed 16 July 2024.