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/
