Company growth

How Microsoft grew into a giant

April 13, 2012: 12:04 PM ET

The tech giant was a no-name startup when it launched its MSDOS operating system in the 1980s. But the open environment it created with developers fueled its explosive growth.

By John Hagel and John Seely Brown, contributors

Bill Gates, 1986

Microsoft chairman Bill Gates in 1986

FORTUNE -- Microsoft was still a no-name startup based in Redmond, Wash. when it launched its operating system, MSDOS in the early 1980s. From the beginning, however, the company believed that this was not your average product launch. MSDOS's design allowed it to adapt easily to different hardware, reducing entry costs for potential users. And Microsoft encouraged participants to tailor MSDOS for particular environments, meaning that the product could actually improve over time.

Like any good platform, however, MSDOS was only as valuable as its network. While it did not have a large user base in its early years, Microsoft (MSFT) soon negotiated relationships with tech giants like IBM (IBM) and Intel (INTC), fueling growth expectations and motivating more early adopters to sign on. In this way, the platform was able to quickly gain critical mass and achieve network effects -- that wonderful position when the value of the network increases for all participants as more members join. This growing value helped to attract even more participants. By relying on growing economic incentives to attract and engage participants, Microsoft significantly reduced the overhead costs that often slow, or even limit, the growth of more conventional business networks.

Perhaps even more important than its network size was how individuals interacted with and tailored the MSDOS platform. In some respects, the common platform leveled the playing field among participants, creating incentives for them to "protect their turf" by improving their own performance. As the number of participants continued to expand, both competitive pressures as well as the spoils of success increased, perpetuating a cycle of continuous innovation around the standard platform.

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In many cases, different participants teamed up to make the network better, while others chose to work on their own. Without any intervention from Microsoft, these interactions among participants evolved into complex webs of collaboration, where the interactions were not just one-to-one, but among groups of different players. This resulted in an explosion of experimentation.  Many of these promising ideas were quickly adopted by other participants, and those that failed served as collective learning material.  In this way, each participant, and the ecosystem as a whole, learned much faster than they would have on their own. More

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