(1) Commodity: A product like sugar or oil. All sellers have exactly the same product.
The price of commodities is a good indicator of the overall economy.
(2) To bundle: To sell one or more products together.
In the 1990s, companies had to bundle Microsoft Windows with their computers. Otherwise, no one would buy them.
(3) Network effects: The ways things change when many people use the same thing
Network effects are the main reason Facebook is so popular. Everyone uses it, so you use it too.
1. Which part of a computer was a commodity in the 1990s?
a. The hardware
b. The software
c. The retail store
2. After initial development costs, how much did it cost Microsoft to continue producing Windows?
a. It varied greatly by country
b. Almost nothing. Copying software is free
c. Nearly 50% of their operating budget
3. How did Apple’s strategy differ from Microsoft’s?
a. They only sold software
b. They only sold hardware
c. They bundled hardware and software
By Jeremy Schaar
Imagine this situation. You want to sell lemonade. You need sugar and lemons. Lots of people sell sugar, so the price of sugar goes down. But only one person sells lemons, so the price of lemons goes up.
Today on the blog you’ll learn about Microsoft. You’ll learn the strategy that made them so successful. In the process, you’ll learn some great strategy vocabulary and be better able to discuss the strategy at your company.
Why was Microsoft was so successful in the 1990s? Because Microsoft was a lemon seller. They understood that the hardware of a computer was a commodity. The software, however, depended on network effects. It meant that the makers of computer hardware would have many competitors. But the makers of the software would have no competitors.
In the 1980s it wasn’t clear if Microsoft or Apple would win the computer wars. Apple had a different strategy. They bundled their software and hardware. The result was that if you bought a Macintosh computer, then you used Macintosh software. If you bought almost any other computer, you used Microsoft software. Because it was hard to learn new software and easy to share information if everyone was using the same software, Microsoft dominated.
And that was great for Microsoft. If you wanted to sell a computer, you needed Microsoft. Customers wouldn’t buy computers without it. This let Microsoft demand very high prices.
In addition, Microsoft was able to make an infinite number of copies of their product at almost no cost. Microsoft has had piracy problems over the years, but the ability to copy their software has basically been a huge competitive advantage.
So, what’s changed? I’ll answer that question next week on the blog.
In the meantime, think about your company. Do you sell lemons or sugar? Do your customers demand your product or is it easy for them to choose something else? Is there any way for you to use network effects to make your product more valuable?