Intellectual Property, Architecture, and the Management of Technological Transitions: Evidence from Microsoft Corporation

Many studies highlight the challenges facing incumbent firms in responding effectively to major technological transitions. Though some authors argue that these challenges can be overcome by firms possessing what have been called dynamic capabilities, little work has described in detail the critical resources that these capabilities leverage or the processes through which these resources accumulate and evolve. This paper explores these issues through an in‐depth exploratory case study of one firm that has demonstrated consistently strong performance in an industry that is highly dynamic and uncertain. The focus for the present study is Microsoft, the leading firm in the software industry. The focus on Microsoft is motivated by providing evidence that the firm's product performance has been consistently strong over a period of time in which there have been several major technological transitions—one indicator that a firm possesses dynamic capabilities. This argument is supported by showing that Microsoft's performance when developing new products in response to one of these transitions—the growth of the World Wide Web—was superior to a sample of both incumbents and new entrants. Qualitative data are presented on the roots of Microsoft's dynamic capabilities, focusing on the way that the firm develops, stores, and evolves its intellectual property. Specifically, Microsoft codifies knowledge in the form of software “components,” which can be leveraged across multiple product lines over time and accessed by firms developing complementary products. The present paper argues that the process of componentization, the component “libraries” that result, the architectural frameworks that define how these components interact, and the processes through which these components are evolved to address environmental changes represent critical resources that enable the firm to respond to major technological transitions. These arguments are illustrated by describing Microsoft's response to two major technological transitions.