Let's return to the Microsoft story and imagine it is now the year 1987, six years after Gates signed the contract with IBM. The still nascent PC industry has just gone through a period of explosive growth.36 No one has ridden that growth harder than Microsoft. But MS-DOS is now coming to the end of its natural life cycle. Customers are beginning to look for a replacement operating system that will take better advantage of the graphics and greater power of the new generation of machines. A change in the S-curve is coming, and the industry is far from certain how things will work out. Despite its success, Microsoft was still a $346 million minnow in 1987 compared to the multibillion-dollar giants hungrily eyeing its lucrative position. IBM was developing its own powerful multitasking OS/2 system; AT&T was leading a consortium of other companies, including Sun Microsystems and Xerox, to create a user-friendly version of the widely admired Unix operating system; and Hewlett-Packard and Digital Equipment Corporation were pushing their own version of Unix. Apple was also still a threat, consistently out-innovating the rest of the industry, and its highly graphical Macintosh was selling well.
We can imagine the options that Microsoft faced at this point. Option one: Gates could make an enormous "bet the company" gamble by investing in building a new operating system called Windows and attempt to migrate his base of DOS users to the new standard, ideally before a competitor would reach critical mass with its own system. Option two: He could exit the operating-system part of the market, cede that to his larger, better-funded competitors, and instead focus on applications for which Microsoft's small size and nimbleness might be more of an advantage. Or, option three: He could sell the company or otherwise team up with one of his major competitors. While Microsoft would lose its independence with option three, such a move would probably tip the balance of power in favor of whichever company he chose to partner with.
All these options would involve big commitments to hard-to-reverse courses of action and involve major risks. The conventional wisdom is that Gates chose option one, and the big bet paid off, enabling Microsoft to continue its dominance of desktop operating systems and spend the next decade fighting antitrust regulators. But that is not actually what happened. What Gates and his team did was much more interesting—they simultaneously pursued six strategic experiments.
Read the Harvard Business School’s Working Knowledge analysis of just what Microsoft did here.