Today, Microsoft commands the high ground of the information superhighway by owning the operating systems and basic applications programs that run on the world's 170 million computers. Beyond the unquestioned genius and vision of Bill Gates, what accounts for Microsofts astounding success?Drawing on almost two years of on-site observation at Microsoft headquarters, eminent scientists Michael A. Cusumano and Richard W. Selby reveal many of Microsoft's innermost secrets. This inside report, based on forty in-depth interviews by authors who had access to confidential documents and project data, outlines the seven complementary strategies that characterize exactly how Microsoft competes and operates, including the "Brain Trust" of talented employees and exceptional management; "bang for the buck" competitive strategies and clear organizational goals that produce self-critiquing, learning, and improving; a flexible, incremental approach to product development; and a relentless pursuit of future markets.Cusumano and Selby's masterful analysis successfully uncovers the distinctive way in which Microsoft has combined all of the elements necessary to get to the top of an enormously important industry -- and stay there.

Michael A. Cusumano teaches strategy and technology managment at MIT's Sloan School of Management. He lives in Cambridge, Massachusetts.

Contents

Preface to the Paperback Edition
Preface

Introduction

Organizing and Managing the Company
Find "Smart" People Who Know the Technology and the Business
Managing Creative People and Technical Skills
Organize Small Teams of Overlapping Functional Specialists
Competing with Products and Standards
Pioneer and Orchestrate Evolving Mass Markets
Defining Products and Development Processes
Focus Creativity by Evolving Features and "Fixing" Resources
Developing and Shipping Products
Do Everything in Parallel, with Frequent Synchronizations
Building a Learning Organization
Improve Through Continuous Self-Critiquing, Feedback, and Sharing
Attack the Future!

Appendixes

Microsoft Chronology
Main Microsoft Desktop and Business Applications
Microsoft Operating Systems
Applications Division Employee Survey
Selected Chronology of Microsoft Agreements for the Information Highway

Interviews
Notes
Acknowledgments
Index

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PREFACE TO THE PAPERBACK EDITION

It gives us great pleasure to write this special preface to the paperback edition ofMicrosoft Secrets,which we originally published in October 1995. The book has been translated into fourteen foreign languages and has been on best-seller lists around the world, in markets ranging from the United States and Japan to Germany, Brazil, and China. The personal computer software industry moves very quickly, and much has happened to Microsoft in the past three years. The strategies and principles discussed inMicrosoft Secretsstill appear to be guiding the company forward.

The Internet:The most important change has been the rise of the Internet and the World Wide Web. When we were writing this book, Microsoft was almost totally focused on finishing Windows 95 (which shipped in August 1995), revising Office and some other applications to go with its new operating system, and launching the proprietary online network, Microsoft Network. Not until December 1995 did Bill Gates and other Microsoft executives become truly serious about the Internet, even though they did ship a basic browser, Internet Explorer 1.0, with Windows 95.

Since that time, Microsoft has changed most of its product plans and products to make sure that they took advantage of the Internet's enormous capabilities. Microsoft now has 40 percent of the browser market (compared to 60 percent for Netscape). Microsoft also has a strong and growing position in server software based on Windows NT Plans for Microsoft Network did not work out as expected, although Microsoft has remade much of this system into a Web-based service.

Microsoft has made many strategic acquisitions in the Internet arena to bolster its technical skills and market positions. These acquisitions include companies such as Vermeer, which created what is now Microsoft FrontPage (a leading program for creating Web pages), as well as Web TV (which allows users to surf the Web while using and watching television). Microsoft also continues to struggle with Sun Microsystems over standards for the Web, primarily involving the Java programming language and the potential of a non-Windows operating system and computing platform. Nonetheless, we can confidently say that Microsoft has demonstrated remarkable speed and agility as it has remade itself into an Internet company, while still remaining the dominant desktop software company. It is also a very strong player in enterprise software for corporations with products such as Windows NT and BackOffice.

Growth and Profits:We have seen no significant slowdown in growth or profitability at Microsoft. We think of the company as a train that continues to push forward. For investors, it does not matter so much when they jump on the train! In mid-1998, the company had approximately 26,000 employees (up from 17,800 in 1995). Sales were running at an annual rate of between $14 billion and $15 billion. Microsoft's expected profits of nearly $4 billion in 1998 also accounted for more than 40 percent of the profits of the ten largest publicly traded software companies. The company's stock price reflected these numbers and continued to rise and double every other year or so. Perhaps most important in driving these numbers was Microsoft's success in moving to the high-margin enterprise market as well as in persuading customers to upgrade their operating systems and applications software. Microsoft Office had about 90 percent of the desktop applications market and had become a standard in corporations. Windows NT and Microsoft BackOffice (which includes servers and database software) were also growing rapidly in market share. These corporate products had higher profit margins than products sold to individuals and guaranteed that Microsoft's profits would probably grow faster than its revenues.

Antitrust:Perhaps the biggest concern about Microsoft was antitrust. The federal government, individual state governments, and governments in Japan and Europe were all concerned that Microsoft was too powerful. We saw these same concerns when we publishedMicrosoft Secretsin 1995. Government scrutiny of Microsoft seemed more intense in 1998, however. The scrutiny was not so much with regard to acquisitions but with Microsoft potentially using its position in operating systems to extend its dominance to other areas, such as Web-based Internet commerce.

The most recent serious debate has involved features or products that Microsoft is bundling into new versions of Windows. The browser that comes with Windows 98, for example, is much more tightly integrated into the operating system than in Windows 95. Microsoft also continued to include the browser at no extra charge (which forced Netscape to make its browser available for free also, even to companies that previously had paid for it). The problem: Microsoft has allegedly pressured computer manufacturers not to load competitors' products, such as Netscape's Navigator/Communicator browser. The browser is no longer a revenue source in itself, but it is critical as a "portal" to the Web. Both Netscape and Microsoft, for example, use their browsers to draw customers to their Web sites, from which point customers can purchase various products and services, such as books, news, and travel reservations. Furthermore, in Windows 98, Microsoft is including the Web TV software "for free" and is encouraging computer manufacturers to include hardware to support this technology. Web TV makes it possible to combine TV advertisements and programming with Internet-based sales.

Not all of Microsoft's initiatives will succeed. The company can misjudge markets, as it did with the Microsoft Network. Microsoft also has more competition in Internet markets than in operating systems or desktop software. But the possibilities are limitless for Internet commerce. And Bill Gates has clearly put Microsoft in a superb position strategically and technically to thrive in this new age of the Internet.

Product Development Process:To build new Internet and enterprise products, Microsoft has continued to use the same principles and organization for product development that we talked about inMicrosoft Secrets.The company has made some minor changes, however, that we feel are important to note. For example, in Internet groups that want to move especially fast from ideas to final products, Microsoft developers sometimes take the lead in proposing features and writing up outlines of specifications. This leaves Microsoft program managers to work mainly on managing project schedules, writing up test cases with testers, or building relationships with outside partners and customers. Product managers, in this scenario, play less of a role and mainly work with customers or prepare for the sales efforts. Microsoft also continues to try to hire one tester for every developer, although this practice now varies more than in the past. We have seen some Internet groups that had more testers than developers, in order to speed up the process of stabilizing the product and getting it to market. Some other groups had fewer testers than developers and relied more on the release of frequent beta versions to get feedback on the quality of the product.

Impact ofMicrosoft Secrets:It is appropriate to close this preface with a few words on the impact ofMicrosoft Secretsas a book. We think the book has become popular because there is great interest in Microsoft, and our study has revealed at a very deep level how Microsoft works. We are told that the book has nearly become a "bible" to many software companies and nonsoftware companies, providing hints about how to manage highly creative people in dynamic markets.

We now know thatMicrosoft Secretshas become essential reading at a wide range of organizations. These include computer companies such as Sun Microsystems and IBM, software companies such as Netscape and Baan, financial companies such as Fidelity Investments and Swiss Bank, communications companies such as Ericsson and US West/Media One, and even NASA (the National Aeronautics and Space Administration). Many managers in these companies have been attracted to the alternative approach to product development that we called the "synchronize-and-stabilize" process. This process moves away from rigid, sequential approaches to product development. It allows engineers to make a lot of changes in their designs until late in a project, while still keeping individuals synchronized and the evolving product more or less stabilized. The synchronize-and-stabilize process enabled Microsoft to add, for example, Internet features (including the browser in Windows 95 and the ability to create HTML pages in Word) very late in projects that had not included these features in their original designs. The process is the essence of speed and flexibility, which is important not only in software but in many industries.

We would also like to say that studying Microsoft over a period of several years has been one of the most interesting and rewarding experiences in our professional lives. We are extremely grateful to the Microsoft people who made this book possible. We also expect thatMicrosoft Secretswill continue to be a basic reference on Microsoft and high-tech company management for many years to come.

Michael A. Cusumano

Cambridge, Massachusetts

Richard W. Selby

Newport Beach, California

June 1998

PREFACE

This study started in March 1993 as part of a project at MIT to compare the management of product development at PC software firms with that of older companies making software products for mainframes and minicomputers. During this initial research, it became clear why Microsoft was able to remain on top in its industry while most contemporaries from its founding years in the 1970s disappeared: Microsoft has had remarkably effective ideas on how to compete and market products in a rapidly expanding and evolving industry. Microsoft people have also created an approach for product development and team management -- we call it thesynch-and-stabilizeprocess -- that superbly supports its culture and business strategy. This process has enabled the company to build an increasing variety of complex software products and features for the mass market and corporate customers.

In writing this book, we cannot overemphasize the unique opportunity we have had to probe broadly and freely inside Microsoft. We reviewed published articles and books to analyze the public record on the company's history, strategy, and range of activities and products. But most of the book is based on unusually candid interviews (all tape-recorded and transcribed into several thousand pages) as well as our analysis of several thousand pages of confidential internal documents and project data. We interviewed thirty-eight Microsoft employees in depth; typical sessions lasted two hours, and we interviewed many people twice. These formal interviews took place at Microsoft (either its headquarters in Redmond, Washington, or its offices in nearby Bellevue) between March 1993 and September 1994. Telephone and e-mail correspondence as well as additional meetings with Microsoft people to receive their feedback on the manuscript continued through July 1995.

We spread our interviews across different categories of people (Bill Gates and other top executives, middle managers, senior and junior software developers, program managers, testers, product managers, recruiters, and product support staff) and across different product areas (Word, Excel, Office, Mail, Windows NT, MSDOS, Windows 95, advanced consumer products, and research). Among the highly-sensitive documents we asked for and received were key memos on the development process and written "post-mortems" on major projects between 1987 and 1994. The post-mortems were particularly valuable sources of quantitative data on quality, scheduling, and project management as well as the evolution of Microsoft's practices for product specification, software development, testing, and user education (documentation for users). We also received samples of product specifications at different stages, as well as training materials for product design and implementation, documentation on tools (special software programs used to write other software), test plans, customer problem reports, and an internal employee survey.

We agreed with Microsoft to avoid specific discussions on features or schedules for unannounced products, and to let Microsoft people review the manuscript before publication and suggest changes. But we retained the right to publish whatever we felt was appropriate about the strategies, processes, methodologies, or organizational structures used at Microsoft. For this reason, Microsoft exerted no editorial control over the content of this book (except for suggestions on how we treated some sensitive issues and confidential data), nor did we receive any financial support from Microsoft (although we did use an office during our visits). The result is a study about the company written by two outsiders but told primarily through its own people and documents. We recognize that competitors or people openly critical of Microsoft might want to put a somewhat different slant on the material that we have analyzed. Nonetheless, we have tried our best to present an accurate picture of how this firm operates.

We have tried to summarize the "best practices" used in Microsoft. We acknowledge that there are variations across groups. Microsoft does not always manage small projects (like Macintosh versions of its products) or operating systems upgrades (like Windows 95) as well as it manages highly strategic applications that are major revenue generators (like the Windows versions of Excel, Word, and Office) or new technology platforms (like Windows NT). Nor do managers try to control projects engaged in first-time invention as closely as they do more mature products or products targeted for the mass market. We discuss why operating systems such as Windows NT and Windows 95 are particularly difficult to build, test, and deliver on a predictable schedule.

Why did Microsoft agree to reveal many of its innermost secrets? One reason is that Microsoft managers seem driven to critique themselves. They want to identify and spread knowledge about "best practices" in product development as well as in organization and management more generally. They were not afraid of being analyzed. To the contrary, this book seemed to them like another post-mortem report, but with an added twist: We were an outside party attempting to be objective, and we reviewed key projects and the entire company over numerous years, not just one project.

The second reason why we think we received cooperation is that Microsoft has had a lot of pressure from customers to improve its ability to deliver reliable products in a predictable time frame. Though still far from perfect, company people are proud of the improvements they have made -- especially in quality control -- and want to communicate them to customers. They also felt confident that talking publicly was less a risk for them than a competitive advantage, even if Microsoft had to divulge some proprietary information.

Microsoft people have been deeply affected by increasing demands for higher reliability in their products, and they have realized that satisfying customer concerns now requires not only a better public image but also a better development process. As part of their shift to using PCs and workstations, many large firms build or buy "mission critical" software systems that today depend heavily on such Microsoft products as Windows, Office (including Word and Excel), and Windows NT. A famous internal memo from 1989 on "zero-defect code" pointed out that a defect or "bug" in a spreadsheet or word-processing program could cost a customer enormous sums of money. (This is a lesson that the Intel Corporation, with a calculation error in its Pentium microprocessor, now understands.) Indeed, PC hardware producers such as IBM, Compaq, and Dell, which bundle Microsoft software with their products, have been particularly critical of Microsoft on some occasions. These hardware producers, as well as applications developers and retail software stores, all gear up in the expectation of new products, especially operating systems. When Microsoft ships a product late or, worse, ships a "buggy" product that it has to recall, the result can be a technical, public relations, and financial disaster for an entire industry and user community.

Neither we nor Microsoft people claim that its problems are over and that no more Microsoft products will ever be late or have defects. No software producer can make these claims. PC software product's are extraordinarily complex to build. They are also getting larger and more intricate every year, while PC software companies often put unrealistic pressure on themselves to deliver new products and replace existing products in short periods of time. Microsoft has made, and continues to make, laudable improvements in its process for product development and in its ability to organize and share what its people know as a company. Microsoft managers have also rethought conventional practices in software development and made critical departures that go beyond existing good practices in many other firms. Microsoft people often cited the desire to let people know about these advances in their responses to the question "Why let us write this book?"

It's good for our corporate customers to know more about development because they do a lot of development. In aggregate, they have a lot more developers than the commercial software industry does. And so we want to remind them that we have some good ideas, and share those ideas with them. Maybe they'll buy more PCs. (Bill Gates, chairman and CEO)

We have a philosophy that ideas and vision are important, but execution is the thing that distinguishes companies. By and large, we're [a] pretty open book. We tell a lot of people a lot of the things that we do....In the ability to emulate and execute on our ideas, we think we've got an advantage in terms of the people and in terms of what we're doing. So there's not a proprietariness issue. And to some extent, it's probably ego driven. It's nice to have you guys write a book and tell us how good we are, or tell us where we're screwed up, and we can at least go work on that....To some extent, you guys help us with spreading the word on our best practices. (Mike Maples, former senior executive vice president)

My philosophy is that I've seen groups here have to go through a transformation. They have to go through phases and those phases take time....[Competitors] have to go through the same transformations and phases, and it will take them years in some cases. In that time, we've also gone through years, and we're advancing and improving at a quicker rate than they have been. So we're not worried about exposing things that compromise our competitiveness....And if they try to duplicate us, we'll know the failings of that system we have in place today by the time they reach this point. (Dave Moore, director of development)

This is the first book that Bill's talked to anybody for, ever, that I know of....My opinion is that no book in the world is going to be able to capture how we actually do it....It's not going to be a manual. You're not going to be able to go out and hire all the same people. That's the whole craft-versus-engineering thing. Even in engineering, you can't build a bridge by reading a bunch of books, no matter how many books about building bridges you've read. (Steven Sinofsky, former technical assistant to Bill Gates and current group program manager, Office Product Unit)

We would like to make two additional comments to readers. First, we have targeted some of our discussions for people familiar with PC software products (Chapter 3) as well as software development (Chapters 4 and 5). Readers more interested in the overall picture of how Microsoft operates as a company might want to read these chapters selectively and focus on the broader themes behind Microsoft's approach to organizing, competing, and developing new products.

Second, on all the dimensions of division and group-level organization, people management, and software development management, there are differences among the various Microsoft product units. Statements that we make about the Excel group, for example, do not necessarily apply to the Windows 95 group. Differences are particularly large between the applications as opposed to the systems and languages divisions. Many differences reflect variations in the products these groups build or in the customers they serve; others stem from separate histories, preferences of managers, and additional factors that have little to do with technology and markets. We highlight key differences among the groups throughout this book. Nonetheless, compared to other companies, Microsoft groups are far more similar than they are dissimilar. What we try to describe, then, are strategies and "best practices" that most people within and outside the company would recognize.

Excerpted from Microsoft Secrets: How the World's Most Powerful Software Company Creates Technology, Shapes Markets and Manages People by Michael A. Cusumano, Richard W. Selby
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