Intellectual property, architecture, and the management of technological transitions

A number of studies highlight the challenges facing incumbent firms in responding effectively to major technological transitions. While some authors argue that these challenges can be overcome by firms possessing "dynamic capabilities," little work hasdescribed in detail the processes through which such capabilities evolve or the unique resources that they leverage. This paper explores these issues through an in-depth study of Microsoft, one of the leading firms in the software industry. We provide evidence that Microsoft's product line performance has been consistently strong over a period of time in which there have been several major technological transitions and indicator that the firm possesses dynamic capabilities. We examine one ofthese transitions in detail the rise of the World Wide Web to show that this strong performance was also evident when entering new product segments. We then present qualitative data to shed light on this pattern of success, focusing on the way the firm develops and evolves its intellectual property. Specifically, Microsoft codifies knowledge in the form of software "components," which can be leveraged across multiple product lines and accessed by firms developing complementary products. We argue that this software component model represents the unique resource that enables the firm to respond effectively to technological transitions. We illustrate our argument by describing Microsoft's response to two recent transitions.