IntroductionThis essay aims to focus on Microsoft's business strategy and show how Microsoft has successfully used diversification within its business strategy to gain a competitive advantage. This essay will use the following structure. It will begin by providing the reader with a brief history of Microsoft and then continue by explaining what the company strategy is. This will be followed by Microsoft's diversification strategy alongside the reasons why they choose to diversify. Within this section the author intends to explore Microsoft's related diversification approach, business rationale, why skills transfer is essential to sustain a competitive advantage and also how they have achieved and used the economies of scope (EOS). In the section on why Microsoft chooses to diversify there will be notions of proactive and defensive reasons, along with the idea of ​​increasing market power and spreading risk. Finally, a conclusion will follow that summarizes Microsoft's overall ability to sustain a competitive advantage. About Microsoft Microsoft was originally created in 1975 by Bill Gates and Paul Allen. They first introduced their software package, Window 1.0 in 1983, the first package consisting of a mouse that helps navigate a PC. MS-DOS commands were previously used to operate computer systems, however people found them extremely difficult to understand. This Windows 1.0 package was a key turning point in the emergence of Microsoft. As time went by, Microsoft created updated versions that consisted of advanced graphics, built-in Internet support, remote networking, and much more (Microsoft, 2011). Windows packages started from Window 1.0 up to the current version which... middle of paper ......the situation is moving on the part of service companies seeking advantages from information asymmetry and economies of scope”. Stratgic Management Journal, 14: Pgs 569-591.- Porter, M. (1985). “Competitive advantage”. Maxwell Macmillan International-Rumelt, RP 1974, “Strategy, structure and economic performance”. Boston: Research Division, Graduate School of Business Administration, Harvard University.-Rumelt, RP “Diversity and profitability”, Managerial Studies Center, Graduate School of Management, University-Tang, J, 2006, “Competition and Innovation behavior”, Research Politics, vol 35,- Volberda, H. Morgan, R. Et al. 2011, “Strategic Management: Competitiveness and Globalization,” Cengage Learning EMEA, page 244-258-X-box, 2011, “X-Box” http://www.xbox.com (accessed 02/11/11)-X -box 2010, "X-Box History" http://www.gameconsolesedu.info/Xbox.php (accessible 04/11/2011)