Why did Microsoft use Windows 3.1 for the Windows 95 setup?
Briefly

Raymond Chen explained the complexities behind the Windows 95 setup process, designed to streamline the installation through multiple applications regardless of whether it was initiated in MS-DOS or Windows. Although MS-DOS could theoretically manage graphics, it would have required extensive additional coding to create a functionally rich graphical interface, which Windows already provided. This architecture allowed engineers to focus on a single set of code for setup, enhancing the user experience significantly while addressing the limitations of MS-DOS.
Yes, MS-DOS could do graphics, in the sense that it didn't actively prevent you from doing graphics. However, other than a BIOS call to plot a pixel on the screen, it didn't do much else.
Now take a step back and look at what you're doing. You're writing an operating system. (Or, if you're being charitable, you're writing an MS-DOS shell.)
It was a neat solution - engineers only needed to come up with one set of code regardless of where a user fired up the setup.
Chen's patient explanation is that while MS-DOS could manage graphics, it lacked the necessary features and functionality of a more developed graphical interface.
Read at Theregister
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