Is this water damage, dry rot, or just old age?
This looks like a slow water leak, over a time, perhaps caused by:


Ice dam 
gutter overflow
improper flashing near window.
damaged roofing


Is there access below this spot?  You will likely have apparent sub-floor damage.

Its good news that the area is dry now.  Perhaps a roof replacement fixed the source.  At a minimum, you should expose that stud bay side-to-side and 12" high, until you find solid, undamaged base plate and no stud damage.