What Microsoft’s New CEO Should Do

Here is a draft speech that Microsoft’s new CEO could give to the company:

I want to talk to you today about how to get Microsoft to be a great company again. Microsoft is not as relevant as it used to be, but in some incredibly important market segments it’s extraordinarily relevant. Microsoft is executing wonderfully on many of the wrong things. The ability of the organization to execute is really high, though. I’ve met some extraordinary people at Microsoft. They’re doing some of the wrong things because the plan has been wrong. What I found is rather than anarchy, I found people who can’t wait to fall into line behind a good strategy. There just hasn’t been one.

Microsoft has to find where it is still incredibly relevant and focus on those areas. It needs to figure out what it’s core assets are and invest more in them. Microsoft has neglected it’s core assets for a while. It has to forge some meaningful partnerships and it needs to define some new product paradigms.

If we want to move forward and see Microsoft prospering again we have to let go of a few things. We have to let go of this notion that for Microsoft to win, [Apple, Google, …] have to lose. We have to embrace the notion that for Microsoft to win Microsoft has to do a really good job. And if others are going to help us, that’s great, cause we need all the help we can get. And if we screw up and don’t do such a good job, it’s not someone else’s fault. It’s our fault.

Now, let me tell you that this is hardly original so I am not suggesting plagiarism. Astute readers who are intimately familiar with the history of the computer industry will recognize that these are the same words as in Steve Jobs’ speech at Macworld in 1997, except that I have replaced Apple with Microsoft. It’s a weird case of history repeating itself. Jobs mentioned that he estimated Apple’s share in the desktop market to be about 7%. That is what amounts to for Microsoft with Windows smartphones. The script has been flipped. Microsoft has hitched its success and failure to how it performs in the mobile devices space and acquired Nokia’s handset business. Now, unlike Apple, Microsoft is nowhere near bankruptcy, but the future is still uncertain as ever.

Can Microsoft reinvent itself by finding where it is relevant and focusing on its core assets, instead of chasing markets to try and become relevant in every sphere of technology? Can Microsoft let go of things that are not at it’s core? Apple wrote the book on this, and IBM ventured and succeeded. What are Microsoft’s core assets and why does the company find itself in this position today? What should the new CEO do? Time for a flash back.

Microsoft’s Core Competencies

Historically, Microsoft’s strength has been in the following areas:

• Enterprise class platforms and products
• Application developer community
• Hardware ODM (Original Device Manufacturer) partners

Let’s look at these individually.

Enterprise class platforms and products

Microsoft has always been an enterprise company at its core. Although Bill Gates’ vision was to put a computer on every desk, the company’s  true mainstream success first came from replacing IBM and DEC terminals with Windows Workstation and Windows Server. With Windows NT and Active Directory, the company enabled large organizations to manage hundreds of thousands of desktops far flung across the globe. The enterprise core competency was further solidified by additional server platforms like Exchange Server, SQL Server, etc. Its not a stretch to say that Microsoft was untouchable in the enterprise space. There were many challengers from Sun and Oracle to IBM with Linux at one point, but Microsoft withstood all the onslaughts. Microsoft’s success in the 90s and early 2000s primarily came due to the huge enterprise customer base rewarding Microsoft’s core competency in the enterprise space.

Application developer community

Microsoft spawned a complete software industry by providing IDEs (integrated development environments) like Visual Basic, Visual C++ and Visual Studio. Windows was the de-facto standard to write applications for. Microsoft’s love for the geeky side helped it connect with the developers at large, many of whom developed all kinds of applications, and created healthy businesses for themselves. Companies also leveraged Microsoft’s suite of development platforms and products to build internal applications. And Microsoft showed its love for the developer community with MSDN by giving them tons of resources and career path certifications based on its technologies.

Hardware ODM partners

The ODM manufacturers like HP, Compaq, Dell, Toshiba, Samsung, et al, were Microsoft’s bridge to the consumer users for Windows, Office, etc. But the beige box was just a means to an end. The ODMs did try to create their own positions with some special purpose machines like the Dell Alienware laptops for serious gamers or the Panasonic Toughbook for rugged use etc., but by and large, the hardware was the most uninteresting part, what was inside mattered the most.

To it’s credit, Microsoft took these partnerships further by creating special purpose software for a new class of devices such as the PocketPC (e.g., Compaq iPAQ), Windows CE and Windows Mobile based devices, TabletPC with the rotating display, smaller and lightweight Netbooks, etc. But none of these were wildly successful category defining devices in the market.

The most important point to note here is that Microsoft’s meteoric rise as a technology powerhouse and dominant force in the industry came from Microsoft’s market – enterprise customers and application developers – acknowledging and rewarding its core competencies. As per the definition of core competencies given by CK Prahalad and Gary Hamel, Microsoft’s core competencies were indeed:

• Not easy for competitors to imitate
• Reused widely for many products and markets (the multiple markets here being desktop operating system, database systems, corporate email systems, etc.)
• Contributed to the end consumer’s experienced benefits and the value of the product or service to consumers. (Windows being a standard created benefits for consumers as there were tons of third party applications on top of Windows).

Then What Happened?

Well, a lot of things happened that were distractions, not the least of which was the DOJ lawsuit that threatened to break up the company. But somewhere along the way, Microsoft decided to enter new markets. It decided that it was going to cater directly to consumers, who up until then had been indirect beneficiaries of Microsoft’s core competencies.

Remember MSN Internet connectivity service in competition with AOL? Remember the play for content with MSNBC (perhaps as a response to AOL+TimeWarner)? And then of course, Bing, which has an uphill road against Google, the ill-fated Zune, Kin phones, Surface tablet where Microsoft took a huge write down on unsold inventory. The XBOX has been the lone exception in being a hit.

This raises the question:

Did Microsoft truly create new core competencies that were necessary against entrenched competitors like Google and Apple in these new markets?

The core competencies that were applicable to the enterprise and developer segments were not at all “resuable” in these new market segments. 

As a result of this defocus and clouding of market definition, Microsoft took the eye off the ball, and had to endure failures even with its core Windows franchise, resulting in failure with Windows Vista, and recently even with Windows 8. For whom was Microsoft really developing Windows – the enterprise or the consumer? As a result, enterprises have been avoiding Windows upgrades. The very segment that had rewarded Microsoft in the past was avoiding it.

Complex Systems vs Volume Operations

Geoffrey Moore, in his book Dealing with Darwin, talks about two fundamental business architectures as means of creating value: Complex Systems and Volume Operations. Moore defines them as follows:

Complex Systems is a business architecture that specializes in highly customized solutions to very complex challenges. Customers typically range from few governments to hundreds of large enterprises, to thousands of medium businesses, to tens of thousands of small businesses. The sweet spot is the enterprise space where companies can make millions of dollars from hundreds to thousands of companies, year after year.

Volume Operations, on the other hand, specializes in highly packaged products or service transactions that address every day needs for large masses of people. The sweet spot is the consumer market where companies can make tens of dollars from millions of consumers on a weekly or monthly basis.

As we can appreciate, these are two very different business architectures with fundamentally different operating and management structures. Most companies find their sweet spots in one of the two spaces. They may offer products and services in both spaces, e.g. Apple makes products for consumers, but they also make products for companies doing creative and media work, which is a niche market segment, but their success as a company is predominantly tied to their unfair share of success in one of the two business architectures, namely, Volume Operations.

All of Microsoft’s success had come from a Complex Systems business architecture. All of Microsoft’s failures have come from failing at the Volume Operations business architecture. And this can be directly pointed to not having developed the core competencies to play the Volume Operations game – namely, consumer packaging, usability and design, ease of use, distribution, brand management – all of which are hallmarks of its successful competitors who play that game.

What Could Ballmer Have Done?

When Steve Ballmer announced that he was going to step down as CEO over the next one year, the mainstream media panned his lack of vision and Microsoft’s inability to innovate under his leadership. I disagree. Microsoft experimented and innovated in many areas, perhaps it  just did not necessarily have the core competencies to be able to succeed with those innovations in what was fundamentally a different business architecture than it had operated with in the past.

Perhaps Microsoft’s acquisition of Nokia’s handset business may help connect the dots between the hardware and the software, and perhaps there is more that we don’t know, so only time will tell how Microsoft fares in the smartphone market, but if there is one area that Ballmer would not get high marks, it is in not leveraging and extending Microsoft’s core competencies. Of course, we have the benefit of hindsight, and we are really nobody to pass judgement on a CEO who tripled revenues and doubled profits during his tenure.

So what could Ballmer have done? Lets look at the key trends that happened in the industry. All of what has happened in the last 10 to 12 years can be distilled into three big trends:

1) The rise of the Internet as a platform, which we can summarize as Cloud Computing, and

2) The rise of mobile devices and app store ecosystem, which we can summarize as Mobile Computing.

3) The rise of social networks, however, for the sake of this discussion, we will focus on the first two.

Cloud Computing and Mobile Computing brought about significant changes for the underlying platform and application architecture. Instead of chasing markets with volume operations characteristics, Microsoft had the opportunity to extend its platform and products competencies into these new architectures.

Perhaps, that kind of thinking could have accelerated what is now Windows Azure, which has silently become a billion dollar franchise in its own right. Rather than going and creating a not-even-a-me-too music player, or creating its own devices in competition with its hardware partners, perhaps, it would have led to better collaboration with device manufacturers to create new software and platform for new class of devices. Perhaps a different kind of thinking might have even led to an Enterprise AppStore and a Consumer AppStore, keeping developers firmly loyal to the Microsoft platforms. But all this is wishful thinking, and with a huge dose of hindsight. So lets take a look at the future.

Back to the Future – What Microsoft’s New CEO Should Do

If we borrow from the speech at the beginning of this article, it is quite easy to say that Microsoft should focus on its core areas. But that is much easier said than done. In the rapidly changing technology world, the landscape may be quite different from now by the time the new CEO even steps into the corner office. If Microsoft is truly serious about playing for keeps in both the Complex Systems as well as the Volume Operations architectures, it needs to be competent at both. Right now, it seems to be losing its footing in the former, and watching from the outside in the latter.

Microsoft’s board and the new CEO should consider doing what the DOJ did not do – break up the company into two. Give each company the opportunity to develop and execute on its core competencies aligned with the business architecture it adopts and the markets it chooses to serve. Yes, this sounds very simplistic and is not easy. It requires some bold thinking, but that is the need of the hour. Otherwise, it is business as usual.