Microsoft Transforms, but Will It Leave Past Behind?

​Microsoft surprised analysts and investors on Thursday (October 24) when it posted a 17 percent increase in profits over the past three months. The profits come at a time of transition for the tech giant which recently reorganized itself as a “devices and services” company with two groups; one focusing on devices and consumer products and the other on commercial products.


The reorganization will likely be the last major endeavor of CEO Steve Ballmer who recently announced he would retire from the company in 12 months. In a July letter to Microsoft employees, Ballmer laid out his strategy for the future of Microsoft.

“Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe, at home, at work and on the go, for the activities they value most,” he said.

Ballmer’s “One Microsoft” plan transforms the 37-year-old software firm to a faster- paced company that can carve out market share in a post-PC world dominated by rivals like Apple, Google and Amazon.

Ballmer strategy could tie hands of yet-to-be named successor

That push includes the recent $7 billion purchase of Finnish smartphone manufacturer Nokia – a deal that might give Microsoft a toehold in the smartphone market, says Lawrence Hrebiniak, Emeritus Professor of Management at the University of Pennsylvania’s Wharton School, although he cautions that Nokia “hasn’t been doing well.”

But these are major changes for an outgoing CEO, says Hrebiniak, author of Making Strategy Work.

“Normally, a new CEO comes in and makes his own strategic moves. But Ballmer is saying “I am leaving, but I’m going to buy Nokia” – a major move that he’s basically saddling the new person with,” he said.

“All of the things Ballmer’s doing is basically a challenge to a new person coming in to make it work,” he said.

Microsoft has declined comment. But Rob Helm, President of Research at Directions on Microsoft, an independent company that analyzes Microsoft for large organizations, says the Nokia deal represents Microsoft’s future in that it is going to have to take more direct control of manufacturing its own smartphones and tablets.

“So as Steve Ballmer bids goodbye to the company,” he said, “the company is bidding goodbye to the business model that made it a success at its beginning.”

Helm says Ballmer has changed the character of Microsoft, which built itself on PC software and computers controlled by end-users. Now, he says the company is being “forced by circumstances” to shift to computing that is centrally-controlled by a company.

Windows success hurt innovation

​Over the years, Microsoft created a culture around a few profitable products like its Windows operating system, which has some 1.3 billion users worldwide. That culture ultimately led to what Hrebiniak calls “silos or fiefdoms” among the company’s departments and prevented it from adapting successfully to market changes.

Realizing this, Ballmer, who has run Microsoft since 2000, “created a new functional structure to coordinate things at a centralized level around new products,” said Hrebiniak.

He also raised revenues, says Roger Kay, an analyst at Endpoint Technologies, a technology market intelligence firm, even though he was unable to extend the Windows franchise.

According to Hrebiniak, Microsoft has some $61 billion in cash and, in its latest year, close to $78 billion in revenue.

Around 60-70 percent of that is generated by Microsoft’s cloud-based enterprise business - remote servers that host software that businesses need.

“That gigantic real estate, which we never see, has put it [i.e., Microsoft] on roughly the same footing as a company like Google,” said Helm.

Pushing into the hardware market has been less successful. But it is “where the change in Microsoft’s philosophy is the starkest,” Helm said, because Microsoft has typically relied on other companies to build PCs and devices to run its software on.

The company probably had no choice, he argues, given rivals like Apple, which controls its hardware end-to-end, and Google, which tries to set the bar higher with its hardware.

But building computers and phones is a “completely different business,” he cautions, and one in which Microsoft will make some mistakes learning.

And it “is going to have to come from behind” in both mobile and hardware markets, he added, and “win back some trust” because there is “a lot of suspicion of Microsoft” among phone carriers and retailers.

Microsoft has been building its Xbox gaming system and PC peripherals for years, although its recent line of Surface tablets has faltered.

And Kay says that with Surface, “Microsoft is competing with its own customers, the current source of much revenue.”

Consequently, “those partners have been only lukewarm in supporting Microsoft’s recent initiatives in the critical high-mobility space, which includes smartphones and tablets,” said Kay.

To be successful as a hardware manufacturer, Helms says Microsoft has to rewrite its successful applications for touch-based or high resolution devices and attract developers to build market share. Paradoxically, “they don’t have the market share to attract developers,” says Hrebniak.

While Microsoft’s Windows phone has gained ground and is the third leading mobile phone platform, it still trails its rivals in apps.

The road will be tough, warns Hrebniak. He says Microsoft needs an innovative CEO who knows more about mobile devices to see it through.

Some say Microsoft is already changing. But Kay is skeptical. He says Microsoft’s “byzantine empire” is conservative and “falls back on its old ways – things that worked before” and “may not be working now.”