In December 2000, Microsoft had a market capitalization of $510 billion, making it the world’s most valuable company. As of June 2012, it is No. 3, with a market cap of $249 billion. In December 2000, Apple had a market cap of $4.8 billion and didn’t even make the list. As of this June, it is No. 1 in the world, with a market cap of $541 billion. Today, Apple’s iPhone product line brings in more revenue itself than all of Microsoft. No kidding.
What an incredible reversal of fortunes. How could Microsoft – once one of the coolest places to work – revolutionizing the entire world and breaking even IBM’s iron grasp on the computer industry seem to lose its way so dramatically?
Microsoft was once a lean, mean and hip enterprise led by young visionaries out to change the world. Over the years (and not so many of them) they seem to have become slow, bureaucratic, arrogant and filled with backstabbing, silos, politics, petty disputes and passive aggression – everything the company founders hated.
Lesson 1 – Be careful about succession planning. In 1980, the year IBM came to Microsoft to purchase their DOS operating system, the company revenues skyrocketed to stratospheric levels. While founders Bill Gates and Paul Allen were passionate about their products and vision, they both recognized that they perhaps didn’t have the requisite skills to manage the growth. While this was arguably a good thing, they turned to another ex-Harvard colleague, who was brilliant, but also loud, boisterous and hard driven, Steve Ballmer. Gates made Ballmer his “right hand man.” When he ultimately decided to step aside in 2000, even Allen was caught by surprise as he never saw Ballmer as Bill’s successor. He sensed Ballmer was not right for the job since he was a finance guy, and dealmaker who did not have a solid grasp on the product and technology side of the business. And, the executive culture at the company took a decided turn.
Lesson 2 – Even smart people have blinders. By 1997, Microsoft had a 10-year head start on the world in developing a new product – an electronic device that allowed people to download books magazines and other written content. While Gates “green lighted” the project, he didn’t like the initial prototype because it didn’t seem “Windows like.” This led to delays and redesigns. The e-book development was ultimately transferred from R&D to the operating software unit responsible for meeting quarterly profit goals and their focus was quickly shifted to supporting software products. So despite their multi-year head start, Microsoft would not be first to market, allowing Amazon and Apple to reap billions of dollars in revenues and profits.
Lesson 3 – Old paradigms can drag you down wrong paths. Once Gates communicated he didn’t like the operator interface, it signaled a pattern of thinking within the company. Windows was designed to enter information via a keyboard rather than a touch-screen interface. The initial e-book design within Microsoft was more iPad-like. But, the Windows and Office operating units were able to dictate the new product development agenda and the Microsoft Reader product ultimately introduced – left most customers “cold” and was a considerable flop. Microsoft was already beginning to stifle innovation.
Lesson 4 – When old meets new it is not so good. In the early days of Microsoft, the company grew and stock prices soared. Microsoft made not only software, but made millionaires as well – relying on a rich program that granted stock options to employees. After Ballmer took over from Gates, the stock price bubble had burst. The old timers (many millionaires) were now working alongside new employees (millionaire “wannabes”). When the millionaires came to work talking about the new Bentleys they had just purchased, the younger employees began to resent the disparity, creating an environment of us-vs-them which built mistrust and caused unhealthy internal politics to expand exponentially. In the early days people saw they would achieve wealth by inventing exciting new products. But today, people see that the only way to wealth is just like it is at General Motors or IBM . . . through promotions. The bureaucratization of Microsoft was now well under way.
Lesson 5 – When financial engineering replaces real engineering, you are in trouble. As the tech bubble burst, and stock price woes intensified, it was natural that company execs began focusing more on managing financial results. More meetings were created, committees were established to approve things (like what to spend money on) and people began worrying about budgets more than they did about product innovation. This always creates a short-term focus. When the attention turns to cost cutting and budget management, the market has a way of passing you by (especially in a marketplace where the pace of change is great.) Microsoft initially has a lead on some of their key competitors in the smart phone business with their Windows CE operating system. But like in the case of the Microsoft e-book reader, this too was squandered – all due to the crushing weight of Microsoft’s burgeoning bureaucracy.
Lesson 6 – The generation gap can impact every company. Many of Microsoft’s middle (and upper level) managers were initially recruited in their 20s during the 1980s. Today they are in their late 40s and higher. As the millennial generation started to swarm into the junior ranks, they saw a different world of consumer behaviors than their bosses did. As happens at many companies, the suggestions of the younger generation were brushed aside by the older generation managers who seemed out of touch with the market – adding to the resentment and feelings of frustration. Case in point – Microsoft’s MSN Messenger product was introduced as a competitor to AOL’s AIM product – a pre-cursor to the social media phenomenon we now know as Facebook. As was the case with Microsoft Reader and Windows CE, the MSN Messenger product lacked many of the features that younger users coveted. Microsoft managers – said one company software developer – “just didn’t get it.”
Lesson 7 – Don’t steal management concepts from others that don’t fit your culture. One of the more controversial inventions of GE’s Jack Welch was the dreaded ABC system where all managers were forced to grade their subordinates on a bell curve. So no matter how good they were, you had to classify 10% as under-performing “C players.” While this may have worked for Welch, when introduced at Microsoft, it was immediately despised by the masses, furthering a culture of internal competition that one exec called “management by character assassination.” Another software development manager recalled “People [would] openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the [employee] rankings.”
Lesson 8 – Don’t get mad or try to get even. As the bureaucracy issues became more prevalent, a lot of talented people were being lured away to other companies like Google – the emerging new “cool” place to work. When one of Ballmer’s key technical specialists told him he was leaving for Google, Ballmer reportedly had a meltdown throwing a chair and threatening to “bury” Google. This passion for revenge apparently motivated the development of BING, Microsoft’s third less than stellar entry in to the search market, which one engineer described as being developed by a bloated team that was not focused on innovating new features, but bringing out something fast to gain market share and hurt Google. Reports are that Microsoft has so far lost $6 billion on the search venture. While Microsoft has gained market share, it has done so by displacing other Yahoo search customers. Google has also been gaining share.
It is hard to know where Microsoft will turn next, or if Mr. Ballmer will be able to turn things around. But the main point for us all is that all companies everywhere are potentially governed by the same laws of human behavior and company culture. Thinking you are immune is the first big mistake.