Microsoft: How Satya Nadella is Teaching an Old Software Company New Tricks
Since taking over the helm in February of 2014, Satya Nadella has been steering Microsoft back towards evolution and innovation.
Brief History
Founded on April 4, 1975, by Paul Allen and Bill Gates, Microsoft is a multi-national technology company that develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers and services[1]. The company rose to prominence in the late 80’s and early 90’s on the back of its flagship products, the Windows OS and the Microsoft Office Suite, both of which revolutionized the personal computer industry. Throughout the 90’s and into the very early 2000’s, Microsoft was highly regarded as one of the world’s most innovative companies[2], but that innovation quickly turned into stagnation as the company and its products matured.
Business Model
Microsoft’s business model has historically relied on just a few key products, which accounted for the vast majority of the company’s revenue. The first, and by far the largest source of revenue, has been the licensing fees it charges for use of the Windows operating system and the Microsoft Office suite[3]. Additionally, the firm also derived a much smaller fraction of its revenues from the sale of its hardware products, such as the Xbox and Surface Pro, as well as ad sales on its search engine Bing.
Moving forward, however, new CEO Satya Nadella realized that Microsoft would not be able to survive in the current market if it continued with its former strategy and still compete with tech giants like Apple and Google. The paid software market has become far more challenging with the introduction of low-cost/no cost alternatives from the likes of Google[3]. Furthermore, the rise of mobile phones and tablets has come at the expense of the PC market. Recognizing these trends, Satya has begun to implement a business model, one that emphasizes product integration and a “freemium” software package. Essentially, Microsoft will give away most of its prized software for free on all tablets and smartphones, with the hope that this will drive consumer engagement creating a halo effect with firm’s other product offerings.
For example, Microsoft wants its customers to interact more with its current product offerings. In 2015, the firm’s Chief Marketing Officer, Chris Capossela explained this concept while at Microsoft’s Convergence conference: “Rather than using Skype on Sunday night to phone home, you are using Skype for messaging 15, 20, 30 times every single day. That’s engagement.”[3]
Operating Model
In order to facilitate the company’s business model change it was also forced to retool its operating model. The firm will now focus more on innovation, empowering its employees to think outside of the box and take risks, something that was lost during the Steve Ballmer era. To drive this home, Microsoft spent $11 billion in 2014 on R&D[4]. This empowerment is best captured by the company doubling down on its most risky project to date, HoloLens, a headset which will bring hi-definition holograms to life using Windows.
In addition to the employee empowerment, Microsoft has also refocused on consumer engagement. The firm has increased its brand presence, both online and in the physical world with the expansion of its Windows Stores. The company has also focused on product integration, both internally and externally. Internally by making sure that its product offerings worked together seamlessly, and externally by offering its software products on competing platforms like Google’s Android and Apple’s OS. This added level of consumer engagement is intended to make its customers feel more at home on the Microsoft ecosystem.
Results
The changes that Mr. Nadella has implemented at Microsoft have been praised by both consumers and investors. The company is enjoying a resurgence in its brand value, now ranking as the world’s second most valuable brand worth $69.3 billion, up over 30% in the last two years[4]. Microsoft also reached another milestone, beating Apple at its own game, hardware. In October of 2015, for the first time ever Microsoft’s Surface tablet out sold Apple’s IPad[5]. In addition to the consumer response, Satya has also excited investors. Since taking over the CEO role on February 4th 2014, Microsoft’s stock has risen, 56%, increasing shareholder’s wealth by about $137 billion[6]. I would say Satya’s steering the ship in the right direction.
Sources:
[1] https://en.wikipedia.org/wiki/Microsoft
[2] https://en.wikipedia.org/wiki/History_of_Microsoft
[3] http://www.investopedia.com/articles/markets/111015/apple-vs-microsoft-vs-google-how-their-business-models-compare.asp
[4] http://www.forbes.com/sites/kurtbadenhausen/2015/05/13/apple-and-microsoft-head-the-worlds-most-valuable-brands-2015/
[5] http://www.forbes.com/sites/ewanspence/2015/12/07/surface-pro-vs-ipad-air-sales/
[6]http://finance.yahoo.com/q/hp?s=MSFT+Historical+Prices
Will need to get Satya involved in this post!! 😉 THe cmopany has gone through so much change it is really striking. And the results seem to be working. I am intrigued by the future prospects.
I wonder if beating Apple and Google by thinking outside of the box is the way to go. I was under the impression that Apple and Google especially have entire divisions (like Google X) that do crazy, out of the box things. While Microsoft has done extremely well this year with the Surface tablet, I wonder if they can continue to grow. I’d like nothing more than to see them take the fight to Apple/Google, etc!
Very interesting post. The turn-around of Microsoft’s operational model and attempts to reinvigorate the culture seem to have been very successful in the past few years. I wonder, though, if they will be able to turn this new focus into marketable new and ‘engaging’ products that can augment their core business.
Great article, really loved reading your take on Microsoft’s operating model!
You mentioned how they are empowering the employees to be bold and take risks with developing ground breaking technology. Definitely agree on this point! One thing that drives home your observation is the recent move Microsoft took to remove their stack ranking — a yearly employee evaluation program that graded everyone on a forced curve, regardless of objective performance. If you were on all star, but happened to be the “lowest” performer on an incredible all star team, you were given the lowest rating and lowest bonus! So you actually had an incentive to 1) hope that your fellow employees did worse than you and 2) surround yourself with worse talent to ensure you got a better stack ranking. Not a very collaborative performance incentive!
http://www.wsj.com/articles/SB10001424052702303460004579193951987616572
I think Microsoft is a great example of a company that’s had its shares of ups and downs but can really execute when it wants to.
What do you think Microsoft’s focus on consumer versus business has to be going forward, and what the future looks like for business revenue on core products like windows and office? Do you think they can wage a two front war on both Apple and Amazon, or will they have to choose?