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7/20/2012
10:33 AM
Howard Anderson
Howard Anderson
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Microsoft A Victim Of Its Own Success

For all its cash and market advantages, Microsoft is a company in decline.

There's a wonderful article in Vanity Fair this month by Kurt Eichenwald, "Microsoft's Lost Decade," which details the cannibalistic culture that took Microsoft from invulnerable to highly vulnerable. Ten years ago, we all were echoing that Microsoft had all the applications, all the operating system revenue, and all the talent, and so was an impregnable fortress. It would swat all competitors like so many mosquitoes. And we were dead wrong.

Fifteen years ago, we were saying the same thing about IBM. Its profits were larger than those of the next seven computer companies combined and its R&D budget was larger than anyone else's profits. How could we be so consistently incorrect? It's a talent.

Eichenwald puts the blame squarely on CEO Steve Ballmer and makes the case that his talents lay not in technology, but in sales/marketing and other assorted alleged skills. But the real reason is management. Microsoft, like every other large company, was the victim of its own attempts to bring order to chaos. Ten years ago, everyone at Microsoft was getting rich--the stock appreciation alone created 4 million (!) millionaires as the stock options became vested. Then the music stopped. And when it stopped, the only way to get ahead was to get promoted. You couldn't get rich on your stock options anymore because the stock wasn't moving up.

[ If IT organizations don't get their act together, the best and brightest will chart their own destinies. See Here Comes Corporate Brain Drain. ]

Those who had gotten rich either physically or mentally checked out. Then Microsoft subscribed to the forced curve, which said that only 20% of any team could be judged "excellent," 50% had to be called "acceptable," 20% had to be labeled "deficient," and the bottom 10% had to be made eligible for "reduction." Sounds like some MBA theory; in fact, it's a lift from Jack Welch's reign at GE.

So what would you do if you worked at Microsoft and wanted to be a survivor? Would you gravitate to the high-performing teams? No way! Even if you were quite accomplished, you might wind up in that bottom 30%, and you wouldn't be promoted within your lifetime. No, No, No--you would migrate to poorly performing teams, where you could be a superstar. In the land of the blind, the one-eyed man is king. In a high-performing team, you might be cannon fodder even if you met all of your yearly objectives, especially if your peers exceeded theirs.

The second behavior of the Microsofties was even more insidious. In any team, you would delicately and subtly sabotage your peers. Did someone on your team need data by Wednesday for a report due to a Big Boss on Friday? Then why not send it late, send it incomplete, send it by interoffice mail. You sent it, didn't you? No one could complain that you were non-compliant, except that your peer would miss a deadline, which meant that someone's year-end review wouldn't look quite so good.

The result of all of this insidiousness: products were late and decisions were postponed--even as Microsoft racked up record earnings and cash kept accumulating. This dysfunctional "gaming the system" was just the sort of behavior which would have driven Steve Jobs crazy--and which he never allowed.

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There's a lag time between when a company gets into trouble and the world realizes it. For a while, everything is hunky dory--the company is cranking along, making some acquisitions, building derivative products. But there's trouble below the water line. In other words, its success is a predictor of its failure.

I remember a discussion I had once with Cisco CEO John Chambers. I was keynoting a Goldman Sachs conference evaluating the technology sector, and I was rating companies on growth, international sales, products, and the ability to handle adversity. I gave Cisco high grades on all but the last category, and Chambers was ripped that I would even suggest that he didn't face sufficient adversity.

"Howard! All of my key management is filthy rich, and they're all leaving because their stock options are golden--isn't that adversity?" Chambers said. I had to admit that I didn't think that when your company was worth half a trillion dollars you'd be crying the blues.

Every company needs to find some common enemy upon which to rally the troops. If it can't find such an enemy, it will find the enemy within. This is where the backbiting, the gaming of the system, the convoluting of the mission takes place.

Too many years ago, I rowed crew at the University of Pennsylvania. The coach, Joe Burk, had just installed the first ergometers right on the shell, where one to four lights would light up at the cox's position, depending on how hard you were pulling. The coach would follow the boat, looking over the cox's shoulder, and shout: "Anderson, pull harder! You're only lighting three bulbs!" And I would drive my legs harder... while he was looking. Then I (or my teammates) would slack off until the coach came by again. Needless to say, we didn't win many races.

This is what has happened at Microsoft (and IBM, AT&T, Yahoo, HP, Cisco, and SAP), and it will happen sooner or later at Google, Facebook, and Kayak. Maybe not at Oracle, as long as Larry Ellison remains the meanest SOB in the Valley and just won't put up with this BS.

Karl Marx said that capitalism breeds its own destruction, and I think he may have overstated his case. Sorry, Karl, but success can destroy a company much faster (examples: Wang Labs, Digital Equipment).

Groucho Marx (no relation to Karl) was once told that a solution was so obvious that "a 5-year-old child could see it." His answer: Send for a 5-year-old child.

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Andrew Hornback
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Andrew Hornback,
User Rank: Apprentice
7/28/2012 | 8:23:19 PM
re: Microsoft A Victim Of Its Own Success
If you're pinning your assessment of Microsoft's hopes for the future on their Mobile OS, I really hope that's the wrong model. With the waining of Microsoft's share in the mobile business (ask Nokia how their Windows Mobile devices are selling), and the dominance of Apple and Google in that space, they're basically showing up to a gunfight armed with a rusty spork.

No matter how technically "knock your socks off" Win8 Mobile is, where's the killer app? What is it going to do that builds a seriously compelling business case to the point that Apple and Google aren't in the mix? Plus, in the mobile market, unless they're going to acquire a cellular hardware producer, they're only going to be guaranteed a small licensing fee per device - one time revenue.

Personally, I think the best thing that Microsoft could do to save their core business is to spin off some of the technology groups that they have and build smaller, leaner businesses. Keep the operating systems, servers and Office group together as Microsoft, but spin off things like their gaming division, etc. Let product lines sink or swim on their own and simplify how things get done.

The Forced Curve management thing is a joke - if you've got 10 people on your team, they're fully focused on success of their project and all are getting the job done at or above expectations, how can you really tab one person as deficient? Becomes an office politics issue... so, you end up with socialites that are high flyers. Can't argue with Jack Welch's success at GE; however, I think the theory is a crock and leads to lazy management practices.

Andrew Hornback
InformationWeek Contributor
Sam Iam
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Sam Iam,
User Rank: Apprentice
7/24/2012 | 3:52:19 AM
re: Microsoft A Victim Of Its Own Success
Microsoft is still very profitable and growing, despite their failures in mobile, search, social, etc, as a result of Windows and related businesses, e.g. Office, SharePoint, Exchange. All of their other businesses, with minor exceptions like XBOX, rise or fall with Windows. The question is, will the OEMs (HP, Lenovo, Dell, Acer, Asus, etc) decide that it is no longer in their interest to partner with Microsoft and concertedly partner with one of the Linux OS providers, such as Red Hat, Google, Mint, Ubuntu, to come up with an alternative solution?

The OEMs really have little to lose at this point in pushing Linux ahead of Windows. They all make low single digit profit margins with no ability to differentiate except based upon cost. Now that Microsoft has started to compete directly with Surface, it might be time to start putting all of their eggs in the Linux basket.
Sam Iam
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Sam Iam,
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7/24/2012 | 3:28:24 AM
re: Microsoft A Victim Of Its Own Success
It is a myth that Welch "righted the ship" at GE. He inherited a company that was solidly profitable and growing rapidly. Reginald Jones, his predecessor as CEO of GE, doubled revenues and more than doubled profits in the nine years prior to Welch. Welch drastically cut the workforce and used the cash to buy other companies. While he was successful at GE, it is not the "pull yourself up by your bootstraps" story he portrays in his books.
KB9TSF2
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KB9TSF2,
User Rank: Apprentice
7/24/2012 | 2:51:07 AM
re: Microsoft A Victim Of Its Own Success
Yes! I saw this article in Vanity Fair. Bought the magazine to read it.
These stories are so old now. No managers ever seem to learn. They are blinded by their own egos. They are competitive and simply believe that everyone else thinks and acts like them.
We have two distinct projects going on in our team. At a team meeting today the boss was half joking that he was going to create competition between the two groups. I suggested a new strategy, "How about we work together and help each other?" No answer.
I remember times when companies strived to motivate all employees and valued all types and levels of abilities. I'll stop there.
ANON1237925156805
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ANON1237925156805,
User Rank: Apprentice
7/23/2012 | 10:20:33 PM
re: Microsoft A Victim Of Its Own Success
While Jack Welch's mgmt program in toto seemed to work for GE, taken out of context some of his ideas don't fly at all. I've seen the forced curve fail a couple of times in other organizations in exactly the way the author described above.

There's another aspect to this, though: HIstorically GE's core values were top-drawer design and engineering, high-quality construction and inventing the future. They got off course largely because they veered away from these values; going back to them is what righted the ship. The hows were almost secondary because they had that reference point in their corporate genes.

Microsoft has helped to revolutionize the world, but at no point in its history has it ever been a top-tier engineering company. We all know the story of how they brilliantly established a virtual monopoly on the enterprise desktop and thence in the home. With its customer base pretty much locked up early on OEMs dependent on it, Microsoft didn't have to be the best. A few good ideas, an interface refresh and adequate execution under the hood were good enough.

So really the seeds were sowed a decade before the decline became apparent, back when Bill Gates was still very much in charge. Though Mr. Gates made sure that security problems were eventually addressed, that didn't change the culture to one of overall impeccability.

Put in place in this culture a disincentive for employees to take risks and you see where we are. Despite the impressive breadth and depth of its accomplishements, engineering and design IN THE PC ARENA are still problematic at best.

There have been signposts that users get this and are tired of it. For instance the fairly rapid decline of IE once the DOJ injunction ensured fair competition should have been a red flag. If you aren't building products whose intrinsic quality makes users want to buy them, everything else is moot.

Mr. Ballmer was not the optimal person to turn this around, not being a technologist, but he didn't create it. What may have turned this around is the fact that Microsoft can no longer deny that its core turf is under serious threat. That has a way of focusing an organization.

In the areas where it has had to compete-think xBox, back office/networking tools, cloud tools, etc.-Microsoft has done good, sometimes great work. So there's plenty of talent. They seem to have directed some of that talent towards Windows 8. There's a sense of urgency behind the new products and some reviewers seem excited not out of duty but for real.

So now the question is is it enough and is it in time? They've got one more round in the enterprise most likely and if in that time they win back mindshare they'll remain a player. They will likely never be the man again.
ANON1237925156805
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ANON1237925156805,
User Rank: Apprentice
7/23/2012 | 5:54:37 PM
re: Microsoft A Victim Of Its Own Success
One of Jobs's undoubtable plusses, we found out after his illnesses forced a chink in Apple's veil of secrecy, is that he put in place a very good team that cemented the Apple culture. I don't doubt that over time things will shift and they'll be as subject to such vagaries as anyone else. But I'm betting that we've got a couple of years of certainty left.
krupnik443
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krupnik443,
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7/23/2012 | 5:47:40 PM
re: Microsoft A Victim Of Its Own Success
Forced curve - Deming had a field day with these. It's up to management to lead, to motivate, to inspire and to hire those who will follow enthusiastically until if / when they are ready to lead.
Sam Iam
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Sam Iam,
User Rank: Apprentice
7/23/2012 | 7:47:33 AM
re: Microsoft A Victim Of Its Own Success
Great point about the inherent problems of the Jack Welch style approach to performance evaluation. As you mention, under that management system no one is focused on competiting effectively with external competitors, meeting customer requirements or anything of the sort. They are focused on figuring out how to game the rankings and internal politics. As there is no objective and universally applicable ranking methodology (ranking accountants or software developers is more subjective than ranking 100m sprinters), it generally is based upon whatever a manager chooses to base the ranking on for their particular team. It creates a multitude of counterproductive incentives.
Eight Sigma Master
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Eight Sigma Master,
User Rank: Apprentice
7/21/2012 | 1:38:16 AM
re: Microsoft A Victim Of Its Own Success
Hi Howard ! I have managed global telecommunications for AIG, JPMorgan/Chase, Philip Morris and worked with you at Bankers Trust (NT=Not There) and MHT. Your analysis is on target as usual.

Microsoft is overrated and it is also is a PC operating system company, +WINDOWS 8. They are in no shape, financially / technically (no middleware engine) to help to Nokia (stock $1.85 ).
Both companies lack leadership and vision not to mention cash that was wasted on old outdated research efforts.Time is against both.

I always enjoyed supporting you and the Yankee Group. At one presentation I gave while at Philip Morris and Jeff from Bear Sterns was outstanding.

Best Regards,
Mike McKenna
mckenna4751@aol.com
201-394-1199
jbelkin
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jbelkin,
User Rank: Apprentice
7/21/2012 | 12:08:14 AM
re: Microsoft A Victim Of Its Own Success
MS was in decline long before BG left. It's complicated as every company that fails fails its own way but basically, MS was built to be an enterprise sales organization. It was both illegal and legally ruthless in wiping out its competitors. And pre 1997, you could lock up manufacturers, distributors and retailers - after all - as Compaq found out in trying to load Netscape, who would want to lose their WIN OEM license? What changed in 1997? The birth of the consumer internet era. It took a few years before it crossed the threshold to mass market but that was the beginning of the end for MS. They were NOT built nor could they understand a world where people could randomly wipe them out of a market and they WERE POWERLESS to buy them out or "copy" their success as MS did with Lotus, Harvard graphics and even IBM PC DOS. They were in the midst of deciding WMA would the digital audio format going forward except college students choose Mp3. Even if someone technically owned Mp3, did the ten thousand shareware writers of CD converter software care? MS had no way to deal with guys in dorms writing Mp3 software. Same with Mozilla. MS could force OEM's not to load Netscape and set Explorer to not access Netscape.com but a browser crowdsourced by a thousand worldwide programmers who gave it away for free? Same with Google taking taking down MSN Search. MS also failed because they could not see more than 4 weeks into the future, perhaps that is the result of bureacratsrunning an enterprise sales org. The missed Google making HUNDREDS of BILLIONS from ad sales because they were so focused on the $20 dollars AOL brought in every month so they spent $5 billon on MSn as a portal. They saw that game consoles makers made $5-15 off of every game cartridge so they spent $20 BILLION to launch Xbox and missed the IPOD/IPHONE/IPAD market - worth how many HUNDREDS of BILLIONS? (not to mention by cramming a $5k PC into a $299 gaming console at a huge loss, they killed the high end Pc market). Basically, after WIn 98, MS has had ZERO successes in the consumer market. They have literally taken the HUNDREDS of BILLIONS of cash flow from Office, Server and WIN OS the past 10 years and set it afire. The stock trades arund the same price as it did 10 yars ago but MS has generated about $150 BILLION in cash flow in the past ten years (minus dividends) - how much do they have left to show for an decade? They thought they could apply the same game plan to consumers they did to enterprise competition but they were wrong and the internet allowed Apple to regrow (that and the fact that Apple decided - we'll just launch our own stores - the fastest retailer ever to a BILLION dollars). They devalued their own brand name with 10 years of ineptitude regarding viruses, malware and trojans plus a how many wonky OS releases and patches and security holes - not a huge deal with corporate IT having a job but at home, MS is the brand to avoid when consumers realized by 2000, MS WIN wa not a magic machine that would make their kids astronauts. That is why they acnnot sell a PC for more than $600 - no matter how much it looks like a MB Air, people will pay at least twice the price NOT to use WIN PC if they can afford it or help it. That is why theycannot sell mp3 players, watches, webtv or mobile phones (was the KIN the fastest shutdown of a BILLION dollar loss?) ... their failure is arrogance + bureaucracy + frankly, not to be blunt - stupidity. Yes, enterprise generates vast amount of cash flow and has huge sales but that alone does not mean you are smart in everything. Then you add in bureacrats who just want to protect their turf (Windows phones had to run the ENTIRE WIN OS) and of course, make sure no one succeeds without their imprint ... it's FINE to be an enterprise cash machine (Cisco was at least smart enough to realize they could do some things great) but it does not mean throwing cash at every problem will do anything (Zune and MS retail stores). But yet they continue to do it. Aagin, they think it's 1995 - let's lock Google out of mobile ad analysis by speing $6 BILLION dollars ... surprise, others are good at it also. Apple spent a few hundred millions to buy another mobile agency. And yes, BG was as lost as SB when it came to the internet era (remember he tried to sell MSn portal as the "better than the internet.") He only understood running a business as a legal and illegal monopoly. So, while it's nice that he's not wasting most of ill gotten gains on gold faucet heads, he is like Steve Wozniak - an important pioneer of the pre internet era but nothing more. like his pronouncement that Apple needs a tablet like the MS Surface (um, Bill, 100 million people already have the tablet they want) - he's just another old man now. Steve Ballmer is incredible that Ms shareholders and the board were so confused by enterprise revenue, they let him run MS into the ground. You really want a CEO that dismisses a product that in 5 years time generates MORE SALES than his entire company (iPhone). MS shreaholders they can only becoem as smart of IBm and go back to the business of business and not throwing money out the window.
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