Microsoft's Spectacular Comeback

The story of Microsoft has been a story of huge success, a long period of stagnation and rebirth.

A decade ago, Microsoft was suffering from a bad reputation, lack of innovation and failed strategic decisions. However, the company managed to achieve a spectacular turnaround and on June 23, 2021 it became the second US company in history, after Apple, to reach a market valuation of US$ 2 trillion.[1]

How did Microsoft manage to do it? The answer, as always, is simple – “strategy”. This article looks at Microsoft’s strategic shift, how it was implemented and how it led to success.

Microsoft’s problems

Microsoft started as a software company with the goal of putting a personal computer "on every desk in every home". This vision was largely achieved by the late 1990s, at least across the developed world. Bill Gates stepped down as Microsoft's CEO in 2000 and the company embarked on a search for a new vision under Steve Ballmer.

Steve Ballmer was one of the early hires in Microsoft, but he was not a tech person. Over the years he had led business management and sales divisions in the company. Once Ballmer became Microsoft's CEO, he reorganized leadership around businesspeople like himself. He believed that the company's goal had to be to ensure the dominance of the Windows operating system and all projects in the company had to serve this goal. He was pretty much following Bill Gates's ethos of aggressive expansion and cutthroat competition.

One of the attempts to ensure Windows dominance was to expand it to mobile devices with Windows Mobile and Windows Phone. This was unsuccessful as Microsoft was late to the game and was losing the competition to iOS and Android.

Overall, Ballmer's strategy led to losing out on innovation and further deterioration of the company's public image, which had already been marred by anticompetitive practices and suppression of open-source innovation under Bill Gates. The company's image took a hit with the release of Windows Vista in 2007, which was almost universally hated by users. Despite the revenue growth, Microsoft's stock price stagnated under Ballmer (some call this period a lost decade for Microsoft).

Microsoft’s stock price historical data:

Source: Google

Change in leadership and strategy

Steve Ballmer stepped down as CEO in 2014 (Microsoft’s stock price jumped 7% on the announcement showing investors’ excitement in anticipation of the change in leadership and strategy).

Many were surprised when Satya Nadella replaced Steve Ballmer as the new CEO. Nadella was a rather unknown figure serving as executive VP for Microsoft's Enterprise Division in charge of cloud services. However, his appointment was a start of a radical shift in Microsoft strategy:

Satya Nadella. Credits: Insider.com

New mission. Nadella started by setting a new mission for the company. It now stated: “Our mission is to empower every person and every organization on the planet to achieve more.” It signaled a shift towards a more customer-centric approach, a change of focus from aggressive competition to collaboration and partnership. Nadella was saying in his interviews: “If you want to be cool, go work somewhere else. If you want to make others cool, come work at Microsoft.” ?

Windows is no longer the main business. In his first email to employees after becoming CEO Nadella did not mention Windows even once but talked more about succeeding in a “cloud-first world”.[2] In his eight-page 2020 letter to shareholders, he mentions Windows exactly one time on page 4. Windows currently accounts only for 14% of Microsoft’s revenue.[3]

The shift from pursuing a closed ecosystem. While previously wildly popular Microsoft Office software was bundled with Windows operating system and drove up Windows popularity, soon after the change in leadership Microsoft made Office available on iOS and Android. In 2021, Microsoft also announced that Android apps will become available in Windows 11. These decisions were in line with the company’s more open and collaborative strategy.

Microsoft is now all about the cloud and AI. Microsoft cloud platform Azure and its AI platform Azure Cognitive Services were established during Steve Ballmer's time but became the center of the company's business under Nadella as CEO. Since 2014, Azure has been growing rapidly. Cloud and AI services currently account for 56% of Microsoft's business. Here is how cloud services overtook personal computing in Microsoft’s business:

Source: Microsoft. Segment History - Investor Relations - Microsoft. [online] Available at: <https://www.microsoft.com/en-us/Investor/earnings/trended/segment-history.aspx> [Accessed 27 July 2021].

Microsoft is currently the second-largest provider of cloud services worldwide with 19% of the market, behind Amazon Web Services:

Embracing open source. One of the radical strategic shifts for Microsoft was the pivot away from stamping out open source. If previously all software had to be proprietary and independent developers were seen as potential competitors, now Microsoft decided to enable open-source and build tools for developers. One of the most noticeable demonstrations of this shift was the acquisition of the collaboration open-source platform for developers GitHub in 2018 for US$ 7.5 billion.

Social media. Continuing its strategy of diversification from the operating system market, Microsoft broke into social media, which was risky, given Facebook's dominance, but paid off. In December 2016, Microsoft made its biggest acquisition when it bought LinkedIn for US$26.2 billion. LinkedIn currently accounts for 6% of Microsoft’s revenue.

Source: CNBC. 2021. Why Microsoft keeps beating Apple and Google with Windows. [online] Available at: <https://www.youtube.com/watch?v=OcL932W6E1w&t=1s> [Accessed 27 July 2021].

Strategy implementation – the key role of culture

Satya Nadella sees culture as an essential element of Microsoft's strategy implementation, and he likes to talk about it in his interviews. His last letter to shareholders had a separate section on the culture where he sets the following three pillars: growth mindset, customer obsession, diversity and inclusion.[4] It appears that this goes beyond empty declarations as Satya Nadella explains the rationale behind these values.

According to him, in the late 1990s, he saw the sense of arrogance that reaching the market cap of US$ 600 billion produced in Microsoft employees and leadership. He believed that this hubris led to the company's stagnation in the following years, so he was determined to change that with what he calls "growth mindset" and what can be described as continuous learning.

The customer obsession pillar fits nicely in the company's mission of “empowering every person and every organization on the planet to achieve more". So, the growth and success of the company become dependent on the success of its customers. This aims to instill a humbler and more customer-centric approach.

When it comes to diversity and inclusion, Microsoft has been ranked by some as the best among US employers for its diversity.[5]

Microsoft is paying close attention to ESG/CSR objectives as well. A large part of Satya Nadella’s last letter to shareholders was dedicated to the section called “Our Purpose”, where he talked about Microsoft’s initiatives in supporting inclusive economic opportunity, protecting fundamental rights, sustainability and earning trust (data privacy and security).

All of this not only contributes to the practical implementation of Microsoft's strategic objectives but also creates an image of the company that can be described as modern, innovative, open, collaborative, responsible, trustworthy. The company was in bad need of this image makeover and Satya Nadella managed to achieve it. His own unassuming and likable personality also helped to build confidence among customers and shareholders.

Conclusion

It is important to remember that the cloud services division in Microsoft was created and became profitable under the leadership of Steve Ballmer, so he deserves some credit for setting the foundation for Microsoft's later success. However, it was Satya Nadella who reinvented the mission, the strategy, the culture and the image of the company, and ultimately led it to a US$ 2 trillion valuation. It turned out that shareholders needed not only sustained revenue growth but also a company that is modern, humble, collaborative and open.

The strategy, as an art of difficult choices, played a central role in this turnaround. Microsoft had to abandon its pursuit of market dominance at any cost, its obsession with Windows and its unsuccessful attempts to break into the mobile OS market. Instead, it chose to refocus its efforts on cloud computing, AI, tools for developers and social media. It helped the company harness the technological and societal trends and keep up with the competition.

In one of his interviews, Satya Nadella was talking about leadership and one his remark caught my attention. He said that to him leadership is about removing constraints. When the company becomes stagnant, obsessing over old products, familiar metrics and ROI, it is up to the leadership to assume the risk and remove these constraints on the path forward. It seems to me that this is exactly what Satya Nadella has managed to achieve. A good lesson to remember.

[1] Bloomberg. 2021.?Microsoft Rises to Join Apple in Exclusive $2 Trillion Club. [online] Available at: <https://www.bloomberg.com/news/articles/2021-06-22/microsoft-rallies-to-join-apple-in-exclusive-2-trillion-club> [Accessed 27 July 2021].

[2] Microsoft. 2014.?Satya Nadella email to employees on first day as CEO. [online] Available at: <https://news.microsoft.com/2014/02/04/satya-nadella-email-to-employees-on-first-day-as-ceo/> [Accessed 27 July 2021].

[3] Microsoft. 2021.?Microsoft Investor Relations - Annual Reports. [online] Available at: <https://www.microsoft.com/en-us/Investor/annual-reports.aspx> [Accessed 27 July 2021].

[4] Microsoft. 2021.?Microsoft Investor Relations - Annual Reports. [online] Available at: <https://www.microsoft.com/en-us/Investor/annual-reports.aspx> [Accessed 27 July 2021].

[5] Comparably. 2021.?Best Companies for Diversity 2020. [online] Available at: <https://www.comparably.com/news/best-companies-for-diversity-2020-2> [Accessed 27 July 2021].