Steve Ballmer has announced a reorganization at Microsoft (NASDAQ:MSFT). Can a reorganization solve Microsoft's problems? My fellow Forbes contributor Mark Rogowsky has looked at the tech side of the issue and concluded: Microsoft's New Strategy Doomed By Contradictions. Let's look at the issue from a corporate strategy perspective.
In my corporate years, I saw companies decentralize to save costs (taking a one-time charge to earnings), then re-centralize to save costs (taking another one-time charge to earnings). Nothing seemed to actually reduce costs, though some of us thought the resulting turmoil was fun. I learned a basic lesson in that era:
Reorganizations do not solve problems. They may be necessary, but in themselves they don't change much. For example, Microsoft's operating systems of various types (Windows, Xbox) will now be part of the same division. This would be a big deal in a 50-person company. Microsoft has about 100,000 employees. So here's a team of 5,000 programmers who had been part of a 25,000 person division. Those 5,000 are now shuffled to work alongside a different 20,000 partners in their new 25,000 person division. Will any of the 5,000 notice the difference?
The senior managers in the different division will certainly feel a difference, but for a change to work, it has to get down to the coders. It has to get down to the coders because . . .
Most innovation comes from cross-fertilization. There are two ways to come up with cool new stuff. The hard way is to plow forward, improving a current technology so that it's better. The easy way is to grab one idea from left field, another from right field, and combine them into something new. So Steve Jobs takes the MP3 player and Internet commerce and comes up with the iPod. Then the iPod and the telephone to create the iPhone. Wal-Mart (NYSE:WMT) combined basic store management with inventory management software to create a killer chain. This argues strongly for bringing people with different knowledge bases together. A good example is Facebook's (NASDAQ:FB) Hackamonth, in which software engineers spend one month on loan to a different team.
High level re-organization by itself does not generate cross-fertilization, but it is probably a prerequisite. When department managers are battling with one another, the front-line workers won't share knowledge or ideas.
Next, a cursory look at Microsoft's financials led me to the age old wisdom:
Watch the cash. Microsoft is a large, well-to-do company. It had $56 billion in cash at the end of fiscal 2012, against fairly small debt. It would be easy to get complacent. Were I their consultant, though, I would point to the online division. This, in the old organization, housed Bing, MSN and some other small items. It lost $8 billion last year. Whoa! How do you have a division that loses $8 billion and you just push the boxes around on the org chart? If a client told me that there were good reasons for not changing things there, I would probe. Ask more questions. Come back to it. When the client tried to change the subject, I would return to the critical issue, eventually shouting, "Your online division is losing $8 billion! You can't ignore that."
OK, maybe I'm a penny ante guy. I watch my nickels and dimes, drive a five-year-old car, and buy my beer when it's on sale. Perhaps I should be more of a big spender. But I can't think of any successful companies that ignored $8 billion losses and went on to thrive.
The final lesson is one that is taught in business schools and ignored in businesses:
Cannibalize your own products. That is, create new products that will destroy the market—and the profits—of your old products. Most companies, in contrast, protect the cash cow. And yes, it's good to have cash. But every old cow dies one day. The smart dairyman has a new, younger cow ready to take old Bossy's place.
Microsoft should—if it isn't doing this already—have a team of engineers envision that Windows doesn't exist. What should the company do? One approach would be to watch the world go to OS X, Linux, or Chrome OS. How does the company change its other products to exploit the shift to alternative operating systems? Another approach would be to create a swell new operating system. If designed with a goal of being better than anything currently on the market, the new Windows could sustain Microsoft for several years. The key, though, is not to look at Windows as a product to be saved, but to view a new Windows as a start-up that has to knock off the leaders.
In conclusion, I don't have enough inside knowledge to know what's really going on inside Microsoft. They may be quietly doing exactly the right things. Their announcement, however, does not convince me that they are on the right track.