Why Microsoft's Mismanagement Cost It The Present

| About: Microsoft Corporation (MSFT)

Little debate could exist among the gurus from the world of information technology about the revolutionary role that Microsoft Corporation (NASDAQ:MSFT) has played ever since its inception. The innovations that the company has brought to the field of computers are exemplary. This is what the company is all about, this is its legacy, and this makes it a tech-giant: the creation of a platform for human innovation and improve personal productivity on a scale never before seen. Regardless of how you may feel about Microsoft in the past, and everyone has their opinions with all of them justifiable, it would be churlish to discount the company's contribution to the improvement of humanity these past 30-plus years.

However, just as their dominance of thethe technological world reached its apex, like all organizations grown too big and too unwieldy, it allowed competitors like Google Inc. (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) to challenge it nibbling away at its position as the computing world and consumers tastes evolved, until it became obvious that not only as it left behind in every area of the market not named Office and Windows, but that it had little to no idea how to go about mounting a counter strategy. Management at Microsoft needed to come up with something different, something that could take what it had left and use it to reassert its supremacy in the computing world - by not just playing catch up, but attempting to leap ahead.

My peers are my competitors?

The culture within Microsoft at its height created an internal cancer that backfired and catalyzed the decline of the company by stifling innovation and allowing the building of small fiefdoms within the company. Initiatives such as 'stack ranking' where out of a team of 10, two would get good reviews, seven average, and one would get an unsatisfactory one no matter how well he performed, led to the employees competing against each other and not the company's external rivals.

A house divided cannot stand and from what has been become known from former Microsoft employees, Microsoft wasn't just divided by being atomized, it forgot that its true competitors existed outside of the Redmond campus not within it. This is why the company that first introduced the concept of the tablet computer is now the absolute last one to get one out the door.

While the current employees were not blunt enough about the management policies at Microsoft, ex-managers like Ed McCahill categorically placed the onus on the bureaucratic culture at the office for squandering the advantage that the company had over its competitors.

Have you ever wondered why Windows, for all of its ability, is essentially unchanged since 1995? And even then, Microsoft did very little of the kernel development on Windows 2000, arguably the best version of their flagship product, as their join-development agreement with IBM (NYSE:IBM) with OS/2 allowed them to poach all the good code and when IBM abandoned OS/2 and the desktop computing world to Microsoft, OS/2's kernel lived at the heart of Windows. The lack of incentive to succeed outside of Office and Windows ensured that anything that threatened the twin cash cow was discarded.

It is telling that since the day that Microsoft took a stake in Apple, the roles for the two companies have essentially reversed. Apple finally surpassed Microsoft's market capitalization record in mid-August and Microsoft's stock has not recovered an ounce of market cap since the bursting of the NASDAQ bubble in 2000.

Innovations or endangering partnerships?

Microsoft is constantly dogged by speculations regarding a management change at the top. CEO Steve Ballmer is looking to bring more innovative engineers to management - which is a switch for Ballmer, whose reign has been characterized mostly by purely business decisions, his area of expertise and not style, innovation and progressive thinking. Ballmer is a dealmaker and a broker. Apple was run into the ground by middle-management types like John Scully only to be resurrected by a visionary in Steve Jobs.

The questions surrounding Microsoft's very daring Windows 8 strategy all center on Ballmer and whether or not he's the guy that can lead this team in a completely different direction without screwing it up. So, while Ballmer's business and acquisition savvy (aQuantive notwithstanding) served the company in the past to maintain its death grip on the desktop, the question remains if the innovative ideas would be allowed to travel up the management hierarchy? At the very least, some very good ideas have filtered up, but one gets the feeling, it's been done out of desperation, rather than shrewdness.

The Surface table announcement and subsequent ticking off of most of their OEMs, relationships that Microsoft has always been accommodative of in the past, smacks of this; for good or ill.

It should be obvious at this point that if these next months are a disaster for Microsoft, Ballmer will be replaced. It will prove once and for all that he is the wrong guy for the current job. The good news for Microsoft is that his main competition is now Tim Cook at Apple.

Then again, at least Cook knows how to get products into the hands of consumers when they want them. The iPhone alone generates revenue close to that of Microsoft as a whole. Its mobile strategy up until the last two years has been muddled and the rise of the iPhone speaks to the main difference between Ballmer and Jobs. Jobs understood that beautiful things matter in a world that has become increasingly crass. Ballmer is the epitome of the blunt, crassness of modern American culture. So, the massive lead in mobile operating systems that Microsoft had with Windows CE evaporated overnight and Ballmer stood around shaking his head and just not getting it.

The Windows-on-ARM or Windows RT variant is the first admission by Microsoft that the old relationships were no longer working for them. It would be, in effect, abandoning Intel (NASDAQ:INTC). The Surface tablet was the big one though, that told the OEM's that Microsoft would not be going down quietly and that Apple was right. If someone was going to put your logo on their product, it wasn't going to be some cheap piece of disposable garbage. While there is a big market for nearly disposable phones, tablets and laptops, especially in emerging markets, controlling the perception of a minimum quality standard is essential to long-term brand loyalty. Microsoft has enjoyed loyalty more in the form of Stockholm Syndrome than genuine love for its stuff.

Surface represents the beginning of what is hoped by investors and many in the tech community as the new Microsoft. Internal management at Microsoft is confident of the product's success, primarily because of internal product development groups at the company testing it for a while. But how much of that is smoke and marketing we will have to find out. The rumor is that the ARM-based Surface tablet will sell at $199, but that seems unlikely. What the rumor does mean is that Microsoft is serious about pushing its envelope into the mobile space.

Between Surface, Windows 8 and its growing relationship with Nokia Corporation (NYSE:NOK) - with Nokia itself looking to become a leader in location technology - that has implications far beyond smartphones, this has put a lot on the line for Microsoft. It's a big gamble, but it's one born out of a necessity of management's own gestation after years of complacency and bureaucracy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.