September 28, 2005

Microsoft's Reorg: a Pear Solution to a Peach of a Problem

In the wake of senior talent defections to Google and elsewhere (back in July I was gloating at the Kai-Fu Lee defection), Microsoft leadership leaped into action. (You noticed last week's reorganization news.) Trouble is, this reorganization is a solution to a non-organizational problem.

The problem Microsoft faces is one of The Innovator's Dilemma, which is described plainly in that book (Harvard Business School Press, 1997) by author Clayton M. Christensen. Good companies tend to fail – when they fail – because they are good.

The objectives of the Microsoft reorg seem to make sense in any common corporate setting where products and markets are maturing. The identified problem is that talent is leaving in frustration at not being able to get things done. It's reported there is a bottleneck getting face time with senior decision-makers. Delivery for things like handsets has been too slow in fast-paced markets like gaming. There may also be the problem of dour incentive: MSFT is stuck in a range. The reorg solution creates three president-figures below Gates & Ballmer who can pull the trigger with discretion. The choices probably can't be faulted on face, yet the main problem at the fundamental level of Microsoft's software markets goes unaddressed.

The problem is a classic: it is both fundamental and it is staring the company in the face (see boilerplate in their SEC filings). Yet managers can't seem to accept its reality or decide the nature of the threat, or agree on what to do about it. The problem is the new presence of a disruptive innovation which is both cheaper and (apparently) provides less functionality than Microsoft's flagship, Office. But this new market entry is starting to satisfy most of the requirements of Microsoft's customers, all while Microsoft is focusing on premium features outside, well above, the customers' requirements and price range.

According to Christensen, when good, even great, companies fail it is because their behavior and culture is locked into patterns determined by the environment in which they won success, by the products, capabilities and value networks they established which are now leading the leaders to be highly effective at killing ideas their most profitable customers do not want. Always the natural drive from training and successful experience is for higher margins and even larger markets. When, for example, Arsene Wenger or Jose Mourinho add a player, their default mode is to try to find one of singular ability who is better than any of the ones they already have. These tendencies are as natural as they are flawed.

The problem is that Microsoft officials see no reason for realistically addressing the lower-profits and small, remote customers who are taking up OpenOffice, and by the time they find effective ways to compete, the markets will have shifted irretrievably. The main strategy appears to be negative public relations while “Shared Source,” “Local Language” and “Windows Lite for Asia” programs are half-hearted stabs at doing something – anything – to shore the levee from the disruptive innovations flowing out of Open Source & Free Software (“FLOSS”).

To compete, Microsoft needs to form a new independent company based on components like Linux, Firefox and OpenOffice and wade down into the marginal markets being soaked up by FLOSS. That new company should have the brief and get free reign to cannibalize Microsoft's core Information Worker businesses faster than anyone else. They're good at marketing and this entity as a full-blooded Open Source company could out-manuever Red Hat, Novell and Canonical/Ubuntu (but not IBM) in one swoop. While they wait for the reorganization to show results, FLOSS will be gaining stride in Massachusetts and other state governments in the United States. History repeats itself and soon enough Microsoft will be just another item on the list of incumbent losers to disruptive innovation.


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