I like Microsoft’s new corporate strategy but execution is key

Microsoft announced a major strategic overhaul yesterday, shifting to a ‘One Microsoft all the time’ organizational structure. Now, all of Microsoft’s business are in five main functional silos irrespective of platform. I applaud the move. However, while the strategy is the right one, the crux of the matter will be execution.

Below are the key lines from an internal email from Microsoft CEO Steve Ballmer to employees:

This company has always had a big vision — to help people realize their full potential. In the earliest days, it was by putting a PC on every desk and in every home. We’ve come farther than we could have imagined. The impact we have collectively made on the world is undeniable, and I am inspired when talented new hires say they chose Microsoft because they want to change the world — that’s what we do today, and that’s what we’ll do tomorrow.

Sharpening Our Strategy

About a year ago, we embarked on a new strategy to realize our vision, opening the devices and services chapter for Microsoft. We made important strides — launching Windows 8 and Surface, moving to continuous product cycles, bringing a consistent user interface to PCs, tablets, phones and Xbox — but we have much more to do.

Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.

[…]

One Strategy, One Microsoft

We are rallying behind a single strategy as one company — not a collection of divisional strategies. Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do. We will see our product line holistically, not as a set of islands. We will allocate resources and build devices and services that provide compelling, integrated experiences across the many screens in our lives, with maximum return to shareholders. All parts of the company will share and contribute to the success of core offerings, like Windows, Windows Phone, Xbox, Surface, Office 365 and our EA offer, Bing, Skype, Dynamics, Azure and our servers. All parts of the company will contribute to activating high-value experiences for our customers.

[…]

There will be four engineering areas: OS, Apps, Cloud, and Devices. We will keep Dynamics separate as it continues to need special focus and represents significant opportunity.

I like this strategy because it is clear that the PC business is in decline. PC shipments in the most recent quarter fell for a record fifth consecutive quarter as tablets and the mobile space generally stole share. It’s not that people compute less. Rather, it is that the platform where Microsoft has been dominant is dwindling in significance. Moreover, as the world moves to a cloud computing-style organization, each individual platform becomes less important because the platform lock-in is diminished.

It is the move to mobile and the cloud which concerns Microsoft the most because that’s what is killing their PC platform lock-in. I first wrote about this in February after I visited a Microsoft retail store in Tyson’s Corner, Virginia. This was my main takeaway: “Although I believe the tablet/laptop nexus is the key one for Microsoft, I also believe that the Xbox is a critical one as well. Device convergence could make the Xbox into any other device Microsoft wishes it to be. The devices that have the most overlap are tablets and set top boxes because gaming is done on a TV and the game console is portable. To the degree Microsoft can leverage its Xbox platform into set top boxes and tablets and tie the software to the Windows platform at the same time, Microsoft could develop some stickiness around the Xbox that carries over into the tablet space.

“The whole experience left me understanding that Microsoft’s only advantage is its installed base of PC users. It also left me believing more than ever that the PC is toast, that tablets will steal a lot of their customers because of overlapping functionality, my own comments about my needing a laptop notwithstanding. Clearly then, Microsoft has to migrate its customers from the PC to the tablet as quickly as possible, building out enough price points in the process to have the Microsoft tablets act like either full notebook or traditional tablet depending on the price. Doing this will minimize cannibalization and extend the PC lock-in that is now starting to erode. The point here is to keep customers familiar with the operating system who have bought a gazillion dollars of PC software locked in to the Windows platform. And the only way for this to happen is via migration to mobile using tablets.”

So now we see Microsoft responding in full. The ‘One Microsoft’ strategy is supposed to make the company more platform agnostic, driving their functional product areas forward in an integrated way. They essentially have four areas to concentrate on: Operating systems, hardware, software and the cloud. I see the cloud silo as artificial since ‘the Cloud’ is really just a channel and not a functional area. So I do have some questions about how Microsoft came up with this approach. But, from a big picture perspective I am encouraged here.

Nevertheless, the outlook for Microsoft is cloudy because of the decline in their core business and their lack of traction in mobile. Acquiring Nokia before that company withers on the vine would be a smart strategic move to bolster their position in mobile. Overall though, it’s about execution, particularly in mobile. It’s still early days for Microsoft here but they are late to the party and we should be sceptical that they will be able to deliver. Since, the PC business is declining, expect earnings to be under pressure for the next few years until the company develops a coherent long-term strategy in the cloud and in mobile that it can successfully execute on to take share. For Ballmer, this is the last stand.