Microsoft: What Happens When the Leadership is Passed On?

Steve Ballmer, Bill Gates’ successor, is stepping down after thirteen years as CEO of Microsoft. His strategy during his time as chairman was to move Microsoft to a "services and hardware" company, when its specialty had always been software. Is Ballmer's decision to step down an admission that shareholders rejected this decision? What should the next leader of Microsoft do? Looking at a few examples of how other companies have fared when shifting leadership can offer some enlightening information.

Microsoft has long been compared to IBM because the two companies have similar holds within the computer industry. Given Lou Gerstner’s stellar ability to transform a failing IBM in the early 1990s, the comparison is worth it – and can foreshadow what can be expected from the next leader at Microsoft. When Gerstner took over as CEO in 1993, he took the reins of an old and prestigious institution with a rich history. Microsoft is equally prestigious and rich with history, so leadership teams at Microsoft should pay attention to Gerstner’s strategy. The company’s incoming leader will need to do what Lou Gerstner did – and what Steve Ballmer had been missing.

Lou Gerstner honored the values and skills that IBM already had and that gave them a distinct competitive advantage. He then took those values and skills and reapplied them to a changing market place – a marketplace that wasn’t so interested in PCs anymore. Then, like now, the fortunes in the PC market were flagging. The cash cow for IBM at the time was the mainframe hardware business. To support this business, IBM developed distinctive capabilities to service large companies, companies who were well-established customers using IBM’s hardware. IBM's turnaround was based on applying those skills to the same market but rebranding them as a consulting service. Thus, Gerstner helped the computer company build on its existing competitive advantage and cater to long-standing customers.

The reason Microsoft edged out IBM in the computer market has become a part of management folklore. But certain ideas are often less explored. For instance, IBM's competitive advantage at the time (as discussed above) was not conducive to the phase of the computer market occurring at that time. Today, Microsoft's capabilities in software are not suited to the reduced PC market. That's more Apple’s domain. The Windows phone, while doing a little better than Blackberry, says more about Blackberry's failures than it does Microsoft’s advantage in the smart phone market. That’s Apple’s domain, too, along with a few others.

New leader, New Strategy

Microsoft’s strategy, as the outgoing Ballmer defined it, was to move the corporation in the direction of "devices and services." This company strategy was surely wrong-headed. Microsoft, as its name implies, has always been a software company – never a device company. It is unlikely that it could develop the capabilities in design and manufacturing to compete in a marketplace already inundated with devices from well-established companies like Apple or Android.

The incoming Microsoft CEO will need to honor the value, skills and the competitive advantage of the business. Regardless of its current misguided strategy, the company has done a lot of things right. Microsoft’s new leader will need to emulate Lou Gerstner, and not Ron Johnson, whose recent attempt to reinvent the dowdy J.C. Penney into something more akin to Apple fell flat. Johnson ignored the value and competitive advantage offered by J.C. Penney and forced in ideas of a "premium" line that ultimately failed to perform. After all, J.C. Penney and Apple customers visit their respective stores for very different reasons.

According to The Economist, Microsoft’s revenues comes from five divisions. PC’s account for 25 percent, servers and tools for 25 percent, online services garner 4 percent, business takes 30 percent, and entertainment ad devices, including the Xbox games console, gets 14 percent. It's easy to see that while the PC business is declining, their future lies in extending its server tools and business divisions by capitalizing on Microsoft’s already formidable competitive advantage. For both Microsoft and IBM, switching costs in these industries are huge.

Microsoft is hardly on its last leg, and the situation isn’t as extreme as IBM’s, who in 1993 had moved right to the edge of bankruptcy (Microsoft has $77 billion in cash). But the space for new leadership could be a blessing and a curse. Even the deepest pockets will only allow for a certain number of silly forays into markets in which they have no advantage.

Daniel Lock is the principal of Daniel Lock Consulting specialising in helping organisations to unlock value and productivity through project, process and change management. You can contact him on his blog DanielLock.com/blog or by email.