Next CEO’s Biggest Job: Fixing Microsoft’s Culture; At Software Giant, Taking the Safe, Profitable Route Often Wins Out Over Innovation

Updated August 25, 2013, 8:01 p.m. ET

Next CEO’s Biggest Job: Fixing Microsoft’s Culture

At Software Giant, Taking the Safe, Profitable Route Often Wins Out Over Innovation



Months before Apple Inc. AAPL -0.39% unveiled its iPad in January 2010, the tech world was buzzing about mockups of a tablet computer from Microsoft Corp.MSFT +7.29% Created by an inventor of the company’s Xbox videogame machine, the Courier folded like a book and let users sketch and jot ideas on a touchscreen. That spring, Microsoft Chief Executive Steve Ballmer told employees at Courier’s Seattle laboratory that he was pulling the plug on the device. Mr. Ballmer said he was redirecting resources to the next version of the company’s Windows operating system, which was more than two years away, according to Georg Petschnigg and other former employees of the lab.This year, more than 200 million tablets will be sold world-wide, and few of them will run Windows.

Whoever succeeds Mr. Ballmer at Microsoft will face the challenge of rebooting its corporate culture, in which charting the safe but profitable course—at least for the short term—too often wins out over innovation, say current and former Microsoft employees and other industry executives.

Under Bill Gates and then Mr. Ballmer, who announced his retirement last week, Microsoft honed franchises like Office and Windows to become a financial powerhouse.

The ingredients for success also made Microsoft a graveyard for the kind of big ideas that have inspired companies like Apple, Google Inc. GOOG -0.40% Inc. AMZN +0.10% to create new areas of computing.

“If that is the game you’re going to try to play, you’re going to lose,” Mr. Petschnigg said.

So ingrained is Microsoft’s culture of protecting entrenched interests that swinging for the fences is sometimes punished, and so people stopped trying, say current and former employees and outsiders. They say that an outsider CEO may be the best choice to welcome back technologists who think outside the box.

“It is most likely, if not essential,” says management psychologist Thomas Saporito.

Mr. Ballmer’s Microsoft has churned out some cutting-edge products, such as the Windows smartphone software and the Kinect motion sensor for the Xbox. But Microsoft has had few iPads, iPods or Kindles—products that have altered the way people live and work.

The result: Microsoft matters less than it used to. In the 1990s young tech companies almost always had Microsoft technologies as a backbone, and “every startup lived with constant awareness that they were the 800-pound gorilla,” says Bill Gurley, a longtime Silicon Valley investor at Benchmark Capital. “Neither of these things are true today.”

A Microsoft spokesman declined to make Mr. Ballmer available for an interview.

But Craig Mundie, a senior adviser to Mr. Ballmer, said in some cases Microsoft didn’t capitalize on new ideas because its structure didn’t make it easy for divisions to work together. Last month, Mr. Ballmer reorganized the company, and Mr. Mundie said the next CEO will “inherit a better structure to take all these new ideas to market.”

The Microsoft spokesman said most large companies, including Microsoft, continuously test lots of new ideas, and many of them aren’t promising enough to bring to market. The Courier was an early experiment that was far from being a viable product, he added.

Microsoft, however, hasn’t always kept pace with change. It still frowns on higher-level executives using iPhones or other rival gadgets. Employees talk about the “Redmond Bubble,” or tendency to lose sight of tech reality outside of Microsoft headquarters. Some workers, fearing for their jobs, say they are wary of working on a new technology that might not pan out.

An executive who recently left Microsoft said such fear has made people stop trying to take risks. “I don’t think it’s Steve stamping it out from above, it’s the culture stamping it out from below,” he says.

Some employees leave to seek their freedom. “When we first did the Internet work in ’95 to ’97, incredibly talented people unleashed did amazing things,” said Brad Silverberg, a technology investor and former Microsoft executive who led its Windows 95 development effort. Today, he says, “so much energy is expended on repressing good things to play defense and protect the castle.”

In many cases, Microsoft latched onto technologies like smartphones, touchscreens, “smart” cars and wristwatches that read sports scores aloud long before Apple or Google did. But it repeatedly killed promising projects if they threatened its cash cows.

In 2000 Microsoft developed word-processing software for the Web, dubbed NetDocs. It was folded into Microsoft Office, where it was discontinued because of concerns it would cannibalize Office sales, former executives say.

Dozens of Microsoft employees volunteered their time to develop software that could have established a beachhead for Microsoft in the automotive market, and outflanked Google and the iPhone.

Tom Button, the executive who led the previously undisclosed project, said he couldn’t persuade Mr. Ballmer to roll the dice.

“The company can’t afford another big bet right now,” Mr. Button says Mr. Ballmer told him nearly a decade ago.

Whether to manage a company for growth or for efficiency is a classic business conundrum, and the choice isn’t simple.

The upside of Mr. Ballmer’s approach is that Microsoft became one of the world’s most-profitable companies. Its annual revenue has quadrupled since Mr. Ballmer took over as CEO in 2000, roughly the equivalent of padding Microsoft with Google’s annual sales. Microsoft makes about 75 cents in gross profit on every dollar in sales, at least double the take of Google or International Business Machines Corp.IBM +0.12%

And Microsoft, on Mr. Ballmer’s watch, turned at least a half-dozen new businesses—from the Xbox videogame system to a workplace collaboration software called SharePoint—into big businesses that generate $1 billion or more in annual revenue.

The downside of his approach is that it left Mr. Ballmer inclined to dismiss emerging technologies, say current and former employees. During a meeting with Microsoft employees in 2005, one worker brought up how Apple had reshaped the ways people bought and listened to music. He asked Mr. Ballmer whether Microsoft should try to compete with iTunes.

Mr. Ballmer asked the room for a show of hands. “How many people think Microsoft is in the business of selling music?” he said sarcastically, according to a former company product manager in attendance. No one raised a hand. More than a year after the meeting, Microsoft launched its own digital-music player, the Zune, but it never caught up to Apple’s iPod.

Just as former Google executive Marissa Mayer has found as the outsider CEO of Yahoo Inc., a sustained innovation gap can be hard to close and can contribute to other problems.

“Without that ‘wow cool’ [factor] it gets very hard to hire the best and brightest talent,” said Jim Whitehurst, chief executive of Red Hat Inc., RHT -0.75% which sells computer-server software that competes with Microsoft. “You have to lay out the next goal to inspire people inside and outside.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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