Until the end of the last decade, Microsoft had never departed from its tradition of relentlessly protecting its dominance in personal computer operating systems and software licensing. The shift of technology to smartphones and tablets gradually meant personal computers were displaced, and at the turn of the decade, Microsoft came to terms with the end of the dominance of its flagship operating system. In 2011, it released the Office applications for Mac. In 2012, its Azure cloud enterprise offerings began to support Linux, which competed head-to-head with Windows for server dominance. These were followed by Office for iPhone and Android in mid-2013. Limited Success beyond the Comfort Zone of Windows and Office Beyond the comfort zone of Windows and the Office applications, Microsoft achieved traction in the consumer market with its Xbox and in the enterprise segment with its cloud service offerings. Xbox The first-generation Xbox was released in 2001. It immediately allowed Microsoft to take the second place in the market, albeit a distant second, behind Sony’s PlayStation 2 and slightly ahead of Nintendo’s GameCube. With the rolling out of Xbox One in October 2013 with Skype pre-installed, the company ambitiously positioned the device to be the single interface for all living room experiences, from entertainment to communication and networking. Despite its success, the Entertainment and Devices Division, where the Xbox was housed, had cumulative losses of over US$3.5 billion as of 2013, though it started to make a positive contribution to the company’s bottom line in 2008.4 Azure and the Cloud Microsoft’s cloud activities started in its heyday in 1997 after its acquisition of Hotmail. For over a decade, its cloud offerings took the form of “Software as a Service” applications; revenues were mainly generated from consumer offerings, such as Bing and Hotmail. The company deliberately focused on these cloud offerings only so that the cloud-based applications would not be in the way of its traditional products of Windows, Office, and Windows Server. 5 The decade-long delay of Microsoft to properly address the market potential of cloud computing caused the company to trail behind Amazon’s 71% market share. A major change occurred in the company’s cloud strategy in 2010. The company rolled out Windows Azure and SQL Azure, the company’s “Platform as a Service” cloud offerings that were positioned to compete with traditional server businesses, including Windows Server. By April 2013, the company’s enterprise cloud platform offerings claimed a distant second market position with its US$1 billion billings. It was expected to grow stronger, challenging Amazon’s huge lead of an over 70% market share; an analyst at Forrester Research Inc. anticipated that Microsoft could narrow the gap substantially by commanding as much as a 35% market share in a year’s time. 6 Failures to Catch the Shift to Mobile Devices Tablets Despite the fact that Bill Gates predicted tablets’ cannibalization of desktop computers and notebooks, Microsoft consciously chose to give up the strategic development of tablets and touch-screen smartphones.7 It viewed the tablet as a complement to Windows, instead of seeing the potential of tablets to revamp consumers’ digital and technological lives. It therefore put the development and marketing of the tablet PC under its Windows division, which meant the company’s attention was not on getting the tablet experience right. Rumor had it that Microsoft’s Pioneer Lab had a similar concept with a Courier tablet around the time when Apple was developing the iPad. But Microsoft’s Windows-powered tablet would not arrive until two and a half years after the iPad. However, the device and the operating system did not live up to market expectations, and the company had to include a US$900 million inventory write-off of the device in its 2013 books.8 The company had three different Windows operating systems that ran on different platforms: Windows RT ran Surface RT, Surface Windows 8 / 8.1 powered Surface Pro and PCs, and there was Windows Phone OS powered smartphones. In an in-house interview with Gates, he described the direction as a plan to “merge all of the operating systems, which work well with the company’s long-term endeavors in both cloud storage and cloud-based personalization across multiple devices.”9 Mobile Operating Systems and Devices When Microsoft launched Windows Mobile in 2003, all major mobile vendors were reluctant to adopt the platform lest it would claim dominance in the mobile operating system domain, like what Windows had achieved in the PC market. But Microsoft never managed to achieve the critical mass required for a dominant position. It failed to develop an operating system that would offer the right smartphone experience, which was not the usual Windows experience crammed in a cell phone. The smartphone market would have to wait until Apple’s iOS and iPhone arrived in 2007 to take off. It took Microsoft five years after the iOS launch to release a smartphone operating system that seemed to be on the right track, especially with its Windows Phone 8 touch- and tile-based Metro user interface, and the shared kernel between Windows 8, Windows RT, and Windows Phone 8 that allowed developers to create applications that could run on all three platforms of PCs, tablets, and smartphones. The software company was flexing its muscle made up of a huge Windows user base to try to catch up with building an ecosystem of application provided another missing piece of the ecosystem—much-needed mobile devices that would run the Windows Phone platform. Missing the Market Opportunities of Search and Online Advertising Seven years after Google was incorporated, Microsoft finally had its own search engine to switch over from Inktomi, which had powered its MSN portal’s search engine till then.10 Microsoft’s Online Services division, which housed Bing, the company’s search brand, was dwarfed by Google in many ways. The division’s search service and online advertising revenue was a mere US$3.2 billion for its financial year 2013, while Google pocketed US$50.5 billion revenue for the same period (excluding Motorola’s billing). The software company had a cumulative US$17 billion loss on its Online Services division since its inception in 2005. Bing’s market share was 18% in October 2013, trailing far behind Google’s 67%.11 The Organizational Legacy Mixed Success with Inorganic Growth When Ballmer retired, he left Microsoft with the acquired mobile capability of Nokia. The company had a doubtful record of integrating non-software-related acquisitions despite its repeated successes in absorbing software-related acquisitions into its business. Its US$8.5 billion acquisition of Skype in 2011 not only allowed Microsoft to have a strong and popular real-time communications offering with revenue opportunities, but also provided a muchneeded way for Microsoft to claim a place amid the trend of social and professional communication and networking integration. Microsoft realized the strategic potential of Skype by pre-installing Skype in Xbox One and by merging Skype and Lync, which was the company’s Office 365 communication application positioned for professionals. In 2008, Microsoft acquired the much-needed search technology behind Fast Search, enabling Bing, Microsoft’s Live Search (renamed in 2009), to become the distant number-two search engine behind Google. And almost immediately after the acquisition of Yammer in 2012, the company deployed it as its preferred enterprise social networking technology. However, when treading beyond software and applications, Microsoft’s acquisitions did not work out. A glaring example was its acquisition of aQuantive in 2007, then one of the world’s largest advertising agencies. The company paid US$6.3 billion for the agency, and wrote down its value by US$6.2 billion for fiscal year 2012. So when Ballmer announced the Nokia acquisition in September 2013, the world started speculating whether Microsoft would be able to make sense of this deal. The pressing need to regain the market’s faith in Microsoft’s mobile ability meant that the company needed to quickly decide how to match Nokia with the rest of the Microsoft family. The Silos and the Politics Analysts and journalists following Microsoft did not hesitate to agree that the company had a lot of politics going on and a great many silos existed that hindered performance and killed creativity. After interviewing existing and ex-Microsoft employees, observers concluded that  corporate success within the software company depended not on work excellence or creativity but on a mastery of office politics.12 One reason for the proliferation of office politics could be traced to the huge wealth disparity between the “old folks” and the newcomers. The “old folks” were those who had joined the company before the internet bubble burst. During those days, Microsoft’s always rising stock price and stock options meant that these people could count on their creative works and quality output to become millionaires. The newcomers, those who joined Microsoft after the bubble burst, found that they were better off moving up the corporate ladder rather than counting on the rewards the company offered for their innovative excellence. The stack-ranking approach provided a breeding ground for office politics. The July 2013 Reorganization Ballmer also left Nadella a new organizational structure that aimed at enabling collaboration within Microsoft. The reorganization, which was announced in July 2013, right before his retirement announcement, would be the 11th reorganization during Ballmer’s reign [for more information on these reorganization initiatives, see Exhibit 7]. In July 2013 before Ballmer announced his retirement, he sent out his “One Microsoft” restructure memo to everyone in Microsoft. Ballmer stated that realignment was necessary “to enable innovation at a greater speed” and that the company should work “together with more collaboration and agility around . . . common goals” [see Exhibit 8 for Ballmer’s “One Microsoft” memo].21 As the title of the reorganization memo suggested, one of the goals of recalibrating Microsoft with a new structure and a new vision was to “break down barriers, and instead of working in any kind of silos, to really work as a team.”22 Ballmer and his leadership team decided that the decades-old, product-oriented organizational structure was not suitable for Microsoft’s new vision. He declared that the company should “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.”23 From Product Organization to Functional Organization Under the new structure, the 100,000 staff of the “devices and services” company would henceforth be organized by function, joining together as teams of engineering, business development, strategy and research, marketing, finance, human resources, legal, or operations.24 The most dramatic change was that instead of having eight product teams that looked after a group of products with its own marketing and finance support, Microsoft cut the team numbers by half and had the people organized into four engineering teams. The engineering function would look after the four cornerstones of the revamped “devices and services” company: operating systems, applications, the cloud, and devices. Marketing and finance would be centralized. Ballmer also centralized all the work related to partners’ development and ecosystems building under the “business development and evangelism group.” Ecosystems Unlike Microsoft’s Cloud OS Network ecosystem, which added value to the company’s competitiveness by competing with Amazon, Microsoft’s smartphone ecosystem was comparatively weak, especially with application developers. 39 This was partly due to a chicken-and-egg situation associated with the popularity of Windows in mobile devices. Before there were a comparable number of users of Windows Phone mobiles and Windows tablets as there were for Apple’s iPhones and iPads or Android-powered phones, developers preferred to write applications for iOS and Android rather than for Microsoft’s Windows platform. But without the support of strong ecosystems of application developers, consumers would not opt for the Windows Phone operating system. Another reason for weak support among application developers had to do with the past pattern of Microsoft being difficult to work with.40 A long history of negative experiences among developers doubled the challenge of building a strong ecosystem to support Microsoft’s mobile devices. Microsoft had limited experience in working with telecom and mobile operators around the world but these partners could make or break the success of Windows Phone. If Microsoft’s devices and services strategy was to work out, the company needed to figure out how to strengthen its smartphone ecosystem. It was hoped that the Nokia acquisition would enable Microsoft to bring this skills set in-house, provided the company could successfully manage the integration. Nokia Integration According to McKinsey & Co., roughly 70% of mergers failed.41 The risk for Microsoft had to be much higher than this percentage because of a number of factors that added complexity to the integration. Firstly, the teams involved were huge: 32,000 staff at Nokia and 100,000 employees at Microsoft. Secondly, the two big organizations had very different backgrounds, legal systems, cultures and histories. Thirdly, Microsoft was itself going through a reorganization. Fourthly, Microsoft was also changing its commander-in-chief. The CEO who had orchestrated this acquisition would not be around to land this integration. While the deal was not yet finalized, morale at Nokia was already badly affected. As Finnish press reported worries among Nokia staff about losing their jobs, those who were of the highest value in filling Microsoft’s skill gaps were likely to have jumped ship.42 In fact, this was often the biggest risk of any merger. And even if these talented people decided to integrate with Microsoft, the culture clash, which was common to merger integration and proven to be one source of merger failures, would likely result in Microsoft losing these people in the middle of the integration process.43 However, if Nadella managed to beat the odds and successfully integrate the two companies and preserved Nokia’s talents, the rewards to Microsoft would be high. The company would find much use in Nokia’s experience in penetrating emerging markets, where there was huge growth potential for mobile device sales. Microsoft would also be able to build its muchneeded device capability with Nokia’s experience in producing a wide range of mobile devices from high end to low. Only if this were achieved would Microsoft be one step closer to winning the mobile-first, cloud-first war.

1. What is the case about?

2. What are the important events that occurred in the case?

3. What can we learn from reading the case?

4. What advice do you have for the leaders in the case and/or company in the case?