Microsoft’s Crisis of Perception (Part 2)

In Part 1 of this post I explained why I do not believe Microsoft is a consumer products company and some of the strategic perception issues this causes for the company. In part 2 I will discuss the business Microsoft is really in and how that has come to dominate strategic decision making at the company.

Before I move on I wanted to thank my old friend Alan Yates for pointing out that I was incorrect to state that Microsoft never had been a consumer products company. He is of course correct. Alan was a 1990 veteran of the company and he pointed out that it was in 1990 that Microsoft first hit $1Billion in retail sales. That is individual users and small business owners picking up shrink-wrapped product from a store shelf which, by my previous definition, makes you every bit a consumer company. Alan went on to point out that it was very shortly after this milestone that the company embarked on a fundamentally new growth strategy which would redefine the company and its market focus.

So what business is Microsoft in? In a colloquial sense Microsoft is in the 'Plumbing' business. Doing 'Plumbing' is not sexy or exciting, it does not get you many front page headlines nor does it excite consumers but doing it well does satisfy the goose that has been laying golden eggs for the last fifteen years. The goose has a name and it’s called the Enterprise. Making the goose happy generates billions and billions of dollars for the company every year.

When Alan joined the company in 1990 he worked on a project to bring a new version of windows to market. That version was called Windows for Workgroups. At that same time I was working for an Oil company running the PC support group. I can remember the joy of finally being able to install a version of Windows that started to address many of the configuration challenges we faced in trying to deploy Windows inside a large enterprise organization. WfW was Microsoft’s first product step on the long road to becoming the worlds largest enterprise software vendor. I joined the company in July 1994 and the group I belonged to became the first dedicated enterprise sales and marketing organization six months later. The brilliance of the strategy and the strength of the products which enabled Microsoft to grow that kernel from zero a dominant portion of Microsoft’s revenue stream is rarely recognized but important to understand.

As with any business strategy which spans fifteen years, lots of things change, dead ends are driven down and the whole complex business evolves beyond recognition. However, some very core strategies have remained central. At risk of over-stretching my previous analogy I’d like to go back and talk about 'Plumbing'. Microsoft would identify a 'Building' (Competitor) with tenants (Enterprise customers) who were stuck with inflexible and generally complex 'Plumbing' (Server, Messaging, Database software.) The pipes were all different sizes and took huge amounts of money to force them to fit together and to stop them from leaking. Tenants were enticed to move into a a shiny new building (Microsoft) where all the plumbing was designed to work together, be efficient and to not leak. In exchange for moving in all the customer had to do was sign a three year lease (Enterprise license agreement) with the option to renew or move out at the end of the term. There was only one small problem with this strategy; the company needed to start delivering 'Plumbing' that would increasingly meet these customer’s very complex and evolving needs. It was the very deep process of engagement with these enterprise customers that slowly mutated the original consumer focused DNA into the form we find today.

Early in my career with the company I was responsible for hosting the very first series of Enterprise Chief Information Officer Roundtables in Redmond. We would fly in CIOs from some of our most important large enterprise customers, put them in a conference room for two days and wheel each of the product group executives in front of them for a lengthy debate about their needs and the deficiencies of Microsoft’s products. Each session was closed with a two hour session with Steve Ballmer and occasionally BillG. To see Steve in this type of engagement is to see him at his absolute best. He would arrive with notepad and pen; listen intently to the customer complaints, push back politely when he thought necessary, explain his thinking and strategy and would always leave the customer satisfied and wanting further engagement at this level. After those meetings Steve would go back to his office and fire off a long series of emails to BillG and the relevant divisional executives telling them what he had heard from the customers and what needed to be done to satisfy these very important customers.

The 'Virtuous' cycle of customer engagement in product design is compelling: The influence of very large enterprise customers on product design meant that increasingly Microsoft’s products became a closer and closer fit for their needs. As a result the revenue base from these customers grew dramatically which further cemented their importance and the need to listen to them. Furthermore once the world’s largest companies, with all their vast complexity, use and trust your products it becomes the best endorsement for all the other smaller enterprise customers to do the same. It used to be said that a CIO would never get fired for picking IBM. Remarkably, during the first decade of this century choosing Microsoft as your enterprise software vendor has become the accepted low risk choice for most CIOs around the world and Microsoft’s growing stream of enterprise revenue reflects that reality.

This series of posts is titled a «Crisis of Perception.» The most common 'Perception' issue facing the company, and the one most frequently stated, is that Microsoft does not innovate. The problem with most of these accusations is that they are leveled by members of the 'Digerati' who almost always use consumer products as their frame of reference. What these commentators mean is that Microsoft does a lousy job of bringing 'Shiny Objects' and compelling consumer experiences to market. In that regard they are correct. However, I hope it is now clear that this is not the business Microsoft is in. Sit down with an executive from IBM, Oracle, VMWare or SalesForce and ask them 'Off the record' if they believe Microsoft innovates. If they are being honest you’ll get a good deal of acknowledgment that indeed Microsoft has and continues to deliver a huge amount of innovation. This continued flow of innovation driven by the intimate relationship Microsoft has with its largest customers and the resulting revenue stream this drives is a very real competitive advantage and a very real threat to the company’s competitors.

Innovation is not just about what new 'Functionality' you build into the next version of your products. How you market, sell, license, deploy, and support are all valid areas for innovation. I would argue that not only is there a huge amount of genuine technical innovation at the core of Microsoft’s enterprise product portfolio but the company’s innovations in its overall business model have fundamentally transformed the global enterprise software business.

Microsoft’s core 'Perception' problem is that innovation in 'Plumbing' is not very visible or exciting. If you want the proof of this then watch any on-line video of a Microsoft executive trying to demonstrate fail-over clustering, systems management or large scale database technology. These are generally not existing presentations. However the peace of mind and the problems that these innovations solve for enterprise customers are worth many millions of dollars in incremental revenue to the company.

Far from being a company that does not innovate Microsoft may be the poster child for the 'Innovator’s Dilemma'. The strategic question facing the company today is whether such a heavy dependence on the enterprise revenue stream is a blessing or a curse and how do you avoid killing the goose that laid the golden eggs as you attempt to enter new markets? That is the central challenge facing Microsoft’s executive ranks today.

In part 3 I will take a look at some of the structural issues facing the company’s today and impacting its ability to address a series of critical challenges.

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