Quick Thoughts: At Microsoft, Structure Follows Strategy

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–          MSFT’s well-conceived reorganization focuses resources toward opportunities in the cloud, SaaS applications, the Windows platform, and the consumer market while streamlining decision making.

–          This formalizes a clear shift in strategic priorities, reiterating the importance of Office365 and Dynamics, elevating Azure and Xbox, and recasting Windows as a platform across all device types.

–          The matrix approach, separating SG&A functional groups from product focused engineering groups, is a textbook organization structure that can foster focus, agility, and co-operation.

–          While investors may be disappointed that Ballmer stays in place, the new organization breaks old fiefdoms and empowers rising talent, improving the odds of long term success.

Steve Ballmer has clearly read a few books on business strategy as the new Microsoft reorganization is a pretty classic matrix structure, with product focused groups supported by shared SG&A functions. If reporters are to be believed, he also spent a lot of time talking through it with Ford CEO Alan Mulally, an old friend who not so long ago used a very similar reorganization to energize his own company. While the historical record on major corporate reorganizations is decidedly mixed, investors appear willing to bet on this one, taking Microsoft to the verge of its 52 week high today, in a year when the stock seems to have finally broken through the $30 ceiling that had capped its value for over a decade.

Arguably, today’s announcement has been a fait accompli for quite a while. Windows bad boy Steve Sinofsky left Microsoft shortly after the launch of Windows 8, a product that had been his baby, but that would have to compete on a very different basis going forward. Sinofsky could bring home a major software release on schedule, but the future will be a steady drumbeat of minor platform updates for software that will be integrated into a range of new device types across the whole company. The Office cash cow, well-tended by 20 year Microsoft vet and former McKinsey consultant Kurt DelBene, is becoming the anchor tenant of a Microsoft’s SaaS applications business, with DelBene headed to join Sinofsky in early retirement. Last week, former Xbox boss Don Mattrick announced that he was quitting Microsoft to take on leadership of troubled Farmville publisher Zynga. I’m not sure early retirement wasn’t a better option.

What remains at Microsoft makes sense. The major groups are labeled “engineering” groups to highlight the technology focus of the company as a whole, but in a software company, the distinction between “engineering” and “product” is really one of semantics. Satya Nadella’s Cloud and Enterprise Engineering Group will have Microsoft’s increasingly important Azure cloud infrastructure, which competes as a product against the likes of Amazon Web Services, but also supports the company’s ambitions in consumer cloud services like Xbox Live, and its enterprise SaaS offerings like Office 365 and Dynamics ERP. Raising the cloud to a direct reporting segment is an obvious step in an IT world that is coming to be dominated by cloud data center architecture. Microsoft is well ahead of its traditional enterprise IT rivals, with the next few years critical in establishing itself as a force in the cloud next to Amazon and Google.

Terry Myerson has the Operating Systems Engineering Group, which is really Windows, but highlights the importance of managing the OS as a common platform with several flavors running across multiple categories of devices, from the Xbox to Windows Phone, to Tablets, PCs and Servers. Over the past 5 years, Microsoft has worked to wrestle its platforms to a single interface concept and a related set of device operating systems. Orchestrating the alignment of all of these to a single coordinated ecosystem will be Myerson’s primary job. It is telling that he comes to the job, not from Sinofsky’s Windows 8 crew, but rather from leading development on Windows Phone. At least for now, mobile is taking precedence over desktop at Microsoft.

Office is being combined with Microsoft’s many other cloud-based applications and given to Qi Lu, who had run the maligned but perhaps misunderstood On-line Services Division, containing Skype, Bing, Hotmail, and other apparently money losing services. Ultimately, this is the home of Microsoft’s Software as a Service (SaaS) applications, a huge opportunity for the company to leverage its cloud infrastructure and its strength in the enterprise software market, but at the start, its most ambitious initiative, Dynamics ERP, is being held out as an independent business unit. Given its importance, this may be an appropriate step, but eventually, Dynamics should be aligned with the other SaaS businesses.

Finally, fast track executive Julie Larson-Green, who had shared post-Sinofsky Windows leadership with Myerson, is taking on Devices and Studio Engineering. Ballmer has made it clear that he expects that devices will be a big part of Microsoft’s future and it will be up to Larson-Green to make it so. She starts with the controversial but exciting Xbox One and the slow to grow Surface Tablet initiative, but given the profile of this business unit, one can assume that the roster of Microsoft branded devices will expand in the not so distant future. This business unit also contains the company’s content initiatives – games, video and such – an area certain to see more activity with the impending arrival of the Xbox One.

I’ve written that I believe that Microsoft is on the right strategic track (http://live.ssrllc.com/2013/02/february-14-2013-microsoft-no-more-mister-softy/). This reorganization provides a more cogent leadership structure to pursue it.

For our full research notes, please visit our published research site.

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