The new, new, new Microsoft?

Enrique Dans
Nov 12, 2014 · 4 min read

An interesting article in TechCrunch entitled “Should Microsoft build hardware?” highlights what might be the company’s latest strategic move: focusing its business on just three lines of activity: Windows, Office 365 and Azure; making it a service company that would try to offer a competitive multiplatform operating system, a series of productivity tools on the cloud, and cloud services.

In other words, a return to the essentials of a company that became enormously successful building platforms to interact with the user in the age when these platforms were located in personal computers, and that it is now hoping to mirror on the cloud: another line, such as games that could be important — not strategic — in terms of its long-hoped for transition to the cloud through recent acquisitions such as Minecraft, and the likely dropping of other lines that right now are a distraction from what is going to be its main activity.

The aggressive refocusing brought about by Satya Nadella could make sense: Windows is a relationship and interaction platform with the user. And although sales are slowly declining, it is still important in some market segments, and what’s more, has been the company’s flagship product for almost 40 years. The sad truth is that few users return to Windows once they have tried other platforms, but the operating system is still a major player in the market, and is still the screen that many people associate with their computer, even if computers are no longer the most important platform.

Office 365 will be the stepping stone to the cloud, an absolutely essential transition, but that in my opinion is still a midway point that is trying to remain anchored to the personal computer and that does not stand up well compared to suites focused on the cloud like Google Apps. I’m not trying to be controversial here, simply to reflect what I see from my own use and that of others, who believe that Google’s tools are something genuinely new and have many advantages when it comes to improving productivity on the cloud, and above all for working in groups, and who tend to see Office 365 as the first step in a transition by a suite of applications that are basically more of the same.

That said, bearing in mind the product’s roots in the corporate market, there is no denying Microsoft’s chances of consolidating its position in the future environment.

But it is Azure that the whole thing rests on. This is a future-focused product, and the company is putting a lot of resources into its consolidation, given that it will have to compete head on with what Amazon, Google, and others will come up with. It is being positioned for both business and personal use through a range of tools that will prepare the transition of the operating system toward an increasingly multiplatform world.

The only flaw in this plan is that it could relegate certain product lines as sunk costs, particularly those related to hardware. In recent years, largely as a result of the megalomania of what has possibly been the worst CEO in the history of technology companies, Steve Ballmer, the company began making not only tablets such as Surface, but smartphones such as Lumia that have bled vast amounts of money out of the company in return for tiny income and minimal market share. Microsoft even went so far as to try a Trojan Horse strategy with Nokia, a company that it is now in the process of dismantling. Could these colossal investments now simply be written off as stranded costs that the company will gradually rid itself of so as not to lose strategic focus?

One of the main reasons for trying to move Microsoft into the hardware market was to emulate Apple. But as an excellent article in the Harvard Business Review points out, both Apple and Amazon are companies that have made cash conversion cycle (CCC) their raison d’être: their operations allow a rapid rotation of products and quick payment from their customers, while their competitors must wait longer for returns, an approach that has turned them into cash cows with negative cycles (-30.6 days for Amazon, and -44.5 days for Apple) compared to the single digit figures, albeit positive, of distribution monsters like Walmart or Costco.

Traditionally, such negative values for CCC are found in industries with extremely loyal (or even addict) client bases, such as gambling or tobacco. Microsoft, or at least the Microsoft we know, is clearly not that kind of business, and is a long way from reaching the same kind of financial dimensions or rotation for its hardware products. Therefore, it seems likely that hardware will continue to be a disaster for the company.

A strategic focus is one of the classic ways that a new leader tries to exercise control over a company. In the case of Microsoft and Satya Nadella, this is going to have huge consequences, and amounts to a corporate reinvention. He may pull it off, but the costs will be enormous, impacting on staffing and how the analysts assess the company. His approach seems reasonable enough: abandon those lines that Microsoft probably should never have entered in the first place and that have lost it huge amounts of money. Take into account past decisions such as sunk costs that should not influence current decisions is straight out of any management book. But that doesn’t make it one that is any easier to take.

(En español, aquí)

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

Enrique Dans

Written by

Professor of Innovation at IE Business School and blogger at enriquedans.com

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

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