Commentary: Microsoft's Worst Enemy: Success

Unless it can reinvent itself, the giant is destined to be--gasp!--a mature company

The memo that Microsoft (MSFT ) Chief Executive Steve Ballmer recently sent to the company's 57,000 employees was clearly designed to rally the troops -- to get them excited about their jobs and Microsoft's future. But what comes through loudest and clearest in the 4,900-word e-mail is quite a different message: This is no longer the vital, nimble, fast-growing Microsoft of yore.

Microsoft Corp. is stuck in a full-blown midlife crisis. The 24-year-old company is now a sprawling organization with dozens of businesses, modest revenue growth, and a flat stock price. Instead of being driven to change the world -- the mission its best employees signed up for -- a key focus now for Ballmer is "process excellence," which seems unlikely to inspire Microsoftees to stay up all night creating the Next Big Thing. The only news in Ballmer's missive was that he's targeting $1 billion in cost cuts in the next fiscal year, despite the company's $56 billion cash hoard. "It sounds like a memo that maybe Procter & Gamble (PG ) would send to its employees -- not the kind of thing you'd expect from a dynamic software company," says Michael A. Cusumano, a professor at Massachusetts Institute of Technology's Sloan School of Management.

Indeed, Ballmer's memo pales in comparison with Chairman William H. Gates III's rousing "Internet Tidal Wave" message in 1995. Gates warned Microsoft had to learn to ride the Internet wave or risk being left behind. Sure enough, Gates hung ten. In a way, Ballmer has a far more difficult task. It's Microsoft's very success that has brought on its malaise. The company so thoroughly dominates that it's hard for it to grow much faster than the computer industry. So Microsoft's biggest challenge isn't some external opportunity or threat. It's Microsoft.

What the company needs is a new vision of itself -- one that motivates employees, excites investors, and places it once again in the vanguard of an industry on the march. Sure, with $300,000 in annual expenses per employee, it could use some cost-cutting. And it's about time Microsoft distributed a chunk of its cash to shareholders. But neither of those moves would do anything to restore the company's vitality -- the excitement that pushed its stock price up more than 10,000% in the 1990s.

Innovation is the key -- Ballmer says as much in his memo. But in spite of spending more than $4 billion per year on research and development, Microsoft can't seem to beat its rap: It's a follower, not a leader. After all, it was Google Inc. that reinvented Internet search with its breakthrough technology and Apple Computer Inc. (AAPL ) that led the music industry into the Digital Age. You hear about wonderful things in Microsoft's lab. One project, called News Junkie, sifts through articles on the Web and presents to you only the ones you haven't seen before. Yet when it comes to actually delivering jazzy new products, Microsoft is often stuck -- trapped by its legacy. It focuses slavishly on bolstering the Windows and Office monopolies through what it calls "integration innovation." As a result, it fails to deliver breakthrough innovations that might draw buyers into the stores and get the company growing more rapidly again.

Does Microsoft's midlife struggle signal that the glory days are over for tech? Not a bit. While industry revenue growth is slowing, there's still plenty of innovating to do. Microsoft just has to figure out a better way of going about it.

By Steve Hamm

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