Microsoft CEO, Seeking Growth, Tells Managers: Step It Up

The day Satya Nadella became Microsoft Corp.’s chief executive officer, he invited several dozen vice presidents to breakfast and had a simple, calm admonition for them: “Can you step it up?”

The engineer’s tone was a departure from the yelling and wild gesticulations favored by his salesman predecessor Steve Ballmer and the razor-sharp interrogations of co-founder Bill Gates. Nadella’s approach underlines the low-key and analytical style he brings as CEO since starting the job in February, as he seeks to revamp the world’s largest software maker. Nadella has unveiled plans to cut more than 18,000 jobs, killed unpromising products and boosted sales of computing tools delivered via the Internet, while seeking to reduce the company’s reliance on software installed on personal computers.

“He’s one of those people where you just hate to say no to the guy,” Jeff Teper, Microsoft’s head of corporate strategy, said of Nadella in an interview in March. Teper hired Nadella into the company in 1992. “Steve and Bill are a lot more confrontational -- they challenge you to bring your A game. With him it’s more like ‘well I don’t want to disappoint the guy, let me work a little bit harder here.’ He’s incredibly smart, he’s gracious, but he’s also super-demanding.”

Nadella’s lieutenants may need to work a lot harder to overcome the challenges facing Microsoft. The company’s Surface tablet and Windows smartphones have failed to gain more than a few percentage points of market share, while the PC industry is on track to shrink for a third straight year. Investors will get more insight into whether the new CEO’s efforts are paying off later today when Microsoft reports quarterly earnings.

Financial Impact

Microsoft, based in Redmond, Washington, is projected to report that profit, excluding certain items, fell to 60 cents a share in the fiscal fourth quarter through June, according to the average of analysts’ estimates compiled by Bloomberg. Sales are anticipated to rise 16 percent to $23 billion.

The job reductions, mostly related to the integration of Nokia Oyj’s handset unit, will result in $1.1 billion to $1.6 billion in charges over the next four quarters. Microsoft hasn’t yet disclosed how much it expects to save from the firings. All of the forecasts of analysts covering the company have gone “out the window,” as they wait to hear what Nadella and Chief Financial Officer Amy Hood have to say about the financial impact of the measures, said Mark Moerdler, an analyst at Sanford C. Bernstein & Co.

Empowering Engineers

So far, investors have backed Nadella’s efforts, pushing Microsoft’s shares up 20 percent this year and valuing the company at 17 times projected earnings. While that’s higher than Oracle Corp.’s multiple of 13, Microsoft lags cloud-computing pioneer Inc., which trades at 105 times projected earnings.

“The elephant in the room was Nokia, and now the new elephant is that with the stock up so much year to date, will the fundamentals now deliver to back that up?” said Brent Thill, an analyst at UBS AG in San Francisco.

The job cuts and streamlining layers of management aren’t just about saving money, they’re also about changing Microsoft’s culture by speeding up decision making and product development. A key focus for Nadella is getting workers to challenge entrenched practices that may be slowing the company down.

“I want us to be much more nimble and decisive,” Nadella said in a July 10 interview. “So how do we empower the engineers and the salespeople in the field to be able to make decisions without having to go around in circles?”

Productivity, Platforms

The new CEO sees Microsoft’s main focus as “productivity and platforms,” similar to the Microsoft of the 1990s when Nadella joined. At that point the company had two divisions -- one focused on the Office family of e-mail, spreadsheet and document applications, and the other on Windows, the company’s main PC software.

Nadella’s vision for those two categories is far more ambitious, he said in the interview, and it’s focused on how to provide those kind of products in a mobile-and-cloud world rather than one of PCs and servers.

To get there, Nadella wants his employees to build products from the point of view of a challenger, rather than the market leader Microsoft has been for much of its 39-year history.

“We are going to innovate with a challenger mindset,” Nadella told software developers who build applications for Windows at a conference in April.

As part of that, Nadella has the Office group focusing on applications that will be available on rival operating systems. Apart from Office for Apple Inc.’s iPads, Nadella has accelerated development of a version for Google Inc.’s Android, which is likely to come out later this year, according to a person familiar with the plans.

New Focus

Elsewhere, Microsoft’s Bing search team is working on Cortana, a speech-controlled personal assistant that Nadella said in the interview is “perhaps the biggest innovation in productivity we’ve done.” Currently available for Windows Phone, Nadella wants to broaden its use and says it can perform tasks like helping a salesperson automatically keep track of customer engagements and results. The company is also debating whether to create a version of the voice assistant for Apple’s iOS and Android, one of the team’s executives said at a recent conference.

Experiment, Change

Nokia, now part of Microsoft, will no longer seek to sell as many phones as possible at the best possible profit margins, and instead serve as a showpiece and vehicle for Microsoft’s services, Nadella has told devices chief Stephen Elop.

“It is particularly important to recognize that the role of phones within Microsoft is different than it was within Nokia,” Elop wrote in a memo last week announcing the reduction of 12,500 employees related to Nokia. “Whereas the hardware business of phones within Nokia was an end unto itself, within Microsoft all our devices are intended to embody the finest of Microsoft’s digital work and digital life experiences, while accruing value to Microsoft’s overall strategy. ”

Nadella has also been quick to end projects he doesn’t consider core to Microsoft’s new mission. In May, he opted to withdraw a planned small version of Microsoft’s Surface tablet. Last week, he announced plans to end an ambitious effort to develop original television shows for Xbox.

To reinforce the idea that Microsoft should be focused on building products and on engineering, Nadella has replaced the company’s slickly produced annual meeting at a local stadium with a week-long hackathon that will take place later this month.

“I want to give everybody more permission even to question any orthodoxy we may have which is getting in the way,” Nadella said in the interview earlier this month. “There’s no such thing as a static culture. I want us to be able to have the ability to question, experiment and change.”

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