We empower people and businesses to realize their potential. And to expand, I would simply say we’re about defining the future of productivity, entertainment, and communication.I am reminded of an old, failed Sony vision about providing the networked home. Companies do not make money by formulating nice or catchy vision statements. Companies make money by having clear corporate and business-unit strategies and then executing well. However, Ballmer's statement is simply too general to be a good vision, and I hope Microsoft's strategies are much sharper.
Here is another interesting comment from Ballmer related to strategy:
Our number one thing is supplying products to consumers. That’s kind of what we do. Sixty-five percent of all PCs go to the consumer, not to the enterprise. Seventy percent of all Office suites go to the consumer, not the enterprise. One hundred percent of all Xboxes go to the consumers, not the enterprise. Now, we’ve monetized the enterprise better than the consumer, there’s no question about that. And there’s no question that there are things that we have done for both the consumer and the enterprise that we would like to improve. So I’m not trying to push back. I’m merely trying to highlight that we really are very involved in both. We’re building new capabilities to give the consumer what the consumer wants. Take pen computing: I think it’s fair to say we’ve been talking about pen computing for years, but it was hard to do that with OEMs who were not equally incentivized. Now we’re trying to lead a little bit with Surface Pro. We have a model that allows OEMs to move with us.Microsoft is not even organised into a consumer and a business division, so why is Ballmer making this distinction? I think it is perfectly reasonable that the world's largest software company should sell both to consumers and businesses.
The more interesting question is what they will sell to generate future growth. Microsoft has three cash-cow divisions; namely Operating system, Office suite, and Server software. These three business-units generate 83% of revenue (4-yr CAGR 5.0%) and a whopping 96% of EBIT (earnings before interest and tax). In addition corporate management has spent some ten years developing additional businesses. They are now organised into three business-units; Bing & MSN, Xbox & Phone, and Skype. During the last four years these businesses shrank with 0.2% per year. In terms of corporate strategy Ballmer has failed miserably. Most of these new businesses are directed towards consumers and not businesses. Maybe this is why Ballmer put emphasis on the consumer.
I tried to find Microsoft's revenue split between companies and consumers, but that turned out to be very hard. In the end, I found that some of the equity analysts estimate that just 15-20% of both revenue and EBIT are coming from consumers.So here we have a business-to-business company kind of saying that the consumer is the most important. It is all a bit odd. Or is it? Maybe the analysts got the data wrong. There are huge fixed costs involved in maintaining and developing new Windows and Office products. With consumers buying the cheaper versions they might not look so profitable in the fully-allocated-cost accounting system. However, this is the wrong conclusion if costs are fixed. If consumers were to stop buying Windows and Office products, sales would go down 20%, using the analysts' estimate above. However, this would translate into a 35% drop in EBIT.
In the 1960s, many American firms implemented the multidivisional organisation. This was an innovation used to separate the corporate and the business-unit levels of management. At the time, the view was that corporations were the masters of the universe. Corporate management could decide to enter any industry they pleased. It was the era of the conglomerate; unrelated diversification. For several reasons that I will not discuss here, almost all conglomerates failed. I wonder if Microsoft has fully learnt the lesson. I think it is a good idea to develop software that both consumers and businesses want, despite making most of the profit on business customers. It is a much bigger challenge for Microsoft to develop software and hardware that is targeted at the consumer market. So far they have not been very successful.
If the cash-flow from Windows and Office is threatened, we can understand Ballmer's worry about the consumer. We understand why they teamed up with Nokia for the Windows phone, we understand why they developed their own Surface tablet PC, we understand why they bought the consumer brand Skype. However, these isolated developments will not save Microsoft unless it is able to develop some kind of coherent consumer experience. Ballmer needs to take the phone, the tablet, Skype, Xbox, MSN, and Bing and somehow create something unique. The pieces that do not fit should be sold. If these businesses are treated like stand-alone businesses, they will lose out to competition. And if that happens, 35% of the Windows and Office profit can be lost as well.
I think Microsoft needs to take corporate strategy more seriously. There are potential growth segment both in the consumer and business markets. Ballmer has, so far unsuccessfully, tried to grow the consumer market. What about the business market? Who inside Microsoft is currently responsible for growth opportunities in the business market? Microsoft should consider a matrix organisation with customer types and product categories on the axes.
My guess is that it would take five to seven years to put any consumer experience vision into reality. Is Ballmer the man? With 12 years as CEO and 15 billion in the bank, he might not be as hungry anymore. I think it is time to change CEO now before the consumer vision has been solidified. Changing CEO in mid-term is not advisable. Ballmer could still continue dancing around (funny!).
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