windows phone | Adam Hartung

Ballmer Resigning – Next?

by Adam Hartung | Aug 23, 2013 | In the Swamp, Leadership, Software, Web/Tech

Steve Ballmer announced he would be retiring as CEO of Microsoft within the next 12 months. This extended timing, rather than immediately, shows clear the Board is ready for him to go but there is nobody ready to replace him.

The big question is, who would want Ballmer's job? It will be very tough to make Microsoft an industry leader again. What would his replacement propose to do? The fuse for a turnaround is short, and the options faint.

Microsoft has been on a downhill trajectory for at least 4 years. Although the company has introduced innovations in gaming (xBox and Kinect) as well as on-line (games and Bing), those divisions perpetually lose money. Stiff competitors Sony, Nintendo and Google have made these forays intellectually interesting, but of no value for investors or customers. The end-game for Microsoft has remained Windows – and as PC sales decline that's very bad news.

Microsoft viability has been firmly tied to Windows and Office sales. Historically these have been unassailable products, creating over 100% of the profits at Microsoft (covering losses in other divisions.) But, these products have lost growth, and relevancy. Windows 8 and Office 365 are product nobody really cares about, while they keep looking for updates from Apple, Google, Amazon and Samsung.

The market started going mobile 10 years ago. As Apple and Google promoted increased mobility, Microsoft tried to defend & extend its PC stronghold. It was a classic business inflection point in the making. Everyone knew at some point mobile devices would be more important than PCs. But most industry insiders (including Microsoft) kept thinking it would be later rather than sooner.

They were wrong. The shift came a lot faster than expected. Like in sailboat racing, suddenly the wind was taken out of Microsoft's sails as competitors shot to the lead in customer interest. While people were excited for new smartphones and tablets, Microsoft tried to re-engineer its historical product as an extension into the new market.

Windows 8 tablets and Surface tablets were ill-fated from the beginning. They did not appeal to the huge installed base of Windows customers, because changes like touch screens and tiles simply were too expensive and too behaviorally different. And they offered no advantage for people to switch that had already started buying iOS and Android products. Not to mention an app availability about 10% of the market leaders. Simply put, investing in Windows 8 and its own tablet was like adding bricks to a downhill runaway truck (end-of-life for PCs) – it sped up the time to an inevitable crash.

And spending money on poorly thought out investments like the Barnes & Noble Nook merely demonstrated Microsoft had money to burn, rather than a strategy for competing. Skype cost some $8B, but how has that helped Microsoft become more competive? It's not just an overspending on internal projects that failed to achieve any market success, but a series of wasted investments in bad acquisitions that showed Microsoft had no idea how it was going to regain industry leadership in a changing marketplace going more mobile and into the cloud every month.

Now the situation is pretty dire, and now is the time for Microsoft to give up on its defend and extend strategy for Windows/Office. Customers are openly uninterested in new laptops running Windows 8. And Win 8.1 will not change this lackadaisical attitude. Nobody is interested in Windows 8 phones, or tablets. This has left companies in the Microsoft ecosystem like HP, Dell and Nokia gasping for air as sales tumble, profits evaporate and customers flock to new solutions from Apple and Samsung. Instead of seeking out an update to Office for a new PC, people are using much lighter (and cheaper) cloud services from Amazon and office solutions like Google docs. And most of those old add-on product sales, like printers and servers, are disappearing into the cloud and mobile displays.

So now, after being forced to write off Surface and report a horrible quarter, the Board has pushed Ballmer out the door. Pretty remarkable. But, incredibly late. Just like the leaders at RIM stayed too long, leaving the company with no future options as Blackberry sales plummeted, Ballmer is taking leave as sales, profits and cash flow are taking a turn for the worst. And only months after a reorganization that simply made the whole situation a lot more confusing for not only investors, but internal managers and employees.

Microsoft has a big cash hoard, but how long will that last? As its distribution system falters, and sales drop, the costs will rapidly catch up with cash flow. Big layoffs are a certainty; think half the workforce in 2 years. Equally certain are sales of divisions (who can buy xBox market share and turn it competitively profitable?) or shut-downs (how long will Bing stay alive when it is utterly unnecessary and expensive to maintain?)

But, there is a better option. Without the cash from
Windows/Office, you can't keep much of the rest of Microsoft walking. So
now is the time to cut investments in Windows/Office and put money into the
best things Microsoft has going – primarily Kinect and cloud services. A radical restructuring of its spending and investments.

Kinect is an incredible product. It has found multiple applications Microsoft fails to capitalize upon. Kinect has the possibility of becoming the centerpiece for managing how we connect to data, how we store data, how we find data. It can bring together our smartphone, tablet and historical laptop worlds – and possibly even connect this to traditional TV and radio. It can be the centerpiece for two-way communications (think telephone or skype via all your devices.) Coupled with the right hardware, it can leapfrog iTV (which we still are waiting to see) and Cisco simultaneously.

In cloud services it will take a lot to compete with leaders Amazon, IBM, Apple and Google. They have made big investments, and are far in front. But, this is the bread-and-butter market for Microsoft. Millions of small businesses that want easy to use BYOD (bring your own device) environment, and easy access to data, documents and functionality for IT, like guaranteed data back-up and uptime, and user functionality like all those apps. These customers have relied on Microsoft for these kind of services for years, and would enjoy a services provider with an off-the-shelf product they can implement easily and cheaply that supports all their needs. Expensive to develop, but a growing market where Microsoft has a chance to leapfrog competitors.

As for Bing, give it to Yahoo – if Marissa Mayer will take it. Stop the bloodletting and get out of a market where Microsoft has never succeeded. Bing is core to Yahoo's business. If you can trade for some Yahoo stock, go for it. Let Yahoo figure out how to sell content and ads, while Microsoft refocuses on the new platform for 2017; from the user to the infrastructure services.

Strong leaders have their benefits. But, when they don't understand market shifts, and spend far too long trying to defend & extend past markets, they can put their organizations in terrible jeopardy of total failure. Ballmer leaves no with clear replacement, nor with any vision in place for leapfrogging competitors and revitalizing Microsoft.

So it is imperative the new leader provide this kind of new thinking. There are trends developing that create future scenarios where Microsoft can once again be a market leader. And it will be the role of the new CEO to identify that vision and point Microsoft's investments in the right direction to regain viability by changing the game on the current winners.

Dell – Take the Money and Run! Innovation trumps execution.

by Adam Hartung | Feb 13, 2013 | Current Affairs, In the Whirlpool, Innovation, Leadership, Lifecycle, Web/Tech

Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.

In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.

Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.

Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.

But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.

Which is why Dell's sales, and profits, began to fall several years ago. And even though Michael Dell returned to run the company 6 years ago, the downward direction did not change. At its "core" Dell has no ability to innovate, or create new products. It is like HTC – merely a company that sells and assembles, with all of its "focus" on cost/price. That's why Samsung became the leader in Android smartphones and tablets, and why Dell never launched a Chrome tablet. Lacking any innovation capability, Dell relied on its suppliers to tell it what to build. And its suppliers, notably Microsoft and Intel, entirely missed the shift to mobile. Leaving Dell long on execution skills, but with nowhere to apply them.

Market watchers knew this. That's why Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.

Now Dell has a trumped up story that it needs to go public in order to convert itself from a PC maker into an IT services company selling cloud and mobile capabilities to small and mid-sized businesses. But Dell doesn't need to go private to do this, which alone makes the story ring hollow. It's going private because doing so allows Michael Dell to recapitalize the company with mountains of debt, then use internal cash to buy out his stock before the company completely fails wiping out a big chunk of his remaining fortune.

If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.

Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.

Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.

Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.

The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.

Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.

Dell – Take the Money and Run! Innovation trumps execution.

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