Steve Ballmer’s announcement today that he will retire as Microsoft’s CEO after 14 years at the helm highlights the challenges high technology companies have in sustaining their success. Ballmer’s tenure was marred because he permitted Microsoft’s Office and Windows businesses to dominate the company. Meanwhile, opportunities in smart phones, search, mobile applications, social media, and on-line videos were ceded to emerging companies from Google to Blackberry, Facebook, Twitter, and YouTube (now part of Google). Led by the return of Bill Gates’ old nemesis, Steve Jobs, Apple has far surpassed Microsoft in every category except PC software. Even there, Jobs was able to finesse Microsoft in creating the iPad that has contributed to the steady decline of the PC business.
To his credit, Ballmer invested heavily in R&D – over $10 billion in the past year – but Microsoft has little to show for it. Like many of its high tech counterparts – Hewlett-Packard, Yahoo, Nokia, Dell, Blackberry, Kodak and Motorola, to name a few – Microsoft has been unable to overcome the dominance of its core business. Thus, it is following a similar path to IBM with mainframe computers in the 1980s. Most likely the crowning blow for Microsoft’s founder-dominated board was the fiasco with Windows 8, its mainstream product update.
Microsoft’s problem is not a technology problem but an organizational one. It is the classic issue addressed by my HBS colleague Clay Christensen in The Innovator’s Dilemma. The dominant business that generates most of the profits gets the bulk of the resources and attracts the best people in the company. Meanwhile, the dominant group squeezes resources for emerging businesses, especially when funds are tight, and focuses its R&D on replacement products, not true innovation. Similar things happened in the pharmaceutical industry which, with the exception of Novartis and J&J, missed the biotech, med tech, and generic revolutions.
We had a similar problem at Medtronic with the dominance of our cardiac rhythm business, made up of pacemakers and defibrillators, which used to account for 80% of revenues and 90% of profits. Seeing the eventual saturation of that market, we used its cash flow to spend heavily to build a series of medical technology businesses through internal ventures and acquisitions. These include neurological disease, spinal disease, cardiovascular disease and diabetes, along with emerging businesses in otolaryngology and urology. Today the latter businesses account for more than 60% of Medtronic’s revenues and make up the bulk of its growth.
Ballmer contributed to Microsoft’s innovation problem by personally dominating its organization, not letting anyone have sufficient authority to counteract the power of the mainstream business. The consequence is that after 14 years – which is four years too long for a high tech CEO to be at the helm – Ballmer is leaving Microsoft with no successor in sight. Shame on the Microsoft board for letting this happen.
So the company is turning to Heidrick and Struggles to propose a successor. Let’s hope the Microsoft board is wiser in the selection process than the Hewlett-Packard board, which four times unsuccessfully went outside its ranks for a new CEO, yet never found a leader who could restore the innovative, egalitarian culture of H-P’s glory days. IBM’s approach should be a role model: it recruited Lou Gerstner, who had no computer background but was a superb strategist and leader, to get the company back on track. Gerstner wisely groomed Sam Palmisano as his successor, turning over the reins after only eight years. In the past decade Palmisano remade IBM into a highly successful enterprise systems and solutions company and groomed an internal successor, Ginny Rometty, to carry on the IBM success story.
Fortunately for Microsoft’s board, there are excellent candidates who could rebuild its innovative spirit. Three in particular come to mind: Jeff Bezos, CEO of Seattle-based Amazon; Cheryl Sandberg, COO of Facebook; and John Donahoe, CEO of eBay. It is unlikely Bezos would make the shift, but Sandberg might welcome the opportunity to become CEO rather than COO. Donahoe is less well known, but has done a superb job in remaking eBay after taking over a declining franchise from former CEO Meg Whitman.
At this writing Microsoft’s future is very much in doubt. For the sake of America’s dominant position in the global high tech field, let’s hope its board goes the route of IBM and not H-P. Doing so will require all the wisdom of Bill Gates and his fellow board members.