For years, tech industry watchers have viewed Microsoft as a 20th-century phenomenon, rich and happy thanks to its monopoly on Windows—the tech giant hadn't introduced a breakthrough innovation in decades.
by Behnam Tabrizi
It was rich enough to be a fast tracker, but too big and too red tape to be a leader in any market. Jeff Bezos was known to look east while admonishing his colleagues at Amazon not to become complacent like their Seattle neighbors.
Yet on Feb. 7, 2023, Microsoft CEO Satya Nadella told reporters that a "new day" in the search for artificial intelligence was dawning. Microsoft's much criticized Bing was integrating Open AI's ChatGPT technology to generate not just links, but direct information for users. In doing so, he was directly challenging Google, the undisputed champion of search, by trying to beat it in innovation on its own turf.
This was not expected, especially not because, already burned in 2014 by Amazon's Alexa voice assistant, equipped with artificial intelligence, it announced in 2016 that it would become a company "with AI in first place". The problem was not, however, of an engineering nature: the company had, in fact, made fundamental progress in AI. Despite Google's expensive and buggy demo in early February, its LaMDA chatbot was probably just as good as the ChatGPT3 version that was taking the world by storm, and had laid the groundwork for chatbot-based research even before the failed launch.
We have long known that high-tech success and transformation depend more on culture than technology, and the management decisions made by each company appear to have made a difference. Some believe that, given its leadership position, Google had to tread carefully to minimize hostility and misinformation on social media; others praise Kevin Scott, Microsoft's chief technology officer since 2017, who joined at the time of the LinkedIn acquisition, partnered with OpenAI a year later, and pushed hard on technology within Microsoft.
These explanations have some merit, but they don't go deep enough. How did Microsoft, stuck in a slow decline, find the ability to leapfrog? As any business expert will tell you, no one person, however talented, can transform an organization. It is the culture that must change.
The existential moment of Microsoft
My team and I recently completed a multi-year research project to better understand continuous innovation: we wanted to know what drives companies to keep innovating even after initial success. To answer this question, we surveyed 6,873 executives, academics and consumers from around the world and narrowed the company database down to 26 companies, grouped into high, medium and low levels of agility and innovation. We analyzed the performance of these companies based on a long list of attributes, interviewed dozens of managers, executives, frontline employees and alumni, and tagged the data.
From these efforts, several companies have emerged that appear to have cracked the code of perpetual innovation. Some we expected: Apple, Amazon and Tesla. But the list also included some surprises: notably, Microsoft made the list, but Google/Alphabet did not.
I have worked in Silicon Valley since the 1990s and the presence of Microsoft was somewhat of a surprise, however, upon taking a closer look, we discovered that something extraordinary had happened, a cultural shift that led to people not playing defense going on the attack.
This process began with Nadella assuming the reins in 2014, when the Microsoft board selected him to replace outgoing CEO Steve Ballmer. He was head of the company's rapidly growing cloud computing division at the time, and it seemed unlikely that his promotion would change the trajectory of the unwieldy giant. But Nadella and the board were tired of seeing the tech world rush past the once-leading company, so he announced it was time to "rediscover the soul of Microsoft, our reason for being." .
This wasn't just another exercise in corporate purpose: Nadella treated it as an existential moment. After long achieving the goal of “a PC on every desk and in every home, running Microsoft software,” the company needed a new goal to attract and inspire its many coders and engineers and sustain its profitability . Together with his colleagues, he refocused the company to “give every person and every organization on the planet the ability to achieve more”.
This reorientation was accompanied by a strategic change. Instead of protecting its assets, in a defensive position, Microsoft went on the attack, forgoing large investments in existing technology and looking to jump into emerging opportunities.
The most noticeable change was the external one. For decades, the company resisted partnerships. After all, in the 1980s, insisting on owning DOS and other software platforms had yielded large profits and cash cows. But to fulfill its new existential commitment, Microsoft needed to combine its enormous resources (money and engineering talent) with those of other companies, opening up to other platforms and investing in partnerships.
This has taken two notable forms. First, Microsoft embraced rival operating systems like Linux and iOS and backed other companies' virtual reality devices. Second, recognizing the entrepreneurial agility of startups, the company has begun investing in a number of small, cutting-edge technology companies. Nadella has also dared to nurture talented individuals from a number of acquisitions, including Kevin Scott. As I pointed out at HBR in 1999, sometimes the greatest value in high-tech acquisitions is the people.
Adopt a startup mindset
Despite the company's massive size, Microsoft's cultural transformation has resulted the adoption of various characteristics typical of startups. One of them is obsession with customers. The company sold a lot of software products, most of which connected online in various ways: rather than relying on sales, a lagging indicator in fast-moving markets, or even on what customers were saying, Nadella asked developers to products to focus on what people were actually using. They then created dashboards to see usage over the previous month, to get an up-to-date idea of the market.
The company it also unleashed his engineering talents in order to explore new possibilities. As Nadella wrote in his account of the change, "They came to Microsoft with big dreams, but it seemed like all they did was deal with senior management, run demanding processes, and bicker in meetings." The company thus reduced hierarchies and freed engineers from most institutional controls, including rules for reaching out to people at different levels to get answers to a specific problem. Engineers "became the mainstream of Microsoft, instead of fighting daily battles like renegades." With them on board, the company could better deal with sudden opportunities and threats.
Microsoft even sponsored what it called the largest private hackathon in the world, where the company's engineers worked together on all kinds of projects they dreamed of. The annual event regularly drew more than 10,000 people in hundreds of cities, and each event lasted only a few days, but it built connections between the various silos, which continued for commercial projects, solving problems through fast-paced collaboration. In all of these ways, Microsoft has behaved more like a startup, less like a bulky, protective giant.
Commit to change
In real life, organizational transformation is messy, and Nadella and the other leaders had to push hard. Managers had become accustomed to their own little fiefdoms: pleasant, orderly worlds, with profits and enough technical challenges to engage all but the most ambitious talent. There was the infamous "stack ranking" system, in which managers ranked people on a bell curve, assigning each rank to a fixed number of employees. The company had an arrogant "us versus them" and "take no prisoners" culture that no longer served its purpose.
To regain the audacity of a younger company and commit to the new visionNadella announced that Microsoft was doing the equivalent of burning its own ships after making landfall on a new shore: The company would no longer update the once-central Windows operating system that had fallen out of favor. It also canceled the $7 billion investment in Nokia's me-too smartphone business, freeing up engineers to work on new projects. The stack leaderboard is also gone.
At that point, the company launched a series of acquisitions that opened up the market. Instead of “me-too” operations like Nokia's smartphone, it bought category pioneers it intended to take to the next level: work-related social media platform LinkedIn for $26 billion, developer platform GitHub for $7 billion, and then the monstrous 68 billion deal for the video game developer Activision Blizzard.
Taken together, these moves made it clear that the only option was to move forward. People realized they had to succeed with the new approach because they couldn't fall back on cash cows.
The game has begun
Meanwhile, Google was in the opposite situation of audacity. Having become a technology giant for all to see, he didn't care about concerns about "sentient artificial intelligence" and antitrust attacks. (Microsoft, on the other hand, went on the attack, pushing ahead with a deal to acquire Activision despite antitrust scrutiny). Google leaders were also concerned about cannibalizing search revenues. They prioritized mobile telephony, cloud computing and hardware over the latter, which had become the company's cash cow. While Google has invested heavily in AI, it has been risk averse, playing defensively.
All of which set the stage for Microsoft's surprise victory earlier this month. Google may still prevail over time, but they have real competition now and will need a similar culture shift as Microsoft.
Microsoft's resurgence is an extreme case, but any company can implement a similar change to play offense. To do this, several phases are necessary, but the most important are: to gather people around an existential vision, to promote the openness and market orientation of startups and therefore move boldly to build organizational momentum.
You don't have to be a tech company — we've seen similar changes in industries like retail and manufacturing. But you must decide to go on the attack, with an existential commitment, a startup mindset, and bold action.
Behnam Tabrizi He has been teaching Leading Organizational Transformation in the Stanford University Department of Management Science and Engineering and in executive programs for over 20 years. An expert in organizational transformation and leadership, he is the CEO of Rapid Transformation, LLC. Behnam has written six books, including Rapid Transformation (HBR Press, 2007) for businesses and The Inside-Out Effect (Evolve Publishing, 2013) for leaders.
