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What We Can Learn From Microsoft's Strategic Challenges

It’s an incredibly challenging time for Microsoft. CEO Satya Nadella is faced with navigating a serious identity crisis as the software giant’s core business in the PC market sees a steady decline. The world is changing rapidly around Microsoft. In this post, I’ll look at 3 strategic challenges facing Microsoft and its future, and what businesses can learn from them.

The graph below paints a grim picture for Microsoft’s performance in its current business environment. The company has relied on PC sales to generate lucrative profits from its Windows licenses, but the world is changing. The future is mobile and Microsoft’s current business model and value proposition no longer fits with its business environment.

 Credit:  Benedict Evans  Credit: Benedict Evans

When you’ve enjoyed market dominance for so long, it’s practically impossible to earn the same margins and dominate in another area of business. Any other business Microsoft starts is doomed to fail because it will be near impossible to reclaim the market share the company once enjoyed with Windows.

So what has to be done? Satya Nadella is up against some pretty tough strategic challenges as he explores what future success can look like for Microsoft.

Here are three of those challenges with added context from industry analysts and journalists:

1. Improve the old business model, and keep it alive

For a company like Google, migrating to the mobile world made sense. Mobile is where advertising was going, and the company was able to reposition its web based business model into the mobile first world. Microsoft’s once lucrative licensing model is steadily becoming irrelevant but the company can still generate revenue from Windows and Office, it’ll just be in a different world: mobile. Office365 is Microsoft’s play into software services that consumers can use across many devices with different operating systems. Nadella oversaw the launch of Windows 10 and gave it away for free--a move the giant would never be caught doing. From these activities, a few new pricing maneuvers are being deployed. Customers can upgrade Microsoft products for free, but have to purchase premium software or hardware upgrades separately (Apple does this through iOS upgrades). Office365 is Microsoft's attempt to generate revenue via subscriptions across multiple devices rather than a license tied to one product.

So what? Alex Osterwalder always reminds me: value propositions and business models expire like a yoghurt in the fridge. Your current success can become irrelevant or be disrupted fairly quickly in today’s business climate--especially an industry like tech. Microsoft’s licensing model may have been strong in one era, but customers no longer value its services through that model. Companies have to be prepared for that shift. 

2. Create a culture that can build the company’s future

Former CEO Steve Ballmer encouraged a culture that focused squarely on dominating the market through improving its existing business or keeping it alive. Windows, Windows, Windows was the company mantra, and any invention from the company was always centered around this specific business. Despite pumping money into an amazing R&D arm, the company’s efforts here have led to some successes like XBOX and a slew of professional collaboration services like Sharepoint. But none of these have matched the scale obtained by Windows. CEO Satya Nadella’s proposed vision for the company considers a future where Windows is just one component of the Microsoft experience. Nadella is aware that Microsoft won’t dominate like they used to, but he’s determined to still discover and profit off of products and services that can grow the company in a different direction. That includes dramatics shifts like opening up the ecosystem so outsiders can also contribute to its growth; a cultural change that departs from Microsoft’s winner-take-all approach to business.

So what? Ask yourself: does your company have a structure to invent its future, or only improve its existing structure? Such a hard focus on improving the existing business can result in your company struggling to invent future growth engines. Your company needs a completely new structure that is responsible for inventing the future of your business. It will exist in parallel to your current business, but will require its own culture, resources, and skills to function.

3. Experiment with new business models for the future

Microsoft doesn’t have such a clear picture of what the company can offer in the “mobile first, cloud first” world. It tried and failed to create a Windows Phone. Instead, Nadella is looking to champion any strengths in Microsoft’s business model and place existing resources front-and-center to ignite new growth engines. Office could very well own “productivity” across mobile devices. The company’s Azure cloud-service platform is one area where Microsoft has enjoyed critical success. This existing infrastructure will be important to the services and tools Microsoft builds in the future as it shifts into developing an ecosystem. Both strengths don’t require a “Windows first” approach.

So what? Your business model may contain a variety of strengths and existing resources that could be grown into new growth engines for the company. Microsoft, and many other companies, could follow in Amazon’s footsteps. The ecommerce giant was able to invent a successful cloud-storage platform for enterprise and consumer customers by taking advantage of an existing resource the company already had

What other lessons can be learned from Microsoft and its strategic challenges?

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