Why the Microsoft Reorganization Plan Won't Fix What's Wrong

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With a Microsoft reorganization plan expected to be announced on Thursday, investors at this point must be wondering: will it matter?

Shareholders of Microsoft Corp. (Nasdaq: MSFT) have only recently gotten a glimmer of hope. Microsoft stock had languished in the $25-$30 range for more than a decade until this year, which has seen MSFT pop about 30%.

Although extremely profitable, Microsoft under the leadership of CEO Steve Ballmer has struggled to move beyond its core products of Windows and Office, which still deliver nearly all of those profits.

What this new Microsoft reorganization plan needs to do is reorient the Redmond, WA-based company toward future engines of growth, such as the mobile wave of smartphones and tablets, cloud computing and big data.

Insiders say Ballmer intends the new structure to provide "functional coherence" and will align the company into divisions based on services and devices.

But given Ballmer's spotty track record and Microsoft's unwieldy size (98,000 employees), it's not a given that any major structural overhaul will do much good in addressing the company's real problems.

As one worried Microsoft insider told The Wall Street Journal's All Things D: "If this is all about an org chart and not how to build great products, it does not matter what org chart Ballmer presents. Consumers buy products, not management structure."

What the Microsoft Reorganization Plan Hopes to Achieve

To Microsoft's credit, it does know where its best chances for future success lie.

In his annual letter to shareholders last year, Ballmer foreshadowed the coming Microsoft restructuring plan as well as areas where he saw big opportunities for the tech giant.

Those areas included the development of new form factors, making technology more intuitive, and building and running cloud services.

If the Microsoft reorganization plan works as Ballmer has envisioned and makes the company more competitive in those high growth areas of technology, it would do wonders for Microsoft stock.

Microsoft has already missed much of the shift toward mobile computing, where rivals Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOG) dominate.

Cloud computing is a natural opportunity for Microsoft, but the playing field is getting crowded.

Both Apple and Google are pursuing cloud computing, along with such other tech titans as Amazon.com, Inc. (Nasdaq: AMZN), Oracle Corp. (Nasdaq: ORCL) and Cisco (Nasdaq: CSCO).

Indeed, one of the main components expected in the Microsoft reorganization plan is the creation of a cloud computing and business products unit.

"Microsoft could be the largest cloud company in the world," said ValueAct Capital founder and CEO Jeffrey Ubben in a recent speech.

Certainly, the potential is there for Microsoft to make an impact in several key areas of tech.

But whether the Microsoft reorganization plan will do anything to help realize that potential is another question altogether.

Why the Microsoft Restructuring Plan Is Likely to Fail

Major restructuring at any company is almost always traumatic, but Microsoft's ultra-competitive corporate culture will amplify the impact.

Last year a Vanity Fair magazine story described Microsoft's debilitating employee ranking system, in which team leaders are forced to hand out reviews based on a quota system. So at least one member of each group will get a bad review, no matter how well they perform.

That system has fostered a lack of cooperation and vicious office politics, a malady that is said to run through the entire company at all levels.

Microsoft's frequent missteps can at least be partially blamed on this tendency for units to fight amongst themselves and resist cooperation. It's also why Microsoft's products often aren't as well-integrated as they could be.

"Microsoft needs to unify the experience across all devices, and stop treating them as separate businesses with separate priorities and revenue goals," Forrester Research analyst David Johnson told PCWorld.

Ideally, a restructuring would begin to fix these issues, but given the company's history it could just as easily make them worse.

Another warning flag for this Microsoft reorganization plan is the company's – and Ballmer's – historic stumbles in execution.

Several launches of new versions of Windows have gone poorly, most notably Vista and now Windows 8, which has already necessitated an update to address consumer complaints.

Microsoft got behind in mobile because of early flops in the tablet space (even though they were years ahead of Apple) and the failure of Windows Phone to get any traction either before the iPhone or after the deal last year with Nokia Corp. (NYSE ADR: NOK).

And the new Xbox One, introduced in May, has been heavily criticized by industry analysts and gamers alike, who have compared the device unfavorably to the Sony PlayStation 4.

It doesn't bode well for the success of the Microsoft reorganization plan.

"It will take a while to see how this shakes out," a person with knowledge of the situation told The Wall Street Journal. "And it is very dependent on collaboration that is very hard to pull off even in much smaller organizations."

Money Morning's Defense and Technology specialist, Michael Robinson, is very excited about the "mobile wave" that Microsoft missed and has created an entire strategy for how to invest in it.

Join the conversation. Click here to jump to comments…

  1. Asok Asus | July 10, 2013

    Reorgs are the last refuge of a failed manager.

  2. pmcllc | July 11, 2013

    Shareholder proxy and fire Ballmer.

  3. Fred | July 12, 2013

    Kicking of a dying beast. It grew too big, too set in it's ways, an acts on anything too little, too late. Remember IBM? me neither, they are out of consumer market. Same story repeats here. They had superior operating system, OS2 (it is still be used by banks around the world because of it's reliability), and completely botched marketing it, charging developers 2000 bucks for the kit. They ended up losing billions. This after they literally wiped their "rear end" with MS, being able to run DOS and Win 3.xx in OS2.
    The same thing is happening with MS, and now MS is fighting their bloated bureacracy with more bureacracy.

  4. Brad M | July 19, 2013

    This is not great news certainly, but look at microsoft more fundamentally and longer term. They have a massive capital warchest to use and I have read that they have begun research and development projects in the areas of quantum computers and nano-tech. The next massive tech frontiers. Microsoft will be ok if you are looking longer term. Short term is a bumpier ride.

  5. Brad M | July 19, 2013

    Microsoft is a bloated, arrogant, corporate bureacracy.. but change is coming. Who knows, maybe even Gates will grab the reigns again before too much longer ( really doubt it though ). This is a black eye and likely stock dip short term for MS. But even though they do not currently have the relevance of apple or google in the tech world remember this.. a decade ago all called apple dead, and who lent apple money to jump start the iphone? MS! Look at apple now. Think long term on MS.. they have massive captital reserve and assets, plus they have some research and development going in the realms of quantum computers and nano tech that could be huge in the future. A bigger than apple comeback is possible with MS, but look long term.

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