Microsoft Realigns To Focus On Hardware And Better Compete Against The Apples And Samsungs Of The World

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Microsoft made its biggest move yet to shift its focus on integrated hardware and software: today CEO Steve Ballmer announced a round of management changes that will see all the department heads changed and some formerly well-staffed research groups gutted of top talent to further bolster OS, entertainment, and mobile divisions.

In short, these long-expected changes constitute a night of long knives at the company, removing or moving nearly all the heads of most major organizational silos into other positions.

Terry Myerson, former head of the Windows Phone division, will head the operating systems group in charge of “core cloud services” and OS work. Julie Larson-Green, former Windows co-leader and potential favorite for the CEO position, has been put in charge of the money-making entertainment division at the company. Qi Lu, former head of online services like Bing, is now in charge of Applications and Services Engineering.

This wholesale re-org, a first in the company’s history, is far-reaching but not surprising. The company first signaled something was afoot when Ballmer fired Steve Sinofsky, the wunderkind who led the development of Surface. He ruled the Windows division, resisting any integration across the different product groups. At the time of his dismissal, Ballmer wrote a memo saying the different product groups needed to be more cohesive.

Ballmer said it’s “imperative that we continue to drive alignment across all Microsoft teams, and have more integrated and rapid development cycles for our offerings.” He then appointed Julie Larson-Green, who will now lead the Windows engineering group. Ballmer cited skills in her that Sinofsky does not seem to have as much of a strength for:

“Leading Windows engineering is an incredible challenge and opportunity, and as I looked at the technical and business skills required to continue our Windows trajectory — great communication skills, a proven ability to work across product groups, strong design, deep technical expertise, and a history of anticipating and meeting customer needs — it was clear to me that Julie is the best possible person for this job, and I’m excited to have her in this role.”

Ray Ozzie, in his time at Microsoft, had been a proponent of an integrated approach but lost out to Sinofsky, who won Ballmer’s ear. Ozzie argued that the world was moving into a post-PC world. He was a passionate proponent of the cloud and was instrumental in the development of Windows Azure, the Microsoft cloud service. It is Azure that is cited as Microsoft’s best chance of surviving in this new post-PC era. Without it, the company would face a dire future, left behind as the PC market goes mobile and work gets ever more distributed. It is now less about the PC vs. everyone else and far more about the PC vs. the cloud. Even the company’s much-maligned Xbox One launch pointed to a more Internet-based approach to gaming to the detriment of die-hard gamers who were looking for a more optical-media-based approach to game purchases.

As the company faces competition from Apple and Samsung on the mobile side and Google on the apps and OS side, these changes suggest a more focused effort to head off new competition while bolstering the already strong entertainment silo. The focus on cloud systems is also key as the company is facing a potential dip in Office sales as more users go online.

It seems the company is also doubling-down on talent in key divisions. For example, Rick Rashid is moving from Microsoft’s research arm to “return to his roots in OS to help propel us forward” as a lead in Windows innovation.

Microsoft lost a great deal of ground over the years and is only now catching up. A poor mobile strategy stymied growth in the face of iOS and Android and IT shops still look at Windows 8 in askance.

Windows Phone, arguably even more important to Microsoft’s future than full-fat Windows — as computing continues to shift its compass from the traditional fixed desktop use-case to portable mobile devices — has also struggled to gain traction. Analyst figures for Q1 this year gave it a low single-digit share of the smartphone OS market: 3.2% according to IDC vs 75% for Android and 17.3% for iOS.

Microsoft’s mobile OS was already late to the party when it launched in fall 2010, as Windows Phone 7, but was then rebooted onto an entirely new kernel in fall 2012 — orphaning early device adopters from future platform updates. In its Q1 Nokia, Microsoft’s primary Windows Phone OEM, reported quarterly sales of just 5.6 million WP devices. It expects to sell just 7.1 million in its Q2.

In this strategic document Ballmer notes: “We are rallying behind a single strategy as one company — not a collection of divisional strategies. Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do.”

He also goes on to discuss the need for “a strategy to deliver a family of devices and services” — noting: “No technology company has as yet delivered a definitive family of devices useful all day for work and for play, connected with every bit of a person’s information available through one cloud. We see tremendous room for innovation in software, services and hardware to bring the consumer this new, more complete and enveloping experience.”

Specifically Microsoft name-checks the following devices in its planned “family” — “phones, tablets, PCs, 2-in-1s, TV-attached devices”, along with “other devices to be imagined and developed”. Microsoft already makes its own tablets, its Surface devices, but it’s still relying on external OEMs in the phones category — most obviously Nokia, who has thrown its all in with the Windows Phone platform for smartphones.

Rumours of a Microsoft acquisition of Nokia have made the rounds periodically, most recently last month, ever since former Microsoft exec Stephen Elop took over as CEO in 2010. Microsoft’s new “single strategy” approach may make it more imperative for Redmond to fully own phone hardware, as it now does with its Surface tablets. Especially as it’s not the only company pushing hard on a single strategy across a family of devices: Apple has of course pioneered this strategy with its Macs, iPhones and iPads, but Sony is also now pushing sole-branded mobile, tablet, PC and TV hardware.

Ray Wang, founder of Constellation Research said Steve Ballmer is still clearly in charge. What he’s done is consolidate his lieutenants.  He’s picked the winners for the next 3 years:

  • Terry Myerson on Operating systems can consolidate on all deployment options
  • Qi-Lu wins on  apps and services – meaning he has the tools and foundation folks will depend on
  • Julie Larson-Greengets all the cool consumer devices
  • Satya Nadella has to deliver on the cloud for everyone
  • Dynamics stays the same and Kirill Tatarinov gets an easy access point to the all the good technology in Microsoft w/o mucking up an enterprise sale
  • Eric Rudder gets all the cool research
  • Marketing goes to Tami  Reller- no surprise
  • COO Kevin Turner is the rock
  • Tony  Bates on business development will get to push out more to find and acquire innovation

“It’s basically a consolidation of functions and a reduction of chiefs,” Wang said. “Ballmer’s picked his winners and hopes for synergy on one Microsoft.”

Microsoft has been a bloated bureaucracy for a long time – this is Ballmer finally taking steps to prune the organization and shape it to create his legacy. As the “one Microsoft” idea takes root in Redmond, this new structure streamlines things for an organization that has long been mired in an over complicated organizational structure that didn’t allow it to innovate fast enough. “One Microsoft” is now more than just a slogan for the company. This re-org finally makes this idea – which Microsoft name checks every time it gets a chance – an organizational reality. The company will likely be criticized for not going far enough in this re-org, but it’s a massive step for Microsoft and judging from today’s announcement, we will likely see a few more changes in the organization in the coming months.