HK1039

ALI FARHOOMAND

MICROSOFT: NEW WINE IN AN OLD BOTTLE?

Within four weeks of becoming the new CEO of , laid out the major challenges that awaited him in the two letters he sent to everyone at Microsoft.1 He defined Microsoft’s battlefield as the “mobile-first and cloud-first world.” 2 That was where Microsoft needed to get its products and technology right, to build platforms and ecosystems and to integrate devices, services and the new mobile capabilities. In order to do so, Microsoft needed to zero in on a mobile and cloud-first world and do new things. In his view, “industry does not respect tradition – it only respects innovation.” And in order to innovate, he needed his 130,000-strong staff around the world to lead and help drive cultural change, to find Microsoft’s swing so that the team was “in such perfect unison that no single action by any one is out of synch with those of all the others.”3

Many challenges awaited Microsoft in its transformative journey. On platforms, the future of Windows was not clear. On devices, Microsoft needed to find ways to woo application developers to build its mobile ecosystem. On integration, the company had to find ways to transfer and to grow the mobile capability acquired from Nokia. And most importantly, Nadella had to figure out how he could achieve cultural changes to focus everyone on innovation via collaboration.

The Business Legacy

Business Performance When retired, he left behind a record high revenue year in 2013 but a trail of sluggish stock performance [see Exhibit 1 for the company’s revenue and net income figures

1 Nadella, S. (3 March 2014) “Satya Nadella Announces Changes to Senior Leadership Team,” release, http://www.microsoft.com/en-us/news/press/2014/mar14/03-03email.aspx (accessed 30 March 2014); Nadella, S. (4 February 2014) “Satya Nadella Email to Employees on First Day as CEO”, Microsoft press release, http://www.microsoft.com/en- us/news/press/2014/feb14/02-04mail2.aspx (accessed 30 March 2014). 2 Satya used the phrase “mobile and cloud-first world” in his letters to the Microsoft staff to stand for “mobile-first, cloud-first world,” which he reiterated many times during public and press meetings and events. 3 All quotes were from Nadella’s memo mentioned in footnote 1.

W. H. Lo prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2014 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 14/541C

1

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

2000-2013; Exhibit 2 for a chart showing the stock price of Microsoft 1986-2013]. The company had also generated ample cash and had handsomely sent its shareholders consistent returns of dividends over the years [for a , see Exhibit 3A and Exhibit 3B]. Its financial metrics of profits, dividends, and cash returns of the last decade had beaten those of , , IBM, Oracle, and . Apple was its only competitor that produced better financials [see Exhibit 4 for the comparison presented by Ballmer during the company’s latest financial analyst meeting].

The company’s flagship products were the Windows operating systems and the Office applications for personal computers and servers. Microsoft also had two profit-making lines of businesses: the growing servers and enterprise cloud business and the Entertainment and Device Division that housed the well-known . The company’s only losing product group was its online service division, which included Bing and its online advertising service [see Exhibit 5 for a breakdown of Microsoft’s product divisions’ income 2005-2013].

Until the end of the last decade, Microsoft had never departed from its tradition of relentlessly protecting its dominance in personal computer operating systems and licensing. The shift of technology to and tablets gradually meant personal computers were displaced, and at the turn of the decade, Microsoft came to terms with the end of the dominance of its flagship . In 2011, it released the Office applications for Mac. In 2012, its Azure cloud enterprise offerings began to support , which competed head-to-head with Windows for dominance. These were followed by Office for iPhone and Android in mid-2013.

Limited Success beyond the Comfort Zone of Windows and Office Beyond the comfort zone of Windows and the Office applications, Microsoft achieved traction in the consumer market with its Xbox and in the enterprise segment with its cloud service offerings.

Xbox The first-generation Xbox was released in 2001. It immediately allowed Microsoft to take the second place in the market, albeit a distant second, behind ’s PlayStation 2 and slightly ahead of ’s GameCube. With the rolling out of in October 2013 with pre-installed, the company ambitiously positioned the device to be the single interface for all living room experiences, from entertainment to communication and networking. Despite its success, the Entertainment and Devices Division, where the Xbox was housed, had cumulative losses of over US$3.5 billion as of 2013, though it started to make a positive contribution to the company’s bottom line in 2008.4

Azure and the Cloud Microsoft’s cloud activities started in its heyday in 1997 after its acquisition of Hotmail. For over a decade, its cloud offerings took the form of “Software as a Service” applications; revenues were mainly generated from consumer offerings, such as Bing and Hotmail. The company deliberately focused on these cloud offerings only so that the cloud-based applications would not be in the way of its traditional products of Windows, Office, and . 5 The decade-long delay of Microsoft to properly address the market potential of caused the company to trail behind Amazon’s 71% market share. A major change occurred in the company’s cloud strategy in 2010. The company rolled out

4 Microsoft (2002–2013) “Annual Reports,” http://www.microsoft.com/investor/AnnualReports/default.aspx (accessed 30 March 2014); the contributions and losses of the Entertainment and Devices Division were calculated from information available from Microsoft’s annual reports from 2002 to 2013. 5 Iansiti, M. and Serels, A. (4 April 2013) “Microsoft Server and Tools,” Harvard Business School Business Case No. 9-613-031.

2

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

Windows Azure and SQL Azure, the company’s “Platform as a Service” cloud offerings that were positioned to compete with traditional server businesses, including Windows Server. By April 2013, the company’s enterprise cloud platform offerings claimed a distant second market position with its US$1 billion billings. It was expected to grow stronger, challenging Amazon’s huge lead of an over 70% market share; an analyst at Forrester Research Inc. anticipated that Microsoft could narrow the gap substantially by commanding as much as a 35% market share in a year’s time. 6

Failures to Catch the Shift to Mobile Devices

Tablets Despite the fact that predicted tablets’ cannibalization of desktop computers and notebooks, Microsoft consciously chose to give up the strategic development of tablets and touch-screen smartphones.7 It viewed the tablet as a complement to Windows, instead of seeing the potential of tablets to revamp consumers’ digital and technological lives. It therefore put the development and marketing of the tablet PC under its Windows division, which meant the company’s attention was not on getting the tablet experience right. Rumor had it that Microsoft’s Pioneer Lab had a similar concept with a Courier tablet around the time when Apple was developing the iPad. But Microsoft’s Windows-powered tablet would not arrive until two and a half years after the iPad. However, the device and the operating system did not live up to market expectations, and the company had to include a US$900 million inventory write-off of the device in its 2013 books.8 The company had three different Windows operating systems that ran on different platforms: Windows RT ran RT, Surface / 8.1 powered and PCs, and there was OS powered smartphones. In an in-house interview with Gates, he described the direction as a plan to “merge all of the operating systems, which work well with the company’s long-term endeavors in both cloud storage and cloud-based personalization across multiple devices.”9

Mobile Operating Systems and Devices When Microsoft launched in 2003, all major mobile vendors were reluctant to adopt the platform lest it would claim dominance in the domain, like what Windows had achieved in the PC market. But Microsoft never managed to achieve the critical mass required for a dominant position. It failed to develop an operating system that would offer the right experience, which was not the usual Windows experience crammed in a cell phone. The smartphone market would have to wait until Apple’s iOS and iPhone arrived in 2007 to take off.

It took Microsoft five years after the iOS launch to release a smartphone operating system that seemed to be on the right track, especially with its touch- and tile-based , and the shared kernel between Windows 8, Windows RT, and Windows Phone 8 that allowed developers to create applications that could run on all three platforms of PCs, tablets, and smartphones. The software company was flexing its muscle made up of a huge Windows user base to try to catch up with building an ecosystem of application

6 Bass, D. (30 March 2014) “ Sales Top $1 Billion Challenging Amazon,” Bloomberg, http://www.bloomberg.com/news/2013-04-29/microsoft-azure-sales-top-1-billion-challenging-amazon. (accessed 30 March 2014). 7 In his keynote speech during the fall 2001 Comdex, Bill Gates said, “[A tablet] is a PC that is virtually without limits – and I predict that within five years it will be the most popular form of PC sold in America.” Raju, H. (11 December 2001) “Tablet PC, An Overview,” SLCentral, http://www.slcentral.com/articles/01/12/tabletpc/ (accessed 30 March 2014). 8 Sams, B. (26 August 2013) “After a 900 Million Write Down, Microsoft is Building a Surface RT 2,” Neowin, http://www.neowin.net/news/after-a-900-million-write-down-microsoft-is-building-a-surface-rt-2 (accessed 30 March 2014). 9 Hatchimonji, G. (26 October 2012) “Gates: Microsoft Intends to Merge Windows and Windows Phone,” TabletPCReview, http://www.tabletpcreview.com/default.asp?newsID=3597&news=microsoft+windows+8+phone+rt+surface+merging+single+ OS (30 March 2014).

3

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

developers that the competing iOS and Android had already achieved. Its acquisition of Nokia provided another missing piece of the ecosystem—much-needed mobile devices that would run the Windows Phone platform.

Missing the Market Opportunities of Search and Online Advertising Seven years after Google was incorporated, Microsoft finally had its own to switch over from Inktomi, which had powered its MSN portal’s search engine till then.10 Microsoft’s Online Services division, which housed Bing, the company’s search brand, was dwarfed by Google in many ways. The division’s search service and online advertising revenue was a mere US$3.2 billion for its financial year 2013, while Google pocketed US$50.5 billion revenue for the same period (excluding Motorola’s billing). The software company had a cumulative US$17 billion loss on its Online Services division since its inception in 2005. Bing’s market share was 18% in October 2013, trailing far behind Google’s 67%.11

The Organizational Legacy

Mixed Success with Inorganic Growth When Ballmer retired, he left Microsoft with the acquired mobile capability of Nokia. The company had a doubtful record of integrating non-software-related acquisitions despite its repeated successes in absorbing software-related acquisitions into its business. Its US$8.5 billion acquisition of Skype in 2011 not only allowed Microsoft to have a strong and popular real-time communications offering with revenue opportunities, but also provided a much- needed way for Microsoft to claim a place amid the trend of social and professional communication and networking integration. Microsoft realized the strategic potential of Skype by pre-installing Skype in Xbox One and by merging Skype and Lync, which was the company’s Office 365 communication application positioned for professionals. In 2008, Microsoft acquired the much-needed search technology behind Fast Search, enabling Bing, Microsoft’s Live Search (renamed in 2009), to become the distant number-two search engine behind Google. And almost immediately after the acquisition of in 2012, the company deployed it as its preferred enterprise social networking technology.

However, when treading beyond software and applications, Microsoft’s acquisitions did not work out. A glaring example was its acquisition of aQuantive in 2007, then one of the world’s largest advertising agencies. The company paid US$6.3 billion for the agency, and wrote down its value by US$6.2 billion for fiscal year 2012. So when Ballmer announced the Nokia acquisition in September 2013, the world started speculating whether Microsoft would be able to make sense of this deal. The pressing need to regain the market’s faith in Microsoft’s mobile ability meant that the company needed to quickly decide how to match Nokia with the rest of the Microsoft family.

The Silos and the Politics Analysts and journalists following Microsoft did not hesitate to agree that the company had a lot of politics going on and a great many silos existed that hindered performance and killed creativity. After interviewing existing and ex-Microsoft employees, observers concluded that

10 Google (n.d.) “Financial Information,” http://investor.google.com/earnings.html (accessed 30 March 2014); Richardson, C. (1 July 2004) “Microsoft Gives Facelift to MSN Search,” Web Pro News, http://www.webpronews.com/microsoft-gives-facelift- to-msn-search-2004-07 (accessed 30 March 2014). 11 Goodwin, D. (14 November 2013) “Google Fails to Gain Search Market Share, Bing Steals from Yahoo,” Search Engine Watch, http://searchenginewatch.com/article/2307115/Google-Fails-to-Gain-Search-Market-Share-Bing-Steals-From-Yahoo (accessed 30 March 2014).

4

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

corporate success within the software company depended not on work excellence or creativity but on a mastery of office politics.12 One reason for the proliferation of office politics could be traced to the huge wealth disparity between the “old folks” and the newcomers. The “old folks” were those who had joined the company before the internet bubble burst. During those days, Microsoft’s always rising stock price and stock options meant that these people could count on their creative works and quality output to become millionaires. The newcomers, those who joined Microsoft after the bubble burst, found that they were better off moving up the corporate ladder rather than counting on the rewards the company offered for their innovative excellence. The stack-ranking approach provided a breeding ground for office politics.13

The original objective of the stack-ranking approach was to “balance creativity and discipline.” 14 As time went by, the company deployed systems and procedures to help manage almost every facet of the corporation, including recruitment progress, employee appraisals, procurement, production, sales management, finance, product development, and innovation.15 With operations in over 100 countries, and human resources of around 100,000 people [see Exhibit 6 for head count information for Microsoft 2004-2013], institutionalization was necessary for the company. However, for a company like Microsoft, whose excellence depended highly on the quality and brainpower of individuals and teams, much was at stake if the balance of creativity and discipline was upset and the former became gradually traded for the latter. An example would be the employee performance management system and stack- ranking employee review approach that was adamantly criticized by both Microsoft employees and the press.

The stack-ranking system was first introduced by Gates back in the early days when he was still the CEO. Supervisors and managers force-ranked their staff by numeric values that closely resembled a bell shape, and Microsoft rewarded the high performers disproportionately while the low performers ran the risk of being invited to leave; in essence this system meant that each team had a predetermined target of achievers versus underperformers and of reward distribution. Over time, the approach was institutionalized with the support of a performance management system; managers were encouraged to execute “stack-ranking” religiously.16 Gradually, it became a sort of central focus of everyone; some even described this reward system as an integral part of the company’s culture.17

The immediate downside of this approach was that even a team of the brightest would have some of its team members ranked low despite them being among the brightest at Microsoft; therefore most Microsofters, even achievers, were reluctant to work with other smart Microsofters. What was even worse was that in order to move things ahead and to obtain support within the organization, one had to make sure that the job or work was tied to others’ “stack-ranking” in some way; this was the beginning of bureaucracy. Such bureaucracy repeatedly hurt Microsoft by slowing it down, as shown in its slower than a snail’s pace response to the smartphone market and the developments in internet search. The stack- ranking system not only hurt morale and hindered collaboration but most importantly deterred innovation.

12 Eichenwald, K. (August 2013) “Microsoft’s Lost Decade,” Vanity Fair, http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer (accessed 30 March 2014). 13 Ibid. 14 Herbold, R. J. (January 2002) “Inside Microsoft: Balancing Creativity with Discipline,” Harvard Business Review, 80 (1), pp. 72–79. Robert J. Herbold was Microsoft’s ex-chief operations officer, and the phrase was borrowed from the article written by him. 15 Ibid. 16 Ibid. 17 Budd, C. (13 November 2013) “Farewell, Stack Rank: Why This Change Was So Big for Microsoft,” Geekwire, http://www.geekwire.com/2013/farewell-stack-rankings-billg/ (accessed 30 March 2014).

5

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

When the study on the “best companies to work for” started in 1998, Microsoft was ranked number 8.18 In 2013, its position fell to 75. This implied the company was losing its edge in terms of competing for top-notch talent. It might have been over the top to blame the company’s politics-silos syndrome as the only cause; the company’s flat stock performance might have played its part. But in view of the not-so-attractive stock options, the company upgraded its cash-based compensation in 2011, making its cash package the most attractive among major software players.19

Just before Ballmer retired in November 2013, Microsoft informed its team of 100,000 that it would abandon the stack-ranking system. This was another initiative by the company to try to rebuild Microsoft as one team. The announcement also said that it would instead introduce a performance appraisal approach that emphasized teamwork and collaboration.20

The July 2013 Reorganization Ballmer also left Nadella a new organizational structure that aimed at enabling collaboration within Microsoft. The reorganization, which was announced in July 2013, right before his retirement announcement, would be the 11th reorganization during Ballmer’s reign [for more information on these reorganization initiatives, see Exhibit 7].

In July 2013 before Ballmer announced his retirement, he sent out his “One Microsoft” restructure memo to everyone in Microsoft. Ballmer stated that realignment was necessary “to enable innovation at a greater speed” and that the company should work “together with more collaboration and agility around . . . common goals” [see Exhibit 8 for Ballmer’s “One Microsoft” memo].21

As the title of the reorganization memo suggested, one of the goals of recalibrating Microsoft with a new structure and a new vision was to “break down barriers, and instead of working in any kind of silos, to really work as a team.”22 Ballmer and his leadership team decided that the decades-old, product-oriented organizational structure was not suitable for Microsoft’s new vision. He declared that the company should “focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.”23

From Product Organization to Functional Organization Under the new structure, the 100,000 staff of the “devices and services” company would henceforth be organized by function, joining together as teams of engineering, business development, strategy and research, marketing, finance, human resources, legal, or

18 Great Place to Work Institute (1998) “Fortune’s 100 Best Companies to Work For”, http://www.greatplacetowork.net/best- companies/north-america/united-states/fortunes-100-best-companies-to-work-forr/444-1998 (accessed 4 December 2013). 19 Greene, J. (21 April 2011) “Microsoft Boosts Cash Compensation for Employees,” Cnet, http://news.cnet.com/8301-10805_3- 20056099-75.html (accessed 4 December 2013); Pay Scale (12 April 2013) “Apple Google Microsoft Salary Comparison and Other Employers,” http://www.payscale.com/rccustomview.aspx?name=Apple_Google_Microsoft_Salary_Comparison_and_other_Employers&p id=bc89b4bd-16cb-4746-8700-e2831bd8524c (accessed 30 March 2014). 20 Todd, B. (12 November 2013) “Microsoft Axes ‘Stack Ranking’ in Massive Overhaul of Employee Review Process,” Geekwire, http://www.geekwire.com/2013/microsoft-axes-stack-ranking-massive-overhaul-employee-review-process/ (accessed 30 March 2014). 21 Ballmer, S. (11 July 2013) “One Microsoft: Company Realigns to Enable Innovation at Greater Speed, Efficiency,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2013/jul13/07-11onemicrosoft.aspx (accessed 30 March 2014). 22 Microsoft (19 September 2013) “Transcript of the Engineer Leader Panel, Financial Analyst Meeting 2013,” http://view.officeapps.live.com/op/view.aspx?src=http://www.microsoft.com/investor/downloads/events/EngineerPanel_FAM _2013.docx (accessed 30 March 2014). The quote was from the host of this engineer leader panel, , Executive Vice President of Marketing. 23 Ibid.

6

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

operations.24 The most dramatic change was that instead of having eight product teams that looked after a group of products with its own marketing and finance support, Microsoft cut the team numbers by half and had the people organized into four engineering teams. The engineering function would look after the four cornerstones of the revamped “devices and services” company: operating systems, applications, the cloud, and devices. Marketing and finance would be centralized. Ballmer also centralized all the work related to partners’ development and ecosystems building under the “business development and evangelism group.”

After the Nokia acquisition was wrapped up, the newly created devices division would be a huge group overseeing the development of a wide range of hardware and managing the supply chains. The range of hardware would include smartphones, the Surface tablets, the Xbox, and all the gaming accessories. With this creation of a device division, Microsoft hoped to address the pressing problem of the continuous erosion of the personal computer market by mobile devices such as smartphones and tablets.

Unlike the product-oriented structure that had each product with its own people designing and upgrading its platform, all of Microsoft’s operating systems would be centralized and looked after by one single operating systems team. Via this division, Microsoft wanted to see tighter- linked software that powered the . It was hoped that this would enable a consistent and user-friendly experience across the full array of Microsoft devices, from smartphones to tablets to living room entertainment devices. In order to deliver this, the operating system division organized its teams into three layers. It had a core team that ensured all applications could be delivered to different platforms by bringing the silicon interfaces of Microsoft’s devices together. Another team focused on delivering core services that worked on all Microsoft devices. The division then had a number of satellite teams that worked on the device categories so that each group of hardware would provide the experience and interface that customers expected.25

All applications development would then be handled by the applications and services engineering group, while enterprise and cloud services would be in the hands of the fourth engineering group.

In this new organization, while every group held responsibility for one crucial function of Microsoft, no one group could exist independently from the others: an application had to run on an operating system, which could not function without a device. In this way, each function had to communicate with its adjacent functions if each wanted the results of its hard work to materialize. Likewise, instead of each product line having its own marketing and finance team, these key support functions would be centralized, driving better communication among the different functions. It was in this way that Ballmer hoped that the new structure would enable better collaboration among Microsoft’s 100,000 employees.

A Part of a New Strategy The July 2013 reorganization differed from the other ten reorganizations Ballmer initiated. Ballmer said, “In a sense the word re-org almost understated what we were doing. We were really clearly laying out a strategy that we want to pursue.” After a decade of mild successes

24 One exception to this functional structure was the line of business: the enterprise resource planning and customer relationship management applications. This line of business would have a matrix structure with its product staff dotted-line reporting to one of the four engineering teams, its marketing staff to the Marketing Group, and its salespeople to the COO team. 25 Microsoft (19 September 2013) “Transcript of the Engineer Leader Panel, Financial Analyst Meeting 2013,” http://view.officeapps.live.com/op/view.aspx?src=http://www.microsoft.com/investor/downloads/events/EngineerPanel_FAM _2013.docx (accessed 30 March 2014).

7

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

and missed opportunities, Ballmer and his senior leadership team spent 2013’s first “six months . . . not sort of beating out what a reorganization look[ed] like, but really fundamentally honing the strategy” of Microsoft.26 They decided that Microsoft should be a “devices and services” company. Though the development and marketing of Xbox meant the company did possess some sort of devices capability, the product was developed as a legacy expansion initiative to gaming applications and had nothing to do with the company’s plan to address the paradigm shift from personal computers to mobile devices. The introduction of “devices” as a core element of the company officially marked the intention of Microsoft to end its platform-only approach in dealing with the shifted mobile devices paradigm. To ensure that Microsoft could live up to its new positioning as a “devices and services” company, the company’s reorganization created a devices engineering team. Knowing that the function was just a skeleton without muscle, Microsoft went on a shopping spree. To leapfrog from a software-centric company to one with strong devices capability, it acquired Nokia and planned to transfer the mobile company’s troop of 32,000 to form the core of the devices division when the deal was finalized. This was what Ballmer referred to when he stated that the reorganization was part of a major strategy revamp. However, apart from the building of a strong devices team that had the capability to produce mobile devices, Ballmer was vague on how the rest of the One Microsoft strategy looked. The public would have to await the new CEO to gain more insight into the substance of the new strategy.

A Drive for a Cultural Change Besides being part of a new strategy, the organizational restructuring was also a drive for a cultural change at Microsoft. In a press interview after the reorganization announcement, Ballmer explained that this change would start with the “One Microsoft” strategy, which was reflected by the replacement of divisional goals with the establishment of shared goals.27 In his One Microsoft memo, he explained how each shared goal would be managed to prevent fall-out: “Each major initiative will have a champion who will be a direct report to me or one of my direct reports. The champion will organize to drive a cross-company team for success.” 28 Ballmer saw this as the process element that would drive cultural change at Microsoft.

The need to completely change how Microsoft was organized was also due partly to Ballmer and his senior leadership team’s recognition of Microsoft’s internal problems. Besides the tension and competition that had developed among the product teams and that called for a cultural shift, Ballmer admitted in his reorganization memo that there was one fundamental problem that he wanted to fix. In order to strive for success, Microsoft needed “better execution from product conceptualization and innovation right through to marketing and sales.” 29 The ability to execute well was usually a necessary factor for organizations to succeed. In Microsoft’s case, its dominance in the PC market had allowed it to slip in this operational capability. With the continuous decline in PC sales, the company lost its comfort zone and was forced to examine the fundamentals of what made a company successful. Ballmer hoped that a cultural change could reinstate this organizational capability.

To nurture a cultural change, Ballmer recommended that Microsoft and everyone under its roof should develop five attributes:

26 The quote is from the transcript of Ballmer’s speech at the Microsoft 2013 Financial Analyst Meeting. Ballmer, S. (2013) “Ballmer FAM 2013”, Microsoft, http://view.officeapps.live.com/op/view.aspx?src=http://www.microsoft.com/investor/downloads/events/Ballmer_FAM_2013. docx (accessed 30 March 2014). 27 Tu, J. I. (14 July 2013) “One-on-One with Microsoft CEO: Ballmer on Reorganization, Future,” The Times, http://seattletimes.com/avantgo/2021383604.html (accessed 30 March 2014). 28 Ballmer, S. (11 July 2013) “One Microsoft: Company Realigns to Enable Innovation at Greater Speed, Efficiency,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2013/jul13/07-11onemicrosoft.aspx (accessed 30 March 2014). 29 Ibid.

8

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

 Nimble: Everyone needed to make the right decisions faster.  Communicative: Information exchange was not enough; people needed to communicate to “drive agility, action, ownership and accountability.”  Collaborative: People needed to “coordinate effectively . . . to get results.”  Decisive: With clear strategic direction, Microsoft needed to empower staff in the field to make decisions to drive for “higher levels of productivity, growth and customer satisfaction.”  Motivated: Ballmer hoped that everyone would love what he or she did, and be inspired by the opportunities and challenges associated with “fulfilling the potential of all people around the globe.”30

As was the case with the rest of Ballmer’s aspirations regarding organizational restructuring, the establishment of a new corporate culture had to await the new CEO.

The New CEO’s Letters: Challenges Charted

After 22 years at Microsoft and as a member of the senior leadership team, Nadella knew what Microsoft’s challenges were. Whether on purpose or otherwise, Nadella laid out the major challenges that awaited him in the two letters he sent to everyone at Microsoft within his first four weeks as CEO [see Exhibits 9 and 10 for copies of these two letters].31 As he stated at the beginning of his first letter, one of his challenges was to work with the board as it began its new chapter after Bill Gates retired from the role of chairman. Nadella needed the board’s full support as he led his troops to the battlefield. He defined Microsoft’s battlefield as the “mobile and cloud-first world.” That was where Microsoft needed to get its “products and technology” right, to “build . . . platforms and ecosystems” and to integrate “Nokia devices and services and the new mobile capabilities they [brought].” In order to do so, Microsoft needed to “zero in on . . . reimagin[ing] what [Microsoft had] done in the past for a mobile and cloud-first world, and do new things” because the “industry [did] not respect tradition – it only respect[ed] innovation.” And in order to innovate, he needed his over 100,000 employees around the world “to do [their] best work, lead and help drive cultural change,” to find Microsoft’s swing so that the team was “in such perfect unison that no single action by any one is out of synch with those of all the others.” 32 In this way, Nadella eloquently spelled out the challenges Microsoft needed to surmount in order to “make a difference” and to “change the world.”

Products and Technology Microsoft’s main problem was the decline in personal computer sales, on which its flagship Windows and Office products depended. For over a decade, Microsoft’s legacy showed repeated instances of missing the technology shift and failure to lead innovation. In the marketplace of mobile devices, Microsoft trailed far behind its competitors. So one of its major challenges was to get its hardware right, even though it was yet to spell out clearly its devices strategy.

The company’s Surface line of tablets had achieved limited success. Its first generation of tablets cost a write-down of US$900 million. Though Surface 8.1 had significant improvements, reviews generally concluded that there was ample room to improve before it

30 Ibid. 31 Nadella, S. (3 March 2014) “Satya Nadella Announces Changes to Senior Leadership Team,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2014/mar14/03-03email.aspx (accessed 30 March 2014); Nadella, S. (4 February 2014) “Satya Nadella Email to Employees on First Day as CEO,” Microsoft press release, http://www.microsoft.com/en- us/news/press/2014/feb14/02-04mail2.aspx (accessed 30 March 2014). 32 All quotes were from Nadella’s memo mentioned in footnote 31.

9

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

could be considered a de facto choice of tablets. This, together with the fact that it was losing money from Surface tablets, meant that Microsoft was still a long way from being a successful tablets provider.33

Google’s Android had achieved a position for smartphones equivalent to that of Windows for personal computers. It was clear to Microsoft that its platform-only approach in the past would not be effective in winning the mobile war. In pursuit of a devices and services strategy, its acquisition of Nokia was logical, though risky amid the challenges presented by the herculean task of integrating two giant companies of diverse backgrounds, histories, cultures and legal systems [see “Nokia Integration” section below for more information].

However, by entering the device domain and by producing its own tablets, Microsoft put the relationship with its hardware partners, who contributed to Windows and Office dominance, to the test. The acquisition of Nokia meant that the company was going to be serious about rolling out its own tablets and smartphones. So instead of a business partner, Microsoft had become one of the hardware vendors’ major competitors. Instead of working together with computer brands to address market segments, the new strategy saw Microsoft competing with them for not only market share but also suppliers’ resources. It would be a tough challenge for Microsoft to keep its license revenue from Windows by maintaining an amicable balance between selling to vendor partners and competing with them.

Nadella requested support from the founder of the company and asked Bill Gates to spend one-third of his time at Microsoft focusing on products and technology. Nadella counted on the fact that no one carried as much weight as Bill Gates within Microsoft, and he could be instrumental in ensuring collaboration among the different teams on projects of strategic product or technology development. Besides, the founder was also the perfect gatekeeper to ensure that no Microsoft device or service was launched in the market before it could deliver what customers expected it should do. In this way, it was hoped that the company could avoid the awkward performance the market had seen for the first-generation Surface tablets.34

Platforms and Ecosystems

Windows Microsoft decided to go from having three platforms to two, sealing the fate of Windows RT.35 Any Microsoft device in the future would be either a Windows device or a Windows Phone device. In his first press briefing on products, Nadella de-bundled the Windows platform and Office by expanding the Office application suite to iPad users via the cloud.36 This was an acknowledgement from the new CEO that Windows, once the dominant operating system, had become just one of the operating systems in the market of smart devices. The de-bundling allowed Microsoft to continue to drive revenue growth from Office applications and possibly ended its dependence on personal computers for Office applications sales, but the company had yet to answer some tough questions related to Windows and Windows Phone.

33 Keizer, G. (23 January 2014) “Microsoft Lost Money on Each Surface Sold Last Quarter,” Computer World, http://www.computerworld.com/s/article/9245673/Microsoft_lost_money_on_each_Surface_sold_last_quarter (accessed 30 March 2014). 34 Spence, E. (21 October 2012) “Microsoft Has a Problem with the Public’s Expectation of the Surface,” Forbes, http://www.forbes.com/sites/ewanspence/2012/10/21/microsoft-has-a-problem-with-the-publics-expectation-of-the-surface-rt/ (accessed 30 March 2014). 35 Gralla, P. (25 November 2013) “Microsoft Confirms Windows RT Will Die,” Computer World, http://blogs.computerworld.com/windows/23194/microsoft-confirms-windows-rt-will-die (accessed 30 March 2014). 36 Microsoft (27 March 2014) “Satya Nadella Press Briefing Webcast,” http://www.microsoft.com/en- us/news/press/2014/mar14/03-27webcast.aspx (accessed 30 March 2014).

10

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

One practical question was how to strike a balance between maintaining the licensing revenue of Windows from personal computer brands and Microsoft devices competing head-to-head with these hardware vendors. Apple, Palm, Nokia, and Google had all failed to achieve this balance in the past.37 While Microsoft would likely waive the Windows Phone licensing fees for mobile makers, managing the relationship with Windows licensees and hardware vendors remained a huge challenge.38

But perhaps the fundamental question related to the future of Windows was how Microsoft planned to take it to the next level in a mobile-first, cloud-first world. Windows was the starting point of Microsoft, and amid the technology paradigm shift, it was unlikely that Microsoft would allow Windows to be reduced to the outdated operating system that powered personal computers.

Ecosystems Unlike Microsoft’s Cloud OS Network ecosystem, which added value to the company’s competitiveness by competing with Amazon, Microsoft’s smartphone ecosystem was comparatively weak, especially with application developers. 39 This was partly due to a chicken-and-egg situation associated with the popularity of Windows in mobile devices. Before there were a comparable number of users of Windows Phone mobiles and Windows tablets as there were for Apple’s and or Android-powered phones, developers preferred to write applications for iOS and Android rather than for Microsoft’s Windows platform. But without the support of strong ecosystems of application developers, consumers would not opt for the Windows Phone operating system. Another reason for weak support among application developers had to do with the past pattern of Microsoft being difficult to work with.40 A long history of negative experiences among developers doubled the challenge of building a strong ecosystem to support Microsoft’s mobile devices.

Microsoft had limited experience in working with telecom and mobile operators around the world but these partners could make or break the success of Windows Phone. If Microsoft’s devices and services strategy was to work out, the company needed to figure out how to strengthen its smartphone ecosystem. It was hoped that the Nokia acquisition would enable Microsoft to bring this skills set in-house, provided the company could successfully manage the integration.

Nokia Integration According to McKinsey & Co., roughly 70% of mergers failed.41 The risk for Microsoft had to be much higher than this percentage because of a number of factors that added complexity to the integration. Firstly, the teams involved were huge: 32,000 staff at Nokia and 100,000

37 Patel, N. (2 October 2013) “One Month after Nokia Deal, What Is Microsoft’s Plan?” The Verge, http://www.theverge.com/2013/10/2/4794530/one-month-after-nokia-deal-microsoft-still-faces-unanswered-questions (accessed 30 March 2014). In this article, Patel listed the examples of failure: “Apple failed with the original Mac and the Newton, Palm failed with Palm OS, and Nokia itself struggled with . The only recent example [was] Google, which . . . had to build a ‘firewall’ around Motorola and even reportedly treats the company more harshly than its other partners in order to maintain the appearance of propriety and placate important OEMs like Samsung.” 38 Goldstein, P. (13 March 2014) “Report: Microsoft Waive Windows Phone License Fees for Indian Vendors,” Fierce Wireless, http://www.fiercewireless.com/story/report-microsoft-waive-windows-phone-license-fees-indian-vendors/2014-03-13 (accessed 30 March 2014). 39 Lunden, I. (12 December 2013) “Microsoft Brings Together 25 Partners for the Cloud OS Network to Drive More Windows Azure Use,” Tech Crunch, http://techcrunch.com/2013/12/12/microsoft-brings-together-25-partners-for-the-cloud-os-network- to-drive-more-windows-azure-use/ (accessed 30 March 2014). 40 Foley, M. J. (6 April 2012) “Windows Phone 8: What’s Microsoft’s Developer Story?” ZDNet, http://www.zdnet.com/blog/microsoft/windows-phone-8-whats-microsofts-developer-story/12353 (accessed 30 March 2014). 41 McKinsey & Co. (June 2010) “Perspective on Merger Integration,” http://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Organization/PDFs/775084%20Merger%20Management %20Article%20Compendium.ashx (accessed 30 March 2014).

11

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

employees at Microsoft. Secondly, the two big organizations had very different backgrounds, legal systems, cultures and histories. Thirdly, Microsoft was itself going through a reorganization. Fourthly, Microsoft was also changing its commander-in-chief. The CEO who had orchestrated this acquisition would not be around to land this integration.

While the deal was not yet finalized, morale at Nokia was already badly affected. As Finnish press reported worries among Nokia staff about losing their jobs, those who were of the highest value in filling Microsoft’s skill gaps were likely to have jumped ship.42 In fact, this was often the biggest risk of any merger. And even if these talented people decided to integrate with Microsoft, the culture clash, which was common to merger integration and proven to be one source of merger failures, would likely result in Microsoft losing these people in the middle of the integration process.43

However, if Nadella managed to beat the odds and successfully integrate the two companies and preserved Nokia’s talents, the rewards to Microsoft would be high. The company would find much use in Nokia’s experience in penetrating emerging markets, where there was huge growth potential for sales. Microsoft would also be able to build its much- needed device capability with Nokia’s experience in producing a wide range of mobile devices from high end to low. Only if this were achieved would Microsoft be one step closer to winning the mobile-first, cloud-first war.

Reorganization and the Cultural Change to Zero in on Innovation Nadella dived right in to confirming the relevance of the organizational structure put in place by Ballmer immediately after his appointment. Within one month of his becoming CEO, he had fixed the cracks that had developed since the reorganization of July 2013 by reshuffling some of the team heads. This meant that Nadella believed the organizational structure he inherited from Ballmer was the right structure for Microsoft’s team to collaborate and to surmount the challenges ahead. That was why he had only made personnel changes without changing the organizational structure. For instance, the devices engineering team was set up in July 2013 with Julie Larson-Greene as the team head. However, Nokia’s acquisition, announced in September 2013, meant that Microsoft’s default head of the device engineering team should be the CEO of Nokia, , who would report for duty as soon as the deal was finished. Without letting the devices team wonder too long about what would happen to their current team head, Nadella decisively moved her to “a role that [she had] real passion for and unique skills in.”44 Nadella also quickly fixed the embedded conflicts within the marketing function by reshuffling some of the senior leadership team, and he communicated those movements openly and swiftly through his second letter to the Microsoft troops.45

Though the new organizational structure and Microsoft’s senior leaders were instrumental in establishing a collaborative culture that sparked innovation, much had yet to be done to inspire the needed cultural change. Nadella translated the “One Microsoft” vision as meaning that his troops should innovate in synch. The challenge of cultural change was doubled with Nokia’s integration, which would bring in a team with a very different culture. Both teams,

42 Spicer, A. (4 September 2013) “Microsoft-Nokia Cultural Clash Will Be Tough to Overcome,” The Conversation, http://theconversation.com/microsoft-nokia-culture-clash-will-be-tough-to-overcome-17798 (accessed 30 March 2014). 43 Weber, R. A. and Camera, C. F. (April 2013) “Cultural Conflict and Merger Failure: An Experimental Approach,” Management Science, 49 (4), pp. 400–415. 44 Ovide, S. (24 February 2014) “Microsoft Hardware Chief Julie Larson-Green to Take New Job,” , http://blogs.wsj.com/digits/2014/02/24/former-microsoft-hardware-chief-julie-larson-green-moves-to-new-job/ (accessed 30 March 2014); Hal, B. (3 March 2014) “Satya Reshuffles His Leadership,” Hal's (Im)Perfect Vision, http://hal2020.com/2014/03/03/satya-shuffles-his-leadership/ (accessed 30 March 2014). 45 Nadella, S. (3 March 2014) “Satya Nadella Announces Changes to Senior Leadership Team,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2014/mar14/03-03email.aspx (accessed 30 March 2014).

12

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

from Microsoft and Nokia, would need time to understand each other’s culture, but time was very limited for both Nadella and Microsoft, given the pressing need to prove the company’s relevance in the mobile-first, cloud-first world. One part of the challenge was to make changes without creating negative sentiments among the Nokia team by implying that their embedded culture was an inferior one. But the hardest thing to crack would still be establishing the Microsoft swing in innovation.

Zero in on Innovation History indicated that getting Microsoft to focus was hard. A mainstream media technology writer summed up this phenomenon spot-on with the description that Microsoft “enthusiastically launches products before they’re ready, then loses interest or dramatically shifts gears a few years later.”46 With loads of cash, a couple of cash cow products and services with strong embedded revenue streams, and a supportive board, a CEO like Ballmer might be able to get away with wastage like this. For Nadella to lead Microsoft to become a market leader, to inspire his team to step up to the challenges of the mobile-first, cloud-first world, and to establish a culture of collaboration that had his troops move in unison, he needed to get everyone to focus on just one thing—innovation. With a troop size of over 130,000 after the Nokia integration, this would be Nadella’s biggest challenge.

The Board Nadella needed to manage the board, which also faced many changes. Bill Gates had retired, and a new chairman, John Thompson, was appointed. While Ballmer was still on the board, it also welcomed a new board member who vowed to realize shareholders’ value. When the activist shareholder Mason Morfit, president of ValueAct (which owned 0.8% of Microsoft), became a director, he was prepared to bring to the table the request to scale back consumer products and services, such as Xbox.47 This point deviated significantly from the new CEO’s planned strategy, as he declared to the press during his first public meeting: “We want to bridge the consumer and business market.”48 Managing the board was a challenge for Nadella and for Microsoft.

The sluggishness of the company’s stock performance also put pressure on the board and Nadella. Unlike previous CEOs who each had significant but minority shares of Microsoft’s stock, Nadella would be pressed harder by the board and the activist shareholders on the company’s stock price performance.

Tough Questions to Answer

With a new CEO and a new One Microsoft strategy that focused on innovation for the mobile-first and cloud-first world, could the once-upon-a-time most valuable company in the world regain its glory of leading technological breakthroughs? The challenges that Nadella set out to master were all difficult ones.

46 Bott, E. (5 February 2014) “Six Challenges for Microsoft as the Satya Nadella Era Begins,” ZDNet, http://www.zdnet.com/six- challenges-for-microsoft-as-the-satya-nadella-era-begins-7000025975/ (accessed 30 March 2014). 47 Microsoft (11 March 2014) “Microsoft Board Expands to Include Mason Morfit,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2014/mar14/03-11dividendpr.aspx (accessed 30 March 2014); Jinks, B. and Bass, D. (3 February 2014) “Microsoft’s New Director Plans to Seek Windows Sales Redo,” Bloomberg, http://www.bloomberg.com/news/2014-02-03/microsoft-s-new-director-plans-to-seek-windows-sales-redo.html (accessed 30 March 2014). 48 Weinberger, M. (4 February 2014) “New Microsoft CEO: We Want to Bridge the Consumer and Business Market,” Citeworld, http://www.citeworld.com/consumerization/22936/satya-nadella-bridge-consumer-enterprise (accessed 30 March 2014).

13

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

Starting with the Windows platform, how could the balance in competing with vendor partners be addressed? Were there other means to resolve this conflict of interest with vendor partners? What did the future of Windows look like?

Regarding devices, should Microsoft devices focus on running the Windows family of operating systems? Some argued that Microsoft should also consider rolling out Android- powered devices, but what were the pros and cons of doing so? What should be done to build a vibrant mobile ecosystem to support the Microsoft devices?

And what would Nadella need to do to ensure Nokia’s integration came through in realizing its value to shareholders and to Microsoft? How could mobile capability be transferred and grow in Microsoft?

And most important of all, how should Nadella orchestrate the cultural change of innovation through collaboration?

14

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 1: MICROSOFT'S REVENUE AND NET INCOME 2000-2013

1HW

                                       

       

       

Source: Microsoft (2000–2013) “Annual Reports,” http://www.microsoft.com/investor/AnnualReports/default.aspx (accessed 30 March 2014).

15

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 2: MICROSOFT'S STOCK PERFORMANCE 1986-2013 (30 MARCH 2014)

Source: Yahoo Finance (4 December 2013) “Microsoft Corporation (MSFT),” http://finance.yahoo.com/q/bc?s=MSFT&t=my&l=on&z=l&q=l&c= (accessed 30 March 2014).

16

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 3A: MICROSOFT'S KEY MILESTONES 1975-1999

1975 Microsoft was founded by Bill Gates and . 1977 Gates became president and Allen vice president of Microsoft. 1978 Microsoft went international, opening its first overseas office in Japan. 1979 Microsoft moved from Albuquerque, New Mexico, to Bellevue, Washington. IBM chose Microsoft to develop languages and an operating system (OS) for its personal computer. 1980 Steve Ballmer reported for duty to help introduce discipline to the company; he started with the financial, organizational, and resource allocation areas. Microsoft incorporated. Gates became president and chairman of the Microsoft board, and Allen was executive vice president. 1981 IBM introduced its personal computer with Microsoft's 16-bit operating system, MS- DOS 1.0. , the extension of MS-DOS with a graphical operating environment, was developed. The window management capability allowed unrelated software to be viewed on the same screen, and data could also be transported from 1983 one application to another easily. Allen resigned, and Gates took on the executive vice president title and responsibilities. Microsoft issued Microsoft Basic, Multiplan, Word, File, Chart, and Excel 1984 applications for Apple . Microsoft Windows 1.0 was shipped. 1985 Microsoft and IBM entered into a joint development agreement. Microsoft moved to its corporate campus in Redmond, Washington. was launched; the suite included word processing, , 1986 , communications, and drawing modules. Microsoft stock went public at US$21 per share and ended the first trading day at US$28 per share. Microsoft launched MS OS/2, the first of the many OS to come written to exploit capabilities of processors. 1987 Microsoft later launched Windows 2.0, then Excel for Windows, to be followed by the LAN Manager, a LAN OS. Microsoft acquired Forethought, the developer of PowerPoint. Microsoft announced its first SQL server. 1988 It claimed the first position of a software vendor. Microsoft introduced the earliest version of the Office suite that contained Microsoft 1989 Word, Excel, and PowerPoint. Microsoft launched Windows 3.0, which instantly became a phenomenal success with over 3 million copies sold that year. This paved the way for the software company’s absolute dominance in the PC OS market in the years to come. 1990 Microsoft was the first PC software company to have annual revenue over US$1 billion. Microsoft and IBM terminated their decade-long OS relationship.

17

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

The US Federal Trade Commission began a decade-long anti-trust investigation of Microsoft. Microsoft renamed OS/2 as Windows NT. 1991 The domain name of microsoft.com came online. Windows 3.1 was released with over a million pre-orders. 1992 The beta version of Windows NT was released for corporate evaluation. Windows NT, Office 4.0, and MS-DOS 6.0 were released. 1993 The number of licensed users of Windows exceeded 25 million. 1994 Microsoft reached an anti-trust settlement with the US Justice Department. Microsoft launched and MSN, its online network service. The anti-trust settlement reached in 1994 was earlier rejected and then reinstated. 1995 Microsoft formed two multimedia joint ventures, one with DreamWorks SKG and the other with NBC. Microsoft launched (“IE”) 2.0. 1996 Windows CE, the OS for handheld computers, was released. IE 4.0 was released with huge success. Microsoft’s bundling of IE with Windows led to filings by the Justice Department alleging Microsoft’s violation of the anti-trust settlement of 1994. Microsoft and Apple entered into agreements, including a cross-licensing agreement 1997 between the companies, Microsoft’s production of Office for Mac for at least five years, IE to be used as the default browser on new Macs, and a $150 million investment by the former in the latter. Microsoft began developing its own search engine. Microsoft launched . 1998 IE surpassed as the most used browser. 1999 Office 2000 was launched.

Sources: Thocp (14 March 2013) “Microsoft Company 15 September 1975,” http://www.thocp.net/companies/microsoft/microsoft_company_part2.htm (accessed 30 March 2014); Microsoft (n.d.) “Facts About Microsoft,” http://www.microsoft.com/en-us/news/inside_ms.aspx (accessed 30 March 2014); Computer Hope (2013) “Computer History 1900’s,” http://www.computerhope.com/history/1900.htm (accessed 30 March 2014).

18

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 3B: MICROSOFT'S OFFICIAL LISTING OF KEY MILESTONES 2000-2013

Steve Ballmer named president and chief executive officer for Microsoft. 2000 Microsoft launched . Bill Gates and Steve Ballmer outlined Microsoft's .NET strategy for Web services. Microsoft launched Office XP. 2001 Microsoft launched Windows XP. Microsoft launched Xbox. Bill Gates outlined Microsoft's commitment to Trustworthy Computing. 2002 Microsoft and partners launched Tablet PC. Microsoft launched . 2003 Microsoft launched System. Microsoft announced plans to return up to $75 billion to shareholders in dividends and stock 2004 buybacks. 2005 Microsoft launched . Microsoft announced a new US$20 billion tender offer and authorizes an additional share- 2006 repurchase program of up to $20 billion over five years. Microsoft launched and the 2007 Microsoft Office System to consumers 2007 worldwide. Microsoft launched , SQL Server 2008 and Visual Studio 2008. 2008 Bill Gates transitioned from his day-to-day role at Microsoft to spend more time on his work at The Bill & Melinda Gates Foundation. Microsoft launched Bing decision engine. 2009 Microsoft launched . Microsoft launched general availability of Office 2010. Microsoft launched for Xbox 360. 2010 Microsoft launched . Microsoft announced availability of Microsoft Lync. Microsoft launched Office 365. 2011 Microsoft closed its acquisition of Skype. Microsoft acquired Yammer. Microsoft launched . Microsoft launched Visual Studio 2012. 2012 Microsoft employee giving topped US$1 billion. Microsoft introduced new entertainment experience from Xbox. Microsoft launched Windows 8 and . Microsoft unveiled Windows Phone 8. Microsoft launched Office 2013, expands Office 365. Microsoft launched Outlook.com. Microsoft unveiled Xbox One. “Microsoft One” reorganization realigned company to enable innovation at great speed, 2013 efficiency. Microsoft CEO Steve Ballmer announced plan to retire within 12 months. Microsoft announced decision to acquire Nokia’s devices and services business, license Nokia’s patents and mapping services. Microsoft launched and . Source: Microsoft (n.d.) “Facts About Microsoft,” http://www.microsoft.com/en- us/news/inside_ms.aspx (accessed 30 March 2014).

19

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 4: "PERSPECTIVE" SLIDE COMPARING MICROSOFT WITH AMAZON, GOOGLE, APPLE, ORACLE, IBM, AND SALESFORCE—EXTRACTED FROM STEVE BALLMER'S SPEECH AT MICROSOFT'S 2013 FINANCIAL ANALYST MEETING

Source: Ballmer, S. (19 September 2013) “Slide Presentation of Ballmer Speech, Microsoft Financial Analyst Meeting 2013,” Microsoft, http://view.officeapps.live.com/op/view.aspx?src=http://www.microsoft.com/investor/downloads/e vents/Ballmer_FAM_2013.pptx (accessed 30 March 2014).

20

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 5: MICROSOFT'S REVENUE AND NET INCOME BY PRODUCT DIVISION 2005-2013

(In US$ 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions) Windows Division Revenue 19,239 18,400 19,061 18,491 14,974 17,211    Operating income 9,504 11,555 12,280      

Server and Tools Revenue 20,281 18,534 16,559          Operating income 8,164 7,235 6,105      

Online Services Division Revenue 3,201 2,867 2,607        Operating loss (1281) (8125) (2657)      

Microsoft Business Division Revenue 24,724 24,111 22,607       Operating income 16,194 15,832 14,678      

Entertainment and Devices Division Revenue 10,165 9,599 8,915          Operating income 848 380 1,261      

Source: Microsoft (2005–2013) “Annual Reports,” http://www.microsoft.com/investor/AnnualReports/default.aspx (accessed 30 March 2014).

21

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 6: MICROSOFT'S HEADCOUNTS 2004-2013

 

 

 

 

 

 

 

 

 

 

Source: Microsoft (n.d.) “Facts About Microsoft,” http://www.microsoft.com/en- us/news/inside_ms.aspx (accessed 30 March 2014).

22

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 7: MICROSOFT'S REORGANIZATIONS 2000-2012

It started with a minor reshuffle at the end of 2001, the year Ballmer succeeded Gates as the CEO, when a reorganization of the company’s original equipment manufacturer (“OEM”) partner management team led to successive team head replacements in a 12-month period.49 In 2002, Microsoft announced a major reorganization that saw the then president and chief operations officer of the company stepped down “as part of a broader change in the company’s organizational structure”. In this re-organization, “the heads of Microsoft’s core businesses – Windows Client, Knowledge Worker, Server & Tools, Business Solutions, CE/Mobility, MSN, and Home & Entertainment” started reporting to Ballmer.” 50 This structure lasted for three years; in 2005 Microsoft announced “a realignment of the company into three . . . divisions, each of which will be led by its own president. . . . These changes [were] designed to enhance decision-making and speed of execution”.51

Since 2005, restructuring seemed had become the company’s annual ritual; the major reshuffle of 2005 lasted for half a year when in 2006 the company decided that it needed another restructuring, due to the major delay of Windows Vista, to allow “its Platforms & Services division to better align its Windows unit and its online MSN operations with its Live strategy.”52 The restructure had charged to tidy up the chaos epitomized by the debacle of the Vista delay. Sinofsky institutionalized software development processes through a functional structure that had the daily lives of software developers, testers, and program managers orchestrated by a tight and pre-set product development schedule. From the perspective of managing product development, this functional approach was highly effective, as illustrated by Sinofsky’s on-time delivery of Windows 7, Windows 8, and the Surface tablet.

The reshuffling of the company’s Windows division was to continue in 2007 when the company separated its server and tools business from the rest of the Windows products and services.53 Dust in the Windows division did not settle in 2008; that year the company decided to split the Windows division further into and online services. 54 In the subsequent year, Microsoft carried out its first-ever layoff and a minor reorganization to split the hardware and software team of , Microsoft’s disastrous answer to Apple’s iPod.55

In 2010, the company’s partial answer to the underperformance of the Entertainment and Devices Division amid the growing market size of consumer mobile technology was to reorganize the division by splitting it into two—the Interactive Entertainment Business and the Mobile Communications Business.56 Entering 2011, the company responded to the rising business potential and importance of online advertising by creating the Advertising and

49 Wikipedia (n.d.) “Microsoft Partner Ecosystem,” http://en.wikipedia.org/wiki/Microsoft_Partner_Ecosystem#cite_note- CRN07.2F10.2F2004-8 (accessed 30 March 2014). 50 CNN Money (3 April 2002) “Belluzzo Out as Microsoft President,” http://money.cnn.com/2002/04/03/technology/microsoft/ (accessed 30 March 2014). 51 Microsoft (20 September 2005) “Microsoft Realigns for Next Wave of Innovation and Growth,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2005/sep05/09-20execchangespr.aspx (accessed 30 March 2014). 52 Microsoft (23 March 2006) “Microsoft Realigns Platforms & Services Division for Greater Growth and Agility,” Microsoft Press Release, http://www.microsoft.com/en-us/news/press/2006/mar06/03-23psdreorgpr.aspx (accessed 30 March 2014). 53 Bishop, T. (28 February 2007) “Assessing Microsoft’s Latest Windows Reshuffling,” seattlepi.com, http://blog.seattlepi.com/microsoft/2007/02/28/assessing-microsofts-latest-windows-reshuffling/ (accessed 30 March 2014). 54 Microsoft (23 July 2008) “Microsoft Announces Reorganization of Windows and Online Services Business,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2008/jul08/07-23corpnewspr.aspx (accessed 30 March 2014). 55 Fried, I. (14 January 2009) “Microsoft Expected to Announce Layoffs,” Cnet, http://news.cnet.com/microsoft-expected-to- announce-layoffs/ (accessed 30 March 2014); Fried, I. (13 February 2009) “Microsoft Splits Zune Team in Two,” Cnet, http://news.cnet.com/8301-13860_3-10163257-56.html (accessed 30 March 2014). 56 Microsoft (25 May 2010) “Microsoft Announces Retirement and Transition Plan for Robbie Bach,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2010/may10/05-25transition.aspx (accessed 30 March 2014).

23

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

Online Business.57 This was just a prelude to the unavoidable major reshuffle at the end of 2012 due to the abrupt departure of the president of Windows and Office.58

57 Microsoft (21 April 2011) “Microsoft Announces Global Leader for Advertising & Online Business,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2011/apr11/04-21hollandpr.aspx (accessed 30 March 2014). 58 Cnet News Staff (12 November 2012) “Ballmer’s Memo Announcing Steven Sinofsky’s Departure,” Cnet, http://news.cnet.com/8301-10805_3-57548758-75/ballmers-memo-announcing-steven-sinofskys-departure/ (accessed 30 March 2014).

24

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 8: STEVE BALLMER'S "ONE MICROSOFT" MEMO

From: Steve Ballmer To: Microsoft - All Employees Date: July 11, 2013, 6 a.m. Subject: One Microsoft

Today, we are announcing a far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability in a fast changing world.

Today’s announcement will enable us to execute even better on our strategy to deliver a family of devices and services that best empower people for the activities they value most and the enterprise extensions and services that are most valuable to business.

This company has always had a big vision — to help people realize their full potential. In the earliest days, it was by putting a PC on every desk and in every home. We’ve come farther than we could have imagined. The impact we have collectively made on the world is undeniable, and I am inspired when talented new hires say they chose Microsoft because they want to change the world — that’s what we do today, and that’s what we’ll do tomorrow.

Sharpening Our Strategy

About a year ago, we embarked on a new strategy to realize our vision, opening the devices and services chapter for Microsoft. We made important strides — launching Windows 8 and Surface, moving to continuous product cycles, bringing a consistent user interface to PCs, tablets, phones and Xbox — but we have much more to do.

Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.

We will do this by leveraging our strengths. We have powered devices for many years through Windows PCs and Xbox. We have delivered high-value experiences through Office and other apps. And, we have enabled enterprise value through products like Windows Server and Exchange. The form of delivery shifts to a broader set of devices and services versus packaged software. The frontier of high-value scenarios we enable will march outward, but we have strengths and proven capabilities on which we will draw.

This memo shows you how far we have developed our thinking on our strategy for high- value activities based on devices and services delivery.

Driving Our Success

It is also clear to me and our leadership that we must do an extraordinary job to succeed in this modern world. We have delivered many great products and had much success in market, but we all want more. That means better execution from product conceptualization and innovation right through to marketing and sales. It also means operational excellence in cloud services, datacenter operations, and manufacturing and supply chain that are essential in a devices and services world.

25

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

To advance our strategy and execute more quickly, more efficiently, and with greater excellence we need to transform how we organize, how we plan and how we work.

Improving our performance has three big dimensions: focusing the whole company on a single strategy, improving our capability in all disciplines and engineering/technology areas, and working together with more collaboration and agility around our common goals.

This is a big undertaking. It touches nearly every piece of what we do and how we work. It changes our org structure, the way we collaborate, how we allocate resources, how we best empower our engineers and how we market.

One Strategy, One Microsoft

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. We will see our product line holistically, not as a set of islands. We will allocate resources and build devices and services that provide compelling, integrated experiences across the many screens in our lives, with maximum return to shareholders. All parts of the company will share and contribute to the success of core offerings, like Windows, Windows Phone, Xbox, Surface, Office 365 and our EA offer, Bing, Skype, Dynamics, Azure and our servers. All parts of the company will contribute to activating high-value experiences for our customers.

We will reshape how we interact with our customers, developers and key innovation partners, delivering a more coherent message and family of product offerings. The evangelism and business development team will drive partners across our integrated strategy and its execution. Our marketing, advertising and all our customer interaction will be designed to reflect one company with integrated approaches to our consumer and business marketplaces.

How we organize our engineering efforts will also change to reflect this strategy. We will pull together disparate engineering efforts today into a coherent set of our high-value activities. This will enable us to deliver the most capability — and be most efficient in development and operations — with the greatest coherence to all our key customers. We will plan across the company, so we can better deliver compelling integrated devices and services for the high-value experiences and core technologies around which we organize. This new planning approach will look at both the short-term deliverables and long-term initiatives needed to meet the shipment cadences of both Microsoft and third-party devices and our services.

This means we will organize the company by function: Engineering (including supply chain and datacenters), Marketing, Business Development and Evangelism, Advanced Strategy and Research, Finance, HR, Legal, and COO (including field, support, commercial operations and IT). Each discipline will help drive our overall strategy. Each discipline will also be charged with improving our core capabilities in its area. We must improve in all aspects of the business.

There will be four engineering areas: OS, Apps, Cloud, and Devices. We will keep Dynamics separate as it continues to need special focus and represents significant opportunity. We will consolidate our technologies coherently into

26

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

these groups pulling together some things that have been spread out in our current BG structure like cloud infrastructure, operating systems, mail, and identity, to name a few. Some of these changes will involve putting things together and others will involve repartitioning the work, but in all instances we will be more coherent for our users and developers. We have resolved many details of this org, but we still will have more work to do. Undoubtedly, as we involve more people there will be new issues and changes to our current thinking as well. Completing this process will take through the end of the calendar year as we figure things out and as we keep existing teams focused on current deliverables like Windows 8.1, Xbox One, Windows Phone, etc.

To improve engineering pace and quality, we will increase focus on our engineering systems, processes, and tools to improve the productivity of every engineer and to facilitate engineering collaboration and contribution across the company. Our engineering culture and new structure will enable more cross- group contribution, while maintaining confidentiality of some projects as needed. We will improve the approach we use to get MSR involved in product development, building on and enhancing our significant strengths there.

Organizing for Speed and Strategic Alignment

Specifically, our teams and their leaders will be these:

 Operating Systems Engineering Group. will lead this group, and it will span all our OS work for console, to mobile device, to PC, to back-end systems. The core cloud services for the operating system will be in this group.

 Devices and Studios Engineering Group. Julie Larson-Green will lead this group and will have all hardware development and supply chain from the smallest to the largest devices we build. Julie will also take responsibility for our studios experiences including all games, music, video and other entertainment.

 Applications and Services Engineering Group. Qi Lu will lead broad applications and services core technologies in productivity, communication, search and other information categories.

 Cloud and Enterprise Engineering Group. Satya Nadella will lead development of our back-end technologies like datacenter, database and our specific technologies for enterprise IT scenarios and development tools. He will lead datacenter development, construction and operation.

 Dynamics. Kirill Tatarinov will continue to run Dynamics as is, but his product leaders will dotted line report to Qi Lu, his marketing leader will dotted line report to Tami Reller and his sales leader will dotted line report to the COO group.

 Advanced Strategy and Research Group. Eric Rudder will lead Research, Trustworthy Computing, teams focused on the intersection of technology and policy, and will drive our cross-company looks at key new technology trends.

27

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

 Marketing Group. Tami Reller will lead all marketing with the field relationship as is today. will take a broad view of marketing strategy and will lead with Tami the newly centralized advertising and media functions.

 COO. Kevin Turner will continue leading our worldwide sales, field marketing, services, support, and stores as well as IT, licensing and commercial operations.

 Business Development and Evangelism Group. will focus on key partnerships especially our innovation partners (OEMs, silicon vendors, key developers, Yahoo, Nokia, etc.) and our broad work on evangelism and developer outreach. DPE, Corporate Strategy and the business development efforts formerly in the BGs will become part of this new group. OEM will remain in SMSG with Kevin Turner with a dotted line to Tony who will work closely with Nick Parker on key OEM relationships.

 Finance Group. will centralize all product group finance organizations. SMSG finance, which is geographically diffuse, will report to Kevin Turner with a dotted line to Amy.

 Legal and Corporate Affairs Group. Brad Smith will continue as General Counsel with responsibility for the company's legal and corporate affairs and will map his team to the new organization.

 HR Group. will lead Human Resources and map her team to the new organization.

As part of these changes, Kurt DelBene will be retiring from Microsoft. Kurt has been a huge part of our success in evolving Office to be a great cloud service, and is a key member of my leadership team. I can’t express enough gratitude for the work he’s done for the company, and I will truly miss him. Kurt is a truly amazing leader and a special person. His contributions to Microsoft over 20+ years can inspire us all.

Craig Mundie will be stepping off the SLT to devote 100% of his time to a special project for me through the end of this calendar year. Beginning in 2014, Craig will continue as a consultant through his previously agreed upon departure date at the end of calendar 2014.

Also at this time, Rick Rashid will step away from running and move into a new role driving core OS innovation in our operating systems group. Rick created MSR, the most amazing research institution in the world. We owe him so much for that. He has a great team to assume the mantle, and it is exciting to have Rick return to his roots in OS to help propel us forward.

How We Work

The final piece of the puzzle is how we work together and what characteristics this new Microsoft must embody. There is a process element and a culture element to discuss.

28

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

Process wise, each major initiative of the company (product or high-value scenario) will have a team that spans groups to ensure we succeed against our goals. Our strategy will drive what initiatives we agree and commit to at my staff meetings. Most disciplines and product groups will have a core that delivers key technology or services and then a piece that lines up with the initiatives. Each major initiative will have a champion who will be a direct report to me or one of my direct reports. The champion will organize to drive a cross-company team for success, but my whole staff will have commitment to the initiative’s success. We will also have outgrowths on those major initiatives that may involve only a single product group. Certainly, succeeding with mobile devices, Windows, Office 365 and Azure will be foundational. Xbox and Bing will also be key future contributors to financial success. Our focus on high-value activities — serious fun, meetings, tasks, research, information assurance and IT/Dev workloads — also will get top-level championship.

Culturally, our core values don’t change, but how we express them and act day to day must evolve so we work together to win. The keys are the following:

Nimble

In a world of continuous services, the timeframe for product releases, customer interaction and competitive response is dramatically shorter. As a company, we need to make the right decisions, and make them more quickly, balancing all the customer and business imperatives. Each employee must be able to solve problems more quickly and with more real-time data than in the past.

Communicative

In the new, rapid-turn world, we need to communicate in ways that don’t just exchange information but drive agility, action, ownership and accountability.

Collaborative

Collaborative doesn’t just mean “easy to get along with.” Collaboration means the ability to coordinate effectively, within and among teams, to get results, build better products faster, and drive customer and shareholder value.

Decisive

As a global company with literally billions of diverse customers in an accelerating business environment, we must have a clear strategic direction but also empower employees closest to the customer to make decisions in service of the larger mission. This is tricky in a big company, but it is the key to higher levels of productivity, growth and customer satisfaction.

Motivated

In our industry, every day brings more challenges and more opportunities than the day before. But we have a unique chance to make the lives of billions of people better in fundamental ways. This should inspire all of us — those who love making products and services, those who love engaging with customers, and those who love planning and running our company in the most effective way possible. We want people who get up each morning excited to make Microsoft better — that’s how we come closer to fulfilling the potential of all people around the globe.

29

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

Our leadership team has discussed these cultural aspects a lot and is committed. In my own staff meetings, we are modeling these new characteristics yet also find ourselves occasionally slipping back. One strategy, united together, with great communication, decisiveness and positive energy is the only way to fly.

Seizing Our Unique Opportunity

Together, we have created great products and great success, but we all want more. That means a strategy to deliver a family of devices and services that best enable people for the activities they value most and the enterprise extensions and services that are most valuable to business. A new structure to bring these to market faster. Stronger centralized services so we can be more efficient and effective. Priority focus areas, short and long term. New characteristics of how we work together. In other words, better execution and innovation through strategy and goal and discipline and engineering coherence. One Microsoft all the time.

Across Microsoft, we are facing incredible new opportunities. As devices become further integrated into everyday life, we will have to create new and extraordinary experiences for our customers on these devices. We are going to focus on completely reinventing experiences like creating or viewing a creative document and what it means to communicate socially at home or in meetings at work. We are going to immerse people in deep entertainment experiences that let them have serious fun in ways so intense and delightful that they will blur the line between reality and fantasy. And as we develop these new experiences, we will also support our developers with the simplest ways to develop apps or cloud services and integrate with our products. We will help businesses that find themselves in a new world of ever-mounting information to manage that information through greater enterprise information assurance. We will make these high-value activities priorities in our strategy.

Lots of change. But in all of this, many key things remains the same. Our incredible people, our spirit, our commitment, our belief in the transformative power of technology — our Microsoft technology — to make the world a better place for billions of people and millions of businesses around the world. It’s why I come to work inspired every day. It’s why we’ve evolved before, and why we’re evolving now. Because we’re not done.

Let’s go.

Steve

Source: Ballmer, S. (11 July 2013) “One Microsoft: Company Realigns to Enable Innovation at Greater Speed, Efficiency,” Microsoft press release, http://www.microsoft.com/en- us/news/press/2013/jul13/07-11onemicrosoft.aspx (accessed 30 March 2014).

30

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 9: SATYA NADELLA'S E-MAIL TO EMPLOYEES ON HIS FIRST DAY AS CEO

From: Satya Nadella To: All Employees Date: Feb. 4, 2014 Subject: RE: Satya Nadella – Microsoft’s New CEO

Today is a very humbling day for me. It reminds me of my very first day at Microsoft, 22 years ago. Like you, I had a choice about where to come to work. I came here because I believed Microsoft was the best company in the world. I saw then how clearly we empower people to do magical things with our creations and ultimately make the world a better place. I knew there was no better company to join if I wanted to make a difference. This is the very same inspiration that continues to drive me today. It is an incredible for me to lead and serve this great company of ours. Steve and Bill have taken it from an idea to one of the greatest and most universally admired companies in the world. I’ve been fortunate to work closely with both Bill and Steve in my different roles at Microsoft, and as I step in as CEO, I’ve asked Bill to devote additional time to the company, focused on technology and products. I’m also looking forward to working with John Thompson as our new Chairman of the Board. While we have seen great success, we are hungry to do more. Our industry does not respect tradition — it only respects innovation. This is a critical time for the industry and for Microsoft. Make no mistake, we are headed for greater places — as technology evolves and we evolve with and ahead of it. Our job is to ensure that Microsoft thrives in a mobile and cloud-first world. As we start a new phase of our journey together, I wanted to share some background on myself and what inspires and motivates me. Who am I? I am 46. I’ve been married for 22 years and we have 3 kids. And like anyone else, a lot of what I do and how I think has been shaped by my family and my overall life experiences. Many who know me say I am also defined by my curiosity and thirst for learning. I buy more books than I can finish. I sign up for more online courses than I can complete. I fundamentally believe that if you are not learning new things, you stop doing great and useful things. So family, curiosity and hunger for knowledge all define me. Why am I here? I am here for the same reason I think most people join Microsoft — to change the world through technology that empowers people to do amazing things. I know it can sound hyperbolic — and yet it’s true. We have done it, we’re doing it today, and we are the team that will do it again. I believe over the next decade computing will become even more ubiquitous and intelligence will become ambient. The coevolution of software and new hardware form factors will intermediate and digitize — many of the things we do and experience in business, life and our world. This will be made possible by an ever-growing network of connected devices, incredible computing capacity from the cloud, insights from big data, and intelligence from machine learning. This is a software-powered world.

31

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

It will better connect us to our friends and families and help us see, express, and share our world in ways never before possible. It will enable businesses to engage customers in more meaningful ways. I am here because we have unparalleled capability to make an impact. Why are we here? In our early history, our mission was about the PC on every desk and home, a goal we have mostly achieved in the developed world. Today we’re focused on a broader range of devices. While the deal is not yet complete, we will welcome to our family Nokia devices and services and the new mobile capabilities they bring us. As we look forward, we must zero in on what Microsoft can uniquely contribute to the world. The opportunity ahead will require us to reimagine a lot of what we have done in the past for a mobile and cloud-first world, and do new things. We are the only ones who can harness the power of software and deliver it through devices and services that truly empower every individual and every organization. We are the only company with history and continued focus in building platforms and ecosystems that create broad opportunity. Qi Lu captured it well in a recent meeting when he said that Microsoft uniquely empowers people to "do more." This doesn’t mean that we need to do more things, but that the work we do empowers the world to do more of what they care about — get stuff done, have fun, communicate and accomplish great things. This is the core of who we are, and driving this core value in all that we do — be it the cloud or device experiences — is why we are here. What do we do next? To paraphrase a quote from Oscar Wilde — we need to believe in the impossible and remove the improbable. This starts with clarity of purpose and sense of mission that will lead us to imagine the impossible and deliver it. We need to prioritize innovation that is centered on our core value of empowering users and organizations to “do more.” We have picked a set of high-value activities as part of our One Microsoft strategy. And with every service and device launch going forward we need to bring more innovation to bear around these scenarios. Next, every one of us needs to do our best work, lead and help drive cultural change. We sometimes underestimate what we each can do to make things happen and overestimate what others need to do to move us forward. We must change this. Finally, I truly believe that each of us must find meaning in our work. The best work happens when you know that it's not just work, but something that will improve other people's lives. This is the opportunity that drives each of us at this company. Many companies aspire to change the world. But very few have all the elements required: talent, resources, and perseverance. Microsoft has proven that it has all three in abundance. And as the new CEO, I can’t ask for a better foundation. Let’s build on this foundation together. Satya Source: Nadella, S. (4 February 2014) “Satya Nadella Email to Employees on First Day as CEO,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2014/feb14/02-04mail2.aspx (accessed 30 March 2014).

32

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

EXHIBIT 10: SATYA NADELLA ANNOUNCES CHANGES TO MICROSOFT'S SENIOR LEADERSHIP TEAM

From: Satya Nadella To: Microsoft - All Employees Subject: Leadership Update

In the past month, I’ve had the opportunity to talk with many of you – in person, on Yammer, and in groups in Redmond as well as in our Boston and Northern California offices. (Thank you for all the questions and please keep the input coming!) I’ve also been able to get on the road meeting with customers and investors, which has been really helpful as well.

One of my consistent themes has been a point I made in my original mail – we all need to do our best work, have broad impact and find real meaning in the work we do. Coming together as teams fuels this on a day-to-day basis. And having the Senior Leadership Team (SLT) set both pace and example means a lot to me.

I have discussed this point in various forms with the SLT and have asked for their “all in” commitment as we embark on the next chapter for the company. We need to drive clarity, alignment and intensity across all our work. With that as a backdrop, I want to share a set of changes to the leadership team:

Tony Bates has decided this is the right time for him to look for his next opportunity. Tony came to the company via the Skype acquisition, where he was CEO of Skype, and did a great job of successfully landing that team and continuing to build the service in a high impact way. He also stepped up to the new opportunity of leading the Business Development and Evangelism team over the past eight months. I’ve appreciated Tony’s insights and perspective, and wish him well in his journey. I know he is just a Skype call or message away. Eric Rudder will serve as interim leader responsible for Business Development and Evangelism, while continuing in his current role.

I have decided we need a single leader running marketing for the company, and have asked Chris Capossela to take on this role as EVP and Chief Marketing Officer, reporting to me. I have talked about the premium we need to place on getting very, very focused on things that we can uniquely do. How we articulate our value, how we market our message, how we deliver that value to customers through our advertising and other channels, all have to tie into an overarching strategy. Chris brings a wealth of experience to this need, serving in senior leadership roles across the marketing function for many years. He is a strong organizational leader, and the work he has done with retailers, operators and OEMs on a global basis gives him real visibility and insight into how consumers are buying and using our products. He has been at the center of our devices and services transformation in SMSG as the worldwide leader of the Consumer Channels Group (CCG), starting with the formation and building of CCG, to overseeing the launch of numerous consumer products from Windows 8/8.1, Surface and Xbox One. Chris will be promoted to EVP and join the SLT as a part of his new role and will remain as acting lead for CCG until his replacement is named.

This change in marketing structure provides an opportunity for Mark Penn to play a new leadership role at the company as EVP, Chief Strategy Officer. Mark brings a blend of data analysis and creativity that has led to new ways of working and strong market outcomes such as the “Honestly” campaign and the Super Bowl ad, both of which were widely cited as examples of high impact advertising across the industry. His focus on using data to quickly evaluate and evolve our campaigns has driven new insights and understanding. Mark and his team also will continue to provide input in the area of competitive research and analysis. I am

33

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.

14/541C Microsoft: New Wine in an Old Bottle?

looking forward to applying Mark’s unique skill set across a broader set of challenges facing the company, from new product ideas to helping shape the overall areas of strategic investment. He will be a member of and an advisor to the SLT and will continue to report to me.

Tami Reller agrees with the go-forward approach of a single marketing leader and will support Chris through his transition into his new role. She will then take time off and pursue other interests outside the company. Tami’s contributions to Microsoft are significant; she’s held multiple CFO jobs across the company, for Microsoft Dynamics, the Product and Services Division and Windows. She led marketing, finance and business strategy for Windows including Surface and partner devices. Over the past eight months, she’s led the Marketing Group, bringing many distinct teams together to form a cohesive organization. I have had the good fortune of working with Tami ever since she joined Microsoft and have valued her contributions and look forward to seeing what she does next.

Lastly, I wanted to share a final thought from a book I recently finished about the University of Washington rowing team that won the Olympics in 1936 that was written by Daniel James Brown, who worked at Microsoft for over a decade. It’s a great story of how commitment, determination, and optimism among groups can create history. There is a very evocative description in the book about a team of rowers working together at the highest level – he calls it “the swing of the boat”:

“There is a thing that sometimes happens in rowing that is hard to achieve and hard to define. Many crews, even winning crews, never really find it. Others find it but can’t sustain it. It’s called ‘swing.’ It only happens when all eight oarsmen are rowing in such perfect unison that no single action by any one is out of synch with those of all the others….Poetry, that’s what a good swing looks like.”

As a company, as a leadership team, as individuals, that is our goal – to find our swing. As an SLT and across the company we are on our way.

Satya

Source: Nadella, S. (3 March 2014) “Satya Nadella Announces Changes to Senior Leadership Team,” Microsoft press release, http://www.microsoft.com/en-us/news/press/2014/mar14/03- 03email.aspx (accessed 30 March 2014).

34

This document is authorized for use only in MBA Culminating Experience by Dr. Richard Koza, CSC Dept. of Business Faculty at Chadron State College from September 2014 to March 2015.