Bear with me, I know my premise is ridiculous.
Imagine Steve Ballmer was right now the CEO of Apple, with the same set of products and opportunities. Suspend disbelief about cultural clashes, or organizational structure. Presume Ballmer could set the strategy, and that Apple would execute it accordingly.
In this scenario Apple would make more money in the next five years than they will under Tim Cook.
At this point, I’ve fully backed off of last week’s post and believe the iPhone 5C will cost (at least) $450 (I’ll explain why soon); Ballmer, however, would push out the low cost version I advocated and attack non-subsidized markets. Ballmer would do more than catch enterprise accounts that fall in his lap; he would aggressively court CIOs and make changes to the iPhone to accommodate them. Ballmer would expand the iPad range to multiple screen sizes and price points, and would push for every school district in the world to standardize on them, far more aggressively than Apple is today. Ballmer would leverage iTunes, and all those credit cards, by making a play for payments and identity. As for computers, well, the XMac might even become a reality.
There would, of course, be handsome incentives to make this happen. Apple’s sales team would be hugely expanded, and their pay directly connected to the above becoming a reality. The product teams would be pedal to the metal filling in all the holes in Apple’s current lineup, and marketing would be aggressively targeting everyone from CIOs to developing nations. Apple would give both China Mobile and NTT Docomo whatever concessions necessary to gain access to their customers, and Apple’s carrier base would double, perhaps even triple to Samsung’s level.
The revenue and profits would flow.
And yet, under Ballmer, everyone at Apple would be working so hard, and be making so much money, both for themselves and for Apple’s shareholders, that they would ensure that Apple never again reinvents consumer computing.
See, if Steve Ballmer were the CEO, Apple would make more money, but they would slowly but surely become irrelevant. Just like Microsoft.
The more thoughtful summaries of Ballmer’s time at Microsoft suggest his tenure was a mixed bag. Profits have tripled, but the share price has stagnated. Mobile and tablets have been missed, but Windows and Office remain strong, and Server has added a third leg to the stool. In short, Microsoft has maximized the revenues and profits from its existing businesses, but failed to create any new ones of significance.1
This though, is not a “mixed bag.” Ballmer’s successes and failures are fully intertwined.
Ballmer is a master at pushing a successful product to a dominant position and extracting the profits that follow. He demonstrated this not just in his time as CEO, but in his previous role as the head of sales and marketing. Microsoft’s truly remarkable run of ever-rising revenue and profits is the direct responsibility of Ballmer. But, this run of ever-rising revenue and profits, and the means by which it was generated, were also the same reason opportunities have been missed.
It is my contention that a strategy that seeks to maximize revenue and profits – i.e. the sort of strategy at which Ballmer excelled – necessarily precludes the creation of significant new products.
Part of this is certainly due to the innovator’s dilemma, the idea that a successful new product can’t be pursued because of its impact on margins, yet can’t be dismissed because of its impact on revenue. But I think the issues presented by a strategy predicated on profit maximization run even deeper.
Said strategy – both its upsides and downsides – is about much more than CEO decisions. It is necessarily part and parcel of a company’s culture and organizational structure. Microsoft has been structured and incentivized around the goal of maximizing revenue and profits, and while Ballmer may be exiting stage left, the Microsoft he built remains (Bizarrely, Microsoft recently re-orged away from a divisional structure incentivized by profit-and-loss; however, as I’ve argued, a reorg doesn’t change the culture).
Mary Jo Foley had a chance to ask Ballmer what he was most proud of (emphasis mine):
I’m proud of being I would say a significant part even of the birth of intelligent personal computing, the notion that people use computing technologies, whether that’s phones, PCs. I mean, we kind of birthed that over the course of the ’80s and the ’90s, and that’s had such an unbelievable impact on people’s lives. I would say a billion plus people and now more with phones, even if they’re not all our phones, I’m very proud of what we’ve accomplished there.
If I had to sort of couple it, I’m very proud that we were able to make this incredible impact on the planet and at the same time do a good job for our shareholders.
There it is, unprompted. In addition to putting a computer on every desk, Steve Ballmer is most proud of “do[ing] a good job for [Microsoft's] shareholders.” And, by definition, shareholders care about dollars and cents.
And so, dollars and cents were a central focus for Ballmer, and for Microsoft. Employees were incentivized by dollars and cents in the form of bonuses and stock grants. Bonuses and stock grants were tied to a stack ranking system, that devolved your performance to a number. What was measurable mattered, particularly if it was measured in money.
The result is inevitable: Microsoft is a company filled with people motivated by measurables like salary, bonus, and job level. Anyone who isn’t would necessarily leave.2 Unsurprisingly, said people make choices based on measurables, whether those be consumer preferences, focus group answers, or telemetrics. The human mind is flexible, but only to a point.
In other words, over time, as you incentivize your workforce through measurables, you eventually have a workforce that only thinks in measurables. You ultimately have a workforce of mini-Ballmers.
Yet, if Apple’s success has proven anything, it’s that measurables aren’t the half of it. Things like design can’t be measured, nor can user experience. How do you price delight, or discount annoyance? How much is an Apple genius worth?
In the consumer market, it’s the immeasurables that matter. It’s the ability to surprise and delight, and create evangelists. It’s about creating something that developers demand access to, and that consumers implicity trust. The consumer market is about everything you can’t measure, everything Microsoft’s legion of mini-Ballmer’s can’t see and will never appreciate.
It turns out that all of Ballmer’s good qualities, especially when it came to maximizing revenue and profits, were also his worst qualities, especially as the consumer market came to dominate computing. And, to Microsoft’s short-term benefit but long-term detriment, the incentives Microsoft gave its employees to achieve Ballmer’s aims choked out the sensitivity to truly understand what’s next.
A friend ascribed Ballmer’s failings not to lack of vision, but rather to poor R&D (which, given Microsoft’s earlier entry into phones and tablets, seems reasonable):
The bit that is hard to understand is why R&D efficiency is so variable between companies. Is that about the CEO or the rank and file troops? If so what drives it? Bezos and Jobs have very different styles but amazing R&D productivity. Chambers/Mark Hurd have very different styles but equally poor R&D productivity. What is really happening here? What is driving this?
I think the driver is motivation.
Last summer Jony Ive said:
Our goal isn’t to make money. Our goal absolutely at Apple is not to make money. This may sound a little flippant, but it’s the truth…Our goal and what gets us excited is to try to make great products. We trust that if we are successful people will like them, and if we are operationally competent we will make revenue, but we are very clear about our goal.
There was scoffing a plenty, but I actually think it’s true; Apple employees are (for the most part) intrinsically motivated. And Apple, relative to Microsoft, is infinitely more relevant to the future of computing.
Amazon, the other company my friend mentioned in a positive light, is similarly up-front about its motivation. In this year’s letter to Amazon’s shareholders, Jeff Bezos wrote:
As regular readers of this letter will know, our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors…
One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader.
Amazon famously makes minimal profits; Microsoft made more money last year than Amazon has made ever, yet Amazon too is far more relevant in the consumer market today than is Microsoft.
There is a tradeoff when it comes to strategic goals, and relatedly, motivating a workforce. Using dollars and cents makes the most dollars and cents,3 but it breeds a certain culture and way of thinking that is out-of-touch with what matters to consumers and with what’s next.
One of the single best pieces I’ve read in the last month was by John Kay entitled Sometimes the best that a company can hope for is death:
Humans have always found it hard to cope with the idea that every individual has a lifespan even as life itself goes on. The idea of a natural life cycle for a business, or industrial centre, is even more difficult to accept. So we ask: what can be done to revive Detroit? Can BlackBerry find a new role? [...]
The marketing guru Theodore Levitt elaborated this theme in an article half a century ago. Levitt denounced marketing myopia. There was always, he suggested, a future for a company; the key was to look for a creative answer to the question: “What business are we in?” [...] Levitt did not recognise that competitive advantage, rather than a fertile imagination, is the key to success.
Kay’s analysis absolutely applies to any company that has optimized itself for its shareholders; extracting the value of a competitive advantage is profitable, until it isn’t. And then, creative destruction dictates the company, having shined so brightly, contracts and ultimately burns out.
Still, it’s not clear that not pursuing such a strategy is better. Amazon is a particularly relevant example: from a profit and dividend perspective, one would have been better off investing in Microsoft, the last decade notwithstanding. If one were to truly embrace capitalism and the idea of shareholder value, isn’t Microsoft the better company?
Yet, it’s hard to imagine living without Amazon, or Apple. It’s far too easy to imagine living without Microsoft.
Ballmer did exactly what our capitalist system dictate he do: he maximized profits to the benefit of Microsoft’s shareholders. The implications of suggesting he was a failure are far more profound than most of his many critics likely realize.
- Xbox is the exception, of course. That said, Xbox is net negative – by a wide margin – over its lifetime, and in a niche market to boot. I’m not a fan from a business perspective ↩
- Relevant ↩
- Yes, Apple makes more profit than Microsoft, but that’s because the mobile market is so much bigger than the PC market. As I noted, I think it’s probable that a Microsoft-like approach with Apple’s product line would result in even more profits than Apple is making currently in the short-term ↩