I have been very critical of Microsoft’s decision to organize functionally:

• Why Microsoft’s Reorganization is a Bad Idea argued that Microsoft was much better suited to a divisional structure
• The Uncanny Valley of Functional Organizations argued that Microsoft was setting itself up for failure pursuing a functional structure

The larger question remains, though: why did Microsoft reorganize, and what should they have done instead?

“Nothing is more important at Microsoft than Windows.”
— Steve Ballmer, CES 2012 Keynote

While last week I praised Microsoft’s diversification, from a profit-standpoint Microsoft is a three-product company: Windows, Office, and Server, and the latter two are direct beneficiaries of Windows dominance. More Windows machines mean more opportunities to sell Office. More Windows machines with Office mean more opportunities to sell Windows Server and its associated products like Exchange and SQL Server. Steve Ballmer is no dummy: he built Microsoft’s sales side, and knows exactly how critical a solid Windows base is to every other profit-generating product Microsoft sells.

Unfortunately, Windows is foundering. Division profits fell by 54% last quarter (8% if you exclude the $900 million Surface charge), and PC shipments are falling off a cliff. If you believe, as Ballmer likely does, that this imperils all of Microsoft, then there is a certain logic to putting all of the company’s resources to work to prop up Windows. From the One Microsoft memo:

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…

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.

The crux of the problem is in that second paragraph: no one is asking Microsoft to design its “customer interaction” to “reflect one company.” Customers are asking Microsoft to help them solve their problems and get their jobs done, not to make them Microsoft-only customers.

The solipsism is remarkable.

The truth is that Microsoft is wrapping itself around an axle of its own creation. The solution to the secular collapse of the PC market is not to seek to prop up Windows and force an integrated solution that no one is asking for; rather, the goal should be the exact opposite. Maximum effort should be focused on making Office, Server, and all the other products less subservient to Windows and more in line with consumer needs and the reality of computing in 2013.

The trouble for Microsoft in the devices layer is that they only know horizontal domination. When there was nothing but PC’s, the insistence on one experience no matter the hardware worked perfectly. However, a Dell and an HP are much more similar than a tablet and a web page, for example, each of which has its own input method, user expectations, and constraints. A multi-device world demands bespoke experiences, not one size fits all. Microsoft simply doesn’t seem to understand that, and the longer they seek to “horizontalize” devices the greater the write-offs will become.

However, look again at that picture: there remains a horizontal layer – services – and it’s there that Microsoft should focus its energy. For Office and Server specifically:

• Documents remain essential and ubiquitous to all of the world outside of Silicon Valley; an independent Office division should be delivering bespoke experiences on every meaningful platform. Office 365 is a great start that would be even better with a version for iPad
• A great many apps are simply front-ends for web-based services; an independent Server division should be delivering best-in-class interfaces and tools for app developers on every meaningful platform

As for Windows, let it focus on solidifying Microsoft’s hold on the enterprise (it’s here the need to fight the iPad is most acute), with a nice spillover into Home PCs and gaming, and accept the fact Windows was only ever relevant in the consumer market because nobody got fired for buying IBM.

“Devices and services” is only half right; unfortunately Ballmer picked the wrong half.