Tuesday, November 2, 2010

Microsoft Wakes Up to Disruption

I was recently listening to Arcade Fire’s latest album, The Suburbs (great, by the way), and decided to check out some of their older work, just to refresh my cultural memory. For those who don’t know, Arcade Fire is a two-time Grammy-nominated indie rock band. On “Wake Up,” singer Win Butler belts out this lyric: “Children wake up, hold your mistake up.” It got me thinking — recent announcements from Microsoft draw strong parallels to “Wake Up.”

A couple of weeks ago, Microsoft’s Chief Software Architect, Ray Ozzie, announced that he is retiring to pursue other opportunities. Ozzie was recruited to Microsoft after the $200-million acquisition of his company, Groove, in 2005. Regarded as a visionary, Ozzie helped create the first spreadsheet, VisiCalc, and is largely responsible for Lotus Notes, as well as Microsoft Office collaboration software. (Anecdotally, Bill Gates is said to have called Groove the best deal Microsoft ever made.) In disruptive innovation circles, Ozzie is famous for writing an influential memo shortly after he arrived at Microsoft in 2005 that explained how Internet services would disrupt Microsoft’s core business. So it is ironic that only now, five years after Ozzie’s prescient memo and on the eve of his departure, Microsoft is just starting to wake up to the potential of software-as-a-service and to the widespread enterprise benefits of cloud-computing services.

These past few weeks have been busy for Microsoft. The firm sold its 240 millionth license for Windows 7, making it the fastest selling operating system in history — a huge win for its core strategy. Potentially of far more strategic significance, however, were the recent releases of Windows Phone 7, a welcome addition to the smartphone ecosystem, and an update to Microsoft’s cloud-computing services: Office 365. These are innovations with disruptive potential — the first still latent, but the second more obvious.

The disruptive potential of Phone 7 is there, if Microsoft cares to harness it: Despite generally positive reviews, by most accounts the Windows Phone 7 is not a superior consumer alternative to the iPhone, or the Android phone, for that matter. But does it really have to be? A Windows phone that seamlessly integrates office productivity features (Microsoft Office applications, especially) in a smartphone form factor is an attractive value proposition for companies. As Internet connectivity approaches ubiquity, seamless online offerings of Microsoft Office will allow employees to go from the office, to transit, to home without a loss in productivity.

In my eyes, rather than competing directly with Apple or Google, Windows Phone 7 is actually a better alternative to RIM’s BlackBerry. If I were a brand manager at Microsoft, I’d focus my marketing campaign for Windows Phone 7 on providing a superior user experience for the working professional on-the-go, not the broad consumer. Microsoft is not going to beat Apple at Apple’s game – delivering superior consumer-oriented products. Microsoft doesn’t need to, however, since Windows Phone 7 can deliver better features for doing the job of “fill my time productively” than either the iPhone or the Android. Enterprise applications are Microsoft’s forte.

Online cloud-computing services will only enhance the value proposition for Windows Phone 7. And that brings us to the significance, and the irony, of Microsoft’s third announcement on the heels of Ozzie’s departure – Office 365.

This upgrade is an enterprise version of Office 365, which now comes bundled with the full suite of Office Web apps — SharePoint, Lync Online, and Exchange. Previously, all of these services were separate offerings. Through targeted discounts Microsoft is wisely pursuing small businesses (less than 25 employees) with a price of $6 per month, per employee. These are the types of businesses that are less likely to pay the per-user license fee for the full Office suite but could grow into larger, more-sophisticated enterprises over time. Clearly, Google App’s disruptive cloud-services offering, priced at $50 per year per employee, has finally proven enough of a threat to take seriously. In other words, Microsoft did indeed “wake up” and “hold its mistake up.” But what took so long?

I suspect the answer is Windows 7.

Early this summer, Scott Anthony wrote a post on Microsoft and the Innovator’s Paradox. The Innovator’s Paradox essentially states that when you don’t need growth, you act in ways that lead to your not getting the growth you will need. Microsoft’s core businesses – Windows and Office – are still so wildly successful that the firm had difficulty widening its focus from core sustaining innovations to simultaneously embracing disruptive innovations.

Looked at in this light, the Office 365 announcement is all the more significant, and perhaps a sign that Microsoft should be given some level of credit. For incumbents, disruptive innovation is exceptionally difficult to pursue. And Microsoft is certainly one of the world’s most powerful and entrenched incumbents, perhaps the most powerful and the most entrenched. Established corporations simply cannot act as entrepreneurs and venture capitalists do. As Tom Perkins, one of the founders of Kleiner Perkins Caufield & Byers, put it in a recent interview, “If you make an investment and you fail, it won’t look good on your resume.” While that’s certainly not an accurate blanket statement (what blanket statements are?), the point is well taken. The “job” of an established incumbent, to most shortsighted shareholders, is to protect the core businesses from disruptors. The “job” of employees is, often, to take only calculated risks that propel them up the corporate ladder – unnecessary risks will cause them to lose their job.

Serial innovators, however, understand that core businesses will get disrupted and anticipate having to make fundamental business model and value proposition shifts to create new business lines. That’s what Ray Ozzie saw so clearly in 2005. It’s sad that it took Microsoft five years, and the loss of a clairvoyant thinker on disruption, to finally “wake up.”

You don’t have to be operating the most successful core business of our generation to be facing the same dynamic that frustrated Ozzie. If Microsoft’s juggernaut of a core business model is not enough to protect it from disruption, where does that leave your company?

In the grand scheme of things, arriving late to the disruptive game isn’t Microsoft’s real mistake. The mistake was not devoting a small fraction of its attention to putting in a set of systems, processes, and incentives to pursue the disruptive innovations that Ozzie spoke of back in 2005 even as it was pouring the majority of its resources into critical sustaining innovations like Windows 7.

To innovate effectively, companies need to be aware of the inherent biases in current organizational structures, products, business models, metrics, and corporate culture. Most important, companies must allocate resources to disruptive innovation in both bad times and good. Disruption isn’t going to just disappear if you have a killer product or wildly successful core business; in fact, disruption is coming faster, more often, and to more companies. To paraphrase Arcade Fire, “You’d better look out [for the disruptors] below.”

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The INNOBLOG covers all aspects of growth strategy, from innovation to organizational change, in thought-provoking and insightful posts. Innoblog is a group forum to which many Innosight team members contribute. Outside contributions are welcome too. The blog is edited by Evan I. Schwartz, who also edits Strategy & Innovation.

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