Impact of a New Leader – A Breath of Fresh Air at Microsoft

September 5, 2014

Today Microsoft is both a tech and a Fortune 50 company. If this is true, why does it matter? Well, Fortune 50 companies are typically maturing or mature, generating large revenues and earnings but not always as proportionately large valuations. In contrast, tech companies aim for the opposite: rapid growth accompanied by proportionately larger market caps in relation to the size of their revenues.

Microsoft’s market valuation hovered for a decade at somewhere around the $220-$250bn mark, but since Satya Nadella’s start as CEO at the beginning of 2014, has jumped 40% or more to $370bn. Astonishingly, this has happened without any major new initiatives having been launched and/or borne fruit, except for the recently announced employee reductions (still being implemented). What can explain such a run-up? I argue here that the change of leadership at the top of Microsoft after 39 years with just two CEOs, Bill Gates and Steve Ballmer, has, in the fresh and open persona of Satya Nadella, revitalized customer and investor expectations in a remarkable, almost mystical fashion. Of course, the honeymoon could end at any time. For sure, Nadella inherited some important challenges from Ballmer, alongside a still hugely profitable cash generating machine. And if he fails to fulfill expectations regarding, for example, growth in Microsoft’s cloud business, customers and investors could become disenchanted, and it could all end in tears. But the impact of this different personality has in and of itself exerted a massive initial impact on how the company is perceived.

I see some real substance for Microsoft to work with, to leverage the breath of fresh air that Nadella’s approach and style have infused into the company and the marketplace. Where Gates led the first “Rule the world” era in spectacular if controversial fashion, Ballmer seemed to be his trusted lieutenant, with a style focused on and limited to optimizing the performance of the existing businesses. But fourteen years of optimizing – and either moderately successful, or late or even failed initiatives in new categories – can be deadly for a growth-oriented company. Although the profits and cash have continued to roll in, Microsoft has missed every new wave, from ad-enabled search to cloud, to mobile, to analytics, to big data, and to social networking. Much of the damage caused by the lost decade could be recovered in one or more of these major categories. For example, it’s not too late for Microsoft to become a leader – perhaps not a dominant one, but a leader nonetheless – in cloud infrastructure, platforms, or business productivity applications, though Amazon (AWS), Apple, Google, and Facebook have all profited mightily from Microsoft’s failure to grab the initiative. Between Power – shaping new trends and industries, establishing new leadership positions – and Performance – expanding and exploiting its existing power positions (principally Windows and Office) – Nadella’s initial statements and moves indicate a return to focusing on Power. This is in stark contrast to Ballmer’s style. Despite his considerable intelligence, commitment, and knowledge of the business, Ballmer seemed addicted to maximizing Performance and unable or unwilling to break down the organizational silos until it was too late in his tenure. This failure cost the company dearly in terms of time to market, despite its continuing massive annual profits and cash flow.

On top of the mega-trends mentioned above, we now see ourselves entering the era of the Internet of Things. It’s unimaginable to me that the major systems companies of the past four-plus decades – IBM, Microsoft, HP, Oracle, Cisco, possibly SAP – will forfeit their right to compete in and shape the IOT world. Of course, global “Things” companies such as GE, Siemens, ABB, and the major auto companies are investing heavily in transforming their products and services into software-centric solutions for automating and analyzing data from meters, jet engines, machines, automobiles and trucks, trains, imaging equipment, household appliances, thermostats, you name it. Hence Google’s recent acquisition of Nest, the home thermostat developer. Speaking of whom, the foremost internet player in machine-generated data today is Google with its considerable investment in organizing and analyzing the world’s information in search, mapping and navigation, consumer and business behavioral data, data center management. In a nutshell, there’s a world of opportunities for Microsoft but also some very stiff opposition, many of whom have strong early leads over company. Nonetheless, it’s very good to see that the company finally shows signs of focusing meaningfully outside its Windows and Office fiefdoms, into these new areas of opportunity.

Back to Nadella’s challenges and his initial impact. His task in the end is to transform Microsoft from a value stock paying good dividends into a growth business once again. Otherwise, the company will probably remain very rich for some time to come, but remain relatively irrelevant as far as shaping how the world benefits from information technology. Nadella has said that he wants the company that made its name as the personal productivity provider to become the “Do More” company, as in helping every customer to get more done in their jobs and personal lives.

What’s really impressive about Nadella is how quickly and at the same time unassumingly he has changed the tone inside Microsoft and between the company and the marketplace. This indicates that he knows full well that he is – and needs to be – a different person and leader from Gates or Ballmer. It helps greatly that he actually does have a quite different personality, and especially that he is plainly humble, quiet, thoughtful, and considerate, and sees himself as serving the company and its people rather than the other way around. Although quite common in other industries, in tech we seem to pay more attention to the flashy, noisy, provocative types (whom we all recognize but will remain nameless here) than to the quietly confident, self-aware, though confident-in-their-abilities leaders.

Here’s my summary of where I see Nadella, mapped against six criteria that I’ve grown to see as critical in successful CEOs. Just a brief note on my use of the term “CEO”: I think it is applicable in the literal sense, when describing characteristics required of actual chief executive officers of companies or other organizations, as well as in the equally meaningful conceptual sense, when applied to each of us being CEOs of our careers or our lives, and also of course for functional leaders, general managers, and other roles.

  1. Transmit certainty in uncertain environments – this is not about the CEO being all-knowing, but about their determination always to do the right thing independently of what the easy option is, to open up the organization to learning, to partnering collaboratively (something that Microsoft has always struggled with), to understand that it takes an ecosystem to succeed in nascent and emerging businesses, and that bullying is not the best option because eventually partners and customers will get their revenge somehow. To my mind, Nadella is doing all of these things, in a quietly assertive and very smart way.

  2. Demand complete commitment to excellence, especially in serving customers – everything in a healthy business flows from every employee knowing who our customers are, and placing their welfare above the welfare of the company. Furthermore, a healthy obsession for every employee, which the CEO must continually nurture, is to serve the company’s target customer differently and better than the competition can or will do. Nadella appears intent on re-orienting the company to connect more effectively with customers, and partners, as exhibited in his decisions to, for example, open up Office 365 to non-Windows platforms – thus enabling iOS and Android laptop and mobile users to do their Office-based work on whatever hardware platform they prefer.

  3. Serve the interests of the business, as opposed to serving their own and the board’s (or the organization’s) parochial interests – unfortunately, while not necessarily anywhere close to a majority, there are many self-serving executives and complaisant boards in tech. As stated above, Nadella transmits through his pores that he has a real concern for serving the business and the company’s employees.

  4. Empower every individual in the company to do their job – and make it your business to remove obstacles preventing them from reaching their goals. Nadella has expressed in early press interviews his determination to “ruthlessly remove any obstacle to us innovating successfully” as one of his top three objectives. This, in a company that had become a graveyard for new business initiatives, due largely to the ferocious in-fighting between functional and business groups that thrived for so long under Gates and especially under Ballmer.

  5. Balance EQ with IQ – with an emphasis on the former. In the tech industry, engineering prowess and other forms of technical or professional brilliance are often prized above the ability to listen, empathize, think, and consider thoughtfully how to bring out the best in your people. Nadella has been vocal about his preference for the latter, and his persona conveys this well.

  6. Know what they know and what they don’t know – there are too many “smartest guys in the room” in CEO jobs. You can tell them by their inability to listen, and even by their tendency to get their way with what can only be termed intellectual bullying. Eventually, colleagues and employees give up presenting their views and just pretend to go along with what the “big boss” thinks and wants. Nadella’s ego appears to be well in check, in contrast with his two predecessors, and his communication style clearly leaves people around him at ease to express their ideas freely.

To my mind, a CEO or any other leader who lives these values and behaviors will be successful more often than not, because they’ll tend to have their people, their customers, and their partners rooting for them. I believe Nadella has made an excellent start according to these criteria which along with the limited number of actual moves he has made in the past six months or so explain the steady and dramatic jump in the stock price. One clear strategic shift has been his declaration to get the company to become cloud and mobile driven. In cloud, progress seems to be accelerating, whereas in mobile the company seems still to be struggling in its Nokia Lumia, Windows Phone and Surface initiatives.

John Hamm, expert in CEO leadership and author of Unusually Excellent, defines three main leadership priorities for CEOs: first, generate trust by being credible; second, generate respect by being competent; and third, generate a positive legacy by being determined and self-aware about the impact they can have on the careers and lives of those whom they lead. To me, the way Nadella has talked and acted thus far reflects a clear preoccupation to revitalize the organization along these vectors. Fortunately, as I have often stated, customers and consumers are notably tolerant of the mistakes made by tech vendors that are important to them, and very ready to give them a second and, if necessary, a third chance at success.

All of this said, we’ll have to wait and see how things pan out over time.