Microsoft vs. Apple: Vertical Integration

Source: CIO.com

In a matter of days, we saw two contrasting announcements by tech giants Apple and Microsoft.  First, Apple announces that it will be making its ARM-based processors for Mac laptops and desktop computers.   The firm will no longer be using Intel chips.   Second, Microsoft announces it will close all 83 of its retail stores.  What's happening here? Apple is deepening its vertical integration, while Microsoft is backing off.  

Both strategies make sense.  Vertical integration has always made more sense for Apple than for Microsoft.  Apple has used vertical integration, backward and forward, to control product quality, enhance brand experience and product differentiation, and stay close to its customers.  Microsoft has operated in the portion of the industry that has relied far less on vertical integration.  Microsoft made the operating system, Intel made the microprocessors, Dell, Lenovo, HP and others assembled the PCs, and a variety of players helped distribute and retail the computers.   

What, then, was Microsoft doing in the retail store business?  I'm not sure.  It never made as much sense as it did for Apple to operate stores.   The genius bar, product demonstrations, computer classes, and other activities that occur within an Apple store are all part of the rationale for vertical integration at the company.   These activities deepen Apple's relationship with its customers, enable it to collect valuable information directly from its most ardent fans, help the firm create a powerful brand experience, and provide an opportunity to enhance product differentiation.   Microsoft doesn't sell the same type of products, nor does it have the same type of image.  Moreover, its customers are different.  Microsoft has incredibly satisfied, loyal customers; Apple has fans.  Remember the word fan comes from the word fanatics.  Apple's customer base is just different, and it fits more with a vertical integration strategy.  

Vertical integration, of course, has many drawbacks.   I often discuss these limitations and risks at length in my strategy courses.  However, in some cases, it can make a great deal of sense.  Apple may be one of those cases; Zara may be another.  Microsoft's competitive positioning doesn't appear to be as conducive to vertical integration.  

Microsoft CEO Satya Nadella on Empathy

Source: Wikipedia

In this interview with IESE Business School, Microsoft CEO Satya Nadella describes the importance of empathy as a company tries to innovate and evolve. Empathy means more than asking customers what they want, as Nadella explains. It means truly trying to understand their pain points, frustrations, and unmet needs. Empathy means digging deep to understand the latent needs that may not be articulated by your customers when you ask them questions or conduct surveys and focus groups. It means stopping yourself from assuming that you know what the custonmer wants. Nadella, interestingly, connects empathy with a growth mindset. Here's an excerpt from this terrific interview with Nadella: 

My success depends on my customers’ success. That’s the essence of business. If we’re successful, it means we’ve somehow been able to meet the needs of customers, even their unarticulated needs. But where does that inspiration for being able to be in touch with that unmet, unarticulated need come from? It comes from empathy — that deep sense of understanding the real needs out there. It’s not, “Oh, I talked to 10 customers and I’m doing exactly what they told me to do.” It’s going deeper to understand what’s behind those words.

How does one invoke empathy? You can’t just go to work and hit the empathy button every morning: “Now I’m going to be empathetic.” Your entire life has to involve constantly pushing yourself to develop a deeper sense of empathy with those around you, recognizing that that journey never ends.

At Microsoft we’ve been trying to develop what we describe as a learning culture. Stanford University psychologist Carol Dweck wrote a famous book called Mindset, which shares a simple concept. Take two schoolchildren: one has great innate capability but is a know-it-all; the other has less innate capability but is a learn-it-all. You know how the story ends: the learn-it-all does better than the know-it-all. And that applies to CEOs, to companies and to company cultures.

The goal is to adopt that growth mindset and use it to develop a deeper sense of empathy, so that you can create those products and services that meet the unmet, unarticulated needs of your customers.

Microsoft Acquires LinkedIn: Separate or Together?

Chris O'Brien has written a thought-provoking piece for Venture Beat about the Microsoft acquisition of LinkedIn.  O'Brien has a bearish outlook on the deal.    In his article, he cites many reasons why the deal may not work out, including the fact that Microsoft has had a less-than-stellar record of making major deals (Skype, Nokia, Yammer).    I don't know if I'm quite as bearish as O'Brien on the deal, but I certainly have some doubts.   What I found most interesting, though, was O'Brien's take on the issue of how Microsoft will manage LinkedIn going forward.  Here's an excerpt, in which O'Brien describes the "acquisition double-talk" taking place at Microsoft:

Acquisition double-talk, part 1: On the one hand, this deal is all about the oft-vaunted idea of “synergy” (even if that word is not used). The idea is presumably to build LinkedIn into all sorts of Microsoft products. Great! But, does this mean I’m going to get all sorts of messages suddenly asking if I want to share my Word doc through LinkedIn or have some LinkedIn integration with an Excel spreadsheet…or…what? There’s a lot of talk today about how this is going to broaden Microsoft’s reach into all sorts of new channels for selling stuff like cloud services. But does one of the largest tech companies in the world really need to spend $26 billion to reach new customers?

Acquisition double talk, part 2: Structurally, LinkedIn is going to remain independent. Per the Nadella memo:

“LinkedIn will retain its distinct brand and independence, as well as their culture which is very much aligned with ours. Jeff (Weiner) will continue to be CEO of LinkedIn, he’ll report to me and join our senior leadership team. In essence, what I’ve asked Jeff to do is manage LinkedIn with key performance metrics that accrue to our overall success. He’ll decide from there what makes sense to integrate and what does not.”

So, we will all work together. But we will work together while remaining separate. We call it: Separate Togetherness. (I’m going to copyright that and write a book on it one day.)

O'Brien raises an interesting issue that arises in many acquisitions.   On the one hand, the acquirer wishes to realize substantial synergies.  After all, those synergies are the very reason why the acquirer pays a large premium to purchase the target firm.  On the other hand, the acquirer does not want to spoil all that is good about the target firm.  Thus, they promise to provide the target firm a great deal of autonomy moving forward.  They promise to keep it separate.   You can see the conundrum here.  Keeping it separate means probably forgoing key synergy opportunities.  Pressing for too many synergies too quickly might alienate employees at the target firm, infringe on the innovative culture of the target, etc.   One also has to raise a broader question though:  If you are going to manage the target separately, then could you have achieved many of the collaborative benefits without actually acquiring the firm.  Could you have pursued some other organizational arrangement, such as a strategic alliance?  Could you collaborate, but without the risks and costs associated with a merger?   

Does Busywork Actually Make Us Happier?

Rachel Emma Silverman of the Wall Street Journal reported this week on a new study by University of California-Irvine's Gloria Mark and co-authors from Microsoft Research.   Mark and her colleagues tracked 32 workers at Microsoft for more than 1,500 hours.  They found that people's moods brightened when they performed busywork (i.e. rote activities), and they were less happy when they tackled challenging tasks.   The article quotes Mark:  “Focus involves a kind of stress and people aren’t generally happy when they are stressed,” says Dr. Mark. By contrast, “rote work is effortless, so you can get gratification for getting things done.”

What do I make of these findings?  I think we have to take them with a large grain of salt.  Years of research on intrinsic motivation shows that people value work in which:

• they have autonomy
• they feel that they are making a contribution to a greater goal
• they find challenging and rewarding
• there is some variety in the tasks being performed over time

What accounts for the difference in the findings?  Well, if you evaluate people in the moment, I think you get different answers.  In other words, the Microsoft study appears to examine people who are performing challenging work, and then from time to time, they perform some busywork.   Of course, the busywork may be a great relief, a nice break from their tough duties.  However, that's not the same as saying busywork is always mood brightening.  If all you did was rote work, you might not be so happy.   So, busywork can lighten the mood, but perhaps only when it comes in small doses amidst a stream of work that has the characteristics I listed above in bullet points.

Restructuring at Microsoft

Yesterday, Microsoft CEO Steve Ballmer announced a massive organizational restructuring of the company.   According to the Wall Street Journal, "Microsoft Corp.'s broad reorganization announced Thursday aims to break down internal fiefs that have slowed product development and caused friction among teams of employees... The company said it will shift from largely autonomous product groups to a more horizontal structure, under which managers who will oversee specific kinds of functions like engineering, marketing and finance."

Here are a few quick reactions:

1.  The Ballmer memo to the company consisted of more than 2,700 words.  Wow!   If you need that many words to describe what you are doing and why you are doing it.... do you really have a clear strategy?   Will employees really digest all of this material, understand it clearly, and align behind it?  First rule of thumb for leader communication:  keep it simple & concise.  The Ballmer approach falls down on this metric.

2.  No organizational structure is optimal.  Each structure has its strengths and weaknesses.  The key to high performance is driving the right culture, values, and processes in an organization.  Just moving lines and boxes around on an organizational chart won't enhance performance substantially.  Microsoft will succeed or fail based on how they redesign key processes and shift the culture and values.   Boxes and arrows won't  be the panacea.

3.  One still wonders if Microsoft should remain as an intact entity versus breaking up into several parts.  Many investors have wondered if the whole is truly worth more than the sum of the parts.  That question still remains after the Ballmer announcement.