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This week the tech scene has been alive with buzz about Microsoft’s business model.

CEO Steve Ballmer has yet to make any official statements (at least at time of writing), but speculation is rife that the company are set to undergo a large-scale restructuring, in order to become, in  Ballmer’s own words, a ‘Devices and Services’ company. 

When we talk about examples of digital transformation, it’s often the assumption that we’re speaking about older, traditionally non-digital businesses attempting to come to grips with the brave new world of digital marketing and ecommerce.

Many case studies show businesses who have long relied on traditional revenue funnels and struggle with multichannel attribution, and who have yet to master social, mobile and ecommerce (or even email in some cases). 

The scope of digital transformation

Steve BallmerThe reality and scope of transformation is rather more complex.

There are a number of pressure points facing businesses, and there are many companies who are already doing sterling work in the digital space, but have yet to adopt working processes or business plans that capitalise on this fully.

Although it’s still at the speculative stage, it feels as though any restructuring that happens at Microsoft makes a clear point about the challenges facing any business that wants to make the most of digital, as both a focus for products and services, and as an enabling point for their internal culture. 

Before we go any further, a caveat; This is based on industry hearsay, so all or none of this may come to pass at Microsoft, but as mentioned, it should serve as a useful overview of the challenges facing businesses attempting organisational transformation.

When one thinks of businesses and digital transformation, Microsoft is hardly a company that leaps to the front of your mind.

Since the early 90s, Microsoft has been software for a huge percentage of home and business users. The company runs extensive digital services and has significant mobile, gaming and search products in addition to their original hardware/software proposition, so why should we consider them as an example of digital transformation?

The truth is that while Microsoft’s model is extremely complex, spread across multiple brands globally, the core proposition is remarkably linear, and has a number of weak points because of this.

At its core, Microsoft produces hardware, bundled with software. This is as true for Xbox as it is for Windows, and in many ways it has historically relied on ubiquity, as evidenced by the notorious use of “embrace, extend and extinguish" tactics in the past. 

Although profits remain in the billions, we only have to glance at the company’s financials to spot the weaknesses:

Microsoft revenue by division

While profits are healthy, they are heavily linked to new product releases. Above, there’s a definite tail-off prior to the release of Windows 8, followed by a quick jump as people pile in and purchase the latest version. Similarly, the entertainment division is linked to major Xbox releases. 

While there will always be bumps around launches, it’s worth noting that Windows 8 was seen as a relative commercial failure, and Microsoft is relying more heavily on its business division, and particularly Office, to generate revenue. 

Generally speaking, we can trace slumps in Windows usage to slowing PC sales, but putting more focus on Office means that Microsoft must place more focus on customer feedback and service support.

The modern user is increasingly unlikely to pay large sums for a one-off software product. Many will use free or subscription alternatives (or turn to the torrents), and incompatibility with Microsoft products will lead to increasingly negative brand sentiment. 

The advantages of service

All this means that switching to a primarily cloud-based subscription service makes more sense over the long-term. Cloud services are more agile, with the ability for multiple iterations to be launched quickly, and have the advantage of ‘ironing out’ the traditional revenue stream.

The decline before a new major release and the inability to innovate quickly represents a huge opportunity for competitors, so it has to be a major focus. 

Of course, in order for a subscription model to work, you need to both provide value, and focus on providing customer value. Agile deployment means that customer feedback can be acted on quickly, but only if the internal business structure is positioned to act on that feedback. 

Microsoft’s traditional business model has also produced a surprisingly traditional corporate structure, despite the ‘eating our own dog food’ internal culture. Ballmer and the board currently sit atop a pyramid, or more accurately, a series of pyramids formed by each business division: 

https://assets.econsultancy.com/images/resized/0003/3999/windows_post_image_1-blog-full.png

According to a variety of sources, restructuring would probably include more prominent roles for Don Mattrick, currently president of Interactive Entertainment, Servers and Tools President Satya Nadella, and also Skype Comms’  president Tony Bates.  

That these particular names should be mentioned is especially interesting here.

All have experience in areas that support direct community response and service support. If new roles are indeed in order, then it indicates a the beginnings of a consolidation of divisions, flattening the overall model so that business intelligence is more closely related to customer insight, while resources are more easily able to be deployed across the entire organisation: 

https://assets.econsultancy.com/images/resized/0003/4001/microsoft_structure_pic_2-blog-full.png

Internal and external opportunity

Of course, this kind of transformation is a multi-step process, but this initial step highlights a challenge many companies face when attempting to redeploy employees and restructure.

The worry for many is that a shift from a pyramid to a ‘hub and spoke’ model will remove clear career progression, while some staff may feel that they are facing a form of demotion, or at least a curtailing of their career ambitions.

In fact, these moves enable staff to broaden their experience and provide greater value to the business, while connecting them more efficiently with customers. It’s the first step on the road to a model which focuses less on departments and teams, and more on overall business goals. 

Ultimately the pyramid should almost vanish, leaving in its wake a wide, flattened structure with a broad connection between users and decision-makers: 

https://assets.econsultancy.com/images/resized/0003/4000/microsoft_final_structure_3-blog-full.png

By focussing in this way, Microsoft stand to gain a more stable revenue stream, with products and (that word again) services that directly match customer needs. In addition, insight is such that should the need arise to refocus; this opportunity can be spotted quickly.

Overall, this transformation is about connecting senior stakeholders with customer insight. Ultimately a public company is beholden to its shareholders, and happy customers = happy shareholders every time. 

Transformation at every level

Microsoft are a timely reminder of the need for this kind of forward-thinking in any industry, but I do want to highlight that it doesn’t require a large budget or a multinational presence to achieve this kind of restructure, and a smaller presence does not limit the opportunities it presents.

Businesses have a real need to become more customer-centric. The value of insight from, for example, social media sources has been espoused for some time now, but the real challenge lies in harnessing that information and experience across the business.

‘The Microsoft Model’ has been a staple of business schools for years now, and it’s potential and actual decline has been analysed to death, but if restructuring is harnessed correctly, we could be about to see the birth of The Microsoft Model 2.0.

If you're interested in enacting digital transformation, Econsultancy has a range of services and training available that can help. 

Matt Owen

Published 5 June, 2013 by Matt Owen

Matt Owen was formerly Head of Social at Econsultancy. You can follow him on Twitter or hook up on LinkedIn.

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Comments (2)

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Maggie Tolliday

I was wondering how these structures compare to those of Apple?

almost 3 years ago

Matt Owen

Matt Owen, Head of Social at Econsultancy

Hi Maggie, I'd assume Apple has a similar hierarchy but couldn't comment off the top of my head. I will say that while it represents a different type of shift, it's worth looking at Apple's iPhone (and increasingly iPad) revenue over time for a good example of a business transforming its revenue stream - not quite relevant here but interesting none the less.

almost 3 years ago

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