Microsoft’s huge turnaround last month is recognition that technology shifts are rapidly eroding the business model the company has relied on for the last 25 years — a model that assumes a PC on every desk, loaded with Microsoft Windows and OfficeWhat’s killed the model is a combination of pervasive high-speed Internet connections and new mechanisms for loosely coupling software elements spread across the Internet. If it’s Scott “the network is the computer” McNealy versus Bill Gates, Bill Gates just blinked. If it’s Linus Torvalds versus Bill Gates, Bill just blinked again.
Ray Ozzie, Microsoft’s chief technology officer, has written an elegant and forceful analysis of what Microsoft must now do to compete successfully, including the embrace of open-source development models. If you’re an IT executive, this is essential bedtime reading. But if you’re in a different industry, you also had better watch out. Microsoft’s recent refocusing of its strategy affects all industries in some form or another. Here are the lessons.
The general strategic message is to acknowledge the wisdom of Harvard Business School’s Clayton Christensen: Be prepared to abandon your core business in the face of disruptive technologies, even if it means short-term pain. A corollary message is to time your strategic moves carefully. Microsoft is an object lesson in both.
Microsoft’s technological nemesis affects us all. In the first case, the PC as we know it is dying, and we all face retooling our IT infrastructure. Second, if you can bolt together software components located anywhere on the Internet to form an effective application, then the days of monolithic ERP-type applications are over — more re-tooling and more IT investment. Third, we are entering an era of intense innovation in computer applications, as the cost of entry for creating and distributing software is declining dramatically. (High barriers to entry are, of course, the ultimate source of Microsoft’s huge wealth.)
Many of these innovative applications will spring up apparently out of nowhere, and reshape the economic landscape. A good example is Flickr, the photo-sharing application that achieved one million users within 18 months of its launch. Skype is another. Google Maps is a third, suddenly and startlingly making real the promise of location-based services. In all these cases there is rapid value migration towards the innovator, and away from established players.
Innovation is more rapid in part because the components for creating computer applications are suddenly huge. Developers can piggyback on the power of these components, provided by Amazon, eBay, Google, Microsoft, and other platform contenders, to create new things. The components of these platforms embrace functions that cut across many industries. They include search, maps, calendars, payment, auctions, Internet access and telephony. Affected industries most obviously include telecommunications, retail and financial services, but considering how integral IT is to innovation in so many industries, from pharmaceuticals to automotive design, then the scope of disruption is much higher.
What has been lost to some extent in all the nerdish glee surrounding Microsoft’s about-face is a final and most important lesson. Microsoft long ago read the tea leaves, figured out the strategic alternatives, and assembled the core competencies to support them, so ultimately the company was strategically positioned for success. Has every CTO been so prescient or so careful?