Fast Company

Steve Ballmer's Big Moves

Microsoft's CEO faces a challenge that has been the undoing of many leaders in many industries: Can a giant company that dominated one era lead in the next?

Steve Ballmer didn't set out to run a big company.

Two decades ago, he dropped out of Stanford Graduate School of Business at age 24 and joined Microsoft, where he became one of the software company's first 40 employees. No matter how successful Microsoft became, he and the other pioneers maintained the brash, intense culture of a company where people viewed themselves as working for a tiny underdog.

Today, though, there's no escaping Microsoft's vastness. The company has nearly 40,000 employees, $23 billion per year in revenues, and a market position so dominant that it has spent much of the past three years battling the Justice Department in an antitrust investigation. While that court case has dominated media coverage of Microsoft, a second, largely overlooked drama has been playing out inside the Redmond, Washington-based company. Since becoming Microsoft's CEO last year, Ballmer, 45, has been wrestling with all of the classic big-company tensions between innovation and inertia -- looking for ways to stay on the fast-growth track when most giants would inevitably slow down.

Those challenges will be especially pressing over the next five years. Major parts of the economy are sagging, and it just isn't realistic to expect the sunny conditions of the late 1990s to resume anytime soon. Meanwhile, the Internet is creating all sorts of pitfalls -- as well as opportunities -- for big companies that are trying to transform themselves. Get your Web strategy right, and you can speed up innovation, reduce costs, and be more in touch with customers' wishes than ever before. But it's all too easy to spend a fortune putting the wrong parts of your business online the wrong way. Even a company with as brilliant a past as Microsoft's has no easy answers as it tries to make the most of Internet opportunities without undermining the company's longtime profit engines.

In a recent conversation with Fast Company, Ballmer talked not only about how he wants to run Microsoft, but also about how any executive should think about strategy, the competition, the Internet, and the war for talent. At times, Ballmer can be his own toughest critic, worrying about Microsoft's slowing growth rate and the difficult interplay between all of its divisions. Don't be fooled, though. For all of his grumbling, the Microsoft CEO knows where the biggest opportunities lie and how an executive in his shoes can best exploit them. As he wryly put it, "It's nice to have simple businesses. But sometimes it's the complicated businesses that make a lot of money.''

You've had a great career at Microsoft, but not everything you've done has worked out well. In the 1980s, when you were running the Windows business, your first few versions flopped. What did you learn from that?

I like to tell people that all of our products and business will go through three phases. There's vision, patience, and execution. Windows 1.0 wasn't a success. Windows 2.0 wasn't a success. It wasn't until we put out Windows 3.1 that we really had a big winner. It reminds me of that elementary-school joke where the thirsty donkey is trudging through the desert, and every time he asks how much farther it is to the well, his owner tells him, "Patience, jackass, patience.'' That goes on forever, until the person hearing the story asks, "Will this ever end?'' And then the answer, of course, is "Patience, jackass, patience.''

The vision phase is full of excitement, vim, and vigor. Everything looks big and rosy. At that stage, we don't know what we don't know. Then you get into the patience stage, and that's tough. You have to cut out parts of the product that don't fit. You have to react to what the market is telling you. You get in trouble if you assume that you're going to reach critical mass quickly -- because it's most likely that you won't. Through all of these trials, you can't lose patience. Then you finally get to the execution stage, when you're tuning things up, tracking prices, and figuring out how to get more revenue.

That final execution phase can be a comfortable place to be. Frankly, the vision phase can be very comfortable, too. It's the patience phase that's really not comfortable at all.

So where are we in the Internet economy? We surely aren't in the vision stage anymore.

We've gone from the vision phase to the patience phase. And most people aren't very patient. Entrepreneurs in particular don't have the stomach for this. They thought the vision phase would last forever, or that they could go right from vision to execution. That's why we had little companies doing Superbowl ads that frankly just should not have been done. Even take a look at Amazon. I love the company, but if you aren't patient, get out! That goes for the employees as well as the stock traders. A bit of the same is true for Yahoo! too. They still look great, but hey, it's the patience phase now.

Even if you look at infrastructure companies, who can you really count on to be around in five years? VeriSign might be a safe bet. But look at guys like BroadVision, Vignette, or Interwoven. They have nice market capitalizations, but are they going to be around in five years?

All the same, you've said repeatedly that the biggest challenge to Microsoft isn't likely to come from an entrenched company; it's likely to come from a startup that's taking a dramatically different approach to some big issue. So I have to ask: If you weren't running Microsoft, and you were just starting a company, what would you set out to do?

Do you mean "What's a good business idea?" or "What would I do to compete with Microsoft?"

Either one.

The first thing I would ask myself is "Can I afford to build a company for the long term? Or is my strategy to build something that, 7 chances out of 10, I would want to sell to Cisco, Microsoft, or Intel because it would dovetail with their business?" If I couldn't afford to be patient, I would probably pick an area that's very enterprise-oriented, where I could get real customers quickly with a modest investment. There are plenty of good enterprise ideas rattling around. I wouldn't pick a dotcom area, because that's too dependent on brand. I'd probably choose some enterprise infrastructure area -- and then attach it to someone else's big sphere.

If I could be patient, I'd probably take a look at one of the real platform shifts that is coming along. That might mean looking at Microsoft's dot-net initiatives and asking, "Do I want to bet with Microsoft, or do I want to bet on the opposite side?" I might bet on mobile wireless technology, assuming that this will really be a major shift. It may be less of a shift than some people think, but it's an intriguing area.

So how do you make sure that you're getting fresh new perspectives, given the job that you really have?

I try to have at least two or three chats a month with venture capitalists. We invest with Accel Partners here in the United States, and we have other venture funds in England and in Israel. It's a way to keep in touch with interesting companies and to look for interesting opportunities for partnerships. I spoke at a venture-capital roundtable we put together in California not long ago. I spoke at a similar event in Paris around the beginning of November. When I talk to VCs, their top issues always seem to be "Where are you going? What are you avoiding? Where is it clear that you need partners?" That's very important stuff.

Also, I've always encouraged -- and sometimes ordered -- our engineers to get out and talk to customers. We can believe that we know where the world should go. But unless we're in touch with our customers, our model of the world can diverge from reality. There's no substitute for innovation, of course, but innovation is no substitute for being in touch, either. We have Project Bluestar, which we're doing with financial-services customers, primarily in New York. We've dispatched a number of our key development people to New York so that they can spend time with Merrill Lynch, Goldman Sachs, and other businesses that will fundamentally shape our product strategy.

What's your advice to the CEO who's running a blend of businesses? Even if an executive isn't in high-tech, she is likely to have some big, profitable warhorses that were founded long ago and some small but promising new areas that clamor for resources. How do you manage the two?

One of our biggest challenges is managing a portfolio of multiple businesses. There are many CEOs who can say that each one of their businesses has almost total independence, so all that they need to do is juggle how much investment they put in. But that's not our situation. We have common technology platforms across nearly all of our business, so we can't let people at each operating unit just do their own thing. It's not enough for us just to decide the investment streams. We need a common road map.

If you think about it, there's a lot you can learn from the automotive industry. You have to look at the people in this world who have big R&D budgets -- and that basically means pharmaceuticals, autos, chips, and network-equipment makers. At Microsoft, we're spending $4 billion a year in R&D. If you want to find people up in our range, they're basically almost all within those industries.

Now, what's striking is that in pharmaceuticals, the company that leads a therapeutic category in one generation is very seldom the leader in the next generation. So the guy who is best at treating heartburn this year generally isn't the guy who will do best in the next cycle. That's not the dynamic we want to be in. We want to keep building a leadership position. In other cases -- General Electric, for example -- it's more that they're in five or six independent businesses than that they're trying to support a common platform. (Although any company with GE's market cap and an ability to grow earnings 15% a year is worth studying.)

In the automotive industry, you've always got lots of brands, but the question is How many underlying platforms should there be? If you're Ford, should you have 20 platforms worldwide? Or should you have 10? Or one? Having more platforms gives you more flexibility, but it means that you don't have nearly the efficiencies of scale that you could enjoy. Having a smaller number of platforms always seems desirable, but getting there is never easy. How do you manage that stuff? These issues have a lot of the complexity that I'm thinking about.

It's nice to have simple businesses. But sometimes it's the complicated businesses that make a lot of money. IBM used to be more complicated, but it is getting to be more simple, because services is starting to be its real business. I don't want that to happen to us. I don't want to get simple in that regard.

You have a huge dot-net initiative under way, which is not going to make Microsoft any simpler. Explain why you're doing it and what you hope to accomplish.

We want to give users and developers the next-generation platform for taking advantage of Internet technologies. Right now, it's not at all easy to mix and match things from different Web sites. With our application-integration model, that should become much more practical. Also, the user interface should scale up and down with you, so that you can use the same software on a big screen or on a little screen. And finally, a new generation of software should take care of itself. You shouldn't have to install it and update it formally. The software should live in the Internet cloud as well as on your desktop or on a server -- so that it can be updated effortlessly.

Any time a big company does something this fundamental, the tricky part is to keep the train running while making this big bet for the future. In our case, Windows and our Office applications suite are two of the best businesses in the world. We could argue about whether the profit margin on any new business would ever be as good as the margins on Windows and Office. The answer would probably be no. But for us to get revenue and profit growth, our newer businesses -- servers, small business, and consumer applications -- will be very important. They'll help us grow faster than the basic rate of the PC business. We're certainly not underinvesting in these areas.

As our dot-net technologies get included in each of our businesses, they will make the non-dot-net versions of these products obsolete in four, five, or six years -- whatever the magic number is. You know, there are people in the Office group who would love to say, "Let's just do everything on the Internet right away. Let's abandon those current customers." But you can't do that.

I'm sure that any time people want to pitch you on a new initiative -- whether it's someone internal or external -- if they encounter resistance from you, they warn you that you are about to succumb to "the innovator's dilemma." You've read the book on that subject by Harvard Business School professor Clay Christensen (The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, Harvard Business School Press, 1997). What's your thinking about whether Microsoft is vulnerable?

Let's remember precisely what the book says. Christensen contends that something crummy can get traction in the marketplace even when the established companies don't want to make it. That happens when there's something different enough and important enough in the way that the thing is made that, eventually, a better version of it will prevail. His book doesn't really focus on the question of whether big companies or small companies can innovate better. Frankly, big companies can do things that small companies can't even dream about doing. Being big or small isn't the crucial issue. If you don't move, you don't move.

Look at what's happening with the Linux operating system. By Clay Christensen's definition, it's crummy. It's not as easy to use as our Windows operating system. It's not as debugged as Windows, and it's not in as many applications. But in some markets, crummy has been okay. In multi-Web-site hosting, Linux has some traction. In that market, we recognize Linux quite clearly as an A - number one, first-class competitor. You can't just dismiss these things because they aren't as good.

Or take things like ThinkFree Office or HalfBrain. These are office applications and Internet hosts, and they aren't very good. But if they're sufficiently more convenient than what's been available before, could they make us obsolete? You have to make judgments. You can't just assume that those products will go away. There's always going to be someone out there asking, Is there something that will disrupt Office -- by providing half of the features but 20 times the simplicity -- something that could capture the world?

I was thinking more about the BlackBerry email devices. You make Microsoft Outlook, which is the dominant email application, and which keeps adding features all the time. Along comes BlackBerry with a much smaller device, where the screen is tiny, the commands are limited, and the keys are much too close together. Yet it's incredibly mobile -- and everyone wants to have one. What's going on?

Are they really a threat? Are they redefining the core scheme of the way email gets done? Do you really know very many people who would get rid of their personal computer to have a BlackBerry? No. The company that makes it totally uses our Exchange software as its back end. It's primarily an add-on. It would be trivial to do one. But even so, you have to ask, Will appliances like the BlackBerry disrupt PCs? The answer might be yes. So if we don't fight that battle, we'll lose.

About a year ago, you acknowledged that every new version of a software package gets bigger in terms of the number of lines of code, and you portrayed that as a good thing. Do you still think it's a good thing? Or at some point, does big become bad?

Big is great. Big per se is not a problem. If you look at how fast hard disks and machine-processing capabilities are growing, software is relatively smaller today than it's been at any time in the past 20 years. If you use size for more complexity, that's bad. But if you use size to bring more simplicity, that's fine. In our next release of Office, we put in more bytes to make it easier to use.

Tell us a bit about your current thinking on outside partnerships. It seems as if every company is more attuned than ever to working with a whole constellation of allies. What's the right way to make that happen?

That's the $64,000 question for us. We have five or six businesses, and we have different needs for partners in every one. There's no way we can succeed in isolation. In every business, the partner ecosystem is very important. But when people come to see us about partnerships, it isn't even obvious to me where to send them.

I had a company in here recently that builds -- I'd better not say exactly what, but let's call it middleware that they've integrated into Windows. It would be good for them and for us to build products that could be embedded in other things and that would therefore be tied to our embedded-systems group. That could produce solutions that have something to do with what we're doing in the consumer area. And those solutions would need development tools to go with them.

You're right. If you aren't careful, you'll end up giving them a scooter and sending them to every single building on your campus.

Exactly. We do too much of that. So the question is, How do we get a crisp point of contact? How do we get somebody within Microsoft who can speak powerfully for multiple businesses?

The Internet makes all of this more complicated. If it weren't for the Internet, we wouldn't be looking at MSN. We wouldn't have dot-net middleware. We had our partnering model pretty well taken care of, really, pre-Internet. It only involved Windows, Office, and a couple of servers. And then, darn -- along came that Internet. It brought so many more people that we need to touch -- and with whom we need to form partnerships in different ways.

How about within Microsoft? How do you get all 40,000 of your people to think about the Internet with a new sense of urgency?

It's not a problem to get this company Internet-oriented. It's really pretty easy. People act as if it's a hard thing, and it's not. The harder thing is to get people to agree on what you want to do. We need enough consistency in our platform and in our vision that we take customers in one direction instead of six. When you need to do that, you can't make everyone happy. Sometimes you try, but you almost never can.

In the past few years, with the dotcom mania, some people left because they thought they could make a lot of money at a startup. That has changed. We're back to doing better at recruiting and keeping the people we want. And we're spending much more time focusing on the quality of the job. We're thinking hard about how to keep jobs big and full of impact. That's the key: doing more than just fixating on compensation.

We have a culture in which people really want to move quickly. So senior management has to keep all of this commotion organized, and sometimes that means slowing things down. Our people complain that we move more slowly than we used to. But some of that more measured approach is appropriate, and it's much better than being stuck in a situation where the CEO has to invigorate a place and keep shouting, "Come on guys, let's move!''

George Anders (ganders@fastcompany.com) is a Fast Company senior editor based in Silicon Valley. to learn more about Steve Ballmer and Microsoft, visit Microsoft on the Web (www.microsoft.com).

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