At a time when most digital transformations are falling short, last week’s appointment of CEO Satya Nadella as chair of Microsoft’s board is a shout of confidence in Nadella’s leadership and in the digital transformation that he has led since 2014. After having split the CEO and chairman’s roles in 2014, rejoining them is an unusual governance move.
The appointment reflects confidence in Nadella’s combination of technical expertise, business savvy, inspirational capability, and dazzling financial results. The seven-fold increment in Microsoft’s market capitalization of some $1.5 trillion makes Microsoft one of the world’s few digital giants, leaving most other companies in the dust, as shown in Figure 1.
Starting Position: Grim
It’s hard to remember now that in 2014, Microsoft was on the ropes. PC sales were falling. Microsoft’s software products were in decline. Its static, old products lacked pizzazz and personified ‘boring’. Windows couldn’t compete with Google’s free operating system. Microsoft’s investment in the Nokia phone was disastrous. Microsoft’s share price was stagnant. Few saw a viable path forward.
Moreover, Microsoft’s corporate culture was notoriously combative, both inside and outside the firm. It was personified in the prior CEO, Steve Ballmer. (I had visited Microsoft in 2004 and experienced it first-hand.)
Staff were demoralized and even saw Nadella’s appointment as disappointing: only an outsider could re-energize the tired old giant.
Microsoft seemed a relic of an industrial-era company that, like so many other big firms, had failed to grasp the meaning of the emerging digital economy.
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Although each firm is unique, many CEOs could learn from Nadella’s successful six-step playbook.
1. Kill Losing Business Models
Most firms undertaking a digital transformation soldier on with their losing, industrial-era business models, while they dabble in digital innovation on the side. The common result: the loss of energy that is sucked into the losing business models prevents the firm from ever putting its heart into digital innovation. The firm muddles along, cutting costs to make money, as the stock market punishes its lackluster performance and lack of growth prospects. In due course, the firm’s board loses patience and a newcomer CEO is hired to restart the cycle.
Nadella did the opposite. At the outset, he did the unthinkable. He gave Windows away for free and dropped the Nokia phone. In so doing, he freed up energy for promising domains.
2. Establish A Customer-Focused Purpose
Given the popular cry for firms that have a purpose beyond making money, many CEO’s blunder into declaring some high-sounding goal (like ‘we save the environment’) unrelated to the firm’s business. The result is a PR disaster that undermines trust. Customers see immediately that it’s just a stunt. Internally, it causes mass confusion.
While the search for purpose is worthwhile, seeking it in some alternative arena is misguided. In the customer-driven digital age, Peter Drucker’s dictum—“there is only one valid purpose for a corporation: to create a customer”—is still the guiding star.
What CEOs can do, as Nadella did, is to spell out how the firm will create customers. Microsoft would not waste time chasing Apple’s iPhone or replacing Google’s search. Instead, Microsoft’s mission is help empower people wherever they are, whatever device they are using. Nadella’s simple purpose of empowering everyone on the planet inspired staff. They could see how it applied to their daily work, whether they were a coder, designer, marketer, or customer-support technician. Nadella also talked about the environment, but he did so without distracting from Microsoft’s core purpose of empowering customers.
3. Define Areas Of Opportunity
Nadella defined the two main areas of opportunity—mobility and the cloud. While Microsoft’s competitors defined their products as mobile, Microsoft was about the mobility of human experiences, experiences made possible by Microsoft’s cloud technologies. Microsoft’s cloud could make working on Apple’s iPhone more useful. It also led to innovative hardware products like the Surface PC and gaming products that won the hearts of hip customers who wanted something cool. Microsoft would only be in the phone business if it had something that really differentiated.
4. Address Culture Up Front
Many firms attempting digital transformation shy away from the issue of culture, thinking it too “mushy” and “touchy feely” to achieve anything meaningful. They may believe that “if we do things right, culture will adjust of its own accord.” If only it were so.
Nadella recognized that culture, as the unspoken—sometimes unconscious—set of values, habits and assumptions about ‘how things are done around here,’ is hard and tangible, not soft or mushy. Microsoft’s confrontational culture of ‘us versus them’ and ‘take no prisoners’ had deep historical roots in the firm. It was the antithesis of what was needed to succeed in the digital economy.
So Nadella confronted culture on day one and announced that from then on, the culture would be one of collaboration and finding mutually profitable solutions. Instead of ‘us vs them’, it would be ‘us with them.’
Nadella had no idea what the response would be. Cynics feared the worst. But they were wrong. Leaders who agreed with the vision were invited into Nadella’s leadership team and staff responded positively. Those at the top who disagreed were not dismissed, but they soon saw that their future lay elsewhere and left. The result? Little time lost on unnecessary culture wars.
5. Make Empathy Central
Nadella took another risk in making empathy the centerpiece of his culture initiative. His personal philosophy is to connect new ideas with empathy for other people. “Ideas excite me. Empathy grounds and centers me.”
Making empathy the keynote concept of a major corporation is almost unprecedented. But Nadella saw that without empathy, Microsoft would never succeed in understanding customer needs—particularly needs customers themselves didn’t know they had—and delivering solutions to meet those needs. The bet paid off, as Microsoft’s staff found ways to upgrade and enhance products that had users exclaiming, “I didn’t know I could do that!”
6. Inspire and Unleash The Hidden Agile Army
Six years before Nadella became CEO, around 2008, many lower-level teams began exploring Agile software development practices, without top support. Nadella himself had found in 2008 that “the key was agility, agility, agility. We needed to develop speed, nimbleness, and athleticism to get the consumer experience right, not just once but daily. We needed to set and repeatedly meet short-term goals, shipping code at a more modern, fast-paced cadence.” (Hit Refresh, p.51)
By 2014, there was an army of thousands of enthusiastic Agilists who remained stifled by the warlike culture at the top. Nadella’s culture of collaboration enabled this army to come out of the shadows and perform their magic with official, top-management blessing. They became Microsoft’s mainstream, rather than fighting daily battles as renegades.
Many big firms have similar hidden armies of enthusiastic Agilists, but they remain imprisoned in their IT departments, working at odds with the top of the firm. Those firms have yet to do what Nadella did: set the Agiliists free.
The net result of these six moves? A $1.5 trillion gain in market capitalization. The question is: why don’t the CEOs of other struggling big companies shown in Figure 1 do what Nadella did?
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