Irrational Behemoths

There seems to be a law of large companies that when faced with disruptions to their core business they begin to act irrationally. By irrational I mean they start new projects and businesses, often with enormous amounts of capital, that do little to nothing to effectively address the challenges they actually face.

This came to mind once again when I read this well-written article on Microsoft's activities. The rise of the internet created new challenges and opportunities for the entire technology industry, and especially for industries that depended on controlling telecommunications channels to customers. This is well-understood and does not need elaboration. Microsoft did quite well in the early days with Internet Explorer and IP-centric extensions to their Windows-based business lines, by effectively using their size (and money) to out-manouver emerging competitors like Netscape. It was no small victory: they furthered their dominance by a full decade.

The challenges they now face are more formidable. They are coming at Microsoft from many directions all at once: mobile, gaming, cloud computing, web services and portals (including search), smart phones, open source software, and so on. The upshot is that their dominance in the PC operating system space is increasingly less useful as a tool to control and manage the overall computing and communications marketplace.

Things do change, even for Microsoft. We need not shed any tears since they continue to have quite a good run. What is fascinating is watching them deal with these multifarious threats. Mostly these have been in the realm of the aforementioned mega-projects: Zune, Xbox, .NET, Exchange, Windows Mobile, MSN, Vista, and, most recently, Bing. These are not all terrible products and services, but little distinguishes them from the competition, and this is a problem when you are trying to displace other dominant players in those areas. Surprisingly, Bing looks promising, but then I would not expect Microsoft to get everything wrong!

Why they have been doing all this is clear enough: position themselves on every path between consumers and the services they want. I think they will ultimately fail. The picture I have in my head is from the old story of the little Dutch boy sticking his finger in the dike to block the hole in and untimely failure of the dam. Except in Microsoft's case, there are many holes, and even great rending cracks, popping up all over as the water level behind the dam grows ever higher, building pressure until the dam gives way or the water flows over or around it. What Microsoft needs is not a concrete patching kit, but a boat.

Why does Microsoft make so many costly errors, especially when they have the resources and the talent to do so much better? Large companies are typically risk averse, and Microsoft is no exception. They feel most comfortable picking other, successful businesses that threaten their cash cows and trying to compete with those well enough that their brand and resources can win the day. That is a very expensive strategy. When that doesn't work they try to leverage their installed base of Windows, Office and other products to cripple their competitors. For examples, look at ActiveX, .NET and ODF. They had temporary success with ActiveX and other HTML peculiarities, but ultimately that failed because they continued to be followers and not leading innovators.

Microsoft, as I indicated at the start, is not alone in their irrational behaviour -- many large companies, especially those that have been dominant, are the same. Even in Nortel, with which I have personal experience, there was a bizarre sequence of irrational behaviour in the late 1990s as they encountered their own challenges due to the internet. These included spending enormous amounts on redundant and unwanted switching software that the carriers didn't want, buying companies at ridiculous valuations that were perceived to fill holes in their portfolio, and raising prices even in the face of cheaper competitive products. The automotive industry also comes to mind here, with all their ineffective and expensive initiatives over the past decade or two.

One thing these companies have in common is far too much money: their cash cow businesses keep refilling their coffers, covering for management's expensive mistakes. This, of course, can only continue until those cash cows eventually sicken, which must happen to all cash cows. Except by then the opportunity to replace them has been lost. They would have been wiser to spread some of that money across a range of innovative proposals and then make further investments in those that show initial promise. They can choose proposals according to how well they address the company's challenges, and even make it a contest for employees. That would light an entrepreneurial fire among their best people.

Managers at these companies are typically not entrepreneurial and they are measured on objectives that are comparable to the size of the companies. A common thing you'll hear in every one of them is that it is pointless to propose a new technology or business unless it is provably able to deliver $100 million or more revenue per year. That's an impossible hurdle for truly innovative and risky ventures, and so it is no surprise that good ideas that their smart people propose go nowhere. Like Nortel, Microsoft, GM and all they rest, they stick to the tried and true, and unhelpful initiatives. To them it's very rational. But it isn't - it's irrational when you consider what they must at least attempt to accomplish to keep the company healthy and competitive. Instead they stifle the best ideas of their best people, driving them to leave, and leaving the company without the talent they need to succeed.

By comparison look at companies like Amazon and Google, both of which are large, dominant businesses. Google is very engineering-driven which, while causing many problems, does generate lots of interesting initiatives. They are also young enough as a company to not (yet) be afraid to innovate. Amazon is another interesting example with their history of innovation. Have a look at this interview with Jeff Bezos. Contrast his style of leadership with that found in Microsoft. Apple is of course another good example, in that they have gone through alternating phases of innovation and big-company misadventures, and finally back to innovation.

Microsoft has talent and a record where they do sometimes do things right. That makes them interesting to watch as they continue their struggles. Love them or hate them, there are some important lessons to be learned from their ongoing successes and failures.