Caught in the Disruption trap: Why job cuts can’t save Microsoft

What could possibly go wrong with these guys in charge?

What could possibly go wrong with these guys in charge?

I don’t know why anyone is surprised Microsoft just axed 14% its workforce. It’s a company with deep pockets, filled by annual profits of $billions from its legacy position as the operating system of most desktops and laptops. It’s global. Microsoft owned properties like MSN used to rank consistently in the top 3 online destinations in the US, EMEA and Australia for a decade. Hotmail was (and arguably still is through Outlook) the biggest online email platform in the world.

So when they get into the doldrums with new technology, like phones and tablets, what’s the obvious solution? Conventional business wisdom suggests you need to shake up the relevant departments, make a few changes… so some drastic cuts in your recently acquired mobile phone company and a new management team is the MBA 101 logic at work.

It’s not going to work. That’s because Microsoft, like AOL and Yahoo, is caught in ‘The Digital Distruption Trap”. And like everything else at ManvsBrain.com – it’s a thinking problem.

The digital disruption trap.

The “digital disruption trap” is an idea inspired by Werner Heisenberg’s work in quantum physics. He postulated in 1927 that there was a limit to the measurement of complimentary variables. Put simply, you can’t determine both the position and the momentum of a subatomic particle simultaneously.

In the world of digital technology, we see a similar problem.

The more you try to refine your current business model with technological innovation, the more you are exposed to the risk your competitors will do it better with more scalable, more interoperable technologies. However, you can never have enough data to accurately predict how far and fast the technological ecosystem will change, so waiting to commit to the right technology strategy means losing market position to those who refine their business models with technology, even if they commit to the wrong long term solution.

The dilemma of the trap is simple. Formulating the correct technological response to adapt your business models to a changing digital environment is fraught with risk, but not addressing the issue until you are certain you are making the right decision is equally risky.

It’s a decision making problem.

The larger the corporation, the harder it is to escape the digital disruption trap. This idea explains the scenario where a hugely profitable tech giant like Microsoft, and a profitable mobile phone company like Nokia, can lose market share to newer market players like Apple and Samsung for years before they commit to a technological response within their own product offerings. The delay in reaching the market means even when they do, they can’t capture a profitable market share in the smartphone or tablet markets, even if they offer better components and innovative new design features.

Escaping the digital disruption trap is also simple, but by no means easy. The only business model that can survive prolonged digital disruption, it seems, is the one that chooses to disrupt itself through devolved decision making and continuous system redesign. Kaizen thinking. Large corporations like Microsoft can’t do this very easily because they’re not structured to make those kinds of decisions. They are, socially speaking, invested in their business culture to the detriment of their original purpose.

It was the corporate infighting at Nokia and Microsoft that made their new mobile devices arrive late to market, as design-by-committee fudges.
 

Here’s an example of Microsoft’s disruption crisis:

Back in the summer of 2012, when I went to see the Windows Phone team to offer them some strategic advice about how to sell the damn things. I had a few contacts there, had spoken at events about digital technology and so on. I saw an opportunity to use data analysis of social media to help them fix their performance. After all, the Windows Phone 7 OS Lumia was the most unsuccessful smartphone ever launched. The most returned mobile phone device in history, allegedly.

I thought the only answer would be mining data out of social media platforms and trying to listen to what the phone owning, phone buying public thought about it.

I mined 1.8 million tweets from 3 months of monitoring for mentions of smartphones (a lot more before you cut out the spam, news feeds and retweets). By looking at user profile analysis, I’d also managed to get a rough idea of the demographics of the sample. And the result was… about 0.018% of the tweets mentioned Windows Phones / Nokia Lumia. The mentions were from younger people, and they all positively mentioned the 2012 price reduction on the handsets being aggressively promoted by the likes of Verizon in the US.

So the answer seemed obvious:

  1. Target the phone at first time smartphone buyers, who are less committed to the ubiquitous iPhone / Android journey that everyone over the age of 25 was already on.
  2. Cut the price, because if you’re 18, saving £5 per month is a lot of money compared to a 30something iPhone / Galaxy user who’s got more disposable income.
  3. Finally, shift the marketing away from lifestyle messaging aimed at young mums and dads, and get the product seen and used in extreme sports and music, fashion and so on. After all, Xbox was big with the snowboarding scene, so play on the Windows Phone / Xbox functionality and…

…The look on the face of the marketing person stopped me in my tracks.
 

She said “No” and wagged her finger at me. Then she actually laughed in my face. No kidding. She told me they had a premium product and it would sell at a premium price to people with children. Her agency told her so, and they were a very well respected global company.

I said the data suggested that wasn’t going to happen, she told me that was “just what people on Twitter were saying”.

Then she pulled out the phone and asked me “Have you actually seen a Windows Phone?” and I pointed out that yes I had, but only because I’d closed a deal for my former company to develop apps on them. I’d never actually seen someone using one in the street, on the Tube, at a conference, in a pub, on the packed commuter trains between Suffolk and The City or anywhere else for that matter. And that included not just what I’d seen in London, but what I’d observed delivering a series of lectures on digital culture, politics and economics on three different continents and eight different countries.

I also told her that, in fact, I didn’t know anyone from the 120,000 people Tweetminster’s systems tracked who actually used one. Sony, yes. Samsung, yes. HTC, yes. Blackberry, yes. Apple, yes. Even Nokia Symbian phones, yes. Windows Phones? No.

She told me, in no uncertain terms, that no matter what my data mining had thrown up you couldn’t rely on social media data. Social media, in Microsoft, was run by a different department, and they would be using it to promote the phone with innovative engagement programmes, like “retweet this link to win a Windows Phone mug.” She also informed me that her agency had a panel of 40 people in a proper ‘scientific’ market research programme, and that “insight data” showed the Windows Phones were going to enter the market and take the third place behind Samsung and Apple.

She kindly offered to connect me with them, so they could “educate me”.

And then she showed me the door. Awkward.

And then the phone, despite all that money and effort on behalf of Microsoft and its market research, crashed so hard it set the toilet on fire as it disappeared down it.
 

Analysis

I realised what happened was simple. They thought their phone sales problem could be solved by throwing money at traditional marketing and advertising, with traditional agencies using traditional market research. When it failed, they did what any big corporation does, they did exactly the same thing again, but this time with a different celebrity endorsement and a different tag line. When that failed, they did the same thing again, but this time, with unknown actors pretending to taking photos of each other in a trendy nightclub. It’s what I’m now calling the “repeat until you make 14% of your staff redundant” school of business.

And yesterday we see an equally traditional exercise in cutting costs through redundancies and management restructuring. So I’m going to go out on a limb here and say traditional, conventional wisdom won’t fix their problems.

That’s because the right solution means reorganising on a fundamental level. Microsoft has a department for this, a committee for that, teams everywhere, all beavering away in silos with a cabal of big ticket agencies telling them they are right whilst anyone can see they’re becoming irrelevant. They shipped on a lot of computers over the last twenty years and had a really good online email service. Everything else, with the exception of Xbox, has flopped. In fact, even worse than that…
 

…they could have been Facebook

Microsoft owned the largest chat product in the world (MSN Messenger), the largest online email platform in the world (Hotmail), gave all its users free online disc space, published its own news and entertainment content, owned its own ad-serving platform and so on. They, along with AOL and Yahoo, dominated online market share in the US, EMEA and Australia between 1997 and 2004. In 2002 Microsoft even launched their own dedicated social network within the Xbox Live platform, enabling gamers to play live against each other. They did, in fact, own and make money from all the elements required to make Facebook, years before Facebook launched. But Microsoft was socially invested in an established corporate culture, meaning their management structure wasn’t agile enough to combine all those separate business streams into a singular concept.

Mark Zuckerberg on the other hand, had no choice. Without deep pockets and a large workforce, his start-up, like Google before them and Ebay before Google, lacked structure. They were organised by necessity around the concept of “all hands to the pumps” decision making.

It doesn’t matter how many people Microsoft employ. It’s how they employ them that counts and given their almost comical inability to get their phone and tablet sales figures close to their competitors, it’s a pretty safe bet to assume they won’t be able to agree, in committees, departments, teams and silos, about how to change that.
 

The lesson here is simple.

Microsoft has a terminal confirmation bias problem. They operate the business from a point of view that looks for reasons why their decisions are right, not for reasons why they might be wrong. They have a fundamental problem of assuming that the technology market is about products and services, when in fact, it’s about adapting products and services to a distributed, real time, social computing culture. They think new components, snazzy marketing and out-spending their rivals will change the habits of their target consumers, but they don’t understand what they’re dealing with.

Consumers in the mobile, distributed world don’t buy phones and computers, that’s just a byproduct of conducting their business and social lives. If their business and social lives are defined by a world of social networks and interoperable data, you won’t sell them anything that doesn’t exist in that world. Which means, in simple terms, if Microsoft sold a phone that could only use Facebook and do nothing else, they’d have a better chance of attracting users than trying to sell a new operating system that uses their own picture sharing platforms, email, messaging and so on, or even welding a new front end over popular social network platforms so Tweets and Facebook posts all appear in one continuous live stream, which totally misses the point of each platform’s community function (basically, we use each one differently, so mashing them together is pretty pointless).

They are too late to market with a plush smartphone. They’re too late to market with a funky phone. They’re too late to come to market with something that isn’t an Android phone. They’re too late to build anything that competes with Google or Facebook, they just need to offer more Google and Facebook than the competition.

Their challenge is being socially relevant, but they can’t be socially relevant when their internal structure resembles a feudal kingdom from the Dark Ages.

Successful digital companies in the future need to behave like Zebras. They cooperate and share the ecosystem. Microsoft, on the other hand, is more like a Cheetah. They think running fast and living in a tiny family group is a recipe for survival.

Cheetahs are an endangered species.