Nadella’s strategy & the rebirth of Microsoft: takeaways for startups

Bill Gates and Paul Allen founded Microsoft in 1975, creating MS-DOS to provide the operating system for IBM’s first PC, followed by its now-ubiquitous Windows software. Microsoft dominated the PC era after their Windows 95 rollout, to become one of the most dominant monopolies ever created.

The most successful products of Microsoft’s history were created under Gates: MS-DOS, Microsoft Office, MSN Messenger, Internet Explorer, Outlook. Gates’ competitive nature blocked any potential competitors by slashing prices, buying the competition, or handling the web browser integration with the operating system, thus abusing monopoly power.

Microsoft’s growth was under the spotlight of the US Congress, it was so intense that Gates decided to step down as CEO. For his replacement, he chose Steve Balmer – Microsoft’s thirtieth employee. It was a baptism of fire. Ballmer oversaw the company’s struggle with failed product launches and a fundamental shift in its identity and direction.

By the early 2000s, Microsoft was severely bruised, yet for a while became the most valuable company in the world, but success bred complacency. By the early 2010s sales growth had slowed and profit margins had shrunk. Today, Microsoft has been reborn and enjoying a new heyday under CEO Satya Nadella for the last decade.

A number of acquisitions have given a range of customer solutions that the ‘old’ Microsoft would never have considered: LinkedIn, GitHub, Skype, Power BI, Lens, Teams, Sharepoint, Xbox. Now Nadella is charging ahead with another bold move, this time around AI. Thanks in large part to its investment in OpenAI, the startup behind ChatGPT, Microsoft is striving to become the go-to firm for enterprise AI tools.

Alongside AI, Microsoft is pushing into video game streaming, and recently completed a £56bn takeover of Call of Duty maker Activision Blizzard in the gaming industry’s biggest ever deal, despite concerns from rivals PlayStation-maker Sony. Microsoft now control games such as Call of Duty, World of Warcraft, and Candy Crush that will provide huge revenue. The takeover cements Microsoft as a video game giant and could catapult it ahead of Nintendo to become the third-biggest player in the industry behind Sony, and market leader Tencent.

Nadella has brought Microsoft back from the brink of irrelevance with a new culture and enthusiasm. The growing wealth and power of ‘Big Tech’ over the last decade has been a defining feature of modern capitalism, yet judged by the standards of his peers, Nadella stands out. It is notable that he’s put Microsoft back at the top of the tech heap without attracting the resentment and anxiety provoked by other tech leaders or, for that matter, Microsoft’s former self.

When Nadella took over, Microsoft had missed almost every important new tech trends since the turn of the century. An expensive pursuit of Google in the search market had come up short, social networking had passed it by entirely, attempts to catch Apple in smartphones came to nothing. One of Nadella’s first acts was to shut down the Nokia mobile business Microsoft had bought in a last-ditch gamble.

At the root of the problem was Microsoft’s addiction to the profits churned out by its PC operating system. The effort to keep Windows at the centre of the revenue model handicapped and hampered efforts to break into mobile and cloud computing. Nadella responded by taking Microsoft back to its roots, to a period before Windows when its software tools were used by other companies to build their own technology. That fundamental notion is that we build tools, build platforms so that others can build more technology.

The equanimity that has accompanied its recent rise is testament to the new purpose at the heart of the company, as well as a culture that reflects the personal qualities of a chief executive more given to humility than the intellectual arrogance the company was once known for.

So from a strategic perspective, what does the rebirth of Microsoft inform us that we can apply to the thinking of a nascent startup – not in terms of resources, but in the boldness and agility of strategic thinking to create new horizons and reboot competitive advantage? Here are some thoughts as to how Nadella’s strategy has helped Microsoft get back on top, and can be adopted in your startup.

1. If needs be, rip it up and start again. When Nadella took over, Microsoft was suffering from decades of bad reputation, under Blamer revenue had grown but the share price hadn’t moved. From anti-competitive practices to suppression of open-source development, there were few people saying nice things about Microsoft. Microsoft essentially did a 180-degree turn on its philosophy. It not only embraced open-source development but actively started supporting it, so much so that one of Nadella’s biggest moves was to acquire GitHub. It’s telling that in Satya’s first public presentation as CEO, he didn’t mention Windows once.

Takeaway: Be prepared to pivot in a big way, rather than tinker around the edges and seek incremental improvement. Turn things on their head, change priorities and reboot. If your strategy is failing, you need a new underlying philosophy for growth.

2. Think customer not product. From ancient Greece to Silicon Valley, the only thing that gets in the way of success, relevance, and impact is hubris. Microsoft was broken. despite global resources, it hadn’t been able to compete effectively with Apple on tablets, a platform it initially drove into the market.

Microsoft is now thinking like a customer, focusing on customer solutions, you see a very different company, The new model is one that looks nothing like a traditional hardware or software company, reflecting the ability to serve and distribute to customers via the cloud and subscription models.

Takeaway: Don’t look inwards, look outwards otherwise you miss trends, evolution, and revolution. There’s no value in dominating a sector when customers are leaving that sector for more relevant, cheaper, and more valuable solutions. Live in your customers world or you become irrelevant.

3. Don’t rest on your laurels. From Windows-first to Windows-andThe old Microsoft was obsessed with maintaining Windows at the centre of all computing experiences, and that got in the way of what customers wanted as highlighted above. Nadella set aside the obsession for Windows and brought greater capabilities to mobile operating systems controlled by Apple and Google. It now contributes to open-source software projects.

Takeaway: Be constantly restless with reinvention and renewal. At the height of your success, invent a crisis of confidence – what should we do next? Complacency quickly becomes arrogance and eats away at innovation and agility.

4. Invention doesn’t have to owned. Microsoft has been adept at working out how to bundle and sell technologies created elsewhere. The firm launched Copilots, ChatGPT-like assistants, for various software offerings. At their core sit the capabilities of OpenAI’s tools combined with a cloud-computing business model pioneered by Amazon.

With Nadella at the helm, Microsoft has set aside longstanding rivalries. It has formed partnerships with competitors like Dropbox, Red Hat and Salesforce. Microsoft is now more open to partnering with competitors and scaled back first-party mobile ambitions, trying to make itself out to be less of a threat and more of a desirable, collaborative partner at the core of the eco-system.

Microsoft is applying a similar formula to its gaming business. It plans to combine its cloud technology with the gaming assets and expertise of Activision Blizzard. Compare this approach with that of invention-obsessed Google, which has a cumulative operating loss of $24bn in its moonshot ‘other bets’ business since 2018. Amazon, too, has invested heavily in technologies that have sci-fi appeal, but have so far failed to win customers.

Takeaway: Strategic collaboration via partnerships is often a fruitful path for startups, building trust, customer connections and joined-up marketing opportunities. It links product development, marketing, and growth strategies, offering a trajectory and open doors not otherwise accessible. Be collaborative not cutthroat.

5. A little bit of paranoia goes a long way. When Ballmer took over, Windows was sacrosanct. As a result, Microsoft failed to exploit big shifts in technology, such as the smartphone and cloud computing. It could have easily gone the way of Kodak. But Nadella was conscious of their laggardly status and put Microsoft on hyper-alert to promising new technologies. That prepared it to move quickly on LinkedIn, GitHub, Dashlane, Gaming and now AI.

Takeaway: There is always something new around the corner that will eat your current successful strategy and customer revenues for lunch. Live in the business of today and tomorrow. Spend 20% as a futurist, researching emerging trends and asking, ‘So What?’ and ‘What if?’

6. If you’re going to play catch up, go all in. Nadella doubled down on cloud computing. Microsoft has missed the boat, but today Azure’s public cloud offering (22% market share) is challenging market leader AWS (32%) and ahead of Google Cloud (11%). In the last twelve months, Microsoft and Google have each added 1%, Amazon has lost 2%. It’s a three-horse race – Alibaba with 4% are the fourth largest player in the market.

Nadella made cloud a higher strategic priority, although when he succeeded Balmer, Azure had been in development for six years, and the enterprise division, which is now the bread and butter of Microsoft, was already profitable.

Takeaway: It was obvious to a blindman on a galloping horse that Microsoft needed fundamental change. Nadella hasn’t tinkered, he’s articulated some clear strategic bets, reshaping the offering, and gone deep. What are you famous for? Grab customers attention, craft a compelling offer, and make sure you are their go-to choice.

7. Play safe to avoid pitfalls. The consensus on privacy and data security is the need to regulate big tech companies. Microsoft has largely been insulated from the strongest criticism. While it still has an online advertising business through its Bing search engine and MSN family of web sites, its core business is elsewhere. That means Microsoft has less obvious incentive to collect and store data about users. Facebook, by contrast, has seen questions and scandals related to how it uses and secures user information.

Takeaways: Read the runes and risks prevailing in your market. High risks mean high regards for sure, but also offers the opportunity to fall into a pothole that can divert, if not destroy your venture. A bit of caution may mean you let others play the high-stake roulette.

8. Make big bets. Of course, playing safe isn’t always an option, and Nadella’s charge into AI is perhaps the biggest bet any company is taking on the nascent innovation. The prize is potentially huge. Copilots could transform the world of work for the 1.2bn people using 365 and the 1.4bn using Windows. This would allow Microsoft to bring in new customers and charge them more, which in turn could drive business to Azure, helping it overtake AWS.

AI offers Microsoft a tantalising chance to do something that has eluded it to date, bringing together all that it offers. Teams, Microsoft’s video-conference service, might be more attractive than Zoom if it features a Copilot sorts emails in Outlook and collates information from Word and PowerPoint documents. All this wizardry can also be channelled through Azure, further boosting Microsoft’s business.

It has invested $13bn, for a 49% stake in Open AI. The deal not only allows Microsoft to use OpenAI’s technology, but also stipulates that OpenAI’s models and tools run on Azure, in effect making OpenAI customers indirect clients of Microsoft and Open AI the default for large enterprises trying out AI. Microsoft has also bought 15 AI-related firms since Nadella took over.

Takeaway: You’re a tech startup, so do what tech startups are supposed to do – be ballsy, go deep and be confident in your tech chops. Seek first mover advantage by disciplined entrepreneurship, making calculated, thoughtful bets based on robust strategic thinking. Do what others only think.

Microsoft is in a strong position. It failed to seize on the advent of smartphones and was slow to grasp the potential of the cloud. Today it finds itself poised to exploit a raft of technology in its portfolio. Like a startup, it must maintain a delicate balance, moving fast while ensuring it converts opportunity into revenue and wins clients for the long-term. Microsoft 2023 has a customer-oriented philosophy, an innovation led culture, and a tech focused strategy – just what a startup needs for success.

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