Back in the spring of 2002, more than a decade ago, the big news coming out of Redmond was that Microsoft President Rick Belluzzo was leaving after 14 months on the job. But looking back today, with the benefit of hindsight, a different part of that announcement would turn out to have a far bigger impact on the company’s future.

Steve Ballmer at the Microsoft CEO Summit 2013. (Microsoft Photo).
Steve Ballmer at the Microsoft CEO Summit 2013. (Microsoft Photo).

Microsoft at the time decided to give “comprehensive operational and financial responsibility and greater accountability” to the leaders of its seven core divisions — further enabling those divisions to operate as businesses unto themselves.

“We realized we needed to give our core leaders deeper control and accountability in the way they run their businesses, while at the same time ensuring strong communication and collaboration across the business units,” said Microsoft CEO Steve Ballmer in a news release announcing the changes in April 2002.

It wouldn’t be the last time. Here’s what I wrote in September 2005 about that year’s reorg: “Microsoft will divide itself into three business divisions, each with its own president, trying to make its operational units more autonomous and its overall business more agile as it competes with the likes of Google and other smaller rivals.”

This was the end result, as famously portrayed in an online comic by BonkersWorld lampooning various tech company structures.


Microsoft insiders acknowledge the ring of truth in this parody. Rather than encouraging speed and collaboration across the company, the autonomy often put the divisions at odds.

This is what makes Microsoft’s latest reorganization, announced last week, so radically different. It’s not just another reorg. It’s a sudden reversal of the corporate structure that Ballmer himself put into place and repeatedly reinforced over the past decade.

Microsoft has shifted from a structure of comprehensive, end-to-end business units, organized largely around specific products, to what’s known in management circles as a “functional” organization — where groups are formed instead around their disciplines and the tasks they perform. That’s why, for example, the company’s new operating systems group includes not only engineering for Windows and Windows Phone but also for the Xbox operating system.

Ballmer outlining the changes to employees last week. (Microsoft Photo)

Ballmer explained the benefits in his memo to employees last week: “We are rallying behind a single strategy as one company — not a collection of divisional strategies. Although we will deliver multiple devices and services to execute and monetize the strategy, the single core strategy will drive us to set shared goals for everything we do. We will see our product line holistically, not as a set of islands.”

Ironically, many of the approaches in Ballmer’s new “One Microsoft” strategy are the same as those espoused by former Microsoft Windows president Steven Sinofsky, who wrote a book called “One Strategy” about functional organizations and the shift to this model in the Windows division under his leadership.

Sinofsky and Ballmer clashed over the best way to run the company, but the reorg almost makes it seem as Ballmer is now on the same page, literally.

For example, Ballmer told analysts last week: “The problem we’ve had in a sense — not the problem, but the opportunity we have — is if you subdivide the thing into too fine a set of parts you don’t think about your R&D investments as a general corporate resource that should be repurposed and used very broadly. It’s my resources, my business, and so this notion even from a P&L and resourcing perspective of getting to a more ‘One Microsoft’ strategy is very important.”

Assuming this is true, why did it take so long to figure out?

pcshipmentstabletsYes, Microsoft is different today than it was in 2002, and significantly larger, with nearly twice as many employees. The company says its evolution into a “devices and services” company — making both hardware and software — prompted the changes. Maybe it would have been too much to expect this type of foresight a decade ago.

But somewhere over the past 10 years, and long before this year, it must have become clear that the approach of autonomous divisions attempting to work together wasn’t working, as Microsoft failed to gain traction in key consumer markets, and Apple, with its functional structure, created a series of consumer hits.

One theory is that the U.S. antitrust settlement kept Microsoft from integrating in this way in the past, and that the expiration of that deal in 2011 cleared the way for this new structure, but Microsoft execs I’ve spoken with over the past week said that wasn’t a factor, at least not consciously.

Now the company is facing the decline of its traditional Windows PC business without a strong position in the booming markets for tablets and smartphones.

There will be — or at least there should be — tremendous pressure on the leaders of this new Microsoft organization to move quickly. This time, when they say the new org will make Microsoft more nimble and collaborative, they’d better hope it’s actually true.

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  • rayburt456

    That chart shows shipments of all products down. But folks say it’s the end of the PC era. They don’t say the end of the IPAD era. Or the end of the Tablet era. Interesting.

    • Todd Bishop

      Sorry, I should have done a better job making the seasonality clear. Best to compare Q1 to Q1 and so on (as opposed to Q4 to Q1, etc.) On that basis, iPad and tablet shipments are up, while PC shipments are down.

  • Guest

    It took so long because MS is run by arrogant jackasses who have been arguing with their critics and grossly underestimating their competition for more than a decade, even as the company’s competitive position has gone from industry dominance to tier 2 player. Very little of that fall has anything to do with org structure. It’s more about leadership and culture. Changing the former while leaving the latter largely in place isn’t magically going to fix the agility and execution problems that have plagued the company over this lost decade. Indeed to the extent that the new structure makes MS even more reliant on the vision and judgment of Ballmer, it’s a disaster. The only reason we may see actual change this time isn’t structural but economic. With PCs now in decline, and MS having failed miserably in the two growth markets it helped pioneer: smartphones and tablets, they can no longer rely on their cash cows to keep revenue and earnings growing. And let’s be clear, the fact that revenue and profit kept increasing despite the problems over the last decade is the ONLY reason Gates has been able to keep Ballmer as CEO and SLT maintain autonomous control of the company generally. The minute that growth ends, SLT and the board are gone. And for the first time in a decade, all of them realize that’s a distinct possibility.

  • Guest

    The reorg may disarm product groups holding guns on each other but it doesn’t do anything about people holding guns on each other.

    The lack of cooperation had some to do with divisional fiefdoms and sure, this’ll help that.

    But it has much more to do with personal survival under the review system.

    A zero-sum system that requires losers and is driven by peer feedback creates incentive to kill before you’re killed.

    People are openly targeted and tagged as “the 5” in a group these days and everyone focuses on making sure it’s not them that gets tagged.

    In this brutal environment there is no trust and so no real cooperation. And its only going to get worse as people scramble for chairs as the reorg trickles down.

    • Guest

      I cannot believe that the management doesn’t see that the hostile review system sets the tone for the overall company culture.

      • Guest

        More likely they don’t care. It’s a corrupt system.

        Notice that Ballmer’s directs aren’t subject to the curve? Would be good to know how high the review system is actually applied. I’m guessing it stops 2 – 4 rungs below Ballmer.

        So it’s one company, two systems.

        And the system is skewed to only leave people who benefit from it in place over time. And those people are busy trying to get to where they’re not subject to it any more as well.

        It aligns beautifully with the Partner system. People have a vested interest in towing the line so they can get the big payoff by “making it”.

        I’ve seen many a good person check their soul at the door once they see that’s how you get ahead in that system. No one ever made partner by saying the review or Partner system was bad. They just get 5’d and their slot given up to another more agreeable person.

      • Keeping it Real

        Actually the review system is an outgrowth of MS’s culture, which has remained largely unchanged for decades.

  • Flydog57

    Hal Berenson’s blog makes similar points. However, he also points out how the 2005 era re-org was a reaction to the Vista fiasco, and how having a strict product-centric org allowed Microsoft to recover from Vista (with Win7) and how several other groups were able to thrive.
    Watching how this org affects MSFT (the company and the stock price) over the next few years should be interesting.

  • ex-softie

    If Ballmer really wanted more cooperation, he would not have promoted so many people who are good at playing corporate politics. I am shocked at a few of the people he has promoted. As always, politics wins over quality.

    • Not Another Disgruntled Ex Emp

      Few people rise to senior management who aren’t good at playing corporate politics. That’s true at MS and most other large companies. If you’re one of those people who pretend that isn’t the case and everything’s a meritocracy, then that might explain why you’re an “ex-softie”, assuming you even are. So putting aide the non-criticism that these new leaders aren’t naïve idiots and know how to play the game, who amongst them isn’t also quality? Frankly, when someone of Hal Berenson’s stature says he’d happily work for any of them were he back at MS, that’s a mighty big refutation of your low quality thesis.

  • ExMSFTer

    The problem with this approach is that small important groups are lost in the mix. In the case of the OS Engineering group, it’s like putting an 800lb gorilla (Windows) into a cage with a fox (Xbox) and a minnow (Windows Phone). The fox and minnow will do whatever the gorilla wants.

    • Guest

      The argument has been that they were already lost in the mix due to the magnitude of the Windows business. At least in this move they’ve centralized OS dev and put the WP guy in charge overall.

  • panacheart

    Good article on the history of reorgs at MS. I’m not sure another round of musical chairs will change anything significantly. It’s kind of like putting a new coat of paint on an old house. Too bad Ozzy couldn’t have taken the reigns.

  • Behonest

    Honest companies prevail; dishonest ones die slowly. I hope Microsoft just goes away; mini microsoft style. All this movement does nothing for innovation. They just don’t get it.

  • Sad times-99

    Ballmer needs to fix the mess called Microsoft then leave. He should start with the review system. The infighting doesnt stop at the divisions. Keep clicking. So many yes lieutenants around he can’t see the truth. Then he has to stop letting HR and the COO run the business for him. The place functions like a law firm more than a software company. The board should be ashamed of themselves. Horrible show and they just let it go on. Like watching a slow train wreck of sorts.

    The whole reorg announcement is rubbish. It means nothing. Internal people that we are now to expect innovation from now that they have new titles. What a hoax. What a freakshow.

  • DZ

    HR, Finance, ect are thoese functions support functions for the five divisions?

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