BLOOMBERG BUSINESS CASE IN THE NEWS [LO 6-1, 6-2, 6-3, 6-4] Microsoft CEO Satya Nadella Looks to Future Beyond Windows

Our industry does not respect tradition. It only respects innovation, Satya Nadella said in February 2014 when he was appointed chief executive officer of Microsoft. After 39 years, the company Bill Gates co-founded had come to be perceived as an out-of-touch behemoth that relied too much on its Windows operating system and failed to move into new markets, like mobile. Key products such as Microsoft Officethe suite of applications that includes Word and Excelhad been designed around Windows, with only parts converted to work on Apples iOS and Googles Android systems. Nadellas accession would be a chance to reorient the company, getting it to introduce products that looked outside Windows and to develop new business models. Nadella has aggressively pur- sued this course. Since December, Microsoft has bought two small companies that focus on mobile pro- ductivity apps for iOS and Android phones and tablets. To appeal to younger users, the company last September purchased Mojang, maker of the popular Minecraft video game, for $2.5 billion, and its adding features to Windows such as 3D holograms that users view through a headset and control with hand gestures. The newest version of Microsofts Power BI (business intelligence) producta dashboard for data analysiswas released in January, first for iOS systems. Micro- soft hasnt really shown any sort of vision like this in a long, long time, Michael Silver, an analyst at Gart- ner and longtime Microsoft watcher, said in January when it unveiled the holograms. All it took was replacing

the senior management.

In Nadellas first year, Microsoft stock rose 14 percent, and sales increased 12 percent. The new CEO, unlike his predecessor Steve Ballmer, is popular with investors, venture capitalists, and startups. Even employees like Nadella, sur- prising for a chief executive who signed off on the largest layoffs in Microsofts history18,000 job cuts were announced last July. Staff say they appreciate Nadellas strategy shifts and attempts to make the com- pany leaner and less bureaucratic. The big issue Nadella faces is how to generate more revenue with new software and features, such as cloud subscriptions and free apps replacing pricey Windows and Office licenses. Revenue is pro- jected to increase 8.6 percent, to $94.3 billion, this fiscal year, slow- ing from last years double-digit growth, according to data com- piled by Bloomberg. Hes hit all the low-hanging fruitthat said, these things were not easy to do, says Brad Silverberg, a venture capitalist and former Microsoft executive. Where there are execution issues, we will address them, Nadella said on a conference call in January. Where there are mac- roeconomic issues, we will weather them. Microsoft declined to make Nadella available for an interview.

Windows, which once domi- nated computing and ran on more than 90 percent of computing devices, now runs on 11 percent of computers and gadgets, accord- ing to a report from Sanford C. Bernstein. Nadella and Windows chief Terry Myerson are looking at ways to update the software. Nadella uses the Power BI dash- board to track and compile huge amounts of information on product usage and financial performance to see what works and what doesnt, says James Phillips, general man- ager of the product. Nadella also measures and coordinates executive performance with metrics from the dashboard. Satya has been leading the charge for everyone in the com- pany to be more data-oriented, says Chief Strategy Officer Mark Penn.

Microsofts quarterly earnings report in January highlights the hurdles Nadella faces. While cloud software sales to businesses more than doubled in the quarter that ended Dec. 31, sales of traditional Office and Windows software to companies fell short of analysts estimates. Windows sales to per- sonal computer makers who put the program on their machines dropped 13 percent. In total, profit declined 11 percent from the previous year, to $5.86 billion, while sales rose 8 percent, to $26.5 billion. Revenue is being hurt by fluctu- ating currencies, while the Chinese government is investigating Micro- soft over alleged anticompetitive practices and seeking to end pur- chases of its software. The govern- ment of Russian President Vladimir Putin says it wants to reduce reli- ance on Microsoft.

Internally, Nadella and his execu- tives make the point whenever they can that the day could come when new and younger generations of computer and software users might not use its products. At one board meeting last year, Windows chief Myerson showed a slide with pic- tures of students using Apple Macs and iPads, according to Microsoft spokesman Peter Wootton. In 2014, Nadella told employees at a town hall that they should skip meetings if they dont really need

to be there. And hes advised work- ers to come to him directly if they feel the bureaucracy is stifling. The organization knows its go-time, says Phillips. There are changes in the market we need to respond to. Nadellas also changed the way engineering teams are structured, eliminating testers to speed up soft- ware releases and adding data sci- entists and designers to the teams. Hes looking at cutting some middle managers to make decisions faster and to eliminate layers of bureau- cracy, Wootton says. Eli Lilly Chief Technology Offi- cer Mike Meadows says Microsoft is more open and listening to what customers need. He was glad to see the company demonstrate its products on iPads at Microsofts chief information officer conference last fallLillys 20,000 salespeople use Apple tablets, Meadows says. Theyre starting to demonstrate more understanding of reality, he says. They would say, We were going in this direction already, but Satya lit a fire. The bottom line: Nadella is working to push Microsoft out of its Windows slump and into cloud computing and apps for iOS and Android. Questions What kind of planning missteps helped cause Microsofts decline over the past few years? How is Nadella trying to eliminate some of the bureaucracy that has hurt the companys ability to innovate? What business strategies has Nadella implemented that will help revitalize the technology giant? Please answer the questions in detail