Microsoft sharpens product focus with reorganization

At the advanced corporate age of 30, Microsoft felt it was losing its competitive spirit under layers of bureaucratic fat. So last week the world's largest software maker ripped up its organizational chart, consolidated six unwieldy divisions into three, and appointed presidents with unprecedented leeway to run them.

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The organizational streamlining results in a sharpened focus on the forthcoming releases of the Vista OS, Office 12 productivity suite, and the next-generation Xbox game console. According to analysts, however, a deeper motivation of the shakeup appears to be a long-term effort to look beyond Windows-based computing, toward Internet-based, hosted software services such as those that Google offers.

CEO Steve Ballmer announced the three new units: the Microsoft Platform Products & Services Division, at which Kevin Johnson and Jim Allchin will serve as co-presidents until Allchin retires at the end of 2006; the Microsoft Business Division, with Jeff Raikes as president; and the Microsoft Entertainment & Devices Division, with Robbie Bach as president. Furthermore, Ray Ozzie will expand his role as CTO to help drive a software-based services strategy across all three divisions.

Analysts said too many divisions had confused sales, marketing, and development efforts. The restructuring will enable Microsoft to more efficiently deliver products, combining technologies from divisions that previously had difficulty working together because they were in separate organizations, said Rob Enderle, principal analyst at Enderle Group.

"The company had become almost unmanageable," Enderle said. "In the past two and a half years, it felt like you just couldn't get anything done. The turf wars became more pronounced."

Some analysts said Microsoft is giving particular weight to a services strategy designed to create new products through MSN within the Platform Products & Services Division, thus depending less on selling packaged software and instead providing more services for customers.

Ballmer touched on the issue in an e-mail to company employees last week. "Our MSN organization has a track record of innovating quickly and delivering software-based services at scale, while the existing platforms groups possess great expertise in creating a software platform and user experience that touches millions of people," he said. "Having David Cole and MSN reporting to Kevin Johnson enables us to bring together these businesses, harness our services capabilities and deliver greater value to our customers."

Gordon Haff, senior analyst at Illuminata, said the growing success of Google's Internet-based search platform prompted Microsoft's push toward a services strategy.

"At some level, this [reorganization] is clearly a response to Google because of Microsoft's historic orientation around the fat client and traditional operating system and applications," Haff said.

With the reorganization, Microsoft has covered its bets with fat- and thin-client strategies.