Perceived missteps may have hit a tipping point for Ballmer

He has been in hot water over a variety of issues, including Microsoft's position in the tablet market

An accumulation of blunders under Steve Ballmer's leadership may have hit a tipping point this year, leading to Friday's groundshaking announcement that Bill Gates' former right hand and heir, as well as Microsoft's fiercest cheerleader, will step down as CEO within the next 12 months.

In recent years, Ballmer has been the target of critics over a variety of issues, including their dissatisfaction with the company's stock performance, Google's dominance in search advertising, the perception that Microsoft reacted late to cloud computing and its weak position in the tablet and smartphone OS markets.

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"There have been a whole series of market shifts that Microsoft has either missed entirely or misjudged their importance," said Al Gillen, an IDC analyst.

Rebecca Wettemann, a Nucleus Research analyst, said Ballmer should have exited the stage several years ago, because he has lacked the vision to see market fluctuations and failed to properly execute on opportunities.

"This gives Microsoft a chance to start a new chapter and hire a CEO who has vision to lead the market, and not follow it, which is what Microsoft has been doing," she said. "It must be someone who isn't looking just at how we move people to the next version of Office, but how we innovate to drive value to customers."

Most recently, Ballmer has been in hot water over Windows 8, a major upgrade of its flagship OS that many perceive as a flawed release. Billed as a product of historic importance, Windows 8 represents Microsoft's attempt to improve Windows' anemic participation in tablets and smartphones, where Android and Apple's iOS dominate.

However, Windows 8, which began shipping in October, has been heavily criticized due to its radically redesigned user interface, which is based on tile icons and optimized for tablets and other touchscreen devices.

Windows 8 also has a more traditional Windows desktop interface for running legacy applications, but many consumer and enterprise users have complained that toggling between the two interfaces is clunky and inconvenient. There has also been an outcry about the removal of the Start menu and button.

Microsoft plans to release an update for the OS, called Windows 8.1, in October. It addresses these complaints and several others, but there is a concern that the fixes may be too little, too late to salvage the OS's reputation and that it might end up being a fiasco like Windows Vista.

Some critics maintain that attempting to build a single OS for desktops, laptops and tablets was a strategic mistake because Microsoft has ended up instead with a product that isn't good enough for any of those devices. Apple's strategy, by contrast, has been to have Mac OS for its desktops and laptops, and iOS for the iPad, iPhone, and iPod.

"If Windows 8 had been a huge success and the business was growing by leaps and bounds, and Microsoft was winning share in the tablet market, there'd be a lot less pressure for Ballmer to leave," Gillen said.

Another focus of criticism for Ballmer has been what many consider a bad strategy related to the company's Office cash-cow franchise of refraining from releasing a full-fledged version of the suite for iOS and Android. Seen as a move to protect Windows, critics of this strategy say Microsoft is leaving billions of dollars on the table by not giving users of iPads and Android tablets a full version of Office.

Ballmer has also shouldered the blame for the controversial and so far not very successful decision to have Microsoft manufacture and brand its own tablet, the Surface, an attempt to mimic the model popularized by Apple with its combination of iOS and the iPhone, iPod and iPad devices.

The move has upset the company's hardware partners, because they view it as unexpected competition from Microsoft. Beyond that, the first Surface models haven't sold well.

In its fourth quarter, which closed in late June, Microsoft missed Wall Street's revenue and profit expectations while taking an almost $1 billion charge related to the dismal sales of the Surface RT, the model that runs Windows RT, the Windows 8 version for ARM chip devices.

The other Surface model, the Pro, which runs x86 chips, has been criticized for being too expensive and for being a battery hog.

"The weak performance by Microsoft in the last quarter, combined with the lackluster uptake of Windows 8 and the failure of the Surface RT -- all those things created additional pressure for Microsoft in general and for Ballmer in particular," said Gartner analyst David Cearley.

A crucial flaw for Ballmer in recent years was his disconnection from customer needs and demands, according to analyst Jack Gold from J. Gold Associates. "The disaster in tablets, the failure of Windows RT, the idea that they knew what was best for customers by ramming Windows 8 down their throats," Gold said in an email statement. "Ultimately, if you lose the focus on what your customers want, you lose."

Frank Gillett, a Forrester Research analyst, said whoever replaces Ballmer must manage the company more like a startup and less like a big company with complex metrics and processes. "The new CEO will need a strong sense of emerging business models and tech industry dynamics," he said.

In mid-July, Ballmer shook up the company's executive ranks with a broad reorganization billed as necessary to reinvent Microsoft as a devices and services company, and evolve from being a provider of packaged software.

The goal is to make Microsoft function more cohesively and be more efficient and innovative so it can better compete against rivals like Apple, Oracle, IBM, and Google.

The reorganization, which is being implemented now, dissolved the company's five business units -- the Business Division, which housed Office; Server & Tools, which included SQL Server and System Center; the Windows Division; Online Services, which included Bing; and Entertainment and Devices, whose main product was the Xbox console.

Those business units are being replaced by four engineering groups organized by function, around OSes, applications, cloud computing and devices, and by centralized groups for marketing, business development, strategy and research, finance, human resources, legal and operations.

However, the plan has also met with skepticism among those who believe that it will lead to less accountability, less clarity and ultimately less agility.

Others maintain that the "One Microsoft" mantra at the center of the reorganization is misguided because the opposite approach is needed, namely to reorganize it into more independent operating companies because it now houses businesses and products that are too different -- like the SQL Server enterprise database and the Xbox console.

Another question concerns how Ballmer's successor handles the company's Dynamics ERP (enterprise resource planning) and CRM (customer relationship management) software business, which has been built up through a number of acquisitions.

Ballmer carved out a special place for Dynamics in his reorganization plan, saying Microsoft would "keep Dynamics separate as it continues to need special focus and represents significant opportunity." He also kept Kirill Tatarinov in place as head of Dynamics.

While Microsoft lags behind the likes of Oracle and SAP in enterprise applications, analysts see Dynamics as a conduit of sorts for selling a wide array of other Microsoft services into enterprises. Given the strategic nature of ERP and CRM systems to a business, it also gives sales representatives an opportunity to speak with CEOs, chief marketing officers and chief financial officers, as opposed to IT managers.

"Dynamics is key to Microsoft's enterprise cred," said analyst Ray Wang, CEO of Constellation Research. "I think that it was a visionary move to bring Dynamics in when he did."

However, Dynamics didn't start becoming well-integrated and aligned with other Microsoft products such as SharePoint, SQL Server and Azure until more recently, he said. "If it had happened earlier, they'd be further ahead."

There has often been talk of Microsoft selling off the Dynamics business. "I think that's up in the air," Wang said. "Dynamics set up as a stand-alone unit could be possible given how the company is currently structured. The CRM side would go to Office and the ERP stuff would be spun out."

At any rate, Ballmer's exit doesn't mix well with the just-announced, massive reorganization and new strategy shift toward devices and services, especially when the expectation had been for him to be on board for several years at least executing on the plan, Cearley said. "This creates additional uncertainty in the market."

Even if Ballmer's replacement sticks with the current plan, it's to be expected that this person will put his or her own imprint on the company's operations and strategies, so there will be some changes, even if they're not radical, he said.

For example, it's unlikely that the board would pick someone to come in and do a 180-degree turn, such as breaking up Microsoft into more autonomous businesses. After all, Ballmer will remain with the company and participate in the selection of his replacement. Plus, the board of directors backs the current direction of the company, Cearley said. "There is no repudiation of the current Microsoft strategy nor of the things Steve was trying to do," he said.

However, all bets are off looking ahead three or four years from now, so CIOs and enterprise IT decision makers need to keep an eye on how things develop once Ballmer steps down. "We see no big change in the near term, but longer term there are more questions about the strategy," Cearley said.

Ballmer's departure will be a historic turning point for Microsoft. Ballmer, who is 57 and joined Microsoft in 1980, has been CEO since 2000. In a statement, he said the decision to step down wasn't easy, but that he believes it is the right one.

In particular, he's convinced Microsoft should have a CEO who is on board for the entire "transformation" process set off by the reorganization announced last month.

"Our new senior leadership team is amazing. The strategy we have generated is first class. Our new organization, which is centered on functions and engineering areas, is right for the opportunities and challenges ahead," Ballmer wrote.

Wall Street's response has been enthusiastic, with the share price up almost 7 percent in mid-afternoon trading.

Now the attention turns to his successor, Cearley said. "Steve Ballmer leaving Microsoft is a major event, because he has been such a strong force in the company for many years, but an even bigger watershed event will be the naming of a successor," he said. "That'll signal more clearly what future direction Microsoft will take."

(Chris Kanaracus in Boston contributed to this report.)

Copyright © 2013 IDG Communications, Inc.

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