The practice of business strategy as it’s been taught in business schools puts big companies at a competitive disadvantage to startups. Amazon andGoogle GOOGL +0.31% grew from startups to giants with that realization firmly in mind.
Before getting into why Microsoft looks more attractive as an investment, let’s look at the field of business strategy and how some big companies are adapting to the way startups practice it. The key insight is that the traditional way that big companies practice strategy slows them down — reducing perceived career risk but giving startups a huge competitive edge.
How so? In big companies, strategy has traditionally been an affair that involves an executive steering committee and a team of consultants.
The consultants spend six to 12 months analyzing the attractiveness of a potential market, evaluating the capabilities needed to win in that market, assembling the resources needed to master those capabilities, detailing the action steps to implement the strategy, and building a robust financial model that estimates the investment required and the strategy’s expected return.
Two years ago, I published Hungry Start-up Strategy based on interviews with over 160 entrepreneurs. What I found is that startups don’t have the time for this concept of strategy because they could easily burn through their remaining cash in the time it would take to get this process started.
As a result, startups take their two best guesses about the right strategy; build quick, cheap versions of the products that represent those guesses; put those versions in front of customers and measure the response. Startups learn from those responses and try again.
In the time it takes a big company to go through its six to 12 month strategy process, a startup has tried six or seven different strategies — each one better than the one before. The result is that as a result of their lower resource levels, startups have much faster clock speeds than big companies.
I have given talks on how big companies can get back their startupness. What is nice to see is that Microsoft — which I am assuming has not seen my work – is starting to follow some of the principles I talked about.
This approach is starting to appear in Microsoft’s Azure business unit that operates its relatively fast-growing cloud computing unit — according to Microsoft’s latest 10Q, its revenues rose 13% in the quarter ending September 2014 – that Nadella helped to get off the ground.
Some organizations are starting to operate in a way that mirrors how cloud computing works. According the New York Times, “In cloud computing, computer servers are pooled through management software. Power is dialed up or down depending on the workload, and the system is continually reconfigured, based on data about the next workload. To see how this changes a workplace, look at the structure of the biggest cloud companies around.”
Microsoft is starting to do just that. As David Campbell, the head of engineering at Microsoft Azure told the Times, “You learn to harness feedback. Early on, this means lots of ‘A/B testing,’ or putting up two versions of a website to quickly see which the customers prefer.”
Azure adapts based on customer preferences. According to Campbell, Azure “makes engineering changes by moving parts of its customers’ traffic into the new stuff, seeing if that works as predicted and then building up. Checking expectations and hypotheses in real time takes hours, instead of months and years in the legacy world.”
The result of this is a radical change in the practice of strategy — letting market response to cheap experiments prevail over a battle of managerial egos. As Campbell explained, “Instead of having a debate informed by decades of experience around whether a customer would want A or B, we define a testable hypothesis, which we quickly try to validate.”
This all sounds promising — but Microsoft has not worked out all the kinks. After all, on November 17 Azure went down for 11 hours. The BBC wrote about how this hurt clients – preventing health care workers from accessing their email and documents and making a social media startup’s site go dark.
Jason Zander, a corporate vice president with Microsoft Azure, wrote in a blog“When we have an incident like this, our main focus is rapid time to recovery for our customers, but we also work to closely examine what went wrong and ensure it never happens again.”
If Microsoft can indeed learn from this mistake — and incorporate this new concept of strategy across the entire company — I expect its revenue growth to rise — and given its 23.4% net profit margin that would be good for Microsoft investors.
Source Url:http://www.forbes.com/sites/petercohan/2014/11/24/why-the-death-of-strategy-makes-microsoft-a-better-investment/
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