Learning from the reinvention of Microsoft

Corporate culture must be oriented toward cultivating new technologies, and leadership must have an eye for future technology.

Kim Chang-gyuThe author is the editor of economic news at the JoongAng Ilbo. Last week, Taiwan’s TSMC, the world’s top pure-play foundry, released impressive earnings for the third quarter. It raked in $10.1 billion in net profit, up 54.2 percent from a year-ago period and far exceeding market estimate of around $9.4 billion. Its sales for the period jumped nearly 40 percent to $23.7 billion.

Earlier, Samsung Electronics reported its preliminary earnings for the third quarter — a net profit of $6.6 billion, nearly tripled from a year-ago slump — but fell short of market expectations of $7.9 billion. Its sales increased 17 percent on year to $57.2 billion in the quarter.

The Asian tech bellwethers contrast more sharply in market cap. Samsung Electronics had a market cap of $249.2 billion as of Oct. 22, while TSMC was valued at $1.5 trillion. All tech behemoths like Microsoft and Sony have experienced ups and downs. Experts mostly blame a lack of agility in responding to the changing times through expeditious innovations and communication. Microsoft fell from grace, descending from being the pioneer of personal computing to a fat laggard complacent in its Window monopoly. But today, Microsoft transformed itself nicely to join the Fabulous Five.

Microsoft was pushed aside by Google and Apple after it failed to keep up with the mobile and social networking wave. When Satya Nadella ascended to the helm in 2014, Microsoft was at its worst, lacking communications internally and externally as well as innovative motivations due to its bureaucratic culture and long-held monopoly in the operating system. Consumers were disgruntled with Windows 8, and its mobile phone as well as search engine were largely shunned. Its earnings and stock prices dipped as investors found the company irrelevant to innovation.

One of the first things Nadella did away with was the notorious “stack ranking,” which was blamed for reinforcing a bureaucratic organization and killing innovative genes. Managers graded employees on a bell curve in a rating from 1, the highest, to 5, the lowest. A fixed number in the relative performance scale had to go to the bottom, propelling an arrogant and complacent culture of pursuing short-term goals and defying risk-taking collaboration or teamwork among peer engineers. Nadella changed the performance review system to an absolute one as he found the evaluation unfit for the age of tech transitions demanding agility, versatility and the ability to carry out several projects simultaneously. He also added scores for teamwork. The “One Microsoft” project was promoted to eliminate hierarchies and barriers from different divisions to encourage engineers to share their ideas and works. It sponsored the world’s largest annual “hackathon,” where its engineers across hundreds of cities competed with all sorts of projects over a few days. These projects gradually turned the dinosaur into something more like a daring startup.

A bigger challenge was how to find new avenues for growth. The largest stumbling block was open-source operating system Linux. Co-founder and former CEO Bill Gates likened it to a “communist” concept and his successor Steve Ballmer even called it as “toxic as cancer.” Microsoft feared the free software would wreck its mainstream OS system business. But Nadella saw a bigger picture and bet high on cloud services where open sourcing was essential to connect servers and databases for companies and individuals. Saying, “Microsoft loves Linux,” the CEO embraced rivaling operating systems and other companies’ virtual devices.

There is no clear-cut playbook for business management. What worked as a strength before can become a weakness later. But what ultimately matters at the core is technology. Corporate culture must be oriented toward cultivating new technologies, and leadership must have an eye for future technology. “Listen more and talk less” and “be decisive when the time comes” are the virtues of leadership, according to Nadella. The same wisdom had been shared by Samsung founder Lee Byung-chul. He gifted a calligraphy piece with the word “Listen” when handing down the helm to his third son Kun-hee in 1979.

Translation by the Korea JoongAng Daily staff.