How Goliaths Beat Themselves: Microsoft's Mobile Failure and the Innovator's Dilemma

At giants like Microsoft, success creates its own centripetal force that can make it impossible to invest in the future

Some of the best pre-mortems for Steve Ballmer, out-going CEO of Microsoft, have chalked up the company's problem to the "innovator's dilemma." But which innovator's dilemma are they talking about, exactly?

The first and most simplistic definition of the dilemma, which was coined by Harvard's Clayton Christensen, says that firms fail when their core product is undermined by a "disruptive technology."

A second, less simple -- but, I think, more useful -- definition is that firms led by excellent managers fail precisely by doing the thing excellent managers are supposed to do: listening to their customers. No good business teacher will tell you, "never listen to your idiot customers." Listening to users is how you make stuff better! But there's a catch.

Since customers cannot possibly tell you want they don't know (how many of you were crying out for something like the Samsung Galaxy S4 in 1998?), great managers have to anticipate and bravely invest in technologies that not only have pathetic current customer appeal but also might cannibalize their core business. Cut to Microsoft: Redmond HQ was brilliant at iterating on a core product in the late 1990s -- Windows 2.01, Windows 2.03, Windows 2.10 -- but less brilliant at foreseeing the mobile trend that would eclipse Windows-run desktops. As the graph leading this article (via Benedict Evans) shows: Apple and Android are devouring the market for computers.

This leads to a third, more complex, and even more useful lesson from the innovator's dilemma. Managers find it very hard to keep resources focused on the pursuit of disruptive technologies because successful companies tend to be better at organizing around -- and honing expertise in -- the product lines they already make money from. Success creates its own centripetal force that makes it hard to invest in a future outside the model.

From the book, itself:

Despite their endowments in technology, brand names, manufacturing prowess, management experience, distribution muscle, and just plain cash, successful companies populated by good managers have a genuinely hard time doing what does not fit their model for how to make money. Because disruptive technologies rarely make sense during the years when investing in them is most important, conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. It is powerful and pervasive.

You could scarcely write a better analytical description of Microsoft in the late 1990s if you tried. Take it from one guy who did try. Kurt Eichenwald's Vanity Fair essay on the company could be a footnote to The Innovator's Dilemma:

Microsoft failed repeatedly to jump on emerging technologies because of the company’s fealty to Windows and Office. “Windows was the god—everything had to work with Windows,” said Stone. “Ideas about mobile computing with a user experience that was cleaner than with a P.C. were deemed unimportant by a few powerful people in that division, and they managed to kill the effort.”

This prejudice permeated the company, leaving it unable to move quickly when faced with challenges from new competitors. “Every little thing you want to write has to build off of Windows or other existing products,” one software engineer said. “It can be very confusing, because a lot of the time the problems you’re trying to solve aren’t the ones that you have with your product, but because you have to go through the mental exercise of how this framework works. It just slows you down.”

In his last chapter, Christensen writes that the most gratifying conclusion from his book is learning that "thinking smarter," "managing better," and "working harder" aren't answers to the innovator's dilemma, and thank heavens, because most people that make it to the top of a major company are pretty smart thinkers, good managers, and hard workers. Instead, successful companies become victims of their own self-sustaining success.

Microsoft is a very successful company. It's worth as much as Amazon and Verizon put together. Since 2009, revenue is up 33 percent, net income is up 50 percent, and total assets have doubled. Steve Ballmer has basically succeeded in growing Microsoft as far as it could go ... and that's exactly how he failed.