Reorganization by Microsoft

The final reading discusses a recent reorganization by Microsoft ("Microsoft Sets Big Restructuring Plan" from the WSJ). Please answer the following questions regarding the reading.
? With its new choice of business units, what grouping principle is the company following and why?
? Describe one way that these units will continue to be interdependent. What linking mechanism would you use to deal with this interdependence, and why?
? Explain one complementary change in the company's informal organization might be necessary to make this redesign effective.
? What is one source of inertia that the company is likely to face with this change?

Essay 3 Reading:
Microsoft Sets Big Restructuring Plan --- Shift to Three Major Units Aims to Improve Flexibility Against the Likes of Google
By Robert A. Guth, 1158 words, 21 September 2005, The Wall Street Journal, A3
Microsoft Corp., facing its most serious challenge from agile upstarts in a decade, announced a broad reorganization as it strives to keep pace with Google Inc., Linux makers and others exploiting the Internet to quickly develop and distribute software.

Under the reorganization, the Redmond, Wash., software giant is being divided into three major units, each led by a senior executive holding the title of president, a streamlined structure that reflects a sense of internal urgency that Microsoft must more effectively embrace a trend it has long seen coming but to which it has never fully adapted. While Microsoft still mainly sells software that is upgraded from time to time, Google and others are using the Web as a medium for services that evolve more quickly to meet new customer needs.

The reorganization is "part of driving software-based services in competition with anybody else who thinks they're going to use that strategy to get ahead in the marketplace," Chief Executive Steve Ballmer said in an interview. "We're not the only guy who's going to try to deliver software that has a service-based component. We need to get there aggressively and quickly."

The moves also are aimed at speeding decision-making in an organization that is now 30 years old, has 60,000 employees and has seen some senior managers defect to nimbler rivals. The company's dominant Windows software and huge Office division give it a critical foundation for funding new businesses, but many of them have yet to yield profits. Each also competes with specialists; in videogames, for instance, Microsoft is up against Sony Corp., while its online service, originally designed to take on America Online, now is rivaled by Yahoo Inc. and Google, among others.

Mr. Ballmer said the reorganization is intended to push decision-making further down into the organization. "That will allow us to be more agile, faster moving," he said. It follows other changes he has pushed through, including several years ago arranging the company into seven divisions, each responsible for its own financial performance.

The changes reflect the reality that Microsoft faces its most daunting competitive threat since the first wave of Internet startups in the mid-1990s developed Web-based software that threatened the primacy of the company's Windows operating system as a foundation for technology development. Microsoft beat back that threat -- in part thanks to tactics that prompted a long-running government antitrust suit.

Now the spotlight is on cash-rich Google as it uses the Web to distribute programs such as email and search technologies and then incrementally improves those programs. Similarly, Salesforce.com sells subscriptions to its software that customers access over the Internet. Makers of the Linux operating system, meanwhile, use the Internet as a tool for collaborating on new software innovations.

Each of the new unit presidents will report to Mr. Ballmer. Among the new divisions are Platform Products and Services, which will for the first time group Microsoft's Windows group -- including PC and server software -- under the same umbrella as its MSN online business.

The pairing highlights how Mr. Ballmer hopes to meet the challenge. Struggling with the growing complexity of Windows, Microsoft a year ago was forced to delay the next version of the operating system, called Windows Vista, until late next year, five years after Windows XP and the longest interval between versions of Windows. That delay allowed Google to pop out programs like desktop search before Microsoft could offer similar functions in Windows.

MSN, meanwhile, has been an in-house champion of using the Internet to iteratively release software and over the past two years has pumped out new versions of search and communications services. As part of Windows, MSN could be used as a distribution mechanism for future Windows features, said people familiar with Microsoft's plans.

Still, problems could result. Earlier when Microsoft executives first aired the possibility of merging MSN and Windows, some key managers threatened to quit if the combination went through, according to people familiar with the situation. It is unclear how or whether that conflict was resolved. "We're all Microsofties at the end of the day so I don't actually see different cultures," Mr. Ballmer said.

The Platform Products and Services unit for the next year will be co-headed by Group Vice President Jim Allchin and Kevin Johnson, who most recently served as group vice president in charge of Microsoft's sales division. But Mr. Allchin, who now runs the Windows division, will retire late next year, Microsoft said.

A second unit, the Business Division, will oversee Office and Microsoft's business software, which includes software for handling functions such as accounting at small and medium-sized businesses. Jeff Raikes, Microsoft's group vice president in charge of its Office software unit, will run that unit.

The architect of Microsoft's Xbox videogame business, Robbie Bach, will head a third group to be called Entertainment and Devices, which will combine consumer groups including Microsoft's videogame business and its mobile-phone unit. One mission of Mr. Bach's group will be to devise a better strategy for competing with Apple Computer Inc., which has trumped Microsoft's online music efforts with its iPod line of music players.

Microsoft also appointed a highly regarded computer scientist to oversee each of three new divisions' shift to more network-based methods of distribution. The executive, Ray Ozzie, joined Microsoft when it bought his company Groove Networks earlier this year. Mr. Ozzie -- who in the 1980s developed the hugely influential Lotus Notes collaboration software for Lotus Corp., now part of International Business Machines Corp. -- will report to Microsoft Chairman Bill Gates.

Mr. Ballmer said he wants Mr. Ozzie to put in place a broad "foundation" for making all software available as a service across Microsoft. The company also said that Senior Vice President Eric Rudder will also report to Mr. Gates in a role focused on Microsoft's overall technical strategy. Mr. Rudder, now head of the company's server and tools division, is considered by Microsoft insiders as a candidate for potentially assuming Mr. Gates's technical responsibilities some day.

The reorganization further puts Mr. Ballmer's imprint on the company five years after he took the CEO reigns from Mr. Gates. Each of the new unit leaders has been a Ballmer lieutenant, and each, like him, built careers on the sales and marketing side, not the technical side led by Mr. Gates.

"They're picked for leadership more than any particular functional skill," Mr. Ballmer said. Mr. Bach, for instance, is a highly regarded generalist who is credited with building the Xbox business, which though unprofitable, internally is seen as a successful model in how Microsoft can break into a new business area.