Microsoft Emerges From the Cocoon of Bureaucracy

Microsoft Emerges From the Cocoon of Bureaucracy

The rumors were true! Microsoft has just announced a major internal restructuring as it kicks off its new fiscal year. The company has shared an internal memo from CEO Steve Ballmer that lays out the future of "One Microsoft."

In no uncertain terms, this is a dramatic overhaul of the software giant's organizational hierarchy that will change how departments collaborate and revamp internal resource allocation policies, among other things. The previous structure was known to foster too much competition between departments, all vying for resources to fulfill their own goals. Former Windows head Steven Sinofsky reportedly used to undermine any products that would have reduced the importance of his own segment, which is hardly good for collaboration.

Microsoft's own worst enemy
Microsoft's internal performance review system is built on a stack ranking system that fostered too much internal competition at the expense of cooperation. A pre-specified percentage of employees are categorized as top performers, good performers, average performers, or poor performers, regardless of their accomplishments in absolute terms. Everything is relative, so everything is about competing with coworkers instead of working together.

This system has been characterized as the "most destructive process inside of Microsoft." These types of rankings aren't exactly uncommon among large companies. Microsoft just took it to a "dysfunctional" level, according to an op-ed in The New York Timesin 2010 penned by former Microsoft exec Dick Brass.

This may all be about to change.

Function over form
Under the new structure, Microsoft will be organized by function rather than by product. Microsoft has had five operating segments for many years, all based on products. Windows, servers, and business were the cash cows while online services and entertainment and devices were on the side.

Now, Microsoft will have organizations dedicated to things like engineering, marketing, and research, all of which will focus on the company's unified strategy of becoming a devices-and-services company. In Ballmer's words: "We are rallying behind a single strategy as one company -- not a collection of divisional strategies."

Be like Apple
On a high level, this is largely the structure that Apple has employed. The Mac maker has groups that work on individual products, but organizationally the company's primary departments are for software engineering, hardware engineering, and online services, and other functions. There is no overarching "iPhone" department; instead, there are employees within each organization that work on different products. To get a better picture, here is an organizational chart that Fortune compiled back in 2011.

Apple just made its own organizational changes last year under Tim Cook in the name of greater collaboration. The changes weren't as sweeping as Microsoft's, but the underlying goal is identical. Apple also had a software exec (Scott Forstall) that had a bad reputation of not playing well with others.

Back to the future
As Microsoft embarks upon its fiscal 2014, it's facing a computing landscape that favors integrated offerings. It's also safe to say that competition over the future of computing has never been more intense. Mobile is here to stay and Apple and Google call the shots there. Microsoft has started to gain traction, recently becoming the No. 3 smartphone platform over BlackBerry, but it has a long way to go if it hopes to remain relevant in an era of integrated mobile computing.

The restructuring is an important step in the right direction.

The war over computing is only going to continue escalating to epic proportions. As it does, Microsoft will duke it out with Apple and Google on an increasing number of battlegrounds as it competes for consumer mindshare and market share. The company's new structure will help align its strategic goals for the long haul, but the battle is just beginning. Find out more by clicking here now.

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Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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