February 26, 2007

How should Microsoft capitalize on its place in the food chain?

Posted in management at 7:26 pm by scottmaxwell

I read Don Dodge’s post on Microsoft not suffering the innovator’s dilemma and had a similar reaction to Robert Scoble’s. I am a big fan of Microsoft and use their software every day on my Mac. It is great software from a great company full of great people.

That said, the issue is not whether they are suffering the innovators dilemma (all large companies suffer), the issue is what they should optimize their innovation given the limitations that large companies have (the innovators solution can help, but does not nail the solution in my opinion). Well run small companies will beat large companies if their angle of attack is right (see my “How David Can Beat Goliath” series on the topic), but well run large companies can stay relevant (and important) if their angle of defending attack is right. My sense is that Microsoft is trying to win all of the games all of the time rather than focusing on playing the games that it will win!

Microsoft needs to optimize its place in the “food chain” by considering what its natural advantage is, where it is disadvantaged, and how they should capitalize on this advantage. Microsoft has several natural advantages from its location at the extreme end of the food chain (see list here) and also has natural disadvantages (some listed here but written more from the reverse perspective). The net of it is that it is extremely difficult (impossible?) for the large companies (even the great ones) to create, develop, and test out the hundreds (thousands?) of innovative ideas that it takes to get one or two “hit” products/companies because most of the best ideas grow from the other end of the food chain!

Net, net, if I were the decision maker at a large technology company like Microsoft, I would put aside 2-3% of my market cap each year to purchase the innovative companies that have grown (and evolved) to the point that Microsoft can either

  • Put them through its current technology, sales and marketing, and customer service engines to supercharge their performance, or
  • Develop them (in whole or in part) independently to create new technology engines, new sales and marketing engines, and/or new customer service engines (depending on the uniqueness of these engines).

if they did this with the proper focus and magnitude, then we all would look at them as more innovative, even though a lot of the innovation would have been incubated by external parties (at the other end of the food chain).

(Yes, Microsoft will say that they are doing something like this, but they are not doing it with either the focus or the magnitude that is necessary to win the innovation game, at least right now.)



  1. Don Dodge said,

    Scott, I agree that acquisitions are an important strategy. In fact, I have written several posts that suggest big companies like Microsoft are better off acquiring hot start-ups than trying to do all the R&D themselves.

    The other approach is to develop internally. Both approaches are necessary. Development can be done proactively by doing lots of research and trying to invent new products and technologies. This is rarely successful, but everyone does it. Less glamorous, but far more effective, is to be a “fast follower”.

    Fast Followers should experiment with a few different technologies, build an internal team of domain experts, and then pounce on an emerging opportunity that has gained traction before it is too late. Most times, fast followers can develop a product and get it to market before the start-up innovators can dominate the market.

    On the other hand, if a start-up dominates a space, or builds a user base that can’t be replicated…go the acquisition route.

    Just as a reference, Microsoft acquired 14 companies in 2005 and 19 more companies in 2006. Just yesterday Microsoft announced the acquisition of MedStory, a health care search engine.

    Microsoft is moving ahead on all fronts, and I think that was your point. But, the definition of focus for a 70,000 person company with $40 Billion in the bank is far different than almost any other situation.

    I think we agree that more attention and dollars should be given to acquisitions. Done right it is the best return on investment.

  2. scottmaxwell said,

    Don, thanks for the comment. Microsoft clearly has the right trendline for acquisitions and clearly has a lot of smart people working on the issues. I would not be surprised to see the number of acquisitions continue to go up over the next few years…of course I will then be able to congratulate myself for the useful advice I have given you 🙂

    Keep up the great blog posts!

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