In sports, when a team fires its coach, sometimes it's not because he suddenly became bad at his job, but because the playbook that always worked for him needed updating.

Sometimes it's simply that the game has changed around the coach, and it's hard for most to adapt. Maybe it was a rule change, maybe player skills have evolved, or maybe it's a combination of a lot of little things that make a one-time top-tier leader less than what he once was.

In many ways, that's what happened to Steve Ballmer at Microsoft (MSFT -0.25%). The longtime CEO did not lose his skills, but the game changed around him. When he took over the company from founder Bill Gates, it was essentially a monopoly. Apple (AAPL 1.30%) had some niche market share in areas like education and graphic design, but Microsoft Windows dominated the business and home markets.

That changed when tablets and phones running Android and iOS began to become alternatives for traditional Windows PCs. That loosened Microsoft's dominance and gave consumers real options. It's hard to know if Ballmer would have ultimately been able to change his thinking, but his resignation and Satya Nadella taking over as CEO in February 2014 changed the course of the company.

The Microsoft campus

Microsoft has made big changes to how it operate under Nadella. Image source: Microsoft.

How did Microsoft change?

Nadella made lots of operational changes to the company, but the biggest change he made was more in overall thinking. The new CEO recognized that the operating environment had changed, and that Microsoft had to change with it. That's a surprisingly hard pivot for many companies to make.

This change was most evident in three areas, and it's fair to say the first may have happened under Ballmer, who had begun making changes in that direction.

  1. Bringing Microsoft software everywhere: While there was an Office version for Apple's Macs, Microsoft had a history of largely keeping its software unique to Windows. Nadella formally ended that and brought free Office apps to iOS and Android, allowing the company to keep programs like Word and Excel as industry standards.
  2. Admitting Windows 8 was a failure: Windows 8 was based around the idea that soon most computers would have touch screens. The OS dropped many familiar conventions, like the Start Menu, and was not popular with consumers. Nadella addressed that quickly and responded with Windows 10, a still-innovative OS that restored many of the favored features.
  3. Correcting the hardware business: Ballmer spent $7.6 billion buying Nokia's former phone division in order to try to make Windows Phone a thing. It did not work, and Nadella was willing to admit it. He scaled back the company's phone business but did not exit hardware. Instead, he committed to the Surface line, which has grown to include tablets, hybrids, and laptops, as well as a unique desk-sized model.

Nadella created a more humble Microsoft. He recognized that it was not possible to go back to being a monopoly, so he made a cultural shift, where the company became wiling to do whatever customers needed. That was not an overnight change, or an easy one, but the new CEO managed to pull it off.

MSFT Chart

Image source: YCharts.

What's next for Microsoft?

As you can see in the chart above, Nadella has brought Microsoft's share price steadily upward. Much of that has been driven by the attitudinal change he led at the company, but those are not the only changes he has made.

The new CEO led his company fully into the cloud, and he completed the transition of Office from a one-time purchase to a subscription product. Going forward, the cloud should be a major source of growth, and the Internet of Things (IoT) offers a chance for big growth in Windows. In addition, Nadella has his company exploring emerging technologies including virtual reality (VR), where its HoloLens could become a driver for Microsoft.

Nadella not only changed Microsoft's culture, he changed how the company is perceived internally and externally. That's a major feat to pull off, and if he can maintain that nimbleness of thinking and willingness to admit failure, it should serve the brand well for years to come.