On Aug. 23, Microsoft (MSFT 0.25%) CEO, Steve Ballmer, announced his retirement after 12 years leading the technology giant. Following the news, the stock soared 7%. The message from shareholders was clear: Mr. Ballmer, don't let the door hit you on the way out.
Microsoft's lost decade
Ballmer's retirement is long overdue. Under his watch, the company went from a widely feared behemoth to a firm that's fighting to stay relevant. Over more than a decade, Microsoft has missed every major technological development -- search, online advertising, social networks, and others. The company's shares have languished. Granted, Ballmer did take over at the height of the technology bubble.
The company's old Windows and Office monopoly is under attack. According to Gartner, PC sales declined 10.9% during the second quarter, marking the fifth consecutive quarterly decline in desktop shipments. Tablets have been gaining market share at the expense of PC sales, and the trend hasn't been reversed by Windows 8. On the contrary, Microsoft's new operating system might actually be accelerating the decline of the PC industry.
Most troubling is Microsoft's inability to adapt to the mobile computing age. In July, the company took a $900 million charge to reflect growing inventories of unsold Surface RT tablets. The Windows Phone is showing some signs of life, but its launch could be described as lukewarm at best.
In contrast, Microsoft's competitors have completely taken over. When it comes to tablets, Apple (AAPL +0.01%) is the leading manufacturer in the high end of the marketplace. The iPad Mini has been a big success for the company, providing a more affordable alternative to premium models. Apple is still, by far, the biggest tablet maker with 32.4% of the market share.
At the same time, just as it did with smartphones, Google (GOOG +0.56%) has leveled the competition with its incredibly popular Android operating system. The platform is growing faster than Apple, thanks to high demand for lower-priced products, especially in emerging markets. According to estimates by IDC, Android-powered devices made up 62.6% of tablet sales during the second quarter.
Remember, when Ballmer took over in 2000, Apple was on the verge of bankruptcy, and Google was a Ph.D science project.
What Microsoft needs now
Microsoft did not lack the resources to capitalize on these missed opportunities. Indeed, its near-monopoly on the desktop provided the company with the fat margins needed for research and development.
But, rather than innovate, it employed the strategy of being the first to profit. Microsoft chose to build its own versions of proven technology, as opposed to creating new devices from scratch. Netscape versus Internet Explorer is a great example. By owning the operating system on nearly every computer, Microsoft managed to crush the smaller rival, despite its late entry into the browser wars.
This worked when Microsoft was stronger than its competitors, but things are different today. Judging by the company's long list of product failures -- the Surface and Zune come to mind -- Microsoft no longer has the brute strength necessary to deploy this strategy.
Microsoft needs to transform its culture to move like a challenger, and not like the leader it once was. A change at the top is the first step in this process. But, the transformation must trickle down to the rest of the organization.
Foolish bottom line
Ballmer was the wrong person to lead Microsoft. He's a business type with a sales and marketing focus. But, in times of change, a visionary is needed. An engineer or product maverick is required. That's the leader Microsoft needs if the company is to revive its fortunes.
