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Here's What Microsoft Will Look Like in 12 Months

By Alex Dumortier, CFA – Jul 11, 2014 at 10:16PM

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Microsoft CEO Satya Nadella charts an ambitious course for the company in a 3,100 word memo.

U.S. markets managed to close out the week on a winning note, with the benchmark S&P 500 rising 0.1% on Friday, while the narrower Dow Jones Industrial Average (^DJI 0.41%) was up 0.2%. The technology-heavy Nasdaq Composite Index (^IXIC 0.04%) gained 0.4%. One of the most prominent Nasdaq components, Microsoft (MSFT -0.53%), managed to put together a second straight day of outperformance, with a 1% gain. Investors may still be digesting a 3,100-word memo that CEO Satya Nadella sent out to all Microsoft employees on Thursday regarding the company's mission and direction. Although it was short on specific actions, Mr. Nadella laid out an ambitious vision for Microsoft in a "mobile-first and cloud-first world" (six mentions).

Quoting not one, but two 19th century Germanic intellectuals -- Rilke and Nietzche -- in this memo (can you imagine the same in a Steve Ballmer memo?), Microsoft CEO Satya Nadella waxed lyrically on the company's future role in people's lives, promising nothing less than "reinvent productivity to empower every person and every organization on the planet to do more and achieve more."

"A devices and services company" -- Mr. Ballmer's expression -- was just the beginning of Microsoft's transformation:

At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world... Microsoft has a unique ability to harmonize the world's devices, apps, docs, data and social networks in digital work and life experiences so that people are at the center and are empowered to do more and achieve more with what is becoming an increasingly scarce commodity -- time!

In doing so, Microsoft "will think of every user as a potential 'dual user' -- people who will use technology for their work or school, and also deeply use it in their personal digital life":

Across Microsoft, we will obsess over reinventing productivity and platforms. We will relentlessly focus on and build great digital work and life experiences with specific focus on dual use... Apps will be designed as dual use with the intelligence to partition data between work and life and with the respect for each person's privacy choices.

Incidentally, managing that very "partition" was the motivation behind Google's (GOOG -1.99%) (GOOGL -2.13%) May acquisition of Divide.

The new key buzzwords at Microsoft are now (after "mobile-first and cloud-first world," which goes without saying): productivity, user experiences, platforms, and dual users. But beyond this 30,000 foot view, what concrete indications about the business' direction can we glean from the memo? Here are three:

Microsoft remains committed to hardware. Mr. Nadella writes "the Windows device OS and first-party hardware will set the bar for productivity experiences." I have a hard time believing they will achieve it, but Microsoft is committed to that goal. Nadella even committed Microsoft to developing "new categories [of hardware] like we did with Surface." Which also means that...

Nokia stays. "We will responsibly make the market for Windows Phone, which is our goal with the Nokia devices and services acquisition."

Xbox stays, too (for now). Even though he made it clear that the Xbox gaming system is non-core at Microsoft -- it's not "dual use," after all -- Nadella says the company is "fortunate to have Xbox in our family." Beyond the opportunity in gaming -- "the single biggest digital life category" -- he pointed out the overlap in technologies between gaming and productivity.

From the outside looking in, then, Microsoft may look relatively unchanged in 12 months' time, but Nadella made it clear that the organizational culture must become more agile:

Every team across Microsoft must find ways to simplify and move faster, more efficiently. We will increase the fluidity of information and ideas by taking actions to flatten the organization and develop leaner business processes.

Journalists and analysts have already begun (justifiably) speculating that this could mean significant layoffs, but Mr. Nadella would not expand on this point in several interviews yesterday.

By and large, I've been very impressed with Mr. Nadella's tenure to date – he's certainly a more inspiring figure than his predecessor. However, you can't rate a leader on a sweeping vision alone; the difference comes down to its execution. Mr. Nadella promised more detail when Microsoft announces its quarterly results on Jul. 22. Stay tuned.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), and Microsoft. 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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