Determined to keep Microsoft Corp. from becoming a lumbering giant, Chief Executive Steve Ballmer laid out plans in a 4,900-word memo to employees for a billion dollars in cost-cutting and what he promised would be stepped-up innovation to boost the company's sales and stock price.
Yesterday's memo comes as Microsoft is mulling action to address shareholder concerns about the company's stagnant stock price. Some investors have grown impatient as the company sits on a cash hoard of $56.4 billion as of the end of March. Analysts, meanwhile, predict Microsoft will announce multibillion-dollar stock buybacks between now and the end of July, or sharply raise its dividend. Microsoft paid its first dividend in March 2003, and doubled it, to 16 cents a share, in November 2003.
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The "core" issues facing the company, Mr. Ballmer wrote in the e-mail to the company's 57,000 employees world-wide, are largely those that have been put to him by the company's own workers: "Will we be first with important innovations? Will process excellence lead to greater ability to make an individual difference? Will our focus on costs hurt employees personally and will it hinder new investments? Will we grow and will our stock price rise? Will the PC remain a vital tool, and will we remain a great company?"
While answering each of those questions with a firm "yes," Mr. Ballmer's memo acknowledges big hurdles in satisfying software customers, shareholders and employees. Microsoft workers, in particular, roundly complained when the company reduced discounts they receive on company stock purchases and reorganized its medical benefits, and morale has been fragile.
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Mr. Ballmer said the cost-cutting was necessary, noting that the company's expenses have grown more quickly than revenue for three years running. He urged employees to take more accountability for their work, calling for them to prioritize goals better than in the past and focus on five to seven measurable "commitments" each year. A Microsoft spokesman said the cuts don't involve any layoffs and that hiring for the current year will be "consistent" with past years.
Slowed growth of personal-computer sales in recent years have throttled sales of Microsoft's two main products -- the Windows operating system and its Office suite of software. The company's revenue since 1999 has grown at an average annual rate of 13%, compared with 34% in the four years to 1999. Profits, which grew at a 52% annual rate from 1995 to 1999, have essentially been flat since.
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Mr. Ballmer points out that Microsoft's share price is about the same as it was in late 1998, though the company has doubled its operating profits since then. "The key now to growing our stock price is growing profits even more."
Stagnant shares have led to employee griping about other issues, including salaries, benefits and working conditions. Mr. Ballmer addressed some employee questions over why the company's cash hoard isn't being used for employee benefits, writing that "the cash is shareholders' money, so we need to either invest in new opportunities or return it to them."
When a company starts to manage revenues and costs as two seperate entities, in my mind it no longer has a competitive strategy. Competitive strategies focus on (economic) profit, where revenue and its associated cost are linked together by a unique business logic that reduces substitutes and allows the firm to raise its prices. If the two are decoupled then all that is left are tactics -- hack off some expense here, run after some business there, but no sense of how the whole comes together. Many businesses--perhaps most--are so complicated that they have no option but to operate this way.
Here's an older piece I wrote about how Microsoft mustrenege on some of its compensation promises to employees as it goes from high-growth to mature.
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