Business / Technology

If Microsoft begins a turnaround now to regain its innovative edge, the hinge won’t be the retirement of Steve Ballmer or any new device. It will be the elimination of the employee evaluation system known as stack-ranking.

This was the origin of the poisonous culture that has damaged the company, setting employee against employee, department against department.

Far from providing an honest evaluation of performance combined with benchmarks and coaching to improve, it required that a certain percentage of employees be deemed falling behind the bell curve — as in, find another job — even if they were excellent. Kurt Eichenwald described it in his influential Vanity Fair article, “Microsoft’s Lost Decade”:

Supposing Microsoft had managed to hire technology’s top players into a single unit before they made their names elsewhere—Steve Jobs of Apple, Mark Zuckerberg of Facebook, Larry Page of Google, Larry Ellison of Oracle, and Jeff Bezos of Amazon—regardless of performance, under one of the iterations of stack ranking, two of them would have to be rated as below average, with one deemed disastrous.

In an interview earlier this year with my colleague Janet I Tu, Ballmer seemed to begin backing away from the system as part of the company’s reorganization.

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My two weeks away were timed for the part of summer “when nothing happens.” So much for that.

• There’s a school of thought in classical economics that in the long run monopolies always commit suicide. Why? They become so dominant and wedded to the enormous revenues of their monopoly that they are insulated from competitive forces, new ideas and market discipline. Thus, for example, they miss the next new thing, price their products at a disadvantage and fail to see, forgive me, the road ahead. If this is so, whatever the merits of the federal case against Microsoft, it behaved as a classic monopolist and paid the price. It failed to snatch the escape clause of this theory, which enables today’s oligopolies: Capture the government to perpetuate your power.

When I held Friday’s poll anticipating today’s announcement of the big shakeup at Microsoft, most respondents wanted to wait for details before deciding whether it had a strong chance for success or not. Now we know, so I’m going to ask again. As the Seattle Times’ Janet Tu reports, CEO Steve Ballmer will realign the company by reducing the number of product divisions by half while centralizing such areas as marketing, finance and business development.

The goal is to help transform the software giant into a “devices and services” company better prepared for a world where PCs are fading, or at least growing much more slowly. Also to break down barriers between units and outside partners, move more entrepreneurially. Thus, engineering functions will be Operating Systems, Applications and Services, Cloud and Enterprise, Devices and Studios. In a memo, Ballmer wrote:

Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.

We will do this by leveraging our strengths. We have powered devices for many years through Windows PCs and Xbox. We have delivered high-value experiences through Office and other apps. And, we have enabled enterprise value through products like Windows Server and Exchange. The form of delivery shifts to a broader set of devices and services versus packaged software. The frontier of high-value scenarios we enable will march outward, but we have strengths and proven capabilities on which we will draw.

Ballmer haters will not be satisfied; he’s staying. Shares are up more than 2 percent as I write. Read the story and tell me what you think. The comments section also awaits your responses.

Today’s Econ Haiku:

Bangladesh reform

Europe goes left, U.S. right

Will the seams meet up?

The word is that Microsoft CEO Steve Ballmer could announce a major reorganization of the company as early as next week. Don Mattrick, who led the division that produces Xbox is already leaving to become chief executive of Zynga. According to Bloomberg, Skype president Tony Bates might be placed in charge of acquisitions and relationships with software developers, while Windows boss Julie Larson-Green is given oversight of hardware engineering for all of Microsoft.

The speculation is a moving target. In early June, Kara Swisher of All Things D reported that a larger role was being contemplated for several executives, including Mattrick, as Ballmer moves to fulfill his promise to make Microsoft into a devices and services company. Now, not for Mattrick, obviously. Last fall, Ballmer wrote to shareholders, “This is a significant shift, both in what we do and how we see ourselves — as a devices and services company. It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses.”

Microsoft is trying to catch up in a number of areas and make the shift to leapfrog in tablets and phones, not repeat the mistake it made with search. There’s also an activist shareholder in the background, even though MSFT shares are almost $10 higher than they were three years ago and dominant shareholder Bill Gates would block any activist attempts to control the board. Another issue about the restructuring is how it affects larger employment for one of the biggest employers in the Puget Sound. What do you think?

Read on for some important stories you might have missed plus the haiku…

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