In January 2000, after running Microsoft for 25 years, Bill Gates handed the reins of CEO to Steve Ballmer. Ballmer went on to run Microsoft for the next 14 years. If you think the job of a CEO is to increase sales, then Ballmer did a spectacular job; he tripled Microsoft’s sales to $78 billion and doubled profits from $9 billion to $22 billion. The launch of the Xbox and Kinect, and the acquisitions of Skype and Yammer happened on his shift. If the Microsoft board was eager only for quarter-to-quarter revenue growth, Ballmer was as good as it gets as a CEO. But if the purpose of a CEO is long-term company survival, then one could make a much better argument that Ballmer was a failure as a CEO the moment he optimized short-term gains by squandering long-term opportunities.
How to miss the boat—five times
Despite Microsoft’s remarkable financial performance during these 14 years, Ballmer and the rest of Microsoft’s leadership failed to understand and execute on the five most important technology trends of the 21st century: search, smartphones, mobile operating systems, media, and cloud. Microsoft left the 20th century owning more than 95% of the operating systems that ran on computers (almost all on desktops). Fifteen years later, 2 billion smartphones have shipped worldwide, and Microsoft’s mobile OS share is just 1%. These misses weren’t just in some tangential markets—missing search, mobile, and cloud were directly where Microsoft users were heading. Yet a very smart CEO missed all of these. Why?
Execution and organization of core businesses
It wasn’t that Microsoft didn’t have smart engineers working on search, media, mobile and cloud. They had lots of these projects. The problem was that Ballmer organized the company around execution of its current strengths—Windows and Office. Projects not directly related to those activities never got serious management attention or resources.
For Microsoft to have tackled the areas they missed would have required an organizational shift toward becoming a services company. Services (cloud, ads, music) have a very different business model, and they are hard to do in a company that excels at products. Ballmer and Microsoft failed because the CEO was a world-class executor of an existing business model trying to manage in an industry of increasing change and disruption. Microsoft executed its 20th century business model extremely well, but great short-term gains don’t make up for far less compelling long-term prospects.
In 2014, Microsoft finally announced that Ballmer would retire, and in early 2014, Satya Nadella took charge. Nadella got Microsoft organized around mobile and the cloud (Azure), freed the Office and Azure teams from Windows, killed the phone business, and released a new version of Windows without the usual trauma. He’s also placing resources into exploring augmented reality and conversational AI. While it’s likely that Microsoft will never regain the market dominance it had in the 20th century, Nadella likely saved his company from irrelevance.
What’s missing?
Visionary CEOs aren’t just responsible for world-class execution of a tested and successful business model—they’re also world-class innovators. Visionary CEOs are product and business-model centric, and extremely customer focused. The best are agile and know how to pivot, making substantive changes to their business models before their markets have shifted.
One of the best examples of a visionary CEO is Steve Jobs, who transformed Apple from a niche computer company into the most profitable company in the world. Between 2001 to 2008, Jobs reinvented Apple products three times, and each transformation—centering around the iPod and iTunes in 2001, the iPhone in 2007, and the App Store in 2008—drove revenue and profits to new heights.
And that brings us to the Apple we’ve known for the last few years, and its CEO, Tim Cook.
Why Tim Cook is the new Steve Ballmer
One of the strengths of successful CEOs is that they cultivate a team of world-class operating executives. But in a company driven by a visionary CEO, there can only one visionary. This type of CEO surrounds himself with extremely competent executors, but rarely any disruptive innovators. While Steve Jobs ran Apple, for example, he alone drove Apple’s vision and chose to place strong operating execs in each domain—hardware, software, product design, supply chain, manufacturing—who can translate his vision into plans and procedures.
When visionary CEOs depart from companies, the operating executives who reported to them believe it’s their turn to run the company, often with the blessing of the former CEO. At Microsoft, Bill Gates anointed Steve Ballmer, and at Apple, Steve Jobs made it clear that Tim Cook was to be his successor.
Once in charge, one of the first things these new execution-oriented CEOs do is to get rid of the chaos and turbulence of their organizations. Execution CEOs value stability and reproducible processes. On one hand, that’s fantastic to promote predictability, but on the other hand, it often also ignites a creative death spiral in which creative employees start to leave the company in search of a new environment. This culture shift ripples from the top down, and what once felt like a company on a mission to change the world now feels like any other job.
The parallels between Gates and Ballmer and Jobs and Cook are eerie. Apple under Cook has doubled its revenue to $200 billion while doubling profit and tripling the amount of cash it has in the bank (now a quarter of a trillion dollars). The iPhone continues its annual upgrades with incremental improvements. Yet in five years the only truly new product that’s managed to ship is the Apple Watch. And somehow, with 115,000 employees, Apple can barely get annual updates out for its laptops and desktop computers.
But the world is about to disrupt Apple in the same way that it disrupted Microsoft. Apple brilliantly mastered user interface and product design to fuel the iPhone’s rise to dominance. But Google and Amazon are betting that the next wave of computing products will be AI-directed services—machine intelligence driving apps and hardware. Think of Amazon Alexa, Google Home, and Assistant, all powered by smart, conversational artificial intelligence; most of these products will belong to a new class of devices scattered around your house, not just on your phone. It’s possible that betting on the phone as the platform for conversational AI may not be the winning hand.
It’s not that Apple doesn’t have any irons in the fire in conversational AI—heck, Siri was one of the first. It also has autonomous car projects, AI-based speakers, and augmented- and virtual-reality labs. The problem is that a supply chain CEO who lacks a passion for products and has yet to articulate a personal vision for Apple is ill-equipped to make the right calls to bring a revolutionary product to market.
Challenges for a board of directors in the 21st century
The dilemma facing the boards at Microsoft, Apple, or any company on the departure of an innovative CEO is strategic: Do they still want to be a innovative, risk taking company, or do they want to focus on the execution of core business models, reducing risky bets and maximizing shareholder return?
Steve Jobs and Bill Gates (as well as the 20th century’s other creative icon, Walt Disney) shared the same blind spot: They suggested execution executives as their successors. They confused world-class execution with a passion for products, customer experience, and market insight. One reason is that if a board of directors decides its company needs another innovator at the helm, you can almost guarantee that the company’s best executor—the No. 2 or 3 vice president in the company—will leave feeling overlooked. Now the board is faced with not only having lost its CEO, but potentially the best of its executive staff.
But as companies grow larger and management falls prey to the fallacy that only need to maximize shareholders’ short-term return on investment, companies become risk averse. Large companies and their boards live in fear of losing what they spent years gaining (customers, market share, revenue, profits). This may work for some stable markets and technologies. But very few of those remain today.
In a startup, the board of directors realizes that risk is the nature of new ventures and innovation is why they exist. On day one there are no customers to lose, no revenue and profits to decline. Instead there is everything to gain. In contrast, large companies are often risk-averse engines—they are executing a repeatable and scalable business model that spins out the short-term dividends, revenue, and profits that the stock market rewards. And an increasing share price becomes the reason for existing. The irony is that in the 21st century, the tighter you hold on to your current product/markets, the likelier you will be disrupted. (As articulated in the classic Clayton Christensen book The Innovators Dilemma, in industries with rapid technology or market shifts, disruption cannot be ignored.)
Increasingly, a hands-on product/customer, and business model-centric CEO with an entrepreneurial vision of the future may be the difference between market dominance and Chapter 11. In these industries, disruption will create opportunities that force “bet the company” decisions about product direction, markets, pricing, supply chain, operations, and the reorganization necessary to execute a new business model. At the end of the day, CEOs who survive embrace innovation, communicate a new vision, and build management to execute the vision.
This post originally appeared at SteveBlank.com.