Fueling Innovation: How Microsoft Finally Got It Right

WE OFTEN THINK of innovation as something visionaries draw out of thin air, like manna from heaven. That’s a myth. Often, and especially in contemporary times, the real story of innovation doesn’t involve lone geniuses or flashes of inspiration, but teams, organizations, and leaders who cultivate systems and cultures where new ideas can sprout and flourish.

Here’s an innovation story that’s closer to reality: It’s a story of loss, grit, and renewal. It’s about a wildly successful company that went off course. It’s also about a never-too-late approach to innovation that enabled a floundering business to launch a second golden age.

You know this company. It has more subscribers than Netflix and Amazon combined. Its profit margin is higher than Google’s. Its market cap is over $2 trillion. Chances are, you’re one of a billion people that use its flagship software. We’re talking about Microsoft.

Back in the mid-2000s, Microsoft was in trouble. Not only was the U.S. government scrutinizing it for monopolistic practices, but the company was also coming under fierce attack for investing in its archrival, Apple.

Even more alarming, almost every new business it launched failed: e-books, mobile phones, search engines, music; it was one dramatic dud after another.

Inside the company, morale was at an all-time low. Long-timers and new hires alike were deeply disillusioned by a caustic culture that was quick to assign blame and pitted employee against employee. With few wins in the ledger, the best and the brightest started to leave.

For Microsoft, the future looked bleak.

In stepped Satya Nadella. In 2014, when the company’s market capitalization was $380 billion, this Microsoft veteran took over as CEO. The turnaround he engineered was nothing short of remarkable. By 2019, Microsoft’s market capitalization edged past the $1 trillion mark, making it the world’s most valuable company. That same year, the press declared, “Microsoft is cool again.” By 2023, its market cap reached $2.5 trillion, and the company led the race for tech’s next big trophy—making artificial intelligence mainstream.

How did this happen?

Troubleshooting Microsoft

What precisely did Nadella do to steady the company and launch it into a high-octane period of growth and innovation?

Two facts underscore how he made this happen:

Fact #1: Innovation Is Simply a Means to An End

Nadella understood that innovation is a tool rather than a destination. His goal was not to make Microsoft the most innovative company but the most successful in its field. Of course, part of that entailed reestablishing the company’s reputation for cutting-edge technology. But there was much more than that.

To him, Microsoft’s efforts lacked a strong mission. The company had been rolling out one product after another without any guiding rationale other than they were “innovative.” It was no wonder that they failed to gain traction. Innovation had become the goal, and that wasn’t enough.

Nadella changed that. He quickly pivoted Microsoft from being a company that sold boxed software to a global computing engine that rents out its processing power and online storage to businesses.

At the time, this was a bold suggestion. Nadella proposed that Microsoft move beyond its most profitable product, Windows, in favor of chasing a cloud dream, even though Amazon had a four-year head start. Moving into services instead of hardware also meant abandoning ambitions to compete with Apple and Google in smartphones, though Microsoft had already spent billions of dollars buying Nokia’s cellphone business. Naturally, there were many skeptics.

But the decision stood. Nadella made this change in strategy clear when he announced a company-wide goal for his 115,000 employees: “We will take our tiny cloud business and build it into a multibillion-dollar empire.” This meant passing on many seductive “whiz-bang” opportunities—like autonomous vehicle hardware—and staying laser-focused on this core mission.

By 2019, Nadella started shifting his aim. The company wouldn’t just be a leader in cloud, but also in AI. That year, he championed Microsoft’s first $1 billion investment into OpenAI, the company that would shake the industry with its release of ChatGPT. In 2022, he upped the ante, investing $10 billion in OpenAI to acquire just short of a majority stake. Perhaps more significantly, he also pushed each of the company’s business units to infuse AI capabilities throughout their offerings.

Fact #2: Innovation Thrives in Structure

To most people, this fact seems counterintuitive. Doesn’t micromanaging and process smother creativity?

Innovation powerhouses don’t leave innovation up to chance. They know that innovation needs to be nurtured. You do that by setting up structures that notice, encourage, and develop innovative ideas and practices.

At Microsoft, this meant fundamentally changing how people worked. It started with creating systems that captured and vetted new ideas from all over the organization. The company created “rules of the road” for what to do with a new idea: how to test it, how to build a business case for it, and who to pitch it to.

Nadella championed numerous innovation programs, including allocating physical spaces for Microsoft employees to work with local entrepreneurs, creating accelerators to incubate new businesses, and hosting a global hackathon that became one of the largest innovation events in the world.

From top to bottom, everyone was expected to get on board. Those who resisted—and many did at first—were often given a stern talking-to by Nadella himself.

The Takeaway for Leaders and Businesses

If there is one thing you take away from Microsoft’s story, let it be this: Innovation requires planning. When leaders become known as innovators—succeeding at new things again and again—they do not just “get lucky.” They plan their luck.

Innovation doesn’t just show up in the middle of the night, waking you from a dream and pressing you to find a notebook by your bedside to jot down the next big idea. Innovation requires clear goals to reach toward. It demands a process to make it come to life. It’s a campaign—not a quick fix. And it’s a key skill for our 21st-century workplace.

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Steve Wunker is the managing director of New Markets Advisors, a global consulting firm focused on innovation, and co-author of the new book The Innovative Leader: Step-by-Step Lessons from Top Innovators for You and Your Organization. Learn more at innovativeleaderbook.com.

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Posted by Michael McKinney at 09:37 AM
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