To say that the last decade has been uninspiring for Microsoft Corporation (NASDAQ:MSFT) investors may be an understatement. Shareholders in the company have basically seen their stock moving sideways over the past 10 years, while other tech titans like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) delivered amazing returns.
The problem with Microsoft Corporation (NASDAQ:MSFT) is not about products or technologies; the issue is its management team and an outdated approach to innovation.
Money and Innovation
The main reason behind this huge gap in stock performance is clearly innovation. While Apple, Google and Amazon have launched revolutionary products and technologies that disrupted the technology industry in the last decade, Microsoft has missed the most exciting trends in the business like mobile, search, social networks and ecommerce, among many others.
The company started the decade in a position of unrivaled strength: owning the operating system inside the huge majority of the computers in the world, and complementing that strategic position with a gigantic bank account, providing abundant resources for research and development expenditures as well as acquisitions.
It´s not because of lack of spending that Microsoft Corporation (NASDAQ:MSFT) has lagged the competition; the company devotes more money as a percentage of sales in R&D than any of the other big tech players. But Google, for one, has obtained remarkably better returns for its money. Among other amazing achievements, Google has built the most popular mobile operating system in the world and is giving life to almost unbelievable products like the self-driving car and augmented reality glasses.
Apple follows a more focused and concentrated approach to R&D spending than Google, and the company has managed to disrupt several industries with a comparatively low investment in R&D. It’s important to note that the table includes figures for the last 12 months — back in 2003 Apple was spending 7.6% of sales in research and development. As the company has gotten much bigger, and sales exploded, the ratio has come done in a material way over the years.
In any case, Apple has enormous amounts of cash available to invest in R&D and acquisitions, so the company is probably spending as much as it thinks it makes sense to spend. Even if some analysts have been complaining about a lack of new revolutionary products after the departure of Steve Jobs, there is no questioning that Apple has been one of the most innovative companies in the last decade.
Amazon spends much less that Microsoft Corporation (NASDAQ:MSFT) in R&D, but it has still been able to develop a gigantic and growing online retail operation while expanding into areas like cloud computing, ereaders or online video streaming. Even though profit margins at Amazon have been significantly declining over the last years, investors are rewarding the company’s innovative drive and long-term focus, and the stock is trading at stratospheric valuation ratios since the market is focused on its long-term growth prospects as opposed to its short-term lack of profitability.
On Management and Culture
Under the leadership of Steve Ballmer, Microsoft has followed the strategy of not trying to be the first to innovate, but the first to profit. This means that the company intends to make money by selling its own versions of new technologies as opposed to building new things from scratch. This used to work when Microsoft was bigger and stronger than its rivals, but that’s not the case anymore.
The Netscape vs. Explorer example can be quite illustrative about how this used to function: by owning the operating system in the vast majority of computers around the world, Microsoft managed to beat Netscape in spite of starting in second position to the browser race.
But things work differently nowadays. Microsoft Corporation (NASDAQ:MSFT) has lost its strength in several key areas, and that requires a change of strategy. In the war for mobile, for example, having a strong platform is a determinant factor of success. Ecosystem depth and applications availability are key aspects when consumers choose a mobile device, and both Google’s Android and Apple’s IOS are way ahead of Microsoft in that regard.
Running from behind is a big disadvantage in the current tech environment, so Microsoft will need extra effort if it hopes to catch up with the competition. It’s not so much a matter of money invested in R&D or acquisitions, but an issue related to corporate culture and innovation strategy. Microsoft Corporation (NASDAQ:MSFT) needs to start thinking like a challenger, not like the leader it once was.
Bottom Line
There are some things money can’t buy, and one of those is a dynamic and forward-thinking culture of innovation. Those kinds of things are not easy to modify, and they usually require changes at the top level. Considering that Ballmer owns responsibility for the company’s stagnation over the last decade, maybe it’s time for a management team to take charge before it’s too late for Microsoft Corporation (NASDAQ:MSFT).
The article The Problem with Microsoft originally appeared on Fool.com and is written by Andrés Cardenal.
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