One cure I recently recommended for Microsoft was to split up the company. I challenged its board of directors to do so before shareholders stage a revolution.

(See What To Do With Microsoft? Chop Up The Borg - Now.)

The shareholders could do just that, and did so last week with HP’s board, because “shareholders elect the board to oversee management and to assure that shareholder long-term interests are served.” On its website, Microsoft further mentions that its board “oversees the company's business affairs and integrity, works with management to determine the company's mission and long-term strategy” etc., etc., etc.

Is Microsoft’s current board really doing a good job?

Microsoft's Board vs. Its Competitors

Microsoft’s competitors have similar charters. The duty of Google’s directors is “to oversee management and evaluate strategy,” and they are bound to assess “Google’s overall strategy and monitor Google’s performance against its operating plan and against the performance of its peers.”

I like how Google emphasizes oversight of management and evaluation of all the company’s strategies. Microsoft’s directors, on the other hand, are being directed to look after long-term shareholder interests and evaluate long-term company strategies. Could this be the reason - or an excuse - for missing so many short-term opportunities in the last decade?

The requirement for Google’s board to judge management’s performance against its competitors highlights the company’s competitive spirit. How well did Microsoft’s board do this over the last decade?

In a recent NBC interview, Microsoft's chairman - Bill Gates - said “amazing things” have happened under the tutelage of CEO Steve Ballmer. Most pundits would disagree. And so do I, knowing that in that same interview Gates contradicted himself by noting his unhappiness with Microsoft’s rate of innovation. Where does the buck stop in this regard: with Gates, with Ballmer or with the board?

What Makes A Good Board Of Directors?

Most tech companies’ shareholders have elected a mix of academics, venture capitalists and financiers to their boards. What interests me most is how well its members are actually educated and how much experience they bring to the table in regard to technology. Fortunately, their professional backgrounds are available on their companies’ websites.

It should surprise nobody that neither Steve Ballmer nor Bill Gates has a degree in computer science (Gates at least wrote software in the early days of the company, Ballmer has only managed developers). Neither has ever worked for an IT company outside Microsoft. Both have been Microsoft’s decisionmakers for more than 30 years.

Given that, you might expect Microsoft's board to include many directors knowledgeable about what goes on outside the company’s own technology realm! Yet I found only a meager three out of nine directors with such experience. And I graded on a curve, counting academic experience as real work experience.

(In comparison, Facebook looks like the weakest company in regard to directors’ tech experience, while Google’s strength is obvious. Its board wins in every category, and that may be a key reason why it constantly beats Microsoft.)

The Gates Era - And Afterward

I worked for 20 years at Microsoft - when Bill Gates was not only chairman and CEO but by far the company's largest shareholder. During that time, the Board was never as strong as I would have liked. Yet until Microsoft lost its landmark antitrust trial in 2000, Gates did a good job guiding the company through the turbulent PC revolution, with the help of Jon Shirley, Microsoft’s former president and long-term board member, former COO Bob Herbold, and others.

After Gates handed the CEO reins to Ballmer, things changed profoundly. Gates kept his chairman title even after he left the company in 2008, but the board did not get strengthened. I have served on several boards, and know how easy it is for a board to be reduced to a mere formality - especially when it's dominated by founders or longtime company executives.

Microsoft's Board Today - And Tomorrow

Microsoft’s tech leadership is being severely challenged. The chairman is no longer the respected tech guru he once seemed to be. Microsoft's CEO has never been mentioned as a technology leader. So who on the Board provides the required oversight of company's tech strategy? Who “works with management to determine the company's mission and long-term strategy” instead of just dealing with financial and procedural issues?

I can't spot enough people with sufficient intellectual firepower or market insight to properly evaluate the company's strategic objectives. Electing decent and well-meaning people to the Board is not enough to propel a company into the stratosphere of the highly competitive IT universe.

For the last decade, Microsoft has managed to produce respectable revenues and profits by incrementally improving already well-established products. To win over the long haul in a fast-changing market, though, a leader must relentlessly out-innovate competitors.

This was never Steve Ballmer’s personal strength. He needed help and I believe the board let him down, or maybe he didn’t listen carefully enough. I believe Microsoft’s shareholders need to overhaul their board and elect directors with tech foresight who will force the changes needed in the company's senior leadership team.

Experienced women and men should be on every board of directors to help guide the often younger executive teams. But sometimes this can be a severe handicap. Both Google’s and Facebook’s directors represent a younger generation than Microsoft’s. They seem to have a better handle on the pulse and the trends of the IT market.

Why can’t Microsoft attract that type of talent? Two thoughts cross my mind. First, Microsoft might no longer be exciting and reputable enough to attract top talent. Second, and worse, Gates and Ballmer seem to be controlling Microsoft as their personal playground - avoiding bringing in most capable directors who might eventually threaten their positions.

That’s the final straw for why I believe Microsoft’s board has served its time and should be replaced. Of course, if you really did chop up the Borg, as I recommended, this whole issue would naturally resolve itself.

After a decade of missing lots of key growth opportunities and finding itself outpaced by competitors taking away market share, Microsoft’s board should have felt compelled to investigate much earlier why the company has fallen behind and demanded structural adjustments.

Bill Gates is the chairman of Microsoft’s board, a title he retained after he left the company in 2008.Today most pundits refer to him as a philanthropist, and rarely mention his Microsoft duties. Does this mean he is no longer focused on the company he founded? Outsiders and insiders alike have suspected and suggested this for some time. Only he can truly answer this question.

My speculation stems from the way the company is led by Bill's friend and handpicked successor, CEO Steve Ballmer. Bill not only gave him the reins of the juggernaut, but also carte blanche to shape, operate, and direct it. Over the years, Steve has built a senior leadership team composed primarily of long-term Microsoft veterans who, under his tutelage, have been fixated on protecting the declining Windows and Office franchises, mostly through incremental product improvements.

While revenue and profits haven't been severely hampered following this strategy, the company as a whole has become bloated and bureaucratic. The excitement of the earlier years is gone, and the company has settled, with a few exceptions, for protecting the status quo — despite having sufficient financial strength and talent to break out of this mold.

How Microsoft's Structure Boxes It In

Since I published my book Resolve and Fortitude, in which I share my experiences and observations from working for nearly 20 years at Microsoft, I have talked and corresponded with many former, as well as current, Microsoft employees. A common thread emerges in these discussions: Steve Ballmer has architected an unusual and complex corporate structure and surrounded himself with yes-men and –women. The board probably considers him indispensable.

Looking mostly inward, he has mastered the company’s complexity — but seems to have difficulties, as demonstrated over the last decade, anticipating, responding to and fostering change and innovations in the marketplace. Even Bill Gates acknowledged the missed opportunities and the lack of innovating in a recent CBS interview. Is this a sign of forthcoming concrete actions or just a casual remark?

Evidence of Steve's influence on the corporate structure is everywhere. His trusted COO, Kevin Turner, runs more than 50% of the total organization, including the field sales and marketing groups — a most awkward situation, considering his resume. Unlike his counterparts at other companies (or Bob Herbold, one of his predecessors), Turner has no control over the finances and the HR activities of the company.

When Steve Sinofsky departed as head of the Windows group, Microsoft split it in two. Today, one person is responsible for marketing and finance and another for development. This is a strange arrangement, considering the company already has a chief financial officer — and, furthermore, that product marketing in all other development teams always rests with the product group leader.

Management In The Maze

I could continue to analyze this further, but instead, let me look at the company from a different angle and discuss the management style being practiced.

Another common theme that comes up in my discussions is that Steve likes to meddle in all aspects of the company, seemingly micromanaging the various business units. People working for the senior leaders therefore feel that this disempowers them. They also suffer from decisions frequently made by committee, which both hinders response time and leads to a lack of accountability. To make things worse, the highly profitable Windows and Office franchises are blocking innovation and a healthy sense of paranoia. This is very comparable to the situation IBM found itself in during the early 1990s with regard to its mainframe business.

With the board and the CEO being weak when it comes to technical leadership, the onus is on the senior leaders to provide technical foresight. Being veterans and living to some degree in the past and having to please a controlling CEO makes this hard. From what I understand, the different departments continue to have turf battles, and sometimes give the impression of being fiefdoms, making it nearly impossible to execute a unified strategy. To me, it feels increasingly that Microsoft is tied up in an exceedingly complex knot, with infighting, factions, and bureaucratic inertia creating a stranglehold on the company. 

The Alexandrian Solution

Alexander the Great was confronted with an equally intricate challenge when he invaded the Persian Empire in 333 B.C. We all know what he did to disentangle the so-called Gordian knot; he unsheathed his sword, splitting it in half. Later some people labeled his action the equivalent of cheating. I call this a sign of a bold leader because he thought outside the box. (Recall that he went on, as the legend predicted, to fulfill his destiny by conquering Persia!)

It is along these lines that I find the medicine that should enable Microsoft to regain new strength and conquer the IT universe once again. But not as a single company! It needs to be split in several parts to unlock value for stockholders and set its talent free from bondage. The feds tried this once before. Now Microsoft’s board should do it voluntarily by creating six independent companies:

1. Operating systems for server, desktop and mobile devices
2. Tools and languages for all platforms
3. Productivity and business applications for all platforms
4. Game consoles and game software for all gaming platforms
5. Consulting for all platforms
6. Internet related business (incl. browser, advertising, search, e-mail services, social media) for all platforms

Except for the first unit, all others would need to start expanding their business horizon by developing software and/or services for all relevant operating system platforms and not exclusively for Windows. The group developing the Azure platform is already on the way following this recipe by supporting Phone Gap, Apache’s Hadoop and the Android environment.

Unit six should be modeled along the lines of Google, and develop its own sexy browser, etc. The current IE browser integrated into Windows should be nothing more than a download vehicle for any available browser and could therefore be reduced in functionality.

Maybe this proposal is radical. But how else can you re-infuse entrepreneurial spirit in a company with a feeble or handcuffed leadership team, which mainly protects its own turf and ignores broader opportunities? To propel Microsoft out of its current predicament, I see no other way than to split the company into more manageable pieces.

If this means four or six independent companies at the end, well, that's open for discussion. The key to success is to make the newly created enterprises hungry for new opportunities, and competitive enough to please shareholders and Wall Street alike.

A byproduct of such a move would be lower costs and less administrative fat because most of these separate units could no longer rely on Windows and Office subsidies. Also, the currently centralized research group would need to be split up accordingly and please its new masters by ensuring that research is not just done for the benefit of mankind, but for Microsoft’s shareholders.

Last but not least, this move — if ever accomplished — would shake up the leadership team and do away with the established fiefdoms. Let only the fittest and best survive!

Organization-chart cartoon courtesy of Manu Cornet. Lead image cropped from the full cartoon

[Editor’s note: Joachim Kempin is a former top Microsoft executive and author of a new memoir, Resolve and Fortitude: Microsoft’s 'Secret Power Broker’ Breaks His Silence. This is Kempin's fourth column on Microsoft for ReadWrite. See his earlier contributions here, here and here.]

Over the last couple of weeks, my provocative weekly columns and blogs have created an astonishing amount of feedback. I feel honored. The general tenor: Microsoft is no longer capable of creating innovative ideas or products. In his latest CBS interview, even Bill Gates joined that chorus. People have given up on the company and its leadership team. Some hate its CEO so much that they can’t write about him or the company he is supposed to lead in a rational fashion. They call Microsoft “the Borg.” I have quite a different take on the company and its potential.

Four years ago this country was in the throes of an economic recession not seen since the 1930s. Then-candidate Obama campaigned with the motto of hope and change. I am campaigning for this once great company with the same thought in mind. Stone me - I probably deserve it - but I still firmly believe that deep down Microsoft has the talent to rise to the occasion and cause the paradigm shift needed to lift itself from the ashes.

In many ways, Microsoft’s current predicament is similar to the one facing the Republican Party today. With the country still plagued by a 9% unemployment rate, Obama in 2012 was vulnerable, but Republicans couldn’t take advantage. Obama ran an efficient data-mining campaign, and his team possessed the better kaleidoscope in regard to the country’s shifting diversity mix, social order, and values. The world has changed around the Republican Party, and like Microsoft it hasn’t kept up. Continuing to condemn abortion, gay marriage, gun control and entitlements while calling on illegal immigrants to self-deport will further marginalize the Grand Old Party.

The World Has Changed - Microsoft Hasn't

Today, Microsoft finds itself searching for static security within a continuously evolving social-technological landscape. Back in the late 90s, together with its partners, Microsoft owned the dominant information technology platform and ecosystem. A questionable judge and an appellate court concurred with the Feds, and ill-guided politicians, Microsoft haters, and competitors maintained that the company had gotten too powerful and needed to be reined in. I still consider their intervention a first class judicial blunder, but who am I to change antitrust history?

Declaring the company a monopoly and stamping the scarlet M on Bill Gates’ forehead, caused a lot of pain and a change of guard, which led to an unparalleled leadership crisis. The company lost its edge.

No wonder! Competition never rests. As complacency, bureaucracy, and lawyer scrutiny gain the upper hand, you will lose your lead and endanger your franchise. Bombing with a disastrous Windows Vista operating system, getting a late start on cloud computing, and not recognizing social media and mobile trends nearly pushed the company over the cliff. From then on, Microsoft found itself in catch-up mode. Infighting fractions, talent drain, and severely hampered technical thought leadership accelerated the dethroning of that once top-notch enterprise.

Like the Republican Party, Microsoft’s leadership team never got the message that the landscape was rapidly changing to its disadvantage. The company’s fixation on the declining Windows platform reminds me of the Republican Party’s continuing focus on 18^th-Century social values where no Internet existed, long-distance travel was done via horse and carriage, and Social Security and Medicare were not heard of. While the majority of constitutional principles developed by the founding fathers remain valid and worthwhile to defend, the last 200 years have left their mark and caused several paradigm shifts progressively adjusting people’s social consciousness.

Missing The Shift To Mobile

Innovation and changes in information technology preferences happen much quicker. The last decade presents itself as a great example of a relatively swift first-choice-transformation as hordes of end-users opted out of Windows-based devices and flocked to alternative mobile communication tools. Microsoft’s top honchos missed this paradigm shift badly, which deteriorated the Windows franchise, making it less relevant and less valuable. The time has come for Microsoft to accept that, move on, and pursue growth opportunities beyond.

When it comes to politics, I am an independent who subscribes to William James’ style of pragmatism. I always vote for whoever presents common sense, and not for party doctrine or ideology, which will rarely be executed upon anyway. During my 20 years in Microsoft, I had plenty of opportunities to observe a similar viewpoint from Microsoft’s partners. They preferred to stay independent enough so that they could freely pursue the most promising opportunities and not merely follow Redmond’s ideologically driven dictate.

As long as Microsoft’s offerings were compelling and helped them win, they were loyal followers. Today, they are defecting in droves because Microsoft’s leadership has missed the boat too often. I would have humbly acknowledged this, even in defeat, and embraced it as a growth opportunity by catching up and leading the next phase of innovation.

Instead, the current leadership team jealously clings to a shrinking Windows franchise and continues on the path to protect it, without seeing beyond its limited horizon. That conduct is preventing the company from pursuing software development opportunities on other platforms that, when combined, have already started overtaking Windows. (Protectionism, even with resolve and fortitude in mind, is the worst solution where collapse is not an option!)

Be Open, Not Closed

The key for Microsoft’s revival lies in writing software for all relevant platforms—in particular the ones outside its current realm like iOS and Android, more than doubling its business potential. Look forward and make innovation work and ring in a new area of openness! Only that will set new standards people can trust, retain current partners, and regain lost ground with others. This is why I think the company needs a major overhaul from top to bottom, accompanied by a shift in management style I can believe in. Bob Herbold’s book What’s Holding You Back comes to my mind.

For this change to take hold, a very effective ground game will be needed to recoup lost trust with every possible hardware and software vendor. The Obama team executed this to perfection by audaciously switching its 2012 motto to forward and winning over doubtful voters who believed in his hope-and-change message, but were deeply disappointed of what had transpired during his first term. A huge door-to-door campaign and effectively using information technology ahead of his rival cured this impression and made voters reborn believers.

It reminds me of what I witnessed during the Windows 95 crusade. Microsoft ran a terrific ground game by nearly tripling its software- and hardware developer support, instead of letting it slide, as an insider recently mentioned to me in regard to Windows 8. Just count the number of available Windows 8 applications. Ten thousand, as another employee told me, were envisioned at launch! The company missed that goal by a wide margin! The ground game, while desperately needed, was ineffective. Long time hardware partners even felt outright betrayed when the company launched competitive tablets. Like software developers they continue to move on to competitive mobile, social media and other environments by assuming they provide greater opportunities. What an embarrassment!

How large of an earthquake will be needed to shake Redmond to its foundation, and stop pursuing an already lost dream? The company still has significant financial resources and talent, and therefore I have neither given up on hope and change nor on forward. Call me stupid, but with a lame duck board, the only solution might spring from shareholder dissatisfaction and rebellion. That is extreme but it might, in the end, offer the only chance. What remains to be seen is whether this this alone will be enough to propel the Redmond juggernaut fast and far enough forward to come to grips with the realities of the 21st Century technology trends.

[Editor’s note: Joachim Kempin is a former top Microsoft executive and author of a new memoir, Resolve and Fortitude: Microsoft’s 'Secret Power Broker’ Breaks His Silence. This is Kempin's third column on Microsoft for ReadWrite. See his earlier contributions here and here.]

When I saw a TV ad using this strange word scroogled, I wasn't quite sure what it meant, so I looked it up in the Merriam-Webster online dictionary. I got this reply: “The word you've entered isn't in the dictionary.”

Frustrated, I thought maybe the dictionary hadn’t been updated recently. So l pursued an alternative way of exploring the word’s usefulness: Microsoft Word. The software redlined the word, meaning scroogle is not a genuine word.

I don't Google. As a loyal ex-Microsoft employee, I use the all-knowing Bing. So I challenged the oracle-engine from Redmond to find out what this mysterious word without meaning (or, should I say, meaningless word) stands for.

I soon discovered that “scroogled” is the centerpiece of an advertising campaign in which Microsoft warns Internet users of ugly consequences if they don't let go of their despicable habit of Gmailing. It soon dawned on me that the word must have been invented by somebody who wanted to avoid saying “scr(ew G)oogle” in public.

(See also: Undeterred By Failure, Microsoft Vows To 'Scroogle' Google Some More)

A dirty word indeed, so my kids will definitely be forbidden to use it in school. But I decided to add it, just for fun, to my Word vocabulary.

What Is Microsoft Thinking?

That Microsoft is using this silly word in TV and online ads nevertheless remains a conundrum. I'd thought the company had stopped nastily smearing competitors right after its painful antitrust experience. Now I'm wondering if this inexplicable little word is just a simple faux pas, or a sign that the company is returning to its innately competitive, if not exactly pleasant, roots.

I broke my own rules and turned to Google’s search engine to dig deeper. I was surprised to find a richer and more revealing trove of information than Bing had offered me.

I learned that Microsoft’s ad campaign is designed to lure Gmail customers into the realm of Microsoft’s recently launched and updated Outlook e-mail system. (This is a replacement for its old Hotmail product, which I've  used for eons.)

Mark Penn, Idea Man

The person behind the ad campaign is Mark Penn, who made his mark as a political operative and is best known for his involvement in Hillary Clinton’s unsuccessful 2008 presidential campaign.

He joined Microsoft last year because its CEO, Steve Ballmer, was reportedly impressed by Penn’s novel ideas of how to present Microsoft’s products to the public. I'm surprised the company hired him, knowing from a most trusted source that he was one of the most useless consultants Microsoft hired during its antitrust trial. He apparently believes that where search engines are concerned, “people these days are making a choice, just like they’re making a political choice.”

So here we have it. What works well in politics should, according to him, work as well for Microsoft in the 21st century. The notion of this software-driven company resorting to politics is nothing novel. The only surprise for me is that its latest target is now its current and former customer base.

(See also: Incoming! Microsoft Launching Another Pathetic Smear Campaign Against Google)

Smearing a competitor might work in politics, as we witnessed again in the last presidential election, because in that universe the word truth does not hold a lot of water. The software business is quite different. Ease of use, performance and affordable prices have long been the foundation for success. In short: Better products eventually win.

In Software, It's All About Products

Remember how Microsoft once beat another fierce competitor called Netscape? Its browser, Navigator, reigned supreme for nearly three years until Internet Explorer caught up and the development community and the pundits eventually regarded Explorer as superior. Only then did its public usage increase, and only then did Netscape lose the race. This is a lesson Microsoft needs to recall.

To retain customers, companies often build marketing campaigns around FUD — that is, by spreading Fear, Uncertainty and Doubt about competitive offerings while promising future improvements for their own. It’s pretty nasty when you're on the receiving end, but if you have an inferior product this tactic can work by delaying customer defections, buying you time to beef up your offering.

But the Scroogled campaign doesn't follow this well-known pattern. It seems to be built solely on fear. Has Microsoft’s obsessive-compulsive disorder spread so far that it can’t get past fear to uncertainty and doubt?

Oh, no! Google has the audacity to match ads to words found in a machine search on customer emails! Therefore Microsoft wants Gmail users to believe that their privacy is endangered. My Google search, however, quickly discovered what Microsoft states in its own usage policy:

Information about your past online activity, or the activity of others using this computer, might be used to help predict your interests and to select the ads that you see. But you’re in control and can opt-out of receiving personalized ads at any time.

Google allows its customers to opt-out as well. So what is there to fear?

If Microsoft could match Google’s smarter technology, the word scroogle would have never been invented. A couple of years ago, Microsoft bought an Internet-wide advertising platform by buying aQuantive for $6.3 billion, but then couldn’t make it work properly to beat Google and subsequently wrote off nearly the entire value of the acquisition.

Now, guided by a political smear artist, the company has to resort to a fear campaign where very little fear exists. If you're the sort to worry that the postal service knows where you live, then you might be scared about the ads Google derives from your email content. The government, under the Patriot Act, snoops way more intensely — and for uglier reasons.

Outlook Is Actually Better!

Even more disturbing, when you compare the new version of Outlook with Gmail, Outlook already wins. Instead of designing a campaign designed to stir up privacy anxiety among Gmail users, the energy should have been directed towards making Outlook usage most desirable. Microsoft could have challenged its marketing folks to create additional incentives for switching to Outlook, instead of wasting between $30 million and $90 million of shareholders’ money on useless slander.

Consumers make their product decisions in private, helped by their friends’ recommendations and information derived from the Internet. Most seem to consider Google to be a couple of notches less evil than the bully from Redmond, which is why Microsoft’s scare tactics won't work.

There's another reason Microsoft’ energy is totally misdirected. Neither Microsoft nor Google represent a political party. The process of choosing the right software isn't really comparable to voting in political elections, where fiscal or social principles in general determine the outcome.

Therefore I will keep the ugly word scroogle in my dictionary just to remind me what not to do in sales and marketing. A company and a CEO that resorts to a political smear campaign to promote its products and services has most definitely seen better days.

[Editor’s note: Joachim Kempin is a former top Microsoft executive and author of a new memoir, Resolve and Fortitude: Microsoft’s `Secret Power Broker’ Breaks His Silence. It’s a fantastic book, and I’ve asked Kempin to write a few columns for us sharing his perspective on Microsoft. In this, his second column for us, Kempin argues Microsoft should take over the social networking space, and get out of the hardware business. –Dan Lyons]

Last week I gave you a historical perspective about Microsoft and pinpointed several areas for improvements. Today I will continue that discussion with more food for thought:

Reinvent Social Media Software

Microsoft could create lots of magic by developing advanced social media software, which would be so user-friendly that even a dog could use it with ease. The leading product, Facebook, lacks a good user interface; while it connects you, it basically sucks. Its value lies in its huge user base, the vast computer network it needs to function, and the ease with which it attracts immense amounts of advertising dollars.

As with any social media network, the vast user information it contains is its most valuable asset. This is the main reason why Google is making a serious effort in that product category. By properly analyzing and evaluating this info with modern data-mining techniques, Facebook can create unprecedented consumer market knowledge and deliver well-targeted advertising. Microsoft has only a very small share in this business.

Therefore, Microsoft needs to reinvent this space and make it easier, more fun and more intuitive for users to create a lively community. Convincing current social media users to migrate into a Microsoft-conceived realm will take time and incentives, and will require an easy transition path in form of a few clever mouse clicks to reestablish links and move existing user information into a more captivating universe.

A Facebook-like product with superior functionality and vastly improved privacy features, including characteristics from Twitter, Google+ and LinkedIn, would be extremely compelling. Microsoft has the technical capacity and the design wit to do this. In particular, when combined with free Skype usage, it could take a lot of advertising revenue away from Facebook and Google.

There’s also an opportunity to bend over backwards and open up the Chinese market. This could be done through a local partnership or a technology deal. Since Facebook is blocked in that country, Microsoft could have a nice growth opportunity.

In the ‘90s, Microsoft undertook something comparable with the Java programming language invented by Sun Microsystems. The principle applied was christened “embrace, extend, and innovate.” It succeeded because Microsoft improved a mediocre product by providing the necessary plumbing through foresight and architectural underpinning.

Applying the same method a second time, when reinventing social media software, would very likely succeed and curtail the success of Microsoft’s competitors.

But let’s not stop there. Let’s be audacious, and provide Internet Explorer (IE) with a long-needed boost by making social networking capabilities an integrated part of IE, available for everybody’s web-browser-fingertips, anywhere on any mobile and desktop device! This would be way more effective than spending advertising money to encourage people to use IE.

I can see the competitors already running for cover and complaining once again to the feds, but since it’s a “genuine technological integration” - as a court once ruled in regard to IE — such a move would represent a totally legal operating system/browser extension.

Research With A Product Angle

The other change I would introduce is to locate product development and relevant research personnel under one roof. The goal would be to accelerate the turning of research projects into marketable products.

This means abandoning the currently centralized research unit. Under this new scenario, the person running the Office group (for example) would pay for and guide his or her own research department. Therefore that executive would have the ultimate motivation to turn innovative ideas into money-making ventures. This was already talked about when I was still around, but has never been accomplished.

Best products win — mostly! The company needs to remember that and execute accordingly. Over the last decade it has not adhered well to that principle. Moving research into the product groups might just do the trick and re-infuse that old but so very successful principle and enable the company to lead in several categories, as it did in its glory days.

Complaining, as Bill Gates recently did, that the company is no longer innovative enough proves my point. Act, Mr. Chairman! Act!

Products To Divest Of

Very simply put: All hardware devices. The foundation for Microsoft’s prosperous ecosystem was built with software DNA and partnerships with hardware producers and software vendors. The company’s leadership needs to remember these old roots and make it a priority to keep suppliers who support Microsoft’s platforms close, and enlarge that club with the ones who once left.

Its CEO and chairman know very well that re-earning formerly prevailing trust is the key to success here. It takes years to gain it, and only one wrong announcement or power grab to destroy it.

The reason why people prefer a certain computing device over another ultimately comes down to a combination of usefulness and affordability. Usefulness means how easily one can operate the device and how many software applications are made available for it. Charge too high a price, and users will most likely compromise and pick the cheaper and a less useful platform. Low price is the main reason why Windows PCs beat Macintosh computers by eight to one, and why Android-based smartphones outnumber iPhones. Apple’s products, while superior, are as overpriced as the wonderful Porsches I love so much.

Recently, Microsoft announced it is changing direction and wants to be known as a device and services company, so that it can show off its software products more favorably. I am not surprised about emphasizing a more intensive focus on cloud services, where competitors are way ahead. But I vehemently disagree with the idea of producing hardware devices to the detriment of loyal ecosystem partners. It simply undermines their trust, and is a distraction for the company.

Microsoft’s experience with building hardware is very limited. From computer mice and keyboards to the Xbox game console, the company has struggled for years to compete and be profitable in that field. Why will the newly introduced Surface tablets change that?

In the ‘80s, Microsoft ventured into producing hardware in form of memory cards, an add-on board for the Apple II so it could run CP/M software, as well as printer hardware and computer mice. I sold all of them as General Manger of Microsoft’s German subsidiary. With the exception of the computer mice and the Apple II add-on board, all of them flopped. When the Apple II fell out of favor, only the Microsoft mouse survived until the turn of the century when ergonomic keyboards and the Xbox game console showed up.

The mice are still getting produced, but just for the replacement market. My team sold 150 million of them to PC manufacturers, but the business was abandoned in 2000 because we were no longer price competitive in that cutthroat market segment. The same happened to keyboard sales. Dropping mice and keyboards altogether would make some friends — Logitech comes to mind — and would hardly be noticed on the balance sheet.

Xbox, Microsoft’s game console, came into existence to keep Sony from conquering the living room, as Bill Gates once pointed out. It came with a steep price. The company lost $6 billion to $8 billion in this venture. Even today, every Xbox remains subsidized. Its losses are made up with software royalties from game manufacturers, profits from Microsoft’s prospering “Halo” game and service fees paid by cloud services users. Leaving Xbox behind would therefore only cause a small revenue shortfall, and would hardly be noticeable at the bottom line.

The best solution: Spin the total hardware division off and continue to do game software. Game consoles, in particular, are a dying breed. The future of gaming for hard-core gamers will be on powerful PC systems equipped with high-end graphics and on tablets for the causal crowd. Sony’s recent PlayStation 4 announcement confirms this to some degree. Sony wants to revive game console sales by making them as powerful as PCs, or maybe even more powerful, by including social media connectivity, improved cloud services and key PC attributes. Why not just subsidize PCs instead of spending money on a proprietary platform design which will increase Sony’s losses for years to come?

The real money is in gaming software, period. Spinning Microsoft’s console business off would avoid future losses. And last but not least, Valve might be interested in buying that division. Who knows?

What else to get rid of: All retail stores. Sell online instead and clean up the messy Windows 8 application store or Windows 8 might join the lists of Redmond management casualties.

Next Step

Next week, I will focus on organizational issues and explain why a major organizational change is needed to revive Microsoft’s mojo.

Image courtesy of Shutterstock.

[Editor’s note: Joachim Kempin is a former top Microsoft executive and author of a new memoir, Resolve and Fortitude: Microsoft’s `Secret Power Broker’ Breaks His Silence. It’s a fantastic book, and I’ve asked Kempin to write a few columns for us sharing his perspective on Microsoft. In this column, Kempin explains what Microsoft should do to regain momentum in the marketplace. –Dan Lyons]

Quarterbacking while sitting in a living room chair, or in this case composing a guest column on a PC, is always easier than actually being in the field feeling the heat of battle, or enduring fierce competitive push-backs. Therefore, take this column with a grain of salt, if you wish. I worked for Microsoft for nearly 20 years as an executive, and I will use this opportunity to present some provocative, yet serious, ideas on how to get Microsoft back on track.

Historical Perspective

Microsoft grew up as a software company developing programming languages for early PCs. Its management used the introduction of the IBM PC to branch into PC operating system and application software, and a variety of software development tools. For 32 years, it was led by a visionary executive who had pure software DNA in his blood. No wonder the company reached dominant positions in many of the software markets it tried to conquer.

Competition was always tough, but the technical foresight and unrivaled business acumen of Bill Gates and his management team gave the company an edge. Even if product version number one was not always flawless, Microsoft never gave up reaching for perfection and fighting for market share. This required guts and stamina, and a “take-no-prisoners” approach. When we executed with resolve and fortitude to near perfection, Wall Street listened and rewarded the company’s shareholders.

A Focus On The Enterprise

Today, Microsoft no longer occupies that splendid coveted position. During the last decade, its leadership focused mainly on the business community and no longer kept the younger generation in its sights. In 2008, when Bill Gates retired, he gave a weird goodbye speech at the worldwide sales meeting. He was off message. (You know when he’s going off message because his right arm starts drifting upward from his body, and his hand just hangs out there at the level of his face.) He said, “We aren’t a consumer company. We are a big company company. We make our money from standards that are adopted by big enterprises.”

To some degree this has worked well; Microsoft’s revenue and profits grew quite impressively, but its reputation as an innovative tech leader deteriorated in the public eye. Once cool, today Microsoft is a well-oiled money machine, but the contagious excitement around the time when Windows 95 launched is long gone. That torch has passed to the Apples, Googles, Twitters, and Facebooks of this world, which, judging by public enthusiasm, best support the still growing mobile and social media trend.

No doubt Microsoft suffered from partially losing its antitrust battle. Infighting of opinionated and polarized fractions and losing talent hand-over-fist caused additional damages. With the former tech guru losing his luster before finally leaving the company, Microsoft became a ship without an anchor drifting in a sea of opportunities and waiting for the right wind to propel it in a promising direction.

Meanwhile, competitors sailed right by! It frustrates me, someone who uses Microsoft’s products daily, to observe how its tech leadership is being whittled away. Competitors, companies I once helped to beat, have been able to regain lost ground because Microsoft is no longer fighting to stay ahead of the game. With $68 billion in the bank, Microsoft can find and acquire talent. I can find no valid excuse for letting the ship continue to drift. Let’s see how the company could be revived and regain its tech leadership.

The Cry For A Technical Leader

First of all, the company needs a bold and charismatic executive with bona fide technical credentials to head all of its product divisions. This dynamic leader must not only serve as the main spokesperson for all products, but he or she must also inspire and command the respect of developers. (Unfortunate Ray Ozzie did not survive in this role, and the one who came after him, Craig Mundie, was from the beginning the wrong person.)

This new tech leader should streamline Microsoft’s offerings in several key product areas. The first one to tackle should be cloud services components and infrastructure tools—including search. On top of the list should be cloud resource management. Its objective would be to save costs through clever infrastructure design. I recommend that Microsoft’s team works closely with the development community in that field, to make add-on development more effective and less time consuming when using Microsoft’s core creations.

Microsoft lags in this area, but is by no means shut out. Search is evolving from finding things to finding relationships between things. It will continue to evolve, always upsetting existing standards. This is exactly what Microsoft needs to understand and execute upon. Have a vision and pursue it like in the old days, expressed as a mission statement in its original logo: “A computer on every desk and in every home.” Mimicking Google, and trying to beat Google, which is what Microsoft is doing today, is a distraction and will not lead to dominance.

Security And Connectivity

Next on my list is security, and protecting privacy and identity on every computing and communication device for consumer and business communities alike. Hackers and spies need to be defeated, just as my old team once crushed the software pirates.

While the executive in charge will have to continue to improve Microsoft’s bread-and-butter products, like Office and Windows, Microsoft’s focus for them needs to shift. Instead of adding more features we need a crusade resulting in making phones, tablets, notebooks, desktops, game consoles and TVs work better together.

Windows 8, which unifies the user interface of these devices, has been a step in that direction, but much more can be accomplished by looking comprehensively at communication interfaces and connectivity improvements, and not just in parts. I can hear the drums from Redmond already signaling we are doing this already. Not fast enough! It needs to be further accelerated to ensure that all devices mentioned above will soon create plenty of blossoming opportunities for Microsoft’s hardware partners.

Schools And Education

The US school system is antiquated and needs to be brought into the 21st century. This presents an opportunity for Microsoft to engage and help teachers, parents, and children to excel. I am convinced that if Microsoft would seriously commit to develop educational software it could help tremendously to improve the competitive position of the United States in the world. From a marketing perspective, wouldn’t it be great to introduce the next generation early in life to a company called Microsoft instead of Google?

If the Gates Foundation would fund this as a charitable endeavor it would add no additional expense to Microsoft. The products could be made available free of charge. The foundation already supports the Kahn Academy; there is an opportunity to link up.

Games And Openness

Last but not least, I would create a game division with the goal of writing exciting games for all game consoles, and not just for Xbox. This might need an acquisition, and compares well with Office running on Windows and some Apple devices. I would change that as well, by opening Office to all relevant computing platforms.

This would establish Office as the dominant standard for integrating most corporate services. Protectionism, as it is practiced today by Microsoft, never works long term. The market will cure itself with competitive products, while the protectionist loses a revenue stream.

Next Steps

In my next column I will recommend additional aggressive product moves, explain how to reorganize the research group and say what products the company should refrain from making. Later, I will get into a big picture company reorg proposal.