Changing the Engine: How Nadella Transformed Microsoft

Verification notes (2026-10-28): 1. “All mobile devices under 10 inches” should be “phones and tablets with screens smaller than 9 inches.” Windows licensing fees for those devices were waived in an announcement at Build on April 2, 2014. Sources: https://news.microsoft.com/source/2014/04/03/microsoft-showcases-latest-updates-to-windows-opportunities-for-developers/ https://blogs.windows.com/windowsexperience/2014/04/02/thoughts-on-day-1-of-build-2014/ https://www.theverge.com/2014/4/2/5574146/microsoft-making-windows-free-on-devices-with-screens-under-nine 2. Reports support the account that senior executives were asked to read Nonviolent Communication. Sources: https://fortune.com/2021/12/21/microsoft-cultural-transformation-book-excerpt-satya-nadella/ https://www.businessinsider.com/satya-nadella-microsoft-nonviolent-communication-feelings-2018-11 3. Reports support the account of improved relations with Silicon Valley and cooperation between Microsoft and companies such as Box. Sources: https://www.wsj.com/articles/microsofts-satya-nadella-makes-peace-with-silicon-valley-1423072674 https://www.boxinvestorrelations.com/news-and-media/news/press-release-details/2015/Box-Joins-Microsoft-Cloud-Storage-Program-to-Power-Openness-in-the-Enterprise/default.aspx ---- #TransformationOfGiants #Microsoft Microsoft’s low point was no different in essence from those of many large companies in business history. The reason was the same: The product or business that once made the company successful and dominant suddenly stopped working as a new era arrived. The company then entered a long period of transformation. Some companies emerged from it; more did not. What they needed to do sounds simple. If a ship is slowing down or no longer moving, take out the old engine and install a new one. Of course, that is easier said than done. However badly the old engine performs, until it stops entirely, nobody knows whether a few repairs might keep it running for another twenty years. Replacing it inevitably brings pain: how many people will abandon ship? An engine alone is useless without fuel and an excellent crew. And perhaps what you really need is not a new engine at all, but an airplane. It is always easy to see things clearly in hindsight. Those living through the situation must consider countless factors, most of which will never be recorded. Transforming a large company is like replacing a ship’s engine. For a once-dominant monopoly such as Microsoft, it is harder still: replacing the engine of an aircraft carrier is nothing like doing so on a small motorboat. ---- How did Satya Nadella successfully transform Microsoft? For Microsoft, the engine that once made it unbeatable was Windows. After years of monopoly, and seeing itself as the industry, Microsoft had started to forget market realities and consumer needs. The reality was that, however much it denied it, Windows had become irrelevant in the new era of smart mobile devices. Ballmer had not truly accepted this even by the time he left. How did his successor Nadella respond? First, he removed Windows licensing fees for all mobile devices under 10 inches—in plain terms, smartphones and tablets—so every manufacturer could use it free of charge. Windows licensing fees were practically Microsoft’s lifeblood. Of course, in the smartphone era, Windows already contributed little profit or market share. But Nadella’s move sent a message: Microsoft was beginning to accept market reality. He also opened Microsoft’s star products, including Office and Skype, to rival platforms: iOS and Android. And they were completely free. Features sometimes arrived on iOS and Android ahead of Microsoft’s own platform. Nor were these simple copies or ports; they were specially optimized for those operating systems. Microsoft finally understood that it was a service provider and needed to bring its services to as many people as possible. For a monopoly facing a changed market, the hardest step is always to humble itself, put customers first, and genuinely meet their needs, even at the expense of some of its own short-term interests. Fortunately, it withstood enormous pressure and made the transition. Microsoft successfully replaced its Windows engine with cloud services. The hardest part: reshaping culture These changes to the business mattered, but saving a company—particularly a monopoly—requires something even more fundamental and difficult: reshaping culture. Reshaping Microsoft’s Culture Under Microsoft’s former appraisal system, employees had to be ranked against one another. A small group of top performers received promotions and raises; those at the bottom had to leave. As a result, employees focused on competing with one another. Under this distorted performance system, employees constantly thought about beating their teammates. After taking over, Nadella accelerated the “One Microsoft” culture that had already begun to form. Under the new system, the company judged performance by team success rather than individual results, greatly encouraging cooperation. Nadella also led by example and became more open. With its headquarters in Seattle, Microsoft had previously had less close ties with Silicon Valley. Now he developed a habit of visiting regularly, something uncommon among earlier CEOs. Companies that had previously worked only with AWS began working with Microsoft’s cloud services too, including the well-known cloud-storage company Box. He also asked senior executives to read Nonviolent Communication, a well-known book about empathy and effective communication, from beginning to end. Through this series of measures, Microsoft’s teams regained energy. The company seemed “cool” again, and more engineers and university students once more saw it as an attractive employer. #Dedao #ZhangXiaoyuClassicBusinessCaseCourse