As is often the case with many start$-$ups, in its early days Microsoft$$s organization developed organically. Initially, when the company$$s main product was its MS$-$DOS operating system $($the forerunner to Windows$),$ the company had a functional organization. The two main functions were engineering, which was responsible for developing software products, and marketing and sales, which sold those products to computer manufacturers, business users, and consumers. The engineering function was initially headed by founder and CEO Bill Gates, while Steve Ballmer $($who would ultimately succeed Gates as CEO$),$ ran the marketing and sales function. Support functions included finance, human relations, and legal.

As the company grew and developed new products such as Office, Windows server software, development tools, Xbox, and Internet search, Microsoft developed into a de facto matrix organization. Each major product category was put into its own business division, while the engineering and sales functions cut across these divisions. The rational for the matrix structure was that it encouraged close coordination between the different businesses. This was seen as a key imperative at Microsoft, where various software products needed to work well with each other. For example, on the engineering side, Office needed to be optimized to run well on Windows; Xbox used a customized version of the Windows operating system, so development had to be synchronized; and the Windows operating system for desktop and laptop computers had to communicate seamlessly with the Windows server software that ran on servers. On the sales and marketing side, coordination was important to ensure that business users had one main point of contact with Microsoft, which was far preferable to having multiple salespeople from different divisions contact the company.

While the matrix organization achieved its main objectives of facilitating coordination between divisions and presenting a main point of contact for businesses, it did create some problems for the organization. There was a chronic lack of accountability within Microsoft. When things went wrong, it could be unclear whether this was due to management problems within the business divisions, or due to a lack of execution by the engineering function, or by sales and marketing. It was also the case that engineering was viewed as the premier cultural function within the organization. Most importantly, engineering took the lead in developing new products. This didn$$t always serve the company well because its engineers, isolated from customers, were not as focused on the market as they should have been. Over time, the company also became increasingly bureaucratic and slow to respond to innovation by rivals such as Apple and Google.

When Satya Nadella became CEO of Microsoft in January $2014,$ one of his priorities was to increase accountability within the organization and make Microsoft more agile. By mid$-2017,$ he had reorganized into three main business segments$$Productivity and Business Processes $($which included Office $365,$ Dynamics, and LinkedIn$),$ Intelligent Cloud $($public$,$ private, and hybrid server products and cloud services$),$ and More Personal Computing $($Windows$,$ Xbox, Surface, and search advertising$).$ The heads of each segment report directly to Nadella, and they have primary profit$-$and$-$loss responsibility for their segments. The different product offerings within each segment are also profit centers, and the heads of those product divisions report to the head of each segment. Sales continues to operate as a separate function, but engineering and marketing responsibilities are now embedded in each segment, and the product groups within each segment. In other words, Microsoft has moved significantly away from its de facto matrix structure. The articulated goal of these changes is to align structure with strategy, drive accountability, and eliminate obstacles to innovation. Judged by Microsoft$$s financial results and the rapid growth of its cloud offerings since Nadella took over, so far this seems to be working.

Sources: Discussions with Microsoft personnel by the author.

Case Discussion Questions

What were the advantages of Microsoft$$s matrix organization?

What were the disadvantages of Microsoft$$s matrix organization? How might this organizational form have negatively impacted the company?

What was Satya Nadella trying to achieve when he reorganized Microsoft after becoming CEO in $2014?$ How successful has he been?

Is there still a need for coordination between businesses at Microsoft? How do you think the company achieves this?