Ballmer Reveals Blind Spot in Attacking IBM’s Narrow Focus

In an interview with the New York Times, Microsoft CEO Steve Ballmer pointedly criticized strategic myopia at IBM, a company with which Microsoft enjoys a complex relationship encompassing both conflict and cooperation.

Specifically, Ballmer charged that IBM was misguided in exiting hardware businesses in networking gear, hard disks, and PCs. Technology companies, according to Ballmer, must pursue constant market expansion and diversity to stay alive and relevant.

Said Ballmer:

“IBM is the company that is notable for going the other direction. IBM.’s footprint is more narrow today than it was when I started. I am not sure that has been to the long-term benefit of their shareholders.”

First, we have to question Ballmer’s sincerity. Does he actually think IBM has gone strategically astray, or does he have ulterior motives? Perhaps he’s upset that IBM didn’t jettison businesses in which it competes with Microsoft.

Let’s put that possibility aside, though. Let’s take Ballmer at his word and assume his remarks were candid.

Networking gear? After the death of Token-Ring local-area networks (LANs), IBM was a bit player in networking, not a leader. Rather than flogging a moribund horse, IBM chose to make money by using its professional-services reach to resell other companies’ networking products (such as Cisco’s) into extensive enterprise-wide solutions.

How would IBM have achieved the same result selling undifferentiated adapter cards, hubs, and switches at wafer-thin margins? To paraphrase John McEnroe, Ballmer cannot be serious.

It was a similar story with disk drives, another business that offered unattractive margins, low growth, and not a lot of meaningful opportunities for clear competitive differentiation.

It’s when we get to PCs that the verdict becomes a little harder to render and more ambiguous. Yes, PCs are a low-margin commodity, and IBM wanted no part of the consumer market. It got tired of surrendering PC margin to the likes of Microsoft and Intel, which carved out the biggest profit percentages with operating systems and microprocessors, respectively.

Nonetheless, PCs (mobile or desktop) are included in every enterprise solution. IBM also might have been able to devise innovative value (if not outright differentiation) in the design, features, and functionality of the boxes for deployment in specialized business environments. They could have used their considerable experience and knowledge of enterprise requirements to become the un-Mac, the business-oriented inversion of Apple’s consumer mystique. It also might have saved its Global Services and other sales teams a degree of effort in sourcing and integrating PC into customer deployments.

But would it really have been worth it? Would it have provided enough value to compensate for the hassle and low margins associated with a commodity hardware business? In all likelihood, no. That’s why IBM probably made the right call.

Microsoft, of course, is the polar opposite of IBM. If Microsoft isn’t the jack of all trades and the master of none, it definitely is a hyperactive tradesman that wants to be involved in any project with commercial potential.

Its consumer forays have been more unsuccessful than successful, and they have distracted the company from extending and expanding its presence and in enterprise markets of all sizes. On the basis of opportunity cost alone, Microsoft has squandered resources on dismal consumer-oriented products (Bob and Zune, anyone?). Those resources could have been assigned to gainful, less-quixotic endeavors in the enterprise.

I am not saying that IBM is absolutely right and Microsoft absolutely wrong. We might find that IBM’s lack of networking hardware, for example, becomes a factor in its battle against Cisco and HP for supremacy in the converged data center. What I am saying is that Microsoft’s own mixed results belie Ballmer’s implicit claims of superiority.

As pointed out in the New York Times article, shares of I.B.M. are up about 30 percent since 1999, while shares of Microsoft have dropped about 30 percent during the same period. Since Ballmer invoked shareholder value as his measuring rod, it seems fair for us to beat him with it.

In the final analysis, if IBM suffers from having a focus that is too narrow, Microsoft suffers from having one that is too diffuse.

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