Why Apple Beats Microsoft At Change Management

Vijay Govindarajan, 09.08.10, 06:00 PM EDT

Microsoft comes up with great ideas too, but fails at execution.

A decade ago Apple was presumed dead, and Microsoft was so dominant it was fighting
antitrust charges. My, how times have changed. Microsoft's stock price has since hardly moved
while Apple's has multiplied nearly tenfold.

This is a stunning turnaround, one that begs explanation, particularly since Microsoft ( MSFT -
news - people ) remains a company with enviable financials. It generates roughly $20 billion a
year in operating income on $58 billion in revenues, and it has a spectacularly clean balance
sheet.

But that's not enough to thrill investors, who want growth, growth and more growth. To get it,
Microsoft needs more innovation, and the company is not delivering nearly enough of that.

Failures to innovate come in two forms: failures of imagination and failures to execute. It is
almost completely implausible to attribute Microsoft's stagnation to the first kind of problem.
While some say the company has recently seen a decline in its ability to attract top talent,
Microsoft has been an employer of choice for the world's greatest software minds for most of its
history.
Therefore the problem can only be a failure to execute on an abundance of brilliant ideas, from
tablet PCs to e-books to smart phones to Web TV to portable music players. But why? In an
attention-grabbing op-ed article in The New York Times, a former Microsoft vice president, Dick
Blass, offered a blunt diagnosis: too much internecine warfare.

That's probably part of it, but the crux of the challenge is that innovation and ongoing operations
are always and inevitably in conflict. Whether innovation thrives depends a great deal on how
those conflicts are resolved.

The problem, of course, is that it is never a fair fight. Innovation initiatives are small and
experimental. Ongoing operations are big and established. Furthermore, the leaders of ongoing
operations have more concrete arguments for why they should get what they want. They face
unrelenting pressures to deliver outstanding results, every day, every month and every quarter.
Meanwhile innovation efforts offer only risks, hazards and distractions in the short run and
abstract hopes in the long run. No wonder, then, that so many innovation leaders feel that their
biggest enemies are inside their own companies.

The solution is for companies to forge improbable partnerships between innovation and ongoing
operations. Every initiative needs a close collaboration between its dedicated team and the
performance engine, the group that runs the larger day-to-day business.

As with any partnership, its success can only be built on mutual respect. Innovation leaders must
recognize, first of all, that they need the performance engine. Almost all innovations inside
established companies build on existing assets. Second, they must realize that conflict in the
partnership is normal. It is not the result of laziness or instinctive resistance to change; it is the
result of good people doing good work, trying to make the performance engine run as effectively
as possible. Leaders of the performance engine, meanwhile, must recognize that no performance
engine grows--or even survives--indefinitely. Therefore each side depends on the other