VideoSays Hilal at Friedman Billings Ramsey: "The move to seven P&Ls and seven CFOs was aimed at treating each product group as a separate company—and they've seen benefits.' This year, MSN joined the client, information worker, and server and tools groups as Microsoft profit engines, Hilal says. "The three businesses that are losing money are losing a lot less of it," he says.
To Connors, the move represented a shift in which finance was given an equal footing in a company which had always been the province of techies and 'the field'. "We now have these P&Ls constructed over and above the field," says Connors. "In the past, we had our geographical people who managed their own P&Ls—and we didn't have them managing R&D. Now we have P&L leaders in charge of R&D, sales, services, and marketing."
Still to be done, says Connors, is implementing "this in a way that our field isn't frustrated." He elaborates: "Say Australia has a great program in mind for a promotion that isn't the same as France and Germany; we need to make sure that they're not stopped from doing that." He talks of a need to "make a big investment in public sector sales and relationship work. Making sure we have that kind of rapid decision-making movement as we would have before we established the seven PGs (product groups)."
Learning to Adapt
The Microsoft conundrum - of an admired giant seeking to find a footing in the developing world—is perhaps most succinctly defined by a Microsofter himself. "I have a company that economically is being driven by the mature market," says John MacLellan, the company's finance director for the Asia Pacific and greater China regions based in Singapore, "and I have to understand how to drive it by the emerging markets."
MacLellan sees the seven P&L structure as a boost to his efforts in China. "We have to realize that we have 97 percent piracy and whatever we do we're not going to get economic returns - not in the short term," he says. "The seven P&L structure allows us to communicate with our shareholders more clearly about the bets we're making," he says. In other words, the strategy for X-Box—Microsoft's game console—in China is not joined at the hip to the strategies for the other units, and the goals of investments within a given group can be argued on their own merits.
MacLellan is a Scot amid his second stint at Microsoft. He says a prime reason for his return was the lure of Asia and making Microsoft work here. "There's no higher priority than getting Asia right," he says. Despite his background in finance, he has the zeal of an expert salesman, though he hardly talks the party line. "We're taking this phenomenal 800 pound concept," he says, "and we're trying to fit it in a region where this 800 pound concept may not fit." He adds: "Of course, if you've been here for five minutes you see that it doesn't. And we're having to adapt."
That adjustment involves getting China in a different way, understanding the dynamics between the central and local governments, how businesses struggle, what China needs. "We in the West seem to regard the direction of China with a McCarthyite view," he says, "as if there's a unified, ominous intent behind official decisions." MacLellan is an engaging conversationalist, a tall man whose size makes a stronger impression because he's an animated, passionate speaker. "But this isn't the case," he continues. "We have to have the patience to let them figure some of this stuff out, and to understand the bravery of some of their decisions."
He adds, "It's a phenomenal engine that these guys are trying to manage, and trying to understand. They're looking for the levers."
The same could be said about Microsoft in its encounter in China. Things started badly when Microsoft opened an office in Taiwan in 1989 and began shipping its Windows products into the PRC. A Taiwanese programmer had inserted patriotic statements into the software, which were revealed later and offended the Chinese government. Then, as the magnitude of the piracy problem developed, Microsoft launched a series of lawsuits, which alienated public opinion. Bill Gates also told Fortune magazine in 1998 that eventually Chinese users would become 'addicted' to computers and become paying customers. The phrase is used by Pogo Linux, an open-source software company based, like Microsoft, in Redmond, Washington, in its Chinese marketing materials. "Chinese executives don't miss the parallel with the Opium Wars and China's victimization at the hands of the colonial powers," says Tim Lee, president of Pogo Linux.
But then Microsoft reversed its tracks. Its US$750 million investment in the PRC over three years (beginning in June 2002) is an extraordinary bid to help China build a market for software development—and help put Microsoft in better standing with the government. The deal allows China's state planners a say in where Microsoft donates millions of dollars worth of technology training. It calls for Microsoft to buy hardware for its X-Box consoles from Chinese partners, and the government gets to pick the partners. The money is being used to set up four joint-research labs at Chinese universities and to pay teachers at universities elsewhere in China.
All this, of course, is more than altruism. In the absence of a developed 'eco-system' for its products in China, Microsoft is determined to create one. "The question is how we can help build a software and IT ecosystem," says Connors. "China is a long way behind in the eco-system. If you look at India, it's very Silicon Valleyish. China doesn't have that advantage in IT or software."
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