What were the chances 16 years ago when Microsoft lost its crown as the world’s most valuable company that it would regain the position?
Slim at most. History shows that the name at the top of the market capitalization charts changes only with epochs and that previous incumbents have little chance of revisiting their glories. Time moves on. Technology changes. And companies that lose their way don’t get a second chance. Not all the time, however. It’s a close-run thing, but trading closed today with Microsoft valued at $851 billion – ahead of Apple at $847 billion.
If Microsoft ends the year as the world’s most valuable company, it will be the first year it has done this since 2002.
New Leader Sparks Renaissance
Satya Nadella’s appointment as Microsoft chief executive four and a half years ago surprised many observers, including this writer. However, moves to abandon the mobile phone strategy of previous CEO Steve Ballmer and return Microsoft to its business-to-business roots with acquisitions including LinkedIn and GitHub have paid off. Microsoft stock has since tripled and increased by 7% in November alone.
However, Microsoft’s ascent to regaining its position as the world’s most valuable company also owes much to the decline of its two main rivals for the crown. Apple has tumbled from the trillion-dollar market capitalization it reached briefly in August, with the shares dropping 16% in November, following disappointing earnings, a decision to stop disclosing quarterly iPhone, iPad and Mac sales and concerns that it is falling behind ininnovation.
Amazon, which crossed the trillion-dollar threshold during intra-day trading five weeks later but never closed above the benchmark, has since dropped back. It closed on Friday with a market capitalisation of $826 billion – still well up for the year.
Game-changer
Longer-term, the game-changer for Microsoft has been Nadella’s decision for Microsoft to totally focus its products around the Cloud infrastructure market starting to close the gap behind Amazon Web Services, which controls one-third of the market. Mikael Johnsson, co-founder and partner at growth capital firm Oxx, says: “Nadella’s impressive leadership is particularly evident when you look at how he let go of the old paradigm that was all about controlling the operating system (OS) and instead moved towards controlling the platform.
“This included accepting that Windows as a server side OS was no longer going to rule the world - even leading to Linux being the major operating system within MS Azure today.
“This is something of a masterstroke.”
The Innovator’s Dilemma
If sustained, this achievement will also be a rare example of a very large company breaking free from the "innovator’s dilemma” made famous by Professor Clayton Christensen. Published in 1997, this theory claims to show how successful, outstanding companies can do everything "right" and yet still lose their market leadership – or even fail – as new, unexpected competitors emerge and dominate the market.
The theory runs that this happens because of the diminishing value of iterations of an innovative product after a middle point is reached, while smaller, newer innovators don’t have the pressure of existing large customer bases or the need to demonstrate regular growth and can rapidly outperform in niches before assuming overall dominance. Christensen’s seminal theory of "disruptive innovation" has thus changed the way that many CEOs around the world think about innovation, and Nadella is the best current example of a leader who has tackled it head on.
“It is hard to see this happening under previous Microsoft leadership,”Johnsson contends.
Having reasserted its leadership, however, Microsoft now has to prevent itself falling victim to Christenson’s dilemma again.
