John Cook from Tech Flash asked me to comment on the following question:What should Microsoft do to reposition itself as the most dominant and valuable tech company on the planet?

This is not a problem that has appeared over night; it has been decades in the making and can’t be cured with a single act.  The industry has matured, and Microsoft is still run like the company it was 20 years ago.  It lacks the visionary who can anticipate what its customers will desire and the ability to delight and surprise (in a positive way) those customers with a clean and crisp innovation.

Microsoft has become the IBM of the last generation – it is a de facto enterprise solution and “no one will get fired for selecting Microsoft.”  Microsoft had the ability to lead the way in the Internet, but it instead focused on the competition inside and didn’t dream the big dream.  Worse – it became boring!

Look at Windows Vista and Office 2007.  Neither were improvements on previous versions, nor were they more stable or easier to use.  And, of course, Microsoft had the clear shot at the Smartphone operating system.  Instead, it tried to bring us Windows on our phones.

Customers wanted new thinking, sleek products, and ones that were much easier to use.  The iPhone was really a breakthrough – a browser-based phone that was truly useful and enabled 1000’s of cheap, easy, and imaginative apps.  Apple unleashed the imagination and creativity of an entire generation.  And then they extended it to the iPad.  They took leadership of the entire industry.  They earned the mantle.

The fact that a large company loses its ability to innovate is not a surprise.  I call this the  “$0B Business Problem.”    As an illustration, I was the first GM of the Microsoft Search team.  We had a great plan to lead the search business that would grow to a new $250M business in 3 years. (Any VC would have funded this business; it returned over 50x ROI.)  But we competed for resources with Excel, which needed the same 25 headcount, and had an net present value of $4B.  In that context, my $250M rounded to $0B, and we didn’t get the people.

Microsoft needs to find a way to unleash it’s innovation.  It needs to behave more like  a startup.  When I was there, I suggested Microsoft form a group called “The Idea Factory,” where innovative and entrepreneurial employees could “spin in” (rather than spin out) a new idea, and create a startup around that idea.  The notion was that an internal VC group would vet and fund a portfolio of ideas, in exchange for ownership in the new company(newco)  and a right to acquire the entire company at a later date at a market price.  The employees who transferred to newco would exchange their options/restricted shares for newco stock.   And the newco would hire a great startup CEO to build the company.  These newcos shouldn’t be constrained to “work within the existing system,” or you will get another Windows Mobile instead of an iPhone.

Changing leadership at Microsoft, but keeping the system, won’t change the company’s trajectory.  Acquiring a large and already successful company won’t solve the problem.  Nor will decreeing that it is going to “kill Google,” or “kill iPhone.”  Microsoft still has the most formidable research and intellectual ability in the industry.  Microsoft needs a better vision, one that is tied to delighting customers.  Technology that is easier to use and just works.  And technology that surprises it customers.  If Microsoft can’t make this transition, it risks becoming irrelevant in the industry. That would be sad.