Microsoft: Managing Change and Creativity in Organizations

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Executive Summary

Innovation is the means to achieve growth. In a highly technology oriented industry there is no alternative to flexible innovation. This is shown through a study of innovative orientation of Microsoft. Microsoft operates in a highly technology oriented industry where constant innovation assumes utmost importance. Microsoft puts optimum stress on innovation and creativity in the company, as that would help it to differentiate its product and service offerings. From its very inception, the company has inculcated a culture of innovation.

This is reflected through the company’s founders desire to grow through innovation. The company culture too fosters innovation with its flexible work culture and teams constantly aims at finding something new. The reward system aims at rewarding employees who become successful innovators through ESOPs and other options. Therefore, the company’s innovative culture and structure has evolved through time in order to keep the operations of the company flexible.


“Microsoft is focused on growing its market share worldwide through a seemingly endless wave of innovation in its product portfolio.” (Hernandez 2009, p. 52) Clearly, Microsoft’s present strategy is to increase the development of its product portfolio through innovative inclusions and increase its competitive edge. Using innovation to differentiate its products and ultimately using a differentiating strategy through increased innovation and creativity has been reiterated through executive communications at Microsoft (Hernandez 2009; Burrows 2009).

In a highly technology oriented company like Microsoft, innovation is the only means of differentiating its products. A company needed to so this in order to remain competitive in the fast moving information technology landscape. Microsoft is a 29 year old company with a large number of businesses and a modest revenue growth. The focus of the annual report of Microsoft shows that how the company has strategized to become an innovating machine through its current operations and future acquisitions (Microsoft 2009).

Therefore, it definitely appears that Microsoft puts optimum stress on innovation and creativity in the company, as that would help it to differentiate its product and service offerings. Given this, this paper will try to ascertain if Microsoft has always been an innovation oriented company. What the history of Microsoft has to suggest regarding the innovativeness of the company? This paper will also study the culture, structure and the rewarding process of the company in order to understand what the company does to maintain and inculcate innovation. However, first we will do a brief background study of Microsoft and the internal and external environment of the company.

Background of Microsoft

Microsoft Corporation is the multinational computer technology based company. The company was founded in 1975 and soon it becomes the dominator in home computing operating system market with its first innovation MS-DOS in the mid-1980s. This was soon followed by Windows operating systems and has been often criticized for following monopolistic and anti competition business policies. Presently Microsoft’s operations are not only constricted to software products, but also to computer hardware products like keyboard, mouse, and home entertainment devices like Xbox, Xbox 360, Zune, and MSN TV (Microsoft 2009).

The main strengths of the company are its strong brand image, which generates a large portion of the company’s intangible earnings (Microsoft 2009). The company has a consistent financial performance with the revenue consistently increasing and the growth rate in 2008 was 13.2 percent (Microsoft 2009). The company faces a CAGR of 13 percent between 2004 and 2008. The main reason for increase in the company’s growth rate is due to the licensing policy of different products like Windows Vista, 2007 Microsoft Office, etc. further the company has historically invested huge amount in research and development.

A few of the weaknesses that the company has are related to the low revenue generated from the company’s MSN (search engine) segment of the business. Further, the slow adoption of Windows Vista vis-à-vis Windows XP has had barriers to the company’s revenue. Further, the company has also faced several lawsuits and antitrust cases due to the alleged anti-competition business policy of the company. This provides a brief background to Microsoft’s operations.

Management of Innovation/Creativity

High Research and Development Investment

Microsoft has always had a high degree of investment on research and development. In its annual report, Microsoft states that at the heart of the company lays “our commitment to innovation” (Microsoft 2009, p. 2). They boldly declare that they are the largest investor in research and development in their industry. In 2008, the company invested $8.2 billion in R&D expenses, which was an increase by 15 percent from the 2007 R&D expenditure. As compared to Google, which is Microsoft’s closet competitor, Microsoft has a much higher investment in R&D as a percentage of revenue. Google invested 12 percent of its revenue in research while Microsoft has invested 14 percent in research. As research is the key to the innovation taking place in the company, therefore it is important to have a high level of investment in research and development.

Research and development expenses included by the company includes “payroll, employee benefits, stock-based compensation, and other headcount-related expenses associated with product development [and]… third-party development and programming costs, localization costs incurred to translate software for international markets, the amortization of purchased software code and services content, and in-process research and development” (Microsoft 2009, p. 40). According to the annual report of 2008, the in-process research and development comprised of $35 million. In 2008, the company has made an investment of $8.2 billion on research and development of the company. There are a lot on stress given on hiring scientists and technological engineers for product development. This shows that the company has a very high research and development initiative and sets high priority on it.

Founder’s motivation towards innovation

In an article written in the Wall Street Journal, Bill Gates, one of the founders of Microsoft has written, “Microsoft has a long history of improving its operating system products and building in new functionality, just as Apple, IBM, Sun, Novell and others have.” (Gates 1997). According to the founder of the company, innovation is of utmost importance, as he believes that if they failed to innovate they would lose market share rapidly (Gates 1998). Therefore, innovation is essential in fast moving industry where technology assumes such great importance.

Gates has always stressed on innovation as Microsoft has played an important role in “innovation, largely because it serves as an open, integrated platform for software developers, hardware vendors and solution providers. This gives them the incentive and the certainty they need to build products for Windows, which attracts more customers and, in turn, encourages greater demand, more innovation and new products.” (Gates 1997) Therefore, this indicates that the founders of the company essentially stressed on innovation as the company itself started with innovation of a unique technology, operating processor.

The founder began the company with an innovation and knew that that the only way to grow and attain competitive advantage in a short-life cycled technology oriented product market. Product development, thus, assumed priority along with which came the question of continuous innovation and creativity. This vision of the founders becomes clear through the mission statement of the company which states: “Our mission is to enable people and businesses throughout the world to realize their full potential” (Microsoft 2009, p. 7). In order to achieve this mission the company founders have made the need to innovate at the very heart of the company.

Effect of culture on innovation

The culture of the company fosters innovation as it has a ‘geeky culture’. The culture at the company creates almost a “monolithic culture in which employees cultivate an almost fanatical devotion to their work” (Harmon 1998). The culture of the organization has created a technology oriented culture where there has evolved a set lingo: “They engage in regular “bug bashes” – looking for errors in software. They like to “drill down” to discover “core competencies” and the “highest-order bit” — the most important function of a program” (Harmon 1998). Thus, the culture at Microsoft is different from the “mainstream” corporate culture.

This culture is observable through the stress on research and development in the organization. The company feels that building advanced technologies for the future software products and services. The company is customer oriented. The culture fosters innovation through its customer oriented approach: “We believe that we will continue to lay the foundation for long-term growth by delivering new products and services, creating new opportunities for partners, improving customer satisfaction, and improving our internal processes.

Our focus is to build on this foundation through ongoing innovation in our integrated software platforms; by delivering compelling value propositions to customers; by responding effectively to customer and partner needs; and by continuing to emphasize the importance of product excellence, business efficacy, and accountability.” (Microsoft 2009, p. 7)

Further, the company is a growth oriented company. The company has always focused on performance. In order to grow in the IT industry, innovation is inevitable. Therefore, the company’s growth culture is based on the development of new products and willingness to tap and adopt the new technological trend. The culture of innovation not only in product development but also in product marketing has been observed in the company’s culture. The culture at Microsoft is so cohesive that when the US Government filed an antitrust suit against Microsoft, Microsoft employees were aghast at the ignorance and naivety of the government officials as they failed to see the logic behind bundling internet explorer with Windows (Harmon 1998).

In addition, the corporate culture at Microsoft believes in capturing the knowledge culture. This knowledge sharing culture fostered at Microsoft has enables employees to interact and share knowledge and ideas faster than is possible in a traditional culture.

Thus, the culture at Microsoft puts immense stress on:

The ability to capture and share ideas easily and rapidly to promote a culture of innovation by increasing first the quantity and then the quality of ideas contributed … The capability to collaborate to solve problems, gain incremental benefit or break new ground in a product, service or process by garnering feedback, gauging interest, forming teams and further developing concepts to transform them into well-thought-out ideas.” (Microsoft Press Release 2008)

Therefore, knowledge sharing assumes utmost importance in the Microsoft’s corporate culture, which helps in innovation.

In an e-mail from Kevin Johnson to the company employees shows the company’s culture that inculcates innovation. He states in the mail that Microsoft has a culture, which has a “passion” for “great engineering, creativity, and development”. Thus, the company has great value for creativity and analytical aspect and therefore using this innovation to turn into business profit. The culture of innovation is also fostered through the company’s long terms commitment to research and development, which is evident from its high research expense (In 2008, the company invested $8.2 billion in R&D expenses, which was an increase by 15 percent from the 2007 R&D expenditure).

At Microsoft, team based culture is prevalent and the culture is set by these teams. These teams are responsible to retain the culture and thus are combined to shape the culture of the whole company. The culture fosters optimism about technology, which helps in creating new product and push growth of the industry.

Effect of structure

Microsoft has recently undergone a restructuring in order to be more flexible to external environment and threats from competitors (Greene 2005). The company has a very flat corporate structure. Earlier there were seven levels, which were shrunk to three in 2005. The three levels are the three verticals – Platform Products & Services, Business, and Entertainment & Devices – that are headed by a president.

Thus, the company has focused its business into three divisions and innovating according to the need of the division. The 2005 restructuring of Microsoft was made in order to realign the company in three divisions. According to Microsoft CEO, Steve Ballmer, the restructuring was aimed at making the structure more receptive of innovation and inculcating a continuous process of creativity:

These changes are designed to align our Business Groups in a way that will enhance decision-making and speed of execution, as well as help us continue to deliver the types of products and services our customers want most,” said Steve Ballmer, chief executive officer at Microsoft. “It’s great to have extremely successful broad leaders with strong track records in driving growth and innovation leading these three very important areas for the company. We see a new era of opportunity to provide greater value to our customers by weaving both software and services into forms that suit their needs. By bringing together the software experience and the service experience, we will better address the changing needs of our customers’ digital lifestyles and the new world of work.” (Microsoft News Release 2005)

Apart from the structure mentioned above, the company has executive teams with 16 officers from the company who have various duties including making the employees grasp the culture of innovation at Microsoft. The team usually includes of the chief software officer, general counsel, and secretary, the chief financial officer, and the vice presidents of from the different divisions. The company does not have any separate department dedicated to research and development. Rather the research is done by the core divisions and the engineers.

The new divisions that were made at Microsoft aimed at increasing customer orientation and innovation in software platform and services, especially the Internet (Microsoft News Release 2005). Eventually the structure of the organization was based around the culture of innovation. The division was devised in such a way that it could be less hierarchical and more responsive to the immediate changes required for fast moving innovation driven needs. Fewer levels imply lesser formalization, and fewer bureaucratic rules.

This will imply that the company has opted for innovation oriented culture. Further, a flatter structure would also help the company becoming more responsive to the flexibility that a flat structure offered in order to support and help promote creativity and innovation. Therefore, a flat structure based on business divisions makes innovation easier and more business oriented.

Incentive for innovation – formal or informal perks

Innovation is always rewarded at Microsoft. In one instance, the company declared a sum of $250,000 for the founder of the creator of the Sasser worm (Microsoft Press Release 2005). The company has a set reward program, which provides pecuniary motivation to the engineers. The aim of the program is said to be for “technical innovation” and “engineering excellence”. Apart from this special reward, the company has a compensation system, which is one of the best in the industry. The company has a competitive base salary, which is at 65th percentile.

There is performance based bonus system, which is based on the performance of the individual and the achievement of the set objectives. Apart from this, the company also provides employees who have worked in the company for over five year period purchase company stock, and in certain cases, they are also awarded with company’s stock option. The company gave stock options and thus has increased the employee morale. Apart from these, the company also provides benefits, which are very attractive. Therefore, the reward system at Microsoft enables the company to foster innovation. Thus in order to keep the employee motivated to continue innovating, the company has fostered pecuniary reward system.

Is innovation important to the company?

The company thrives on innovation. In a technology oriented company, innovation is the key to growth. Thus, the Annual Report states, “At the heart of our success lies our commitment to innovation.” (Microsoft 2009, p. 2) The company has continuously innovated on products after the other, which has revolutionized home computing. Its operating system pioneered the growth from MS DOS to Windows. However, the question remains whether, innovation is important to Microsoft? Microsoft has innovated products, which have product viability and consumer demand. They have used innovative marketing policy to boost their sales. Nevertheless, is it their product, which has revolutionized the performance of the company? One cannot be sure.

This is so because the company has stressed an innovative corporate climate, no doubt, but with a stress on business success. Further in the last few developments through Microsoft it can be observed that the company has actually altered the cosmetics of the Windows operating system without bringing forth any substantial change in the product or introducing a ground breaking new product. But one undoubtedly must admit that the company has foster business innovation to its best:

Across our products and technologies, we introduced compelling innovations in fiscal 2008 that deliver valuable new capabilities to our customers. With the release of Windows Server 2008, we introduced Microsoft Hyper-V, a technology that enables multiple operating systems to run on a single computer. Called virtualization, this approach is helping companies reduce costs and energy consumption and it is transforming the way computing capabilities are delivered and managed.

The availability of Hyper-V is just one of the ways we made significant strides toward realizing our vision for dynamic IT systems that have the flexibility and intelligence to automatically adjust to changing business conditions. New Microsoft Systems Center products released in fiscal 2008 are helping IT organizations optimize business processes and improve the delivery of computing services.” (Microsoft 2009, pp. 2-3)

Thus, the company has involved innovation, but only those innovations, which has commercial viability. Thus, innovation is a need for the company as it drives the business and growth of the company.


The company has a great focus towards innovation. In order to foster innovation the company has undergone change in structure. It has set reward system to motivate performers. Though some believe the company has neared stagnation but Microsoft has reacted to it through a change in the corporate structure. The stagnation with Windows has been observed by Microsoft has thus the company due to the huge size of its code base and the “compatibility with the legacy hardware and software, that it just slows everything down” which has actually slowed down innovation at Microsoft (Lohr & Markoff 2006). This has also been observed by the Microsoft people who believe that the “complexity kills”.

Further, the size of Microsoft was growing too. Therefore, a change was inevitable. Therefore a change was brought forth in 2002 in order to increase the pace of movement of the company (Greene 2005). This resulted in speedier segment which would help foster innovation.

This was noted by Ballmer in a mail to the employees: “Our goal in making these changes is to enable Microsoft to achieve greater agility in managing the incredible growth ahead and executing our software-based services strategy” (Greene 2005) thus the change was an initiative top remove the growing bureaucratic structure and culture of the company in order to make it more flexible to internal and external demands and changes. Therefore, the company has leaned its operations in order to become reflexive and foster a culture of innovation.


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