Microsoft's Keys to Success

In their 2005 annual report, Microsoft lists its financial highlights. The "Cash & Short Term Investments" entry for 2005 really stands out. It's amazing that such a large company has nearly $38 billion in the bank. That cash allows Microsoft to be adaptable. While most dominating companies retrench defensively to preserve the valuable territory that they control, Microsoft does the opposite. It can change its focus in an instant. Like some kind of mutant super-company, Microsoft can out-maneuver giants like IBM and apply its endless cash resources to overwhelm smaller rivals like Netscape.

Financial Highlights
(In millions, except per share data)
Fiscal Year Ended June 30	2001	2002	2003	2004	2005
Revenue	$25,296	$28,365	$32,187	$36,835	$39,788
Operating income	11,720	8,272	9,545	9,034	14,561
Income before accounting change	7,721	5,355	7,531	8,168	12,254
Net income	7,346	5,355	7,531	8,168	12,254
Diluted earnings per share before accounting change	0.69	0.48	0.69	0.75	1.12
Diluted earnings per share	0.66	0.48	0.69	0.75	1.12
Cash dividends declared per share	--	--	0.08	0.16	3.40
Cash and short-term investments	31,600	38,652	49,048	60,592	37,751
Total assets	58,830	69,910	81,732	94,368	70,815
Long-term obligations	2,287	2,722	2,846	4,574	5,823
Stockholders' equity	47,289	54,842	64,912	74,825	48,115
Source: 2005 Microsoft Annual Report

Part of this incredible ability is the nature of producing software: It doesn't have the logistical struggle of building an airplane or a skyscraper. People make software by writing computer programs. You can produce software as long as you have the skills and the idea.

Microsoft was also there before anyone else. Not only have they "been there and done that," but they also have the market position and the cash on hand to exploit the market to their advantage.

Organization may be the most important key to Microsoft's success. Bill Gates never really consolidated the company after its start-up phase. Instead, he sought to replicate the most productive aspects of Microsoft's first team. Microsoft designs its teams to be overworked. Project managers calculate the number of staff members needed to accomplish a task, then reduce it. This results in a team that has to scramble immediately or be overwhelmed.

Microsoft also takes great care to choose the "right" people. The take-away is that Microsoft has very specific criteria their workers must fulfill, and they have developed an innovative means of assessing candidates: They ask them riddles. A company built on dominating via improvisation and high-energy needs high-energy problem solvers who don't mind working 72 hours straight. Although this type of employee seems difficult to find, somehow Microsoft keeps finding them.

All empires fall at some point, and organizations atrophy like muscles in old age. Usually, the charismatic leader isn't there to see it, because he probably wouldn't let things get to that point. Bill Gates is not likely to buck that trend, so you can count on Microsoft's reign to extend for years to come.

In the meantime, let's look at what Microsoft has in store for us.

The Bill and Melinda Gates Foundation What does Bill Gates do with all of that money? He and his wife Melinda founded a charitable organization in 2000, dedicated to "promoting greater equity in global health, education, public libraries, and support for at-risk families in Washington state and Oregon." Recently Gates pledged $258 million to fight malaria in developing countries [ref].