CASE STUDY: How Satya Nadella overhauled Microsoft's cutthroat culture and turned it into a trillion-dollar 'growth mindset' company
- Microsoft is a trillion-dollar company thanks largely to a culture shift led by Satya Nadella.
- Since Nadella became CEO in 2014, he's encouraged the entire company to adopt a growth mindset, or the belief that skills are developed through hard work and challenges are opportunities to learn.
- Before Nadella took over, Microsoft was characterized by competition between teams and between individual employees.
- Now, in keeping with a growth mindset, Microsoft evaluates employees' performance based partly on how much they helped their colleagues succeed. The company also looks to learn from its former rivals in the tech industry.
- Business Insider spoke with a range of company insiders and organizational researchers to get the inside story on how to change the culture of a 150,000+ employee software giant.
- Microsoft is a case study in how a growth-mindset culture can help companies succeed in the future economy.
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A cartoonist once drew an illustration depicting Microsoft's organizational chart as warring factions.
Take a look and you'll see three separate gangs: one blue, one green, one yellow. The gangs are assembled in pyramid-shaped hierarchies, with one leader at the top, two or three deputies at the next level, and so on.
A hand sticks out from each pyramid, pointing a gun directly at one of the others. It's clear. This is war.
And then Satya Nadella became CEO.
Nadella described the era of warring gangs in his 2017 memoir-manifesto, "Hit Refresh:" "Innovation was being replaced by bureaucracy. Teamwork was being replaced by internal politics. We were falling behind."
That particular cartoon - drawn in 2011 by a Google employee named Manu Cornet, no less - made changing Microsoft's culture Nadella's No. 1 goal as CEO.
"As a 24-year veteran of Microsoft, a consummate insider, the caricature really bothered me. But what upset me more was that our own people just accepted it," Nadella wrote. "When I was named Microsoft's third CEO in February 2014, I told employees that renewing our company's culture would be my highest priority."
Since becoming CEO, Nadella has been credited with a grand reinvention of Microsoft, exemplified by its market value exceeding $1 trillion, one of just a handful in history to hit that mark. When Nadella first took over, its market value was around $300 billion. The company has shifted from a has-been to a cloud powerhouse.
One of the keys to this transformation is a psychological concept that's become a mantra at Nadella's Microsoft: growth mindset.
Microsoft has traded a fixed mindset for a growth mindset
Growth mindset describes the belief that skills are developed through hard work and that challenges are opportunities to learn. Fixed mindset, on the other hand, refers to the belief that talent is innate and that struggling is a sign of failure. Research on the difference between growth and fixed mindset - and how they predict success - was pioneered by Stanford's Carol Dweck.
Early on in her career as a developmental psychologist, Dweck visited children at school and presented them with a series of increasingly difficult puzzles. Her goal was to better understand how people cope with failure. Some students, she found, weren't fazed by it.
In her 2006 book, "Mindset," she recalls one 10-year-old boy who "pulled up his chair, rubbed his hands together, smacked his lips, and cried out, 'I love a challenge!'"
Dweck would spend the next five decades trying to figure out the difference between people who relish a good challenge and those who fear failure. Scores of studies published under her name suggest that people who see intelligence and abilities as learnable are more successful, personally and professionally, than people who think they're static.
Recently, Dweck coauthored a study that drew a link between growth mindset and organizational success. Employees who think their companies have a fixed mindset, the study found, interpret the company's culture as less collaborative, less ethical, and less willing to take risks than employees who think their companies have a growth mindset.
Given the rapid pace of technological change, these research findings are hyper-relevant. Across industries, adopting a growth mindset may be the only way to survive, and certainly the only way to thrive. When neither executives nor rank-and-file employees can predict what their jobs will look like next week, they need to embrace the resulting vulnerability, and get excited about learning.
Plenty of companies, in industries from telecommunications to early education, talk about cultivating a growth mindset, and about looking for job candidates who have it. But Microsoft is perhaps the most powerful example of an organization that has used growth mindset, and the psychology behind it, to rebuild its culture.
In many ways, fixed mindset and growth mindset can describe Microsoft before and after Nadella.
Nadella has encouraged Microsoft employees to be 'learn-it-alls' instead of 'know-it-alls'
Gates was famous for meltdowns and browbeating - so much so that Microsoft cofounder Paul Allen once described working with Gates as "being in hell." Gates would only back down if you could convince him you knew what you were talking about, Allen said.
Gates' successor, Steve Ballmer, also known for an explosive temper, later presided over the atmosphere depicted in that cartoon Nadella was determined to address. Ballmer was known for cultivating a culture in which Microsoft teams warred with each other, as previously reported by Business Insider.
Nadella, who joined Microsoft as an engineer in 1992, came up in this culture, before becoming CEO in early 2014.
By that point, the company's bid to compete in the smartphone market through the purchase of Nokia was proving to be a burden and would lead it to write off nearly the entire $7.6 billion acquisition price. The personal computer market was shrinking, leading to declines in Microsoft's flagship Windows operating system business, and the Xbox One console's poorly received launch made it a punchline.
Microsoft's history as a tech-industry pioneer wouldn't help the company compete, Nadella wrote in an email to employees on his first day as CEO. The company needed a change in mindset.
"Our industry does not respect tradition - it only respects innovation," Nadella wrote on Feb. 4, 2014, in a memo to employees days after taking on the CEO role. "Every one of us needs to do our best work, lead and help drive cultural change. We sometimes underestimate what we each can do to make things happen and overestimate what others need to do to move us forward. We must change this."
Nadella's leadership philosophy evolved into the adoption of a growth mindset. He asked employees to be "learn-it-alls," not "know-it-alls," and promoted collaboration inside and outside the organization. Employees are now evaluated partly on how much they've helped others on their team.
Microsoft introduced a new performance-management framework based on growth mindset
With any company culture shift, executives run the risk of promoting jargon more than action, and of HR representatives being the only ones who know there's a culture change underway.
Microsoft has tried to avoid that fate, not only by training its employees on the psychology of growth mindset, but also by embedding the concept into its daily work flow.
Prompts to adopt a growth mindset appear on posters throughout Microsoft's campuses (something at which employees sometimes poke fun). At the start of a meeting, a manager might remind colleagues to approach an issue with a growth mindset.
And in one of the most significant manifestations of growth mindset, Microsoft has eliminated stack ranking.
Stack ranking was famously used by Jack Welch when he was CEO of General Electric. Ballmer used the system at Microsoft to evaluate employees, although he did start phasing it out prior to his departure. Microsoft managers had to rank their employees from one to five in equal measure. Which meant that, no matter how good the employees were, some of them had to get the lowest ranking of a five.
Performance was defined in stack ranking as the quality of individual work, and that emphasis on individual performance was linked to fierce competition among Microsoft employees. It was also a barrier to Microsoft's innovation, since it facilitated a culture that rewarded a few standout team members and even gave employees incentive to hope their colleagues failed.
Dweck's research helps explain this trend, too. Her studies suggest that stack ranking's emphasis on "star" employees can leave everyone else afraid to try anything new, for fear of failing. In turn, that means companies are less innovative.
Microsoft leadership says its new system for evaluating employees instead rewards collaboration. Managers and employees meet often to discuss performance, in keeping with the general trend of companies nixing annual reviews and having managers regularly speak with employees about their work.
"What we really value is three dimensions," said Hogan, Microsoft's chief people officer. "One is your own individual impact, the second is how you contributed to others and others' success, and the third is how you leveraged the work of others."
To use Hogan's examples, maybe a more seasoned employee helped someone new to the team, or a software engineer built on another engineer's work instead of reinventing it.
Microsoft recently applied growth mindset to a new framework for managers: model, coach, care. That's a combination of setting a positive example for employees, helping the team adapt and learn, and investing in people's professional growth.
To measure the impact of these initiatives in real time, Microsoft emails employees with a different question every day asking how they're feeling about the company and its culture.
The shift from competition to collaboration might seem like it would be a breath of fresh air. And on the whole, it has been. But employees say it's presented its own challenges, too.
Nadella pushes Microsoft executives to take on stretch assignments
It was 2017 and Lee - now corporate vice president of Microsoft healthcare - had long worked on broader technology problems as a key leader in Microsoft Research, the company's research division.
Nadella wanted him to take on a new challenge and lead the company's emerging health care business, using his background in artificial intelligence and cloud computing to find new ways to tune the products to the needs of healthcare companies.
"Taking on healthcare was something that really perplexed me at first," he said. "I joked Satya sent me out into the Pacific Ocean and said, 'Go find land.'"
Adopting a growth mindset can be uncomfortable, he said.
"Growth mindset is a euphemism because it can feel pretty painful, like a jump into the abyss," he said. "You need to be able and willing to confront your own fixed mindset - the things that make you believe something can't work. It's painful to go through personally, but when you get past it, it's tremendously rewarding."
The transition has been edifying, both in terms of his personal growth - Lee was recently named to the National Academy of Medicine - and Microsoft's growth in the industry, as it establishes itself as a meaningful player in healthcare tech.
Microsoft now sees the business case for letting go of its rivalries with other tech giants
Under Ballmer, Microsoft was notorious for prioritizing its Windows operating system and Office productivity applications businesses over the rest of the company - at one point, it even canceled the Courier tablet, which would have been an early, future-looking competitor to Apple's iPad, because it may have undermined Windows.
Likewise, Microsoft once shunned Linux, a free open-source operating system once considered the biggest threat to Windows. Ballmer once called it a "cancer." But early on in Nadella's time as CEO, Microsoft changed tack and proclaimed, "Microsoft loves Linux."
It wasn't just Microsoft being friendly. There was a strong business case for blurring boundaries. At the time, Microsoft said it realized its customers used both Windows and Linux, and saw providing support to both as a business opportunity on-premise and in the cloud. That would have been unthinkable in the Ballmer years, but it's proven to be a savvy business move: Microsoft recently hinted that Linux is more popular on its Azure cloud platform than Windows itself.
Microsoft's relationship with Salesforce has followed a similar trajectory. Whereas Ballmer had frequent and public bouts with Salesforce CEO Marc Benioff, Microsoft under Nadella put aside its rivalry with Salesforce - which competes directly with Microsoft's customer-relationship-management Dynamics 365 product - in order to ink a big cloud deal that was good for the company overall.
Nadella even invites leaders from companies across industries to Microsoft's CEO Summit so the executives can learn from each other. Ballmer, meanwhile, famously snatched an employee's iPhone at a company meeting and pretended to stomp on it.
Which is not to say Microsoft always plays nice in the Nadella era. The company last summer changed licensing agreements to raise prices - often significantly - when customers choose to run certain Microsoft software on rival clouds including Amazon Web Services or Google Cloud. And it's been trading public barbs with AWS over the still contested $10 billion Pentagon cloud contract.
The Trump administration awarded the contract to Microsoft over AWS, but Amazon is challenging the decision in court, alleging political interference. In February, a judge ruled that Microsoft must stop working on the contract.
The culture shift at Microsoft is an ongoing process
The beginning of Microsoft's culture shift was rocky.
In "Hit Refresh," Nadella recalls a Microsoft manager who announced in the early days, "Hey, Satya, I know these five people who don't have a growth mindset." Nadella writes, "The guy was just using growth mindset to find a new way to complain about others. That is not what we had in mind."
Even today, Microsoft leaders acknowledge that the culture change isn't over. Things have improved under Nadella, but the company culture is still far from perfect.
Diversity is an opportunity for improvement at Microsoft. Much like the larger technology industry, Microsoft still employs relatively few women and people of color in leadership and technical roles.
One of Nadella's biggest gaffes as CEO happened early on in his tenure, when he suggested women should not ask for raises, but rely on "faith" and "karma." After these comments, Nadella sent out an internal memo admitting to his mistake, explaining how he planned to learn from it, and stating his belief in "equal pay for equal work."
Nadella writes in "Hit Refresh" that in some ways he's glad to have belly-flopped in public. "It helped me confront an unconscious bias I didn't know I had," Nadella writes, "and it helped me find a new sense of empathy for the great women in my life and at my company."
Kevin Oakes, who runs a human-resources research company that helped Microsoft with its shift toward growth mindset, sees Nadella as an exemplar of a leader during a transition. That's largely because Nadella practices the growth mindset he preaches. In a presentation at Talent Connect, an annual conference organized by LinkedIn (which is owned by Microsoft), Oakes said Nadella has been Microsoft's "culture champion." Nadella understands that organizational culture is critical to the company's performance, Oakes said.
But today's Microsoft is still far from perfect. The positive contributions of growth mindset have not yet matched up with diversity and equity for Microsoft's workforce, according to some employees. Microsoft is the subject of a gender discrimination lawsuit still pending, which was denied class-action status by a federal judge. Employees have also openly alleged sexual harassment and discrimination.
The company released its first diversity and inclusion report in 2019 to track its progress in hiring - and retaining - a more diverse workforce. Results from that report showed that minorities in Microsoft's US offices earned $1.006 for every $1 white employees earned. A closer look reveals that white men still held more high-paying leadership positions than women or underrepresented minorities.
Meanwhile, Microsoft leadership still has some philosophical differences with employees as it relates to employee activism. Employee groups have protested Microsoft and Microsoft-owned GitHub's relationship with Immigration and Customs Enforcement, and more recently, some employees have said Microsoft's relationship with oil and gas companies is at odds with the company's goal to become "carbon negative" by 2030.
At that point, Neal recalled, a third meeting participant addressed the male colleague to ask whether perhaps he hadn't understood the female colleague's point. And Neal said it wasn't a passive-aggressive attack. Senior leaders are encouraged to "be curious and ask questions, versus making statements," as a way of modeling growth mindset, he added.
Microsoft has been equally vocal about diversity and inclusion within its customer base, building products that are accessible to as many users as possible. Ben Tamblyn, a 15-year company veteran and Microsoft's director of inclusive design, mentioned Xbox as a prime example. In 2018, Tamblyn helped oversee the release of the Xbox Adaptive Controller, which makes it easier for gamers who have limited mobility or physical impairments to play. (Interviews with Neal and Tamblyn were arranged by Microsoft's public-relations firm.)
Microsoft is a case study in growth mindset
Microsoft's culture shift, and its accompanying business turnaround, is already a case study in business schools and in reports from management consultancies and research centers. That makes sense to Mary Murphy, a professor of psychological and brain sciences at Indiana University and Dweck's co-author on the paper about growth mindsets within organizations.
Growth mindset is essential for innovation in the technology industry, Murphy said, where change rarely happens incrementally. Instead, there are big inflection points from which there's no return. Microsoft, Murphy added, needs to be on the "cutting edge" of growth mindset in order to stay relevant.
Nadella, for his part, has modeled a growth mindset from the top of the organization, not least in his response to his tone-deaf comments about gender and compensation. "I learned, and we will together use this learning to galvanize the company for positive change," Nadella wrote in the memo he sent apologizing for the comments. "We will make Microsoft an even better place to work and do great things."
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