Retrenchment - Nadella Axes Jobs in a Bid to Simplify Microsoft

Satya Nadella, the new CEO of Microsoft who has taken over from Steve Ballmer, has announced that 18,000 jobs will be cut by 2015. These are the largest job losses in Microsoft's history and represents around 14% of Microsoft's total workforce. This is the classic action of a new CEO opting for a strategy of retrenchment as a way of imposing his/her views on the appropriate strategic direction.

You can read more about Nadella's announcement here:

http://www.theguardian.com/technology/2014/jul/17/microsoft-cut-18000-jobs-tech-giant

http://www.bbc.co.uk/news/business-28348223

Most of the 18,000 job losses (about 12,000) are in the newly-acquired Nokia mobile phone business which was bought by Microsoft in 2013.

The heritage of Microsoft is rooted in the PC world - selling operating systems and software. However, Nadella wants to reposition Microsoft to take on the likes of Google, Amazon, Apple and fast-emerging competitors from the Far East. In his first day in the job Nadella said he planned to make Microsoft fit for a “mobile-first and cloud-first world”.

Nadella is trying to reshape Microsoft into a “leaner” business and the redundancies are just one part of that plan. By any definition, Microsoft is a complex multinational. When Nokia was acquired by Microsoft, it operated 130 sites in 50 countries. Including those, Microsoft currently runs 717 sites across 114 countries. There must be enormous duplication between many of those operations - and the elimination of duplication is an important source of cost synergies for Microsoft.

Nadella has explained that he wants to embark on what he describes as “work simplification”. The Guardian quotes Nadella as follows:

“The overall result of these changes will be more productive, impactful teams across Microsoft … We will simplify the way we work to drive greater accountability, become more agile and move faster”.

Almost certainly delayering will be a key part of these changes as Microsoft aims to "to accelerate the flow of information and decision making."

Nadella's announcement is discussed in more detail here in this FT video:

The shareholders of Microsoft seem to have reacted positively to the redundancy announcement. As you can see from the chart below, the redundancies were announced on 15 July and the Microsoft share price immediately jumped several percentage points.