Microsoft’s announcement that it is buying Nokia’s Devices and Services unit shows it thinks that by acquiring the right technology, it can regain its lost momentum. Sadly, the company is mistaken. Microsoft’s problem isn’t that it has too little technology; it has too much. And it has too many smart people whose talent is being wasted.

Instead of expanding, it needs to be disbanding its divisions and dismantling its bureaucracy. This will give its innovators the freedom to take risks and do what they do best.

When IBM was struggling for survival in the early 90s, Bill Gates advised its new CEO, Louis Gerstner Jr., to dismantle the IBM empire and create a smaller and more aggressive company. He wanted him to “strip away its unprofitable assets and concentrate on a narrow set of businesses”. Fortunately, Gerstner didn’t listen to Gates. IBM was focused on a single market: the enterprise. It was able to sell hardware, software, and services to a customer base it knew; breaking up the company would have led to disaster.

The medicine that Gates prescribed to IBM is what Microsoft needs today. It is focused on too many conflicting markets—enterprise, personal computing, mobile, and entertainment—and doesn’t understand all of them. Each requires its own marketing strategy, pricing structure, and array of products—which often conflict with each other.

As Microsoft’s failures have shown, it is fighting a losing battle. It has lost ground in practically every emerging field, including mobile computing, music players, smartphones, search, and social networking. Yes, it has had an odd success or two, such as the Xbox, but these are just flukes.

To put it simply, Microsoft has become a grumpy old giant, obsessed with defending its ageing products.Buying more products won’t help it–it will just create indigestion.

I believe that the best path forward for Microsoft is to break itself up into a number of stripped-down and aggressive companies. These need to be free to compete with upstarts in Silicon Valley and with each other. These micro-Microsofts need to have the freedom to take risks and cannibalize the company’s core products.

Microsoft certainly has the talent to do this. But, sadly, it is being wasted.

For two decades, Microsoft was the tech industry’s strongest talent magnet. It hired the best of the best. Most of these geniuses haven’t left—yet. My former students and friends who work at Microsoft tell me that they are stifled by its bureaucracy, turf wars, and central planning. Big ideas get quashed because they don’t fit into the corporate vision; products with great potential are killed because they could threaten the company’s core products.

Microsoft also has serious problems with its culture, as Kurt Eichenwald explained in Vanity Fair. Its employee-ranking system, called “stack ranking”, brings out the worse in its employees by causing them to constantly battle each other for promotions, bonuses, and survival. Employees are rated on a bell curve in each department, so if they happen to work with superstars, they get graded poorly. Instead of working together and helping one other, they work hard to make sure that their colleagues do not work hard. And, with reviews being every six months, the focus is always on the short term.

This is the opposite of the culture you find in Silicon Valley startups—where employees work day and night to battle a common enemy. They are motivated by the stock that the company gives them—so everyone wins if the company does well. Microsoft no longer has such a currency—its stock has remained flat for longer than a decade.

As I explained in my Washington Post column, the Windows 8 fiasco illustrates this reality and the problems that Microsoft faces.

Windows RT, which is the version of Windows 8 that was designed for tablet computers, has a beautiful user interface and functionality. It could have given both Apple’s iOS and Google’s Android a run for their money. But Microsoft wanted to protect its desktop operating system and Office tools from oblivion as tablets overtake both laptops and desktops in sales, so it bundled a version of Microsoft Office into RT and charged resellers a price rumored to be about $85 per device (the OEM price is a well-guarded secret). This is more than what lower-end tablets will soon cost, and it competes directly with Android — which Google gives away. To maintain consistency with the desktop version of Windows 8, Microsoft added to it the same tiled user interface that was designed for tablets with touch screens. But most desktop computers and laptops don’t have touch screens. Microsoft also removed the “start” button that people are used to. So, both products failed to gain widespread market acceptance.

If Microsoft had allowed its tablet operating system group to act independently, they would probably have taken Google head-on by giving RT away. They could have made money by charging for special features and apps such as Office. They might also have committed heresy by selling Google’s Office apps and other competitive products. RT could have snatched Android’s market share and become the leading mobile platform.

Will Microsoft figure all this out? I am not hopeful. It is presently looking for a replacement for Steve Ballmer and it announced the Nokia acquisition. Any new executive coming in will try to fortify his empire, not disband it. Meanwhile, the PC market—which Microsoft is vigorously defending—will continue to lose market share to tablets, which are becoming cheaper and cheaper and adding cell phone functionality. Windows RT and Surface tablets will slip into oblivion. The prices of smart phones will also drop. And Microsoft will continue to miss out on new market opportunities, because it needs to protect existing markets.

Sadly, it is more likely than not that Microsoft will go the way of Kodak, RIM, and Nokia—all of which tanked because they were busy protecting old turf.

(Note: I updated this post on 9/3 after learning of the Nokia acquisition.)

(C) Vivek Wadhwa

Editor’s note: Vivek Wadhwa, a former North Carolina entrepreneur, is now a Fellow, Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; Vice President of Innovation and Research, Singularity University; Director of Research, Center for Entrepreneurship and Research Commercialization and Exec in Residence, Pratt School of Engineering, Duke University; Distinguished Visiting Scholar, Halle Institute of Global Learning, Emory University; Columnist Washington Post, TechCrunch, LinkedIn and Bloomberg BusinessWeek.



Twitter: @wadhwa