In its first quarter earnings report for 2012, Apple announced that the iPhone had generated $24.42 billion in revenue. During the same quarter, Microsoft, once Apple’s fiercest competitor, announced $20.89 billion in revenue for the entire company. Meaning, that one single product in Apple’s incredibly in-demand line of goods generated more revenue than all of Microsoft’s products put together. How did Microsoft fall so far behind?

Stack Ranking Stifled Innovation

In the upcoming August issue of Vanity Fair, reporter Kurt Eichenwald investigates the lost promise of Microsoft, and discovers a management practice that, he contends, is at the root of Microsoft’s failure as a company.

Vanity Fair’s preview of the piece explains,

“Stack ranking—a program that forces every unit to declare a certain percentage of employees as top performers, good performers, average, and poor—effectively crippled Microsoft’s ability to innovate. Every current and former Microsoft employee I interviewed—every onecited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees.

Eichenwald paints a picture of the bureaucratic and stultifying office culture that has stalled Microsoft’s success. Its practice of stack ranking workers not only pits employees against each other, but also results in a top-down corporate culture, which often fails to recognize and nurture creative innovations.

Competition Versus Collaboration

Management practices like stack-ranking can place the power of the individual worker above the value of the team. If each worker is scrambling to prove that they are not in the bottom tier, the process of collaboration becomes strained. Creative teams will focus less on innovation and more on who deserves credit for what.

A former senior marketing manager at Microsoft said, “I see Microsoft as technology’s answer to Sears. In the 40s, 50s, and 60s, Sears had it nailed. It was top-notch, but now it’s just a barren wasteland. And that’s Microsoft. The company just isn’t cool anymore.”

Performance Anxiety

A study by a Virginia Tech Human Neuroimaging Laboratory found that status ranking in small groups can lead to dramatic underperformance within the group. Read Montague, who directs the Lab, said,

“We started with individuals who were matched for their IQ. Yet when we placed them in small groups, ranked their performance on cognitive tasks against their peers, and broadcast those rankings to them, we saw dramatic drops in the ability of some study subjects to solve problems. The social feedback had a significant effect.”

Though some of the study’s high performers thrived under the pressure, very few of them were women. The study reported,

“Neither age nor ethnicity showed a significant correlation with performance or brain responses. A significant pattern did emerge along gender lines, however. Although male and female participants had the same baseline IQ, significantly fewer women (3 of 13) were in the high-performing group and significantly more (10 of 13) fell into the low-performing group.”

The report did not go on to draw fundamental conclusions about how women perform in a hyper-comparative environment, but it is worth noting that, at least in this study, women did not thrive under these conditions.

Both the Microsoft case and the Virginia Tech study raise the question: by placing so much emphasis on status and competition, how many companies are alienating the intelligence and talents of the vast majority of their workforce?

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