Ex-Microsoft prez Herbold: Redmond is in a "dogfight"

April 20, 2011: 11:46 AM ET

After a long career with Procter & Gamble (PG), Bob Herbold became president of Microsoft (MSFT) during some of its highest-growth years. Now he consults to a variety of companies and is the author of the recent book on leadership, What's Holding You Back: 10 Bold Steps that Define Gutsy Leaders. I sat down with Herbold shortly after Japan's horrifying earthquake and tsunami hit the country. What with Paul Allen's new book out telling the early story of Microsoft, Herbold's candid observations about a later era add to the story. An unedited transcript of the complete conversation follows, as well as a video excerpt.

Bob Herbold

Bob Herbold

FORTUNE: You have a new book out. It offers advice on gutsy leadership, could you explain?

Bob Herbold: Well most people as they get higher and higher in an organization, the decisions they face get tougher and tougher, and all of a sudden they're facing decisions where there's no ideal solution, you can't get all the data you want in order to make a decision. It's a guarantee you're going to disappoint some group of people, OK, and a long-term perspective is needed. It's easy to make a Band-Aid decision, but the real decision is are you going to solve that long-term problem or not? And when people are faced with those kinds of decisions for the first time once they get high enough in an organization, what happens is they often times will wimp out, basically.

FORTUNE: Now wimping out is another euphemism for doing what's best in the short-term interest, which is going to make the quarter look good, as opposed to doing what's right for the company, right?

Herbold: Or doing nothing, or delaying. Or thinking about it, thinking about it, thinking about it, driving your people nuts because nothing is happening. You're basically lacking self-confidence, you're lacking the sense of urgency to get on with life and the like, and this is extremely detrimental to an organization.

FORTUNE: Now, do you give examples in the book of companies that have done this?

Herbold: Tons. There are about...

FORTUNE: What's an egregious one that comes to your mind?

Herbold: Well Fiat would be a classic, that I start out with in the book--it's a 100-year-old-plus company. And if you looked at the period from '95 until 2004, basically it was family members trying to hold this thing together. During the period from 2000 to 2004, there are four different CEOs. They're all family members or friends of family members. Nobody is making the tough decisions. Their cars are ugly, their costs are out of whack. And you look at it, and say, these decisions are obvious as to what needs to be done, but they're not being done. 2004, right at the brink of bankruptcy. Finally they go outside, they hire a hard charger, a guy named Marchionne, he's the CEO today. He puts some key people from the middle level of the company that he sees are strong performers, puts them in charge of the key units, lets go a lot of people who are basically not taking the job seriously, and turns the thing around. And Fiat today is one of the best run automobile companies in the world.

FORTUNE: Now it seems like your ideas are tailored toward managers, especially top managers, but it also seems to be a direct message to the board of directors. Usually the board, of a public company anyway, pressures managers to make these tough decisions, or it doesn't. Right?

Herbold: Yeah. But the fundamental principle, if you looked at the 10 principles that I talk about in the book. The first one is crucially important, and it's very simple. Face reality and develop a plan to deal with it. Now that's applicable whether you're a first level manager, intermediate level manager, or a top executive of the company. All of us, every day, we've got to face reality.

FORTUNE: OK, Bob. But the reality is if I don't make the quarter, I'm going to get fired. And you expect me to come in and tell you, you're my boss, "Look, uh, we're not going to make the quarter, but I've got an idea that's going to make this company better." But it might not be until 2014, Bob?

Herbold: It's better to have that conversation six weeks before you get the bad numbers, than it is to wait until the bad news comes in, and be asked, "Why didn't you tell me this?" So the fact is at any given moment you have to be objective, you have to deal with the facts, and that's what strong players are all about. They come in, sort the problem out and make some decisions.

FORTUNE: Good. So other than face reality, what's another core principle?

Herbold: You've got to staff for success. That's the second principle I talk about, which is reaching for the people who have a great track record of achieving something, put them in the key positions. Sometimes these are young people, younger than you would imagine, but it's clear that these are winners. So when you need to win, put a winner in the job to get it done.

FORTUNE: Now you had, in your career, long tenures with two iconic American companies: Procter & Gamble first, for longer, and secondly for Microsoft. Let's take P&G first: what happened either positive or negative in P&G's history that illustrates your point?

Herbold: Well the one that sticks out to me the most as an example would be back in 1992, '91, that period of time.

FORTUNE: And you were still there?

Herbold: Yeah, I was there until '94, when I moved to Microsoft. We had a young brand manager in Thailand who wanted to take a new shampoo formulation that we had and launch it as a new brand, and she needed a brand name. We had made the acquisition of Richardson-Vicks, and along came a name called Pantene, on a department store shampoo, not what Procter & Gamble markets. So we put it on the shelf, actually closed it down, paid the fees in order to keep the trademark alive.

FORTUNE: By put on the shelf, you mean not on the supermarket shelf, but off in a warehouse?

Herbold: Correct, lawyer's shelf, so to speak.

FORTUNE: Got it.

Herbold: So, she needed a brand name. We said, "Fine, use Pantene, we've got world rights," not thinking much would happen. She went out, and they start filming Asian hair, and in particular shine shots on Asian hair. Now Asian females usually have gorgeous, very black shiny hair. She had some of the most fabulous photography. They took it to the ad agency, developed the ad around the notion of healthy hair, because this formulation had a lot of proteins that actually help smooth out the hair and nourish the hair. Put together this ad. And we let her go and run it as a test brand in Thailand. It took off. Within 14 months it was the market leader. We started marching it around the world. Pretty soon, four years later, world's top selling shampoo: Pantene. That is vintage Procter & Gamble. You go to an annual meeting, it's not the executives talking. It's people like this brand manager from Thailand, who spotted a consumer need, did something about it, did some testing, got some evidence and made a success of it. So Procter & Gamble is all about satisfying consumer needs.

FORTUNE: And this is also an example of staffing and recognizing talent where it isn't necessarily obvious, right?

Herbold: Right. That's right.

FORTUNE: Do you talk about companies that are not as good as that, that have such a chain of command that they step on an idea that might come out of Thailand?

Herbold: Oh yes, I would say half the examples are positive in the book, and the other half are sad stories.

FORTUNE: What's another sad story that would illustrate that point?

Herbold: Well I think the saddest story would be General Motors (GM), which watched its market share go from 50% in the U.S. down to about 18%, over a 30-year period. I mean literally it's almost a straight line. You say to yourself, wow, it must have been a complicated problem they were staring into. Guess what? The press says the cars are ugly, all the models look alike; secondly, your costs are way out of whack versus your competition. And thirdly, your reliability stinks. Now that was the story for 30 years.

FORTUNE: Yeah.

Herbold: These smart, well-paid people didn't deal with reality. So they somehow had a culture that somehow suffocated that.

FORTUNE: In reality, you mention the press saying something about a company, and it's an interesting dynamic, among the things that you headed up at Microsoft was public relations.

Herbold: Yeah.

FORTUNE: And as a journalist, we'll get criticized for being too negative. I'm encouraged to hear about your book. A lot of consultants will talk about problems, but they don't name names, or they won't talk about problems, they only want to talk about ways to do better, ways to do well. But you're saying that negativity in the form of criticism, small criticism, is extremely helpful and important. But a public relations department exists almost de facto to step on that?

Herbold: ...To put the smile on all of that.

FORTUNE: Yeah.

Herbold: Well, the fact is, the executives need to be totally objective at all times and have sensors out there as to what really is happening. Some companies build a structure; so these people are so insulted they never touch reality. The great companies get their top people out there with the customers. I mean Procter & Gamble, even the CEO three or four times a year will end up in the laundry room of some household watching an individual use a conditioner, or a fabric conditioner, or a detergent, or a stain remover.

FORTUNE: So let's apply your principles to Microsoft: you've been gone for 10 years now. Your timing was very good, when you left Microsoft the stock was at an all-time high. The company continues to make a lot of money, but on the other hand it has a lot of strategic problems, product problems and so on. So first of all, what is your assessment 10 years out?

Herbold: Well it's a tough industry. You know, the thing that's beautiful about technology, is great, new ideas win. OK, that's the way it should be. And Microsoft has had two of the greatest ideas and have won in the biggest possible way, and we're talking about Office and Windows. So first responsibility is to manage those things well, because the shareholders are counting on it. Secondly, you have to come up with some new ideas that register another kind of winner, along with those two. That's not easy. Let's face it, they've been fairly successful with the Xbox after losing a lot of money for a period of time. Now they've got Kinect -- a product that's very hot. On the other hand you can't help but admit, hey, in regard to smartphones, guess what? They missed the train. They're madly trying to catch up right now. Microsoft is very, very persistent. And they've got a lot of resources, and they've got a lot of talent, so you never want to count them out. But the fact is they have a lot of work to do. Tablets: Bill was carrying around a tablet 10 years ago.

FORTUNE: I remember.

Herbold: It was fascinating. At that time the tablet was used to take notes. There weren't applications like social media and the like. What has really caused the tablet to emerge as a powerful device for individuals, is some of the tools like social networking. So the technology industry is total fun, and Microsoft is a player. You're not always going to win, but you have to keep at it, and I think you characterize Microsoft as very persistent.

FORTUNE: Do they have gutsy leadership?

Herbold: I think that they do. I think that over the years Bill has played a very strong role. He's now backed out, putting most of his attention against the foundation.

FORTUNE: His philanthropy?

Herbold: Yeah. Steve has a ton of energy and is a very courageous individual.

FORTUNE: This is Steve Ballmer you're talking about, the CEO.

Herbold: Yeah. But it's a tough business, it really is. So like I said before, I wouldn't count them out. But on the other hand, are they in a dogfight? You bet. Are they behind on some of these things? You bet.

FORTUNE: Of your 10 principles in your book, which would be one that would illustrate something that Ballmer as a leader of Microsoft needs to be better at?

Herbold: Well I don't know that it's Steve personally, but what happens with larger organizations is they tend to reach for consensus management. When you have a lot of people around, they want to help, they want to contribute. OK? Their heart's in the right place. They want to go to meetings, they want to be involved. And pretty soon, you look at people's calendar, they're going to too many meetings, you're answering too many emails. In fact, that has become your mode of operation. That's a huge mistake.

FORTUNE: Yes.

Herbold: And so consequently an organization, even when it's very large, has to organize itself in a way that it feels very small.

FORTUNE: So it's fair to say that Microsoft, for one, now you're on the outside looking in, has a meeting culture, or an email culture?

Herbold: No, I would say that one of the things they are interested in is making sure these products work together. That's a big burden, OK? And so it does require a lot of coordination across a lot of groups. On the other hand they'd be stupid not to pay attention to it. So they have an additional burden that they have to carry, and it just makes for a more complicated world for them.

FORTUNE: When you look at some of the most successful companies today, let's take two in the technology world, an Apple (AAPL) or an Amazon (AMZN), they've both been very successful at cannibalizing their existing products. It flies in the face of this insistence, or need, I think, at Microsoft, to protect the two great franchises, Windows and Office?

Herbold: Well, you recall the book "Innovator's Dilemma"? OK, that's the issue you're putting on the table.

FORTUNE: This is Clay Christensen?

Herbold: Exactly. You want to have feet in both camps at all times. You want to be independent, but on the other hand you don't want to pass up opportunities. It's the balancing of those things that's crucial. Let's face it, some companies, like Kodak for example, weren't able to make that turn. Other companies seem to be able to allow their children to eat their parents, so to speak, in the context of totally replacing the product. You worry about profitability when those parents, so to speak, are externally profitable. So that's what the big boys get paid the bucks for, is to make these kinds of decisions, and it's not easy. But by and large what you want out of a new idea is you want enough independence, so that it can live, that it can survive and truly get a vote out there with the consumer. You don't want to slow it down and congest the thing. A lot of companies do that.

FORTUNE: So in the case of Microsoft you'd made the case that Xbox worked in part because it was allowed to be independent, make a big investment, and go out. Something like a Zune or various mobile products didn't, perhaps for the sake of argument, because they were very tied to Windows?

Herbold: In some cases they were tied to Windows; in other cases you're using people who have experience in other areas. And sometimes that's a burden because you bring a mentality as to how products are supposed to work. And one of the things that true in this industry is sometimes your best ideas are generated, and sometimes your best projects are managed, by people who are under 30 years old. Why? They don't have the mental baggage. The problem that humans have over time is they accumulate experiences, and their brain attempts to have them learn from these experiences, and sometimes that doesn't help.

FORTUNE: Now, one last business question, on the subject of bigness. Of the two big companies that you've spent time at: let's for the sake of argument say that Microsoft has not had a good innovation decade; Procter & Gamble has done a very good job of managing its size. Is there such a thing as too big, too big to succeed, if you will?

Herbold: It depends I think on how it gets managed. One of the things that Procter & Gamble continues to use is the brand management system. I mean when I was on the Crest brand, we wanted to knock off Gleem toothpaste, another Procter & Gamble toothpaste, just as much as we wanted to knock off Colgate. OK? And we were given the resources if we could prove that we could productively use those.

FORTUNE: Interesting.

Herbold: Said another way, you have consumer data that says your new marketing idea is going to be great. If so, you get more bags of money than your brand group down the hall.

FORTUNE: And at the same time you didn't need to pay attention at all to diapers or dishwasher liquid?

Herbold: ...No, none. No. And so, the independence of the brand management system is magic for Procter & Gamble. It was put in place in the 30s, 40s, and it has served them extremely well, because when you're on that five-person brand group you are your own company. And everyone basically is subservient to you--there's no consensus management around that. A large company? Procter is large, but Microsoft is very large. A different kind of ball-game. You know, in the technology area some of these brands get gigantic, and secondly sometimes you want to branch that technology or have it work well with the new product and the like. Every business has its own characteristics.

FORTUNE: Now for all the kind words you said about young people and their ideas, wisdom also has its virtues. For example, you're consulting with a number of Asian companies right now.

Herbold: Yeah.

FORTUNE: Could you just briefly tell me about the company that you're working with?

Herbold: Well one is the SK Group, out of Korea, a very large company. It's in the oil and gas business, it's in the IT services business, it's in the telco business. And their challenge is to branch out into other countries. This is a gigantic company, in Korea. And so the things I'm doing with them are primarily from a marketing standpoint, in terms of how do you market these products in different countries--that you really have to reflect the cultural differences. And one of the problems that the SK Group has is it's totally Korean, and they realize that their mindset has to be much broader. The good news is, they recognize that. And so, those are some of the challenges I'm working on with them. So, Asia is fascinating right now, in that things are exploding, they're growing middle-income households quite rapidly. Over the last 10 years they've grown enough middle-income households, it's the equivalent of about one and a half U.S.'s, so this economy is exploding. So when you talk about multinational companies these days, most of them are getting their growth from that region.

FORTUNE: Now as we're speaking, the world's third largest economy, Asia's second largest economy, Japan, is experiencing a crisis.

Herbold: Yeah.

FORTUNE: It's moving quickly, facing the threat of a nuclear catastrophe.

Herbold: Yeah.

FORTUNE: How is that playing out in the rest of Asia, what impact do you think Japan will have on the rest of Asia?

Herbold: Well I'm on the board of a container shipping company, and first of all...

FORTUNE: This shipping company, is...?

Herbold: Neptune Orient Shipping Lines. First of all, we ship a lot of good to and from Japan, but secondly a lot of the ships get made in Korea and Japan and that part of the world. So it's a true natural disaster, there's no other way to put it. And the thing that's so fascinating is its implications are so complex, because our world today is complex. Not only does it have to do with transportation, it has to do with power, it has to do with a whole bunch of factors. So today, the major problems that emerge are very complex, and this one is incredible.

FORTUNE: Over the past two days, are you getting, as a board member, real-time information on what's happening with shipping in Japan?

Herbold: That's true. And so far the impact has been there, but it hasn't been tremendous. But we'll see over the course of the next few days and weeks how that rolls out.

FORTUNE: Can you generalize about what Neptune ships in and out of Japan?

Herbold: In terms of primarily consumer electronics products.

FORTUNE: Coming out?

Herbold: Coming out. In some cases shipments from China into Japan.

FORTUNE: Some components.

Herbold: Parts, parts. And in other cases vice versa. So it's very active in the technology areas.

FORTUNE: So the fear would be that production or electricity is disrupted to the extent that...

Herbold: The workers are disrupted. Yes.

FORTUNE: So output needs to stop, which would prevent the need for shipping components in or for taking finished product out?

Herbold: Yeah, the whole supply chain could potentially be disrupted, is the issue.

FORTUNE: So as of Tuesday morning there has been minimal impact on Neptune Shipping?

Herbold: The shipping industry has felt it slightly, but so far not in a major way.

FORTUNE: Sure. So, you've signaled that Xbox has been a success within Microsoft over the past 10 years.

Herbold: Sure.

FORTUNE: So one thing I would wonder would be, is Microsoft looking at that Xbox success, and saying, "All right, how can we replicate that in other parts of the company?"

Herbold: Well clearly it's a part of their cultural knowledge as to what works and what doesn't, but mind you that 2003 was the date of retirement for yours truly. So consequently I can't really intelligently answer that question. But I do know these are smart people who are persistent, that have resources, and I suspect they're attempting to learn as much as they can from each particular incident.

FORTUNE: One last thing on Microsoft, you keep in touch with people there I assume, as well as Procter & Gamble: What's the morale like inside Microsoft?

Herbold: Well I think that people, once again they have to take a longer-term perspective, when you're with a company like Microsoft. Because this is not some new player on the scene. And so, is it different from a Twitter? Of course! Twitter has, to my knowledge, never made a dollar in its life. On the other hand, it's a hot property, fun to be with. Microsoft, a very successful company over the years, it's a different kind of culture. Some people would vote to have fun in culture, others might vote to have fun in the other. You just have to pick and choose.

FORTUNE: Good. Thank you, Bob.

Herbold: Thank you.

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Adam Lashinsky
Adam Lashinsky
Senior Editor at Large, Fortune

Adam Lashinsky is a San Francisco-based editor-at-large for FORTUNE, covering Wall Street and Silicon Valley. Lashinsky joined FORTUNE in 2001, after two years as a contributing columnist. Prior to joining FORTUNE, Lashinsky covered Silicon Valley for TheStreet.com and The San Jose Mercury News. A Chicago native, Lashinsky holds a B.A. in history and political science from the University of Illinois at Urbana-Champaign.

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