After spending most of his professional career at companies that competed with Microsoft, Stephen Elop joined, as he jokingly calls it, the “Evil Empire from the Northwest.” That was a little over a year ago. As president of Microsoft’s Business Division, Elop oversees the largest revenue-generating division of the company.

He held various positions at Macromedia starting in 1998, rising to CEO after Rob Burgess stepped down in January 2005. In that role, Elop facilitated the acquisition of Macromedia by Adobe Systems, completed in December 2005, and joined Adobe as president of worldwide field operations. In January 2007, he left Adobe to become Chief Operating Officer for telecommunications provider Juniper Networks. In January 2008, after extensive interviews with Bill Gates and other leaders at the company, Elop joined Microsoft.

Microsoft’s Business Division encompasses the popular Microsoft Office suite of productivity tools, including Word, Excel, PowerPoint and OneNote. Elop also directs Microsoft’s collaboration strategy, including the SharePoint server products. In addition, the division oversees the company’s Business Dynamics products for customer relationship management (CRM) and enterprise resource planning (ERP), as well as Microsoft’s “unified communications” products targeted at combining telephony with fax, email and other computer-based communications. 

Elop recently gave a keynote address at the Wharton Business Technology Conference in Philadelphia, where he unveiled a “concept” video titled, “A Glimpse Ahead,” that paints a vision of where Microsoft sees technology headed in the future. The video’s futuristic scenarios — from wall-sized global teleconferencing systems to tiny credit card-sized devices with location-aware data displays — were designed, in part, to counteract the claim that Microsoft is not an innovative company. The slick user interfaces in the high-tech devices also signal a renewed focus on the user’s experience. As Elop told Knowledge at Wharton, “I came from companies where the experience is fundamentally the differentiator,” and one of his goals at Microsoft is to “delight” customers with “unparalleled experiences.” Microsoft, Elop noted, “does this sometimes; other times it does not.”

Even before the current economic crisis, Microsoft’s Business Division faced challenges from disruptive business models and a major technological shift from desktop software to web-based applications. In stewarding Microsoft through this transition, Elop needs to protect revenues from the company’s traditional software products while not lagging behind in the emerging arena of online, “cloud-based” software accessed over the web.

Knowledge at Wharton sat down with the 44-year-old Elop following his keynote presentation at the conference to discuss how Microsoft intends to balance leveraging its traditional strengths with moving forward to the next generation of connected software applications. He also talked about how the current economic crisis is reshaping Microsoft’s business strategy. An edited version of that conversation follows.

Knowledge at Wharton: Can you characterize your current role at Microsoft?

Elop: I am the president of the Microsoft Business Division, which is responsible for taking care of information workers — be that someone in the corporation or an individual at home. Of the range of products that we cover within our division, the Microsoft Office suite is the largest element. But [the division also includes] collaboration products like SharePoint, our unified communications stack, and our Dynamics product for ERP and CRM technologies.

It’s the largest division in the company by revenue — not the largest by head count. The field organization is larger.

Windows and Office are two of the bedrock elements of the company, but Unified Communications [UC] and Dynamics are among the fastest growing elements of the company.

So, while people first pigeon-hole me as “the Office guy,” there’s so much more. UC is a multi-billion dollar business. SharePoint surpassed a billion dollars for the first time last year. Anywhere else on the planet, those smaller businesses would be entire companies all by themselves. Given the scope of Microsoft, they’re part of a division.

Knowledge at Wharton: With Office, you have a product that is very profitable and dominant in its category. In some of these other cases, however, you’re entering markets where there are already strong competitors. How does your marketing strategy differ in those instances?

Elop: You have to approach things differently. You have to look for opportunities where the whole is greater than the sum of the parts. We do not think of it as: Here’s our UC marketing strategy, here’s our SharePoint strategy, here’s our Office client application strategy. We think about: What is our strategy to help people become more productive? What is our strategy to help information workers? What is our strategy in terms of the business productivity infrastructure that they need?

When we have a conversation with a customer, it’s less about pitching specific products and more about talking through how we help them solve business problems — which today means saving money, becoming more productive, things like that.

We focus on a high degree of interoperability between the different products. You may think of Office as Word, PowerPoint and Excel, but within a corporation we think of that Office suite of products as the companion to the server capabilities, the workflow, the business intelligence, the various things they can do in their corporation … with the whole being greater than the sum of the parts. It’s all those pieces coming together which offers the best value for our customers.

Knowledge at Wharton: How cognizant do you have to be of the antitrust concerns in a situation like that where you’re getting this tight integration between products?

Elop: Oh, absolutely. I didn’t use the word “integration” — to make the point that you have to be very cognizant of your obligations when you have certain products that are considered to be dominant in their categories.

I talked about “interoperability” — and the distinction is important. “Interoperability” implies that we are taking certain steps with our dominant products to make sure that others can interoperate as well.

For example, a year ago we published our “interoperability principles” as a company, and said that around our dominant products we would publish the file formats, and we would make APIs [application programming interfaces] available. We would provide huge amounts of documentation to make it possible for others to interoperate with us.

People saw these principles and said, “Yeah, let’s see what Microsoft really does.” Fast-forward a year and we’ve published something like 44,000 pages of documentation on how to interoperate across a wide range of products. And you may think, “OK, great. Bury them in documentation.” Actually not.

[Consider] the iPhone. If you go into the mail setup capabilities of the iPhone to pick your mail service provider, the first one on the list is [Microsoft] Exchange. Apple was able to use the documentation to construct that capability. They licensed certain patents which we make available on reasonable and nondiscriminatory terms. We helped them do it. Now the iPhone is a valid client in an Exchange environment. Just two or three weeks ago, Google announced the same thing in terms of making the Exchange ActiveSync protocol available as part of their mail system.

We’ve announced that within the Office suite of products you’ll be able to save and read your documents from the ODF [Open Document] format. And, of course, we’ve gone through the whole standards process with our own document formats — the Open XML formats — so that others can implement and coexist as well.

We have to be very cognizant of our obligations from an antitrust perspective. But we’ve taken it a step beyond that in terms of saying we intend to follow these principles of interoperability.

We’ve made huge investments in this area. Will people believe us? You’ll see it over time. Right now Apple and Google believe it, because they’ve been able to participate.

Knowledge at Wharton: What’s the process by which you determine the features of the next version of major products like Office or SharePoint?

Elop: You have to take a number of major sources of input.

Clearly, your customers are the starting point. Spending a great deal of time with existing customers — or customers who may have said, “You know, this isn’t right for us. You’re missing something.” Getting feedback from existing or prospective customers is an important element of it.

We absolutely take clues from some of the broader trends we see — economic, demographic and so forth. Studying those trends and understanding what’s going on in research are all important factors that come into the planning process.

We also take a look at what’s going on across the company and with our competitors to understand other trends that we may need to avail ourselves of.

Also — this is the perhaps the least scientific or the least process-oriented part of it — sometimes you have to take some leaps of faith as well. There are absolutely examples — and I’ve been involved with these in my time at various companies — where you might have a great idea. A customer will look at it and say, “No, that’s not something I need to do.” It’s something they don’t know they don’t yet know. And yet, sometimes you have to go with your gut instinct and place some bets.

Some of those succeed famously [and result in] entirely new ways of interacting with a product or some new product altogether. And, of course, others are colossal failures because the customer was right all along. Sometimes you have to place those bets.

And then, of course, when you have products that have a history with customers, there’s always the collection of enhancements and bug [fixes] that, naturally, you have to do, as well as architectural advances. The work we’re doing — this release with the Office products — is in part about … taking advantage of advances in architecture, cloud computing, things like that.

Knowledge at Wharton: We’re seeing a trend toward lighter, faster, simpler — whether it’s netbooks in hardware or [micro-blogging services like] Twitter. Does the history of products with a long legacy make it difficult to create a simpler product that may meet a different need?

Elop: First, you have to recognize the trend — which we do. I don’t think it’s unique to this period of time. It was ever thus. Something can get big and complicated and then you think, “OK, what if I just want to do something simple?”

You see us try to recognize that — particularly with some of our most successful products, the Office products for example — this is not a case of saying, “Hey, let’s take away a whole bunch of features and simplify it.”

We have a huge amount of data about how people use our products. And of the hundreds and hundreds of features in the Office products, if we eliminated the 10 least used features, we would get approximately 25 million letters of complaint.

So, great. Let’s just simplify! Let’s get rid of everything but bolding and underline. That’s not the answer. The answer is to recognize that, in different environments, people want to approach that [product] differently.

For example, with our current wave of Office products, we’ve said that there will be limited functionality, simpler browser-based versions of Word, Excel, PowerPoint and OneNote. Someone who is participating in the Office family of products will have a choice. They may want to do simple viewing or editing of a document within a browser environment. It will be much simpler, but consistent in terms of the user interface, because everyone knows the Office user interface to a greater or lesser extent. They’ll see a simplified version of that in the browser.

And yet, there are 500 million people who have more advanced needs and are still using the rich client application. We need to make sure they’re served as well by the rich client apps. It’s not a question of “stop that, do this.” It’s recognizing that you have to cover all of these service areas.

And then, throw in the mobile space, where increasingly I want to be able to look at that document in a way that actually looks like the document, not just some strange representation of it on a small screen.

Our opportunity here is to create an environment where the fidelity of the user interface is strong among all these environments. So if you generally know how to work with our products, in all these environments — a simpler environment, a more complex environment — you can do so.

It’s incumbent upon us to make sure that a document that you edit in one environment survives that editing cycle and looks good in other environments. All of those things need to hang together. So, it’s not a “Let’s just do something simple.” It’s how to bring simplicity to something that can be complex for those people who desire it.

Knowledge at Wharton: To date, Office Live and Office Live Workspace are products that complement the desktop client tools rather than being online versions of those products in the mode of Google Docs or Adobe Buzzword. You’re committed to doing lighter, online versions of those core Office products?

Elop: Yes. In a browser environment you will, for example, look at a document — let’s say, a Word attachment in HotMail — and you’ll say, “Open that document” and it will come up in a version of Word in the context of the browser.

Knowledge at Wharton: This is not just a preview? I can interact with and edit that document?

Elop: Sure. However, it will be a lighter-weight, simpler version. We’re not bringing the full weight and power of the Office system into the browser because, quite frankly, browser-based applications are not performant enough to support that degree of capability.

The way I think of it — and this is a really important distinction — it’s not like, “Hey, there are some people who just want to use the client app, some people who just want to use the browser app. And the browser app is intended to compete with Google. And that’s the way it is.”

I think of it very differently. The browser app will be a companion to — something people will often use along with — the rich client app. They’ll do simple editing, creation, viewing and so forth in the browser. But when they’re polishing up the final version of their term paper, research document or a proposal for funding, they will likely take it into the rich client environment for the highest degree of capability.

And that’s as you would expect. Because fundamentally — and this is a belief that Microsoft has and increasingly our competitors are coming around to — as much as you can do wonderful things in the context of a browser or with software plus services, it will always be the case that a rich client device — be that a PC, a mobile phone, a refrigerator, a car, whatever it is — will always [deliver] a higher quality of experience … on that rich device than you can get solely in a services environment. From a physics perspective, the distance between the screen, the GPU [graphics processing unit], the core processor, memory, disk — the fact that all of those things are closer together with higher bandwidth connections — [allows you to deliver a] greater fidelity of experience.

So the answer in the future is going to be: software plus services. It’s going to be some [sort of] marriage of these things.

Our competitors have come around to this same [realization]. You look at something like [Google’s web browser] Chrome. What is Chrome? A browser? Partially. It’s really an operating system — or an operating platform — so that rich client applications can be allowed to take full advantage of the client computing capacity — on whatever device that happens to be, not just a PC. You can do a bit more, to a higher degree of fidelity on that device. It’s the laws of physics.

Knowledge at Wharton: Is there any concern that this point of view — one that recognizes the importance of the rich client — slows you down from moving forward as quickly as possible in a browser context?

Elop: I can understand how people would come to that conclusion. Within the Business Division, we have six strategic imperatives. The very first strategic imperative for everyone in the division is: Fully embrace software plus services. Fully embrace it — which means don’t hesitate, don’t try and put a moat around the traditional [products].

I know what you’re asking. I get it. That was what I was asking when I joined the company and wondered: How serious is the company about software plus services?

In our announcements in October at the Professional Developer’s Conference, we said, “We’re putting an operating system in the cloud.” It’s called Windows Azure. Not only are we going that far — as far as essentially an Amazon or a Google has gone — but we’re putting database services, collaboration services, authentication services, CRM services, all of these things in the cloud. And, on top of that, [there are the hosted] applications [we provide]. Today, for example, we have major corporations betting their email, their collaboration, their unified communications services on our cloud-based computing.

Our message to the customers is they have the power of choice. They can have it on-premise in the traditional way, they can use it entirely in the cloud, and, of course, they can use whatever combination of those two they want. That’s the message we’re trying to take forward.

The investment that we have in cloud computing right now is substantial. The vision is expansive. And that’s why with wave 14 of Office you’re seeing us as good examples of this [approach], saying “Hey, if all you want to do is simple editing of a Word document or viewing it or whatever — great. Come to our Live environment, open up that document and use the power of Word in the context of a browser to do so.”

Knowledge at Wharton: If the first of these six principles is “fully embrace software plus services,” what are the other five?

Elop: The second is to extend our business value advantage for our customers. I’ve already explained this when I said, “the whole is greater than the sum of the parts.” Making sure Office, SharePoint, unified communications, CRM, ERP collectively deliver even greater value to our customers — that’s an important approach for us, lest we become siloed and try and compete on 18 different fronts. We have to compete as a group of capabilities that interoperate well with ourselves and our competitors. That’s number two.

The third is to delight our customers with unparalleled experiences. Microsoft does this sometimes; other times it does not. I came from companies where the experience is fundamentally the differentiator. In the video [presented at the Wharton Business Technology Conference], you saw our focus on: What is the user experience? What is the interaction model? How can we advance that cause? The quality of the experience is number three.

Number four is about innovation — both taking advantage of innovation that’s going on within the company and around the industry, and also driving innovation. Part of the reason we’re here today [at the Wharton conference] is to stake out the position that we’re driving innovation more aggressively than we’ve ever done in the past. That’s something, particularly during tough economic times, that we feel is important. Now is the time to double down.

Number five and six are more internally focused. Number five is to epitomize operational excellence — quality in our engineering, customer satisfaction, hitting the numbers, driving revenue growth, driving margin growth. All the things you need to do to run a business.

And number six, which is held very dearly at Microsoft more so than any other company I’ve ever been at, is a focus on employee excellence. Everyone says it; I know that. I’ll tell you: At Microsoft, there is more time spent, more investment in … communicating about individuals — their performance, how to advance their career, how to help them develop as individuals. It really is remarkable.

Knowledge at Wharton: In Microsoft 2.0, Mary Jo Foley expressed concern about what Microsoft would be like in a Gates-less era. She wrote that “the existing set of top managers is too mired in old thinking and old ways to turn the Redmond ship quickly.”

Elop: Blah, blah, blah, blah…. Did I get a mention in that book? [Laughs.] I never read it, but … I think when it came out I had just been announced.

Knowledge at Wharton: You’ve been there for just over a year now. Do you see your role to some extent as bringing in an outside viewpoint, making Microsoft a little less insular?

Elop: I wouldn’t claim that role uniquely to myself. Steve Ballmer, our CEO, has very deliberately been taking an approach that mixes the advancement of individuals within the company with the injection of DNA from outside the company. So, for example, at the corporate senior leadership team level at Microsoft there’s a healthy mix of people who have come in from the outside — myself, Ray Ozzie, Chris Liddell the CFO, mostly recently Qi Lu, formerly of Yahoo, to lead the search business, and others — as well as people who have been with the company for many, many years.

So, I don’t think it’s uniquely my role to come in and inject the outside perspective. But I will tell you this: Steve and others within the company greatly value that outside perspective.

Steve is in my mind’s eye right now. It’s like, “So, how would you have dealt with this at Macromedia? How did Adobe think about this? When you dealt with the economic crisis in 2000 and 2001, what was that like?” Steve is a learning machine. He’s a brilliant man who is always trying to learn more. He clearly is interested in drawing in lessons from the outside as well as developing people from the inside. So, it’s a balance that he deliberately tries to strike.

When I think about what spurs on the next generation and so forth, it’s less about Bill and Bill leaving. There’s been a long transition period with Ray Ozzie and Craig Mundie, who have stepped up and are playing a critical role in the company in terms of innovation and research.

Knowledge at Wharton: In your keynote address, you alluded to how the company is responding to the current economic conditions. Can you elaborate?

Elop: What’s happening today economically is one of the most impactful things in terms of changing culture and moving a company forward. It’s very clear, when you look at periods of economic contraction or upheaval like the Great Depression or the 1870s or 1830s, that, sure, revenue for everybody comes down as you get into the depths of the tough economic times. But it comes back in some pattern. And it’s different from one economic crisis to the next. This one feels particularly ugly, but it will come back and growth will return.

But what is also very clear is that there are some companies that go away. When the recovery happens, you don’t get as many new companies coming back. There’s a culling of the herd. There are companies that don’t make that shift, that don’t make the big investments, that don’t make the hard decisions. It is clearly the intent at Microsoft to be one of those companies that bounces back even stronger out of this than [when] we entered that period.

We take a lot of heat: “Boy, you’re really continuing to invest $9 billion in R&D.” But now is the time to double down and actually make those investments, [so that when the recovery starts] we’re in a strong position and can take a share and be more successful than we were in the past.

At Macromedia when we went through the collapse of the Internet bubble — on a much smaller scale, with a far more modest company and so forth — the pattern was similar in that we had to make fewer, bigger bets. We trimmed the company in a number of areas. But from an R&D perspective, we just plowed right through it. We spent more money than we would have spent otherwise, I suspect. But we said, “Focus on these areas, [make] fewer, bigger bets, and go hard.” And it paid off for that company. Macromedia emerged stronger than it had ever been in its history.

[The] same plan at Microsoft is: Make sure you’re clear on your bets, make the tough decisions, force the alignment where maybe there were things floating around that didn’t get dealt with in the past — now deal with them and charge forward.

So I look at the economic period that we’re in as an opportunity to make some of those hard decisions.

Knowledge at Wharton: You’ve mentioned some of your former employers — Macromedia, Adobe. Can you compare and contrast the corporate culture between those companies and Microsoft?

Elop: All three companies are blessed with very smart people. Everyone says, “We hire the smartest people,” but I have to say, Microsoft is a huge attractor of talent. When you’re in a meeting, when you’re in an intense conversation, boy, it’s rich. You’re constantly like, “Wow. That person knows what he’s talking about.” It’s humbling, because you realize you simply don’t know enough to keep up with everybody in the room. The quality of the people is there.

Microsoft is blessed with its ability to invest for the long term, to have a high degree of tenacity, to stick with things. Where others might stop along the way and say, “Look, we can’t keep doing this,” Microsoft — and this comes from Bill and from Steve and from the history of the company — just keeps going and going and going.

We’re competing with Google in search and related advertising. That is going to take many, many years of competition and billions of dollars of investment. But it’s so important and there’s such an economic opportunity that it’s the right thing to do. Smaller companies or companies with slightly different perspectives have a harder time taking on those challenges. Microsoft is one of the few companies that can afford to make those bets and has the intestinal fortitude to do that type of thing. I think that’s a bit of a contrast between the companies.

Knowledge at Wharton: When you spoke at the Microsoft Partner Conference, you mentioned that when you were considering this job, Bill Gates interviewed you and you said that part of what you talked to him about was what you saw as Microsoft’s challenges. What did you tell him?

Elop: You know, I didn’t tell him anything. I asked him questions to test what I call “intellectual integrity.” 

For example, I asked him about software plus services. Remember this is a year ago, before a lot of the announcements of the last 12 months, before I knew what the Office team was planning, the OS guys with Azure and so forth. My concern was I believed that software plus services is a generational shift, an architectural moment in the history of computing. There have been several others over the years, but this is a big one. I did not have visibility into Microsoft really embracing it. I would ask him: “How do you think about software plus services?” If the answer had been: “Passing fad. Not relevant. It’s really about just the client OS or just about client applications” — I would have had a hard time with that. But Bill was able to give a very clear — and, at the time, confidential — perspective on how Microsoft viewed it, what they needed to do and the degree of investment.

In other cases, I asked him questions about particular products that were doing well — or maybe not doing so well. You can imagine an operating system product [about which I asked] “How’s this going?” Bill, in a case like that, gave me two answers. He said, “From a revenue perspective, from an adoption perspective, it was doing actually pretty well. But there are issues.” And he went on to describe what those issues were, what the company was doing about it, the evidence of which we’ve now seen, because many of those problems are behind us — you know, all the things that needed to be done, the mistakes that he made personally.

What I took away from all of that was a high degree of intellectual integrity. This is a defining characteristic of Microsoft. Microsoft is very willing to be self critical, harshly self critical, willing to take a look at something we spent a bunch of money on and say, “You know what, that was a mistake. We shouldn’t have done that. Time to change plans. Time to move on.”

And so, sometimes it’s a big, complex, sometimes slow-moving and hard to navigate organization; at other times the clarity is there.

[And] with clarity comes the opportunity to solve some of the challenges.

Knowledge at Wharton: If that was the view a year ago, where we are now? What are the biggest challenges Microsoft currently faces?

Elop: The economic upset is clearly the single, biggest perturbation in the marketplace right now — trying to understand that and respond to that, knowing how to interact with our customers, how we shift our footing so that we’re talking about saving them money, helping them with productivity, and things like that. The economic circumstance is turning the biggest knobs of the business and so forth.

Wherever the purchase of PCs goes — in business or in the consumer world — there, too, go substantial portions of our business. You saw announcements yesterday from Dell where they’re talking about a slowdown in PC purchases and things like that. And it’s not unique to them. HP a week or two earlier announced some of the same things.

But when you look beyond that, I think it’s clear that some of the disruptive changes in the environment — software plus services as we’ve already talked about — is one area where we are responding aggressively to say, “We need to lead in this space.” And, indeed, we believe we are leading in many ways, in terms of the actual customers using our platforms for e-mail, for collaboration, for UC and so forth.

We think that there’s a lot of work still to be done there. It’s very early days. Clearly, companies like Google … have established what is essentially a dominant position as it relates to search, where there is a virtuous economic model that’s self-reinforcing. We’re distant from them in terms of where we stand in the marketplace. And yet, as I said earlier, we’re one of the few companies that has the resources and fortitude to go at that and say, “No, there needs to be competition in this marketplace.” So you’ll see us continue to plow into those things.

There are lots of changes in the mobility market as well that we’re responding to. The iPhone and the strength of companies like RIM, [for example]. Even though we have very strong market share figures, we look at some of those spaces and say, “We’ve still got a lot of work to do.”

Knowledge at Wharton: I understand you’re a pilot and you own your own Cessna Turbo 182.

Elop: I am indeed.

Knowledge at Wharton: Do you have time to just get in the plane and fly around on the weekend?

Elop: I do. For me, it’s an opportunity to unwind. Flying is intensely technical. When you’re flying in bad weather, using instrumentation, glass cockpit technology, it requires a huge amount of focus. You cannot be distracted by anything. Or you hit the ground — which is generally a bad thing.

When I’m in that mode, I am not thinking about software plus services or the future of technology. It gives me an opportunity to completely disconnect from those other worlds.

What’s interesting is — I don’t know if this is true, but let me broadly generalize — there are those who fly to experience the sensation of soaring through the clouds, disconnected from the earth — that freedom and everything. And then there are those who are the technologists of flying, people who are intensely interested in the technology — the glass cockpit, the instrument approaches, the GPS navigation — all of the wonder of the technology that goes with that.

And, of course, I’m in the latter category. I prefer to fly with full instrumentation. I don’t just go out soaring. I like to go on complex trips and exercise the full intellectual aspects of the sport.