With word last week that Apple Inc (Nasdaq:AAPL) is now the world's largest technology company, it is certainly appropriate to ask the next logical question: "What happened to Microsoft (Nasdaq:MSFT)?". Even more relevant to investors, though, is the question of whether or not Microsoft can fix its issues and once again become not only the biggest tech company, but a creative, growing force in the business.

IN PICTURES: 20 Tools For Building Up Your Portfolio

What Went Wrong
Criticism usually starts at the top, and I am OK with that - if you want to sit in the big chair and make the big bucks, you take the blame as well as the credit. Steve Ballmer was named CEO of Microsoft in January of 2000, a time that just so happens to almost perfectly correlate with Microsoft's stock reaching an all-time high in December of 2000.

Some of Microsoft's issues have been external (costly litigation with the U.S. government and European regulators that drained away billions of dollars and a lot of management focus), but those are actually the smaller problems. On a more fundamental level, Microsoft badly miscalculated the dynamics of the search market and allowed Google (Nasdaq:GOOG) to dominate that industry. Likewise, Microsoft found itself outmaneuvered in other previous strongholds like browsers, where Mozilla caught the company sleeping.

Worst of all, though, has been the company's approach to both its core business and its biggest future opportunity. The launch of Vista was a complete mess, even worse considering the company has chosen to maintain a key focus on this low-growth legacy business. Meanwhile, the company's mobile strategy has gone almost totally off the rails and Microsoft is pretty much nowhere when it comes to the most dynamic segment of the consumer technology market. Along the way, the company has killed incubation projects that could have generated the creativity and the next break-out hits that the company so badly needs.

What Microsoft Can Do Now
The reality is that Microsoft has become something more like a services company - reliably kicking out updated versions of the operating system and core software packages like Office a few times each decade. That is much like what IBM (NYSE:IBM) was before its major transformation - a company living off of the profits of servicing yesterday's platforms.

Others have suggested that Microsoft break itself up, and I will join the chorus. A break-up could separate the low-growth legacy businesses from the high-growth emerging businesses and better align the company's resources and investor expectations. By creating two or more different businesses, with different cultures, agendas and growth profiles, the value of the individual pieces could ultimately surpass the value of the over-extended and stagnant monolith. Investors can look to examples like EMC (NYSE:EMC) and VMWare (NYSE:VMW), or Hewlett-Packard (NYSE:HPQ) and Agilent (NYSE:A) to see how spin-offs really can create value for all parties. (For more, see Parents And Spinoffs: When To Buy And When To Sell.)

Bottom Line
If you borrow a page from world history, you will notice that continent-spanning empires simply do not last. Many military leaders have built amazing empires in less than a lifetime, but nobody has been able to hold them. Simply put, maintaining an empire requires massive resources and organizational abilities, and to grow it further is a monumental challenge.

It may be the case that Microsoft is beyond help at this point. After all, IBM was the company that transitioned the world from the pre-computer way of doing business to mainframes. Microsoft transitioned the world from mainframes to PCs. Now it appears that other companies will pick up the legacy and transition the world to the post-PC era. But just as Microsoft's rise left little room for IBM to grow in its traditional businesses, so too is the rise of the post-PC leader likely to leave Microsoft as a legacy company. (For more, see The Successful Investment Journey.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center