The Nadler Tushman Congruence Model is an organizational diagnostic tool that can help to provide insight into the underlying reasons why a company is or is not enjoying success. For Skype, this model is ideal for understanding the transactional aspects of the company, most particularly how Skype can be made to be profitable. It is important for Microsoft, if it is to keep the core Skype business going, that this business is profitable. The model focuses on inputs, throughputs and outputs. Right now, some outputs are healthy, such as market share and customer base, but other outputs such as revenues and profits could be improved upon. The model should help to deliver insight about potential ways to improve the lagging outputs. . Generally, the conclusion will be to find elements of the inputs and throughputs that are not congruent with the desired outputs.
The claim that arises from this research is that the throughputs are the problem at Skype, namely the business model, but that there are inputs that also contribute to a lack of success. The grounds will be presented in the body of this paper. The warrant is simple -- that businesses exist to earn profits, and that everything else the business does should be geared towards those profits. Thus, the throughputs should be oriented towards profits instead of other outputs, even if those other outputs are also desirable. The Nadler Tushman Model itself has some underlying assumptions as well. These are that the organization is an open social system, is a dynamic entity, that behavior occurs at the individual, group and systems level and that interactions also occur at these different levels.
Nadler-Tushman Congruence Model.
There are four categories of inputs in the model. The environment
- factors external to the organization -- is one. In this category, there is technological change and competition. These factors, especially when put together, challenge Skype because the core technology is becoming a commodity item. It is available from many competitors and this means that consumers are less willing to pay for it. As the price for VoIP in general declines, it is less likely that Skype can recoup its costs. Another external challenge is the environment with Microsoft. It has been speculated that Skype was purchased in order to ensure that Google or Facebook did not purchase it instead. Thus, the competitive environment of Microsoft has contributed to the current situation.
The organization's resources are another input. One industry observer noted that it was critical for Microsoft to retain the top talent at Skype, as there are a few people within that company who have been the drivers of the technology and branding efforts. Without those top people, it is feared that Skype will be less competitive. However, this is one area where Microsoft can contribute to the success of Skype. There are many important resources that Microsoft brings to the table. One is money. With Skype not turning profits, but needing investment to improve its technology and service elements, Microsoft's billions are going to be helpful to the development of Skype. Microsoft also has a lot of talented people in its employ, and these people may be called upon to improve the technological development and marketing of Skype. Right now, however, Skype has suffered from underinvestment on the part of its last two owners, leaving it with only a small number of talented people and with little in the way of technological leadership.
Organizational history is an interesting input for Skype. On one hand, the company is very new, so there is little that could be described as "persistent traditions." This makes Skype a malleable organization that Microsoft can transform into just about anything it wants. A corollary -- albeit not a successful example -- would be the way that HP cut up Palm after purchasing it, retaining only selected assets and completely altering the business. Microsoft could do something like that with Skype, folding its technology and customer base into Microsoft. The lack of history allows Microsoft to quickly and easily transform Skype. That said, Skype has been hampered in recent years by the ownership problems and the corresponding lack of clarity about its vision. Without direction, Skype is lucky to have retained its popularity this long.
The final input category is strategy. Skype's generic strategy is that of a cost leader. Skype competes as a provider of telephony, specifically using the voice over Internet protocol (VoIP) platform. The company offers free calling between Skype users, and offers low rates for calls to people who are not Skype users over their telephones. This strategy, however, creates a perverse incentive. While the policy creates an incentive for users to encourage their friends and families to download the software in order to call for free, such transactions do not result in much revenue for Skype. Indeed, the more people sign up for Skype, the fewer calls that people make will be subject to charge. An effective ambassador for the company's software will sign up so many people that he/she never needs to actually pay for the service. Ultimately, this makes it difficult for Skype to earn a profit, because there is a cost to service all of these customers, while many are seeing declining usage of paid Skype services. The company does still earn revenues, but the more successful it is, the lower the revenue per customer will be. This element of strategy clearly is not aligned with any profit objective. It was great when the company needed to build a critical mass of users in order to survive and to attract capital, but under Microsoft, Skype has ample access to capital. What it needs now is to be able to generate profits.
Another strategy issue is the overall lack of vision that Skype has had for the future. The company has been focused on transactional elements of strategy, such that no matter what level one examines the company at, there have been few efforts to improve innovation, and the company's systems are not set up to encourage high levels of success in technological leadership or in market development.
The strategic fit between the elements of Skype, therefore, is not great. The company's primary objective has shifted from acquiring a customer base to turning profits, and its strategy has not kept up with this objective. After being sold twice, the end game for Skype has arrived -- Microsoft needs Skype to add value for its shareholders. This means shifting the company's strategy and priorities to be better aligned with that objective. At the systems level, Microsoft needs to instill a sense of its own corporate history and culture into Skype, to counteract the inertia that has come from years of hands-off management under eBay and the investment group.
At the individual level, there needs to be incentives created to push innovation and a profit focus. Skype as a business unit needs to be held accountable for its own performance, something that has perhaps not been the case even since the company's inception. In addition, Microsoft can strengthen the management function in general by implementing formal arrangements that will create links between Skype's activities and Microsoft's corporate objectives. Lastly, at the input level Microsoft can benefit Skype by adding its own capital and people to the company, to counteract the deficiencies that have plagued Skype for the past few years.
The reason that Skype's strategy has generally not succeeded is because the key inputs and throughputs have not been well-aligned with the profit motive. The environmental conditions are challenging, but Skype has been hampered by a lack of vision, a lack of leadership and by a certain degree of organizational inertia. However, its issues are not limited to inputs, as there are strategy issues as well. The strategy was…