Analysis of Skype's strategic alignment using the Nadler-Tushman congruence model

Skype competes as a differentiated player in the VoIP industry. The company's business model is based on free distribution of its software, and then encouraging users to sign up for a payment plan that covers usage. The company's technology was once innovative but has now been commoditized (Blodget, 2011). The company was recently purchased by Microsoft for $8.5 billion (Saporito, 2011). The value of the company derives not from the software but from the company's 170 million-strong user base.

The company's strategy therefore relies heavily on throughputs. The most important input for Skype is the technology, which is now common. The technology allows users to interact with each other, using text messaging, voice or video calls. The company charges for this service, but still loses money. The main input for Microsoft is the user base. Without the massive user base, Skype has little intrinsic value and little means of generating income. Thus, the brand becomes a key throughput for the company, because it is the brand that attracts the users and provides an opportunity for the company to earn income.

The Nadler-Tushman Congruence Model emphasizes that in order for the organization to be successful, its inputs, throughputs and outputs need to be congruent. Given the lack of profits at Skype, the reasonable conclusion is that there is poor congruence, despite the company's substantial user base. This paper will illustrate how this is so.

Inputs

There are four key categories of input identified by Nadler and Tushman: environment, resources, history and strategy. The environment, characterized by rapid technological change, first created the opportunity that Skype seized but now represents an ongoing existential threat to the organization. The social environment for the company -- with increased use of technology and increased globalization -- has resulted in a dramatic increase in the need for efficient, low-cost means of communication, and Skype fulfilled that role.

The company has traditionally relied on a combination of human capital and investment capital to drive its business. Money and effort is spent on improving the existing Skype technology, developing enhancements and on developing entirely new product/service lines. The company's current business model is not profitable, so the development of these resources is important in order to add value to the current service that will allow the company to become profitable.

Skype has very little history on which to draw, and having undergone a series of ownership changes over the past several years, the company has not had the opportunity to build a consistent culture for itself. As a consequence, Skype is left without much benefit from the history input. With respect to strategy, the shifting strategy of the company in its short life also relates to its multiple ownership changes. The early strategy was focused on product development and market penetration. However, that strategy has shifted as Skype has been viewed by its more recent owners as an asset rather than a strategic entity unto itself. Blodget (2011) argues that the value of Skype to Microsoft lies more in its user base and social network. This implies that once again Skype is viewed by its owners as a means rather than an end. Microsoft may have little or no intention of trying to improve Skype's ability to monetize its user base, but may instead be focused on Microsoft's own ability to monetize the Skype user base for Microsoft-branded products.

The Congruence Model also emphasizes throughputs, the "key organizational components." With respect to task, there is the day-to-day operations of Skype and then there is new product development. Execution of the first task has been successful, and the 170-million user base is evidence of that. However, the company has failed to tie its user growth with revenue. While Skype earns revenue, its strategy as a cost leader means that revenue falls well short of costs. There is something lacking, therefore, with the individuals within the organization. The company's founders never really conceived how to monetize their invention, and nobody else who has owned Skype has been able to do this either.

The organization's systems therefore also seem to lack the key elements that link human and financial capital to profits. The organizational design reflects a company that has gone through a succession of ownership changes. From its original headquarters in Tallinn, where most of the work still takes place, Skype's leadership has been from California under eBay, moved again when the company was sold, and now leadership is in Europe but taking orders from Redmond, WA. The chain of command, multiple culture shifts and working arrangements and communication patterns that change every other year along with ownership changes create all manner of difficulty for Skype in terms of aligning its systems with any one particular objective. The company again faces that same challenge, with the purchase by Microsoft that has once again seen a shift in its strategic objectives.

The outputs of Skype, not surprisingly, are a mixed bag. The company built a successful service offering initially, and that helped it gain momentum and a dominant user base in the VoIP industry. The company's service has significant appeal among consumers. However, the company in its early years lacked business focus and it showed as revenues never exceeded costs. The company has struggled to turn a profit, despite its significant user base.

Part of the problem for Skype lies with its strategy. Porter's generic strategies shed light on how firms can succeed by targeting either a cost leadership strategy or a differentiation strategy and then focusing all of their energies on the pursuit of those strategies. Skype initially fit somewhere in the middle. As a provider of telecommunication services, Skype occupied a position as a cost leader. However, cost leaders have operations and staff that are focused on driving down the cost of doing business in order to turn a profit with a high-volume, low-margin business model. The company was never fully committed to being a cost leader. Thus, today Skype has a commoditized service, but still spends on innovation that never really is justified in the product. VoIP remains a subset of telecommunications, but is an industry in its right as well, something that does not reconcile with Skype's strategy. The company finds itself in a position whereby it is now a differentiated player based on its user base and the strength of its brand, but Skype simply does not have the ability to build this differentiation into its pricing. Because consumer VoIP in general and Skype in particular began life with a cost leadership model, consumers do not seem particularly interested in paying more for the product. This would be acceptable if Skype could deliver a telecommunications service that is superior to cell or landline service, but as yet it cannot. The human resources, capital resources and innovation systems have been unable to develop this superior VoIP technology that would allow Skype to shift to charge higher prices for its services than, say, other telecommunications companies with different business models can. The more VoIP is commoditized, the less likely that Skype is going to be able to charge premium prices for its services, exacerbating the problem.