Warren Buffett’s Strategy for Focused Attention

 

Warren Buffett’s “2 List” Strategy for Focused Attention

If you read enough financial commentary and you’re knowledgeable about business-to-business P2B like Business2Growth, you’ve seen people saying that SaaS companies have moved into a totally new realm where they are anything but software. They are moving into automation, sales tools, and data science. Companies like Microsoft (MSFT), Oracle (ORCL), (CBY), and (YHOO) are making these investments to compete and compete for market share. So it makes sense that you’d wonder why they’re the last to move into AI. Microsoft still has the legacy mobile, enterprise software businesses to defend. That means the company is really good at creating value that is hard to imitate, thus making it harder for competitors to steal it. So you don’t expect this to happen until there’s a genuine desire for companies to invest, invest, and invest in technology and this sounds like a falling domino effect for Amazon. (Amazon will probably be the last one to move into this core of AI: AI practitioners are more interested in data science, not AI.)

So why is Microsoft giving AI top priority now? They need to stay ahead of their competitors in the latest domain. Microsoft has the network and pipeline to be able to get to an edge of market leadership. It is already the number two IoT services provider. It’s a top ten P2B services provider. What’s more — with their Azure machine learning engine and expertise in system integration, Microsoft is an obvious choice for AI while their traditional software business will provide much of their data science base that they can leverage with AI.

So the question is, how can Microsoft take advantage of all this? Because of their network and wide range of service businesses, they have both the advantage and the challenge of how to invest in a new, crucial domain.

Let’s break this down a little better…

Microsoft could have let their traditional software business alone be their technology department. They could have been the tailwind of change and the engine of AI development. This would have been the fastest way to grow. They would have missed a chance to lead the charge that the whole company has decided to jump into. However, like its software business, Microsoft has got a lot going on and a focus to be able to provide for its customers at all times. Therefore, Microsoft would have had to break out its AI research and infrastructure businesses separately. Not all companies have too many marketing or product-focused units. This would have freed the traditional business division to focus on customers and consumer value while the more focused parts of the company would provide larger businesses with a clearer competitive advantage. But the Microsoft of 2016 is a different Microsoft than its Microsoft of the past two years, so the question is, how can Microsoft work within these more limited constraints? While selling the core products of software, they’ll have a growing lineup of low-margin products that they may need in the future. So they can still have a growing software business, but choose to deduce the growth from the growth of its AI products in the future.

The way they need to do this is to invest in greater numbers of startups that are solving for artificial intelligence. This will be true all over the world. India, Southeast Asia, and France are all quickly proving there is an AI gap. Companies that are delivering real value are continuing to grow and growing more and more quickly each day. This will lead to more capital needed to keep up. That new capital will come through small medium-size enterprises (SMEs) looking for a way to succeed over the long term. But before they can do this, they must first identify a significant shortfall in their overall technology offering and be able to overcome the current $75 Billion dollar deficit. Enter AI. Does Microsoft have enough scale? Does it have a sufficiently nimble and mobile AI engineer? Does it have the pipeline to deliver AI at scale? Is it fast enough to innovate fast? (A McKinsey study says AI companies need to deliver 80% of new AI initiatives in one year and generate a 10x growth rate.) Is it best positioned to lead the market? For all these answers, these five companies need a much more advanced focus on AI. Microsoft needs to be at the apex of all that.

By investing as a startup, Microsoft is allowing them to avoid some of the pitfalls that can come from a complex consumer/business division. It’s not entirely clear what a whole company has to do to focus on an AI-centric development path, especially with the new capabilities that are coming out of the data science group. They just might just be the perfect place to make that happen.

But investing in this way may be a key to taking Microsoft to the next level. We know Microsoft is more than an enterprise software company.