When Satya Nadella took over as CEO in 2014, Microsoft was known for its internally competitive culture and plateauing shares. On Monday, Microsoft opened at a record high, propelling the giant to a whopping $1.097 trillion market cap.
Over those five years, Nadella has made a series of sound business decisions after assuming the CEO position: He used his experience running Microsoft's cloud and enterprise group to push the intelligent-cloud effort that's driving Microsoft's overperformance in quarterly earnings. He was willing to work with competitors like Oracle and Sony and supported Linux on the Azure platform. He even walked on stage at Dreamforce in 2015 with an iPhone to demonstrate Outlook.
Cut to Saturday's announcement that Microsoft had secured a $10 billion cloud-computing contract with the Pentagon. Even as late as Friday evening, Bloomberg considered Amazon the frontrunner for this contract, but Microsoft secured it. Despite complaints from employees that taking a defense contract would mean being complicit in "increasing the lethality" of the defense department, Microsoft confirmed that it "will be engaged" when it comes to the U.S. military.
As a company, Microsoft has visibly grown from where it stood in 2014.
So what changed?
Consider the impact of Nadella's leadership style, and how he's shaped Microsoft's culture.
Prioritizing growth and transformation
Nadella has been very public about his embrace of a growth mindset, a concept that actually grew out of developmental psychology.
The Stanford psychologist Carol Dweck was studying what made grade-schoolers succeed or not when she noticed something odd: Some of the kids loved riddles and difficult problems, while others shut down in the face of them. When the riddle-loving children encountered a problem they didn't understand, they didn't think they were failing — they thought they were learning.
Hence a growth mindset, in which people jump at challenges and see failure as part of a larger learning process, and a fixed mindset, where challenges are a turn-off and failure something to be urgently avoided.
Over the decades, Dweck and her colleagues have found that a growth mindset leads to success in the classroom and the workplace alike.
Ushering in a growth mindset across a culture
Nadella's style of leadership is different from what Microsoft is used to. Bill Gates built a workaholic culture that he has since characterized as intense. Steve Ballmer focused on short-term sales performance over long-term sustainability.
In making his many unprecedented moves, Nadella has demonstrated a growth mindset on a large scale.
According to the New York University psychologist Jay Van Bavel, acquiring a growth mindset means focusing on how your group is improving over time, as well as getting everyone to work on collective goals. It takes the focus off competitors and moves it to the company's internal strategy for sustainable growth.
Crucially, growth mindset destigmatizes making mistakes and struggling with tough problems — like, for instance, if you're trying to take a software giant and push it into cloud computing.
To Van Bavel, Nadella is also an example of an identity-based leader.
"You get your team to feel like you're all part of a common group," he said — for example, by leading a 38-hour hackathon bringing together some 10,000 employees, as Nadella did five years ago.
It's about getting everyone to buy into a vision, like a growth mindset, and modeling it yourself.
Identity-based leadership is a hallmark of executive performance, though it is not without risks. SpaceX chief Elon Musk is another example of the identity-oriented leader, as is ousted WeWork CEO Adam Neumann.
For Nadella, the proof is in the earnings. In the latest quarterly earnings release, announced Wednesday, Microsoft's cloud business generated $11.6 billion in revenue, an increase of 36% year over year. This marks the second consecutive quarter that commercial cloud led the way in earnings. The other two main segments of Microsoft's business, "More Personal Computing" and "Productivity and Business Process", each yielded $11.1 billion for the company.
Microsoft Chairman John Thompson told Business Insider in July that the most important driver of growth was "the cultural transformation that Satya's led."
"The attitude that the team has about each other, their engagement with customers and partners, their belief in openness and inclusiveness," he said. "All of those things have changed under his leadership."