Sun Micro. Case Analysis

A

CASE STUDY ANALYSIS

ON

SUN MICROSYSTEMS, INC

IN THE PARTIAL FULFILLMENT OF MBA PROGRAMME IN SUBJECT STRATEGIC MANAGEMENT

SUBMITTED TO:

Ms. AVANI CHAUHAN(PROF. FMS-GMF)

PREPEARED BY

NIRAV PATEL 04DIVYESH OGANJA 24SATISH POKAR 26BHAVESH PATELMITESH PANCHAL

GROW MORE FACULTY OF MANAGEMENT STUDYHIMATNAGAR

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Case Study Analysis Sun Microsystems, Inc.

CASE STUDYSUN MICROSYSTEMS, INC.

I. CASE ABSTRACT

Sun Microsystems has been described as "the last standing, fully integrated computing company adding its own value at the chip, OS and systems level." After noticing that sharing data between computers was becoming crucial to business success, Sun's CEO Scott McNealy had worked to transform Sun's product line in order to capitalize on networking. Sun now produced servers and workstations, Solaris operating system software for client-server networks, UltraSPARC and Java microprocessors, Java Internet software, and enterprise-wide support services. Sun's competitors in the technical and scientific markets were primarily Hewlett-Packard, IBM, Compaq, and Silicon Graphics.

The information technology industry was extremely competitive and characterized by rapid and continuous change, frequent product improvements, short life cycles, and price reductions. This environment was forcing Sun to rapidly and continuously develop quality products and services at competitive prices. By 1998, Sun was the leading provider of UNIX-based servers with a U.S. market share of 26% of all web servers in use. Sun was also a strong force internationally - approximately 49% of its total revenues were generated outside the U.S. It was the world leader in workstation sales with 39% in unit sales and 35% in dollar sales.

Between 1988 and 1998, Sun's revenues had grown an average of 34.1% annually as the demand for its open network computing products rose. Its net income had grown 41% annually on average over the same time period. By 1998, however, some problems were beginning to emerge. Profits had flattened and Sun's control of the Java programming language (which Sun had developed) was increasingly being challenged. Even though the company's net revenues had increased 13% from 1997 to 1998 (to $9.7 billion), its net income ($762 million in 1998) had reflected no growth during this time.

The Java digital language was the first universal software that would allow all computerized devices to share programs and communicate over a network. Although Sun had indicated that it planned to eventually donate Java to all users, the company still seemed unwilling in 1998 to relinquish control of this software language. Java had become too important to Sun's future. Java was spurring profitable growth for the company in Internet servers, network computers, software development tools, and special microprocessors. Even though Java was fairly immature, and its programs (applets) ran significantly more slowly than programs.Written specifically for a particular computer operating system, the industry was battling over who would control Java. Sun filed suit against Microsoft in 1997, contending that Microsoft violated its licensing agreement by altering Java so that it only worked with Microsoft products. Microsoft, Intel, Digital Equipment, and Compaq were pressuring Sun to turn control of Java over to the International

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Standards Organization so that the language would be in the public domain. Many in the industry were complaining that Sun was too slow in developing new software standards and was charging too much in licensing fees. Sun was focusing on developing Java for mainstream computer programming, to the frustration of companies wanting to develop other uses. Java had yet to start selling its own system for running Java Programs on embedded processors. On November 14, 1998, 14 companies, including Hewlett-Packard, Microsoft, Siemens, and Rockwell, announced that they would be setting their own standards for creating Java programs that controlled devices, such as cell phones and printers. Hewlett-Packard successfully developed its own version of Java, called Chai, which did not require a license from Sun.

By the end of 1998, Sun appeared to have a tiger by the tail (in the form of Java). Its recent partnership agreement with America Online to be AOL's hardware supplier and Netscape's software supplier seemed to strengthen Sun's competitive position with Microsoft. Nevertheless, competition was eating away at Sun's competitive advantage and, once alternative versions of Java were available, could put Sun's future in doubt.

Decision Date: End - 19981998 Sales: $9,790,840,000 1998 Net Income: $762,862,000

II. CASE ISSUES AND SUBJECTSInformation technology industryComputer networking industryEnvironmental scanningIndustry analysisManagement of technologyProprietary vs. open standardsCore competenciesDistinctive competencyCooperative strategy

Strategy formulationStrategic planningGrowth strategiesStrategic alliances/partnershipsCompetitive strategyExecutive leadershipCorporate cultureTechnology strategy

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III. CASE OBJECTIVES

1. To provide an example of a very successful high tech company which is facing a decision point in terms of its future growth.

2. To illustrate how a new technology can be both a strength and a weakness. Sun's control of Java seems to be in jeopardy because of its inability to develop uses for others in the industry.

3. To provide a vehicle for discussing the pros and cons of proprietary versus open-systems software and the question of how standards are set and controlled.

4. To illustrate not only how the development of a distinctive competency (Java programming) can provide competitive advantage in a very competitive industry, but also how the distinctiveness of the competency can be lost over time. (Given enough time and motivation, any competency can be imitated.)

5. To provide an example of a company with a strong corporate culture led by a dynamic CEO. These can be both strengths and weaknesses. It could be argued that Sun's battle with Microsoft has become very personal for Scott McNealy. Sun's flexibility and adaptability could be compromised by the CEO's dogged anti-Microsoft stance.

6. To illustrate the importance of cooperative and competitive strategies in a rapidly growing market dependent upon agreed-upon standards.

IV SUGGESTION FOR DAILY CLASS PARTICIPATION:

We have often found it difficult to get quality daily participation from undergraduate students. We suggest the following:

a. Have the class members prepare individually or as a team (1) EFAS, IFAS, and SFAS Tables or (2) just a SFAS Table for the assigned case.

* We have 1 or 2 individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in a 75 minute class that SFAS alone as a transparency works most effectively.

b. We compare the student's work with that of the team or individual students making a presentation to the class.

* We also discuss how the WEIGHTS and RATINGS were developed and the Total Weighted Score for the case under discussion.

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c. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and to hand it in.

* You can use the results to call on students whose scores seem to be out of line with the case.

** It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the company's internal and external environment.

*** We ask the students if they would buy stock in this company. The Total Weighted Score then seems to have real meaning.

V. DISCUSSION QUESTIONS

1. What are the strengths and weaknesses of Sun Microsystems?

2. What are the opportunities and threats facing Sun Microsystems?

3. What are the strategic factors of Sun's situation?

4. Does Sun have any core competencies? If "yes", what are they?

5. Does Sun have a distinctive competency? If "yes", what is it?

6. How important is Scott McNealy to Sun Microsystem's success? What are his strengths and weaknesses?

7. Describe Sun's corporate culture. Is it a strength or a weakness?

8. What has been the secret of Sun's success?

9. What competitive strategy has Sun used? Is it still appropriate?

10. What industry is Sun Microsystems a part of?

11. Who are the prime competitors in that industry?

12. What are the other current industry forces, such as power of suppliers, distributors, etc.?

13. How is Sun's industry changing?

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VI. CASE NOTES

A. AUTHOR'S CASE ANALYSIS

1. Mission - To rapidly and continuously design, manufacture, introduce, and deliver, in quantity, new systems, software, and service products, in addition to new microprocessor technologies to offer its customers improved performance at competitive prices.

2. Objectives: To produce high quality products at low prices To continue to increase revenues by 10% or > year over year To improve net income; continue to invest in research and development To improve, change, and implement new business processes as a series of

related information systems To satisfy the consumer with continuous product improvement &

innovation

3. Industry Environment

A. Existing Competitors: Hewlett-Packard - large IBM - large Microsoft - large Intel - large DEC - large Silicon Graphics - large Compaq - large

B. Barriers to Entry - LowThe products and services are not difficult to produce. Entering the market is relatively easy. It’s staying afloat in this highly competitive industry that is the real challenge.

C. Substitutes Substitutes for JAVA include other conventional languages that

programmers are using at the present time. On a larger scale there are really no other substitutes for linking and

networking other than Netscape - Explorer. PCs can be possible substitutes for Unix Services but not at the

Technological level. No true/direct substitutes

D. Power of Suppliers: High

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Sun is extremely dependent on the ability of its suppliers. Failure to deliver components on time or in sufficient quantities could have a serious impact on the company’s operating results. In order to hedge this risk, Sun often makes advance payments or enters into non-cancelable purchase contracts with vendors early in the design process.

E. Power of Distributors: LowSun does not have very much risk with its distributors. The distribution of the computer systems is accomplished through the company’s own systems. No customer accounts for more than 10% of its revenues.

4. Macro Environment (PEST Analysis)

A. Legal/Political

Threats If Sun loses lawsuit with Microsoft, Sun may lose key components

of Java and the Java brand, have a huge loss in revenues, and lose any potential investment of trustworthy companies.

Opportunities If Sun wins the lawsuit, it loosens Microsoft's control in the

marketplace, increases revenues, and boosts its reputation. Software companies will be able to differentiate their products once again.

B. Economic

Threats Current market fluctuations could discourage the customer. Java poses security issues raised by a system distributed software on

net.

Opportunities Prices keep dropping, which improves consumer spending.

D. Social

Threats If Sun loses lawsuit, Sun could lose good relations with Digital,

Compaq, Intel and others.

Opportunities Many CIOs are in support of Sun's Java and its loosening effect on

Microsoft.

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C. Technological

Threats Microsoft's tight grip on the computing industry. Increased competitors enter the market.

Opportunities Increase spending in R&D for new and improved technologies.

5. Internal Environment

A. Finance:

Objectives improve net income make continuous investment in R&D support continuous revenue growth

Strengths Revenues 10% or more year after year Large amount of cash Outstanding financial and asset management One of the strongest balance sheets in the industry

Weaknesses Net income flat in 1998

B. Marketing:

Objective Increase consumer base domestically & internationally Aggressive marketing Increase visibility of the company name "Kick butt & have fun" in the industry

Strengths Aggressive strategy - "Kick butt and have fun"

Weaknesses Invest less and spend more $ in promotions

C. Operations:

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Objective Improve efficiency Improve quality & speed Reduce cost

Strengths Investment in R&D Focus on consumer needs

Weaknesses Need to continuously improve

D. Human Resources:

Objective Use humor and enthusiasm to motivate employees Increase employee development

Strengths McNealy has good relationship with employees Uses humor and high energy to excite employees and keep them

enthusiastic.

Weaknesses Image in the industry of being brash - very aggressive

VII. SUMMARY

A. Distinctive Competence - Competitive Advantage

Global Fortune 500 leader in enterprise networking computing and leader in providing Unix based servers.

Favorable financial performance -revenues 10% or greater year over year and outstanding financial and asset management.

Leadership of CEO Scott G. McNealy - known for being smart, complex, fiercely ambitious, passionate, and a rigorous financial manager. Has been with the company since its inception.

First to introduce a software language that allows all computerized devices to share programs and communicate over any network without a need for change.

Continuous innovation and excellent reputation

B. Key Weaknesses

Lawsuit with Microsoft can have a live-or-die effect on the company.

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Net income was flat in 1998 - Wall Street does not look upon this favorably.

Many large competitors in a very cut-throat market. Scott McNealy’s personal vendetta with Microsoft - may be the

doom of the company. Java language is still relatively immature - present programmers can

continue to use conventional languages Security issues raised by distributing software on the Net.

C. Central Problem:

Sun Microsystems’ major problem is that the personal vendetta of CEO Scott McNealy against Microsoft may cause the extinction of the corporation. He has lost sight of business focus and strategy. He may have jumped in too deep by making a deal with Microsoft.

VIII. EXTERNAL ENVIRONMENT

A. Societal Environment

Opportunities The age where information is power Growing U.S. economy Increasing number of businesses and individuals using computers General interest in the Internet and its possibilities

(communications, commerce, education, etc.) Low interest rates

Threats Troubled global economy

B. Task Environment

Porter's Forces High R&D expenditures boost entry barriers Buyers have strong bargaining power Other operating systems languages are obvious substitutes for Java High rivalry of current competitors Suppliers have much bargaining power

Opportunities Expansion of the Internet Sun’s position as leader of the industry Sun’s strong financial position Java

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Litigation against Microsoft over the Java license Consumers’ interest in the Java concept

Threats Big competition in the technical and scientific market Extremely competitive environment Rapid, continuous changes, frequent product performance

improvements, short product life cycles, and price reductions Competition from workstations running Windows NT. Microsoft competition for Internet control Java Litigation against Microsoft over the Java license Microsoft’s strong financial position Alliance between Microsoft, Intel, Digital, and Compaq to push Sun

to turn control of Java to ISO Hewlett Packard development of Chai

IX. INTERNAL ENVIRONMENT

A. Corporate Structure Stage III, Divisional Structure Product line divided into six categories: Servers and Workstations,

Solaris and Solstice, SunSpectrum, Workshop and NEO, UltraSparc and Java Processors, and Java Software

B. Corporate Culture McNealy’s philosophy: "The network is the computer." McNealy’s motto: "Kick butt and have fun." McNealy’s use of humor helped employees live with their

demanding jobs and unified the company Aggressive marketing, featuring Network, McNealy’s Greater

Swiss Mountain dog, and various juvenile behavior taking place within Sun’s headquarters

McNealy’s special gift of using humor and a tremendous amount of energy; has the ability to raise employees enthusiastically to their feet

Environment where talented people, like Bill Joy and Eric Schmidt and others, do brilliant work

Use of workstations called Solaris to run servers that coordinate work and store data on the networks

Growth of market share at both the low end and high end of the workstation market

Expertise in high-performance system design that has enabled the company to bring advanced workstations and graphics technologies down in price

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C. Corporate Resources

1. Marketing

Strengths Scott McNealy Transformation of product line in order to capitalize on

networking Manufacture of 26% of all web servers in the U.S. Use of Java to sell servers 1998 innovations to desktop line to capture new growth Ultra 60 multiprocessing system positioned to take market

share from competitors Windows 95’s capability to run along with Sun’s Solaris Worldwide trade-in program Worldwide leadership in workstation sales – 39% in unit sales JVM – universal software

Weaknesses Fierce price wars

2. Finance

Strengths 1998 Net revenues of $9,790 million, 1997 of $8,598 million,

and 1996 of $7,094 million; 13.9% increase from 1997 and a 21.2% increase from 1996

1998 Net income of $762.8 million, 1997 of $762.4 million, and 1996 of $476.3 million; .06% increase from 1997 and a 60% increase from 1996

Product Gross Margin – 53.8% in 1998 and 51.1% in 1997 $822 million cash in the bank Average revenue growth from 1988-1998 is 41% Research and development investment – 1998 of $1,013

million, 1997 of $l825.9 million, and 1996 of $653 million; 22.7% from 1997 and a 26.5% increase from 1996

WeaknessesNone

3. Research and Development

Strengths Scott McNealy

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Pushing SGI’s technology to the limits with new price/performance levels and intends to take market share in the $25,000+ workstation market

Darwin line-more power and reliability Increase of R&D by 22.7%

WeaknessesNone

4. Operations

Strengths Scott McNealy Suppliers’ competence in designing, manufacturing, and

delivering advanced components required for the timely introduction of new products

Advance payments to specific suppliers Non-cancelable purchase contracts made with vendors early in

the design process Distribution of the computer systems sold by Sun The fact that no customer accounted for more than 10% of

Sun’s revenues Six categories of main products: Servers and Workstations,

Solaris and Solstice, SunSpectrum, Workshop and NEO, UltraSparc and Java Processors, and Java Software

Weaknesses Increasing dependence on the ability of its suppliers Suppliers’ competence in designing, manufacturing, and

delivering advanced components required for the timely introduction of new products

5. Human Resource Management

Strengths Scott McNealy Humor had an important effect on the culture

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McNealy’s tremendous energy that has the ability to raise employees enthusiastically to their feet

WeaknessesNone

X. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

A. Strategic Alternatives

Growth – by development of new technology and products and the acquisition of or partnerships with competitors and companies in related areas, like alternative access to the Internet via telephone companies, cable television, and satellites. Pros – increase market share on the Internet, increase and maintain

the company’s market share of the networking business, and consolidate Java’s strong position as the dominant network software for personal computers.

Cons – high marketing and research and development expenditures.

Stability - maintain present rate of market share in the industry and the Internet while concentrating on existing products like Java and powerful workstations. Pros – reduce research and development expenditures. Cons – risk of losing market position in the industry and the

Internet to the competition in a highly competitive environment. Spending less on R&D may cause the company to lose the opportunity to dominate the market of newly developed technology.

Retrenchment – slowing down research and development of new technology and network software and focusing on existing products. Pros – none Cons – in the computer industry retrenchment and even stability

strategies are very difficult to achieve due to the hypercompetitive environment in the industry. A company considering retrenchment has very little possibility of surviving in this industry.

B. Recommended Strategy

For Sun Microsystems, Inc., we recommend the growth strategy for at least the next five years.

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Sun Microsystems’ solid financial situation and the growing trend of the economy are very good reasons for the company to invest and develop new technology and products in order to consolidate its leadership position in the networking software industry. While consolidating a leadership position in the high performance workstation and networking software arena, Sun Microsystems, Inc. has to attack the business market with Java and the new Darwin systems to solidify its presence.

The company should improve its presence on the Internet by developing new Internet access technology and by forming potential partnerships. Improved data transferring technology should improve Sun Microsystems, Inc.’s market share on the Internet should improve significantly.

New Internet access technology using cable television system, satellite technology, or telephone lines should be gained, either by acquisition or in partnership with another company.

We also recommend the growth strategy around the world. The world economy is not expected to grow at the same rate as the national economy, but the PC and software industry is and will grow globally with more individuals using PC’s at home, more businesses mechanizing their operations, and more home-based businesses.

XI. IMPLEMENTATION/EVALUATION AND CONTROL

Maintain motivational management style challenging employees to work hard and make their own decisions

Move forward with improving the company’s financial strength further, moving into more territories and developing more products.

Maintain aggressive investment and development in research and development.

Maintain regionalization of marketing campaigns by using regional and local images.

Improve market share over the Internet, new technology, and awareness about competitors.

Use financial advantages and worldwide product recognition to grow into new markets using Sun Microsystems, Inc.’s creative marketing strategies.

Improve customer service and satisfaction to be able to compete in these areas and also improve existing products and develop new ones.

Modify the marketing campaign to motivate customers to use Java and related products.

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Sun Micro. Case Analysis

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