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 04
DIVYESH OGANJA 24
SATISH POKAR 26
BHAVESH PATEL
MITESH PANCHAL

GROW MORE FACULTY OF MANAGEMENT STUDY

HIMATNAGAR

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 Case Study Analysis Sun Microsystems, Inc.

CASE STUDY
SUN 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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 Case Study Analysis Sun Microsystems, Inc.

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 - 1998

1998 Sales: $9,790,840,000
1998 Net Income: $762,862,000

II. CASE ISSUES AND SUBJECTS

Information technology industry Strategy formulation
Computer networking industry Strategic planning
Environmental scanning Growth strategies
Industry analysis Strategic alliances/partnerships
Management of technology Competitive strategy
Proprietary vs. open standards Executive leadership
Core competencies Corporate culture
Distinctive competency Technology strategy
Cooperative strategy

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 Case Study Analysis Sun Microsystems, Inc.

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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 Case Study Analysis Sun Microsystems, Inc.

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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 Case Study Analysis Sun Microsystems, Inc.

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 - Low

The 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

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 Case Study Analysis Sun Microsystems, Inc.

D. Power of Suppliers: High

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: Low

Sun 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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 Case Study Analysis Sun Microsystems, Inc.

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

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 Case Study Analysis Sun Microsystems, Inc.

C. Operations:

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

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 Case Study Analysis Sun Microsystems, Inc.

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

company.
 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

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 Case Study Analysis Sun Microsystems, Inc.

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

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 Case Study Analysis Sun Microsystems, Inc.

 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

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

Weaknesses
None

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 Case Study Analysis Sun Microsystems, Inc.

3. Research and Development

Strengths
 Scott McNealy
 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%

Weaknesses
None

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

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 Case Study Analysis Sun Microsystems, Inc.

5. Human Resource Management

Strengths
 Scott McNealy
 Humor had an important effect on the culture
 McNealy’s tremendous energy that has the ability to raise
employees enthusiastically to their feet

Weaknesses
None

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.

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 Case Study Analysis Sun Microsystems, Inc.

B. Recommended Strategy

For Sun Microsystems, Inc., we recommend the growth strategy for

at least the next five years.

 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.

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 Case Study Analysis Sun Microsystems, Inc.

 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.

xxxx…..xxxx…..xxxx

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