Why Sun Failed – unwillingness to adapt

"With Oracle, Sun avoids becoming another Yahoo," headlines Marketwatch.com today.  As talks broke down because IBM was unwilling to up its price for Sun Microsystems, Oracle Systems swept in and made a counter-offer that looks sure to acquire the company.  Unlike Yahoo – Sun will now disappear.  The shareholders will get about 5% of the value Sun was worth a decade ago at its peak.  That's a pretty serious value destruction, in any book.  And if you don't think this is bad news for the employees and vendors just wait a year and see how many remain part of Oracle.  A sale to IBM would have fared no better for investors, employees or vendors.

It was clear Sun wasn't able to survive several years ago.  That's why I wrote about the company in my book Create Marketplace Disruption.  Because the company was unwilling to allow any internal Disruptions to its Success Formula and any White Space to exist which might transform the company.  In the fast paced world of information products, no company can survive if it isn't willing to build an organization that can identify market shifts and change with them

I was at a Sun analyst conference in 1995 where Chairman McNealy told the analysts "have you seen the explosive growth over at Cisco System?  I ask myself, how did we miss that?"  And that's when it was clear Sun was in for big, big trouble.  He was admitting then that Sun was so focused on its business, so focused on its core, that there was very little effort being expended on evaluating market shifts – which meant opportunities were being missed and Sun would be in big trouble when its "core" business slowed – as happens to all IT product companies.  Sun had built its Success Formula selling hardware.  Even though the real value Sun created shifted more and more to the software that drove its hardware, which became more and more generic (and less competitive) every year, Sun wouldn't change its strategy or tacticswhich supported its identity as a hardware company – its Success Formula.  Even though Sun became a leader in Unix operating systems, extensions for networking and accessing lots of data, as well as the creator and developer of Java for network applications because software was incompatible with the Success Formula, the company could not maintain independent software sales and the company failed. 

Sort of like Xerox inventing the GUI (graphical user interface), mouse, local area network to connect a PC to a printer, and the laser printer but never capturing any of the PC, printer or desktop publishing market.  Just because Xerox (and Sun) invented a lot of what became future growth markets did not insure success, because the slavish dedication to the old Success Formula (in Xerox's case big copiers) kept the company from moving forward with the marketplace

Instead, Sun Microsystems kept trying to Defend & Extend its old, original Success Formula to the end.  Even after several years struggling to sell hardware, Sun refused to change into the software company it needed to become. To unleash this value, Sun had to be acquired by another software company, Oracle, willing to let the hardware go and keep the software – according to the MercuryNews.com "With Oracle's acquisition of Sun, Larry Ellison's empire grows."  Scott McNealy wouldn't Disrupt Sun and use White Space to change Sun, so its value deteriorated until it was a cheap buy for someone who could use the software pieces to greater value in another company.

Compare this with Steve Jobs.  When Jobs left Apple in disrepute he founded NeXt to be another hardware company – something like a cross between Apple and Sun.  But he found the Unix box business tough sledding.  So he changed focus to a top application for high powered workstations – graphics – intending to compete with Silicon Graphics (SGI).  But as he learned about the market, he realized he was better off developing application software, and he took over leadership of Pixar.  He let NeXt die as he focused on high end graphics software at Pixar, only to learn that people weren't as interesed in buying his software as he thought they would be.  So he transitioned Pixar into a movie production company making animated full-length features as well as commercials and short subjects.  Mr. Jobs went through 3 Success Formulas getting the business right – using Disruptions and White Space to move from a box company to a software company to a movie studio (that also supplied software to box companies).  By focusing on future scenarios, obsessing about competitors and Disrupting his approach he kept pushing into White Space.  Instead of letting Lock-in keep him pushing a bad idea until it failed, he let White Space evolve the business into something of high value for the marketplace.  As a result, Pixar is a viable competitor today – while SGI and Sun Microsystems have failed within a few months of each other.

It's incredibly easy to Defend & Extend your Success Formula, even after the business starts failing.  It's easy to remain Locked-in to the original Success Formula and keep working harder and faster to make it a little better or cheaper.  But when markets shift, you will fail if you don't realize that longevity requires you change the Success Formula.  Where Unix boxes were once what the market wanted (in high volume), shifts in competitive hardware (PC) and software (Linux) products kept sucking the value out of that original Success Formula. 

Sun needed to Disrupt its Lock-ins – attack them – in order to open White Space where it could build value for its software products.  Where it could learn to sell them instead of force-bundling them with hardware, or giving them away (like Java.)  And this is a lesson all companies need to take to heart.  If Sun had made these moves it could have preserved much more of its value – even if acquired by someone else.  Or it might have been able to survive as a different kind of company.  Instead, Sun has failed costing its investors, employees and vendors billions.

The One thing Sun Micro Did Wrong – and why it can’t survive

$193billion dollars.  An amount that seems only viable for governments to discuss.  But that is how much the value of Sun Microsystems declined in less than one decade (see chart here).  At the height of its dominance as a supplier to telecom companies in the 1990s Sun was worth over $200billion.  Recently IBM made an offer at just under $8billion.  But Sun has rejected the IBM bid, which was more than double its recent market value, and Sun is now worth only about 60% of the bid.  An amazing loss of value for a company that never paid a dividend.  And the failure can be tied to a single problem.

Forbes magazine is having a field day with the leadership at Sun these days. "Sun May Be Pulling a Yahoo!" the magazine exclamed on Monday when Sun said it was turning down the IBM offer.  The similarity is that both companies turned down values at above market price, but both probably won't receive offers from anyone else.  The difference, however, is that Yahoo! has a chance to compete with Google, and Microsoft would have suffocated those chances.  Sun, on the other hand, won't survive and the only way investors will get any value is if Sun agrees to the buyout.

Reinforcing the thinking that Sun won't make it on its own, Forbes today led with "Sun's Six Biggest Mistakes" which decries recent (last 4 years) tactical failings of the company.  But in truth, Sun was destined to fail 8 years ago – as I argued clearly in my book Create Marketplace Disruption (buy a copy from my blog or at Amazon.com.)  The company never overcame Lock-in to its initial Success Formula, and when its market shifted in 2000 the company went into a nosedive from which no tactical changes could save it.

Scott McNealy was the patriarch of Sun Microsystems.  Son of an auto executive, he had a love for "big iron" as he called the large, robust American cars of the 50s, 60s and 70s.  And when he started Sun Microsystems he imbued it with an identity for "big iron."  Mr. McNealy wasn't interested in creating a software company, he wanted to sell hardware – like the days when computing was all about big mainframe machines.  His might be smaller and cheaper than mainframes, but the identity of Sun was clearly tied to selling boxes that were powerful, and expensive.

Everything about the company's development linked to this identity (see the book for details).  The company strategy was tied to being a leader in selling hardware systems.  First powerful desktop systems but increasingly powerful network servers.  Iron that would replace mainframes and extend computing power to challenge supercomputers.  All tactics, from R&D to manufacturing and sales tied to this Identity.  And because the products were good, and met a market need in the 80s and 90s, this Success Formula flourished and reinforced the Identity

A lot of new products came out of Sun Microsystems.  They were an early leader in RISC chips to drive faster processing.  And faster memory schemes and disk array technology.  These reinforced the sale of hardware systems.  The company also extended the capabilities of Unix software, but of course you could only buy this enhanced system if you bought one of their computers.  Sun even invented Java, a major advancement for internet applications.  But then they gave away this software because it didn't reinforce the sale of their hardware.  Sun felt that if everyone used Java it would generally grow internet ue, which would grow server demand, which would help them sell more server hardware – so don't even bother trying to build a software sales capability.  That did not reinforce the Identity, so it wasn't part of the Success Formula.  Everything leadership and the company did was focused on its core – Defending and Extending the sales of Unix Workstations and Servers.  It's hedgehog concept was to be the world's best at this, and it was.  Sun intended to Defend & Extend that Identity and its Success Formula at all costs.

But then the market shifted.  The telecom companies over-invested in infrastructure, and their demand for Sun hardware fell dramatically.  Workstations based on PC technology caught up with Sun hardware for many applications, rendering the Sun workstations overpriced.  Makers of PC servers developed advancements making their servers faster, and considerably cheaper, meaning Sun servers weren't required or were overpriced for company applications.  Within 2 years, the market had shifted away from needing all those Sun boxes, causing Sun sales and market value to collapse

Sun made one mistake.  It never addressed the potential for a market shift that could obsolete its Success Formula.  Sun never challenged its Identity.  Sun leaders never developed scenarios that envisioned solutions other than an extended Sun leadership position.  They only looked at competitors they met originally (such as DEC and SGI) and when they beat those competitors leadership quit obsessing about new comers, causing them to miss the shift to lower price platforms.  Although Scott McNealy was an outrageous sort of character, he created lots of disturbance in Sun without creating any Disruption.  People felt the heat of his presence, but there was no tolerance for anyone who would shed light on market changes (especially after Ed Zander was installed as COO).  Nobody challenged the Success Formula.  Nobody in leadership was allowed to consider Sun doing something different – like selling software profitably.  And thus, there was no White Space in Sun.  No place to with permission to do new things, and no resources to do anything but promote "big iron."

When any company remains tied to its Identity and its Lock-in failure will eventually happenMarkets shiftThen, all the tactical efforts in the world are insufficient.  It takes a new Success Formula – maybe even an entirely new identity.  Like Virgin becoming an airline rather than a record company.  Or Singer a defense contractor rather than a sewing machine company.  Or maybe something as simple as GE becoming something besides a light bulb and electric generation company – getting into locomotives and jet engines.  The one big mistake made by Sun can be made by anyone.  To remain Locked-in too long and let market shifts destroy your value.