$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.