Running head: SUN MICROSYSTEMS CASE STUDY PROJECT

SUN Microsystems Case Study Project
Jeffery M. Anderson, 105225
BBA 3391-06B, Information Systems Cost Analysis

Brief History of SUN Technology and Text Summery
Sun Microsystems was born after Stanford University, Palo Alto graduate student Andy Betchtolsheim, conceived a UNIX based workstation he deemed the “68000 Unix System” for a networking project named Stanford University Network. Early February 1982 colleagues Vinod Khosla, Scott McNealy, and Bill Joy instituted the company SUN Microsystems resulting from the initials of Stanford University Network. (Wikipedia, 2006) Sun made its mark in the workstation market as the leader in the desktop performance competition by introducing the SPARCstation 10 system, the world’s first multiprocessing desktop computer in 1992. That same year they shipped more multiprocessing UNIX servers than any other vendor in their entire history of operation. Other major products contributed by Sun include the Solaris Operating System, Sparc Microprocessor, instant networking with Jini technology; which enables all kinds of devices to connect to the network—plug and play, and of course the famous Java technology. SUN Microsystems enjoyed 1.3 billion in revenues 1996 with server sales and topping out at 16 billion in quarterly sales in 1998 with the technology frenzied internet boom (Afuah & Tucci, 2003, p. 393).
Java Technology Revolution:
Java is by far the most widely used language in the world and is implemented in such places as web development, cell phones, gas pumps, and computers. Sun’s main involvements with Java are currently with their J2EE servers, workstations, Java development tools, standards, and the Solaris operating system (Sun Microsystems, 2006). Developed in early-1990, the Java platform was designed with the goal of allowing programs to run in spite of the device they were used on, coining the phrase “write once, run anywhere.” The Java platform uses the Java programming language, which is an object-oriented programming language that uses models of the real world which promote greater flexibility and maintainability in programming. Originally, Java was endorsed as a platform for the client side, running inside web browsers on the desktop; however this never became a successful solution leaving Java’s popularity with the server side of the internet and the endorsement of being a network application perfectly designed for the World Wide Web. Tucci, et al. (2003) claimed that Java would affect the technology market in four ways: Versatility—each different computer and operating system would be equal in that computers would understand each Java line of code and transform it for the operating system (OS), in which the OS would interpret the code for the microprocessor; Savings—the universal code would greatly reduce development time and expense; Competition—would enable inexpensive network computer to challenge the Microsoft software empire; and Providing “the Dot in .Com”—Java became the most appropriate language for the Internet, because it doesn’t differentiate against any particular machine type or platform.

Alliances and Partnership: In late 1995, SUN decided the best way to make the most of Java was through market acceptance. SUN decided to halt an ongoing browser project and enter a licensing agreement with Netscape creating Navigator 2.0 which featured Java applets. This gave SUN the exposure they were looking for, clenching partnerships with several high profile Web companies such as: Oracle, Novell, IBM (also a competitor), and Baan to name a few which grasped Java technology. Long time rival Microsoft utilized licensed Java in there own browser Internet Explorer 3.0, however in 1997, Microsoft created IE 4.0 which used a form of Java source code optimized for Windows application only making Java no longer the universal language it was created to be (Afuah & Tucci, 2003, p. 398). In 1996, Java set out to make Java an OS by creating JavaSoft a strategic business element charged with developing and marketing Java products and supported products. Nothing ever amounted from this venture, JavaSoft ultimately moved away from their platform development role and into an office application development role. The office application developments had its share of problems too. SUN envisioned an office setting without the PC, instead of the office application residing at the user’s workstation; it would reside on the network and have to be requested every time the user needed the application. The technology proved to be unstable and cumbersome, making office applications that reside on Mac and Windows platforms easier to work with and more cost effective.
The Future of Java: SUN CEO, Scott McNealy, launched the company into a vision which would supply companies with all of the hardware and software to build an Internet system that was touted as being 100% reliable comparing it to today’s reliability of the phone system, he named his vision the “WebTone”. As promised, McNealy held fast to his companies promise to have Java remain as an open license. This required technology companies that developed Java to pass the “100 percent Pure Java test”. The open licensing agreements brought about over 900,000 third party software developers that contended against the Java Development Kit. Although this might not sound like a sound business decision, SUN still declared $130 million in licensing agreements in 1998 (Afuah & Tucci, 2003, p. 399).
Updated Information Since the Text Case Study During the dot-com “bubble” in 1999 and 2000, SUN Microsystems like most technology companies enjoyed a robust growth in profits, revenues, share price, and expenses. Some of the wealth was attributed to the actual expansion of the Web and e-commerce; however another

element was due to the artificial infusion of cash by the venture capitalists that were relying on the predicted high traffic levels that never occurred. With the bursting of the bubble in 2001, SUN’s business performance declined as sales dropped due to the demise of online businesses. As the businesses closed and their hardware was auctioned off, SUN’s high end servers became available for almost next to nothing. This was the chief reason for the decline in sales as SUN was heavily reliant upon hardware sales. With the disastrous quarters of substantial losses and steeply declining revenues came the repeated layoffs and cost reduction efforts. By mid-2004, SUN shut down manufacturing at their Newark, California facility and consolidated all the company’s US based manufacturing initiatives to their Hillsboro, Oregon facility to further their cost reduction plans. SUN also cancelled two major processor projects which “emphasized high instruction level parallelism and operating frequency” (Wikipedia, 2006). Corporate buyers were now interested in the less expensive PC-class Intel-style microprocessors that ran open source Linux OS software which brought criticism to McNealy for sticking to SUN’s longtime business model of “Spend big on loads of in-house technologies, from chips to operating software, then try to sell products at a high enough price to cover the investment and still crank out a hefty profit” (Burrows, 2005). McNealy stuck to his approach leading SUN to unveil a fundamental new chip design called the UltraSPARC T1 processors (previously “Niagara”) which were designed for a different class of server that would accommodate large Internet companies such as Google and Yahoo process millions of simple execute and search requests. The most sweeping change came about when SUN said it would give away virtually all of its software products, either separately or as a packaged roll out called the Solaris Enterprise System. The mind set for giving away the software was to invoke the research and development of products that would run on Solaris. This in turn would create a demand for SUN servers and the service contracts to maintain the free

software and equipment, which is how open source companies create value, and how customers want to pay for it. In April of 2006, Scott McNealy, CEO and co-founder of SUN Microsystems relinquished his position to Jonathan I. Schwartz. Schwartz has since brought SUN out of a five year slump to two strong quarters of revenue growth and market share gains bring SUN’s stock up 38% since late July (Hamm, 2006). Although a 38% increase in stock valuation is impressive, SUN still has a ways to go until they once again enjoy pre-2001 revenues.
Competitive and Industrial Analysis To analyze Sun Microsystems, I found that a Porter’s Five Forces and a SWOT analysis would be most appropriate. Porter’s Five Forces Analysis by design is an assessment of the outside affects an industry has on a firm’s ability to serve its customers and make a profit, Their microenvironment. In contrast, the SWOT Analysis assesses both internal and external forces (macroenvironment) on Sun Microsystems and the computer industry. Equally they can be used to establish how Sun can achieve a competitive advantage over its rivals.
Porter’s Five Forces Porter’s industry analysis looks at five different forces to determine strengths and weaknesses of an industry. Rivalry, substitutes, customers, suppliers, and threat of new entrants are the five forces that affect every industry. By analytically analyzing industry attractiveness with respect to the five forces, Porter shows that strategies can be chosen to give the company a competitive advantage relative to its rivals. The following is an analysis of the five forces that affect the computer industry.
Suppliers. The power of suppliers is unbalanced because of Sun’s commitment to diversity of suppliers and supplies needed. For one instance, supplier power is high in the computer chip market because there are only two dominant CPU manufacturers. For example, in 2003 Advanced Micro Devices Inc. (AMD) made an alliance with Sun Microsystems, agreeing to use AMD Opteron in their servers. In another instance supplier power is also low because of the many firms that supply Sun with basic parts such as metal, plastics, and transistors. (Sun Microsystems, Supplier Diversity, 2004-2006) Customers. Customer power in the computer/server industry is weak. This is caused by the instability of cost, complexity to switching hardware and software platforms, and the global explosion of networking, hardware and software needs. For example, Microsoft has been pressuring their clients into upgrading their software or going elsewhere. I have personally seen this done, Microsoft indirectly gave the US Army until 1 Oct 2005 to upgrade to the XP OS, Windows 2000 would no longer be supported. This is forcing customers to choose between a lasting relationship with a company or spending money on all new equipment and/or software. Brand identity also plays a role in customer decisions. Customers are more likely to choose an expensive computer system or software with a familiar brand name over an inexpensive computer and not so well known software made by a smaller and sometimes virtually unknown company. What firms fail to realize is that what’s popular is not always the best. Rivalry. The computer industry is a very competitive market because of the numerous companies in existence that produce similar products. Sun Microsystems is in competition with the entire top server manufacturing companies including; IBM 31.9% market share, HP 29.6% market share and Dell 10.5% market share (IDC, 2005). Between 2001 and 2003, there were declines in hardware spending which caused many firms to fight for market shares; as a result, in 2004 many companies are lowering their prices and cutting costs to obtain a competitive advantage over their rivals. In order to contend with rivals, Sun, as well as its competitors, must devise strategies to cut costs and keep prices at a favorable level for their customers. Threat of New Entrants. There are many barriers to overcome when entering into the IT industry. Costs involved with starting a business and brand loyalty are among the two strongest obstacles. In the computer industry brand names are associated with specific characteristics of the company. Many consumers have lifelong relationships with computer companies and persuading clients into buying products from new companies could prove to be difficult. Substitutes. The threat of substitutes is strong due to the computer industry constantly growing and developing. Sun Microsystems spent $2 billion dollars on Research and Development last fiscal year 2006 to come up with the latest technology. New innovations such as Solaris 10 OS which is a multiplatform and runs on Dell, HP and IBM to name a few, and the latest UltraSPARC processor technology. However, Sun has made virtually all their software available through Open Source Initiatives such as OpenSolaris, OpenSPARC, Open Source Availability of Netbeans, Java Development Tools, Java Middleware, and Java Platform Technologies. Their reasoning is it will help foster processor architecture development, software and application design which will help lower barriers for the next big build-out of the Internet, encourage innovation and bring new products to market (Sun Microsystems, 2006, p. 8).
SWOT Analysis
Sun’s SWOT analysis unveils the firm’s strengths, weaknesses, and where their opportunities and threats lie. The SWOT is another way of analyzing where Sun is positioned in the computer industry and the internal and external force upon it.

Strengths: * Recognized possibility of world wide network before competitors * More stable server platform than Microsoft * Established Research and Development division * Forged corporate alliances * International market base * Service revenues are increasing | Weaknesses: * Taking advantage of open-source market * Expensive high end products and services * Marketing their products—Web Site in particular * Negative revenue from 2001-2005 * PC has market dominance | Opportunities: * Furthering Java open source * New Technology * Outsourcing Internationally * New Marketing and Management Strategies with new CEO | Threats: * Linux is more open * Microsoft Windows offers more capabilities * Many competitors can make Unix servers * IBM’s PC Research and Development |

Internet Properties Affecting Sun Microsystems Sun Microsystems, even more so now since they have open-sourced or in the process of open-sourcing their software, use the property of mediating technology (B2B), (B2C) to provide the Solaris family of operating systems free of charge to businesses and customers. The universality property of Internet both shrinks and enlarges the world for Sun. Shrinks the world by allowing a Java programmer in London can work from a virtual office at home rather than work in California. Enlarges the world by allowing Sun to provide downloads of their software anywhere a user can gain access to the internet. As for Sun’s software and the way its distributed, again the internet provides that distribution channel. The Internet as a time moderator allows

customers 24-7 access to Sun’s website. Lastly, the internet is an information asymmetry shrinker, again even more so since Sun is open-sourcing their software.
Sun’s Revenue Model and Value Configuration Sun’s Revenue model is a hybrid, based upon both software license/maintenance contracts and hardware sales. There is nothing special about their hardware sales, the basic see it and buy it for a price. However, their software is now open sourced or a zero-revenue software model. Sun’s strategy also includes computer grids as a future significant revenue source. Sun is building and operating computer grids and offering hosted services for scientific applications. It hopes others will follow its example and build large data centers using its hardware and software. Sun’s value configuration is closely related to the value chain and value shop. Sun’s has a value chain configuration on its server/workstation manufacturing, which it receives its chips and other assembled pieces from partners or vendors. They are considered to be a value shop for their intensive technology in the business solutions that they offer in networking, data storage, and office software support.
Sun Microsystems Competitive Advantage Since Sun Microsystems inception in 1982, the once computer only manufacturer starting with the SPARCstation 10 system has evolved into manufacturing high end servers that can accommodate the likes of Google and Yahoo. What made Sun really stand out was their creation of the Java language which boasts “write once, run anywhere”. This was supposed to become the universal language of any device that would or could be hooked to the network. Java however found its place as the most suitable language for the World Wide Web because it doesn’t differentiate what platform or machine it’s running on. Using Java as the language of the WWW would definitely make Sun Microsystems an innovative leader with a competitive advantage.

Some might think Sun’s CEO Jonathan Schwartz to be without his faculties when he announced that Sun’s software was going open-sourced. However what they don’t see is that Schwartz is trying to create a software development consortium made up of developers spanning the globe that will work to find solutions for the next Internet build up. He in fact is cutting cost by allowing Sun’s software to be tweaked by developers for no cost to Sun. Once the breakthroughs are developed, Schwartz can steer his company towards the development of hardware to accommodate the future. Yes, Sun Microsystems has a definite competitive advantage.
Recommendations for Gaining and Sustaining Competitive Advantage
PC has Dominance—the reason PC workstations are popular is because of their independence from servers and the network. A user doesn’t have to rely on a network connection to use word processing Terminals on the other hand are unable to function without a connection to the network. Developing new lower cost workstations using the Solaris 10 OS will help Sun obtain competitive advantage over their PC rivals. Marketing Their Products, Web Site in Particular—Suns’ website is heavily concentrated on company performance rather than creating a balance of performance and marketing their products and services. Purchasing products and services from the website is difficult due to the complexity of trying to find the desired item. For example, Dell provides links to all of their products and services on the home page of their website making product selection easier. Consumers want an easy way to access and look up information about the products and services. Sun can improve upon this problem by having their homepage contain fewer categories about the company itself, and focusing more on the products and services offered. Expensive High End Products and Services—Sun's principal objective market is large corporations and small business owners with their high end network terminals and servers. One opportunity Sun has to increase their profitability is to take advantage of their workstation product. Presently, they are teaming up with Wal-Mart in an effort to reach more small businesses. Workstations are not currently being sold in Wal-Mart stores; rather they are advertising and selling them online. Instead of Sun selling it's products solely over the internet, they need to offer products in stores such as, Wal-Mart, Office Depot, Office Max, and Staples. Offering the workstation’s in stores and on the retailer’s websites, where small business owners buy other office supplies, will give Sun more recognition in the workstation arena. Take Advantage of Open Source—during the writing of this case, Sun has virtually open sourced all of their software. They made available for download their Solaris OS in October of this year, and… Java will be freely available under what’s called the general public license (GBL), which also governs the distribution of the Linux open-source operating system, says Rachael King of BusinessWeek (King, 2006). Taking advantage of open sourcing their software will allow a more open forum for software development. This will also give rise to service contracts on the software as well as enticing more firms to use Sun’s hardware.

References
(Afuah A Tucci T L 2003 Internet Business Models and Strategies)Afuah, A., & Tucci, T. L. (2003). Internet Business Models and Strategies (2nd ed.). New York: McGraw-Hill.
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(Hamm S 20061002 Sun: Out From Behind the Clouds)Hamm, S. (2006, October 2). Sun: Out From Behind the Clouds. Retrieved November 26, 2006, from BusinessWeek Online: http://www.businessweek.com/magazine/content/06_40/b4003088.html
(Idc 20050826 World Wide Server Market Shows Growing IT Investment Across Platforms, According to IDC)IDC. (2005, August 26). World Wide Server Market Shows Growing IT Investment Across Platforms, According to IDC. Retrieved November 28, 2006, from http://www.idc.com/getdoc.jsp?containerId=prUS00223005
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