Sun's Strategy in Need of Change

A decade later, Lou Gerstner took charge of a company that insisted on making everything from PC operating systems to networking equipment to high-end business applications. Gerstner killed those and other underperforming product lines, sold off assets and focused IBM on building technology "solutions" rather than just point products. IBM's profits and stock price exploded as the company rationalized its businesses.

Eisner and Gerstner pulled their once-great companies from the brink of bankruptcy only by challenging deeply held beliefs and hidebound cultures--lighting a fire under management teams that "presided rather than acted," as Gerstner put it in his IBM memoir.

The same challenge now faces Jonathan Schwartz, the recently appointed chief operating officer of Sun Microsystems. Sun's old-guard strategy is to make the highest-performing computers using proprietary operating systems and chips, charging customers a bundle for this premium technology. Although this business model served Sun well for two decades, it started running out of steam in the late 1990s with the emergence of commodity, enterprise-class Wintel computers. Had it not been for the Internet bubble, with dot-coms sparing no expense to power their commercial sites with Sun systems ("the dot in dot-com"), the company's day of reckoning would have come five years ago.

Better for Sun that it had. While Sun was busy feeding the dot-com gluttons, a leaner, Linux-based computing model snuck into the enterprise as an alternative to both proprietary Unix and Windows. The Linux movement has seized on what Forbes publisher Rich Karlgaard calls the "cheap revolution," whereby companies worldwide, many of them Sun shops, are replacing their proprietary IT with less expensive, standards-based hardware, software and services.

Today, as other vendors are bouncing back from the recession, Sun is reeling. Last quarter, the company reported its 12th consecutive year-on-year revenue decline and a $760 million net loss--bringing its accumulated fiscal 2004 losses to $1.2 billion, following losses of $3.4 billion last year and $587 million in 2002. There are only so many $2 billion cash infusions (thanks to its recent agreement with Microsoft) Sun can bank on.Sun's recent talk of releasing its Solaris code as open source reeks of desperation. Most observers think Sun is too late to the open-source party, assuming it isn't just trying to capitalize on the buzz. So far, it has revealed few details about how it will proceed.

While Sun is showing signs that it realizes its proprietary OS is no longer the center of the IT universe, IBM and Hewlett-Packard already are well down that path, having shifted their marketing focus away from their Unix variants and toward Linux. Novell is a more dramatic contrast, having all but walked away from the dying NetWare in favor of Linux.

But transforming a culture is never easy, and the process is never complete. Just ask Michael Eisner, who's in the fight of his life 20 years after turning Disney around. In Sun's case, the company's survival is on the line. Dramatic new thinking is its only hope.

Rob Preston is editor in chief of Network Computing. Write to him at [email protected].