Top Execs At Gateway, Novell and Sun Speak Out

Gateway, Novell and Sun are irrelevant, critics say. But as their CEOs have made bold changes to ensure their companies can still compete, detractors wonder if these men are up

January 26, 2004

9 Min Read
Network Computing logo

Gateway, Novell and Sun are irrelevant, critics say. But their ceos have made bold changes to ensure their companies can still compete. detractors wonder if these men are up for the challenge. In many industries--and in most years--double-digit stock appreciation wins a CEO kudos from virtually everyone. But few people are patting Sun CEO Scott McNealy on the back for increasing Sun's shares by an astounding 40-plus percent in 2003. Instead, many are calling for his head. That's despite the fact that those shares outpaced those of both rivals IBM and HP, and nearly matched the performance of the overall Nasdaq exchange, which finished 2003 up 50 percent.

Why only faint praise for McNealy? Simple. Many think the one-time Internet wunderkind has lost his way and is gambling on a strategy that pits his company against bigger rivals in virtually every technology category in which it competes. The belief that Sun is in the throes of a full-blown crisis was exacerbated last fall when Sun revised a quarterly earnings report that erased a modest profit and left Sun $1.04 billion poorer. Influential Merrill Lynch financial analyst Steven Milunovich was moved to write an open letter to Sun's board of directors in which he concluded that the company "has gone from being pure in vision and predictable in financial performance to an underachieving, bloated, unfocused reflection of its former self."

McNealy's response to all this? "Sun is rocking; no need to worry," he recently told VARBusiness. "As a company, we're at the right point in the road to take advantage of new market opportunities."

Among CEOs with difficult jobs, it's not a unique attitude. Novell CEO Jack Messman tells VARBusiness that he and Novell have "probably got a better strategic position than we have ever had." That's despite the fact the Provo, Utah-based software company ranked dead last in our own 2003 study of partner expectations for key vendor companies.

Then there's Gateway CEO Ted Waitt. He remains upbeat even though his company lost more than $400 million in the first nine months of fiscal 2003 and reported a revenue shortfall of about $45 million in the fourth quarter. He envisions a point in the near future when working at Gateway will be fun. That's right: fun."If you look at the amount of change we've been through in the past six months--the new management team and product intros, changing our sourcing model and sales processes, remodeling our stores, changing our internal processes and systems--there are a lot of fundamental changes going on simultaneously in a short period of time," Waitt says. "But it's like living in a house while you're remodeling: It's a little more difficult to have a good quality of life. Now we'll work more on fine-tuning that experience so we don't have to go through the construction phase again. That's when it'll start to be fun."

But before anyone at these companies begins to experience anything close to that--remember, they have collectively laid off thousands of workers in the past two years--the CEOs of Sun, Novell and Gateway must address serious problems in and out of their organizations. The challenges these companies face amount to what may arguably be called the three toughest jobs in technology. Although all three enjoyed stock appreciations in 2003, they face a host of serious issues this year. Novell, for example, is struggling to prove that it still matters, Sun that it can still compete and Gateway that it can still execute. Of the three, Gateway faces the biggest financial crisis, Sun the largest technological predicament and Novell the most pressing customer loyalty problem.

All three have reacted in an extraordinary fashion, surprising critics and rivals alike by taking exceptionally large risks that will either make or break their companies. In the pages that follow, we examine the tough jobs these CEOs have and what they are doing to rediscover what Stanford Business School professor Jerry Porras calls a company's "enduring purpose," or reason for being. The graduate business school's Lane professor emeritus of organizational change and behavior, Porras says figuring out that riddle is one of the most fundamental issues a company must sort out.

"They have to look at the degree [from] which they've drifted from their enduring purpose," Porras says. "It goes beyond what products and services they're offering. It should guide everything they try to do strategically."

Porras says organizations that don't have an enduring purpose often settle for the best profit opportunity available to them. But that can lead to potentially disastrous repercussions, some of which Sun, Novell and Gateway now grapple with. Read for yourself why the three CEOs of these companies confidently believe they are in the best position they have been in years despite what detractors say. Their response to all the criticism thrown their way: Bring it on.
Although they run very different companies, Messman, McNealy and Waitt actually share much in common, in addition to having some of the toughest jobs in technology. Each man, for example, was there at the birth of his respective company. Each also serves as chairman of the board in addition to CEO, and each has greater entrepreneurial and managerial skills than technology vision. There are other similarities, too: Each, for example, has moved the geographic center of his company to a new locale, though in McNealy's case it was only a few miles, and each depends on tight alliances with partners for a sizeable part of his sales. Moreover, each has a specific nemesis that is richer, more powerful and currently seen as more capable. In the case of Gateway, that, of course, is Dell. For Novell, it's Microsoft, and for Sun, it's IBM principally and Microsoft, too.After years of battling against these giants head-on, Novell, Gateway and Sun have changed how they attack their rivals, preferring assaults against their rivals' flanks as a way of competing. This approach has produced some of the most innovative strategies Sun, Gateway and Novell have come up with in years.

Take Gateway, for example. Waitt believes a price war with Dell is pointless. So, rather than try to be the lowest-cost, most efficient producer of PCs, the company is embarking on a new, multipronged strategy to beat Dell. It revolves around being first to market with aggressively priced devices, including flat-screen TVs for the home--where margins are often twice what they are in PCs for businesses--and building a reliable, loyal base of partners to take PCs to places that Dell does not effectively reach, namely small to midsize corporate customers.

To improve his chances of success, Waitt has made a ton of moves internally. To address operational issues, Waitt brought in new management, including former IBM vice president Jocelyne Attal, who now serves as executive vice president of Gateway Professional's business unit, and former Toshiba America president Joe Formichelli, who serves as executive vice president of operations. Waitt also pushed into new Gateway technology categories. Although its TVs grab all the headlines--Gateway is now among the largest sellers of flat-screen TVs in the country--the company's new alliance with Hitachi Data Systems, which will result in new SAN products, demonstrates how Gateway wants to be more than a mere PC supplier to businesses. That's winning fans among partners, who Waitt and his reseller management team believe could one day account for half of Gateway's business.

"There's no holy war or religion here about being a direct company," says Errett Kroeter, Gateway's director of channel programs. A former IBM channel manager, he was recently brought in to help launch Gateway's new ProNet channel program, which currently has 900 partners on board. Most are uncommitted at best, though Gateway wants to change that. The new program offers competitive benefits and an alternative value proposition.

Since ProNet was unveiled, Gateway's sales at IT Group, a networking consultant for SMB customers, have improved 20 percent to 30 percent. "Before ProNet, Gateway was more reactive, relying on SPs to create more market share for them; now they're actively positioning us with leads and new marketing materials," says George Phipps, vice president of sales and business development at the Los Angeles company.Despite the frustration they have had with Sun's sales performance--Sun's sales have slipped almost $7 billion in two years, an opportunity almost the entire size of Arrow Electronics--partners are remarkably upbeat. That includes Mike Long, president and COO of the North American Computer Products group of Arrow Electronics in Englewood, Colo. "Arrow sees its Sun business as healthy, growing and improving. We have six consecutive quarters of top-line growth in our Sun business," he says. Others who think Sun may rise again include top stock-picker Laszlo Birinyi, president of Birinyi Associates.

But fans of Sun these days are in the minority. While even detractors praise McNealy for reaching out for help, such as he did recently when he cut a deal with AMD to put its Opteron processor in Sun servers, they believe Sun is pursuing too many endeavors that won't produce profits. Merrill Lynch's Milunovich, for one, faults Sun for believing it can shift its reliance on hardware to software and services. That's especially true as Sun tries a new and unproven gambit to take on IBM and Microsoft--offering enterprise versions of its software suite of products to corporate customers for just $100 per year per user.

But McNealy says his detractors don't get what he's doing, namely reinventing the software marketplace. "Things like the Java Enterprise System and Java Desktop System translate immediately to value in the ears of our customers and partners," he says. "We talk nonstop to our partners and customers, and they love this stuff. We simplified software for them to the point that they literally can carry around the software price list and delivery cycle on a business card. That's huge."

Novell is also taking huge steps to change the software marketplace. More than any other company, it's betting the farm on Linux, which Messman squarely believes will be embraced by corporate users as an alternative to Microsoft software despite its technical shortcomings and legal uncertainties. In addition to porting core NetWare services to Linux, the company has bought Ximian and SuSE Linux to round out its Linux portfolio. But pulling everything together has been a chore. Executives, for example, were forced to wage a quiet but fierce civil war internally with engineers over technical priorities. Then Novell struggled with how best to embrace Linux. At one point, the company considered establishing a consortia of companies to jointly build a Linux distribution. Ultimately, it concluded that the effort would take too long and possibly pit Novell against the very hardware companies it hopes will commit to using its Linux software. After struggling mightily to craft its Linux strategy, Messman says he now has something that even Microsoft cannot boast: a software stack based on open standards that includes both a desktop and server-based operating system that share the same code base.

That alone could very well be the enduring purpose Novell has searched for all these years, making at least one of the toughest jobs in technology easier to handle.This story appears courtesy of VARBusiness

Stay informed! Sign up to get expert advice and insight delivered direct to your inbox

You May Also Like

More Insights