Sun Microsystems: Will it Continue to Shine as the Internet Company?




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Sun Microsystems: Will it Continue to Shine as the Internet Company?

 

An Analysis of



the Use of Information Technology

to Gain a Competitive Advantage

within Sun Microsystems

 

 



 

 

 



 

 

 



 

 

 



 

Table of Contents

 

Paper Objective



Scope

Section I: The Internet Hardware and Software Industry

A. Industry Profile

B. Competitive Strategies within the Industry

C. Porter Model Evaluation of Industry Forces

D. Globalization of the Industry

E. Importance of Information Technology to the Industry

Section II: Company Perspective: An Analysis of Sun Microsystems

A. SUN Microsystems company Profile

B. Market and Financial Performance

C. The Competitive Strategy

D. Significance of Information Systems

E. Strengths and Weaknesses of Sun Microsystems

Section III: Information Systems at Sun Microsystems.

A. Structured Analysis

B. Strategic Option Generator

C. Roles, Roles and Relationships

D. Redefine/Define

E. Significance of Telecommunications


  1. Success Factor Profile

Section IV: A Final Analysis of the Success of Sun Microsystems

A. The Success of Business Strategy and IT Used to Date

B. The Effective Position of the Company for Future Performance

Objective

The objective of this paper is to analyze key business strategies and the use of information technology by Sun Microsystems to gain a competitive advantage in the internet hardware and software industry. Sun Microsystems is one of the major players within this broad and brutally competitive technology related market. This paper will place major emphasize on Sun Microsystems and its position within the Internet Hardware and Software industry. This analysis will be accomplished in four sections. Section I discusses the Internet hardware and software industry by defining the structure, the general strategies and trends, the impact of globalization and the importance of information technology within the industry. Section II focuses on Sun Microsystems, describing the company, its competitive strategy and financial performance and its position within the industry. Section III gives a structured analysis of the role and use of information systems within Sun Microsystems, including a narrative of the factors which have contributed to the success of Sun Microsystems. Section IV discusses the success of Sun Microsystems use of information technology in support its business strategies in the past, and whether these factors have effectively positioned the company for the challenges of future.



Scope

The Internet hardware and software industry is one of the most dynamic and challenging industry’s in the world. This industry alone has a major impact on businesses from a wide range of markets and varying size. Companies within this industry compete by fulfilling the demand for increasingly robust, effective and scaleable internet server systems and by providing the server application environment that will be used to propel internet business objectives. To survive in this industry companies need to be able to provide a range of quality server hardware products and they need to be able to provide an effective operating system platform that will suit the needs of small, medium and large businesses. This paper will focus on three companies, which are primary contenders within the internet hardware and software industry. These include Sun Microsystems, IBM, and HP/Compaq. These companies tend to compete within three distinct segments, which include, low-end (less expensive), mid-range and high-end internet hardware/software solutions. Historically, high-end products have produced the most revenue, but in a tough, cut-throat economy, competitors within this industry are doing all they can to leverage competitive advantage from all segments of their market. Although, internet application software within this industry includes both, windows based operating system software, and UNIX based platforms, analysis will focus on UNIX based solutions, which are provided by all three top competitors within this industry.

As illustrated in this graph, during the second quarter of 2002, Sun Microsystems held 39% market share as provider of low, mid, and high-end server hardware/software solutions. Hewlett Packard held second place with 31% market share and IBM finished third at 20% market share. [18].

Internet Hardware and Software Industry

Competitors

Server Systems range

Operating System

Market Share Q2, 02

Sun Microsystems

Small, mid-range, high-end

Solaris-Unix

39%

IBM

Small, mid-range, high-end

OS-2

31%

HP/Compaq

Small, mid-range, high-end

HP-UX-Unix

20%



SECTION I: THE INTERNET HARDWARE AND SOFTWARE INDUSTRY

A. Industry Profile

The internet hardware and software industry is dominated by companies who continually fight to increase their share of the market. Generally, these companies are characterized by being able to provide internet hardware/software solutions within the low, mid, and high-end server markets, including providing the Operating System application to drive the hardware. For examples, Sun Microsystems is continually trying to attract customers who have historically only implemented IBM or HP server solutions. These companies also fight to become the standard internet application solution. Growth within this industry is due primarily to the number of new products, reliability and scalability. Companies are also increasing alliances as they contend for international leadership and market dominance. Customers are looking for internet hardware and software solutions that will allow for tremendous online, internet, intranet scalability and flexibility, while at the same time providing on-time product delivery and exceptional customer service.

The following chart shows the relative size of the dominant players within this industry for the past two years. The change in market share among the three segments shows the dynamic nature of this industry. The Internet server market generated 60 Billion dollars in sales during the year 2000.

During 2000, Sun Microsystems shipped more UNIX servers than IBM, HP and Compaq combined to lead the market in both shipments and revenue. Sun ended the year with a 44 per cent share in shipments and 35 per cent share in revenue. [19]



Entry-level UNIX server category: Sun posted 80 per cent growth year-over-year to take first place in shipments with 315,180 (44 per cent share). In units, Compaq, HP and IBM all suffered share point losses. In revenue, In contrast, IBM fell 28 per cent year-over-year and dropped five share points to end the year with nine per cent market share, while Compaq declined seven per cent to lose two share points for 10 per cent of the market.

Mid-range Unix server category: Sun garnered the top spot for shipments in the midrange UNIX market with 37 per cent market share, while HP had 30 per cent and IBM 11 per cent.

High-end UNIX segment: Sun took first place in worldwide revenue with 47 per cent share (US$2,107 million) and first place in worldwide UNIX shipments with 56 per cent share (1926 units). In revenue, IBM came in with US$842 million and 19 per cent share. In units, they shipped 342 systems for 10 per cent of the market. [4]

Dominance within these segments is a very fragile proposition. Each of these companies is continually striving to attract various segments and to lure away customers from the competition. By the end of the third quarter 2001, Sun was No. 1 in the overall UNIX server market with 28.8 percent market share. HP was No. 2 with 28.5 percent, followed by IBM with 20.9 percent. However, HP had edged out Sun to take the top position in both the midrange UNIX server market for systems costing $100,000 to $1 million and the high-end UNIX server market for machines costing $1 million or more. [6]

UNIX servers, used for tasks such as tracking inventory or performing stock trades, are the mainstay of the server market. More powerful than Windows servers and less costly than mainframes, Unix servers accounted for $29 billion of the $60 billion in total server sales in 2000. In order to remain financially sound each of these companies will have to continually innovate and provide a product that is scalable and enduring. Not only does the product quality have to be present, it has to be delivered without delay to customers. Factors, such as product support and customer service have to remain a top priority.

B. Competitive Strategies within an industry

Figure 4 presents the strategy components that must be addressed to compete within the internet hardware and software industry. Decisions regarding the most profitable server sector, whether a company should place a stronger emphasize on the high-end server sector, the mid-server or low-end server sector. The extent of support, customer service and product adaptability and reliability are key to defining the method of competition for any particular company. The markets and company structure are generally related to the size of the company, name recognition and its ability to produce cutting-edge technology at an affordable, effective manner. The ability to effectively outsource key components of your business has also become a key strategic element of business survival. Information systems play a key role and in the success of companies within this industry. Competitors need to be able to rapidly and effectively be able to respond to customer demands and provide solutions that customers are demanding, supporting strategies of growth, alliance and innovation. [1]

Internet Hardware and Software strategy Options

Product Options



Low-end Servers Solutions

Mid-Range Server solutions

High-End Server Solutions

Customers

Small Businesses

Mid-Size businesses

Large corporate entities.

Markets

Europe

North America

Asian

Latin America

Software Options

Solaris

HP-UX

OS/2

Company Structure

Alliances

Independent

Information Systems

Major Role

Minor Role

Service

Customer self service

Customer full service

Technical Support

Figure 4

 Differentiation Strategy

The internet hardware and software industry follows a differentiation strategy to gain a competitive edge. Each company competes within the market by attempting to offer a more reliable, scaleable and effective hardware and software package. The main objective for a company, such as Sun, is to convince new customers, preferably customer’s from it’s rival companies, that it can offer a product that is better, faster, more stable and can do more things than what IBM or HP systems can offer. The dominant approach is to engineer systems that effectively increase efficiency and reduce over –head cost. Potential customers are looking for a provider who is a recognized leader within the industry and has the leverage to provide an effective product with quality customer service and product support to back it up. Innovation is key to attracting and retaining customers within this industry. [2]

Growth

National and international alliances are a key component of strategy within the internet hardware and software industry. The top three competitors are also continually seeking to predict where demand will take focus. Purchase of new technology and differentiation of products has been a key to growth within this industry. Changing and expanding what product a company is able to offer to its customers is an ever evolving strategy focus and leveraged as tools for growth within this industry. Sun Microsystems is widely recognized for its Java, internet application development product and is continually striving to push it as the product of choice for platform independent software development application. Sun is also expanding into different markets by providing storage products and business software solutions. All with the focus of having Sun Server products as the back-bone for these extended products. Again, the key to growth is being able to have a clear vision, defined strategies, flexibility and innovative approach to all factors within your business enterprise. [6]



Alliances

All companies within this industry are involved in the acquisition of products and services from outside companies to help conduct business more effectively. Strategic alliances have helped companies like Sun Microsystems; expand from a hardware company into an Internet company. This has occurred through various acquisitions and e-business software alliances with companies like AOL and InfraSearch. InfraSearch is currently developing a fully-distributed P2P search engine which Sun said has the ability to return richer and more timely content on the Internet. Sun is banking that the addition of InfraSearch's technology in P2P computing will address the network fundamentals of searching, sharing and storing information, which Sun believes is the key to harnessing the power of the Internet. [17]



Innovation

Innovation with this industry involves searching for and applying methods that increase benefit to customers in a top to bottom approach. Companies like Sun are now focusing on selling more than just servers. Sun is assembling soup-to-nuts offerings that include storage, software, and related technology to help service providers expand their offerings, whether it's shuttling wireless e-mail to consumers or providing powerful back-office applications to corporations via the Web. "We're trying to find as many useful ways as possible to connect everyone, everywhere to the Net," says McNealy. It is the approach of providing a solution that meets the customer’s need from all angles and fulfilling that need with an efficient innovative idea is what gives businesses in this industry the competitive edge to survive in this weak economy. [13]


C. Porter Model Evaluation of Industry Forces

The Porter Model in Figure 5 defines the five forces that influence the competitive environment within the internet hardware and software industry. The intraindustry rivalry lists those companies that directly compete within the industry. It shows that Sun, IBM and HP/Compaq are the key rivals in the United States as well as globally. The model identifies the suppliers and customers that influence the competitive nature of the industry rivals. It also shows potential threats to the industry by identifying possible new entrants into the market and substitute products and services. [1]



IntraIndustry Rivalry

As stated above, rivals within the internet hardware and software industry compete using a differentiation strategy. Those companies that continually reduce the overhead cost associated with operations will maintain leadership within the industry.   Within the internet hardware and software industry a key point of rivalry is the struggle to achieve and maintain market dominance within all segments of the industry. This is achieved through constant introduction of products and features that make it attractive to customers.



Figure 5


The Bargaining Power of Suppliers

With the prolonged sag in the economy, suppliers are having difficulty remaining profitable. This has created declined bargaining power and increased efforts to reduce cost and increase sales. Many suppliers have had to enter into vendor partnership agreements with industry leaders or risk losing their customers. These partnership agreements involve automation of the vendor-customer relationship. Ordering, shipping, inventory control, and marketing information is shared using one database. This wealth of information is valuable to the supplier by giving them timely information about their products. However, this benefit comes with the loss of power. This leverage has forced suppliers to focus their efforts on overhead cost reduction to stay competitive, or risk losing their market share to a competitor at a moment's notice. [14]



The Bargaining Power of Customers

Consumers within this industry demand high quality, expert service and a product that is sophisticated and offers unique tools to help them grow. Purchasing an internet hardware/software solution is not usually a small investment for customers within this industry, because of this they tend to be unwavering on demands. Product differentiation is increasingly harder to maintain and therefore companies within this industry need to remain focused on increasing market exposure, this means focusing on global customers, as well as establishing an identity as the most customer responsive, product savvy, business entity. Recently HP lost customers to Sun Microsystems, as it proceeded with its merger with Compaq. Customers perceived an unstable business environment within HP and opted for the rivals. This demonstrates how quickly companies can lose key customers within this industry. Those companies that meet the needs of consumers on all issues are successful. The companies that have failed to meet those needs risk loss of market share and reduced customer loyalty.[16]



New Entrants

New entrants are either new competitors entering a geographic market or an existing company making a major shift in its business strategies so that it becomes a direct competitor to the strategic business unit.

As demonstrated above, using the Porter Business Model, the threat of new entrants primarily comes from the United States market. Sun leads the market for expensive, highly profitable servers for running e-commerce sites and business-to-business transaction services. That's a market that Intel wants to enter with its Itanium processor. Dell, with its efficient business model, has also been looking for ways to shift its market focus and gain recognition as a competitive provider of internet hardware and software solutions. Foreign companies have not been a big factor but potential is there, specially as Sun, HP and IBM continue to enter new global markets. [18]

Threat of Substitute Products and Services

A substitute is an alternative to doing business with the strategic business unit. Alternatives in this industry include business products like the UNIX based FreeBSD server operating system as well as influences from Linux and other open source, free distributions of UNIX based operating system applications. Another threat comes from a rising interest in what is being termed an ‘open net’ solution. Companies like Microsoft are teaming up with telecommunication companies and establishing grid network. These are networks that companies can connect to and run corporate level, high-intensity applications, rather than purchase the physical hardware and software solutions, the processing power is outsourced through these proposed network grid infrastructure.

While Solaris is widely regarded as a solid software offering, the proprietary operating system comes at a cost, with licensing fees per system often running $500 or more. By contrast, Linux is available for free from various vendors on the Internet. If customers increasingly choose Linux as their preferred platform, Sun could potentially lose millions of dollars in revenue. [5]

Conclusions Based on the Porter Competitive Model Analysis

The Porter Model analysis leads to the following conclusions. First and foremost, intra-industry rivalry is intense. Despite Sun’s strong position in the industry, it faces continual challenges both nationally and internationally as rivals intensely race to provide better, more robust products. The threat of new entrants is very real and alliances are increasingly important in this truly, global industry. Buyer strength is at an advantage. Competition between rival companies is so intense that they are forced to comply with buyer demands or lose market share quite quickly. The internet hardware and software industry is a 60 billion dollar business, this type of revenue and size of business cannot not easily be ignored by suppliers. Suppliers are equally keenly aware of their need to encourage and facilitate friendly alliances with corporations within this industry.



D. Globalization of the Industry

All three companies in this industry are top global competitors and are increasingly focusing on international recognition and forming allies and alliances with companies in various parts of the world. Due to the current economic conditions, the three companies are desperately seeking ways to innovate and predict the technology trends. Most small companies are being replaced or seeking alliances to strengthen financial postures. All companies have experienced lay offs and have cut down on expenses, seeking ways to stream line their operations.

The national companies have recognized the saturation trend, as well as the increased competition that it represents. As a result, Sun Microsystems, IBM and HP are focusing on international efforts. They are increasing alliances and forging strong relationships with foreign businesses, primarily across European and Asian markets. During calendar year 2000, Sun Microsystems, surpassed IBM in total server revenue in the United Kingdom and grew faster than any other major server company in Western Europe, according to Gartner Dataquest. [3]

Sun also grew faster than its competitors in Germany, Sweden, France, Italy, and Switzerland. In 2000, Sun grew 35, 46, 37, 58, and 60 percent respectively year-over-year. When looking at all of Western Europe, Sun grew 44 percent over that same period. Foreign sales account for approximately 49% of Sun’s revenues.[18]


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