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A winning business model for the '90s.

The companies that succeed in the years ahead will be the ones that challenge and change conventional wisdom -- not just on the fine points of doing business, but on the fundamentals of being a business. And that means adopting a new business model that will satisfy the needs of customers, suppliers, and governments while still allowing the company to make money.

It is clear that the traditional business model, at least for the computer industry -- vertical integration, proprietary product lines, direct selling -- just isn't working any more.

I believe the business model pioneered by Sun Microsystems more than 10 years ago can provide some useful insights for companies -- in the computer industry and other fields -- that are interested in positioning themselves for success for the remainder of the 1990s. Sun's approach, considered radical just a decade ago, has proved its merits in this era of increased global competition.

In 1982, Sun Microsystems had a staff of seven and was headquartered in offices that were rented by the day. Today, analysts forecast Sun's revenues at $6 billion and the company is in the top half of the Fortune 500, with 13,000 employees and offices around the world.

In the early days, we succeeded because we had revolutionary products. Andy Bechtolsheim and Bill Joy, two of Sun's co-founders, launched the concept of open systems with the Sun-1, a computer made from standard off-the-shelf components and running the Unix operating system. Unix was powerful yet easy to "port," meaning that it could run on many different types of computers. This, combined with Sun's Unix-based Network File System (NFS), gave customers several important new capabilities. They could create networks of supercharged desktop computers, called workstations, which could share information. They could make every resource on the network available to anyone else on the network -- from any physical location on the network. And they could integrate newer technologies with existing systems, allowing them to take advantage of emerging technologies without sacrificing their previous investments.

For other computer vendors, open systems had an equally significant impact: it threatened to break their strangleholds on prized markets. Vendors of proprietary products had grown accustomed to enjoying what amounted to an unregulated monopoly. They had little competition, so they commanded high prices and set low standards for ongoing innovation. The advent of open systems introduced a new dimension of competition. We all know what happens when competition escalates: prices tumble, innovation soars. Consider, for example, the effect of cloning on the capabilities and pricing of IBM-compatible personal computers.

Initially, Sun's business model was no different from that of its rivals. We wanted to beat our competitors, grow internally, build manufacturing plants, create new distribution channels, acquire promising startups, and so on. What happened was that we realized we couldn't do it all alone. The market was vast, our competitors were huge, barriers to entry in some segments were overwhelming, we didn't have enough cash, and the pace of change in the industry was too fast.

Pure Instinct

What we did was purely instinctive. We reached out to other companies that could help us. We leveraged their expertise and specialty products by forming strategic alliances.

Our first partner was Fujitsu. We wanted to produce special high-capacity hard drives for our workstations, but found that the idea of manufacturing them ourselves was not realistic, given our small size and lack of credit history. We approached Fujitsu and found that they were willing to make the drives for us. The alliance worked so well that we looked for other opportunities. Soon we had a partner that could produce printed circuit boards for us. And another partner that could supplement our service offerings. Then ComputerVision, one of Sun's early customers, approached us with a partnership proposal whereby we would supply our workstations for resale by ComputerVision, allowing them to focus on software product development. We agreed.

So Sun's leveraged alliance model was born of necessity, not ingenious foresight. But we allowed it to continue evolving, and for that we can take credit. Initially, the alliances focused on manufacturing and service agreements, but gradually they expanded to include product development, marketing, distribution -- practically every element of our business.

Today, strategic alliances are the very heart of our business. We have alliances with more than 3,500 software vendors, who have created more than 10,000 solutions for our computer systems. We outsource much of our manufacturing and assembly to multiple companies throughout the world. We buy and sell through a multitude of channels, including value-added resellers, systems integrators, consulting companies, other OEMs, even direct mail. And we maintain separate alliance programs for many areas of technology, including networking, systems integration, hardware, systems management, service, and more.

Now, with the benefit of 20/20 hindsight, I believe I am able to explain why the leveraged alliance model works so well by showing you in more detail how it works at Sun.

Adding Value to Core Competencies

The central premise of the leveraged alliance model is that no one can do it all alone any more. On the other hand, every company has to do something. How does a business determine what to do internally and what to outsource?

The first step is to ask a very tough question. What is the company really good at? What technology, resource, or capability does the company provide that gives it a true competitive advantage? The answer to this question is the company's core competency. This is the platform on which to build -- the foundation on which to add value by leveraging the expertise of third-party specialists.

For example, Sun's core competency is open network computing: integrating heterogeneous resources into a single, powerful network environment. While Sun itself offers hardware, software, and networking products in support of this core competency, we depend heavily on our partners to add value to the Sun foundation.

In the software development market, for example, Sun provides the high-performance programming tools that most developers need to write powerful applications, and forms development partnerships with third-party vendors whose products enhance the Sun development platform.

Each company is able to do what it does best, so redundancies and inefficiencies in product development are minimized. The vendors leverage each other's strengths and take advantage of synergies to address customer requirements. Similarly, Sun produces and sells the operating environment that customers need to run their powerful applications, but most actual software applications are created by our worldwide network of independent software vendors.

On the service side, alliances allow Sun to provide outstanding service for products that weren't manufactured by Sun. Our alliance with Amdahl, for example, complements Sun's service offerings with full third-party hardware support, so customers can take care of all their service requirements through a single vendor.

Worldwide Market Development

Sun's implementation of the leveraged alliance strategy has helped the company enter and succeed in new markets both at home and overseas.

Our operations in Japan provide a good example. Unlike other computer vendors that have attempted to do business in Japan by simply extending their vertically integrated business model to the Japanese market and muscling in on Japanese customers, Sun's approach has been to enter Japan through Japanese partners.

First, we established a local presence with staff and office facilities. The local staff then went about investing in strategic business relationships with Japanese suppliers, distributors, and manufacturers-who of course have a great deal of experience with local expectations, requirements, and culture. As opposed to the traditional "direct sales" model favored by other computer vendors, Sun sells into the Japanese market with assistance from its partners. In addition, rather than setting up its own manufacturing plants, Sun purchases many of its workstation and server components from Japanese firms-some of whom are also Sun customers. The larger of these companies-such as Fujitsu and Toshiba-are potential sources for multiple products, including microprocessors, memory, power supplies, keyboards, and so on.

Buying from suppliers who are also customers yields several positive results. First, it strengthens the business relationship between the companies. Second, it allows for the possibility of more attractive purchase terms on both sides. Negotiations do not have to center on cash-only transactions. Hence, currency risks on both sides can be hedged to some degree. Third, it makes the market more competitive by increasing the number of competitors.

Sun's leveraged alliance approach has created a mutually beneficial relationship between Sun, its partners, its customers, and the Japanese economy. Sun is able to take advantage of Japan's advanced R&D and manufacturing bases; partners have the freedom to create the industry's most innovative leading-edge products; customers can find a solution that fits their business requirements; and Japan benefits from the resulting increase in business. Today, Nihon Sun is one of the most successful foreign enterprises in Japan. In the Japanese workstation market, Sun is now the dominant force, with approximately 40%6 of the market in 1994. In fact, Sun is the only foreign company in Japan with a number-one share in a key computer segment.

The leveraged alliance model works equally well in European countries. Throughout Europe, Sun regional offices are staffed by both U.S. and local employees who are charged with creating demand for Sun products. The staff forms alliances with local companies to adapt products to meet specific local requirements, or to supply components to specific geographies.

Another Winner: Local Economies

Clearly, Sun's leveraged alliance model can yield large benefits for corporations. What is frequently overlooked is how local economies also benefit from this approach. Obviously, local economies are always beneficiaries of increased volumes of business. More workers have jobs, more companies have customers, and more taxes flow to local coffers. But consider the types of jobs Sun's leveraged alliance model produces. In contrast to companies that simply take advantage of low wage rates to build factories that employ minimally skilled workers, Sun helps encourage the development of an information technology infrastructure -- a workforce of highly trained, well-paid people.

For example, in China, Sun's vertically integrated competitors have built factories that take advantage of low-cost labor. These factories create low-wage, low-skill jobs. In contrast, Sun has set up four offices in China that are incented to create alliances with other local companies-even to encourage the formation of new companies that can provide specialty products and services-to satisfy the requirements of local customers. In addition, Sun provides training for its reseller partners, allowing individuals to build their personal1 levels of expertise, which in turn results in a more skilled workforce. In China, all of this has led to the development of a thriving microeconomy that simply didn't exist previously. Sun has many similar examples throughout the world.

Redefining the Supplier Relationship

In the old business model, corporations maintained "arm's length" business relationships with their suppliers. Sun is redefining this relationship by viewing its suppliers as integral partners in the company's business. This fosters a closer relationship in which both Sun and the supplier work together to make each other more competitive.

The cornerstone of Sun's new approach to supplier relations is its Supplier Management Model, unique in the computer industry. Under this model, Sun assembles cross-functional teams to develop and execute strategy for the purchase of each core commodity: chips, mass-storage subsystems, displays, batteries, and so on.

The leaders of these teams, called Global Commodities Managers (GCMs), develop a strategy road map three to five years ahead, taking into account new developments in technology, product shipment forecasts, supplier capacities, etc. Every six months, the GCM meets with individual suppliers to discuss the latest long-term strategy and compare it against the plans of the supplier. As a result of these meetings, suppliers are clear about Sun's expectations and any investments they may be required to make to accommodate those expectations, and Sun is clear about the supplier's ability and willingness to conform to its strategy.

Loyalty Rewarded

Sun in turn rewards suppliers that are able to comply with a high level of loyalty. More than 85% of Sun's expenditures to suppliers last year went to the company's top 20 suppliers, an indication that Sun provides major volumes of business to companies that meet its criteria. In 1994, the total of that expenditure was approximately $2.5 billion, or almost 60 cents on the dollar of Sun's worldwide gross revenue.

The redefined supplier relationship has proven to be a win/win situation for Sun and its supply base. For Sun, the benefits are quite tangible. Sun's inventory turns -- a metric that depends heavily on good relations with suppliers -- are approximately 11 per year, double the average for other computer vendors. Sun has also achieved remarkable gains in productivity through good supplier relations: Revenue per employee is more than $400,000, much higher than the industry average. For suppliers, the new model has resulted in increased productivity and competitiveness, and a closer working relationship with a very large customer.

Clearly, the traditional organization chart doesn't mesh well with the leveraged alliance business model. A centralized, top-down bureaucracy crushes the entrepreneurial spirit and responsiveness that the alliance model creates.

Over the past few years, Sun has been experimenting with and refining an organizational structure that is completely novel in the computer industry. We have formed several discreet operating companies to focus on developing and marketing the company's core technologies independently. For example, Sun Microsystems Computer Co. (SMCC) manufactures and markets SPARC workstations and servers; SunSoft focuses on selling software products, such as operating and development environments, networking and network management products, and multimedia software applications; SunService provides consulting services, education and system support; and SunExpress offers quick, easy ordering and delivery of selected Sun products.

New Ways to Win

Each of the companies is operated as a separate business, run by a general manager who has decisionmaking authority and profit-and-loss responsibility. Each develops its own product lines. And each implements the company's leveraged alliance strategy in its own way, forming partnerships with other technology vendors, suppliers, customers, and competitors as necessary to meet customer requirements.

The new structure has brought Sun Microsystems Inc. closer to its customers, and has made the company more responsive and dynamic than ever. As separate entities, the business units have the flexibility to pursue new alliances, markets, and customers for Sun at their own pace.

For example, by breaking out service as a separate business, Sun is now able to offer its customers a broader range of service options. As an independent business, SunService is free to create service alliances on its own terms with a large number of third-party companies, who provide specialized services under the Sun name. This helps Sun create a critical mass for itself in the service arena while also cutting market development costs.

By using strategic alliances creatively, Sun encourages innovation and competitiveness. All around the world, Sun partners -- ISVs (independent software vendors), resellers, suppliers, distributors, customers, and even competitors -- are actively looking for new ways to win business by forming alliances that leverage each other's core competencies. In a world where the pace of change is scorching, this approach opens up new opportunities for forward-looking companies to create a competitive edge.
COPYRIGHT 1995 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Sun Microsystems Inc.
Author:McNealy, Scott
Publication:Directors & Boards
Date:Sep 22, 1995
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