Scott Mcnealy and Sun Microsystems

Abstract:

Scott McNealy had been the CEO of Sun Microsystems, a company that he had co-founded in 1984, for 22 years. In April 2006, he announced his decision to step down in favor of Sun's president and COO Jonathan Schwartz.

This case study discusses the various events at Sun under McNealy's leadership. It traces the company's growth from a small startup in the mid 1980s to one of the driving forces behind the internet economy in the 1990s. It also talks about the events that led to Sun's decline in the early 2000s, and McNealy' failure to arrest this decline. The case concludes with a discussion of the leadership change at Sun and whether Schwartz was the right person to give the ailing company a new lease of life.

Questions:

1. Assuming that you were hired as a consultant to the Sun board of directors, describe what should be done with the Sun management team.  Make it clear whether the management team should be changed or whether economic and technological circumstances have caused the problems at Sun, meaning the current management team can still lead Sun to success.

INTRODUCTION

"Scott (McNealy) is kind of like Moses. (He) led the world to the land of milk and honey, but he got left behind."

- Paul Saffo, director, Institute for the Future,1 in 2004.2

"Sun has been a labor of love for me for since 1982 and it has been an honor and privilege to serve as its CEO for the past 22 years. We've helped shape the industry as it is today, and the opportunities before us are immense."2

- Scott McNealy, co-founder, chairman and former CEO of Sun Microsystems, in 2006.3

The End of an ERA

In April 2006, Scott McNealy (McNealy), the co-founder of Sun Microsystems, Inc. (Sun), announced that he would step down as the CEO of Sun in favor of the company's president and Chief Operating Officer (COO) Jonathan Schwartz (Schwartz). This was significant news for the IT industry, as McNealy had been at the helm of Sun for the last 22 years and had steered the company through a series of ups and downs in the industry.

The announcement was made on the same day that Sun announced a loss of $217 million4 for the quarter ended March 31st 2006, (taking the company's cumulative losses since 2002 to a staggering $4.5 billion).

It was not a surprise as Wall Street had been calling for McNealy's resignation since the early 2000s when Sun first went into decline following the bursting of the dotcom and telecom bubbles in 2000 and 2001 respectively. Between fiscal years 2001 and 20055, Sun saw its sales fall 39 percent and its share price plummet from a peak of $64 in mid 2002 to around $4 by 2005. Following the announcement of McNealy's exit, the stock gained 8.6 percent in extended trading and reached its highest level of the year at $5.41 (Refer Exhibit I for Sun's share prices).

McNealy said that the leadership change was a part of the company's succession planning efforts, and that he was looking forward to playing the role of 'chief evangelist' within Sun. However, some analysts felt that that the board had forced McNealy to step down under intense pressure from Wall Street over the company's poor financial performance.

McNealy was to continue as the chairman of Sun's board as well as chairman of the board of Sun Federal, Inc.6 McNealy was as well known in the IT industry for his visionary leadership of Sun in the 1980s and 1990s, as for his witty takes on competitors, especially Microsoft Corp. (Microsoft)...

He was one of the most controversial leaders in the industry, but even his harshest critics could not deny that he played a pivotal role in shaping the future of computing. It was not surprising therefore that when the leadership change at Sun was announced, analysts said it was 'the end of an era'in the history of the IT industry.

Background

McNealy was born on November 13, 1954 in Indiana. His father, William McNealy was vice chairman at American Motors Corp. (AMC).7 As a child, McNealy took an avid interest in the auto industry - an interest encouraged by his father, who often discussed business with the youngster and allowed him to accompany him when he went to play golf with people like Lee A. Iacocca.8

After attending Cranbrook Kingswood School, a preparatory school near Detroit, McNealy was accepted at Harvard University, from where he graduated with a degree in Economics in 1976. He then tried for a place at Stanford Graduate School of Business (Stanford) but was rejected.

While trying for an admission into Stanford, McNealy took up a job as foreman at the Rockwell International Corp. (Ohio), which made body panels for trucks. When he eventually got into Stanford in 1978, he chose to specialize in manufacturing rather than the more popular finance. He was not a dedicated student and later admitted that he spent more time 'goofing off' than in classes.

One of his classmates recalled that McNealy never bothered to attend any class that he did not think would help him get a job. At that point McNealy was not ambitious. Reportedly, his ambition was to start a small machine shop that he could leave to his children, and then, to retire early. After graduating in 1980, he worked in the manufacturing departments of FMC Corp. (which made tanks for the US army) and of minicomputer maker Onyx Systems. In 1982, Vinod Khosla (Khosla), McNealy's classmate at Stanford, asked him to join him, Andy Bechtolsheim (Bechtolsheim) and Bill Joy (Joy) in starting a computer manufacturing unit to make and sell workstations operating on UNIX.

The Golden Years

It was McNealy's dynamism and vision that were largely responsible for Sun's rapid growth in the first two decades of the company's existence. When McNealy first joined Sun, he was in charge of manufacturing, but later became responsible for sales as well. This helped him develop a good understanding of different areas of the business. After McNealy became CEO in 1984, he played an important role in shaping Sun's vision that 'The Network is the Computer'. Sun was committed to developing technologies that would allow computers to connect seamlessly over a network, thus increasing their power tremendously. Networking would allow computing to be provided like a utility, just like electricity and telecommunications..

The Decline

The beginning of the new millennium turned out to be inauspicious for the US economy. The collapse of several dotcom and telecom companies combined with the September 11 terrorist attacks on the US sent the economy into a decline, and one of the worst affected by these adversities was the IT industry...

Conclusion

According to analysts, Sun could have become one of the giants of the IT industry, on par with IBM and Microsoft. Many concepts that had become the standard in the early 2000s, like networking and open source, were first popularized by Sun. But the company took some missteps along the way, which did not allow it to take advantage of its resources. "They've (Sun) always had lots of great things on paper. But when it comes to execution, they're lacking. They always seem to be behind where they need to be" said Gary Feierstein, vice-president for information technology at Premier Inc., a hospital management company.

Consider the following hypothetical data for the U.S. economy in 2020​ (all amounts are in trillions of​ dollars): Category Value Consumption ​$12.4 ​Non-income-related taxes net of subsidies 0.9 Depreciation 1.2 Government spending 2.7 Imports 2.5 Gross private domestic investment 3.1 Exports 2.6 a. Based on the data​ above: ​(Enter your responses rounded to one decimal​ place.)          Calculate GDP. ​$ nothing trillion.     Calculate NDP LOADING.... ​$ nothing trillion.     Calculate NI LOADING....     ​$ nothing trillion.

Consider the following hypothetical data for U.S economy in 2020 (all amounts are in trillions of dollars)

Based on the above data

1. What is the gross Domestic product ?

2. What is the new cosmetic Product?

3/ What is the national income?

The following table shows the prices of a sample of U.S. Treasure STRIPs in August 2020. Each strip makes a single payment of $1,000 at maturity without any coupons. (10 points)

​​​​​​​Calculate the annually compounded, spot interest rate for each year.

Spot rate for 1-year strip =

Spot rate for 2-year strip =

Spot rate for 3-year strip =

Spot rate for 4-year strip =

2. Is the term structure upward or downward sloping or plat? Explain.

3. Calculate the annually compounded, one-year forward rate of interest for August 2022.

a) Assume that yesterday (April 22, 2020) the interest rate on dollar deposits in the U.S. was 0.02 (2%) per year and the interest rate on euro deposits was 0.02 (2%) per year. Investors yesterday expected that the exchange rate in one year (April 22, 2021) will be 2.02 dollars for one euro.

What was the current exchange rate in terms of dollars per euro yesterday (April 22, 2020)?

Illustrate your answer, using a graph with the rates of return (in dollars terms) on the horizontal axis, and the exchange rate on the vertical axis.

b) Now, assume that today (April 23, 2020) the Federal Reserve lowers the interest rate on dollar deposits to 0.01 (1%), and the European Central Bank lowers the interest rate on euro deposits to zero (0%). There is no change in the expected exchange rate a year from now - that is, on April 23, 2020 investors expect that the exchange rate on April 23, 2021 will be 2.02 dollars for a euro.

What is the current exchange rate today (April 23, 2020), right after the reductions in the interest rates? Has the dollar depreciated or appreciated between April 22 and April 23? Why? Is your answer consistent with the textbook’s claim that a reduction in the interest rate on dollar deposits should cause a depreciation of the dollar?

Illustrate your answer, using a new graph with the rates of return (in dollars terms) on the horizontal axis, and the exchange rate on the vertical axis.

c) What is the effect of the change in the exchange rate above (from April 22 to April 23, 2020) on exports of American goods to Europe? And on exports of European goods to the United States? Explain. (You don’t need to provide numbers, only the general direction of the changes: going up or going down). Who will benefit and who will lose from these changes in the United States?

d) Now, assume American exporters successfully lobby the Federal Reserve, and convince it to adopt a new monetary policy that will boost American exports. Thus, on April 24 the Federal Reserve decides to change the interest rate on dollar deposit once again, with the objective to cause a 1% depreciation of the dollar with respect to the euro (that is, a 1% increase in the amount of dollars required to buy a euro). Assume that the European Central Bank does not react to the new actions by the Federal Reserve, and that investors’ expectations about the future value of the euro remain unchanged (that is, they expect that the exchange rate on April 24, 2021 will be 2.02 dollars for a euro). What interest rate should the Federal Reserve select in order to achieve its objective? Explain.

Illustrate your answer, using a new graph with the rates of return (in dollars terms as usual) on the horizontal axis, and the exchange rate on the vertical axis.

e) Now assume that, unlike in part d), investors, when they hear that the Federal Reserve intends to devaluate the dollar today, also adjust their expectations about the future: now, they expect that the exchange rate on April 24, 2021 will be 2.0402 rather than 2.02. What interest rate should the Federal Reserve select now, on April 24, 2020, in order to achieve its goal of depreciating the dollar by 1% from April 23 to April 24? Explain (no need to illustrate this answer graphically, just give the answer in words).

PART A

Your line manager, Ahmed, has sent you the following email late on Wednesday just as you are about to finalise your timesheet and head to a monthly tax-update webinar:

Required: You are required to calculate Lisa’s Net Capital Gain (loss) for the year ending 30 June 2020 based on the above information provided. In doing so, you must present an accurate and complete analysis.

Question 6

A.6 Determine the Net Capital Gain and/or Loss for Lisa. Briefly justify your answer/show all workings.

Hint: it is recommended you use a table format to present your answer.

Comment on the results of each of these recent experiments in light of the Old Friends hypothesis:

a) A small group of Finnish children were matched at birth by age and relevant genotype, then followed to see if any developed autoantibodies typical of type I diabetes. Compared to matched healthy controls, the children who would develop T1D had markedly different gut microbiomes. Relative to those of matched healthy controls, rheir microbiomes were less diverse, more unstable, and became increasingly dominated by Bacteriodetes. In contrast, the healthy children increased their population of Firmicutes relative to Bacteriodetes as they got older.

b) Mice treated from birth with broad spectrum antibiotics and tested later in life had lower than normal gut expression of microbial pattern recognition molecules like TLR2, 4, and 5.

1) In 120 to 150 words (at least 120 but not more than 150), describe how the responsibilities and expectations from Financial Analysts have evolved from 2000 to 2020.

2) In 120 to 150 words (at least 120 but not more than 150), contrast the two occupations (a) Securities, Commodities, and Financial Services Sales Agents and (b) Financial Analysts

3) Tell us which of the (a) Securities, Commodities, and Financial Services Sales Agents, (b) Financial Analysts, and (c) Personal Financial Advisors (as defined by U.S. BLS in 2020) may appeal to you; and why?