Business Week on Sun’s McNealy

Business Week has a fairly critical report on Scott McNealy’s management style, calling it a “CEO’s last stand.”

It’s a classic management tragedy, and to a striking degree the responsibility lies with the 49-year-old McNealy. His greatest strengths — the uncompromising determination, sharp-tongued irreverence, and unblushing idealism — turned out to be critical flaws. Through interviews with 38 current and former Sun executives, including nine departees on the record, BusinessWeek has learned that as Sun’s situation deteriorated, McNealy was bucking not just the counsel of outsiders but also that of his own lieutenants. After the tech industry went into its long slide in late 2000, virtually his entire management team, including Chief Scientist Bill Joy and President Edward J. Zander, pleaded with McNealy to scale back his vision and adjust to meaner times.

Time and again, McNealy refused. An economics major during his days at Harvard University, he was convinced that the economy would snap back quickly from its slump, insiders say. Plus, he believed that the Net was so critical to companies that they couldn’t hold off buying gear for long. “The Internet is still wildly underhyped, underutilized, and underimplemented,” he said in early 2001. “I think we’re looking at the largest equipment business in the history of anything. The growth opportunities are stunning.” Preparing for the next upturn, he felt, was much more important than whittling expenses for a brief lull.

Time and again, McNealy refused.

As time wore on, the losses piled up, and McNealy’s high-minded resolve began to look to others like simple-minded obstinacy. One by one, his team lost faith and departed. All told, almost a dozen of McNealy’s most trusted lieutenants have left over the past three years, including Zander, Joy, and John Shoemaker, chief of the server business. Like many others, Masood Jabbar, Sun’s longtime sales chief who retired in 2002, says he admires McNealy’s courage. But the standoff became counterproductive. “The fight just didn’t seem worth it anymore,” says Jabbar. “It was an untenable situation.”

Now some investors believe it’s time for McNealy to follow his former execs out the door, or at least give up the CEO post and retain only a chairman’s role. Says analyst Andrew Neff of Bear, Stearns & Co.: “It’s pretty standard that if the ship keeps going toward the iceberg, you change the captain.”

I am not so sure. I think Sun still has some opportunities – but they are not where it is looking. Sun’s opportunities for its network computing platforms will be found in the emerging markets. McNealy needs to spend some time in countries like India and China to see first-hand the ground realities – and the opportunities. What they need is “computing reinvented” at price points a tenth of what the developed markets are prepared to pay.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.