Scott McNealy

Scott McNealy (born 1954), co-founder, president, and CEO of Sun Microsystems, is an outspoken Silicon Valley maverick. He made his fortune by challenging the computer industry dominance of Bill Gates and Microsoft and championing a network-based computer system based on Sun's Java software, a universal programming language.

McNealy is an unlikely Silicon Valley visionary. He is no technocrat. He didn't drop out of college to found Sun Microsystems. In fact, his background is in Midwestern manufacturing, where his father worked as a top executive in Detroit's automotive industry. Since a twist of fate brought him to California and the helm of Sun, McNealy has worked tirelessly to build the company into one of the world's leading corporations, based on the idea of network computing and a universal operating language. For more than a decade, he nearly single-handedly led the fight against Microsoft and Bill Gates and helped persuade the Justice Department to file historic antitrust charges against the software giant.

Rustbelt Roots

McNealy is a product of the Rustbelt, but with an Ivy League twist. Born in Columbus, Indiana, on November 13, 1954, he was raised in the upper-class suburb of Bloomfield Hills, Michigan. McNealy attended Cranbrook Kingswood School, a prep school north of Detroit. A model student and athlete, McNealy captained the school's championship tennis team and excelled on the golf and hockey teams.

McNealy's early business education came at the hands of his father, William McNealy, a vice-chairman at American Motors Corporation. As a youngster, McNealy spent evenings at home discussing company strategy with his father. On weekends, while his dad caught up on paperwork, McNealy would walk around the factory floor. He picked up more lessons in corporate wisdom on the golf course, joining golf outings with famous automotive executives such as Lee Iacocca. Early on, McNealy recognized that AMCs troubles stemmed from an insufficient market share. The car manufacturer did not have the financial, marketing, or technological firepower to shape the direction of the industry.

Following in his father's footsteps, McNealy attended Harvard University and majored in economics, but he now jokes that he minored in beer and golf. In fact, he captained the Harvard golf team and missed the cut for the 1976 NCAA championship by one stroke. After a less than stellar undergraduate career, McNealy tried to get into business school, but was turned down by Harvard and declined twice by Stanford. Always deeply interested in manufacturing, he took a job as a foreman at the Rockwell International Corporation plant in Ashtabula, Ohio in 1976. The company, which built truck hoods, was preparing for an impending strike. The young manager worked 14-hour days for two months, landing in the hospital for six weeks with a case of hepatitis.

Go West Young Man

McNealy's work record helped him get accepted at Stanford, although his study habits didn't really improve. Classmates remembered him preferring golf to attending classes. He even focused on manufacturing courses at a time when they were out of fashion. After graduating, his first job was with FMC Corporation, a defense contractor that made tanks. Later, he joined minicomputer maker Onyx Systems. McNealy had no desire to become a high-powered CEO after watching his parents' marriage dissolve as a result of the long hours that his father had to work. Instead, McNealy dreamed of running a small family machine shop that he could turn over to his children and take an early retirement.

In 1982, McNealy's life would change forever. He received a call from a former Stanford classmate, Vinod Khosla, who asked him to join with Bill Joy and Andreas Bechtolsheim to form a computer company called Sun (for Stanford University Network, where Bechtolsheim built the first workstation). The company focused on building high-performance computers based on readily available, inexpensive components and the UNIX operating system. McNealy and Sun leaders based their vision on the idea that computers reached their full potential only by working together in networks. Soon, Sun would become the largest company to build computers with its own design, own Sparc chip, and own operating system, called Solaris.

McNealy's manufacturing expertise helped the young company keep up with demand as sales jumped from $9 million in 1983 to $39 million in 1984. Sun grew so quickly, in fact, that expansion outpaced cash supply. McNealy found a benefactor in J. Philip Samper, then executive vice president at Eastman Kodak. On Samper's recommendation, Kodak pledged $20 million to Sun. In turn, they required that McNealy take over as president. In 1984, when Khosla left the company after a dispute with the board of directors, McNealy was named president. Considered too young for the job, the directors looked for a replacement, but McNealy's early success leading Sun secured his position as CEO.

Typical of many Silicon Valley success stories, Sun developed an irreverent corporate culture based on McNealy's own motto: "Kick butt and have fun." An admitted ice hockey junky, McNealy played on several teams near the Sun headquarters in Palo Alto, California. Dick Boyce, a Stanford classmate, told Business Week writer Robert D. Hof that McNealy "would be happy to be described as Joe Six-Pack working hard to get the job done."

Although Sun has a casual work environment and is noted for its laid back atmosphere, McNealy is an intense competitor. He explained to Industry Week's Charles R. Day Jr., "There is nothing casual about Sun. We are intense, disciplined, driven, focused, at times even maniacal. Our culture is doing things that matter. And I'm an absolute believer in what we're doing. As the CEO you must be, or you ought to be shot for not changing the company into what it ought to be doing."

The Network is the Computer

Sun went public in 1986 and two years later had annual sales of $1 billion. However, like many successful young companies, Sun grew too fast. Recognizing the problems, McNealy revamped Sun's manufacturing systems and pared its product line. Attention was focused on workstations built around the high-powered processor, the Sparc chip. This reorganization helped Sun reach sales of $3 billion by 1992.

In the early 1990s, however, Sun's vision of the industry based on the UNIX system and networked computers lagged behind the Microsoft and Intel (Wintel) alliance. Microsoft already equipped more than ten million personal computers. McNealy realized his primary adversary was Bill Gates and Microsoft when Gates began touting Windows NT, a system that would match UNIX. He began a full-scale assault on Microsoft. McNealy unleashed numerous one-liners directed at Gates and the public perception of Microsoft's dominance. He ridiculed his competitors products as overly complex and unreliabe. Sun's new slogan, "The network is the computer," was an effort to diminish the importance of the PC and establish the network-based system Sun favored.

McNealy didn't consider himself to be a visionary or intellectual. He claimed that Sun's strategies were borrowed from other industries. "Our whole concept of the computer as a network device," he told Fortune's Brent Schlender, "is grounded in a business model that was stolen from every other large utility on the planet. You don't have a power-generating plant in your home; you're connected to a power grid."

McNealy's years of criticizing Bill Gates raised Sun's visibility and, in some sense, played on corporate America's fear of its reliance on Microsoft products. Some of these fears led to the Justice Department filing antitrust charges against Microsoft. McNealy claimed that opening competition in the software industry would lead to new innovations and choices for the consumer.

Java Propels the Internet

The Internet has revolutionized the way the world conducts business. McNealy viewed the Internet as the third wave of computing, after the mainframe era and personal computer. Since its introduction in May 1995, Sun has been able to generate excitement over Java, a software language that can run on any hardware or operating system, thus bypassing Microsoft's Windows, which runs 90 percent of the world's personal computers. Sun formed an early alliance with Netscape. When Internet users downloaded Netscape Navigator, they were downloading Java as well.

The idea of Java was so original that few in the computer industry knew how to handle the concept. Soon, companies ranging from IBM to Netscape, and even rival Microsoft, licensed Java. Gates's browser war with Netscape forced him to match the Java feature Netscape used. Industry analyst, Jim Moore, explained to Fortune magazine, "Sun has suddenly become a thought leader for the whole industry."

Java allowed computer programmers to write a program once and run it without modification on any kind of computer. McNealy, understating the Java strategy, confessed to Fortune's Schlender, "The concept that every computer should be able to speak and understand one universal language that nobody owned was stolen from cavemen who wrote on walls."

McNealy was quick to point out that the hottest Internet companies in the world, Amazon.com, eBay, and AOL, all ran on the network server and Java ideology that Sun had championed since its earliest days. Sun, however, is not willing to rest on its laurels. McNealy explained the company's competitiveness to VAR Business writer Lawrence Aragon, "We run scared, we run nervous, we run anxious, we run paranoid, we run at full speed. But we run for the long term. We don't have a strategy of the day. We have been giving our customers ongoing migration, ongoing enhancements and performance without blowing up their installed base."

Sun, with the Java programming language, has quickly grown into a formidable threat to Microsoft's operating system dominance. Sun has fortified itself for a long battle by forming alliances and partnerships with some of the world's strongest companies, such as IBM, AOL, Royal Philips Electronics, and Intel. Sun has also acquired more than a dozen companies since 1996, using the acquisitions to move into other technologies and consumer products.

"Work Hard and Have Fun"

McNealy, clean cut with a toothy smile, is a self-professed workaholic. He routinely works 80-hour weeks and sets a frenetic pace, which insiders say often leads to "Sunburn." His work ethic is summed up by a favorite one-liner "have lunch or be lunch." McNealy describes the company as "very nervous inside" and he uses that anxiety to constantly reassess where Sun is headed. "The two pillars that we live on are open interfaces and the network computing model," McNealy explained to Computer Reseller News, "The rest of the time, its work hard and have fun."

McNealy's hard-charging leadership paid off for Sun. Despite the growing popularity of Windows and Intel machines, Sun held its ground in the late 1990s, seeing profits quadruple from $173 million in 1992 to $762 million in 1997. By 1999, sales stood at more than $11.7 billion with net income at more than $1 billion. Also, Sun scored a coup in 1998 when it greatly expanded business by becoming involved with the merger of America Online (AOL) and Netscape Communications. The deal ensured that AOL would purchase $500 million worth of Sun computers.

By September 2000, when the internet technology market peaked, Sun was valued at $210 billion, which was roughly 10 times revenues and 100 times earnings. In the preceding 18 months, the company's revenues had climbed 60% to $15.7 billion, and profits had increased 150% to $1.9 billion. The chief reason for this explosive growth lay in the almost exclusive use of Sun computers wherever Internet applications ran, whether in e-commerce firms, telecommunications service providers or traditional companies.

With the rapid collapse of the internet technology market, and in particular of the dot-coms, in the early months of 2001, Sun's fortunes took a dramtic downturn. In the first three months of 2001, revenues had fallen 20% from the prevuous quarter, and profits were down 43% from the previous year. In response the company's stock declined in value by about 70%.

Nevertheless, McNealy managed to remain optimistic in the face of the dire news. (There were even reports that he took advantage in the business downturn to spend more time on the golf course.) The reasons for McNealy's optimism were twofold: first, the company had plotted its course carefully as it slimmed down operations to match the lower revenues; and second, Sun actually probably stood to benefit more in the long term than its competitors from the dot-com debacle.

And then Sun had seen its fortunes rise and fall before, so could draw on previous experience. In fiscal 1989, 1992 and 1993, earnings had also declined significantly. And in 1998, before Internet sales began to take off, the company had only posted a 14% gain in revenues. By mid-2001, the company had not experienced any layoffs; it had a manageable inventory; and it had already cut its sales, marketing, and overhead expenses by $40 million in the first quarter of the year. But it remained to be seen whether Sun could avoid taken drastic actions if revenues did not pick up in the following months. Of course, if the business climate were to improve, some observers felt it a sure bet that McNealy would be spending less time on the golf course.

Associated Organizations

Further Reading

• Cringely, Robert X., Accidental Empires: How the Boys of Silicon Valley Make their Millions, Battle Foreign Competition, and Still Can't Get a Date, HarperBusiness, 1992.
• Wallace, James, Overdrive: Bill Gates and the Race to Control Cyberspace, John Wiley & Sons, 1997.
• Business Week, July 24, 1989, p. 70; January 22, 1996, p. 66.
• Computer Reseller News, November 17, 1997, p. 110.
• Fortune, October 13, 1997, p. 70, 82; February 15, 1999, p. 84; May 28 2001, p. 86.
• Industry Week, December 5, 1994, p. 12.
• New Republic, May 9, 1994, p. 6.
• Orange County Register, January 31, 1996.
• PC Week, May 9, 1994, p. 1.
• USA Today, January 19, 1988; April 1, 1996.
• VAR Business, February 1, 1999, p. 47.
• Washington Post, February 8, 1998.
• "Sun Corporate Information," http://www.sun.com (March 1, 1999).