Management: Share the wealth and the growth

AT 27, Scott McNealy founded Sun Microsystems. Eleven years later, it is a dollars 4bn company, an industry leader and standard-setter.

He explained its success in a recent interview with Upside, the Silicon Valley insiders' magazine: first, the company has a care concept, a clear idea of the market it wants to serve and the technology it wants to apply; secondly, it has established superb vendor partnerships; thirdly, it has nurtured a strong and loyal user base (to the extent there is any loyalty in the computer industry); fourthly, it offers sound, high-quality products that are effectively anticipating market needs; and, finally, after trials and errors, Mr McNealy has created an organisation loose enough to tack and jib, yet focused enough to avoid squandering resources.

What can we learn from sagas like that of Sun?

1 You can't plan to dominate the market. Sun simply began with terrific technology that, in effect, came out of the blue. (Ask Hewlett-Packard, which had the workstation world by the tail before Sun's unexpected arrival.)

2 You can take advantage of a good thing when it comes along. Given a solid product that created excitement in the marketplace, Mr McNealy demonically tapped that excitement and built brand muscle ('franchise' is the word he uses). The same is true of Apple and Microsoft.

3 You can uphold your core ideas (control intellectual assets, per McNealy), yet spur growth by letting others inside the tent. A key to Sun's success has been sharing the wealth with lots of partners - encouraging suppliers, software writers and even competitors to exploit Sun's technology. The company adds to the brand's value through the hard work of many talented others.

4 You must decentralise. Every organisation, to maintain appropriate flexibility, needs to loosen the reins at some point. The question is, when? Do it too early and you will never develop partnerships or customer loyalty; do it too late and upstart competitors will catch you napping.

Sun at present is trying to be both decentralised and centralised at once: on one hand, allowing significant business-unit autonomy (if the units don't perform, Mr McNealy insists, he will either boot out their chief executives or shut them down); on the other, focusing on one key business idea (he claims he could not decentralise until he reduced Sun's basic workstation architectures from three to one).

Problem is, the odds are high, very high, that the IBM malaise will eventually creep in. Keeping intellectual capital centralised will probably produce 'autonomous' unit managers who think, talk and dress alike - and produce 'me-too' products.

5 At some point, you must sacrifice your intellectual integrity and concoct a federal structure. When a company becomes a true giant, intellectual centralisation is the kiss of death. Such organisations as General Electric, Johnson & Johnson, Hewlett-Packard and 3M survive only as loosely linked federations of very autonomous sub-units led by very autonomous chiefs. Even in these cases, though, the corporate centre can contribute. For example, in the past decade or so 3M has mounted modestly centralised quality, manufacturing, environmental and international initiatives that have paid off.

Success breeds failure. Full stop. To succeed, you must surprise the market with a good product and then develop constancy of purpose to build your franchise. But every step down this sensible and profitable path is also a step toward rigidity.

Managing the balance of centralisation v decentralisation is the essence of the strategic ballet. The odds of getting it right for all time are zero (name a company that hasn't had significant problems). Thus, the only possible route to sustained success is fiddling, constantly and often fundamentally, with that equilibrium. Yet one has to remember, over the long haul, that the drift must be away from headquarters control and toward increased autonomy; the truth is that, as with ageing in general, the natural tendency is toward inflexibility.

In the 1930s, Alfred Sloan, the legendary chairman of General Motors, observed: 'In practically all our activities, we seem to suffer from the inertia resulting from our great size . . . There are so many people involved and it requires such a tremendous effort to put something new into effect that a new idea is likely to be considered insignificant in comparison with the effort that it takes to put it across . . . Sometimes I am almost forced to the conclusion that General Motors is so large and its inertia so great that it is impossible for us to be leaders.'

Talk about foresight.

Copyright TPG Communications.