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What Xerox should copy, and not copy, from its past

Xerox is again under siege, and questions are being raised about its ability to survive. This time, though, it isn't just competitors that are nipping at Xerox's heels.

    Flashback to 1982: Xerox is under siege. Japanese rivals such as Canon, Minolta and Ricoh have made devastating inroads into the company's core market, and observers are starting to wonder whether the Stamford, Conn.-based giant, whose name is synonymous with photocopying, can survive.

    David T. Kearns, Xerox's CEO, however, is out to disprove the pessimists. Convinced that the copier market has more life left than the skeptics think, he drives Xerox to focus on bettering the quality of its products, technology and after-sales service. Six relentless years later, the company bounces back. The story of Xerox's turnaround becomes a case study for aspiring MBAs.

    Fast-forward to 2000: Xerox, again, is under siege, and questions are being raised about its ability to survive. This time, though, it isn't just competitors that are nipping at Xerox's heels. Revenues--$19.2 billion in 1999--are flat; earnings are plunging; and the company has been caught in such a severe cash crunch that its ability to sell commercial paper to pay its bills has been impaired. The resignation of CEO Richard Thoman, a former IBM executive, in May and his replacement by Paul Allaire, who led Xerox through most of the 1990s, has done little to help. The price of Xerox shares, which traded for $64 in May 1999, has dropped to its lowest level in years. The stock closed on October 24 at a little more than $8.

    The big question before Xerox today is whether it can make history repeat itself. Allaire and Anne M. Mulcahey, who was named president following Thoman's departure, believe it can. On October 24, while announcing a third-quarter loss of 20 cents a share, they also announced a turnaround program that includes cutting $1 billion in costs and raising between $2 billion and $4 billion through the sale of assets.

    Among other steps, Allaire says, Xerox plans to sell its China operations, a part of its ownership in Fuji Xerox (a subsidiary in Japan that serves much of Asia) and other Xerox concerns. In addition, Xerox is looking into a possible joint venture with "noncompetitive partners" for its legendary Palo Alto Research Center.

    Sink or swim?
    Allaire hopes that the combination of these steps will toss Xerox the lifeline it needs at this critical juncture and help the company rebound--just as it has often done in the past. "This will sharpen our competitive edge, deliver the superior products and services that our customers require, and generate the value that our credit providers and shareholders require," he says.

    Others, however, are less gung-ho about Xerox's prospects. Some experts, including Wharton faculty, point out that while the company undoubtedly has great strengths--including an exceptionally strong track record at innovation and a tradition of resilience--its ability to sustain itself will depend on whether Xerox can copy--and not copy--fundamental lessons from its past and forge a new strategy for the future.

    One mistake that these experts urge Xerox not to copy is that of developing innovative technologies that other companies eventually turn into big winners. Bruce Kogut, co-director of Wharton's Reginald H. Jones Center for Management Policy, Strategy and Organization, argues that Xerox has tended to do this in the past. "The company developed amazing technologies--the laser printer, the graphical user interface for personal computers, the computer mouse--but it couldn't commercialize them," Kogut says. "The feeling at Xerox was that all these innovations would go into the ecology of Silicon Valley, and then return to the company. But in the meanwhile, other companies captured value from Xerox's innovations."

    The story of how Xerox failed to capture value from its creation of the personal computer and its graphical user interface is now well known--and Douglas Smith and Robert Alexander tell it at length in their book, "Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer." Writer Owen Linzmayer recounts a part of that story in his recent book, "Apple Confidential: The Real Story of Apple Computer."

    In November 1979 Apple co-founder Steve Jobs visited the Xerox PARC labs with some engineers from Apple. When Jobs saw the software that Xerox researchers had developed--with its moveable overlapping windows and pop-up menus--he reportedly began to jump around, shouting: "Why aren't you doing anything with this? This is the greatest thing! This is revolutionary!" These features later became part of Apple's successful line of Macintosh computers, as they are today of Microsoft's Windows software. (Xerox did sue Apple over the graphical user interface in the mid 1980s, but the lawsuit went nowhere.)

    Missing the boat
    Mark B. Myers, former senior vice president of research and technology at Xerox, and now a senior fellow at Wharton's Emerging Technologies Management Research Program and the SEI Center for Advanced Management Research, finds another missed opportunity more galling. "In fairness to Xerox, it had just introduced xerography around 1960, and it was going through an extraordinary innovative explosion during the 1970s," he says. "The company was not prepared then for another major revolution--the client-server paradigm was larger than any company that existed at that time could manage. My own regret, however, is that although Xerox invented laser printing--a technology close to its birthright--Hewlett-Packard eventually ended up dominating that market. It was Xerox's most difficult loss of opportunity."

    Why did Xerox fail to capitalize on its invention of the laser printer? One factor, explains Myers, is that the company was a victim of its own success. The company had traditionally relied on direct sales by its own sales force, which was an extremely profitable undertaking. The laser printing products, however, had to be marketed through computer superstores and other sales channels, which squeezed the profit margins in that business. "Xerox focused on businesses that had extremely high profit margins, rather than those that had rapid turns characteristic of low-margin businesses," he says. The result, however, was that Xerox all but abandoned the laser-printer field to rivals like Hewlett-Packard until it was too late.

    The enormous profitability of Xerox's core business also hampered the company's ability to develop peripheral opportunities. During the 1960s and early 1970s, Xerox had a virtual monopoly on its copying technology, protected by its patents. The company saw a period of phenomenal expansion during those years, growing by some estimates at a compounded annual rate of more than 40 percent. That success, however, dampened the company's motivation to develop other innovations.

    Xerox eventually was forced to give up its exclusive monopoly on xerography and had to license its technology to rivals. That, in part, created the competitive pressures from Japanese firms like Canon, Minolta and Ricoh, which prompted the counterattack led by Kearns during the 1980s. Kearns also believed that Xerox would have to move its products from an analog to a digital base. Allaire, who succeeded Kearns as CEO in 1990, continued to develop Xerox along digital lines during most of the 1990s. Among other things, he pulled Xerox out of financial businesses such as insurance to focus on digital technology. Xerox's goal, he believed, should be to become a company that helped clients organize all their documents--digital as well as physical.

    Systems slip
    While these were steps in the right direction, they did not protect Xerox against serious errors. The current crisis has developed rapidly during the past two years. A big part of the problem was that the company mandated a sales force and billing systems reorganization with disastrous results. Although most observers blame this initiative on Thoman, who succeeded Allaire as CEO in 1999, Allaire cannot entirely escape responsibility because he was the company chairman when it was introduced. Under the new rules, the sales force was to be organized along industry lines rather than geographic ones, so that each sales person could sell all of Xerox's products and services to the same client.

    George Day, director of Wharton's Emerging Technologies Research Management Program, points out that while the move was "directionally correct, its execution was appalling." The sales force reorganization undermined Xerox's customer relationships, and Thoman was criticized for creating a disruptive situation. To make matters worse, "the new billing system could not support these changes, and that fouled up the billing process," Day says.

    "Customers stopped paying their bills, and then cash flow problems began to appear. That is why Thoman lost his job. He was aggressive and quick to make decisions, but he did not have the support of key members within the company."

    Gabriel Szulanksi, who teaches management at Wharton, says Xerox got into trouble with its reorganization efforts because it tried to force through changes without adequate preparation. "Even before Thoman became the CEO, he toured Europe and saw some innovative sales practices at units like Rank Xerox," he explains. While these were clearly efficient practices within their original context, Thoman went too far in believing that these best practices could be standardized and mandated throughout the organization without first preparing people for them.

    "Xerox offers a wonderful example of taking knowledge management in too big a dose," Szulanski says. "The sales force reorganization killed a capability that Xerox had. When you do that, you fall into the same trap that the advocates of business process re-engineering did in the past. It just becomes another good reason to fire people."

    While Xerox struggled with these problems--which also contributed to a high staff turnover rate as people left to pursue other opportunities--it was slammed by intense competition from rivals. At the lower end of its product range, companies like Canon and Ricoh continued to hound Xerox, while at the higher end, rivals such as Heidelberger Druckmaschinen, a German firm, began to make forays into Xerox's market. "These moves can cause long-term damage to Xerox," says Day. "Its customer relationships are being taken over by competitors."

    A second chance
    Will the reorganization plan that Allaire announced on Oct. 24 succeed in turning the tide? Day, for one, has his doubts. "Many of these steps have the appearance of having been in the works for some time," he says. Others point out that it is difficult to assess their impact until more details are known. For example, Xerox has a crucial relationship with Fuji through its Fuji Xerox venture in Japan.

    If the company sells a part of its stake in this venture, it will take some time to determine how that will affect Xerox's operations in Asia. The sale of the Chinese subsidiary, too, could be a quick fix in the short run, but Xerox's ability to raise cash will depend upon how much more investment in that subsidiary will be needed in the future. Overall, it is unclear what impact the proposed reorganization will have. Xerox may need to do more to reduce its $18 billion in debt and increase its profitability.

    Myers points out that the success of the reorganization plan depends on one more crucial issue: Xerox's ability to figure out how to become profitable in a business that is rapidly changing. Thanks to the continuing commoditization of copying and printing technology, as well as pressure from competitors, Xerox faces a future in which its profit margins will potentially be lower than they have been in the past. "Xerox knows how to be profitable in a high-margin business," says Myers. "The question is, can the company become profitable in a low-margin business?"

    If there is one lesson from its past that Xerox should copy, however, that is its tenacity in bouncing back from looming disaster. Asks Szulanski: "Would I buy Xerox stock today? I'm tempted?because the company has promising technologies and some very smart people. The company is just in a fragile position today." Adds Kogut: "Xerox has seen adversity before and rebounded, while also preserving its social community by avoiding layoffs. The company has a strong internal culture that may allow it over time to respond effectively." Myers, too, is hopeful. "Xerox's story has never been tranquil," he says, "but it has always been an innovative company."

    That history of innovation might yet work in Allaire's favor as he and his fellow executives try to turn things around at Xerox. If they succeed, they could provide future MBA students with yet one more case study to peruse.

     
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