The Case of Fuji Xerox by Benjamin Gomes-Casseres
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First Quarter, 1997, pp. 4-16. Competing in Constellations: The Case of Fuji Xerox By Benjamin Gomes-Casseres The relationship between Xerox and Fuji Xerox, its joint venture in Japan, is the centerpiece of this commentary on how alliances among companies are forging new units of economic power known as "constellations." Internal rivalry can put constellations at a disadvantage against single-company rivals, and the ability to manage the balance of competition and cooperation is critical to success. In a world of global businesses and company comes to depend not only on its extended enterprises, it often makes more own capabilities and strategies but also on sense for companies to team up than go it those of its allies and on its relationships alone. Here is how Xerox and Fuji Xerox to those allies. collectively compete. The case of the Xerox Corporation and the Cooperation among companies has grown Fuji Xerox Corporation shows how rapidly since the early 1980's, as alliances successful a constellation can be if it is have proliferated in one industry after managed effectively. In copiers and laser another. At the same time, however, the printers, the competition between Xerox competition in these industries has in and its archrival, Canon Ltd., was not one many ways become even fiercer than on one, company against company. before. This flies in the face of traditional Instead, a constellation of companies economic thinking. As Adam Smith around Xerox competed with Canon, observed: "People of the same trade which operated as a single company. The seldom meet together, even for Xerox constellation is complex, but at its merriment and diversion, but the core is a pair of allied companies -- Xerox conversation ends in a conspiracy against and Fuji Xerox, the Xerox joint venture in the public, or in some contrivance to raise Japan. Together, this pair develops prices."(1) In fact, modern alliances do products, penetrates markets, not so much suppress business rivalry as manufactures hardware and so on -- all transform it, giving it a new shape that is the things that Canon does on its own. often even more virulent than the old. Fuji Xerox is thus much more than a curiosity on the periphery of Xerox's The new "collective competition" grows organizational chart: the two companies out of the very dynamics of collaboration. are comrades-in-arms. The Xerox Simply put, business rivalry now often constellation has enjoyed some powerful takes place between sets of allied advantages as well as suffered some companies, rather than between single serious disadvantages because of this companies. The alliances among structure. companies are forging new units of economic power -- "constellations" that In one sense, the Xerox group and Canon compete against each other as well as were not all that different. After all, single against traditional single companies. In companies and constellations simply this new world, the way companies represent different ways to control a set of manage the collaboration inside their capabilities so as to maximize their return. constellation affects the competitive The single company can be thought of as behavior and performance of the group as having full control over its capabilities; in a whole. And the performance of each the constellation, control over the set of 2 capabilities of the group is shared among How Fuji Xerox Saved Xerox separate companies. The Xerox story is a classic one of a once- The Xerox group and Canon each had the dominant company that lost its edge and set of capabilities needed to develop, was overcome by new rivals from make and sell copiers and laser printers unexpected sources. The difference this worldwide. But these two rival time is that Xerox relied on a constellation organizations controlled their capabilities of allies to defend itself and ultimately to in different ways. regain leadership in its industry. At the risk of oversimplification, we may The story begins in the 1960's, when the say that Canon had full control over its company's revolutionary plain-paper capabilities, because it owned 100 percent copiers took the industry by storm and of its laboratories, plants and marketing made the name Xerox synonymous with organizations in Asia, Europe and the photocopying. Xerox revenues grew at a United States. record pace for an American business -- doubling every 10 months, from $40 In the Xerox group, as we shall see, million in 1960 to $1.2 billion in 1966. control over the capabilities was split -- Xerox patents on plain-paper copier Fuji Xerox owned some assets and Xerox technology and the company's extensive owned others; Fuji Xerox had rights to the sales and service network sustained its Japanese market and Xerox to the United virtual monopoly in the field. States market. And Xerox did not have full control over the capabilities of Fuji Xerox, Beginning in 1970, however, new even though it owned part of the competitors started chipping away at the venture's equity. Indeed, a tradition of Xerox empire. Many of these competitors Fuji Xerox autonomy gave Xerox even less came from Japan and produced high- effective control than the ownership quality, low-cost machines. Some structure of the joint venture might developed new technologies that suggest. circumvented Xerox patents; others benefited from American antitrust How will such a constellation fare in pressure on Xerox that led the company competition with traditional single to license its key technologies.(2) More companies? The answer depends in part than 20 plain-paper copier vendors on the competitive context. As we will see, operated worldwide in 1975; by then the the Xerox constellation as originally Xerox share of worldwide copier revenues designed was well suited to the context of had plummeted to 60 percent, from 93 the 1970's. But by the early 90's, new percent in 1971. Ricoh, the traditional competitive demands gave the edge to leader in the Japanese market, became Canon's way of controlling capabilities, the top seller in the United States market and forced the Xerox group to restructure in 1976. its constellation. David Kearns, who was then Xerox's chief The battle between Xerox and Canon is executive, recalled the crisis his company thus a microcosm of collective competition. faced at the end of the decade: "The In comparison with competitive battles in Japanese were selling products in the other industries, it is well-defined and United States for what it cost us to make easy to grasp. Precisely because of that, it them. We were losing market share offers valuable lessons to managers rapidly, but didn't have the cost structure bewildered by the new shape of business to do anything about it. I was not sure if rivalry. Xerox would make it out of the 1980's." 3 Initially, Xerox had done little to respond Exhibit I: The Stars in the to the rising tide of Japanese competitors Constellation in the low-volume end of the business. Xerox executives had been more Source: Gomes-Casseres, "The Alliance Revolution" concerned with the entry of I.B.M. and the Eastman Kodak Company into the copier industry, as these companies targeted the more lucrative mid- and high-volume segments of the market.(3) But the crisis forced Xerox managers to change their thinking. They also realized then that they had been ignoring a unique competitive asset in Japan -- their joint venture with the Fuji Photo Film Company. The Origin of the Xerox Constellation Fuji Xerox was a 50/50 joint venture established in 1962 to market xerographic products in Japan and certain other countries in the region. Xerox had already used an alliance to expand internationally in the 1950's, when cash constraints led it to create a joint venture with Britain's Rank Organization.(4) Because it had acquired the rights to make and market xerographic products outside of North America, Rank Xerox became Fuji Photo's partner in Fuji Xerox. Exhibit I indicates the complex ownership relationships between these partners as of 1992. Fuji Photo Film was a manufacturer of photographic film, second only to Kodak in Fuji Xerox was destined to become much that field. With sales of $90 million in more than a marketing outlet for Xerox 1962, it was roughly the size of Xerox, products -- it helped save Xerox from the although not growing as fast. The demise that Mr. Kearns had feared. No company was trying to diversify its one could have predicted this outcome. business away from silver-based For a long time, Xerox executives treated photography, and had already begun Fuji Xerox with a benign neglect that experimenting with xerography and its sometimes bordered on condescension. plain-paper technology. Still, under the This attitude changed dramatically in the agreement with Rank Xerox, Fuji Xerox -- 1980's, as Fuji Xerox came to the rescue not Fuji Photo -- received the exclusive of Xerox with a series of startling product rights to xerographic patents in its breakthroughs and no-less-startling territory.(5) management, manufacturing and technology lessons. By 1990, Fuji Xerox had become "a critical asset of Xerox," as Xerox C.E.O. Paul A. Allaire called it. 4 The Separate Interests of Xerox and Photo engineers began modifying Xerox Fuji Xerox designs to the needs of the local market; Japanese offices, for example, used different paper sizes. Later, Fuji Xerox The reasons behind the transformation of managers wanted to go beyond Fuji Xerox lay in that company's unique adaptation to developing their own relationship with Xerox. By the early products. In particular, they envisioned a 1970's, Fuji Photo and Rank Xerox had high-performance, inexpensive, compact each become passive partners in Fuji machine that could copy books.