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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


Competing in Constellations: The Case of Fuji Xerox

How will such a constellation fare in competition with traditional single companies? The answer depends in part on the competitive context. As we will see, the Xerox constellation as originally designed was well suited to the context of the 1970's. But by the early 90's, new competitive demands gave the edge to Canon's way of controlling capabilities, and forced the Xerox group to restructure its constellation.

The battle between Xerox and Canon is thus a microcosm of collective competition. In comparison with competitive battles in other industries, it is well-defined and easy to grasp. Precisely because of that, it offers valuable lessons to managers bewildered by the new shape of business rivalry.

How Fuji Xerox Saved Xerox

The Xerox story is a classic one of a once-dominant company that lost its edge and was overcome by new rivals from unexpected sources. The difference this time is that Xerox relied on a constellation of allies to defend itself and ultimately to regain leadership in its industry.

The story begins in the 1960's, when the company's revolutionary plain-paper copiers took the industry by storm and made the name Xerox synonymous with photocopying. Xerox revenues grew at a record pace for an American business -- doubling every 10 months, from $40 million in 1960 to $1.2 billion in 1966. Xerox patents on plain-paper copier technology and the company's extensive sales and service network sustained its virtual monopoly in the field.

Beginning in 1970, however, new competitors started chipping away at the Xerox empire. Many of these competitors came from Japan and produced high-quality, low-cost machines. Some developed new technologies that circumvented Xerox patents; others benefited from American antitrust pressure on Xerox that led the company to license its key technologies.(2) More than 20 plain-paper copier vendors operated worldwide in 1975; by then the Xerox share of worldwide copier revenues had plummeted to 60 percent, from 93 percent in 1971. Ricoh, the traditional leader in the Japanese market, became the top seller in the United States market in 1976.

David Kearns, who was then Xerox's chief executive, recalled the crisis his company faced at the end of the decade: "The Japanese were selling products in the United States for what it cost us to make them. We were losing market share rapidly, but didn't have the cost structure to do anything about it. I was not sure if Xerox would make it out of the 1980's."

Initially, Xerox had done little to respond to the rising tide of Japanese competitors in the low-volume end of the business. Xerox executives had been more 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 that field. With sales of $90 million in 1962, it was roughly the size of Xerox, although not growing as fast. The company was trying to diversify its business away from silver-based photography, and had already begun experimenting with xerography and its plain-paper technology. Still, under the agreement with Rank Xerox, Fuji Xerox -- not Fuji Photo -- received the exclusive rights to xerographic patents in its territory.(5)

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