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


Competing in Constellations: The Case of Fuji Xerox

The changes at Fuji Xerox paid off. Between 1989 and 1993, the company developed and marketed three generations of printer engines, each one better and more cost-effective than the previous one. Xerox managers estimate that, in 1990, the Fuji Xerox I.O.T. was technically inferior to the benchmark set by Canon, and 25 percent more expensive to produce. Their 1993 offering, however, was fully up to par technically, and almost at the benchmark level in terms of production cost.

X.I.P.'s early results were encouraging. On the strength of the new Fuji Xerox products, X.I.P. gained major customers in Digital Equipment, Compaq, Apple, Star and other companies, in addition to supplying Xerox itself. The printer engine business remained dominated by Canon, which held about 80 percent of the global market. Fuji Xerox, however, was starting to make inroads. By 1996, its share of various market segments had risen considerably.

Structure and Performance in Constellations

The Xerox story clearly shows how a company can benefit from a well-managed alliance. But it also shows how the difficulty of integrating the separate interests of partners can handicap constellations that face powerful single companies. Moreover, the optimal design and governance structure for an alliance can change dramatically over time, in response to changes in the environment, as well as in the partners themselves.

The collaborative arrangements that helped launch Fuji Xerox in the 1960's and 70's were not as effective in the fierce global battle to develop new technologies in the late 80's. Instead of relying on the transfer of technologies from one to the other across the Pacific, Xerox and Fuji Xerox were forced to join forces to develop wholly new technologies together. This meant that the managerial autonomy that served Fuji Xerox so well in the 70's had to give way to greater coordination and integration between the partners.

Collective competition always requires that companies walk a fine line between rivalry and collaboration. More so than single companies, constellations have within them sources of conflicts that can tear them apart. At the very least, internal frictions can reduce a constellation's ability to exploit benefits from collaboration. And lacking these benefits, the group stands little chance in the competitive marketplace.

Companies have several mechanisms at their disposal with which to manage the balance of competition and cooperation. Equity investments, multiple projects, long-term relationships, personnel exchange and other mechanisms can be used to enhance incentives for collaboration within a constellation and to reduce internal rivalry.

Still, because of the added burden of managing internal frictions, constellations often operate at a disadvantage when facing strong single companies. Overcoming these disadvantages usually requires greater integration among members of a constellation.

In many modern businesses, constellations do not face all-powerful single companies. Instead, the battle is one of group versus group. In this context, all competitors share the basic handicap of internal friction, even though some might manage this handicap more effectively than others. Furthermore, differences in the composition and structure of the constellations are likely to provide one group with a competitive advantage over another.

Competing in constellations, therefore, involves more than just simple competition. To win these days, you need not only a killer instinct but also the willingness -- and the ability -- to collaborate.

Effective constellations depend not only on the structure of relationships among partners but also on the evolution of these relationships. Alliances are dynamic and open-ended relationships that easily bend -- and often crack -- when subjected to new competitive forces. That is sometimes seen as one of their weaknesses: managers frequently cite the high "divorce rate" of alliances as a problem. But, ironically, the flexibility of alliances can be a formidable advantage, so long as the instability inherent in them is managed properly.

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