The Road to Success of Xerox Corporation - Case Study Example

High Cost-Xerox In October 2000, Xerox Corporation, an icon of American innovation and dominator of the copier market for decades, was at a great risk of going the way of once large and thriving companies that went bankrupt, a la Studebaker. Its share price fell below $4 from a high of a steep $64 just the previous year. Its earnings were miserable, its competitors were becoming more and more successful in grabbing its market share and the employee morale was an all time low. The final blow to its reputation came when rumors of bankruptcy began floating around.In this essay we examine specifically how high over head costs of operating a mammoth organization like Xerox was one of the key factors contributing to its downfall during the 90s and early 2000s. According to Slatter, there are six major sources of cost disadvantage which can lead to a firm having to charge higher prices than its competitors.Let us analyze and apply the six factors illustrated by Slatter, to the Xerox corporation to get a better picture of the negative consequences of high over head costs: 1. Relative cost disadvantages due to the firm's inability to take advantage of economies of scale and its lack of experience compared with competitors: Due to staggering assets and international ventures that this long standing company had accumulated over the past few decades, Xerox's cash position had become tenuous. Its liquidity had deteriorated to the point where capital markets froze Xerox out. Cash is king in an economy in recession. like in 2000,and Xerox was crippled with assets without cash flow. High overhead costs piled up due management's obsession with expensive quality control measures during a fairly weak financial position. A perfect quality index while being admirable ,costs a lot of money. The trade-offs associated with 100% quality proved to be too large ,leading Xerox to increase its pricing scheme ,thus creating a negative competitive position. Some international and even local markets were not willing to pay the price for quality especially when Japanese low cost ,high quality products began invading the market. Xerox's biggest weakness proved to be its financial situation, and specifically the heavy debt and the low profitability. The organization was too large leading to huge over head costs.Unlike its competitors who were concentrating on more advanced and diversified technology, Xerox employees were living in the past inspite of Xerox's attempts at diversification.They still were focused on being a copier company rather than a profitable documentation company or a modern information technology company. This resulted in loss of direction .Like all giant companies, it was difficult for talented innovators and entrepreneurs to survive, and instead the mediocrity had taken over and threatened the company from the inside. The once thriving copier division was still too influential and vetoed other innovative projects .(Johan Olsson,january 1996). This made Xerox have weak credibility on the IT-business side lending it a less sophisticated image than its competition. 2. Absolute cost disadvantages which result from competitors controlling strategic variable not available to the firm itself: Let us take the example of the Japanese company Canon,which proved to be Xerox's biggest and cleverest opponent. As a late entrant in the copier market, Canon was forced to concentrate on niches where Xerox was weak. One of these was the low end, which Canon attacked with a series of progressively smaller machines, culminating, in 1982, with the launch of the personal copier. Copiers were notorious for breaking down, a propensity Xerox exploited by charging for service calls. Canon realized that to be successful, a personal copier would not only have to be cheap, it would also have to be virtually service free. Canon's revolutionary solution was to include all the key components - drum, charger, toner, and cleaner - in a replaceable cartridge.(Bob Johnstone,Oct 1994).Xerox ,seeped in its tradition of expensive quality control measures, initially underestimated the invasion of low cost models as the old-timers in Xerox ,immersed in their past glory and success, believing that "low cost means low quality". They were under the illusion that their products were untouchable since they were superior in quality and technology. Xerox did not anticipate that the Japanese would get a firm foothold in the international market place with high quality products while keeping their costs low, due to lack of market research and futuristic thinking. In their technology driven market, the fast development of hardware and software decreased the product price, increasing cost pressures and price competitions. One of the principle reasons for their high price was the fact that Xerox did not manage the trade off between profitability and quality too well.Their Quality Control program cost an estimated $125 million and over 4 million of man hours, but contributed little to the profitability of the company.(Johan Olsson, January 1996).The Japanese were able to produce their products more effectively than Xerox and the parts used in production were less complex, mass produced , more reliable and easier to fix.. 3. Cost disadvantages due to diversification: Over the past decades ,Xerox had diversified so much, a lot of them non-profitable resulting in an excess of non-core assets. Its China operations were running at a loss. While other companies were outsourcing production thereby lowering costs, Xerox's worldwide manufacturing operations had a frightful effect on its over head costs. Xerox had also entered the low end SOHO(small office and home office ) business which was crumbling. The number of insurance companies, Xerox had purchased in the 80s were draining on the company's growth.(Todd Datz, April 2002).The vast range of diversification and international expansion without proper market research and planning proved to be crippling during the economic recession of the early 2000s. 4. Cost disadvantages due to management style and organization structure: The management committed a series of unforgivable blunders in 1999, that proved to be too costly to recover from. After experiencing years of success selling big, expensive copiers, Xerox's salespeople were forced to sell document management "solutions"-not just hardware but software, outsourcing contracts and consulting services to keep up with the changing times. They were also reassigned from geographic territories to industry groups. The reorganization was not very popular with the sales force.. A number of salespeople bolted from the company. Those who remained had to drop long-term customers and commence relationships with new ones. Adding to the mess, the company consolidated its 36 field administration centers into three to cut costs. The move was poorly executed-customers received inaccurate bills, invoices were misplaced, and shipments were delayed. Salespeople were forced to spend valuable time dealing with the problems, taking them away from the field. Xerox executives acknowledged that the restructuring happened too fast and led to wastage of precious recourses and ultimately higher costs to rectify the costly mistakes made.(Todd Datz, April 2002). 5. Operating inefficiencies due to lack of investment and poor management: The company's board was voted one of the five worst boards in the United States by Chief Executive magazine. Its main criticism was that the board has passively presided over botched sales-force reorganization, Thoman's (the COO and president during this fatal period)disastrous reign and the cash crunch, among other things. Xerox was on the verge of financial ruin due to lack of investment returns and poor management .In 2000,its debt loan reached a staggering $18 billion and the capital markets had slammed the door shut to further Xerox borrowing. 6. Unfavorable government policies: Government plays an important role in business world. Deregulations of trade barriers were enforced by the implementation of the World Trade Organization on January 1st, 1995. Unfavorable government intervention such as the lowering of import barriers of goods and services to the United States in accordance to the new GATT agreements intensified the global competition. In 1972, the Federal Trade Commission of USA charged Xerox with illegal monopolizing the copier industry. The company was forced to license its technology. This government intervention dramatically changed the landscape of copier industry. By the early 1980s, low-cost Japanese competitors, such as Canon and Ricoh, had taken a huge chunk out of Xerox's share of the U.S. copier market. (XinXin).Xerox also faced a wide-ranging SEC probe into accounting irregularities. Part of the probe was centered on equipment-leasing irregularities in its Mexican unit in the late 1990s. The SEC was also looking at the company's lease-accounting practices in general. Amid the investigation, it was forced to restate its financial statements for 1998, 1999 and 2000. Further aggravating the tensions from the probe, Xerox fired longtime auditor KPMG who had been critical of the company's lax internal controls. Since then Xerox has been taking a series of measures, having identified high costs as one of its major pitfalls. On Oct. 24, 2000, Xerox announced an ambitious turnaround program to address its liquidity crisis: raise $2 billion to $4 billion by shedding assets, cut $1 billion in costs and get back on a revenue growth curve. Shed $2 billion to $4 billion in non-core assets by the end of 2001. Xerox achieved its target. It sold its China operations for $550 million and sold half of its 50 percent stake in Fuji Xerox for $1.28 billion. It agreed to sell roughly half of its worldwide manufacturing operations to Flextronics for $220 million. It exited the unprofitable, low-end SOHO business that was intensely competitive, with shrinking margins .Xerox also unloaded its U.S. equipment financing unit to GE Capital, which over time the company expects will remove upwards of $10 billion in financing-related debt from its balance sheet. All told, the company had sold $2.5 billion in assets by the end of 2001. At least 13,000 jobs were cut in the year following the turnaround announcement. Discretionary spending was also reduced. For example, trips are now planned 21 days in advance, travel is purchased online, and the company made the increasingly popular decision (to CFOs, not employees) to nix free coffee for workers.(Todd Datz,April2002). Xerox, who has been one of America's finest business and technological pioneers ,has seen its share of ups and downs over the years as it came to terms with a changing world characterized by advancement of technology and opening up of new markets. By its determination to rectify the mistakes it committed while getting acclimatized to a new scenario in which it no longer held the market monopoly,it has avoided the fate that has befallen Kmart and Enron. Works Cited Datz,Todd,"Can Xerox duplicate its past Success",April 2002,CSO,The Resourse for Security Executives,December 2005,< http://www.darwinmag.com/read/040102/xerox.html>. Johnstone,Bob,"Canon,Lone Wolf,October 1994,Wired,Issue 2.10,December 2005,< http://www.wired.com/wired/archive/2.10/canon_pr.html>. Olsson,Johan,"The Xerox Corporation,January 1996,December 2005,< http://www.geocities.com/TimesSquare/1848/xerox.html>. XinXin,"Case Study:Xerox Corporation",Organizational Behaviour,The Road to Success,Research and Study",December 2005,< http://www.boraid.com/english/eList.aspid=50>. Biblography Bianco ,Anthony,Moore,Pamela L.,"Xerox the Downfall",March 5 2001,Business Week Online,December 2005,< http://www.businessweek.com/2001/01_10/b3722001.htm>. Giddy,Ian H.,"Restructuring at Xerox,January 29th,2001,December 2005,< http://pages.stern.nyu.edu/igiddy/xerox.htm>. Lyne Jack,"Xerox says Huge Asset Offload won't include HQ Relocation",December 2005,< http://www.conway.com/ssinsider/snapshot/sf001113.htm>. Perreault,William D.,Jr,E.Jerome McCarthy,"Basic Marketing,A Global Managerial Approach",14/e,McGraw-Hill Irwin. Read More