Xerox's New Products Announcement

Happy End To A Long March

Xerox's New Products Announcement

By Stephen Kindel and Subratra N. Chakravarty
Forbes

April 22, 1985

AT THE END of this month Xerox Corp. will assemble as many journalists, Wall Street analysts and office automation types as it can into New York City's Vivian Beaumont Theater to announce a series of products, systems and corporate strategies that the company claims will transform its business.

Just more undelivered office-of-the-future promises from a company that has had enormous difficulty even holding on to its core copier business? Not this time. The transformation Xerox will be talking about began seven years ago and was mostly completed in June 1983. Completed but largely unrecognized; people paid more attention to the negatives on Xerox--its loss of market share in copiers and a host of other problems.

The happy fact is this: Xerox is moving systematically from being solely dependent on a copying process invented almost 50 years ago, whereby dry ink is literally fused onto paper. It is now rapidly becoming the marketer of a range of products that move information around the office, whether in paper form or not.

At the core of Xerox' newer products is Ethernet, a communications system that allows all sorts of office equipment to use and exchange words and images. Devices as diverse as typewriters, word processors, computers, electronic files, printers and soon maybe even Xerox copiers--all linked together on an Ethernet--can use the same information, increasing office efficiency.

Xerox total equipment sales have risen only modestly over the past three years, from $8.3 billion to $8.8 billion. But this seeming flatness masked big gains in the newer products. Revenues of the reprographics division--the copiers that have been Xerox' chief line of business since 1959--have actually dropped 3%, from $6.8 billion in 1982 to $6.6 billion last year. But revenues in its information systems business rose spectacularly, from $984 million in 1982 to $1.72 billion last year. Best, the rate of gain is accelerating and should make office automation products the dominant sector of Xerox's business by the end of the decade.

Put it another way: If Xerox' information systems were an independent company, it would already be larger than Apple Computer, Inc., many of whose products derive from research originally done at Xerox' Palo Alto Research Center. Apple may have the most to lose if Xerox succeeds.

After a decade of roller-coaster earnings and stagnant stock prices, Xerox finally has products and a strategy to return it to the glamour position it held almost 20 years ago. Information products, which lost money steadily since their first appearance in 1974, have now turned around.

Xerox Systems Group President Robert V. Adams expects his group to be profitable this year, even after corporate allocations and interest. That's because his gross margins have been rising steadily. Right now information systems provide a gross profit of about 45%--good, but not sufficient to turn information into the kind of cash cow that copiers have traditionally been. To do that, Adams will have to push his margins beyond 50%. Adams expects that four waves of new products over the next two years, starting with the Apr. 30 announcements, will get him there.

Some would argue that the 16 intervening years between Xerox Chairman C. Peter McColough's first articulation of the office of the future and its breaking tinot the black was simply too long a gestation period. That judgment ignores the problems and complexities. After all, xerography took 21 years to make it to market from the date patent attorney Chester F. Carlson created the first xerographic image in 1938 until the time the haloid Co. of Rochester, N.Y. sold its first copier, in 1959.

Xerox went on from there to build a near monopoly, depending as much on a wall of patents for its success as on an aggressive sales force. By the time Xerox realized it could not maintain its position as a one-product company indefinitely, it was beset on at least three fronts: from competitors at the high end of copying (such as IBM and Kodak) that had introduced machines of equal sophistication; from the Japanese at the low end; and from computer and other digital-based technologies that were promising to introduce a paperless office.

Oh, yes, Xerox made mistakes, most notably its 1969 purchase, for $900 million, of Scientific Data Systems. After buying the scientific computer manufacturer and trying to go head-to-head with IBM, Xerox wrote off SDS in 1975 with a incalculable loss of face on Wall Street. But SDS wasn't the dead loss some people thought. It brought to Xerox a large cadre of digital-oriented engineers and executives. While SDS founder Max Palevsky made headlines for taking Xerox' money and going into the movie business, Xerox put Palevsky's employees to work. Adams, an original SDS employee, brought out Xerox' first laser printer in 1977. Other SDS people moved their software and electronics skills into the current generation of Xerox copiers.

An especially clear proof of the importance of the SDS purchase can be seen in William F. Glavin, an ex-IBMer who went to Xerox Data Systems, the division formed out of SDS, in 1970. Glavin is now the number three man at Xerox, ranking behind CEO David T. Kearns, himself an ex-IBM executive, and Chairman McColough. Says Glavin: "Xerox picked up {from SDS} a very talented group who understood electronics, systems and systems integration and who could translate it into products."

They did that with a vengeance. Kearns' first major move as president came in 1978--integrating engineering and manufacturing worldwide. This brought the disciplines of electronics manufacturing-where the emphasis is always on driving costs down while driving up the number of features and quality--to all of Xerox' copier products. That has helped Xerox' copier division, now under Wayland Hicks, to rebuild some of its lost market share at both ends of the market.

But Xerox has paid a steep price to regain lost ground. To remain competitive in the copier market, it has to sell twice as many copiers to get the same revenues it got five years ago.

Xerox also has had to survive a collision of cultures within the organization--the electronics people versus the electromechanical types, so to speak. The rising importance of the electronics crowd, run from headquarters in Texas and California, did not sit well with a lost of people in Rochester, whose careers were made in electromechanical copiers. At a time when the new technologies should have been better intergrated into the company, the head of the office products division, Donald J. Massaro, decided to keep its sales force independent and to continue to sell its products without the help of Xerox' huge copier sales force. Massaro, an entrepreneur who had sold his company, Shugart Associates, a maker of floppy disks, to Xerox in 1977, left the company in 1982.

Dwight Ryan, who now heads the reunited Xerox sales forces, says of that time, "Massaro was unlike any other executive ever to come to Xerox. He was young, rich and flamboyant to the point of recklessness. Massaro turned us down on all the overtures we'd made to him in the past." But Massaro was told to let the copier sales force sell the Memorywriter. "With that," Ryan says, "we proved that we could do the job."

And how. Memorywriters--electronic typewriters with text-editing capabilities--were introduced in late 1981. Almost overnight Xerox has matched IBM as the market leader in the sale of electronic typewriters.

The long-needed integration of the two clutures finally got under way when Adams was named to head the Xerox Systems Group--which now includes all office automation products except copiers--in July 1983, after the departure of Massaro. Says Adams: "I realized tht I was letting a major resource, the Xerox sales force, go to waste. I was determined to find a way to use them."

At the same time, Dwight Ryan, head of the copier sales force, was looking for new products for his people to sell. Says Ryan, "A transition was taking place at Xerox, and if we were going to prolong copier life, we had to place the emphasis on the interconnectability of products, of sales, of people inside the company."

That newfound sense of cooperation is epitomized by a gift from Adams that is proudly displayed in Ryan's Rochester office--a walnut relay baton, inscribed: "The next leg is yours." It is an acknowledgment of the need for corporate teamwork, formalized by the unification last January of the sales force worldwide. Moreover, under Adams the company has made a substantial effort to make its products compatible with one another and with other companies' computers and systems, so that they can all be hooked together by Xerox' Ethernet. Xerox alone already makes 24 products that hook to Ethernet and expects to have nearly 40 by year-end. Over 200 other manufacturers are making Ethernet-compatible products, including the IBM personal computer and Digital Equipment's VAX minicomputers. That compatibility is already beginning to help Xerox equipment sales: From a standing start in 1980 Xerox Ethernet installations have doubled each year, to about 1,500 last year.

In keeping its office-of-the-future plan firmly in front of it, Xerox also has learned to make alliances with other companies to fill product gaps. That's a strategy that wouldn't even have been considered in the one-product-behind -a-patent-wall mentality of the old days. Example: a rumored alliance of Xerox, AT&T and Olivetti to market a personal computer.

Will there come a day when xerography disappears from the scene entirely? Maybe, and so Xerox is hedging its bets all over. It has recently licensed Savin Corp.'s Landa III liquid ink process and is incorporating laser printing technology into its copier line. In fact, says Adams, "There will be a time in the intermediate future when you won't be able to tell the difference between a copier and a printer--from us. People don't care what process the machine uses as long as it gets the job done, at the right price."

The stock market so far has taken scant cognizance of all these changes. It prices Xerox at 11 times probable 1985 earnings and a smidgen above book value. It puts no premium at all on Xerox' technology or on its superb sales force. the market values Xerox, a $9 billion (sales) company, at just over $4 billion. With xerox' transformation now complete, the market may be overlooking a good bet.