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Topic: FX 2

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please read the file attached and answer the below questions and number each answer of each question:

1. independence and flexibility in the relationship (was that intended by X in the beginning?) €“ now, when and why do these things matter most? Maybe put that into perspective with the diamond model €“ if FX did not have independence and X would not have given FX any leeway, what would have happened? Implications? ndeed, japanese had some problems with using typewriters due to the complexity of their alphabet(s) €“ yet, why does that lead to a higher demand for copiers? (almost there €“ just push the logic a tat€¦)

2. the patents were clearly a key driver of profits €“ in fact, if you have an (initially €“ how long do they last??? Implications?) patent on something that every business seems to want, what does that imply for your expected profitability? What does that, in turn, imply for your ability to raise money (from banks, investors€¦)? In fact, take a firm like Starbucks €“ they have rolle out their business model in the US WITHOUT franchising €” yet, when they go abroad, they ALWAYS look for a master franchisee in each country. Why? How is that related to X €“ and what does that suggest regarding the key bottlenecks?

3. Xerox ignored the LOW MARGIN end of the market; yet, were X’s decisions only (or even primarily) driven by economic considerations? What, do you think, would be the emotional response of a long term X employee (e.g., an engineer developing large copiers€¦) to FX’s small copiers or, for that matter, to the machines that Canon and Ricoh initially launched in the US? What did X essentially want FX to do for most of the initial history of that JV?

Further, Canon, as Robin pointed out, seems to be a lot more productive (e.g., in R&D) than X, FX, RX €” why? What are the implications of that for the Xerox group of firms?

W Rev. 12/8/92
We are committed to strengthening the strategic and functional coordination of

Xerox and Fuji Xerox so that we will compete effectively against strong and unified

global competitors.

-Paul Allaire, President and CEO of Xerox Corporation
-Yotaro Kobayashi, President and CEO of Fuji Xerox

Fuji Xerox, the joint venture between Xerox and Fuji Photo Film, was at a pivotal point
in its 28-year history in 1990. Many considered it the most successful joint venture in history
between an American and a Japanese company. Originally a sales organization for Xerox
products in Japan, Fuji Xerox had evolved into a fully integrated operation with strong research,
development, and manufacturing capabilities. As its sales and capabilities evolved, so did its
importance within the Xerox Group: its 1989 revenues of $3.6 billion represented 22% of the
Xerox Group’s worldwide revenue.1 Furthermore, Fuji Xerox supplied the rest of the Xerox
Group with low- to mid-range copiers. In Japan, the home country of Xerox’s major
competitors, Fuji Xerox held 22% of the installed base of copiers and 30% of revenues in the
industry.

Yotaro Tony Kobayashi, Fuji Xerox’s president and CEO, ascribed a good deal of the
company’s success to the autonomy that the joint venture had enjoyed from the beginning. Fuji
Xerox was not the norm for joint ventures, he contended, aIDing that the degree to which
Xerox let us run was very unusual. Yet, paradoxically, as the company grew to represent a
larger portion of Xerox’s worldwide business (Exhibit 1), this situation seemed to be changing.
We have to begin to pay more attention to what our actions mean to Xerox, explained
Kobayashi.
1The Xerox Corporation (XC) is referred to in this case simply as Xerox. The combination of Rank Xerox (RX),
Fuji Xerox (FX), and the Xerox Corporation is referred to as the Xerox Group. The revenues of Rank Xerox were
consolidated into those of Xerox Corporation, but Fuji Xerox revenues were not. As described below, Xerox
Corporation received 66% of RX earnings, which in turn included half of FX earnings.

Research Associate Krista McQuade and Professor Benjamin Gomes-Casseres prepared this case as the basis for class
discussion rather than to illustrate either eflective or ineffective handling of an administrative situation.

Copyright © 1991 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No
part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the
permission of Harvard Business School.

Paul Allaire, Xerox’s president and CEO, aIDed that Fuji Xerox’s autonomy had been an
important factor not only in its own success, but also in its growing contribution to the Xerox
Group:

The fact that we had this strong company in Japan was of extraordinary
importance when other Japanese companies started coming after us. Fuji Xerox
was able to see them coming earlier, and understood their development and
manufacturing techniques.

We have excellent relationships with Fuji Xerox at the research,
development, manufacturing, and managerial levels. Yet, because of this close
relationship, there is a greater potential for conflict. If Fuji Xerox were within
our organization, it would be easier, but then we would lose certain benefits.

They have always had a reasonable amount of autonomy. I can’t take that away

from them, and I wouldn’t want to.

Over the years, Fuji Xerox saw its local competitors grow rapidly through exports. The
terms of its technology licensing agreements with Xerox, however, limited Fuji Xerox’s sales to
Japan and certain Far Eastern territories. As Canon, in particular, grew to challenge Xerox
worldwide in low-end copiers, laser printers, and color copiers, Fuji Xerox began to feel
constrained by the relationship. Fuji Xerox has aspirations to be a global company in
marketing, manufacturing, and research, explained Ieff Kennard, who had managed the
relationship between Xerox and Fuji Xerox since 1977. Kobayashi elaborated:

The goals of Xerox and Fuji Xerox can be described as mostly compatible
and partly conflicting. There are serious issues facing us. We often compare our
situation with that of Canon or Ricoh, companies that have a single management
organization in Japan. Are we as efficient and effective in the worldwide
management of our business as we could be?

Some of Fuji Xerox’s products, such as facsimile machines, are managed
like Canon’s with single-point design and manufacturing. But now there are
external conditions in the United States and Europe that call for local
manufacturing and development. Rank Xerox and Xerox are able to reach
efficient volumes in their marketplaces. If Fuji Xerox manufactures only for
Japan and adjacent markets, our volume will be too small, but Xerox is insisting
on this. It is a tough challenge that we have to face together.

How should Fuji Xerox’s aspirations be managed within the context of the Xerox
Group? This was one of the questions facing the Codestiny Task Force commissioned in 1989 to
review the capabilities and goals of Xerox and Fuji Xerox. Composed of senior managers from
both companies, the task force would seek ways to enhance the strategic relationship between
Xerox and Fuji Xerox for the 199os. This was the third such review; Codestiny I (1982) and
Codestiny II (1984) had both resulted in changes in contracts and agreements between the firms.
With the basic technology licensing contract between Xerox and Fuji Xerox due to be
renegotiated in 1993, participants in Codestiny III knew that their analysis could well lead to a
substantial restructuring of the strategic relationship between the companies.
When Chester Carlson tried to sell the rights to the revolutionary xerographic
technology that he invented in 1938, GE, IBM, RCA, and Kodak all turned him down. Instead,
the Haloid Corporation a small photographic paper firm in Rochester, NY agreed in 1946 to
fund further research, and 10 years later acquired the full rights to the technology. By the time
the company introduced its legendary 914 copier in 1959, xerographic products had come to
dominate its business; in 1961 Haloid’s name was changed to Xerox Corporation. The 914 was
the world’s first automatic plain paper copier (PPC), and produced high-quality copies four
times faster than any other copier on the market. These advantages, coupled with an innovative
machine rental scheme, led Xerox to dominate the industry for nearly 20 years. Company
revenues rose from $40 million in 1960 to nearly $549 million in 1965, and to $1.2 billion in 1968,
breaking the American record for the fastest company to reach $1 billion in sales. Net income
grew from $2.6 million in 1960 to $129 million in 1968. In a mere decade, the name Xerox had
become synonymous with copying.

Xerox moved quickly to establish an international network. Lacking the funds to
expand alone, it formed a 50/50 joint venture in 1956 with the Rank Organization of Britain.
Xerox would be entitled to about 66% of the profits of Rank Xerox. Rank operated a lucrative
motion picture business and was seeking opportunities for diversification. Rank Xerox (RX),
the new joint venture, was to manufacture xerographic products developed by Xerox and
market them exclusively worldwide, except in the United States and Canada. By the early
196os, Rank Xerox had established subsidiaries in Mexico, Italy, Germany, France, and
Australia. In 1964, Xerox bought back the right to market xerographic products in the Western
hemisphere.

Japanese firms immediately inquired about obtaining xerography licenses from Rank
Xerox, but they were refused on the grounds that the technology was not commercially mature.
By 1958, however, RX executives had turned their sights to the Japanese market. Aware of
Japanese government regulations that required foreign firms to sell through local licensees or
joint ventures, they sought a strong partner. Twenty-seven Japanese firms jockeyed for the
position; Fuji Photo Film (FPF) was the only nonelectronics firm in this group. Still, the
company was chosen, partly because of the personal relationship and trust that had developed
between RX President Thomas Law and FPF Chairman Setsutaro Kobayashi.

Fuji Photo Film was a manufacturer of photographic film since the early 193os and
second only to Kodak in that field. The company was trying to diversify its business away from
silver-based photography, and was convinced that its technical expertise was well suited to the
requirements of xerography. Under the direction of Nobuo Shono, the company had already
begun experimenting with xerography; by 1958, it had invested six million yen in research and
manufacturing facilities for the copiers that it hoped to license from Rank Xerox. As
negotiations between the two companies intensified, Rank Xerox insisted on a joint venture
instead of simply a license to Fuji Photo Film.

Fuji Xerox, the 50 / 50 joint venture established by Fuji Photo Film and Rank Xerox in
1962, was originally intended to be a marketing organization to sell xerographic products
manufactured by Fuji Photo Film. When the Japanese government refused to approve a joint
venture intended solely as a sales company, however, the agreement was revised to give Fuji

Xerox manufacturing rights. Fuji Xerox not Fuji Photo Film then became the contracting
party with Rank Xerox, and received exclusive rights to xerographic patents in Japan. Fuji
Xerox, in turn, subcontracted Fuji Photo Film to manufacture the products. As part of its
technology licensing agreements with Rank Xerox, Fuji Xerox had exclusive rights to sell the
machines in Japan, Indonesia, South Korea, the Philippines, Taiwan, Thailand, and Indochina.
In return, Fuji Xerox would pay Rank Xerox a royalty of 5% on revenues from the sale of
xerographic products. Rank Xerox would also be entitled to 50% of Fuji Xerox’s profits.

Nobuo Shono became Fuji Xerox’s first senior managing director, and Setsutaro
Kobayashi, its president. Shono and Kobayashi drew their core executive staff, later known as
the Seven Samurai, from the ranks of Fuji Photo Film. A board of directors consisting of
representatives from Rank Xerox and Fuji Photo Film was established to decide policy matters,
while day-to-day operations were left to the Japanese management. The Xerox Corporation
itself was to have no direct relationship with Fuji Xerox, and would participate in the profits of
the joint venture only through its share in Rank Xerox.

Although Fuji Xerox adopted a number of business practices from Xerox, including
organizational structure and the rental system, it remained distinctly Japanese throughout its
history. Hideki Kaihatsu, managing director and chief staff officer at Fuji Xerox, explained:

Employees are typically rotated through many functions before rising to

the level of general management, and compensation and lifetime employment

practices are similar to those of other Japanese firms. We emphasize long-term

planning, teamwork, and we follow bottom-up decision making, including the

ringi system. Furthermore, in procuring parts we follow the Japanese practice

of qualifying a small group of vendors and working closely with them.

Well before negotiations for the joint venture were finalized, engineers at Fuji Photo
Film geared up for the production of Xerox copiers. Xerox machines were disassembled and
studied to determine the equipment and supplies necessary for production. Three FPF
engineers spent two months touring Xerox and Rank Xerox production facilities. At the
establishment of the joint venture, a specific schedule was agreed upon, calling first for the sale
of imported machines, then the assembly of imported knocked-down kits, and finally the
domestic production of copiers. Import restrictions in Japan and government pressure to source
locally accelerated this schedule, and the first Japanese-produced Xerox 914 was completed in
September 1962; by 1965, 90% of the parts for the 914 came from local suppliers.

Fuji Xerox’s first sales plan targeted financial institutions, large manufacturing
corporations, and central government agencies. At the time of the introduction of the 914, 85%
of the market was held by the inexpensive diazo type of copier. Although these copiers were
difficult to operate and produced poor quality copies, they had been enormously successful in
Japan, as the large number of characters in the Japanese language made typewriters difficult to
use, and made copiers essential even for small offices. Ricoh, Copyer, and Mita had sold diazo
copiers since the 194os. By the early 196os, Ricoh held an estimated 75% share of the market. A
diazo copy was often referred to as a Ricopy in Japan.