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Reprinted from Fortune, 18th May 1981, pp. 44-52.
The trip had elements of mystery and Texas
flair. To ignite interest in its latest
creations, Xerox Corp.’s Office
Products Division flew a score of consultants
and market researchers to its Dallas
headquarters last March for a secret briefing.
In the Jade Room of the Anatole Hotel, they
were regaled with a feast that ranged from Mongolian
firepot to winter-melon soup to deep-fried
almond ice cream. Next morning – after
signing nondisclosure agreements –
the outsiders began a day-long preview of
the broad line of office equipment that
Xerox is launching in stages throughout
this year. At the end, one consultant rose
to ask, “This is war,
isn’t it?’
The combative rhetoric was fitting. The
new line, which Xerox started to unveil
in April and will finish announcing by
September, is calculated to set new
levels of performance and price for the
industry. It is a frontal assault on the
market that promises to rock competitors,
touch off vigorous demand, and give
Xerox a chance to become preeminent in
office automation.
The chance comes none too soon. Endowed
with outstanding research, a stream of
cash from its copier business, and a sales
force second in size only to IBM’s,
the company had seemed a natural to take over
the emerging market for that loose cluster
of equipment called “the office of
the future.” Instead, Xerox stumbled
along with electronic typewriters and word
processors that were expensive,
out of date, and difficult to use. Top
management kept pushing for growth.
Lacking any hot products, the Dallas
organization couldn’t meet its
goals and began to buckle under the
pressure from above. (See “Xerox Is Trying
Too Hard” Fortune, March 13,
1978.)
The last two years, however, have brought
some heartening changes. A fresh management
team has made a good start on turning
around the sorely troubled Office
Products Division. Whether or not the
new product line fulfills all expectations,
this internal revolution could re-invigorate
the whole corporation.
The performance of the Office Products
Division won’t determine Xerox’s
financial results. Revenues from office
products probably came to $300 million last
year, a comparative drop in the corporate
bucket of $8.2 billion. That $300 million
could swell to $1 billion by 1985, but
by then – assuming that Xerox
sustains the 16% growth rate it has
sported over the last five years –
corporate revenues will have mounted to
$17 billion. The company’s dominant
business will continue to be in
copiers, duplicators, and other
reprographic devices.
The profitability of this crucial business
has been crimped by competitors.
Japanese manufacturers, IBM, and Eastman
Kodak have all helped shrink Xerox’s
operating profit margins on copiers and
duplicators from around 30% of
sales ten years ago to 23% today. Copier
earnings, a reliable gusher in the past,
have lately been growing at the undramatic
rate of 12% a year. Without substantial
improvement there, even dazzling results
from the Office Products Division would do
little to restore the renown of Xerox
as a premier growth company or to raise
the price/earnings multiple of its
stock, currently about 10% below the
average multiple of the S&P 400.
An eclectic menu
A full line of office products,
nonetheless, is vital to Xerox’s
future. Thanks to the microprocessor,
copiers are getting smarter. They can print
data directly from computers, store
documents, and send and receive messages.
What was once an independent device
standing alone in a corner of the office
is being hooked up with other elements
of automated office systems. So Xerox has
to impress customers as a competent supplier
of such systems. “Otherwise,”
says one of the company’s executives,
“we become just a copier factory,
selling hardware at low margins to other
manufacturers, who will turn around and
make a lot more money selling systems
to the customer.”
Moreover, the office-systems market is at
a critical stage – still growing
and changing so fast that no one company
is dominant. This leaves the field wide
open for Xerox – and others – to
lock up customers for the future. “For
the first time in a decade, there’s
a real fight among the majors to control
accounts,” says a leading consultant
in office automation, “and its new
product line gives Xerox a chance to win.”
To seize this chance, Xerox plans to dish
up a menu of products as eclectic as that
banquet in the Jade Room. The star of the
line is aptly called Star, a “professional
work station” that is scheduled
for late-April announcement. Star looks like
many other work stations – it has
a video screen, a separate keyboard, and a
large box that holds the logic circuits and a
disk memory.
The hardware boasts a couple of novelties.
Xerox has opted for “bit mapping,”
which is a costly display technology that
allows Star to change each of the million
dots on the screen so that users can
compose in many typefaces. They can reduce
text enough to squeeze eight pages onto
the 10-by-12½-inch display and create
graphics of exceptional sharpness. And
for controlling the cursor – the
symbol that the user moves across the
screen to edit text and select performance
options – Xerox has chosen a novel
device known as “the mouse.”
A three-inch-long plastic shell with
three ball bearings on its underside, it
is attached to Star by a tail of thin
black wire. Moving the mouse across any
flat surface, such as the desktop next
to the keyboard, moves the cursor across
the screen in exactly the same way.
Those who have seen Star in action say
that the most attractive feature of the
product is not the hardware but the
versatile, easy-to-use programs Star will
employ. Since 1976, Xerox has tested over
1,200 prototypes of Star, most of them
within the company, some in
universities, and even a few in
the executive offices of the White
House. Software improvements followed from hundreds
of pages of test results.
The “worker bees”
Many users, for example, said they lost
time having to read through the lists of
commands shown on the screen, so Xerox
has substituted “icons” – or
command symbols. If you want Star to file
something, roll the mouse and move the cursor
to a picture of an appropriately labeled file
folder; for storing deleted material,
point to the picture of a wastebasket.
Most impressive to analysts are Star’s
elaborate “Help” routines,
which the user can call up by punching
a panic button when he needs guidance.
Ease of use is critical to Star’s
success because the product is aimed at
people fairly new to computerlike work
stations – including such
professionals as chemists or financial
analysts. These “worker bees,”
as Xerox calls them, turn out elaborate
reports, make up about half of the
white-collar work force, and earn up to
$60,000 a year. On the basis of these
considerations, big companies should be
able to justify ordering constellations
of Stars at roughly $15,000 each. If
the bees take to Star, their productivity
could soar. A petroleum engineer using
Star’s math package and ability to
compare data could do the work of two
or three engineers, one consultant
estimates. Insurance underwriters have
lauded the potential of Star’s graphically
exact screen to check signatures on
policies and examine X rays attached to
accident claims.
Although Xerox will introduce two additions
to its aging line of facsimile machines
in May, the next equipment bombshell
won’t explode until June, when
the Office Products Division brings out a
$5,500 desktop work station known
internally, with a nod toward Apple
computers, as “Worm.” More
powerful than a word processor but without
Star’s deluxe features, Worm wriggles
in two directions. First, it heads
toward the market for IBM’s $8,000
Displaywriter, a hugely popular work station
launched last year. Second, it will eat
into the market for personal computers,
since it can accept the hundreds of software
packages that have been written for the
likes of Apple.
Cutting a swath with Sabers
Xerox’s final salvo will come in August
or September with the announcement of a line
of six low-cost electronic typewriters,
code-named Saber. The Saber strategy
follows that of Qyx, an Exxon subsidiary
that has been pushing a relatively cheap
but intelligent typewriter that can be
upgraded later into a full-scale word
processor. The least expensive Saber goes
for $1,200, and Xerox can transform it
into the most sophisticated model, which costs
another $3,000 or so, by sending out
a field engineer to tinker with the
customer’s machine for scarcely more
than half an hour. Unlike Qyx, which has
lost money on its low-end machines, Xerox
could prosper: the Saber factory is so
automated that workers’ fingers
touch components at only one stage of assembly.
The main competitive target, of course,
is IBM, which has installed some ten
million typewriters around the world,
mostly ordinary electrics that cannot
be upgraded in the field. Xerox hopes
that by 1985 some two million Sabers will
have cut a swath through that population.
Along the way, other competitors could be
sliced to ribbons. “Qyx won’t know
what hit them,” one market-researcher
predicts. A Xerox alumnus who helps
run a hot new word-processor company worries
that “if Xerox really can capture
the typing station, it could make our lives
very difficult.”
An image worth millions
Xerox won’t, of course, have everything
its own way. Systems that compete with Star
are already in the works at several smaller
companies. In time, both IBM and the pack
of fast-moving companies that make personal
computers will respond to Xerox’s Worm
by cutting prices and jacking up performance
levels. And Saber could find itself meeting
tough resistance from inexpensive Japanese
typewriters.
The success of particular products, though,
is not the essential point for Xerox. Its
goal is to be seen as an office-systems
company, not just a specialist in copiers.
The outline of this new image came clear
last fall, when Xerox announced the supporting
hardware needed to run Ethernet, its coaxial
cable for linking up the work stations,
printers, word processors, copiers,
and other electronic parts of the automated
office (see box, page 50). Star,
Worm, and Saber, which can send data to
each other through Ethernet, show customers
that the company is trying “to move
from ‘too little, too late’
to product leadership across the board,”
as one Xerox officer puts it. Such
a corporate image itself should be worth
millions in revenue.
To be taken seriously as a supplier of
office systems will be a novelty for
Xerox. Only two years ago, the Office
Products Division had no winning products
and no coherent strategy. Set up in Dallas
in 1973, it first tried selling the 800
series of electronic typewriters, which
came to market more than a year behind
schedule and used magnetic cards, an
old IBM memory technology that was fading
fast. The 850 series, launched in 1977,
did only a little better: the 850s were
hard to use and inflexible, since they
couldn’t be re-programmed. Xerox
was losing out to upstarts such as Wang and
Lanier, and corporate headquarters was
putting the screws on the Office Products
Division. Passing along the pressure,
the division set unattainable quotas and
lost most of its regional sales
managers and about three-fifths of
its salesmen in one year. Headquarters
decided to eliminate the division as
a profit-and-loss center with its own
president and to have the remaining
managers report to another group. Morale
reached a nadir.
Xerox veterans trace the division’s
problems to a mismatch between Xerox’s
corporate culture and the requirements of
the office-systems market. The culture
clash was loudest in product development.
Looking for another big breakthrough like
xerography, Xerox had set up PARC, the
Palo Alto Research Center, to lay the
groundwork for advanced products. PARC
got around $20 million a year, attracted
a brilliant staff – including
philosophers and anthropologists as
well as engineers – and developed
a kind of utopianism. “They believed
in product development by cataclysm, not
by evolution,” says one of
Xerox’s former planners. L
Drowning in cash
Xerox’s management style made
it even harder to translate advanced
research into marketable products. One
PARC refugee recalls, “A corporate
guy told me, ‘You’ll know
when you have a development program for
a real product. One day, you’ll dig
a bottomless pit out front. Come sunup,
the trailer trucks will start arriving with
dollar bills and dumping them in. Your
biggest problem will be traffic control.’
Xerox could do that kind of brute-force
development for copiers and duplicators.
But in developing office systems – which
change constantly and have much shorter life
cycles – the company drowned us
in cash and the controls that come
with cash. Xerox put all its eggs in one
basket, which got so expensive we
couldn’t afford to take risks or
move quickly.”
The Office Products Division, meanwhile,
was supposed to develop new products
out of its existing line. But a bitter
debate arose between the division,
which wanted to create office systems
by improving and interconnecting electronic
typewriters, and PARC, which advocated an
entirely new system. “The push-pull
between the radical systems strategy and
the incremental approach took up most
of our time from 1977 to 1979,” says
a former corporate official.
A most unlikely leader
The resurrection of OPD began in 1979, when
Xerox hired John V. Titsworth, Control
Data Corp’s executive vice president
for systems, to head up all Xerox’s
information-processing activities,
including office products. Titsworth,
impatient with both utopianism and
factionalism, wanted the Office Products
Division to apply at least some PARC
research. A believer in decentralization, he
also revitalized the division and started
searching for a new divisional president.
The man Titsworth found seems one of
the most unlikely people ever to work at
Xerox. Donald J. Massaro, 38, is
an aeronautical engineer who helped start
Shugart, the leading maker of flexible-disk
memories, and rose to become president
by 1977, when Xerox bought Shugart for
some $41 million. Since he personally
cleared $2 million to $3 million on the
deal, Massaro enjoys a rare freedom. He
has a fast mouth, an entrepreneur’s
impatience, and no respect for corporate
shibboleths. One of his friends calls
him “a bull in a china shop,” adding,
“He doesn’t fit the IBM mold
or the Xerox mold. He’s crazy, and
he won’t take no for an answer. [Xerox
Chairman] Peter
McColough took a big risk when he approved
the appointment.”
So far, it’s been a risk worth taking.
For starters, Massaro insisted on having
nearly complete freedom from the ubiquitous corporate
staff. He got this by promising to put
his division in the black within 18 months.
“For all intents and purposes,”
says Sanford J. Garrett, a security
analyst who follows Xerox closely, “Massaro
is running an independent subsidiary.”
A quick fix
 |  Donald Massaro is the exuberant, audacious chief of Xerox’s Office Products Division. To monitor his headlong innovations, according to one insider, he relies on his financial V.P., “who keeps us all sane.” But top management has liked Massaro’s frenzied ways enough to dub him a corporate vice president. Portrait by Joan Berg Victor. |
Massaro has rebuilt the division from the
ground up. He has brought in nine of his
ten vice presidents from other parts of
Xerox. Following a new business plan that
strictly limits each category of expense, he
has transferred close to 100 staffers out of
manufacturing but has stirred the sales
force by offering a higher commission
rate for all sales above quota. Five
months after arriving, Massaro managed a
quick fix for the product line and
finessed the debate about Utopian systems
vs. evolutionary products by announcing two
developments simultaneously: the 860, a
more flexible version of the 850 word
processor, and PARC’s Ethernet, which
860s can use to talk with each other.
Massaro deserves high marks for restoring
morale and for revamping the marketing
strategy. “His motto is
credibility – with the sales force,
the customers, and the corporation,”
says one insider. Soon after his
appointment, he made a whirlwind tour of
the country, describing his product plans
to the division’s field force and
to dozens of its largest customers. One
customer says, “It was good to know
we wouldn’t be left out in the cold.”
As for credibility at corporate headquarters,
his goals are so ambitious that
some staffers expect him to fail.
But his new marketing strategy has
already paid off. Until late last year,
most of the salesmen pitched to everybody
who would listen; now they woo only
major accounts good for at least
15 860s instead of one or two. Thanks to
reduced manufacturing costs, the Office
Products Division now offers irresistible
prices. One competitor notes with awe:
“Xerox seems to have been slashing prices
every quarter. They’ll give you a
quantity discount for four 860s, and for
a dozen, they’ll negotiate a special
deal.” The result: Massaro’s
division, which lost $50 million in
1979, turned a pretax profit of some
$5 million for the last quarter of 1980.
It will probably stay profitable this year
even after spending $75 million to introduce
its new products.
The division’s marketing tactics
are sure to become still more aggressive.
Until 1985, when it aims to hit a 15%
pretax margin on $1 billion in sales,
Massaro’s shop will sacrifice profit
for market share, staying in the black just
enough to keep corporate headquarters happy.
The marketers are toying with powerful
pricing tools, some of which may raise
the hackles of trustbusters. They want
to bundle their products together so the total
size of a purchase will determine the
customer’s volume discount. They are
even thinking of including copiers in the bundle
and giving volume credits in the U.S. for
gear that a customer installs overseas.
Such moves could devastate competitors with
narrower product lines and less geographic
spread. Even giants like IBM may shudder
somewhat after they see thousands of Worms
and Sabers moving through Xerox’s
retail stores, which will number more than
20 by the end of this year.
Changes every minute
Xerox will need every one of those ploys
to grab the market position it covets.
Figures compiled by International Data
Corp., a market-research firm, show that
the company continued to lose market share
in word-processing last year to
Wang, to NBI, a Colorado-based newcomer,
and to Micom, owned by N.V. Philips. Nearly
all Xerox’s new products address customer
needs that seem to exist but that nobody
has met before. So the company is trying
to create markets, a particularly tall order
when the possibilities for product design
constantly change. Robert M. Metcalfe, who
left Xerox to start 3Com, which makes
transceivers for Ethernet, points out that
“defining the product is a bitch
when you’re sitting in the middle
of technologies that change every minute.”
The critical test for Xerox, though, will
be its handling of the conflicts sure
to flare between the brash Office Products
Division and the rest of the company.
The copier sales force that covers big
accounts, for instance, would like to
add Saber typewriters to its bag of
products. But some executives in Dallas
want to keep Saber marketing in their own
division. Splitting up the turf may
get bloody.
An irritating prospect
Massaro’s freewheeling style is
both boon and bane in the hierarchy at
Xerox. He holds sales meetings that are
too rowdy for some corporate types but
gets unwavering support from the top.
Several times his division has proposed
radical pricing and marketing schemes that
outraged the rest of the company.
Chairman McColough has decided in
Massaro’s favor in each case,
and the copier division has even adopted
some of the controversial new methods.
It looks as though Xerox’s top
managers are using Massaro’s
crew to peddle change to the rest of
the corporation. The company might eventually
be broken up into “strategic business
units” much like the Office
Products Division. Any such prospect
doubtless irritates some powerful corporate
staffers, so Massaro’s first big
mistake could be his last. A
competitor suggests, “He may
get eaten up.” All he and his
division can be sure of is that, for
better or worse, their imprint on Xerox
will be indelible.
by Bro Uttal
Research associate: Peter D. Petre
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