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Reprinted from Fortune, 18th May 1981, pp. 44-52.

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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 Instead, Xerox stumbled along with electronic typewriters and word processors that were expensive, out of date, and difficult to use.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.
This image can be zoomedDonald 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

“How to get around the office without leaving your desk”

Page added on 6th October 2006.

Copyright © 2002-2006 Marcin Wichary, unless stated otherwise.