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Before the 1970's Xerox pretty much dominated the market for document processing. However, by 1970, the Japanese started to penetrate the world market with low-cost products. The public perception in the USA, and Xerox's board believed that low quality was directly linked to low-cost products. In 1974, Japanese Canon, Ricoh penetrated the market with cheap and efficient plain paper copiers. Xerox did not respond to this new idea and continued to sell copiers that required coated paper. As a result, by 1978, the Japanese companies controlled 25% of the world market.
In addition, the Japanese products started to gain a reputable reputation of being good quality copiers for a good price. Xerox realized that the company had to continue to improve products and services continuously in order to gain the lost market share, or even being able to retain the current share. In 1982, David Kearns became the President and the CEO, and he introduced a total quality strategy, which "gave Xerox employees the tools they needed to compete in the global market."
The internal strengths of the Xerox corporation relative to the competition in the industry includes the following strengths. First, I believe that Xerox has a favorable brand name image. The company was one of the pioneers in the document processing business, and the name stands for quality, state-of-the-art technology, and good service. Many Japanese brands may not have such a favorable image. This image was enhanced by the introduction of the "Total satisfaction guarantee" where instead of monetary refunds, the products are replaced. Secondly, I believe that Xerox corporation has an excellent quality management team. This fact has enabled the corporation to increase its market share. Also, Xerox places a heavy emphasis on employee participation in operational decisions. Also, the people in the Xerox organization are of a proactive nature, rather than a reactive. This will make it possible for the company to set industry standards, rather than respond to the actions of competitors. Also, employee participation programs makes it possible for Xerox to gain valuable information from the "bottom up" and the company should be well prepared to meet new customer demands.
The weaknesses of the Xerox corporation relative to the competition include all of the following; high overhead costs as a result of Total Quality management implementation, and a fairly weak financial position. First, keeping-up a close to perfect quality index costs a lot of money. It is possible the trade-offs associated with the "100% quality concept" may be too large, thus creating a negative competitive position for Xerox. How much are customers prepared to pay for exceptional quality and service?
In addition, the financial position of Xerox is not very good. It is true that the fixed asset turnover has increased in recent years, but the total asset turnover ratio has decreased. A possible explanation to that fact is that the company has increased its inventory requirements by its product replacement concept. Profitability ratios are decreasing steadily (returns on sales, return on equity, return on investment and du pont). In addition, leverage ratios are increasing.
The external opportunities that the Xerox corporation can utilize includes all of the following; Diversification into more product lines, and finally, seek expansion into more potential foreign markets. First, by diversifying into more product lines, Xerox will be able to utilize its good reputation and favorable image in new related products and services. By offering more diverse products and services, the company may be able to more effectively respond to international needs in the "office machine" market. Therefore, it may be less difficult to diversify into new potential markets, such as Europe and South East Asia. However, some international markets may not be able to pay the price for quality (such as less industrialized nations).
The external threats that Xerox faces are the following; Increased competition from low-cost-high-quality products from domestic and foreign manufacturers, economic recession, and finally, deregulation's of trade barriers by the implementation of the World Trade Organization on January 1st, 1995. First, in recent years, foreign competitors and domestic competitors have cannibalized a large market share of the copier market from Xerox. These competitors will most probably be able to improve quality and maintain low prices. Many companies may not be prepared to pay a high price for image and reputation. In addition, the copier market is highly sensitive to economic trends. As a result of economic depression, businesses are less willing to invest in assets and may chose to "sail through" the recession utilizing what the company already has. Investments are therefore discouraged. This fact could certainly affect Xerox's market place. Also, unfavorable government intervention such as the lowering of import barriers of goods and services to the United States in accordance to the new GATT agreement may impose a major threat to Xerox's largest market, which is currently the USA. This will make imported copiers less expensive to buy in the domestic market, since importing foreign companies will face lower ad-valorem trade barriers.
The very first step that the Xerox had to take was to enhance and change the corporate culture, which usually is very difficult and time consuming, since the process involves changing the perceptions of the people in the organization. David Kearns decided that this "corporate culture turnaround strategy" was to be achieved by extensive training. A company motto was established, "the better the quality, the lower the overall costs." In 1983, Xerox implemented a "Quality through Leadership" program, which had three main objectives. First to improve profits as reflected in higher returns on assets. Second, to improve customer satisfaction, and third, to improve market share. David Kearns first believed that these three objectives were of equal importance. However, soon it was recognized that the objectives were in conflicting nature, and they could only be achieved on the expense of one other. Therefore, one particular objective was ranked as most important to improve customer satisfaction.
The cost of the implemented program was enormous, $125 million, and over 4 million hours of man hours of work. However, the results of the program were positive. Customer satisfaction increased by 40% and customer complaints decreased by 60%. Promotions were based on criteria not related to quality. By 1989, 75% of Xerox workers participate in the drive for perfect quality, and over 7,000 quality improvement teams were formed. Company expenditure designated for training was increased to 2.5%-3.0% of the annual revenues. In the total quality control (TQC) concept, employees are empowered to take responsibility for quality.
In addition, Xerox closely examined companies such as American Express, American Hospital Supply and L.L. Beam in the purpose to learn how to increase efficiency. This process is known as competitive bench marking which is the "continuous process of measuring products, services, and practices against the company's toughest competitors or those companies renowned as industry leaders." This kind of strategy forces the corporation to examine and effectively respond to changes in the competitive environment.
Furthermore, since it is difficult to control the quality standards of several suppliers (Xerox had 5000), Mr. Kearns decided to cut down the number of suppliers to 300. This action made it possible for the corporation to gain more control over the quality of inputs and to reduce costs.
The second element in TQM is to develop a customer orientation, which emphasizes that quality is what the customer says it is. Xerox did fulfill this element. Employees were directly involved in the sales process, and became directly responsible for keeping customers satisfied. In the Xerox organization, "Employees are closest to the customer".
Third, TQM requires focus on the company's business processes. Processes in all functional areas of an organization should be closely examined, and the organization should look for ways to improve them. Again, Xerox did closely examine its functional areas, such as manufacturing processes. By better utilizing assets, including the employees, Xerox was able to increase its return on assets. Defect free products rose to 99.95 percent. The fourth element which is to develop customer and supplier partnerships. This view suggests suppliers are partners in meeting customer needs, and customers are partners by providing input so the company and suppliers can meet customer product expectations.
Fifth, an organization must take a preventive approach. The management should be rewarded for being prevention oriented and seeking to eliminate non value-added work. The organization must be proactive. Sixth, the organization has to adopt an error-free attitude. Instill an attitude that "good enough" is not good enough anymore. Xerox clearly fulfilled this requirement, since it reached a nearly perfect quality index, and that David Kearns still emphasized a 100 percent fault free products.
Seventh, a company that is in the process of implementing a TQM program should "get the facts first." TQM companies should make decisions based on facts, not on opinions. Xerox fulfilled this requirement, since the company was turned into an information company, as opposed to a copier company. Xerox was one of the first companies to conclude that the "Industrial age" is over and the "Information Age" has begun. Furthermore, research and development staff was reorganized and trained.
Eight, a TQM company should encourage every manager and employee to participate. Xerox was able to fulfill this element. Employees were included in more management decisions. Line workers and other personnel was involved and were given the opportunity to provide input in finding ways of improving production and service through quality improvement teams. The ninth element is to create an atmosphere of total involvement. TQM cannot be achieved unless all areas of the organization apply quality concepts simultaneously. Xerox fulfilled this requirement as well. All functional departments in the organization were involved, and Finally, TQM companies should strive for continuous improvement. Quality is not only a one-time program of competitive response, for it creates a new standard to measure up to. Improving quality is not only good for the profitability of the business, but it is a necessity for long term survival of the corporation. Xerox is clearly planning on preserving its TQM approach, and it is a vital part of the company's long term strategy.
Xerox dominated the document processing industry before the middle of the 1970's. The company anticipated that no one single competitor would be able to penetrate the industry. Xerox believed that the barriers to entry were high, and that most Xerox customers would continue to be loyal towards the company. The company did simply not take the competition seriously. They underestimated the power of the competition, especially high potential Japanese manufacturers.
In addition, Xerox was not worried that the Japanese started to penetrate the international copier market in the early 1970's with their low-cost copiers, since Xerox believed that "low cost mean low quality." They believed that their products were untouchable since they were superior in quality and technology. They believed that "the Japanese products posed no threat, because their products were seen as cheap, unreliable, and of laughable quality."
What Xerox did not anticipate was the Japanese were able to catch up in the international market place, and that they were able to keep costs low, but the products were of good quality. In addition, Xerox did not respond to the plain paper copiers which the Japanese introduced in 1974. Furthermore, 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 than Xerox products. In addition, the Japanese were able to sell their products instead of leasing them, which released tied-up capital. Xerox suddenly had to realize that the company was being out produced and under priced.
The key success factors to Xerox successful strategy turnaround are very much employee related. First, increased involvement of employees has directly increased customer satisfaction. Employees are now directly responsible for keeping customers happy and satisfied. Also, since "employees are the closest to the customer", so they know the best how to please the customer. Furthermore, employees are involved in more management decisions. A large emphasis is placed on employee participation. In addition, plenty of money was spent on employee training. I believe that the funds spent on training paid off good returns. A large emphasis was based on changing the corporate attitude regarding the concept of quality, This massive cultural change was accomplished by the training programs. A new slogan was developed, "the better the quality the lower the overall costs."
In addition, the new customer supplier relationship which was created aided in the process of improving the quality standards of component products. It is logical that it is impossible to produce a superior quality product, when components do not meet required quality standards of the company. Also, by better utilizing assets, including the employees, Xerox was able to increase returns on assets (fixed assets) by almost 300 percent.
Furthermore, by reorganizing the organization (particularly in the research and development staff and the marketing force), with the objective of viewing new product lines as systems in the organization. Also, Xerox was one of the first major corporations that recognized the need to move from a purely product-line oriented company (copier company) to an information company. Computer information networks such as Ethernet and other office communications networks made it easier for divisions and people in the organization to communicate with each other. One of the major problems that corporations face today are problems and interference in communication channels.
There are numerous examples of Strategic controls in the Xerox case.
First, employees are Operational control systems guide, monitor, and evaluate progress in meeting annual objectives. Usually, in order to be effective, operational control systems involves setting four essential objectives; Set standard of performance, measure the actual performance, identify deviations from standards set, and finally initiate corrective action. There are several examples of operational controls in the Xerox case. Xerox has focused on "key success factors", such as improved productivity, high employee morale, improved product-service quality, and growth in market share.
The management style is decentralized. Employee input from all employee hierarchies in the corporate structure is crucial in maintaining Xerox's total quality concepts. Employees are considered to be very valuable, and ideas are taken seriously. Idea generation and basic change is originating from the "bottom" of the hierarchy level. Excellent information systems facilitate the need for the free flow of information between departments, employees, and subsidiaries. That is a necessity, since communication between the over 7000 quality teams is crucial for their effectiveness.
Management by Objectives (MBO) is a crucial component of Xerox's management style. MBO emphasizes employee participation in the decision making processes. Employees meet together with the management, and together, they find possible and reasonable solutions to problems and opportunities. The Management by Objectives system creates effective bench marking (which is set bilaterally by employees and management), which it is possible to measure success factors effectively in individual quality improvement teams and in individual departments throughout the organization.
The leardership approach ar Xeorx is a two way system, and not an authoritan style of management. Upper management at Xerox delegates much authority and decisison making to line supervisors and employees. Furthermore, input from employees is taken seriously, and corporate leaders are open to opinions and changes, which requires a high degree of flexibility. Employees at Xerox are feeling that they are involved in the company.
In addition, I believe that the strategic control is centralized to the top management. Strategy decision making, such as the implementation of new product lines and future expansions into foreign markets are made at a top-management level. The top management at Xeorx is keeping goals in sight, but is flexible enough to adopt to environmental changes both from within and outside the company.
Overall, the Xerox corporation is not financially doing as well as it did in earlier years. While examining a corporation it is important to analyze the internal financial capabilities and policies of an organization. By the use of a trend analysis, the economic health of the company can be determined and educated forecasts can be made concerning the financial future of the company. This trend analysis of the Xerox Corporation Company is for the years 1980 through 1989. The following financial ratios will be used; profitability, liquidity, leverage and finally activity ratios. Please refer to appendix #1 for numeric details.
The activity ratios indicate how effectively a firm is using its resources. The Asset turnover ratio of Xerox has decreased in the last four years, while the fixed asset turnover has increased. That indicates that the turnover on plant and equipment is increasing, but the management is not able to efficiently manage Xerox's total assets. A possible explanation why the total asset turnover ratio is lower than the fixed asset turnover is that Xerox is forced to carry large amounts of inventory, in the purpose of being able to quickly satisfy customer demands and backup the corporation's product replacement program. (Please refer to graph #1)
Profitability ratios indicates how effectively the total firm is being managed. Returns on sales, return on investment, return on equity and the net profit margin are all decreasing. The total profitability of Xerox is therefore decreasing. A Du Pont analysis confirms this negative trend. These numbers may scare future stockholders away from the company. Therefore it may be difficult for Xerox to find future potential investors. (Please refer to Graphs #2 and #4).
Leverage ratios identify the source of a firm's capital. Xerox's leverage ratios are increasing. The total debt to total assets ratio measures the percentage of total funds provided by debt. In 1990, Xerox's debt to total assets ratio was 0.86, way above the national average of approximately 0.50. In addition, the long-term debt to equity ratio, which measures how much of Xerox's long term financing are provided by creditors. This ratio has also increased in recent years. (Please refer to graph #3)
Liquidity ratios are used as indicators of a firm's ability to meet its short-term obligations, such as current liabilities. Xerox's current ratio has decreased in recent years. In 1990, Xerox's current ratio was 1.51, which I believe is a bit too low. Most financial analysts believe that a current ratio of two to three is favorable to companies. (Please refer to graph #4)
To summarize, I believe that the financial position of the Xerox corporation is fairly weak. The company should carefully consider future expansions which require major investments. Leverage ratios should be decreased, and Profitability, Liquidity and Activity ratios should be increased. It is important to improve profitability ratios, as low ratios may discourage future investments in the company. Xerox can not only focus on excellent quality, but the company must also consider the profitability of the company. There is usually a trade-off between profitability and quality. The "QTL" program cost an estimated $125 million and over 4 million of man hours, but to what extent did the program contribute to the profitability of the company? Xerox has to find the proper balance between the two.
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