“Xerox: The Copier Company” epitomizes one of the greatest strategic blunders in the history of high technology corporations. The legacy of C. Peter McColough’s tenure as CEO at Xerox was that he gave away the future of the company while he was at the helm. When McColough took over the reins of Xerox in 1968, Xerox was fully enjoying the 40-45% growth in their 80% copier dominated market share. McColough had the vision to see that in the office of the future, information would be stored electronically and he wanted Xerox to dominate the storing and reproduction of digital information just as it had dominated that on paper. To this end, Xerox developed the first personal computer three years before the first Apple computer and more than eight years before the appearance of the IBM PC. Having the computer and networking businesses firmly hooked, McColough failed to reel them in.
At the outset, McColough appeared to be the champion of his company and perhaps the entire business era. For example, to ensure Xerox’s presence as a leader in the “architecture of information,” McColough established the Palo Alto Research Center (PARC) to develop digital office technologies. After all, he reasoned, the best way to predict the future was to invent it. In the early 1970’s, many corporations were cutting their R&D budgets while Xerox, on the other hand, provided unlimited funding to PARC who gathered together a team of world-class researchers in information sciences and physical sciences. This team invented virtually every aspect of today’s personal computer, including the graphical user interface, on which Windows and Apple are based, along with the mouse, the laser printer, computer networking, internet protocol, bitmapped graphics and e-mail. Despite these profound achievements in computer technology, Xerox is still known as the copier company because McColough failed to commercialize or protect this new technology.
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Nature and Cause of the Error
At the root of McColough’s strategic error was his failure to support his predictions for the future of Xerox with corporate action. McColough touted PARC as the future of the company, yet he neither protected the stunning technological developments from PARC nor evolved Xerox from the service company that it was, to the technology provider that it could have easily become. The error comprised two main shortfalls: failure to commercialize the technology; and failure to protect the resulting intellectual property.
Xerox’s failure to commercialize the computer technology that they had developed was the inability of the corporate leopard to change its spots. Xerox became the world leader in photocopiers by delivering a product that the customer wanted and understood, creating an innovative business model to make the product attractive to the customer, and protecting their intellectual property. When marketing the personal computer, Xerox completely abandoned all three tenants of the previous success.
In marketing the personal computer Xerox refused to recognize the evolving market and tried to fit the market to their product rather than the other way around. Xerox aimed to duplicate their past successes and make and market computers the same way they made and marketed copy machines. Since Xerox made their huge profits in copiers by leasing the machines to businesses, and charging per page for the copies, they created copiers that were top quality, fast, and came with comprehensive maintenance and service. They were built rock solid because any down time ate into Xerox’s profitability – a broken or slow copy machine couldn’t print money as fast. Xerox copiers were proprietary machines that were leased through a network of Xerox sales representatives. Copiers were sold by authorized copier salesman, not in retail establishments and relied on the customer to recognize the usefulness of the computer. Xerox’s strategy did not permit a customer to learn about the potential of the computer by going to a retail establishment and talk about computers with a salesman who knew about computers.
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Xerox Alto Computers. Note the video screen portrait layout similar to a sheet of paper Xerox wanted to market a digital document system that complimented their copier business. To this end, Xerox developed a product for the market they wanted to create, rather than cater to what the market wanted. When the Alto, Xerox’s first computer, was introduced, it required a large amount of expensive memory to enable the networking feature that would permit multiple users to print directly to a single Xerox laser printer. A single unit sold for $16,000 compared to the later Apple 1 at $666 and the IBM PC at $1,565. Additionally, the Alto was not originally meant to be a stand-alone computer, but was part of an integrated Xerox “personal office system” that also connected to other workstations and network services via Ethernet. A typical office would have to purchase at least two or three machines along with a file server and a print server. Dropping $50,000 to $100,000 for a complete installation was not an easy sell. Xerox’s proprietary architecture and software and unwillingness to adapt their product resulted in customers who were forced to buy more than they required or knew how to use. This resulted in very few sales and a giant missed opportunity for Xerox. It seems that due to Xerox’s smugness in prior market share domination, the willingness to try and market a new technology in a new way was never attempted. McColough either did nothing about this or didn’t do enough to try and change that approach. Thus, he let the opportunity go by the wayside.
In retrospect, Xerox’s failure to commercialize the computer pales in comparison to their failure to acquire patent protection for PARC’s intellectual property. Steve Jobs, the CEO of Apple, proclaimed in 1996 that “‘Xerox could have owned the entire computer industry today.” It is estimated that Xerox missed out on at least $500 million per year in licensing revenues it could have collected from the PARC technologies. For example, IBM made $1.7 billion dollars in 2000 licensing its computer technology to other companies. Truthfully, the financial opportunity lost is unquantifiable.
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Had Xerox patented their computer technology, they would have enjoyed a monopoly of the burgeoning computer market, similar to what Xerox had enjoyed in their copier business. Ironically, the patent protection that provided the very foundation of their market leading product lines, enhanced market share and high margins in the copier business was completely ignored when it came to personal computers. A computer patent portfolio could have been used by Xerox as a defensive tool in their marketing of the personal computer. By choosing who licenses the technology and for how long, Xerox can control the marketplace. Selectively licensing the patents could permit Xerox to control the margins realized by licensees by forcing them to implement more costly solutions than Xerox could implement with other patent protected technology. Alternatively, had Xerox decided that the personal computer market did not compliment their copier and document system market, they could have licensed the technology to other manufacturers and thus have reaped monetary reward for their hard earned inventions.
McColough had the vision of the Xerox of the future and the technology to support it; he just couldn’t execute it. At the heart of McColough’s execution problems were Xerox’s inertia and complacency resulting from their previous copier success, McColough’s own lack of focus on Xerox’s day-to-day activities, and failing to hire the right people for essential positions in a high technology company.
Xerox was comfortable leasing copiers and service plans. They reaped huge rewards from this strategy in the past and wanted to experience these rewards again. However, Xerox failed to learn from their past success, that was built on patent protection and delivering what the customer wanted. Xerox tried to force customers to purchase large systems, in contrast to the short-term leases offered on their copiers. Xerox failed to get the patent protection required to recreate the copier monopoly, instead concentrating primarily on the marketing and service aspects. Ironically, in an interview with McColough in the Harvard Business Review in 1975, a quote was printed stating that “affairs go according to the conditions of their time, and plans must be made in accordance with the way affairs are going now.” All this occurred at a time when Xerox was preoccupied with aggressive competition from Japan in its core copier business and pressure from the Federal Trade Commission to break up Xerox’s monopoly on the copier industry. It is as if McColough ignored everything that Xerox had done to make themselves successful with the photocopiers (i.e. innovative market introduction with a new product and proper intellectual property protection and control of that new technology).
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It was those type of elements that were neglected to be executed when introducing the computer technology. It’s like Xerox lost focus of the basics when dealing with new technology.
McColough used his time as Xerox CEO to pursue, and finance, his civic goals. While the CEO of Xerox, McColough was chairman of the finance committee of the Urban League, chairman of the International Executive Service Corps, chairman of the United Way of America, chairman of the planning committee for the presidential campaign of Senator Henry Jackson, director of the Counsel on Foreign Relations, and a trustee of the Rochester Institute of Technology, St. John Fisher College, Manhattanville College, the University of Rochester and a Director of the Community Chest of Rochester and the Memorial Art Gallery. In March of 1966, Mr. McColough received a Presidential appointment to serve as a member of the United Service Organizations for a three-year term. McColough spent millions of Xerox dollars on charitable organizations, civil rights initiatives and to sponsor educational television. Some may have been tax write-offs, but surely Xerox did not profit from McColough’s reduced focus on Xerox business. While McColough was pursuing his civic goals, the focus on Xerox’s day-to-day affairs could have been compromised along with his vision of an “architecture of information” and seeing his vision through to its potential. This lack of focus on the details may explain why the patent protection that was the foundation of Xerox’s copier success was neglected when pursuing the computer technology.
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To compound the problems resulting from his lack of attention to Xerox matters, McColough failed to surround himself with the people that could make his vision and strategy a reality. Jack Goldman, head of PARC, was also active on many other corporate boards, in government and in professional advisory roles. The nobility of these pursuits is undeniable, but it seems that it came at the expense of properly managing the technology mining that Xerox so prized for its future footing.
It should also be noted that in 1975, the Federal Trade Commission ruled that Xerox was using its patent protection to create an unfair monopoly; a monopoly originally granted by the government in exchange for Xerox’s divulgation of its technology to the patent office. The Federal Trade Commission ruled that Xerox must license its copier patents to anyone who applied, thus signaling the end to Xerox’s copier monopoly and huge margins. This ruling created a risk-shy culture at Xerox, prompting McColough to hire a number of Ford executives to rein in research spending. The Ford executives established controls similar to those at Ford which focused on model years, fashion, low technology, and blue collar production lines. These controls did not fit a high technology company where development was critical. This resulted in a culture where the sales and service organizations dominated. In fact, Bob Potter, another executive of PARC was compensated for the number of typewriters Xerox sold, not based on achieving research goals. This encouraged Potter in 1978 to promote a typewriter with digital memory that could hold a page of text rather than pursue the personal computer. Potter got his bonus. This is a point in proof that misguided priorities set or approved by the CEO and higher level executives eventually chip away at an organization’s true potential and prosperity.
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Consequences for the Executive
McColough continued on at Xerox until his retirement in 1985. McColough was not fired for his mistakes primarily because it was only after his retirement that the magnitude of the mistakes were realized. McColough was one of the primary reasons Xerox was so successful in the copier business and the board of directors surely felt some sense of obligation to him for that, especially in a time when fewer CEOs were terminated for their mistakes. McColough was also a CEO in a time when few recognized the value of intellectual property and how important it would become to high technology firms. During his tenure, the government had a negative view of patent monopolies, as is evidenced by their breakup of Xerox’s copier patent monopoly. Board members and shareholders probably felt that what is the point of spending all the money to get patent protection if the government just removes this protection when a company becomes too successful. Had McColough been the CEO of Xerox today, at a time when intellectual property is considered important to high-tech companies, he surely would have been fired, if not found grossly negligent for his failure to acquire patent protection on PARC’s computer developments.
Now McColough’s legacy is not the success of the copier business, but the paragraph in every article about Xerox that describes their lost opportunities in the 1970’s. The company has never recovered from the downward spiral resulting from McColough’s neglect, even bordering on bankruptcy in 2001. McColough’s vision of keeping Xerox at the forefront of technology never materialized in a financially sustainable way.
Not only must the CEO be on top of the day-to-day operations of the company and ensure that the right people are in the right positions to execute the CEO’s corporate vision, but the primary lesson to be learned from McColough’s mistakes as CEO of Xerox, is to recognize the value of intellectual property for both their defensive aspects as well as their potential as a revenue source. Xerox has developed a new organization structure to try to capitalize on their intellectual property. Numerous IBM alumni have been hired, including past CEO Rick Thoman. Thoman had been asked to recreate IBM’s technology friendly atmosphere, as well as their extremely successful patent licensing business at Xerox. Thus, Xerox formed an intellectual property business unit to develop their licensing programs. Xerox further created, and spun off, Xerox New Enterprises which fosters and funds spin-offs from PARC technologies. Over ten new spin-offs have been created and are generating over $700 million in annual revenues.
Where are they now?
C. Peter McColough retired from Xerox in 1985. In the aftermath of his departure from Xerox, the company really didn’t change much. Xerox tried to break out of the “Xerox family” mold by bringing in executives from IBM to help right the ship. CEO Rick Thoman, an outsider from IBM, lasted only 13 months before former CEO Paul Allaire, a Xerox lifer, was brought back in after the board reasoned that Thoman did not connect well enough with people within the organization and erred in forcing a change of pace on Xerox that it simply could not withstand. In a 2005 interview with Businessweek, CEO Anne Mulchahy, another Xerox lifer who replaced Allaire in 2001, said that “the experiences that we’ve been through have certainly focused [us] on really being excellent in execution.” As of today, Xerox has attempted to focus on intellectual property as a core competency, however, they have been unable to capture anywhere near the revenues that IBM realizes. core copentencybeen unable to break free of the Xerox family ways and has yet to recover even a shadow of their former glory. Perhaps the technological pioneering spirit that brought Xerox claim-to-fame in the copier industry can be combined with a renewed focus on execution to result in the company’s bottom line flourishing once again.