Name a management fad and Xerox Corp. has embraced it -- downsizing, diversification, benchmarking, re-engineering. Employees have been empowered, incentivized and organized into cross-functional work teams. Non-core functions have been outsourced. Quality has been turned into a corporate religion.
It may all sound like life in a Dilbert cartoon, but at places like Xerox, folks are chuckling all the way to the bank. With its costs now equal to or below those of its toughest competitors and with a hot new line of digital copiers and printers, Xerox sales and profits are booming. The company's stock price, which completely missed the boom of the 1980s, has climbed 150 percent over the past two years.
The fall and rise of Xerox reflects what has been going on all across Corporate America and goes a long way toward explaining why the United States has regained its title as the world's economic superpower.
The reason that Federal Reserve Board Chairman Alan Greenspan could tell Congress two weeks ago that the American economy is in the best shape he has ever seen stems not only from the wisdom of government economic policy, the vibrant small-business sector or even dumb luck, though analysts agree that nearly all three have been contributing factors. Equally important has been that so many big corporations, including Ford Motor Co., Citicorp, Sears Roebuck and Co., as well as Xerox, have transformed themselves from economic dead-weights into sources of economic strength and power.
Because of sustained and repeated attempts at corporate self renewal -- some of them hokey and misguided, others that turned out powerful and profound -- American workers are again the world's most productive, while U.S. technology has regained it edge and American brand names are sought after by consumers around the world.
"What makes the American economy so strong today is that business has been able to change, learn, adapt and shed old models that no longer apply," said Paul A. Allaire said, Xerox chairman and chief executive.
"It's actually a remarkably simple story: We've tried out lots of different stuff and thrown out what didn't work," said G. Richard Thoman, who last year was appointed Xerox's president after stints at RJR Nabisco Co., American Express Co. and International Business Machines Corp. "But the ones that stuck have had an absolutely profound effect on the way our companies now perform."
David Nadler of Delta Consulting Group remembers stealing away to Asia only a decade ago with a small group of Xerox executives to study Japanese management techniques. "There was a sense at that time that American management was bankrupt and that American industry was headed for an inevitable decline," Nadler said. "But there's been a complete turnaround" to the point that Japanese and European executives are flocking to the United States to study the American way of business.
Business bookshelves overflow with tomes that try to set forth the secrets of this American success. The basic elements -- doing a lot of what you do best and outsourcing the rest, empowering employees and holding them accountable, re-engineering processes for cost and quality -- can be found at successful companies everywhere. Some of the techniques, in fact, were borrowed from Germany and Japan.
But if Xerox is any indication, what gives American companies an advantage in global markets these days is that they have figured out ways to hard-wire the process of adaption and reinvention into the corporate culture and to take what began as a one-time revolution and make it ongoing.
"The American genius is for trial-and-error management -- and Xerox is a great example of that," said Charles Plosser, dean of the business school at the University of Rochester, just down the Genesee River from Xerox's ancestral home. A Rich History
In its 40-year history Xerox has traveled a familiar path from ingenuity to complacency, through desperation and, finally, reinvention.
With the introduction of its 914 copier, which could turn out six plain-paper copies a minute at the push of a button, the Xerox name became synonymous with photocopying. The company's gross margins of 70 percent reflected its virtual monopoly in a rapidly growing new market, with 97 percent of the world market share. Xerox shares topped the "Nifty Fifty" list of hot stocks during Wall Street's go-go years of the 1960s.
In many ways Xerox was the model American corporation, cosseting its work force in generous pay and benefit packages and lavishing largess on its hometown of Rochester, N.Y. Its sales force -- proud, slick and high-commissioned -- inspired countless imitators. At a corporate research laboratory in Palo Alto, Calif., scientists were encouraged to push back the frontiers of knowledge even if its innovations didn't seem to have much to do xerography.
All that began to crumble by the mid-1970s. The Justice Department launched an antitrust investigation that diverted management attention, restrained the company's competitive impulses and forced it to share its know-how with rivals. Companies such as Apple Computer Corp. and Microsoft Corp. created new industries by commercializing breakthroughs made at Xerox labs. And around the world, once-loyal customers were growing increasingly frustrated by expensive machines that were so poorly designed and manufactured that the photocopying error message "Clear Paper Path" became a metaphor for the disregard American business had for its customers.
At the same time formidable competitors had emerged. Japan Inc. had begun to flood the market with low-cost machines from Canon Inc. and Savin Co. that offered attractive lease terms. Even more troubling, IBM and Eastman Kodak Co., Xerox's neighbor in Rochester, entered the market with sophisticated new high-volume machines offering better copy quality, higher speeds and more features at prices 20 percent below Xerox's.
Carlos Pascual, then a rising star in Xerox's European operations, recalls coming to corporate headquarters in the late 1970s with troubling stories of longtime customers who had switched to lower-cost copiers.
"I met with the engineering staff and they told me not to worry, that these machines were just a joke. They didn't have a clue," recalls Pascual, now head of Xerox's customer operations in the United States.
Around the same time Allaire, also a top executive in Europe, suggested at a corporate strategy meeting in Rochester that Xerox might have to cut prices to remain competitive. With a smile, he recalls how he was dressed down for "wanting to ruin the industry's profit margins."
"The reality, which nobody wanted to admit to back then, was that manufacturing was abysmal, research disconnected to products, corporate headquarters was bloated and smug and profits evaporating before our eyes," Allaire said.
Although the company's financial statements continued to tell a favorable story, the results were artificially inflated by the fact that many customers had been encouraged to switch from leasing copiers to buying them. In reality, gross margins -- what a company has after paying for labor and materials -- had declined to 10 percent from 70 percent, while Xerox's share of the world copier market was hovering precariously above 10 percent. David Kearns, then chairman of the company and later secretary of education, told associates that unless something radical was done, Xerox soon would be forced out of the very industry it had invented. Employee Speaks Out
Kearns dates the beginning the turnaround to the annual employees meeting held at the company's manufacturing center in Webster, N.Y., in the recessionary spring of 1980. At the time Xerox was ramping up production on a new low-cost copier, the 3300, which was supposed to be its answer to the Japanese assault. Unfortunately, the company hadn't really designed a low-cost machine -- it had just simplified one of its old designs and then used a lot of cheap, shoddy parts to make it. Even at that, the $7,300 price tag was significantly above that of the competition, but still well below a price that the commissioned sales force thought was worth its time.
As employees gathered under a tent in the parking lot, they could see just how badly things were going by the line of idled rail cars in the distance, each one packed with unsold or unsellable 3300s. After the meeting got under way Frank Enos, a union shop steward and tester on the 3300 line, rose to confront the Xerox chief with a simple question: "David, why didn't you ask us what we thought about this? We could have told you it was a piece of junk."
At that moment of utter humiliation, Kearns recalled, he vowed to turn his company inside out to ensure that it never happened again. He launched one campaign after another to involve every Xerox employee in improving quality, reducing cost and focus on customer satisfaction. In Webster, Enos became something of a touchstone for Kearns's campaign -- managers began seeking his approval for nearly all production changes and executives flew in from corporate headquarters in Stamford, Conn., to seek out his thoughts on designs for new machines. Whatever he and his colleagues suggested, they did.
"It was a real eye-opener the way management jumped after that," recalled Enos, who recently retired from Xerox after 35 years.
The process of renewal has been anything but smooth. At numerous points, Kearns feared it was about to collapse under the weight of cynicism, poor execution and out-and-out resistance.
The introduction of a new combination laser printer and copier, for example, demonstrated the first fruits of the company's quality efforts, but it turned out that there wasn't much of a market for it. Then, a desperate bid to move into the computer business floundered. An ill-timed foray into real estate and insurance eventually cost the company more than $1 billion before the last piece of those businesses was finally sold off this spring.
Along the way, major manufacturing facilities were closed, top executives fired and technology squandered while the company's stock price languished. And frontline workers repeatedly took it on the chin. Since 1980 more than 30,000 jobs have been slashed from the payroll, with another 10,000 to be eliminated in the next two years. Unionized production workers in the Rochester area became so anxious about their jobs that they agreed to dramatic cuts in starting pay with no raises beyond cost of living -- all in return for a no-layoff clause.
Through it all Kearns, Allaire and a determined band of corporate re-engineers won the support of enough workers to implant a culture requiring customer focus and continuous improvement at every level of the company.
"What started out as David Kearns's hobby horse -- quality -- has really become an absolute and unremitting organizing principle for the entire enterprise, from the farthest corner of the factory floor to the strategic planning group at headquarters," said Bobby Ray Inman, who has served as a since resigning as director of the Central Intelligence Agency.
The director's view was echoed by three of Frank Enos's children who still work at Xerox as they gathered recently for a family dinner at Clementes, a neighborhood Italian restaurant.
"For the longest time, I thought all this quality stuff was just a way to pacify us and blow smoke," said son Carmen, who can smile now as he recalls how he was laid off at Xerox when the 3300 line was closed down after his father's famous speech. "But when I started seeing real change and my job became more secure and more satisfying, I became a convert. This empowerment is real."
In Carmen Enos's case, the empowerment has come in the form of a management job, overseeing a new group in Webster that strips old copiers down to their steel frames before outfitting them with refurbished motors and new electronics. Although Xerox had long had a remanufacturing line in Webster, it was a dirty and dangerous job involving toxic cleaning solvents that were a costly environmental hazard. But after Carmen Enos and a group of associates came up with a new process using robots and freeze-dry carbon-dioxide pellets, the work is now faster, cleaner and cheaper -- and has given Xerox a competitive edge over foreign firms that have no manufacturing capability.
No doubt the Enos children inherited from their father some of the sense of responsibility they feel for the success of new Xerox, but it is reinforced by a powerful web of financial incentives. These include a corporate-wide profit sharing plan that in recent years has amounted to 10 percent of pay for nearly all employees, plus work-team bonuses that can range from 5 percent for production workers to 25 percent or more for some managers. Daughter Valerie Enos, who assembles ink-jet cartridges for Xerox's printer business, frequently earns small bonuses in the form of movie passes or a weekend for two at the local Ramada Inn. Second son Michael Enos, an assembler, can quote the closing price for the Xerox stock accumulating in his corporate savings account.
Allaire and other Xerox officials said such financial incentives, along with the promise of job security, have been crucial in teasing out all the thousands of little ideas that have allowed Xerox and other companies to do things better, faster and cheaper.
"It's not that American managers, all of a sudden, became brilliant," Allaire said. "It's that we found ways of releasing the creative energies of everyone in the company and harnessing that over a sustained period."
These efforts have wiped out the 15 percent to 45 percent cost disadvantage under which Xerox used to labor. And they continue to shave an additional 7 percent off of the cost of producing a copier, year after year. For the typical corporate customer that has meant that the 4 cents-per-copy paid through most of the 1970s and 1980s has been cut by half -- and is heading toward a penny a page by the end of the decade.
Quality-wise, the difference is surely noticeable to customers like Jay Butler. When Butler was facilities manager at an aerospace firm in the 1980s, he got so frustrated with the daily breakdown of Xerox machines that he convinced the company to switch to Kodak -- and saved millions of dollars in the process.
Now in a similar job at Phillips Publishing Co. in Potomac, Butler said he has been replacing Kodak machines with Xerox machines. The new Xerox, he says, offers the comparable price and quality plus a color capability that allows Phillips to save time and money in producing its specialty newsletters. Reliability also has improved to the point, Butler said, that "we haven't had a service complaint in quite a while." In Mexico, a Top Plant
Oscar de la Parra, an energetic and engaging thirty-something engineer dressed in a stylish European suit, oozes with corporate pride as he shepherds a visitor around his domain.
He explains how this facility, which was nearly shuttered in 1990, now is the most efficient Xerox factory in the world. There's the just-in-time inventory system, robots, laser-guided assembly and a computerized production system that can produce 48 variations of the same copier on a single production line. A banner across the top of the shop floor announces that production quality is high enough to earn the highest level of international certification. Of the 2,000 employees, 200 have engineering degrees, with responsibility not only for the operations of the plant, but design changes for all of Xerox's mid-range copiers around the world.
What may comes as a surprise is that this plant is not in the United States or Europe or even Japan. It is in Aguascalientes, a dusty industrial town several hundred miles north of Mexico City. And the recent success of the "Aguas" facility says a lot about what it takes to compete successfully in today's global markets.
Surely access to cheap labor has been part of the story -- counting in benefits and profit sharing, a worker in Aguas costs Xerox about one-fifth of the $25.59 per hour it spends on average in Webster. But according to de la Parra, direct labor accounts for 20 percent to 25 percent of the cost of new copier. And even putting aside its wage advantage, his plant can still produce copiers using fewer man-hours and overhead than other Xerox plants -- with as good or better a record on quality.
Because of this performance, Xerox has moved most of its wire harness production to Aguas, where dozens of women perform the painstaking work of stringing and bundling dozens of multicolored wires that form the central nervous system of a copier. But right next to the area where they work is a new million-dollar machine, two years in development, that can produce in less than a minute a new type of harness that would take a worker 20 minutes to produce.
"This is not some textile plant on the U.S. border that will pull up stakes the minute labor costs change," he said. "We're not here chasing cheap labor. This is a long-term investment in creativity, engineering, quality."
And therein lies the difference between a truly global company and one that merely has plants or suppliers or customers in other countries.
By dispersing its operations around the globe, Xerox has learned to take the greatest advantage of what every region has to offer -- be it talent, technology, lower costs or access to local markets and capital.
At the same time, by concentrating all production or engineering work for each product line at one or two locations, Xerox is able to capture the considerable efficiencies and quality control that come only from high-volume production.
For Xerox managers like de la Parra, the task of "thinking global, acting local" has become a full-time preoccupation.
Practically every day, employees from Aguas are meeting with counterparts from around the world to make sure that the "best practices" developed at one plant are quickly disseminated to every other facility. The factory walls are plastered with the same printouts on sales and production as are used up in Webster. And they are spit out from computers that, increasingly, are tied into a worldwide network using common standards and software.
At the same time, de la Parra and his Xerox colleagues are keen to create a local infrastructure for Xerox's operations and tailor the basic model to local conditions -- a strategy very different from the Japanese and European firms that have opened plants in Aguas.
Production workers, mostly recent high school graduates from nearby farming towns, receive three to six months of skills training before they join a line as an apprentice, often followed by years of English-language classes. And like their counterparts in Holland, Brazil or Rochester, they actively compete to come up with quality-improvement ideas that will earn them a bonus and a trip to the company's annual bake-off.
Meanwhile, professionals and managers are drawn from the top ranks of Mexico's elite universities. And the most promising of the recruits, like de la Parra, are eventually sent off for tours of duty at other Xerox facilities around the world before returning to take the top jobs in Aguas.
The importance of this geographic diversity -- and the fact that people and ideas flow in all directions -- was driven home several years ago when rival Canon beat Xerox to the market with a quality color copier. While the primary engineering team in Webster scrambled to catch up, a group at Fuji-Xerox -- the company's Japanese joint venture -- threw itself into the task and came up with a competitive product within a year. Because of their efforts, Xerox had color sales of $1.5 billion last year, up nearly 50 percent.
"Fuji saved our bacon on color," declared one executive. Extended Qualtiy Control
Xerox's extended global enterprise involves more than its own production and engineering facilities. Increasingly important roles are also being played by key suppliers who not only make computer chips and motors and major subassemblies that Xerox used to make in-house, but also participate directly in developing new products and production processes.
Many of these suppliers are required to have a quality program certified by Xerox inspectors. And they are linked into Xerox's central nervous system through phone lines and computers that exchange information on production volumes, billing and design changes.
One such supplier is Schaffstall Manufacturing Co., which operates from an unassuming one-story metal building just behind the high school in the farming community of North Collins, N.Y.
When Jim Schaffstall's dad bought the company in 1972, it was a small tool and die maker serving a local Chevrolet plant, with 15 employees and $2 million in sales. Today, mostly because of its work for Xerox, Schaffstall has 145 employees, including two dozen engineers and two full-time software programmers. Sales last year topped $15 million and they have been growing recently at the rate of 20 percent per year.
Schaffstall has spent more than $5 million for new equipment to service the Xerox account. These investments range from a $30,000 upgrade to an old tooling machine that shaved 15 percent off the cost of a $10 part, to several million dollars for a robot-operated coating machine that allows the company to "paint" metal frames using one-quarter the labor hours. Long-term contracts from Xerox let Schaffstall easily recoup his investments, however. And the new machinery, in turn, has allowed him to pick up other customers leading to higher volumes and even lower unit costs.
"Xerox really forced us to upgrade and, in the process, helped prepare us to stay competitive," said Schaffstall, noting that virtually all of the companies his dad used to compete against have closed their doors.
It is through its network of alliances with key suppliers like Schaffstall, according to consultant David Nadler, that Xerox and other successful American companies have been able to achieve most of the economies of scale without buying into all the diseconomies that would come with trying to do everything in-house -- the old model of the vertically-integrated corporation.
By buying many of its smallest "personal" copiers in Asia, for example, Xerox has surpassed Cannon in a category that it had long conceded to its lower-cost competitors. And rather than trying to sell all its machines to corporations through its own sales force, Xerox has yielded to the preferences of its customers and is selling many of its machines through middlemen and retailers.
"For a long time, we confused scale, which is crucial, with sheer size, which isn't," said Nadler. Redefining Culture
There's very little about John Elter to suggest the stereotype of the company man -- not the in-your-face bravado nor the daily transcendental meditation, not the radical ecological politics nor the adventure vacations like the float trip down the Amazon. But in many ways, the engineer's 35-year career tracks the ups and downs of Xerox.
A Webster native, Elter's first summer job was with Xerox in 1963, figuring out how to speed up the original 914 copier. In the late 1970s he was detailed to help with the 3300 copier that Frank Enos finally blew the whistle on -- a machine nearly as disastrous for Elter's career as it was for the company's bottom line. After burrowing in for a few years, he re-emerged in the late 1980s as head of the design team for a new high-speed copier with a touch-screen control panel that would finally break Kodak's hold on the high-volume end of the copier market.
By the early 1990s, however, Elter, like many at Xerox, had concluded that the company had become competitive again at producing copiers at just the time that copiers were becoming irrelevant. With people relying increasingly on computers, printers and faxes to generate, transfer, produce and store most documents, the old light and lense copier looked to be going the way of carbon paper. Quietly, almost surreptitiously, Elter began cobbling together some money from various budgets to begin designing an "digital" machines that would convert all documents into a series of zeros and ones. By hooking it into office computer and telephone systems, this one machine could serve as an office's combined fax, scanner, printer and copier.
Determined to avoid past mistakes, Elter set out to create a culture for his new development team more like that of a Silicon Valley start-up than a lumbering bureaucratic corporation. He rented an old office building at a highway interchange and slowly began building a staff of independent-minded engineers and PhDs. There were no private offices, no assigned parking spaces, no ties or titles. Closed meetings were banned in favor of open and ongoing brainstorming sessions held in conference rooms named after Rochester area lakes. Researchers out in Palo Alto also were brought into the act.
The goals for the "Lakes" project, as it came to be called, were every bit as radical as the management style: to develop not only a new machine but also a new system for designing, producing and servicing it.
For all its grand ambitions, however, the group quickly got bogged down in some rather prosaic problems: determining just the right amount of wax for the new toner; developing software that could be networked with office computer networks; creating a new solid-state laser the size of a mustard seed.
In the end it took more time -- seven years -- and more money -- $400 million -- to produce than anyone had planned. More than 500 patents were filed in connection with the project and the machine's software packed in 3 million lines of computer code. Two hundred babies were born to Lakes team members before the new Document Center 265 was finally introduced by a teary Elter at a presentation last April in New York.
To an untrained eye the new machine appears to be a marvel of simplicity and convenience. With commands dictated from a ordinary PC, it can turn out crisp documents in any number, from any source, in any of a dozen different configurations. The machine requires no special installation -- just plug and play. And once in operation, most problems can be diagnosed and fixed over telephone lines by service technicians hundreds of miles away.
From the beginning, the Lakes design process was driven by the need to be able to manufacture machines quicker and cheaper. Instead of the 1,250 parts on a comparable light-lens machine, there are 250 components in a Lakes machine provided by only 35 primary suppliers, Schaffstall among them. Three printed wire boards do work that used to require 42. Wire harnesses come from the new automated machine in Aguas.
The whole thing is so simple, in fact, that it can be fastened together in an hour using only seven tools that can be bought at the corner hardware store. Computers, hand-held scanners and bar-codes on every part have banished all paperwork on the line, along with any need to maintain more than a day or two worth of parts inventory.
So far revenue from the Document Centre 265 has exceeded company projections, with sales accounting for half of all sales in that category. And with orders already backlogged, a second shift has been added to the assembly line in Webster and a new one is being planned for Xerox's facility in Venray, the Netherlands.
The importance of the Lakes machine, however, goes beyond the boost it has given to Xerox's quarterly sales and profits. It already has helped to helped to restore the luster to the Xerox brand name and once again made it a darling of Wall Street. And it has holds the very real promise of finally allowing Xerox to make the jump from the copier industry, where the technology is mature and the price competition intense, into the center of the booming and more profitable high-tech industry.
"What distinguishes the old Xerox from the new Xerox is that these days we bet the company every time we bring out a major new product line," said Brian E. Stern, the British native who oversees all of Xerox's office machines business.
Winning those bets, Stern said, boils down to a handful of critical skills, like software development, marketing and people management, in which American firms excel. As a result, he and his colleagues at Xerox see that their greatest challenge in the digital era will come not from its remaining foreign competitors in the copier business -- Japan's Canon or Europe's Oce -- but from Hewlett-Packard Corp., the American computer powerhouse. "It's amazing what American corporations have done in the last decade," Stern said, "just amazing." CAPTION: XEROX'S RISE AND FALL AND RISE (This graphic was not available) CAPTION: X marks the spot for Xerox, which has put itself back on the profit map. CAPTION: Comments by union shop steward Frank Enos, left, got management thinking. Though he recently retired after 35 years, his children Carmen Enos, Valerie Enos and Michael Enos still work for Xerox. CAPTION: John Elter, vice president for new business development, set out to create a culture more like that of a Silicon Valley start-up than a corporate bureaucracy.