Fir st Qu a r t e r , 1 9 9 7 , pp. 4 - 1 6 .

Competing in Constellations: The Case of Fuji Xerox

By Benjamin Gomes-Casseres
The relationship between Xerox and Fuji Xerox, its joint venture in Japan, is the centerpiece
of this commentary on how alliances among companies are forging new units of economic
power known as "constellations." Internal rivalry can put constellations at a disadvantage
against single-company rivals, and the ability to manage the balance of competition and
cooperation is critical to success.

I n a world of global businesses and
ext ended ent erprises, it oft en m akes m ore
sense for com panies t o t eam up t han go it
alone. Here is how Xerox and Fuj i Xerox
collect ively com pet e.
Cooperat ion am ong com panies has grown
rapidly since t he early 1980's, as alliances
have proliferat ed in one indust ry aft er
anot her. At t he sam e t im e, however, t he
com pet it ion in t hese indust ries has in
m any ways becom e even fiercer t han
before. This flies in t he face of t radit ional
econom ic t hinking. As Adam Sm it h
observed: " People of t he sam e t rade
seldom m eet t oget her, even for
m errim ent and diversion, but t he
conversat ion ends in a conspiracy against
t he public, or in som e cont rivance t o raise
prices." ( 1) I n fact , m odern alliances do
not so m uch suppress business rivalry as
t ransform it , giving it a new shape t hat is
oft en even m ore virulent t han t he old.
The new " collect ive com pet it ion" grows
out of t he very dynam ics of collaborat ion.
Sim ply put , business rivalry now oft en
t akes place bet ween set s of allied
com panies, rat her t han bet ween single
com panies. The alliances am ong
com panies are forging new unit s of
econom ic power - - " const ellat ions" t hat
com pet e against each ot her as well as
against t radit ional single com panies. I n
t his new world, t he way com panies
m anage t he collaborat ion inside t heir
const ellat ion affect s t he com pet it ive
behavior and perform ance of t he group as
a whole. And t he perform ance of each
com pany com es t o depend not only on it s
own capabilit ies and st rat egies but also on
t hose of it s allies and on it s relat ionships
t o t hose allies.
The case of t he Xerox Corporat ion and t he
Fuj i Xerox Corporat ion shows how
successful a const ellat ion can be if it is
m anaged effect ively. I n copiers and laser
print ers, t he com pet it ion bet ween Xerox
and it s archrival, Canon Lt d., was not one
on one, com pany against com pany.
I nst ead, a const ellat ion of com panies
around Xerox com pet ed wit h Canon,
which operat ed as a single com pany. The
Xerox const ellat ion is com plex, but at it s
core is a pair of allied com panies - - Xerox
and Fuj i Xerox, t he Xerox j oint vent ure in
Japan. Toget her, t his pair develops
product s, penet rat es m arket s,
m anufact ures hardware and so on - - all
t he t hings t hat Canon does on it s own.
Fuj i Xerox is t hus m uch m ore t han a
curiosit y on t he periphery of Xerox's
organizat ional chart : t he t wo com panies
are com rades- in- arm s. The Xerox
const ellat ion has enj oyed som e powerful
advant ages as well as suffered som e
serious disadvant ages because of t his
st ruct ure.
I n one sense, t he Xerox group and Canon
were not all t hat different . Aft er all, single
com panies and const ellat ions sim ply
represent different ways t o cont rol a set of
capabilit ies so as t o m axim ize t heir ret urn.
The single com pany can be t hought of as
having full cont rol over it s capabilit ies; in
t he const ellat ion, cont rol over t he set of

capabilit ies of t he group is shared am ong
separat e com panies.
The Xerox group and Canon each had t he
set of capabilit ies needed t o develop,
m ake and sell copiers and laser print ers
worldwide. But t hese t wo rival
organizat ions cont rolled t heir capabilit ies
in different ways.
At t he risk of oversim plificat ion, we m ay
say t hat Canon had full cont rol over it s
capabilit ies, because it owned 100 percent
of it s laborat ories, plant s and m arket ing
organizat ions in Asia, Europe and t he
Unit ed St at es.
I n t he Xerox group, as we shall see,
cont rol over t he capabilit ies was split - -
Fuj i Xerox owned som e asset s and Xerox
owned ot hers; Fuj i Xerox had right s t o t he
Japanese m arket and Xerox t o t he Unit ed
St at es m arket . And Xerox did not have full
cont rol over t he capabilit ies of Fuj i Xerox,
even t hough it owned part of t he
vent ure's equit y. I ndeed, a t radit ion of
Fuj i Xerox aut onom y gave Xerox even less
effect ive cont rol t han t he ownership
st ruct ure of t he j oint vent ure m ight
suggest .
How will such a const ellat ion fare in
com pet it ion wit h t radit ional single
com panies? The answer depends in part
on t he com pet it ive cont ext . As we will see,
t he Xerox const ellat ion as originally
designed was well suit ed t o t he cont ext of
t he 1970's. But by t he early 90's, new
com pet it ive dem ands gave t he edge t o
Canon's way of cont rolling capabilit ies,
and forced t he Xerox group t o rest ruct ure
it s const ellat ion.
The bat t le bet ween Xerox and Canon is
t hus a m icrocosm of collect ive com pet it ion.
I n com parison wit h com pet it ive bat t les in
ot her indust ries, it is well- defined and
easy t o grasp. Precisely because of t hat , it
offers valuable lessons t o m anagers
bewildered by t he new shape of business
rivalry.
2
How Fuji Xerox Saved Xerox
The Xerox st ory is a classic one of a once-
dom inant com pany t hat lost it s edge and
was overcom e by new rivals from
unexpect ed sources. The difference t his
t im e is t hat Xerox relied on a const ellat ion
of allies t o defend it self and ult im at ely t o
regain leadership in it s indust ry.
The st ory begins in t he 1960's, when t he
com pany's revolut ionary plain- paper
copiers t ook t he indust ry by st orm and
m ade t he nam e Xerox synonym ous wit h
phot ocopying. Xerox revenues grew at a
record pace for an Am erican business - -
doubling every 10 m ont hs, from $40
m illion in 1960 t o $1.2 billion in 1966.
Xerox pat ent s on plain- paper copier
t echnology and t he com pany's ext ensive
sales and service net work sust ained it s
virt ual m onopoly in t he field.
Beginning in 1970, however, new
com pet it ors st art ed chipping away at t he
Xerox em pire. Many of t hese com pet it ors
cam e from Japan and produced high-
qualit y, low- cost m achines. Som e
developed new t echnologies t hat
circum vent ed Xerox pat ent s; ot hers
benefit ed from Am erican ant it rust
pressure on Xerox t hat led t he com pany
t o license it s key t echnologies.( 2) More
t han 20 plain- paper copier vendors
operat ed worldwide in 1975; by t hen t he
Xerox share of worldwide copier revenues
had plum m et ed t o 60 percent , from 93
percent in 1971. Ricoh, t he t radit ional
leader in t he Japanese m arket , becam e
t he t op seller in t he Unit ed St at es m arket
in 1976.
David Kearns, who was t hen Xerox's chief
execut ive, recalled t he crisis his com pany
faced at t he end of t he decade: " The
Japanese were selling product s in t he
Unit ed St at es for what it cost us t o m ake
t hem . We were losing m arket share
rapidly, but didn't have t he cost st ruct ure
t o do anyt hing about it . I was not sure if
Xerox would m ake it out of t he 1980's."
 3

I nit ially, Xerox had done lit t le t o respond Ex h ibit I : Th e St a r s in t h e

t o t he rising t ide of Japanese com pet it ors Con st e lla t ion
in t he low- volum e end of t he business.
Xerox execut ives had been m ore Source: Gom es- Casseres, " The Alliance Rev olut ion"
concerned wit h t he ent ry of I .B.M. and t he
East m an Kodak Com pany int o t he copier
indust ry, as t hese com panies t arget ed t he
m ore lucrat ive m id- and high- volum e
segm ent s of t he m arket .( 3) But t he crisis
forced Xerox m anagers t o change t heir
t hinking. They also realized t hen t hat t hey
had been ignoring a unique com pet it ive
asset in Japan - - t heir j oint vent ure wit h
t he Fuj i Phot o Film Com pany.

The Origin of the Xerox Constellation

Fuj i Xerox was a 50/ 50 j oint vent ure

est ablished in 1962 t o m arket xerographic
product s in Japan and cert ain ot her
count ries in t he region. Xerox had already
used an alliance t o expand int ernat ionally
in t he 1950's, when cash const raint s led it
t o creat e a j oint vent ure wit h Brit ain's
Rank Organizat ion.( 4) Because it had
acquired t he right s t o m ake and m arket
xerographic product s out side of Nort h
Am erica, Rank Xerox becam e Fuj i Phot o's
part ner in Fuj i Xerox. Exhibit I indicat es
t he com plex ownership relat ionships
bet ween t hese part ners as of 1992.

Fuj i Phot o Film was a m anufact urer of

phot ographic film , second only t o Kodak in
t hat field. Wit h sales of $90 m illion in
1962, it was roughly t he size of Xerox,
alt hough not growing as fast . The
com pany was t rying t o diversify it s
business away from silver- based
phot ography, and had already begun
experim ent ing wit h xerography and it s
plain- paper t echnology. St ill, under t he
agreem ent wit h Rank Xerox, Fuj i Xerox - -
not Fuj i Phot o - - received t he exclusive
right s t o xerographic pat ent s in it s
t errit ory.( 5)
Fuj i Xerox was dest ined t o becom e m uch
m ore t han a m arket ing out let for Xerox
product s - - it helped save Xerox from t he
dem ise t hat Mr. Kearns had feared. No
one could have predict ed t his out com e.
For a long t im e, Xerox execut ives t reat ed
Fuj i Xerox wit h a benign neglect t hat
som et im es bordered on condescension.
This at t it ude changed dram at ically in t he
1980's, as Fuj i Xerox cam e t o t he rescue
of Xerox wit h a series of st art ling product
breakt hroughs and no- less- st art ling
m anagem ent , m anufact uring and
t echnology lessons. By 1990, Fuj i Xerox
had becom e " a crit ical asset of Xerox," as
Xerox C.E.O. Paul A. Allaire called it .
 4

The Separate Interests of Xerox and Phot o engineers began m odifying Xerox
Fuji Xerox designs t o t he needs of t he local m arket ;
Japanese offices, for exam ple, used
different paper sizes. Lat er, Fuj i Xerox
The reasons behind t he t ransform at ion of
m anagers want ed t o go beyond
Fuj i Xerox lay in t hat com pany's unique
adapt at ion t o developing t heir own
relat ionship wit h Xerox. By t he early
product s. I n part icular, t hey envisioned a
1970's, Fuj i Phot o and Rank Xerox had
high- perform ance, inexpensive, com pact
each becom e passive part ners in Fuj i
m achine t hat could copy books.
Xerox. Alt hough t hey st ill held nom inal
decision- m aking powers, t hey were not
involved in day- t o- day act ivit ies and t hey By t he lat e 60's, t he Fuj i Xerox
did not cont inue t o supply t echnology and developm ent group had produced four
expert ise t o t he j oint vent ure.( 6) For experim ent al copiers, each wit h proj ect ed
t echnology and business advice, as well as m anufact uring cost s approxim at ely half
for cert ain product s, Fuj i Xerox t urned t hose of t he sm allest Xerox m achine.
direct ly t o Xerox. When engineers at Rank Xerox and Xerox
first heard of t hese m achines, t hey
doubt ed t heir com m ercial viabilit y. But
Xerox did not cont rol Fuj i Xerox, however,
developers at Fuj i Xerox persist ed, and in
and was only ent it led t o a m inorit y share
1970 t hey t ook a working prot ot ype t o
of t he profit s generat ed by t he j oint
London, where it s perform ance am azed
vent ure. As a result , Fuj i Xerox benefit ed
Rank Xerox execut ives. The m achine was
from a flow of t echnology from Xerox, but
slow ( 5 copies per m inut e, or c.p.m .) , but
also enj oyed an except ional degree of
subst ant ially sm aller and light er t han
aut onom y. Yot aro ( Tony) Kobayashi, Fuj i
com parable Xerox m odels. This
Xerox's president and chief execut ive from
dem onst rat ion boost ed t he t echnical
t he lat e 1970's t o t he early 90's and now
reput at ion of Fuj i Xerox. For t he first t im e,
it s chairm an, ascribed a good deal of t he
Xerox allowed Fuj i Xerox t o have a sm all
com pany's success t o t his aut onom y. " The
R.&D. budget . I n 1973, Fuj i Xerox
degree t o which Xerox let us run was very
int roduced t he FX2200, t he world's
unusual," he recalled.
sm allest copier, wit h t he slogan, " I t 's
sm all, but it 's a Xerox! "
The aut onom y of Fuj i Xerox also st em m ed
from sheer neglect . To m any in Xerox,
Fuj i Xerox's product developm ent effort s
Fuj i Xerox seem ed a faraway out post in a
went int o high gear in 1975, when t he
t iny m arket . Furt herm ore, it had no
com pany launched it s Tot al Qualit y
t echnical capabilit ies t o speak of,
Cont rol program . The focal point of t he
part icularly when com pared wit h Kodak
cam paign was t he developm ent of
and t he I nt ernat ional Business Machines
dant ot su, roughly t ranslat ed as t he
Corporat ion, t he t wo giant s breat hing
" Absolut e No. 1 Product ." Top
down Xerox's neck. When Fuj i Xerox
m anagem ent gave t he m arket ing and
engineers proposed t o develop an
engineering depart m ent s a seem ingly
indigenous line of copiers t ailored t o local
im possible t ask: develop a com pact , 40
Japanese condit ions, t herefore, Xerox
c.p.m . m achine, t o be m anufact ured at
execut ives first t ried t o dissuade t hem and
half t he cost of com parable m achines and
t hen t urned a blind eye when t hey went
wit h half t he num ber of part s of previous
ahead anyway.
m odels, and do it in t wo years, inst ead of
Xerox's t ypical four.
The Rise of Fuji Xerox
Two years lat er, t his " im possible" product
The Japanese engineers had always aim ed was ready. Mr. Kearns, for one, was
t o develop an indigenous expert ise in am azed when he first saw a
xerography. I n t he early 1960's, Fuj i

dem onst rat ion of t he prot ot ype, and
spont aneously broke out in applause. By
1979, t he FX3500 had broken t he
Japanese record for annual sales of a
copier. Largely because of it s effort t o
develop t he FX3500, Fuj i Xerox in 1980
won t he Japanese Governm ent 's
prest igious Dem ing Prize, awarded
annually t o a com pany achieving
out st anding qualit y.
The FX3500 was Fuj i Xerox's " declarat ion
of independence," ( 7) but it was an
independence born of necessit y. The
proj ect cam e aft er Xerox had canceled a
series of low- t o m id- volum e copiers on
which Fuj i Xerox was depending. Code-
nam ed SAM, Moses, Mohawk, Elf, Pet er,
Paul and Mary, each was canceled in m id-
developm ent , even t hough Fuj i Xerox
needed m odels of t his t ype in it s product
line. Jefferson Kennard, t he Xerox direct or
of Fuj i Xerox relat ions, recalled t hat when
Tony Kobayashi was t old about t he
cancellat ion of Moses, he was also asked
t o st op work on t he FX3500 proj ect .
According t o Mr. Kennard: " Tony refused,
and said, in effect , 'As long as I am
responsible for t he survival of t his
com pany, I can no longer be t ot ally
dependent on you for developing product s.
We are going t o have t o develop our own.'
" A year lat er, Xerox t oo began t o im port
Fuji Xerox to the Rescue
The growt h in t he t echnical capabilit ies of
Fuj i Xerox t ook place in what was for
Xerox a " lost decade." ( 8) This was not a
coincidence. The t hreat t o Xerox's
m onopoly cam e from Japan, where new
t echnologies, dom est ic dem and and
rivalry am ong producers generat ed a
unique environm ent for product
innovat ion. Xerox com pet it ors like Ricoh,
Canon and Minolt a benefit ed from t his
environm ent , but so did Fuj i Xerox. The
j oint vent ure had t he addit ional advant age
of direct access t o Xerox t echnology
coupled wit h aut onom y.
5
" The fact t hat we had t his st rong com pany
in Japan was of ext raordinary im port ance
when ot her Japanese com panies st art ed
com ing aft er us," Mr. Allaire, t he chief
execut ive, lat er explained. " Fuj i Xerox was
able t o see t hem com ing earlier, and
underst ood t heir developm ent and
m anufact uring t echniques . I f Fuj i Xerox
were wit hin our organizat ion, it would be
easier, but t hen we would lose cert ain
benefit s. They have always had a
reasonable am ount of aut onom y. I can't
t ake t hat away from t hem , and I wouldn't
want t o."
But it t ook a while for Xerox execut ives t o
recognize t he com pet it ive value of Fuj i
Xerox. I n 1978, Fuj i Xerox offered t o sell
low- end copiers t o Xerox and Rank Xerox
t o help t hem count er Japanese
com pet it ion in t heir m arket s. At t he t im e,
Xerox did not yet see t he need t o do so.
But Rank Xerox purchased 25,000 of t he
m achines for sale in Europe.( 9) The
success of t his t ransact ion led Rank Xerox
t o im port m ore of t he Fuj i Xerox m achines.
Wit h t his product - - and a delay in
Kodak's ent ry t o Europe - - Rank Xerox
was able t o defend it s m arket , while t he
posit ion of Xerox in t he Unit ed St at es
cont inued t o decline.
t he FX2202 and relat ed m achines int o t he
Unit ed St at es. At first t hese product s were
assem bled by Fuj i Xerox. Then, acceding
t o t he dem ands of Am erican unions, Fuj i
Xerox export ed t hem as knock- down unit s
( kit s of part s) t o be assem bled at Xerox.
Over t im e, Fuj i Xerox export ed m ore and
m ore finished product s, disassem bled kit s
and copier com ponent s t o Xerox unit s
worldwide - - as m uch as $800 m illion by
1994.
The Fuj i Xerox export s t o Xerox helped
st em t he advance of t he com pet it ion, but
t hey did not change how Xerox developed,
m anufact ured and m arket ed it s own
product s. Fuj i Xerox's qualit y cont rol
program , however, event ually served as a
m odel for Xerox t hat led t o deep changes

in t hese areas as well. Xerox acquired
m anagem ent ideas, subcont ract ing
approaches, product developm ent
t echniques and com pet it ive dat a from Fuj i
Xerox. Through t his reverse flow of
t echnology, Fuj i Xerox helped Xerox get
back on it s feet .
The Transformation of Xerox
The Xerox t urnaround can be t raced t o
about 1979, when Mr. Kearns t ook a close
look at t he st rat egies and product s of Fuj i
Xerox and ot her Japanese com panies.
Xerox engineers were am azed by t he Fuj i
Xerox rej ect rat e for part s, which was a
fract ion of t he Am erican rat e, and by t he
subst ant ially lower m anufact uring cost s at
t he j oint vent ure. Visit s t o Fuj i Xerox
facilit ies int roduced Xerox execut ives t o
t he pract ice of " benchm arking," which
syst em at ically t racked cost s and
perform ance in all areas of operat ions
against t hose of t he best in t he field.
Xerox's own benchm arking st udies helped
fuel Mr. Kearns's effort s t o infuse his
organizat ion wit h new vision and
det erm inat ion.
I n 1981, Mr. Kearns announced a
com pany- wide init iat ive for " business
effect iveness," and t wo years lat er he
form ally launched t he Leadership Through
Qualit y program , based part ly on t he
experience of Fuj i Xerox. Throughout t he
effort , Mr. Kobayashi and ot hers at Fuj i
Xerox were called on for help. Xerox hired
Japanese consult ant s recom m ended by
Fuj i Xerox, and som e 200 high- level Xerox
and Rank Xerox m anagers visit ed Fuj i
Xerox in lat er years t o learn direct ly about
it s qualit y m anagem ent program .
The rallying point for t he Xerox qualit y
m ovem ent was t he developm ent of t he 10
Series, a new fam ily of copiers. Dubbed
t he " Marat hon" fam ily, t his becam e t he
m ost successful line of copiers in Xerox
hist ory and served t o rest ore t he
com pany's finances and m orale. The
flagship Xerox 1075 becam e t he first
Am erican- m ade product t o win Japan's
6
Grand Prize for Good Design. Alt oget her,
14 m odels were int roduced bet ween 1982
and 1986, six of which were st ill sold in
1990. Fuj i Xerox designed and produced
t he low- end m odels in t he series - - t he
1020, 1035 and 1055, t he lat t er drawing
on basic t echnologies from t he FX3500,
t he first m achine t hat Fuj i Xerox
developed int ernally.
Because Xerox's Japanese com pet it ors
were not st rong in m id- volum e copiers at
t he t im e, t he 10 Series forest alled t heir
m ove int o t hat segm ent of t he m arket and
helped Xerox win back m arket share. On
t he st rengt h of t he 10 Series, Xerox
regained 2 t o 3 percent age point s of
m arket share in 1983, and 12 point s in
1984. By t he end of 1985, m ore t han
750,000 of t he new m achines had been
rent ed or sold, account ing for nearly 38
percent of Xerox's worldwide inst alled
base.
Xerox cont inued t hroughout t he 1980's t o
change t he way it did business. Taking
anot her leaf from t he Fuj i Xerox book, t he
com pany reduced it s supplier base,
bringing t he cost of purchased part s down
by 45 percent . Average m anufact uring
cost s at Xerox were reduced by 20
percent and t he t im e- t o- m arket for new
product s was cut by 60 percent . This
progress was recognized by t he
Com m erce Depart m ent in 1989, when t he
com pany won t he Malcolm Baldrige
Nat ional Qualit y Award.
Fuji Xerox Gains Greater
Independence
Fuj i Xerox cont inued t o grow and m at ure
t hrough t he 1980's. I t s dollar revenues
grew fast er t han Xerox's, and by t he end
of t he decade represent ed a m ore
significant port ion of t he Xerox group's
worldwide revenues t han ever before. Fuj i
Xerox's financial cont ribut ion t o Xerox's
net earnings in t he form of royalt ies and
profit s had also grown sharply - - from 5
percent in 1981 t o 22 percent in 1988.
And t hroughout t he decade, Fuj i Xerox

had been an im port ant source of low- end
copiers for Xerox. Bet ween 1980 and 1988,
Fuj i Xerox's sales t o Xerox and Rank
Xerox grew t o $620 m illion, from $32
m illion.
The t echnological capabilit ies of Fuj i Xerox
cont inued t o broaden and deepen in t he
80's. Fuj i Xerox's increased t echnological
st rengt h is part ly reflect ed in t he
t echnology fees it received from Xerox for
designs it supplied t o Xerox. These fees
were int roduced when t he t echnology
agreem ent s bet ween Xerox and Fuj i Xerox
were renegot iat ed in 1983. The new
agreem ent also called for a gradual
decline in Fuj i Xerox royalt y paym ent s t o
Xerox, in ant icipat ion of a declining value
of xerography.( 10)
Anot her m easure of t he growing capabilit y
of Fuj i Xerox was t he proport ion of m odels
developed in- house. I n t he 70's, t he
m aj orit y of m odels sold by Fuj i Xerox had
been developed by Xerox. Alt hough Fuj i
Xerox cont inued t o rely on Xerox for basic
research in new t echnologies, by t he lat e
80's few of it s m odels were designed by
Xerox. For t he m ost part , t hese were
high- end copier m odels, working at
speeds of above 120 c.p.m . By t he lat e
80's, Fuj i Xerox had produced m any low-
end m odels, and even a few in t he 60- 90
c.p.m . range.( 11) Many of t hese were
export ed t o or m anufact ured by Xerox and
Rank Xerox. I n 1980, 30 percent of t he
low- volum e unit s sold by Xerox and Rank
Xerox were of Fuj i Xerox design; by 1987,
t hat figure was 94 percent . Xerox and
Rank Xerox cont inued t o design and m ake
t heir own m id- and high- volum e copiers,
however.
Closer Collaboration to Meet New
Challenges
By t he 90's, Xerox and Fuj i Xerox faced
new com pet it ive challenges and were
det erm ined t o m eet t hem t oget her. One
challenge was t he rising capabilit ies of
Canon. Alt hough Xerox's precipit ous
decline in t he 70's had been st em m ed and
7
m any of it s com pet it ors from t hat decade
had faded away, Canon's copier business
cont inued t o expand. From 1980 t o 1989,
Canon's sales grew t o $9.4 billion, from
$2.9 billion, a gain of 14 percent a year.
Canon's R.&D. spending grew even m ore
rapidly, at 24 percent a year, t o $525
m illion, from $77 m illion. By 1989, Canon
was no longer prim arily a cam era
com pany - - 40 percent of it s revenues
cam e from copiers, and 20 percent from
laser print ers.
I n t he second half of t he 80's, Canon
developed a dom inat ing presence in t he
low- end laser print ers t hat were becom ing
ubiquit ous com panions t o m icrocom put ers.
Laser- print ing t echnology was closely
relat ed t o plain- paper copying t echnology,
and as digit al copying syst em s were
int roduced, t he im port ance of laser
print ing in t he copier m arket was bound t o
increase. Canon's laser- print ing engines
were t he core of t he highly successful
Hewlet t - Packard Laserprint er series, which
account ed for about 50 percent of laser
print er sales in t he Unit ed St at es. This
original equipm ent m anufact urer, or
O.E.M., business was t hought t o yield
Canon $1 billion in revenues. I n t he rest
of t he world, Canon sold print ers under it s
own nam e.
I n copiers, Canon was st rong in t he low
end of t he m arket , and t he com pany had
recent ly developed a growing business in
color copiers, where it held 50 percent of
t he m arket by 1989. Analyst s point ed out
t hat Canon was int roducing t wice as m any
product s as t he Xerox group, alt hough it
spent less t han $600 m illion on R.&D.
annually, com pared wit h Xerox's $800
m illion and Fuj i Xerox's $300 m illion.
Canon's goal was t o becom e a $70 billion
com pany by 2000, which would require a
22 percent annual growt h rat e in t he 90's.
A significant port ion of t his growt h was
proj ect ed t o com e from Xerox's heart land
of high- and m id- volum e copiers and
print ers.

Xerox, however, was det erm ined t o be
aggressive in it s response. The com pany's
st rat egist s now saw t he relat ionship
bet ween Xerox and Fuj i Xerox as a crit ical
elem ent in com pet ing worldwide against
Canon. Canon had a st rong presence in all
m aj or world m arket s, as did t he Xerox
com panies. But Paul Allaire highlight ed a
m aj or difference in t he t wo com panies'
global net works: " When we negot iat e wit h
Fuj i Xerox, we can't j ust represent
ourselves. We need t o find what is fair
and equit able t o essent ially t hree part ners.
Canon is 100 percent owned by one
com pany." ( 12)
Tony Kobayashi saw t he difference
bet ween Canon and Fuj i Xerox in t his
way: " We oft en com pare our sit uat ion
wit h t hat of Canon or Ricoh, com panies
t hat have a single m anagem ent
organizat ion in Japan. Are we as efficient
and effect ive in t he worldwide
m anagem ent of our business as we could
be?"
I n addit ion t o t his pot ent ial scale
advant age in m anufact uring, Canon
appeared t o gain from it s cent ralized
research.
I n t he lat e 80's, t herefore, t he Xerox
part ners began t o work m ore closely
t oget her. I n research, t hey launched t heir
first j oint proj ect s, in which t hey agreed
on " lead" and " support " roles and
elim inat ed overlapping act ivit ies. Research
collaborat ion bet ween t he com panies was
reinforced by exchanges of personnel and
by an evolving com m unicat ion process.
Personnel from Fuj i Xerox spent t im e as
resident s at Xerox, and engineers from
bot h com panies frequent ly crossed t he
Pacific t o provide on- t he- spot assist ance.
These personnel exchanges were also an
im port ant channel for t he t ransfer of
t echnology bet ween t he com panies.( 13)
Effort s were also m ade t o int ensify
cooperat ion in product developm ent ,
m anufact uring and planning. Mr. Kennard,
t he Xerox direct or of Fuj i Xerox relat ions,
8
and William Glavin, vice chairm an of
Xerox, worked t oget her t o launch
" st rat egy sum m it s." These t op
m anagem ent m eet ings, held about t wice a
year during t he 80's, led t o furt her
m eet ings bet ween t he funct ional
organizat ions on each side. The personnel
exchanges and sum m it m eet ings
cont ribut ed t o a const ruct ive relat ionship.
" Whenever a problem cam e up, we
est ablished a process t o m anage it ," Mr.
Kennard explained. " The t rust built up
bet ween t he com panies has been a key
fact or in t he success of t his relat ionship. I t
enables one t o t ake on short - t erm cost s in
t he int erest of long- t erm gains for t he
group."
Uniting Separate Interests
I n t he cont ext of t he recognized need for
closer collaborat ion, Mr. Allaire and Mr.
Kobayashi com m issioned a " Co- dest iny
Task Force," charged wit h developing a
fram ework for cooperat ion bet ween t he
t wo com panies for t he 90's. One of t he
issues addressed by t he t eam was how
t he Xerox group should m anage t he low-
end laser print er business in t he Unit ed
St at es.
Most laser print ers were assem bled by
O.E.M. cust om ers using im age out put
t erm inals ( I .O.T.'s) produced by vendors
such as Canon, Mat sushit a, Oki and Fuj i
Xerox. These t erm inals were t he hardware
innards of t he print er, t hat is, t he drum ,
phot orecept or, laser and paper- handling
m echanism . O.E.M.'s added t heir own
elect ronic and soft ware subsyst em s.
Dependence on O.E.M. cust om ers and
high volum es of product ion m ade for
fierce com pet it ion in t he I .O.T. business.
" The m argins in t his business are razor-
t hin," com m ent ed Julius Marcus, vice
president for st rat egic relat ions at Xerox.
" And t he business is very different from
any wit h which Xerox or Fuj i Xerox was
fam iliar. You need t o sell it before you
have it , and price it before you know what

it cost s." Furt herm ore, product ion cost s
for I .O.T.'s were highly sensit ive t o scale.
Bill Lowe, Xerox's execut ive vice president
for developm ent and m anufact uring in
1990, recalled how Xerox and Fuj i Xerox
failed t o work t oget her effect ively in t his
business.
" Bot h com panies were t rying t o get full
profit out of it , even t hough t he m argins
were slim ," he said. " Fuj i Xerox's policy
was t o m ark up cost s; Xerox's was t o get
an accept able gross profit . Furt herm ore,
each product had a different m arkup
schem e, and m any sideline deals
confounded t he issues. This fost ered
sharp dealings bet ween t he part ners. So,
m ost of our energy was focused on each
ot her, not on Canon. We were point ing
fingers and frust rat ing ourselves."
Ult im at ely, however, Xerox and Fuj i Xerox
devised a creat ive response t o t he
challenge of selling low- volum e laser
print ers in t he Unit ed St at es. I n 1991,
t hey est ablished Xerox I nt ernat ional
Part ners ( X.I .P.) , a j oint vent ure t o
m arket Fuj i Xerox print er engines out side
of Japan. Xerox holds a 51 percent st ake
in X.I .P., and Fuj i Xerox 49 percent ; t he
first president of X.I .P. was an
experienced Fuj i Xerox execut ive and t he
first chairm an was a senior Xerox
execut ive. X.I .P. had a st aff of fewer t han
60 people, m ost ly in sales, but t he new
j oint vent ure would also get help from Fuj i
Xerox engineers. The vent ure was
licensed t o sell in Xerox t errit ory via
cert ain specific O.E.M. cust om ers out side
of Japan, but m ost of it s business was in
t he Unit ed St at es, where m ost global
O.E.M. cust om ers were based. X.I .P.
would handle only low- end laser print ers.
Execut ives from Xerox and Fuj i Xerox felt
t hat t his new alliance gave t hem a bet t er
chance at com pet ing in a t ough m arket .
They t raced t heir earlier difficult ies in t hat
m arket , in part , t o t he lack of an
appropriat e organizat ion for t he business.
Alt hough Xerox had an exist ing O.E.M.
9
business, which it cont ribut ed t o X.I .P.,
t he business had lacked a com pet it ive
array of low- volum e product s. Fuj i Xerox
sold t o Japanese O.E.M. cust om ers, but
was not licensed t o sell in t he Unit ed
St at es; furt herm ore, t he com pet it ive
environm ent in Japan was less fierce. The
new alliance would give Fuj i Xerox m ore
direct cont act wit h cust om ers in t he
Unit ed St at es and align t he t wo
com panies behind a com m on business
st rat egy for t his specialt y m arket .
Perhaps because of t he need t o get t he
" right " st ruct ure for t he alliance, it t ook
t he com panies a year t o negot iat e t he
X.I .P. agreem ent . From t he beginning, t he
aim was a st ruct ure t hat would creat e
incent ives for collaborat ion. Mr. Marcus,
who was t he Xerox execut ive in charge of
t hese negot iat ions, st at ed his philosophy:
" I am not a believer in m anagem ent , but
rat her in organizat ion. An agreem ent
needs t o be self- policing." The negot iat ing
t eam s left no st one unt urned, he not ed:
" A lot of bright people argued down all t he
alleys looking for pot ent ial fut ure
problem s. We spent our t im e going
t hrough all t he 'what if' quest ions. We
t ook t he agreem ent apart and put it back
t oget her. Because of t his searching, t hings
should be pret t y sm oot h. Throughout all
t hese argum ent s, we m aint ained a long-
t erm vision."
Toshio Arim a, chief negot iat or for Fuj i
Xerox, agreed wit h t his assessm ent . " I t
rem ains t o be seen if we will survive in t he
business," he said in 1993, " but X.I .P. is
already a success in t erm s of t he st rat egy
and t he arrangem ent ."
Am ong ot her t hings, t he new arrangem ent
aim ed t o alleviat e frict ion over how profit s
from t he business would be shared. The
j oint ownership of X.I .P. helped t o align
t he int erest s of Xerox and Fuj i Xerox. I n
addit ion, t he negot iat ors pract iced
" m at hem at ical gym nast ics t o creat e a
seam less com pany wit h all t he right
incent ives t o succeed," Mr. Marcus

explained. " Now it is only us, not we and
t hey."
The seam less com pany reached all t he
way t o Japan, where Fuj i Xerox creat ed a
separat e unit for t he low- end print er
business. This unit t ransferred product s t o
X.I .P., which t hen sold t hem t o t he O.E.M.
cust om ers. The agreem ent also set t he
rat io at which profit s from t he whole
business would be shared bet ween Xerox
and Fuj i Xerox; t he level of t ransfer prices
would not affect t his rat io.
The new arrangem ent also helped Fuj i
Xerox upgrade it s capabilit ies m ore rapidly.
Tom m y Tom it a, a Fuj i Xerox planner,
sum m arized t he im pact of t his vent ure in
1993: " Through X.I .P., Fuj i Xerox was
t hrown int o a new arena. Today, we can
t ake on Canon because of t he discipline
we learned from t he U.S. m arket . X.I .P.
helped us see t he need for low- cost
engineering and showed us how t o fill t he
needs of our cust om ers."
To fill t hese needs, Fuj i Xerox com plet ely
changed t he way it designed and built
laser print er engines. I t creat ed a
business unit dedicat ed t o t he
developm ent of I .O.T.'s and m ade t he
engines in a fact ory specializing in high-
volum e product ion. Even m ore im port ant
were t he changes in m anagem ent . Fuj i
Xerox engineers were involved, for t he
first t im e, in direct discussions wit h O.E.M.
cust om ers in t he Unit ed St at es. Mr.
Marcus described ot her changes: " They
m ade a huge com m it m ent t o t urn t hings
around. They changed suppliers, invent ory
m anagem ent pract ices, design processes,
sourcing and so on. You nam e it , t hey
changed it - - everyt hing in t he food chain.
The organizat ional learning was
t rem endous."
The changes at Fuj i Xerox paid off.
Bet ween 1989 and 1993, t he com pany
developed and m arket ed t hree
generat ions of print er engines, each one
bet t er and m ore cost - effect ive t han t he
previous one. Xerox m anagers est im at e
10
t hat , in 1990, t he Fuj i Xerox I .O.T. was
t echnically inferior t o t he benchm ark set
by Canon, and 25 percent m ore expensive
t o produce. Their 1993 offering, however,
was fully up t o par t echnically, and alm ost
at t he benchm ark level in t erm s of
product ion cost .
X.I .P.'s early result s were encouraging. On
t he st rengt h of t he new Fuj i Xerox
product s, X.I .P. gained m aj or cust om ers
in Digit al Equipm ent , Com paq, Apple, St ar
and ot her com panies, in addit ion t o
supplying Xerox it self. The print er engine
business rem ained dom inat ed by Canon,
which held about 80 percent of t he global
m arket . Fuj i Xerox, however, was st art ing
t o m ake inroads. By 1996, it s share of
various m arket segm ent s had risen
considerably.
Structure and Performance in
Constellations
The Xerox st ory clearly shows how a
com pany can benefit from a well- m anaged
alliance. But it also shows how t he
difficult y of int egrat ing t he separat e
int erest s of part ners can handicap
const ellat ions t hat face powerful single
com panies. Moreover, t he opt im al design
and governance st ruct ure for an alliance
can change dram at ically over t im e, in
response t o changes in t he environm ent ,
as well as in t he part ners t hem selves.
The collaborat ive arrangem ent s t hat
helped launch Fuj i Xerox in t he 1960's and
70's were not as effect ive in t he fierce
global bat t le t o develop new t echnologies
in t he lat e 80's. I nst ead of relying on t he
t ransfer of t echnologies from one t o t he
ot her across t he Pacific, Xerox and Fuj i
Xerox were forced t o j oin forces t o
develop wholly new t echnologies t oget her.
This m eant t hat t he m anagerial aut onom y
t hat served Fuj i Xerox so well in t he 70's
had t o give way t o great er coordinat ion
and int egrat ion bet ween t he part ners.
Collect ive com pet it ion always requires
t hat com panies walk a fine line bet ween

rivalry and collaborat ion. More so t han
single com panies, const ellat ions have
wit hin t hem sources of conflict s t hat can
t ear t hem apart . At t he very least , int ernal
frict ions can reduce a const ellat ion's
abilit y t o exploit benefit s from
collaborat ion. And lacking t hese benefit s,
t he group st ands lit t le chance in t he
com pet it ive m arket place.
Com panies have several m echanism s at
t heir disposal wit h which t o m anage t he
balance of com pet it ion and cooperat ion.
Equit y invest m ent s, m ult iple proj ect s,
long- t erm relat ionships, personnel
exchange and ot her m echanism s can be
used t o enhance incent ives for
collaborat ion wit hin a const ellat ion and t o
reduce int ernal rivalry.
St ill, because of t he added burden of
m anaging int ernal frict ions, const ellat ions
oft en operat e at a disadvant age when
facing st rong single com panies.
Overcom ing t hese disadvant ages usually
requires great er int egrat ion am ong
m em bers of a const ellat ion.
I n m any m odern businesses,
const ellat ions do not face all- powerful
single com panies. I nst ead, t he bat t le is
one of group versus group. I n t his cont ext ,
all com pet it ors share t he basic handicap
of int ernal frict ion, even t hough som e
m ight m anage t his handicap m ore
effect ively t han ot hers. Furt herm ore,
differences in t he com posit ion and
st ruct ure of t he const ellat ions are likely t o
provide one group wit h a com pet it ive
advant age over anot her.
Com pet ing in const ellat ions, t herefore,
involves m ore t han j ust sim ple
com pet it ion. To win t hese days, you need
not only a killer inst inct but also t he
willingness - - and t he abilit y - - t o
collaborat e.
Effect ive const ellat ions depend not only on
t he st ruct ure of relat ionships am ong
part ners but also on t he evolut ion of t hese
relat ionships. Alliances are dynam ic and
11
open- ended relat ionships t hat easily bend
- - and oft en crack - - when subj ect ed t o
new com pet it ive forces. That is som et im es
seen as one of t heir weaknesses:
m anagers frequent ly cit e t he high " divorce
rat e" of alliances as a problem . But ,
ironically, t he flexibilit y of alliances can be
a form idable advant age, so long as t he
inst abilit y inherent in t hem is m anaged
properly.
Som e of t he drivers of change are inside
t he const ellat ion and som e are out side.
Changes in cont ext - - t hat is, in
t echnology, m arket pressures or in t he
ot her businesses of t he alliance part ners -
- can change t he cost s and benefit s of a
part icular alliance. Organizat ions t hat
adj ust t o new circum st ances m ay survive,
ot hers t ypically suffer det eriorat ing
perform ance and decline.
The effect s of int ernal drivers of change
are m ore com plex and less det erm inist ic.
Oft en, t he process of int ernal change can
be represent ed as a circle of causat ion:
t he init ial capabilit ies of part ners
det erm ine t he init ial balance of power in
an alliance; t he alliance in t urn shapes
and t ransform s t he part ners' capabilit ies;
t hese new capabilit ies t hen shift t he
balance of power, and so on. Such a
process can be a vicious circle t o t he
part ner who sees it s relat ive capabilit ies
decline and cont rol slip away, and a
virt uous circle t o t he ot her part y.
This circle of causat ion is evident in t he
relat ionship bet ween Xerox and Fuj i Xerox.
The Japanese j oint vent ure was set up t o
t ransfer xerography t o Japan and adapt it
t o local m arket condit ions. As Fuj i Xerox
did t hat , it becam e increasingly capable in
developing and m anufact uring it s own
low- end copiers. Gradually t he division of
labor bet ween t he com panies shift ed, and
Fuj i Xerox acquired m ore and m ore
responsibilit y in t he Xerox global st rat egy.
Decision- m aking st ruct ures were adj ust ed
accordingly, unt il Fuj i Xerox becam e - - for
all pract ical purposes - - an equal part ner
t o Xerox in select ed businesses. The

st eady series of adj ust m ent s in response
t o new capabilit ies in t his const ellat ion is
sum m arized in t he accom panying exhibit .
Ex h ibit I I : Evolu t ion of t h e
Re la t ion ship Be t w e e n Xe r ox a nd Fu j i
Xe r ox
Source: I nt erviews at Xerox and Fuj i Xerox
The sequence of st rat egies adopt ed by
Xerox and Fuj i Xerox was not planned
beforehand; inst ead, one t hing led t o
anot her. The Xerox case is not unique in
t his sense: alliances seldom end up as
t hey st art ed. Alt hough som e aspect s of
t heir evolut ion m ay be predict able, m any
ot hers are not .
12
This conclusion highlight s one of t he key
underlying differences bet ween single
com panies and const ellat ions. Single
com panies, t oo, evolve and are subj ect t o
forces of change. But in com panies, t here
are also m ore forces against change - -
bureaucracies wit h ingrained int erest s,
est ablished ways of doing t hings, loyalt ies
am ong em ployees, m arket posit ions and
im age t o defend and so on. As a result ,
t he evolut ion of com panies is
m ore predict able t han is t he
evolut ion of a const ellat ion - -
it adheres m ore closely t o a
com m on t hem e and pat h.
The lesson for m anagers is
clear: alliance inst abilit y
should not be feared, but
em braced. I ndeed, m anagers
should be wary of alliances
t hat are t oo st able, a
condit ion t hat m ay indicat e
st agnat ion or, worse,
m ount ing pressure for change.
Effect ive alliances evolve
cont inually t o keep up wit h
changes in t he environm ent
and in t he part ners'
capabilit ies and goals.
Also, a rival's use of alliances
m ay creat e pressures for new
alliances or for m odificat ions
t o one's const ellat ion. And
t he of an alliance will t ypically
need t o be changed t o allow
t he part ners t o pursue new
opport unit ies.
When com panies use
alliances in com pet it ive bat t le,
t he nat ure of t hat bat t le changes. The
essence of t he new collect ive com pet it ion
is t hat alliances inside const ellat ions
influence rivalry am ong const ellat ions,
and t he reverse.
Xerox and Fuj i Xerox, for exam ple,
collaborat ed at one level and com pet ed at
a higher level wit h Canon. The sam e is
t rue for larger const ellat ions facing each
 13

ot her in t oday's t elecom m unicat ions,
m ult im edia and ot her high- t echnology,
global indust ries.
I n every case, collaborat ion wit hin
const ellat ions occurs in t andem wit h
com pet it ion bet ween const ellat ions. As a
result , t he following pat t erns frequent ly
arise:
1. Collaborat ion wit hin a const ellat ion
t ends t o enhance t he group's com pet it ive
advant age, because it allows t he group t o
m arshal it s int ernal resources m ore
effect ively.
relat ionships in t he indust ry dense and
int ricat e? Are t here few com panies left
t hat st ill com pet e as single ent it ies,
relying m ost ly on int ernal capabilit ies and
on arm 's- lengt h cont ract s wit h out siders?
Have const ellat ions changed t he t erm s of
com pet it ion, such as t he scale and scope
required for success?
Ex h ibit I I I : Se le ct e d Bu sin e sse s w it h
Colle ct ive Com pe t it ion , c. 1 9 9 4
Source: Gom es- Casseres, " The Alliance Rev olut ion"

2. By t he sam e t oken, com pet it ive

frict ion wit hin a const ellat ion usually
dulls it s com pet it ive edge, by
divert ing and duplicat ing int ernal
effort s.

3. Com pet it ion bet ween const ellat ions

t ends t o enhance collaborat ion wit hin
t hem , because it draws m em bers
closer t oget her behind a com m on
goal.

4. Conversely, forces t hat reduce

rivalry bet ween groups - - such as
com m on st andards or com m on allies
- - t end t o hurt t he unit y of each
group by generat ing split loyalt ies.

5. Finally, rivalry am ong m em bers of

a const ellat ion, while usually reducing
t he effect iveness of t he group as a
whole, som et im es benefit s individual
m em bers by increasing t heir
bargaining power over ot her
m em bers.

Do t hese conclusions apply t o your

indust ry? The answer depends on whet her
collect ive com pet it ion has spread in your
The evidence so far suggest s t hat
business. You have t o look carefully at t he
collect ive com pet it ion has already
com pet it ors in t he indust ry and exam ine
em erged in a wide variet y of
how product s are developed,
environm ent s and will cont inue t o spread.
m anufact ured and sold.
The accom panying exhibit gives a
sam pling of businesses already in t he
Are alliances im port ant in m any part s of
t hroes of t he new st yle of rivalry.
t he value chain? I s t he web of
 14

A const ellat ion is only as st rong as t he
alliances t hat link it s part ners t o each
ot her. To win in collect ive com pet it ion,
t herefore, com panies m ust carefully
m anage t heir key alliances. Here are t he
fact ors t hat have m ade alliances such as
t hat bet ween Xerox and Fuj i Xerox
successful:
5. Minim ize conflict s bet ween part ners.
The scope of t he alliance and of part ners'
roles should avoid pit t ing one against t he
ot her in t he m arket .
6. Share inform at ion. Cont inual
com m unicat ion develops t rust and also
keeps j oint proj ect s on t arget .

1. Have a clear st rat egic purpose. 7. Exchange personnel. Regardless of t he

Alliances are never an end in t hem selves - form of t he alliance, personal cont act and
- t hey ought t o be t ools in service of a sit e visit s are essent ial for m aint aining
business st rat egy. com m unicat ion and t rust .

2. Find a fit t ing part ner. This m eans a
part ner wit h com pat ible goals and
com plem ent ary capabilit ies.
3. Specialize. Allocat e t asks and
responsibilit ies in t he alliances in a way
t hat enables each part y t o do what each
does best .
4. Creat e incent ives for cooperat ion.
Working t oget her never happens
aut om at ically, part icularly when part ners
are form er rivals.
8. Operat e wit h longt im e horizons. Mut ual
forbearance in solving short - run conflict s
is enhanced by t he expect at ion of fut ure
gains.
9. Develop m ult iple j oint proj ect s.
Successful cooperat ion on one proj ect can
help part ners weat her t he st orm in less
successful j oint proj ect s.
10. Be flexible. Alliances are open- ended,
dynam ic relat ionships t hat need t o evolve
in st ep wit h t heir environm ent and in
pursuit of new opport unit ies.

Reprint No. 97108

FOOTNOTES

(1) Adam Smith, "An Inquiry Into the Nature and Causes of the Wealth of Nations'' (Modern Library, Random House,
1937), p. 128. Originally published in 1776.

(2) The rise of new competitors was in part enabled by the Federal Trade Commission's antitrust actions against
Xerox. In 1973, the F.T.C. charged that Xerox's pricing, leasing and patent-licensing practices violated the Sherman
Antitrust Act. It demanded that Xerox offer royalty-free licenses on all its copier patents, that it divest itself of Rank
Xerox (its joint venture with Britain's Rank Organization) and Fuji Xerox and that it allow third parties to service
copiers leased from Xerox. Xerox signed a consent decree in 1975, in which it agreed, among other things, to license
more than 1,700 past and future patents for a period of 10 years. Competitors were permitted to license up to three
patents free from royalties, to pay five-tenths of 1 percent of revenues on the next three and to license additional
patents royalty-free. Kodak, I.B.M., Canon and Ricoh were among the companies to secure Xerox licenses under this
arrangement.

(3) It was I.B.M.'s introduction of its Copier series in 1970 that signaled the end of the Xerox monopoly in its home
market. This line of products, however, was dogged by performance problems. A more serious threat came from
Kodak's popular and high-performance Ektaprint series, introduced in 1972.
 15

(4) The joint venture with Rank was formed in 1956, with Xerox holding 50 percent of the equity. In 1969, the Xerox
share was increased to 51 percent, and Xerox took over management control of Rank Xerox. In 1995, Xerox
purchased additional shares from Rank to bring its ownership up to 71 percent.

(5) As part of its technology licensing agreements with Rank Xerox, Fuji Xerox had exclusive rights to sell the
machines in Indochina, Indonesia, Japan, the Philippines, South Korea, Taiwan and Thailand. In return, Fuji Xerox
would pay Rank Xerox a royalty of 5 percent on revenues from the sale of xerographic products. Rank Xerox would,
of course, also be entitled to 50 percent of Fuji Xerox's profits. By agreement, 66 percent of Rank Xerox profits (that
is, 33 percent of Fuji Xerox profits) flowed to Xerox between 1969 and 1995. After Xerox increased its share of Rank
Xerox to 71 percent in 1995, 80 percent of Rank Xerox profits flowed to Xerox (that is, 40 percent of Fuji Xerox
profits). Originally, Fuji Xerox was designed to be purely a marketing joint venture to sell copiers made by Xerox or by
Fuji Photo. When the Japanese Government refused to approve a joint venture intended solely as a sales company,
however, the agreement was revised to give Fuji Xerox manufacturing rights. In the early years, Fuji Xerox
subcontracted Fuji Photo Film to manufacture the products.

(6) Rank Xerox became a passive partner because Xerox acquired control of Rank Xerox in 1969, when it increased
its shareholding to 51 percent, from 50 percent; from then on, Rank Xerox decisions were controlled by Xerox. The
reasons behind Fuji Photo's passive stance are more complex. In 1971, Fuji Photo transferred its copier plants to Fuji
Xerox. In an interview in September 1990, Yoichi Ogawa, one of the executives transferred from Fuji Photo to launch
Fuji Xerox, explained how the contract with Xerox raised barriers to technology flow between Fuji Xerox and Fuji
Photo: "According to Fuji Photo's agreement with Xerox, the company, as a shareholder, could collect information
from Fuji Xerox, but it could not use it in its own operations. In addition, a technology agreement between Fuji Xerox
and Xerox provided that any technology acquired by Fuji Xerox from outside sources (including from Fuji Photo)
could be passed on freely to Xerox.

(7) Gary Jacobson and John Hillkirk, "Xerox: American Samurai" (Macmillan, 1986), p. 299.

(8) Ibid.

(9) Although Xerox had acquired control of Rank Xerox in 1969 by raising its share of equity to 51 percent, the line
operations of the two companies were not integrated until 1978. Rank Xerox could thus make this decision in relative
autonomy.

(10) Royalties were again renegotiated in 1993. Xerox then expected the royalties to increase over time, in
recognition of the rising value of Xerox technologies supplied to Fuji Xerox.

(11) Many of these models were manufactured by Fuji Xerox and transferred to Rank Xerox and Xerox for sale in
Europe and the United States. This trend started with the FX2200 and the FX3500.

(12) Paul Allaire was referring to the three ultimate parents of Fuji Xerox -- Xerox, Fuji Photo Film and the Rank
Organization.

(13) By 1989, an estimated 1,000 young Fuji Xerox employees had each spent three years as residents at Xerox, and
about 150 Xerox people had done the same at Fuji Xerox. These residents were directly involved in the work of their
host companies. Every year there were also some 1,000 shorter visits by engineers and managers.