Even Great Companies Need to Evolve

Foolish Decisions and the Demise of Xerox

Posted Feb 05, 2018

When I began working in Rochester, New York in the mid-1960’s, I asked my new colleagues how it was possible that our secretary Eleanor drove a new luxury car every year and showed other trappings of wealth. It was explained to me that Eleanor was one of many Rochesterians who had become millionaires almost overnight as a result of owning shares in a family-run printing company then known as the Haloid Corporation. Haloid changed its name to Xerox when (after giant cross-town rival Eastman Kodak turned down the opportunity), it purchased the rights to a revolutionary dry copying process known as xerography. Xerox quickly came to dominate the paper copying market, and its signature product—the Xerox 914—was considered a technological marvel that became the single most-purchased business machine of all time. The iconic nature of the company is reflected in its becoming a widely-used verb (as in “I am going to the copy place to xerox something”).

Source: KatenkoShutterstock

A hugely profitable company with widely-admired research capabilities, Xerox had every reason to believe that it would continue to prosper and grow indefinitely. Yet, in February 2018, less than six decades after it produced the world’s first dry-process copier, and after many years of financial difficulties, Xerox announced that it had ceased to exist as an independent company. It now functions as a unit of Fuji Film Holdings, the Japanese company that ironically had played a role years earlier in knocking the other Rochester behemoth, Eastman Kodak, off its perch as a virtual monopoly in the film, camera and film developing business.

The main explanation for the demise of Xerox is what has been termed the “competency trap,” namely when a company is very successful at one task, it lacks sufficient motivation to undertake necessary evolution. Ironically, while the spectacular growth of Xerox was due to its recognition of an evolutionary shift in the technical processing of words, it was a failure to recognize and implement further such evolution that led to its downfall. I am referring of course to the digital revolution and the resulting move away not only from paper but from locating production of documents in centralized business settings. Ironically, many of the elements of the desktop publishing revolution (e.g., the mouse, the graphic user interface, cut and paste dragging, icons, ethernet, laser printing [also resisted by the Board as impractical])  were developed at a legendary Silicon Valley research facility—PARC—wholly owned by Xerox. But the board and executive leadership of the company showed a total lack of interest in the accomplishments of PARC. Steve Jobs, who based the Macintosh computer almost entirely on ideas [and some personnel] snagged from PARC, famously asserted that he was blown away both by what he saw there and by the failure of Xerox to understand what they had. Interestingly, Jobs later sued Microsoft for basing its Windows-based PC computers on the Mac, but its case collapsed when the court ruled that the technology in question had first been stolen by Apple from Xerox.   

Although my four-factor explanatory model of foolish action is an imperfect fit when applied to an organization rather than an individual, it may still provide a useful framework for reflecting on the foolishness that led to the demise of Xerox. In the following paragraphs, I attempt to do that. Where appropriate, I give examples of how two other meteorically risen companies—Apple and Microsoft—showed considerably greater adaptive competence, when anticipating that, and how, they needed to evolve.  

As mentioned, the main situational factor contributing to the Xerox corporation’s lack of risk recognition was, ironically, the phenomenal success it had with its initial line of products, and the fact that for a long while, it had no real competition in the document copying business. In line with the competence trap phenomenon, the leadership of Xerox was lulled into underestimating the dangers coming from changed circumstances. Interestingly, even before the existential threat to Xerox from the changed nature of personal computing and document production technology, there was competition coming to the core copying business, caused by legal challenges to Xerox’s patents and, later from the expiration of those patents. Some of this change reflected the move away from mammoth machines that were Xerox’s specialty to smaller machines obtainable by individuals. This presaged the even more substantial challenge to Xerox caused by its failure to get on the personal computing bandwagon that it had (through PARC) done much to bring about.

As is often the case, the main cause of Xerox’s foolishness can be found in the realm of cognition. Steve Jobs had been quoted as saying that he followed the hockey great Wayne Gretzky’s dictum “I skate to where the puck is going to be, not where it has been.” If Jobs had taken the path of Xerox, Apple would have stayed with the Apple-II, or maybe the Mac, but not branched off into such other lucrative products as the iPod and iPhone. Similarly, there were many who wondered why Bill Gates moved into the cloud computing and storage business at a time when Microsoft dominated the market in software sold and activated by disk. But that proved to be a very prescient move, given that most new computers are sold today without even a disk drive.  (Today, software is sold mainly through the cloud, Microsoft lags only behind Amazon in providing cloud storage, and it is a very important contributor to Microsoft continuing to be a very profitable company). After the untimely death of its visionary early leader Joe Wilson, Xerox lacked leaders with an ability to forecast the future. This is illustrated even within its primary photocopying business, as Xerox pioneered the development of color copiers, but then sat on that invention for years, allowing Kodak to take the lead, because of short-sighted concern that color copiers would hurt Xerox’s lead in black and white copiers. It is not unfair, I believe, to assert that the demise of Xerox was hastened by multiple poor decisions over a period of years.      

The third explanatory factor, personality, is more difficult to apply to an organization, but if a personality style could be used to describe Xerox (and other companies that fail to adapt), it probably would be “rigidity”. The main manifestation of Xerox’s rigidity was an inability to move away from the idea that the principal market for the company’s products would continue to be institutions, such as businesses, schools and government agencies. This likely played a role in Xerox’s failure to exploit its technical breakthroughs in personal computing, as such exploitation would require an understanding that most of the purchasers of such technology would turn out to be individuals. An example of this is that when the Alto--the small Xerox PC that Apple copied—was first offered for sale, the company priced it at $16,000, way too high for individual purchase today, let alone in 1973.  

The fourth foolishness explanatory factor, affect/ state, is even more difficult to apply to an organization, but I would argue that collective “fear” is a suitable candidate. This might seem a strange choice, as risk-unawareness/ foolishness is generally thought of as a lack of necessary caution. But adaptive functioning in the world requires not only knowing when to hold back from acting but also knowing when action is required. Companies that built on initial success, such as Microsoft and Apple, were led by people willing to take major risks, while the great misfortune of Xerox was that it stayed too long in its comfort zone, not understanding that eventually a comfort zone can become a danger zone.

Copyright Stephen Greenspan