Expand the Market for Innovation Success

I’ve told the story of the rise and fall of Xerox a few times recently, and I thought it would be worthwhile to actually write it up. The key points from the rise are these:

  • Chester Carlson took out a patent on the process of xerography in 1937.
  • After failing to commercialise it successfully, he sold the patent to Haloid Corporation in the early 1940s.
  • After about 7 years of development, they had the first working commercial Xerox machine ready for sale in 1950.
  • It failed miserably. Haloid gave up and tried to sell the patent to Kodack, GE and IBM among others, but not one was interested.
  • They then changed the business model, targeting high-volume users, introducing lease plans with monthly copy limits and overage charges.
  • Success!
  • The company then changed their name to Xerox, and continued to invent a new industry, which they dominated until 1975, when they had about 75% market share in photocopiers.

And then everything came unglued.

Canon and Ricoh introduced a completely new business model for photocopiers. Instead of targeting just high end users, they looked to sell to everyone that didn’t already have a copier. To do this, they made very cheap copiers, with no features – technologically, these copiers were 20 years out of date when they were introduced. Instead of using a large, well-paid internal sales force, they sold these copiers through office supply stores. And rather than having a large, well-paid service team, they let the market provide people that could service the machines.

The effect of this new business model was enormous. Suddenly, it wasn’t only big organisations that could afford copiers – everyone could. Within 10 years, Xerox’s market share fell in half to under 40%. Within 20 years, Canon was the number one copier manufacturer in the world.

The market share drop was due in large part to the expansion of the market that the new, cheap copiers instigated. However, as the low-end manufacturers got better at making copiers, they started to compete more directly with Xerox in the more profitable high-volume sectors. This eroded the profit margin for Xerox, and led to some major problems for the firm.

The interesting thing here is that in both cases the key innovation was not technological, but rather in the business model. When xerography was invented, Carlson failed to develop the technology into a working commercial version. Haloid managed to do this, but their first attempt at selling Xerox machines failed. It wasn’t until they reinvented the business model that sales took off. However, the key point is that sales took off with the same piece of technology. It was not a technological breakthrough, it was a business model innovation that did the trick.

Then with the Canon and Ricoh copiers, the technology actually went backwards twenty years! Instead of competing head-to-head with Xerox on technology quality and speed, they changed the game and expanded the market. They had to build a completely new business model to do this – and it allowed them to service a group of customers that were too unprofitable for Xerox to go after with their dedicated in-house sales and service teams. This is the a great example of the disruptive innovation strategies that Clayton Christensen talks about.

In both cases, the successful business models ignored the majority of users in the middle. The curve above is from Everett Rogers’ classic book The Diffusion of Innovation. Haloid’s first try with the Xerox machine was aimed at the middle. They wanted to sell the machines to everyone. Their second, successful, business model targeted the early adopters and extreme users. These were the people that were feeling pain from making copies through a typing pool or on a mimeograph machine. Once they got a foothold here, the market expanded out into the mainstream.

Canon and Ricoh took the opposite approach. Again, the avoided the majorities in the middle – by the 1970s Xerox dominated these markets. Instead, they made a business model that would succeed with the laggards – those that hadn’t yet bought a copier.

We often dismiss laggards. They aren’t very with it, and it can look as though they resist change. And some of them do. But many of them have a good reason for not adopting new technologies. If you can understand these reasons, there are huge opportunities available.

If you are trying to enter a market, you can’t afford to try to please the average users. You have to either get out in front with the experimental early adopters, or you have to expand the market by figuring out what the laggards need. It’s easy to overlook the laggards, but they can often be a good route into a competitive market.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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26 thoughts on “Expand the Market for Innovation Success

  1. Nice post Tim. I am finishing up Julian Orr’s “Talking About Machines” book on field service technicians at Xerox in the 1980s. The book is largely about the social organisation of knowledge production within the firm, but it certainly gives you an appreciation for the scale of the resources and organisation Xerox dedicated to servicing the copiers back then.

  2. Tim,

    I suspect you are incorrect in stating that the Japanese photocopiers had “technology [that] went backwards twenty years!”

    I think it would be more accurate to say that the functionality was lower than the state of the art Xerox machines as measured by the standards of the day (i.e. copying speed, paper capacity etc.)

    I suspect that the technology involved in the tabletop machines was very much state of the art – but state of a different art, namely compactness, low weight etc.

    I think you can make your point just as well by talking
    about functionality, and I believe it would be more accurate to do so (and also more consistent with Christensen’s description of disruption).

    Cheers

    Graham

  3. Thanks Greg – it is actually straight out of Chesbrough – he talks about the case in Open Innovation (although I’ve got a fair bit of experience in that field as well). But it’s a fascinating case study.

  4. Thanks for the comment Graham. I don’t agree with your reframing of the case though.

    The first business I was in after university was copiers, about 10 years after Canon and Ricoh were doing this. The company that I worked for was run by ex-Xerox guys and sold Ricoh copiers, and I was able to talk to a few people that were involved in the process. People from both sides described the early Canon and Ricoh copiers as being pretty bad technically. It’s not as though there were an engineering breakthrough that allowed them to manufacture smaller copiers – it really was the case that Xerox simply chose not to.

    The case is described pretty well by Chesbrough in Open Innovation, and there’s also a pretty good discussion of it in Xerox: American Samurai by Jacobson & Hillkirk.

  5. What was the lesson that Xerox learned? Xerox learned to target the market that lead to the changing of their business model. Xerox has a business model that is based on equity focuses on annuity liquidation, and it delivers a strong-cash generation that allows expansion of earnings. The short-term debts support its leasing and customer financing business requiring the company continually to refinance the securities. Xerox-corporation ‘s net income growth rate is significantly lower than the industry average of Office Electronic industry. Yet Xerox is surviving. Xerox-corporation depends on a free cash flow valuation model to maintain a leverage between expenditures and cash flow. Can a company or corporation have too many models? Xerox corporation is in debt. Future development of Xerox appears mighty slim from an investor analysis. What do Xerox need to add to their business approach to really profit? I am confused.