What do you
believe about your marketplace and how can you prove that you’re right? Do you think that you might be wrong? I’m Mike Sandman and we’re going to talk about how Xerox learned that some of its beliefs about its competitor Canon in the desktop copier business were completely wrong. And it’s an interesting object lesson in making sure that you really do understand what your competitors are doing, as opposed to simply thinking you understand.

Case Study: Canon and Xerox

In the 1980s when the Japanese copier manufacturer Canon began to enter the US market, Xerox was convinced that Canon was dumping a product in the US at below cost. Because Xerox was shipping product at a price that was approximately equal to the Xerox’s manufacturing costs. So Xerox decided that they were going to take apart a Canon copier and send all the pieces to their distributor in Japan and get the distributor to come back and tell them what the parts all cost, so that they could bring a dumping action before the US Department of Commerce, and hopefully get punitive tariff put on Canon’s products. Instead what they found out when they got all the pieces back, was that Canon had figured out a less expensive way to build and assemble and in fact service copiers. For example, they found that in some cases Canon had put two screws to hold an assembly in place rather than four, or six that Xerox had. So Xerox took all of this information and added up the cost and they were really shocked to find that Canon in fact could make a profit at that price. And at that point Xerox might have thrown up their hands and said we have to get out of the small desktop copier business, but instead they decided that they would try to figure out what they could do to reduce their own costs. Xerox obviously had its assumptions pretty seriously challenged, and they rose to that challenge and recalibrated.

Examining the Marketplace

So you need to think about what are your assumptions about the marketplace? What do you think is going to happen? Is it going to grow? Is it going to grow rapidly? Are new competitors going to enter into the market? How easy will it be for them to come in? Is there some form of disruption that might occur? And you have to think about whether your competitors have similar assumptions. The way that you can do that is to look at their actions – see whether what you think about them squares with what they’re actually doing. Another thing that’s very important to think about is to look for actions that competitors may be taking that indicate that their assumptions are changing, that they’re thinking about something that they were thinking about five years ago. This understanding of assumptions is very very important for developing the future strategy of your business, because if you don’t get the assumptions right, let’s go back for a moment and think about what the effect of that is. If you go back to our model of how markets work, and what the impact is of new entrance and the power of customers and availability of substitutes, what does that mean for the assumptions that competitors are likely to make about the market? Understanding all this is very important in figuring out your own strategy for the future.