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Reengineering & Restructuring at Canon

Abstract:
In the mid-1990s Canon, Japan's leading camera and photocopier manufacturer undertook
reengineering and restructuring of its business processes.

The case brings out the various strategies employed by the company in its process of
reengineering and restructuring, and the benefits of these programs.

Canon's reengineering efforts were divided into two phases. The case discusses in detail
the reengineering strategies of the company under each phase. The case also discusses the
future prospects of the company.

Issues:

» Understand why organizations opt for reengineering and restructuring

» Understand and appreciate the intricacies of restructuring and reengineering processes

» Understand the differences between reengineering and restructuring

We didn't diversify into everything from fans to refrigerators the way others did. That's
why today we make more money than a lot of Japanese electronics and technology
companies."

- Fujio Mitarai, President in 1998.1

"We still have to build a new technology pillar for the future. I feel we are entering a
tough period."

- Ichiro Endo, Head - Canon Product Development Initiative in 1998.2

The Rising Sun

In the mid-1990s, Japan's leading photocopier and camera manufacturer - Canon Inc
(Canon) - embarked upon a massive reengineering program to turn itself into a truly
global corporation. Fujio Mitarai, who took over as president in 1995, introduced many
changes in the company's manufacturing and management processes.

These changes were implemented in two phases - Excellent Global Corporation-Phase I


and Phase II. By reengineering its business processes, Canon was able to revive itself
without adopting painful strategies like retrenchment. In 2002, Canon's total sales were ¥
2,940,128 million, an increase of ¥ 381,901 million from 1996. Its net income increased
from ¥ 94,177 million to ¥ 190,737 million during the same period.

Analysts attributed the success of Canon to the farsightedness of its management led by
Fujio Mitarai. Commented Hiroshi Kato, analyst at Tkegin Investment Management Co.
(Japan-based investment firm), "Mitarai is taking Canon in the right direction."3

Background Note

The history of Canon dates back to 1933, when Saburo Uchida (Uchida) and Goro
Yoshida (Yoshida) established Precision Optical Instruments Laboratory (POIL), at
Roppongi, in the Azabu district of Tokyo. The lab was started to develop a camera to
compete with the German Leica model C.4

In 1934, POIL introduced 'Kwanon,'5 Japan's first 35mm camera with a focal plane
shutter. Priced at ¥195, Kwanon had a considerable price advantage over the Leica which
was selling at ¥500. In 1935, POIL launched 'Hansa Canon', a 35mm focal plane-shutter
camera and in the same year it also applied for 'Canon' as its trademark. In 1937, POIL
was incorporated as a joint stock company under the name Precision Optical Industry,
Co., Ltd (Precision), with a capital of ¥1 million. During the late 1930s, the company
also started manufacturing accessories such as enlargers, filters, and special tanks for
developers. In 1939, Precision began making camera lenses, and in 1940 production of
X-ray cameras commenced.

In 1942, Takeshi Mitarai (Mitarai) an auditor with the company became Precision's first
president. In 1945, Precision commenced production of midrange JII focal-plane shutter
cameras, and, in the following year, it opened the Ginza camera service station.

In 1947, Precision changed its name to Canon Camera Co (Canon Camera). In 1949, the
company's shares were listed on the Tokyo Stock Exchange, and it established a chemical
division to provide solutions to problems related to camera materials. In the early 1950s,
Canon Camera set up manufacturing plants at Shimomaruko, Ohta-ku in Tokyo district. It
also forged alliances with research laboratories to develop new products. In 1954, the
company along with NHK Science and Technical Research Laboratories,7 developed
television cameras. In the mid-1950s, Canon Camera started setting up branches abroad.
In 1955, it established an office in New York (USA). In 1957, Canon Europa the sole
distributor in Europe was established in Geneva (Switzerland).

During the same period, the company acquired Chichibu Eikosha Co., (optical
components supplier) to establish Canon Electronics Inc. In 1958, Canon's chemical
division was reorganized as a research division and the company started focusing on
optical fibers and fixed lasers.

In 1959, Canon Camera entered the micrographics market through a tie-up with a US-
based company Documat Inc. In the same year, it entered the magnetic heads market and
the Synchroreader8 - Canon's first audio visual product was launched. In 1961, it
introduced Canonet - a 35mm camera with automatic exposure mechanism. Canonet was
a highly successful product with one million units being sold in less than two years. In
1962, the company formulated its first five-year plan with an aim to enter the business
machines market and expand its research activities. In the same year, the company
established a product development section. In July 1963, it produced a prototype of the
10-key calculator,9 but the management was not keen on commercializing the product
due to doubts about its success...

EXCERPTS

Canon Under Fujio Mitarai

When Fujio took over as president of Canon, the company was structured in different
divisions based on the product lines with each product division working as a separate
entity.

Though Canon had a wide range of products, it was not earning profits in all its product
segments. The company was making losses in PCs, liquid crystal displays, optical
memory cards, calculators and electric typewriters. There was no coordination among the
different divisions in the company.

So much freedom was given to each division that right from hiring people to setting up
overseas plants, they acted independently and without coordinating with the other
divisions.

In an interview with BusinessWeek, Fujio said, "These [profitable] divisions had become
so independent, they didn't think in terms of what would benefit the entire company. It
got to the point where divisions were building separate plants in China at the same time.
If they had planned it centrally and moved to China together, they could have combined
their costs. As it turned out, it cost Canon twice as much because these
divisions...functioned like separate companies..."

Excellent Global Corporation - Phase I

In Phase I, Canon decided to exit from its loss-making businesses of PCs, optical memory
cards and calculators. However, Canon did not opt for employee lay off and it stood by
the Japanese principle of lifelong employment within the country.

Instead of lay offs, Canon stopped recruitment of contract workers and transferred
workers from its loss-making divisions to other product divisions.

Canon announced that it would focus on products where it could achieve No. 1 position
in the industry (it was already number one in cameras, and color and black & white
midrange copiers).

Under Fujio, Canon shifted its focus from market share to profitability. It also realized
the importance of taking the whole group into consideration rather than focusing only on
individual product divisions. In 1996, Fujio introduced consolidated balance sheets for
all group companies...

Excellent Global Corporation - Phase II

The objectives of Phase II were to: to become number one in all core product categories,
build strong R&D facilities to fuel the company's growth by developing new businesses,
strengthen the finances of the company, and foster innovation among employees.

To achieve the objectives of phase II, Canon announced that it would set up more
manufacturing bases overseas, increase its R&D spending and focus on chip technologies
such as CMOS sensors for digital cameras and cordless systems like Bluetooth. In an
interview with BusinessWeek, Fujio named globalization and diversification as the two
basic principles on which Canon's phase II would be implemented. He announced that the
company would be concentrating on new technologies such as networking and
semiconductor chips to boost the bottomline of the company. Commenting on the shift in
emphasis from Phase I to Phase II, Fujio said, "If I were to characterize them, I would say
that Phase I was a time for improving our "corporate quality," those factors that ensure
high income and increase corporate value...

Future Prospects

By 2002, with net sales of ¥2,151,062 million, Canon reported record earnings for the
third consecutive year (Refer Exhibit IV for financials of Canon). Canon emerged as
number one in the copier segment and was placed among the top five in its other product
categories (Refer Table VII for 2002 market share).

Analysts attributed Canon's success to the management's foresightedness and its focus on
profits rather than market share. However, not everyone was convinced about the success
of Canon. They pointed out that Canon was able to surge ahead of Xerox in copiers only
because of the internal and regulatory problems faced by Xerox. They also pointed out
that with Xerox showing signs of turnaround it would be tough for Canon to retain its
lead.

Also, Canon's optical products business registered a loss of $10 million on a revenue of
$1.03 billion in the first half of 2003. However, Fujio was not considering quitting the
optical business as it provided technological inputs to other product divisions...

Exhibits

Exhibit I: A Note on Xerox


Exhibit II: Kyosei - Canon's Corporate Philosophy
Exhibit III: Canon Financial Summary For 1996-2000
Exhibit IV: Canon Financial Statements For 2001-2002