BUSINESS STRATEGIC DEVELOPMENT CANON DIVERSIFICATION STRATEGY [pic] By: NURSYAH FAHMANSYAH RIZKI (0832200304) Magister Manajemen Sistem Informasi Universitas Bina Nusantara 2009 DIVERSIFICATION Definition Diversification is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry in which the business is already in.
At the corporate level, it is generally and it’s also very interesting entering a promising business outside of the scope of the existing business unit. Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix: [pic] Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities.
Therefore, diversification is meant to be the riskiest of the four strategies to pursue for a firm. The Different Types of Diversification Strategies The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company.
There are three types of diversification: 1. Concentric diversification This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing effort would need to change. It also seems to increase its market share to launch a new product which helps the particular company to earn profit. 2. Horizontal diversification
The company adds new products or services that are technologically or commercially unrelated (but not always) to current products, but which may appeal to current customers. In a competitive environment, this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity and instability. In other words, this strategy tends to increase the firm’s dependence on certain market segments.
For example company was making note books earlier now they are also entering into pen market through its new product. Horizontal integration occurs when a firm enters a new business (either related or unrelated) at the same stage of production as its current operations. For example, Avon’s move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. An alternative form of that Avon has also undertaken is selling its products by mail order (e. g. , clothing, plastic products) and through retail stores (e. g. , Tiffany’s).
In both cases, Avon is still at the retail stage of the production process. 3. Conglomerate diversification (or lateral diversification) The company markets new products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firm’s current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger.
Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability. Rationale of Diversification According to Calori and Harvatopoulos (1988), there are two dimensions of rationale for diversification. The first one relates to the nature of the strategic objective: diversification may be defensive or offensive. Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems to provide no further opportunities for growth.
Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs. The second dimension involves the expected outcomes of diversification: management may expect great economic value (growth, profitability) or first and foremost great coherence and complementarities with their current activities (exploitation of know-how, more efficient use of available resources and capacities). In addition, companies may also explore diversification just to get a valuable comparison etween this strategy and expansion. Risks Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires the most careful investigation. Going into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a great uncertainty. Moreover, diversification might necessitate significant expanding of human and financial resources, which may detracts focus, commitment and sustained investments in the core industries.
Therefore a firm should choose this option only when the current product or current market orientation does not offer further opportunities for growth. In order to measure the chances of success, different tests can be done: • The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive. • The cost-of-entry test: the cost of entry must not capitalize all future profits. • The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa.
Because of the high risks explained above, many attempts of companies to diversify led to failure. However, there are a few good examples of successful diversification: • Virgin Media moved from music producing to travels and mobile phones • Walt Disney moved from producing animated movies to theme parks and vacation properties • Canon diversified from a camera-making company into producing whole new range of office equipment. CANON Canon Inc. s a Japanese multinational corporation that specializes in the manufacture of imaging and optical products, including cameras, photocopiers and computer printers. Its headquarters are located in Ota, Tokyo. Founded in 1930, this Japanese multinational began its life as Canon Camera Company, a manufacturer of 35mm cameras. But, by the 1960s, the company had begun to spread its experience in imaging technologies into business machines such as printers and calculators. At the same, it began to lso spread geographically, opening offices in Europe and the Americas. A consistent focus on product development (even today Canon is one of the top three firms receiving patents in the US) saw the company rapidly overtake market leader Xerox in the lucrative copying market and, in 1969, it cemented its wide-ranging focus with a change of name to Canon Inc. Since then, Canon has grown to become one of the world’s largest electronics manufacturers and, while the firm’s camera products continue to enjoy a high profile, the lion’s share of its ? 9. 5 billion annual revenue comes from its office products division. Company Perspectives The corporate philosophy of Canon is kyosei. A concise definition of this word would be “Living and working together for the common good,” but our definition is broader: “All people, regardless of race, religion or culture, harmoniously living and working together into the future. ” Unfortunately, the presence of imbalance in our world–in areas such as trade, income levels and the environment–hinders the achievement of kyosei.
Addressing these imbalances is an ongoing mission, and Canon is doing its part by actively pursuing kyosei. True global companies must foster good relations, not only with their customers and the communities in which they operate, but also with nations and the environment. They must also bear the responsibility for the impact of their activities on society. For this reason, Canon’s goal is to contribute to the prosperity of the world and the happiness of humanity, which will lead to continuing growth and bring the world closer to achieving kyosei.
Early History The history of Canon dates back to 1933, when a young gynecologist named Takeshi Mitarai worked with some technician friends to develop cameras; to do so they founded Precision Optical Instruments Laboratory in Roppongi, Minato-ku, Japan. Their first major invention had applications that ranged far beyond the medical field. In 1934 Mitarai and his colleagues developed Japan’s first 35-millimeter camera, closely patterned after the German Leica 35-millimeter camera, the industry standard.
They named it the Kwanon, after a Buddhist figure representing mercy. In 1937 they incorporated their venture under the name Precision Optical Industry Company, Ltd. In 1940 Precision Optical made a significant contribution to Japanese medical imaging technology when it developed the nation’s first indirect X-ray camera, which played a major role in preventing the spread of tuberculosis in Japan. When Japan went to war with the United States, the Japanese economy was entirely given over to supporting the military. The company barely survived World War II.
It was unable to manufacture its mainstay 35-millimeter cameras for the duration of the war, and only Mitarai’s tireless efforts kept it afloat in the economic desolation that followed Japan’s surrender in 1945. With raw materials rationed and capital scarce, Mitarai had to scramble just to keep his production lines going and the company’s finances in order. He also drilled into his workers the importance of producing high-quality products, but his most important move may have been persuading the Allied occupation forces to stock Precision Optical cameras in their post exchanges and ships’ stores.
This arrangement laid the groundwork for Canon’s later success as an exporter; U. S. servicemen bringing their cameras home with them gave the company its first foothold in the U. S. market. In 1947 Precision Optical changed its name to Canon Camera Company, Inc. , using a transliteration of the original Kwanon. Another international breakthrough for Canon occurred in the early 1950s, when news photographers covering the Korean War found that the best Japanese lenses were every bit as good as German lenses. The export market began to open up, and Canon prospered throughout the decade.
The company created a U. S. subsidiary, based in New York, in 1955 and two years later it formed a European subsidiary, Canon Europa, headquartered in Geneva. In 1956 Canon added an 8-millimeter movie camera to its product lines, and in 1959 it became the first company in the world to manufacture an 8-millimeter camera with a built-in zoom lens. Diversifying into Business Machines By the early 1960s Canon had become the dominant Japanese producer of middle-priced cameras, leaving the higher end of the market to Nikon. The company continued to grow, more than tripling in size between 1959 and 1963.
In 1964 it ventured into business machines when it introduced the Canola 130 electronic calculator, the first in the world to use the now-standard ten-key keypad. In 1970 Canon and Texas Instruments produced the Pocketronic, the first all-electronic hand-held calculator. After entering the photocopier market in 1965 with the Canofax 1000, Canon became an innovator in the field when it introduced its first plain-paper copier in 1968. Until that time Xerox Corporation had dominated the copier market with its own process, known as xerography.
Canon’s diversification moves were significant enough to prompt a name change; “Camera Company” was dropped from the name in 1969 and the company became simply Canon Inc. In spite of the company’s engineering successes, however, Canon was plagued by weaknesses in marketing strategy in the late 1960s and early 1970s. Although it was a part of the spectacular overall penetration of the U. S. market by Japanese calculator makers, the company failed for the most part to distinguish itself from its competitors. It also frittered away its technical advances by failing to exploit their sales potential before rivals could catch up to them.
This problem affected its copier lines as well as its calculators. In 1972 it developed the “liquid dry” copying system–so named because it uses plain paper and liquid developer but turns out dry copies–but doubted its own marketing strength and feared that competitors would infringe on its patents. Therefore, instead of selling the system itself, it licensed the technology to other manufacturers, effectively wasting its earnings potential. These mistakes hindered Canon’s financial performance, and in 1975 it failed to pay a dividend for the first time since World War II.
Revitalizing New Product Development and Marketing Into this leadership void stepped Ryuzaburo Kaku, the company’s managing director. He won approval from Mitarai, who was still chairman and president, to change management and sales practices. Under Kaku, Canon began to streamline its operations and chain of command and market its products more aggressively. In 1976 the company introduced its revolutionary AE-1 35-millimeter camera, which used a microprocessor to focus automatically and set the length of exposure, with an advertising blitz led by television commercials featuring tennis star John Newcombe. It was a big gamble because 35-millimeter cameras had never before been advertised on TV,” Mitarai said, but it paid off handsomely. According to Fortune, January 12, 1981, by 1981 the AE-1 had become so popular that one industry analyst called it “the Chevrolet of the 35mm market. ” Kaku’s emphasis on faster new product development led to laser beam printing technology in 1975 and a new retinal camera that made pupil-dilating drugs unnecessary in 1976. In 1977 Kaku was named president of the company, succeeding Mitarai, who remained chairman.
In 1982 Canon introduced the first personal copier, so called because all the essential reproduction components were contained in a cartridge that users could replace themselves. Again, it was accompanied by a massive ad campaign, this time starring actor Jack Klugman. In less than a decade, Canon’s salesmanship had undergone a radical change from passive to highly aggressive. When Canon overtook Nikon as Japan’s camera sales leader in the early 1980s, former Nikon Chairman Kyojiro Iyanaga explained his rival’s success by saying, “We still make the best cameras.
Canon just outmarketed us. ” Canon continued to introduce new products in the 1980s to compete effectively in mature markets. Much of its success, however, came in new markets, such as integrated office workstations and desktop publishing systems. Often that meant challenging large companies that were well entrenched in their markets. In 1982 it came out with an electronic typewriter, initiating a one-on-one competition with International Business Machines Corporation (IBM).
Within a year, it captured 11 percent of that market, while IBM’s share shrank from 26 to 17 percent. In 1983 it took on Xerox with a laser printer that offered similar quality at one-third the price. Canon also engaged Ricoh in a rivalry over facsimile machines in the early 1980s and laid the groundwork for a future duel with IBM in the computer business. It began a research push aimed at developing optical integrated circuits for personal computers of the future, and in 1984 Canon Sales started marketing the Apple Macintosh in Japan.
Canon also joined with Apple to develop software for the Japanese market. Later in the decade, the company’s optical chip efforts paid off when former Apple chief Steven Jobs chose Canon’s chips for his new NeXT computer. In 1989 Canon acquired a 16. 7 percent interest in NeXT Incorporated, along with the exclusive right to market the NeXT in Asia, for $100 million. In the camera area, Canon dropped to the number two position worldwide in 1985 when Minolta introduced the popular Maxxum, whose automated features included autofocus.
By the end of the decade Canon was back on top after the 1987 launch of the EOS (electronic optical system) autofocus SLR followed in 1989 by the high-end EOS-1 autofocus SLR. In the meantime, Canon began a long-running partnership with Hewlett-Packard Company (HP) in 1985 when the two companies teamed up to develop HP’s top-selling line of LaserJet printers. Canon produced the guts of the machines, including their high-quality laser motors, a key part of such printers, enabling HP to focus on its area of expertise, the software linking printers to PCs.
Canon eventually derived as much as one-fifth of its total revenues from this alliance. Slower Growth Canon experienced rapid sales and profit growth from its low-water mark in 1975 through the end of the 1980s. Between 1975 and 1985, its annual sales grew sevenfold, to $3. 3 billion, and its profits showed a 20-fold increase, to $136 million; by 1989, sales had reached $8. 18 billion and profits hit $232 million. Following an exceptional year in 1990 that saw a 27. 9 percent increase in sales (to $12. 3 billion) and a near doubling in profits (to $452 million), succeeding years featured slower growth and reduced profits. Profit margins ranged from 1. 1 to 1. 9 percent from 1992 to 1994 after having ranged from 2. 8 to 3. 6 percent from 1988 to 1991. The slowdown was partly attributable to the maturation of some of Canon’s key product areas, notably copiers and cameras. The maturation in cameras, especially the SLR cameras Canon specialized in, affected Canon much less severely than other major camera makers (notably Minolta and Nikon), who relied on cameras for a much larger portion of overall sales than Canon did.
In 1992, cameras comprised only 19 percent of overall Canon sales (compared to 44 and 43 percent for Minolta and Nikon, respectively), and by 1995 the percentage had dropped to 8. 2 percent. Thus, the rapid growth in popularity of compact cameras, which began with Fuji’s launch of the QuickSnap disposable camera in 1987 and was advanced by Konica’s 1989 introduction of the Big Mini (the first super-compact camera), did not push Canon into the huge losses suffered by Minolta and Nikon in the early 1990s.
Still, Canon quickly reacted to the new competition by developing its own compact camera, the Sure Shot, which grew into a full line of nearly a dozen models by the mid-1990s. In the meantime, however, Fuji had passed Canon as the world’s top camera maker by 1992. A larger factor in the 1990s slowdown was the recession in Japan and the appreciation of the yen, both of which affected all Japanese companies but hit the export-oriented electronic giants such as Canon especially hard.
In response, the company made a major commitment to advance its globalization, in particular by moving production out of Japan whenever possible to where the products were sold. For example, Canon began to produce bubble-jet printers in Mexico in 1995, then started production of the same in Scotland the following year. The company also aggressively sought out new markets for its goods, setting a goal of increasing Asian-Pacific sales outside of Japan to 10 percent of overall sales, and marketing products to Russia for the first time in 1995 through the Finland-based Oy Canon AB subsidiary.
In the face of these years of slower growth, Canon continued its historic commitment to high expenditures on research and development (averaging about 5 percent of net sales) and risk-taking new product development. Back in 1977 a Canon engineer had accidentally invented the bubble-jet printing technology, which Canon then somewhat belatedly marketed successfully in the early 1990s. The BJC-820 full-color bubble-jet printer was introduced in 1992, followed in 1994 by the innovative notebook computer with built-in color bubble-jet printer, a product developed in partnership with IBM.
Canon’s determination to become a major player in the personal computer field was seen as particularly risky, given the failure of NeXT (which exited the hardware business in 1993) and the highly competitive nature of the personal computer market. Of course, Canon’s partnership strategy, which continued in 1994 with another venture with IBM to develop small computers based on IBM’s PowerPC chip, was designed to alleviate some of the risk. Nonetheless, evidence existed that Canon was still willing to venture into territory few dared enter, notably its research into the ferroelectric liquid crystal display (FLCD).
Canon planned to invest more than Y100 billion before seeing any return from its research into FLCD, an integral component to be used in flat, large-sized, high-definition computer and television screens–a projected replacement for the ubiquitous cathode ray tube. Rising Fortunes Under Fujio Mitarai In 1993 the founder’s eldest son, Hajime Mitarai, succeeded Kaku as president of Canon, but the new leader died suddenly of pneumonia only two years later. Thrust into the leadership was Fujio Mitarai, a nephew of the founder, who would take the company to new heights.
Mitarai’s management style was a unique combination of Japanese and U. S. practices–consensus decision-making and job security from the former, merit-based pay and an emphasis on the bottom line from the latter–a style developed during the 23 years he spent at Canon U. S. A. During this stint, which included ten years as head of the unit, Mitarai boosted revenue at Canon U. S. A. sixfold, to $2. 6 billion, which amounted to 35 percent of global sales. He returned to Japan in 1989 as executive director.
Mitarai took over a debt-ridden company managing only a razor-thin profit margin and losing ground in a range of fields to a host of competitors. He almost immediately shook up the company by pulling the plug on a number of money-losing operations, ordering the shutdown, between 1997 and 1999, of businesses producing personal computers, liquid crystal displays, photovoltaic batteries, electric typewriters, and optical memory cards. Canon was refocused on three core areas: copiers, printers, and cameras.
While avoiding layoffs, particularly in Japan, Mitarai significantly cut costs (approximately $300 million in 1999 alone) by streamlining product development and manufacturing processes and through other initiatives. One big change on the manufacturing side came in 1998, when Canon began replacing the ubiquitous production line centered on a conveyor belt with an assembly process revolving around small groups called “cells,” the members of which huddled together to perform multiple tasks.
The new process aided teamwork, helped the workers feel more responsibility for their work, and was faster and more efficient. Canon also slashed its debt by using its own ample supplies of cash for capital investment instead of borrowing money, as was the practice at many Japanese companies; the firm’s debt-to-assets ratio fell from 34 percent in 1995 to less than 11 percent in 2001. At the same time, Mitarai did not skimp on research and development, investing about 7. percent of net sales each year, or Y218. 62 billion ($1. 66 billion) in 2001, for example, to keep churning out new products and improving existing ones. In cameras, Canon joined in the Eastman Kodak Company-led consortium that developed the Advanced Photo System (APS) and introduced its ELPH APS camera in 1996. More importantly, Canon was one of the few camera makers that successfully made the transition from film to digital.
The company introduced its first digital SLR camera, the high-end EOS DCS 3, in 1995, but Canon reached the top of the global digital camera market in 2004, surpassing Sony Corporation, following the introduction in 2000 of the PowerShot Digital ELPH (Digital IXY in some markets), an extremely compact and lightweight model, and the debut in 2003 of the EOS Digital Rebel, an entry-level SLR model. By 2005 Canon’s share of the worldwide digital camera market was a leading 20 percent, while its share of the higher-margin digital SLR segment was a stunning 59 percent.
Canon also managed to surge past Xerox in the copier field by belatedly entering the digital market and by going after the U. S. firm on its own turf, corporate copying. In 1999 Canon introduced the digital ImageRunner copiers, which were smarter, more reliable, and faster than the comparable machines of its competitors. By 2001 the company had captured more than 22 percent of the market for high-end digital copiers, surpassing Xerox’s 17 percent. Canon made further gains in the succeeding years by introducing color laser office printers/copiers, as the corporate world steadily began migrating from monochrome to color printing.
Meanwhile, Canon remained heavily involved in the laser printer market, mainly through its continuing partnership with HP, although it also produced its own laser models that claimed a modest 5 percent of the global market. In inkjet printers Canon trailed far behind HP, which in 2005 held about 40 percent of the market, compared to Canon’s 20 percent. Canon’s photo printers were one bright spot, but in the arena of multifunction devices (printers also able to scan, fax, and/or copy) Canon was far behind the leaders, HP and Lexmark International, Inc.
In seeking to revitalize Canon’s new product development efforts in its core business lines, Mitarai aimed to offset the price declines that had become commonplace in the world of high-tech products. By boosting sales of new products, Canon could lessen the impact of declining prices for its existing products. Between 2000 and 2005, Canon increased the proportion of its sales derived from new products from 44 percent to 66 percent. Even more impressive were the overall results of the Mitarai era. Net sales increased from Y2. 17 trillion ($21. 03 billion) to Y3. 75 trillion ($31. 82 billion) between 1995 and 2005.
Net income grew sevenfold, from Y55 billion ($533 million) to Y384. 1 billion ($3. 26 billion), amounting in 2005 to a profit of more than 10 percent, a huge advance over the minuscule margins of the early 1990s. By this time, Mitarai, widely considered to be the best Japanese CEO of his era, had been elevated to cultlike status in his home country. His prowess was recognized in 2006 when he was asked to head the Japan Business Federation, or Nippon Keidanren, the influential business lobby that serves as a representative of Japan’s largest corporations. Because of the time commitment involved in this prestigious ost, Mitarai announced that he would step down as president in mid-2006, while remaining chairman. Taking on the unenviable task of succeeding Mitarai was Tsuneji Uchida, who was selected in part for his strong technical background because Mitarai wanted the next leader to spearhead Canon’s entry into new fields. As head of the camera division, Uchida had led the firm’s ascendance to the top of the digital camera sector. During this leadership transition, Canon was in the midst of further efficiency drives, including an effort launched in late 2004 to fully automate 25 percent of the company’s plants within a three-year period.
And in a bold but risky move, Canon had also partnered with Toshiba Corporation on a Y200 billion ($1. 82 billion) joint venture charged with producing surface-conduction electron-emitter display (SED) high-definition television sets. The SED technology was touted to offer both the flat panel design of LCD and plasma television and the same levels of brightness and color performance of bulky cathode-ray-tube televisions, while using much less power than LCDs and plasmas.
Canon was hoping that the venture could capture 20 percent of the flat-panel television market by 2010, but the launch of the new technology was delayed until late 2007, or about 18 months, when the prices of flat-panel models began dropping faster than expected. Canon and Toshiba started seeking ways to cut production costs in order to maintain a sufficient level of profits. While this setback placed in jeopardy one of Canon’s main engines for future growth, the company remained one of the world’s leading electronics manufacturers, with leading or near-leading positions in cameras, copiers, and printers.
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