Beyond the box.

Japan's giant Canon Inc. is turning out digital office machines that can be linked together and plugged into the information superhighway. The CEO of Canon U. S.A. is racing a horde of competitors - including Xerox - to dominate the office of the future.

Haruo Murase spends much of his time contemplating the future -office of the future, that is. The president and CEO of $6 billion Canon U.S.A., a unit of Japan's giant Canon Inc., envisions a workplace in which an array of office machines - faxes, personal computers, phones, copiers, and printers - are integrated into single, multifunction units and joined in a vast, digital network. The payoff to Canon is that in such an environment, its copiers and printers become more than processing stations for office gossip; they become on- and off-ramps for local area networks and the touted information superhighway. In Murase's blueprint, one lane on this global roadway is a sprawling, seamless document pipeline. In such an environment, a staffer might write a report on a PC, modern the document to far-flung computers with compatible software, and turn out laser prints at each location.

A stumbling block for Murase, 55, is that some of Canon's marketing personnel - and the vast network of dealers on which they rely - spend much of their time thinking about the past. A typical dealership derives a significant chunk of its revenues from "annuities," the recurring sales of service, parts, and rentals of machines already in place. There are also varying degrees of technophobia to grapple with: Even if they don't depend on them in their own businesses, Murase says, in an integrated environment, dealers must immerse themselves in the world of computers simply because their customers use them. Meanwhile, toner, paper, and other tangible products are far less daunting than the complex software that drives many digital products.

These issues have forced a cultural change inside Canon and prompted Murase - who took over the top slot in 1993 - to launch a huge retraining effort to remain on top of the technology curve. "We tell Mr. Dealer: 'Unless you pay attention to the changes your customers are going through - to the fact that personal computers, scanners, and printers do what copy machines have been doing all along - you are out of business,'" Murase says. "We tell them: 'We will make every effort to provide you with the necessary equipment and training so you can transform yourself, but you need to put in the legwork. You must learn to think beyond the box.'"

As in any business, the transition to a new product paradigm raises the specter of cannibalization. Stand-alone machines won't vanish overnight, and while Murase is pushing to remain a leader in the digital arena, he won't simply stop paddling in an immensely profitable revenue stream. (Canon is No. 1 in terms of placements in the low-end segment, which includes machines that produce 30 pages per minute or less.) Recall that Intel's Pentium chip was expected to quickly make the 486 microprocessor obsolete, but the 486 proved remarkably resilient. Inside the copier industry, digital technology was available as early as 1985, but superefficient laser printers gave analog a fresh life. Meanwhile, digital technology also drives the need for strategic alliances to spread risk and share expertise, blurring traditional competitive borders. Murase says Canon is working with Hewlett-Packard, Kodak, Next, and Oracle in some areas, while remaining competitors with some of these companies in others. Canon recently joined with 17 other information technology companies to produce an open architecture for networking office machines, tentatively called SmartLink. Participants include Fuji Xerox, IBM, Ricoh, Kodak, Lexmark, Matsushita, Novell, Sanyo, and Sharp.

Though competition is heating up in the digital arena, and includes traditional rivals such as Ricoh, Canon U.S.A. and its parent pay particular attention to hometown entry Xerox. The Stamford, CT-based company fired an important shot last year with its integrated DocuTech publishing system, driven by proprietary DocuSP software. But Murase is wagering that an open system is the way to go, with value-added on applications software and product features. Perhaps more important, however, while the Xerox environment is conducive to printing in a central location, Canon's GP-55 system thrives in decentralized environments, "doing work in work groups and LANs, where the work takes place, "Murase says. With local networks proliferating in the U.S. at the rate of 1,000 per day, Murase reckons he's moving in the right direction. Though in typical, low-key Japanese fashion, he declines to draw a parallel, analysts wonder whether Canon hopes to replicate its experience in the U.S. a generation ago, when it and other Japanese companies relegated Xerox's monstrous, "copy-center" machines to the dustbin with smaller, more flexible stand-alones. Given that DocuTech carries a hefty $260,000 price tag - compared with the GP-55's $13,900 - companies can afford to fit more GP-55s into the budget. But the Xerox system prints at a speedy 135 pages-per-minute, while GP-55 is much slower.

Once strictly a distributor of Japanese-made cameras and photographic equipment, Canon now derives 85 percent of its revenues from office machines, with 8 percent coming from its former core market, and the balance from specialized products, including chipmaking, broadcasting, and medical equipment. Like most subsidiaries of a foreign parent, Canon U.S.A. continues to mature: It now manufactures one-quarter of its output here in the States - a figure that is on the rise - taking some of the sting out of the dollar's recent plunge below 90 against the yen. Canon U.S.A.'s revenues jumped more than 15 percent last year, making it a close second to the Japanese market in terms of the parent's segments. The powerful surge offset some of the sluggishness in other world markets and a lingering recession in Japan that has hamstrung Canon Inc. "With global markets flat or declining, Murase's performance has been remarkable," says one industry observer who declined to be identified. "Canon U.S.A. is really in a position to drive the business."

Though he's spent 18 years as a manager in the U.S., Murase - a jovial sort who speaks in near-flawless English - is aware of the pitfalls that may confront a foreign national far from home. "You can't manage in a market like this by flying in and out," he tells CE Managing Editor Joseph L. McCarthy during an interview in Canon's Lake Success, NY, executive headquarters. "You may not even learn it if you're here for two or three years. Today, I may still have a different perception than an American manager who's been born and raised here, and we have to seek different ways to explain a subject to one another. Understanding is the key."

BACK TO THE FUTURE

You've been quoted as saying that the future of digital office machines - including copiers - is now. Why?

Digital technology has been around since 1985. There was lots of talk that digital quickly would become the standard office environment. Yet things did not develop as rapidly as predicted. That's partly because the laser printer eclipsed dot matrix printers around that time. Laser gave analog a fresh life.

If the technology was available as early as 1985, why has the development of digital machines lagged?

If you don't mind paying any cost for such a system, yes, we could have had them earlier. But the customer must have a reasonable price tag, and companies must make money. In addition, while we had digital technology 10 years ago, other companies weren't yet ready to move. You need a multivendor environment to bring maximum satisfaction to the customer. That's open systems as opposed to proprietary technology. The proprietary technology adds value to the open system.

The transition to digital systems is setting in motion significant cultural change inside Canon and forcing you to launch a major retraining effort.

That's a big challenge. Our first task was to train the trainers and to provide them with the equipment they need to become proficient in the new environment. Then we started the training of our own salespeople, marketing people, and service people. At the same time, we also run the dealers' training. It's difficult to put a figure on total training costs, but let's say that it is a significant amount.

There's also the matter of how the relations of suppliers and buyers have changed as technology continues to develop. Things are now almost a partnership in which we put the dealers' expertise in technology to its best use. The U.S. isn't a single market, it is a cluster of markets, and dealers are Canon's source of local expertise.

JOCKEYING FOR POSITION

How about in terms of strategic alliances?

With the entry into the market of additional companies, things are simultaneously becoming more complicated and more specialized. And the need arises to strike alliances because of the speed of technology change. Unless companies share their expertise, they will lag the market.

Several years ago, Canon was touting a "color revolution," that is, the anticipated explosion in the market for color copiers. Has that market developed as quickly as you anticipated?

We introduced the product in September 1987; at the time, we had no competition. In one way, that's very good. On the other hand, when there's only one manufacturer with the capability to produce a machine, that doesn't facilitate the development of the market.

The expansion of personal computers - most of them equipped with color monitors - has created increased demand for devices that can print in color. Canon, Hewlett-Packard, and Epson all produce popular color printers, and that is a big support for the color copier. After all, to be successful, we need color originals to be copied. So the personal computer boom, and the development of software packages that produce sophisticated, color graphics, has helped to advance the color document environment.

In terms of units, color copiers still comprise less than 5 percent of the market; in dollars, the figure would be slightly higher.

Not long ago, you decided to brand all Canon's products - from office machines, to cameras, to equipment that produces microchips - with the single Canon name under a single marketing campaign and advertising slogan. What went into your thinking on that matter?

The answer to that involves the history of Canon's experience in the U.S.

It's important to maintain a single identity. When I first came to the U.S. in 1971, virtually all our products were shipped to the U.S. from Japan but were sold under a variety of different names. And of the letters coming into our office, 80 percent used two "Ns." Based on that experience, we began to take care to develop the Canon brand name.

TODDLER NO MORE

It seems in recent years that Canon U.S.A., like other overseas subsidiaries of multinational firms, has increased its independence.

Naturally, we are a Canon company. But there has been change. We needed to incorporate the needs of our local customers into the product, so we began to develop local research and development capabilities. You also need manufacturing facilities to get closer to the market. Some people make it sound as if Japanese companies engage in these sorts of activities only to overcome the yen-to-dollar situation. That is an oversimplification.

It's interesting that you are expanding your manufacturing capabilities here, while many American firms are looking offshore, partly because of cheaper labor and other cost-related factors.

People think "Made in China" automatically means lower labor costs, but that's not necessarily so. A product we manufacture in our Canon Virginia facility has a smaller end cost than the same product made in China.

How do you manage that?

In China, you have young people working on an assembly line. Here, we have machines running 24 hours a day, seven days a week. So productivity is a key.

What's the next commercial breakthrough technology for Canon, the next bubble-jet printing technology?

New technology aside, we are pleased with the expansion of applications for bubble-jet technology already in place. For example, take this necktie [passes a package for inspection]. Would you believe this isn't the result of dyeing and weaving thread but of bubble-jet printing? Other applications involve textiles of all sorts, wallpaper, and ceramic tiles.

You come from a marketing background. In terms of running a technology company, do you think it's easier for a high-tech whiz to surround himself with good marketing people or for a marketing guy to surround himself with good technology people?

Neither is a perfect position, and no individual CEO is able to do everything. To be honest, though, in the 1980s, the advancement of technology was much slower. Today it is tough to keep up.

What's the most difficult technology for you to get a handle on, and how has technology made your life easier or more difficult?

I am in the middle of a campaign to get people to use e-mail. There's too much paper that goes back and forth. However, e-mail opens up the communications problem.

People always say, "We have to improve communications." What does that mean? What is the best way to transfer only necessary information? It's a nightmare I'm constantly trying to solve.