Canon, Japan’s largest camera and office equipment company, is viewed increasingly in the press as the latest economic recovery "poster child," with third quarter profit surging 53% and sales up 2%. Amidst a dismal Japanese market, Canon has become the most profitable manufacturer in Japan aside from auto makers.
The company, now under the leadership of the much-heralded Fujio Mitarai, has pushed U.S.-style business practices into the Japanese conglomerate structure in order to cuts costs and become the top dog in photocopiers by 2005. Claiming to hold the world’s top market share in unit sales of B&W copiers and laser printers, Canon is now shooting for dominance in the color market: "We must be number one in color or our position won’t be secure," Mitarai said in a recent news conference.

Research and (Under) Development
Regardless of Mitarai’s ambition, it’s not all peaches and cream for Canon. The maverick CEO concedes that the company’s biggest weakness is in R&D, a fact that will demand that Canon make big investments in core (and profitable) technology development to keep pace with an aggressive competitive landscape. Canon is still in the midst of dropping research efforts for its many unprofitable business units. With a research staff of about 250 -- down from 350 in the mid-1990’s -- Canon has announced plans to quadruple that number to 1,000 by 2005. Fulfilling this new mandate will require significant new capital above and beyond the 10% of revenues Canon already spends in R&D ($1.67 billion this year, with just $77 million focused on digital imaging).

Lifetime Employment (Problems)
Mitarai has held firm to one of the foundational tenets of the historical Japanese management style: the guarantee of lifetime employment for all of Canon’s 20,000 Japanese full-time workers. Employees are more valuable than investors, he says, and the guarantee is meant to engender a lifetime of loyalty. In today’s tough technology climate and a struggling Japanese market, however, that promise could become a huge liability.

If the company can’t sustain its planned growth pattern, a "no layoff" policy could endanger profitability and put Canon at a disadvantage with global competitors. Mitarai recently highlighted the risk in an executive Q&A session: "When I was manager in America, I did things differently. The situation [in America] is that if you offered lifetime employment, you could go bankrupt. You’d be left with people who didn’t work…" The other risk is the potential lack of motivation and accountability for those with guaranteed positions.

Canon is already looking to axe its flextime work policy with the company’s labor union, citing strained productivity issues. "We are hoping to end the system in January to enhance efficiency, " said a company spokesperson. "Research and development requires working in groups, but with the current system, the hours that people can get together are limited, and it is difficult to hold meetings."

A One-Two Punch
Perhaps the biggest obstacle to Canon’s growth is a double whammy of weak Japanese export markets and the strong yen which are expected to flatten profits and revenues for the company in the coming year. In addition, sales of laser printers and chip making gear are off due to poor demand. Some feel that Mitarai needs to look to other technology advancements to find growth: "He has to come up with a new product or innovation that will drive Canon’s growth in the future," says Keio University economist Masaru Kaneko.

Disparate Divisions & Debt
Canon may still be recovering from a hangover of unprofitability. Mitarai shut down lagging business units such as the company’s PC business, liquid crystal displays, optical cards, read/write devices, and electric typewriters, and sold other assets to reduce its debt from a massive $7 billion to a still sizable $2.5 billion today.
Other cost cutting has been deep and wide. Mitarai’s golf game with Jack Welch of GE may have left an indelible impression. The Canon chief has been relentless with trimming the fat and shutting down units that aren’t up to snuff. And there may be more—Canon’s sales of optical equipment and chip manufacturing devices slowed nearly 30% last quarter, reflecting a reeling chip market.

Formidable Foe
All these challenges withstanding, Canon is still a shining constellation in the otherwise dim galaxy of Japanese business. With a charismatic and effective chief at the helm, the company has returned to a profitable course and is powering at flank speed towards uncharted territories including China, where it intends to increase the capacity of its plants by 60-100% in the coming year to stay cost-competitive.
Canon also is banking on riding the wave of a booming digital camera and imaging market to increase its presence in the arena, especially in high-end professional systems. Canon has also increased its share of the $ 1.6 billion high-speed production-printer market and last year moved ahead of Xerox in that category. "Canon in the past year or two has been winning," says Angele Boyd, an IDC analyst. In addition, Canon is committing a sizable U.S. marketing budget to digital cameras and home printers, convinced that home consumer imaging will continue to grow in the next year.

There’s a lot that’s positive about Canon’s drive and direction. However, given the turbulent market and the company’s recent financial performance, Canon has to demonstrate that it has the skill and strategies to navigate in the middle of a storm.