Canon: inside-out or outside-in?

© Peter Atkinson
July, 2004

In the literature on strategy two fundamentally different approaches may be identified. There is the ‘outside-in’ approach which is strongly represented by the writings of Michael Porter (eg ‘Competitive Advantage’, 1985 (1)) and by Henry Mintzberg; and, there is the ‘inside–out’ approach explored in Gary Hamel and C.K. Prahalad’s book “Competing for the Future”, 1994 (2).

The outside-in approach considers how well the firm’s product or service ‘fits’ the market. There are two main generic strategies for positioning the product or service in the market: low cost and differentiation. That is, the firm may compete in a mass market on price or it may compete on providing a unique customer perceived advantage – usually encapsulated in the brand identity.

Mintzberg analyses the ‘fit’ of the product or service with the market in terms of how it is positioned in the market (3). The strategic aim is to fit the activities within the firm to the needs of the market or, as Johnson and Scholes put it (4), “... trying to identify the opportunities that exist in the environment and tailoring the future strategy of the firm to capitalise on these…”

Hamel and Prahalad approach the question of strategy very differently. Whereas there is an implicit assumption in the ‘outside-in’ approach that assumes that markets are relatively static, the ‘inside-out’ approach assumes the opposite: that markets are constantly changing and that a firm that does not try to shape the way that they change, and work towards satisfying demand that does not yet exist, will perish.

For example, if you adopt the strategic fit approach then you will probably take market research very seriously for understanding how your products might better fit the market. However if the market knows nothing of a potential product, respondents will not express a desire for it and no radically new products might ever appear.

Hamel and Prahalad recommend that a firm identifies its core competencies and then imagines how these might be built upon by acquiring new competencies in order to offer products or services in the future that are unique to that firm and that will have value for customers. They also describe how a firm might go about acquiring these new competencies by leveraging resources.

Both the ‘outside-in’ and the ‘inside-out’ approaches have validity. The ‘outside-in’ approach is useful in the short term and for smaller firms – a local printing company has little to gain by imagining how they might change the market over the next ten years. However, a global corporation must think in these terms or it will be beaten out of existence by nimbler rivals who change the market and benefit from the new situation.

The development of Canon is a perfect example of the ‘inside-out’ approach as described by Hamel and Prahalad – and, in fact, Canon is cited a number of times as an example in their book.

A firm has at its disposal a range of resources that includes things that might appear on the balance sheet such as buildings and machinery and also includes things that do not such as the knowledge and skills of the workforce. Hamel and Prahalad talk of the importance of identifying ‘core competencies’. A competency is a combination of knowledge, skills and technologies that enable the firm to conduct its business. Some of these competencies are ‘core’ that is, they are fundamental to the firm and its future. A core competence is one that makes a large contribution to customer-perceived value, uniquely differentiates the firm’s products and has a wide application in that it has to have the potential to give rise to new products.

From the beginning Canon exhibited a culture that identified and cultivated core competencies. This is suggested by the fact they were able to apply their knowledge gained in camera manufacturing to the production of x-ray machines in the 1940s. A Canon handbook states that their success in copiers depends on “synergistic management of the total technological capabilities of the company, combining the full measure of Canon’s know how in fine optics, precision mechanics, electronics and fine chemicals” confirms that Canon thinks in terms of core competencies. One of the tasks that management who want to leverage core competencies has to do is to identify them wherever they are in the firm and they rarely reside in one person or team but often are to be found across business units.

For a small competitor to take on an industry incumbent takes years of incremental building of new core competencies. As early as 1959 Canon had identified the future potential for them of copiers and established an R&D section in 1962 which was to explore copier and other technologies. At that time the industry was dominated by Xerox who had huge financial resources and an armoury of patents. Canon could only achieve progress by leveraging their financial resources.

In the early 1960s Canon built competence in micro-electronics by developing a pocket calculator and probably saw how this competence might be used in other future products including copiers. They sought to build their knowledge specifically in copiers by licensing Xerox’s technology from a third party. At this point they concealed their ambitions in the copier market by forming a separate company to sell their copier in Japan and licensed it to another company for sale in the US. Throughout the seventies, Canon followed this practice of generating extra revenue streams by licensing. In this way they were able to build knowledge not just in copier technology but also about the Japanese and US markets and about patent law. In other words, Canon were accumulating a good deal of knowledge and building core competence by bringing a product to market at each step of the way thus avoiding costly capital investment.

Canon’s aim was not merely to replace Xerox as the leading manufacturer of copiers, they aimed to change the market to make it much bigger by selling a new kind of copier. Xerox machines were large a placed centrally in the office and people would queue to use them. Only large firms could afford to have Xerox machines meaning that there was a huge latent market of small firms which could be opened up if a small machine were available. Not only that but the larger firms would probably abandon their large machines and purchase many small machines to distribute around their offices if such a machine were available.

Canon had a clear strategic vision at this point that they communicated to their employees through the slogan “Let’s make the AE-1 of copiers!” (recalling the earlier success of the low-cost but high-quality AE-1 camera and how they drew on different areas of competence in optics and electronics). It was by building a strategy to realise this vision over a long period of time to leverage resources that Cannon eventually succeeded.

The main resources that Canon was able to leverage to gain success in the copier market were: core competencies, financial resources, human resources and marketing resources.

Core Competencies

Canon concentrated on building core competencies that would become ‘gateways’ into new product areas. Where they were unable to readily acquire expertise themselves they bought it in through licensing agreements or joint ventures.

They did not try to hang on to competencies that were not core. All copier parts, for example, that do not draw on Canon’s unique competencies are purchased from suppliers. This approach has allowed Canon to concentrate on its core competencies.

Financial Resources

Canon was able to generate an income stream from each step of its development of the copier keeping capital costs low. They have a philosophy of making the time between investment and income generation as short as possible.

Human Resources

The main way that Canon was able to obtain the best out of their workforce was by communicating with them so that everyone was fully aware of the firm’s strategy. The encapsulation of their strategy in a slogan was useful in constantly focussing everyone’s efforts.

In addition to communicating to the workforce, Canon is known for having a two-way communication with employees being encouraged to make suggestions and having a ‘stop and fix it’ policy so that even the lowliest employee is responsible for the quality of the product.

The use of the human resource as an integral part of the core competencies is exemplified by the way the firm is structured. Knowledge and expertise is available in all the different business areas of the company through the functional committees and by allowing R&D personnel to have first-hand experience of other functions.

Marketing Resource

The marketing resource is leveraged by launching new products in familiar channels and markets to reduce risk. Canon has also been careful to build a banner brand so that any new product they produce will benefit from existing share of mind.

In conclusion, Canon’s approach to becoming the foremost manufacturer of copiers illustrates the ‘outside-in’, resource based approach to strategy that is necessary for a global corporation to survive in a rapidly evolving environment.

1. Michael E Porter (1985), Competitive Advantage, Free Press

2. Gary Hamel and C.K. Prahalad (1994), Competing for the Future, Harvard Business School Press

3. Henry Mintzberg (1998), ‘A Guide to Strategic Positioning’, in Mintzberg et al. The Strategy Process, Herts: Prentice Hall – cited in MBA course text.

4. Gerry Johnson and Kevin Scholes (1984), Exploring Corporate Strategy, Prentice Hall, Europe, p8.