Running a business is all about innovation. Whether it's a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to success. Without innovation, companies run the risk of getting complacent, being outflanked by competitors, or, even worse, folding up shop altogether, the way Circuit City did a couple of years ago.

No company gets a free pass when it comes to adapting its business plan, so when push comes to shove we need to ask ourselves: Will this company innovate or die?

Today, let's take a closer look at Xerox (NYSE: XRX) to determine whether the company can adapt to rapidly changing consumer demands or whether it will be pushed into the background.

What's wrong with Xerox?
If your business is in any way related to office supplies or business equipment, you've had a very rough go of it over the past five years. Shareholders of office-supply stores Staples (Nasdaq: SPLS), OfficeMax (NYSE: OMX), and Office Depot (NYSE: ODP) have buried their heads in the sand with the hope that once they emerge, small businesses will once again be booming. Likewise, competitors to Xerox's business-equipment segment, Hewlett-Packard (NYSE: HPQ) and Canon (NYSE: CAJ), have taken shareholders for a wild ride -- and the end result is companies with stale images.

Xerox has radically transformed itself from the simple printer/copier company it was just a decade ago, and with its purchase of Affiliated Computer Services in 2009, it signaled its move into business services -- yet no one seems to care. Since 2006, the company's gross margins have fallen from a high of 40.6% down to 33.7% in the past four quarters, while earnings per share have dropped by more than 47%.

Getting Xerox back on track
I'm not the CEO of Xerox, but for a moment let's pretend I am. As I see it, there are three things Xerox needs to focus on to regain its 1990s mojo:

  • Take ACS international: This isn't to say that current CEO Ursula Burns hasn't recognized the need to grow internationally, but the company's primary future growth tool, ACS, is going to get bogged down by U.S. competition. Instead, the company needs to focus on European and Latin American business-services growth, which should yield less competition and higher margins.
  • Market aggressively: Again, I have to say that Xerox is making strides. It's taking a more aggressive approach to advertising its higher-margin business-services division and trying to distance its image from being a copying and printing dinosaur. The company is going to need to aggressively spend on its marketing budget if it's to shed its stale image with investors.
  • Address the debt: Xerox is in a tough position. It's using its cash to buy back shares and make acquisitions to drive revenue growth, but its debt-to-equity ratio of 71% is significantly higher than Canon's at 0.7% and even Hewlett-Packard's at 55%, so exercising caution in its spending habits (aside from marketing) would be prudent.

What's the verdict?
Unlike many of the companies I've highlighted so far in this series, Xerox is making strides toward accomplishing much of what it needs to address. Probably its biggest challenge is getting investors to believe that it can change. One way to do that is to boost its earnings and successfully integrate Affiliated Computer Services. Its earnings projections are indeed higher, but integration hiccups remain.

As of now, the jury remains undecided on Xerox, but at least the company knows what it needs to do and is taking the beginning actions to improve its image. Xerox is definitely worth revisiting later.

Do you think Xerox still has what it takes to print profits for shareholders, or is this aging beast heading toward extinction? Share your ideas in the comments section below, and consider adding Xerox to your watchlist to keep up on the latest in the printing and copying sector.