In the early 1990s, Fujio Mitarai was one frustrated executive. He had recently returned to Canon Inc.

‘s Tokyo headquarters after a 23-year stint in the U. S. , where he built Canon’s camera and copier businesses into market leaders and befriended top execs of companies from General Electric Co. to American Express Co. His goal was to push U.

S. -style practices through the entire Japanese conglomerate in order to cut costs and clean up its finances. Otherwise, Mitarai argued, Canon was headed for serious trouble. Few colleagues heeded his call.Although he was a senior managing director, Mitarai says, “I wasn’t senior enough to get the top executives to listen to me. ” Then, a stroke of fate forced them to pay attention. In August, 1995, Mitarai’s cousin, Canon President Hajime Mitarai, died suddenly of pneumonia. Passing over six more senior executives, Canon’s board gave him the job.

That marked the beginning of Canon’s transformation. In seven years, Mitarai has turned an unwieldy conglomerate burdened with money-losing subsidiaries into a streamlined organization.During the tenure of Mitarai, who became CEO in 1997, Canon’s net profits have tripled, to $1. 4 billion, on sales of $24.

3 billion. Market capitalization has swelled, from $11 billion to $34 billion, despite the steady decline of Japanese stocks. A big reason: Mitarai relentlessly drives his staff to cut costs and boost profits. Nor has he been shy about closing weak divisions. There is more to Mitarai’s success than aping the U. S. obsession with the bottom line. What some observers dub the “Mitarai Way” also incorporates Japanese practices.

He rejects the U. S. elief in appointing outside board members, contending they contribute little. Instead, he has given more power to auditors to oversee executive actions. He bases pay on merit to encourage staff to increase sales and improve products. But Mitarai still promises lifetime employment to inspire loyalty.

While Mitarai is demanding and decisive, he also tries to forge consensus before making a major move. In 1997, for example, he wanted to convert every Canon factory to a new production system that organizes workers into small clusters, or “cells,” instead of long assembly lines.Mitarai spent weeks winning over wary senior execs in daily debates on the pros and cons of the arrangement. The result has been a 30% spike in Canon’s productivity. “Mitarai combines Western management principles with those of Japan to create his own unique style,” says Masao Hirano, McKinsey & Co. ‘s Japan director. The formula certainly seems to work, and at a time when Japan is desperate for somebody to lead it out of economic quagmire, this is making Mitarai, 66, something of a hero. His makeover of Canon is the subject of a new book, and the Mitarai Way is lauded in numerous articles in the popular press.

Many company managers now look up to Mitarai as a role model,” says Yoshio Nakamura, senior managing director of Keidanren, Japan’s influential business leaders’ organization. Not that Mitarai lacks challenges. Weak export markets and the strong Japanese yen should keep net profits and revenues flat in 2002. Digital-camera and copier sales remain robust, but sales of laser printers and chipmaking equipment are off. “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.

Still, Canon is in far better shape than the rest of Japan Inc. , which is starting to look to Mitarai for inspiration. Before Mitarai took over, Canon had a dozen major divisions that operated like individual fiefdoms, obsessed with building sales numbers at any cost.

Now, there are four key divisions: copiers, printers, cameras, and optical equipment. Canon managers must fund product development and capital investment out of cash flow rather than bank loans and bond issues. “As Canon grew, managers forgot about economy and efficiency,” Mitarai says. I taught them that we can’t accomplish anything in business without profits.

” Mitarai’s profit fixation dates to 1966. At the time, he had just been posted as an accountant to Canon’s then-tiny U. S.

headquarters in a windowless warehouse in Manhattan. By tinkering with accounts receivable, Mitarai prepared a report showing Canon had earned $6,000 in the U. S. on $3 million in sales. The profits seemed low to the Internal Revenue Service, which suspected Canon might be avoiding taxes. But auditors learned the U. S. perations actually were in the red–and suggested Canon might be better off closing its office.

That was a wake-up call. Mitarai began pushing staff to cut costs and fatten margins and sales. Several years later, he was promoted to head of North American camera sales. In the early ’70s, Canon made cameras for Bell ; Howell Co.

, but its own brand was weak. So Mitarai and other Japanese managers called on dealers from Alberta to New Mexico. He crisscrossed the continent in rental cars, staying in $16-a-night motels to economize. Mitarai lived in a rooming house in Queens, N.Y. On weekends, recalls Toshizo Tanaka, Canon’s top financial officer, who also worked in New York, he and Mitarai took buses to a nearby golf course.

Those golf skills came in handy. After he became president of Canon USA in 1979, Mitarai cultivated top U. S.

execs. One golf partner was former GE CEO Jack Welch. Mitarai pumped him for advice.

“Mitarai wanted to talk about strategy and management methods–and whether they could be applied to Japan,” recalls Haruo Murase, now president of Canon’s Japan marketing arm. Meanwhile, Mitarai learned to build a business.In 1976, he started advertising on TV to establish Canon’s name in cameras and outbid market leader Nikon Corp. to become official sponsor of the 1976 Summer Olympics in Montreal. He then took on Xerox Corp. , the photocopier king.

Canon recruited vendors and launched cheaper, compact copiers. Now, Canon is global leader, with a 30% share. After his 1989 return to Tokyo, Mitarai oversaw accounting, personnel, and administration. He was alarmed at the financial shape of many Canon divisions. Seven were in the red, and profitable ones were building overseas plants with no coordination.

Upon becoming president in 1995, it didn’t take long for Mitarai–a nephew of Canon’s co-founder–to erase suspicions that he owed his ascent to nepotism. To underscore that all divisions are part of one company, he introduced consolidated balance sheets. Mitarai used Canon’s traditional informal board meetings, which start daily at 7:45 a. m. , to prod execs to debate the company’s direction. He also initiated daily lunch meetings with senior managers and monthly meetings for 800 lower-level managers. To fix Canon’s finances, Mitarai took a scalpel to money-losing businesses.

Within the first three months of taking over, he decided Canon should shut its PC business, which lost $85 million in 1995. He exited liquid-crystal displays and electric typewriters. The asset sales and other measures helped cut Canon’s debt, from $7 billion to $2.

5 billion today. Perhaps Mitarai’s biggest accomplishment was to start converting Canon to the “cell” system of production in 1998. A half-dozen workers in a small space can now match the output of 30 on the old assembly lines. All 29 Japanese plants now use the cell system, and Canon’s 15 overseas facilities are converting.This helped Canon eliminate 10,000 contract workers and freed up the equivalent of five factories.

But Mitarai isn’t stingy on research ; development, which he plans to boost from 7. 5% of sales now to 10%. In the past two years, Canon has invested $500 million on optical technology for next-generation chipmaking equipment.

Some analysts think that’s excessive. Mitarai argues that it’s crucial if Canon hopes to deliver innovative products, such as copiers, printers, and cameras that link to networks. Mitarai, who doesn’t plan to retire soon, wants Canon to be No. in digital cameras (it now is third), ink-jet printers, and steppers for making chips. Mitarai also stresses shareholder value, making corporate accounts more transparent and personally attending investor meetings. Still, Mitarai rebuffs U.

S. shareholder demands for short-term profits, saying they encourage companies to doctor results. At Canon, he says, employees are more valuable than investors. So Mitarai guarantees the jobs of Canon’s 20,000 Japanese full-time workers. “There are fewer job opportunities in Japan today and less mobility,” he says.This strategy may work as long as Canon continues to grow.

That’s a tall order given weak U. S. and European demand, since exports account for 70% of sales.

Still, Canon is lucky that Mitarai did most of the streamlining when the global economy was strong. By waiting until Japan is in crisis, restructuring efforts by money-losing conglomerates such as Hitachi, Fujitsu, and Toshiba have met stiff resistance. Mitarai’s advice: “They have to reorganize, put the emphasis on profits, and start paying more attention to shareholders. ” This time, the rest of Japan Inc.

would do well to listen.