Lessons Learned From Kodak’s Fall

The winters in Rochester, NY can be long and harsh. I know. My son attends college there. Situated on the southern shores of Lake Ontario, the yearly snowfall averages 92 inches. But the harshness that I am referring to relates to the demise of Kodak, which was born in Rochester in 1889, and died there on January 19, 2012, falling into bankruptcy.

Given that its name was once synonymous with photography, a Kodak moment, the disintegration of this iconic corporation is particularly poignant. As recently as 1976, the company held a 90% market share of film sales and 85% of camera sales. It was the Google of its day, attracting the best technical talent from across the country. During lunch, the company played movies for its employees.

©Kodak used with permission

A disruptive technology—the digital camera—killed off the film business. Ironically, Steve Sasson, a 25 year-old Kodak electrical engineer, invented the first digital camera in 1975. This fact begs the question: how could a great company like Kodak, flush in the 1970’s with abundant resources and some of the most talented people on the planet, fail to take advantage of a product that was invented in its laboratories?

A failed business strategy and management myopia both contributed to Kodak’s downfall.

Kodak’s Failed Business Strategy

When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera invention was held back because of management’s concerns about the negative impact on film sales.

When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.

Earlier this month, Kodak’s announced that it was exiting the film and digital camera business altogether. Sadly, all that remains of this once august corporation is the intellectual value of its patents, resulting from decades of belated investments in digital technologies.

Management Myopia

Not only was the first digital camera unwieldy—it weighed over 8 lbs.—but it didn’t even save images. Instead, they were projected onto a TV screen. It is difficult to imagine how Kodak’s mainstream customers—Mr. and Mrs. Jones from Kansas—would have bought that first, clunky digital camera.

Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies.

In retrospect, management ought to have spun off its digital camera business to an independent subsidiary. The small business unit could have focused on meeting the needs of the customers who would have embraced it, such as hobbyists and leading-edge photographers. Apple followed this strategy with its first, Apple computer. I remember buying mine from a Chicago-based, electronics shop that catered to technical enthusiasts (techies) who were far removed from the mainstream, consumer marketplace. Over time, Apple developed its product offerings, introducing features and functionality—such as the mouse and Graphical User Interface (GUI)—that made it attractive to Mr. and Mrs. Jones from Kansas.

In his book The Innovator’s Dilemma, Clayton Christensen describes numerous instances where companies have failed at internally developing disruptive technologies. In contrast, firms that set up separate subsidiaries have been able to grow game-changing innovations into full-fledged businesses. HP did this with the invention of the ink jet printer in the 1980s. It set up an autonomous subsidiary in Vancouver, Washington, far removed from the influence of corporate headquarters in Palo Alto, California. Initially, the ink jet printer market was small and limited; over time, the company turned it into a significant business.

Small is Beautiful

I worked as a product manager at a small company that manufactured food-processing machinery for the beverage industry. New product development was the key to its success. In 1980, a large conglomerate acquired it. Within 7 years, innovation, the life-blood of the firm, dried up, and the conglomerate sold off the business.

When it comes to winning the new product development race, small entrepreneurial-driven firms will usually beat the behemoth corporation, especially when dealing with disruptive technologies.

Comments

  1. Nice analysis, Tim. I haven’t worked in the corporate world for many years, but I did spend about four years at Kodak. In retrospect, it was around the time of the digital “inflection point”. I joined Office Imaging in 1992 and moved to Commercial and Government Systems, where I helped integrate digital imaging solutions for law enforcement. After that, it was a short stint as a Product Manager in Digital and Applied Imaging (the division that was supposed to be the savior).

    In my humble opinion, the downfall of the company was caused by one thing: fear. This was supported by another problem shared by all public companies: the quest for positive quarterly earnings. Upper management was scared to death of killing the cash cow. The 35mm film “system” was one of THE MOST profitable product lines of all time. The margins were outlandish. The barriers to entry were enormous. Kodak’s technological lead was vast. Yet, with digital technology banging on the doors, they continued pumping billions into marketing old (but still profitable) technologies and doing half-assed “alliances” with HP for inkjet printing. Very few companies (Apple and GE are the only two big ones that come to mind) have been able to successfully transition into entirely new areas of growth. They do this because they are unafraid to “eat their children”. They know that if they don’t do it, the competition will.

    Here is another casual observation: the other way this culture of fear manifested itself was in a fear of failure. Risk taking was NOT encouraged; it went against the very fiber of the company. When you combine this with the location of the headquarters, a funny thing happens – nobody wants to rock the boat. Rochester is a beautiful city; for two months of the year (we got 24 inches of snow on Mother’s Day one year). Employees who were transferred in from the field didn’t want to rock the boat, lest the piss off the powers that be and end up getting stuck. People who were from Rochester didn’t want to leave because it was home. They had no great incentive to be innovative or risk takers.

    Carl Gustin, Chief Marketing Officer under George Fisher, tried mightily to change this, going so far as to moving Digital and Applied Imaging’s HQ to Atlanta, Georgia. This was met with scorn and derision by most old-timers.

    The whole story is very sad. At one time, Kodak was an absolutely wonderful company for which to work. Cradle to grave, they took care of their employees. I am grateful for the knowledge and experience I gained working for them.

    • Hi Matt:

      Thank you for your comments, which are very perceptive and are spot on in terms of understanding why Kodak failed. You indicate that the quest for quarterly earnings was one of the factors accounting for Kodak’s downfall. I think that it is useful to learn from Steve Jobs, who said that Apple was never in business to make profits; rather, its purpose was to make beautiful products that customers love, and to create a company that would endure after he died.

      It appears that Fisher made a valiant effort to separate the Digital and Applied Imaging division from corporate headquarters, but it clearly was still within the reach of
      headquarter’s corporate tentacles. Given your description of the corporate culture, it reinforces the notion that Kodak’s only chance for survival would have been for it to set up a truly separate, independent subsidiary that developed digital technologies and markets.

      I have never been to Rochester in the summer. Based on your description, I am adding to my bucket list a trip to Rochester in the summer.

      Once again, thank you for taking the time to comment.

      Tim

  2. Kodak may also be a story of being suck in the past unable to let go of things people hold dear. It’s a story that seems to be repeated more frequently these days with the unstoppable rise of the internet and mobile phones. Organsiations, like Kodak, who have built their success in the analog world find that their whole culture drives them to keep on doing what they’ve always been doing. After all, isn’t that what’s made them so successful? Turnng everything on its head – abandoning film for intangible data and consigning to the past decades of innovation, creativity and success is not easy to do. Just try giving up one of your old habits!

    • Thank you for your comment. You make some excellent points. I agree that the transition from analog to digital technologies has wreaked havoc upon countless industries. Also, I agree that we are creatures of habit

      It all gets back to the nature of change, and why we resist it. When I walk from point A to point B in an office building to go to the washroom, I can make the trip essentially on auto-pilot. After a remodeling project, the path has changed. I now have to think about how I am going to get from point A to point B. The requirement of now having to “think” is what makes the change unwelcome. It is much easier to operate on auto-pilot.

      The same principle applies to organizations. Perhaps that is why the only way a disruptive technology can succeed within a large organization is by spinning it off into an autonomous unit.

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  1. […] make it easy to understand. Kodak, focusing its efforts on improving photographic film and paper, paid no attention to digital technology (invented by one of its own engineers), which at first could not compete on quality but which later […]

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