This graph from Peter Diamandis about how Kodak entered the sinkhole is kind of amazing. Diamandis explains Kodak’s failure to swerve in what is I think the orthodox Silicon Valley analysis:
[in 1996] Kodak had a $28 billion market cap and 140,000 employees.
In 1976, 20 years earlier, Kodak had invented the digital camera. They owned the IP and had the first mover advantage. This is a company that should have owned it all.
Instead, in 2012, Kodak filed for bankruptcy, put out of business by the very technology they had invented.
What happened? Kodak was married to the “paper and chemicals” (film development) business… their most profitable division, while the R&D on digital cameras was a cost center. They saw the digital world coming on, but were convinced that digital cameras wouldn’t have traction outside of the professional market. They certainly had the expertise to design and build consumer digital cameras — Kodak actually built the Apple QuickTake (see photo), generally considered the world’s first consumer digital camera. Amazingly, Kodak decided they didn’t even want to put their name on the camera.
There is more of the same (2012 and before) in the MIT Technology review. This is a totally convincing story (it had me convinced), but it leaves out three things:
- the boring old chemicals division of Eastman Kodak which was spun off in 1993 (three years earlier) is still around, profitable ( $10B/year revenue) and dwarfs what’s left of the original company,
- and Fuji films, Kodak’s also ran in chemical film space managed to leap over the sinkhole and prosper, but not by relying on digital cameras.
- Kodak did briefly become a market leader in digital cameras but ran into a more fundamental problem.
Back in 1996, the business press and analysts thought Kodak was doing the right thing by divesting its chemical business.
NEW YORK — Eastman Kodak Co., struggling against poor profit and high debt, Tuesday took a big step in its corporate restructuring, announcing that it will divest Eastman Chemical Co. and in one fell swoop wipe out $2 billion of debt.
Such a spinoff would not have occurred just a few years ago, analysts said, and the move signals that Chief Executive Kay R. Whitmore is responding to new, tougher markets and stockholder pressure to improve financial results quickly.
“They are now recognizing that they are not a growth company, that they must go through this downsizing,” analyst Eugene Glazer of Dean Witter Reynolds said in an interview on CNBC.
Kodak’s shares, up sharply Monday in anticipation of the announcement, ended down $1.375 to $52.375 on the New York Stock Exchange.
[…] “We determined that there was little strategic reason related to our core imaging and health business for Kodak to continue to own Eastman,” Whitmore said at a news conference.
Kodak, best known for photography products but also a major pharmaceutical and chemicals group, has endured slow growth for years. Its photography business has been hit by changing demographics, foreign rivals and new technologies such as camcorders. Whitmore said Kodak sales, especially in photography and imaging, were weak.
[…] Costs will be reduced elsewhere in the company, Whitmore said. Other executives also have said Kodak will cut spending on research and development of new products.
In retrospect, dumping the cash generating parts of the business and cutting R&D was not the best plan even if Wall St. analysts loved the idea. But it’s easy to be a genius after the fact as Willy Shih points out:
Responding to recommendations from management experts, from the mid-1990s to 2003 the company set up a separate division (which I ran) charged with tackling the digital opportunity. Not constrained by any legacy assets or practices, the new division was able to build a leading market share position in digital cameras — a position that was essentially decimated soon thereafter when smartphones with built-in cameras overtook the market.
Yes, those camera phones – which not too many people saw coming in the 1990s. Not only that, but Kodak’s path in digital imaging was not obvious.
The transition from analog to digital imaging brought several challenges. First, digital imaging was based on a general-purpose semiconductor technology platform that had nothing to do with film manufacturing — it had its own scale and learning curves. The broad applicability of the technology platform meant that it could be scaled up in numerous high-volume markets (such as microprocessors, logic circuits, and communications chips) apart from digital imaging. Suppliers selling components offered the technology to anyone who would pay, and there were few entry barriers. What’s more, digital technology is modular. A good engineer could buy all the building blocks and put together a camera. These building blocks abstracted almost all the technology required, so you no longer needed a lot of experience and specialized skills.
Semiconductor technology was well outside of Kodak’s core know-how and organizational capabilities. Even though the company invested lots of money in the basic research and manufacturing of solid-state semiconductor image sensors and developed some notable inventions (including the color filter array that is used on virtually every color image sensor), it had little hope of being a competitive volume supplier of image sensor components, and it was difficult for Kodak to offer something distinctive.
And Shih, perhaps unintentionally, reinforces Diamandis’s point that the top company managers failed to face up to the problem.
For many managers of legacy businesses, the survival instinct kicked in. Some who had worked at Kodak for decades felt they were entitled to be reassigned to the new businesses, or wished to control sales channels for digital products. But that just fueled internal strife. Kodak ended up merging the consumer digital, professional, and legacy consumer film divisions in 2003. Kodak then tried to make inroads in the inkjet printing business, spending heavily to compete with fortified incumbents such as HP, Canon, and Epson. But the effort failed, and Kodak exited the printer business after it filed for Chapter 11 bankruptcy reorganization in 2012.
Management chaos and “spending heavily to compete with fortified incumbents”.
With the benefit of hindsight, it’s interesting to ask how Kodak might have been able to achieve a different outcome. One argument is that the company could have tried to compete on capabilities rather than on the markets it was in. This would have meant directing its skills in complex organic chemistry and high-speed coating toward other products involving complex materials — a path followed successfully by Fuji. However, this would have meant walking away from a great consumer franchise. That’s not the logic that managers learn at business schools, and it would have been a hard pill for Kodak leaders to swallow.
it would have been a hard pill for Kodak leaders to swallow.
But wasn’t that their job? So to conclude this exercise in cut and paste, what about Fuji? The Economist had an interesting take:
the digital imaging sector accounts for only about one-fifth of Fujifilm’s revenue, down from more than half a decade ago.
How Fujifilm succeeded serves as a warning to American firms about the danger of trying to take the easy way out: competing through one’s marketing rather than taking the harder route of developing new products and new businesses. […]
Like Kodak, Fujifilm realised in the 1980s that photography would be going digital. Like Kodak, it continued to milk profits from film sales, invested in digital technologies, and tried to diversify into new areas. Like Kodak, the folks in the wildly profitable film division were in control and late to admit that the film business was a lost cause. As late as 2000 Fujifilm counted on a gentle 15 or 20-year decline of film—not the sudden free-fall that took place. Within a decade, film went from 60% of Fujifilm’s profits to basically nothing.
If the market forecast, strategy and internal politics were the same, why the divergent outcomes? The big difference was execution.
Fujifilm realised it needed to develop in-house expertise in the new businesses. In contrast, Kodak seemed to believe that its core strength lay in brand and marketing, and that it could simply partner or buy its way into new industries, such as drugs or chemicals. The problem with this approach was that without in-house expertise, Kodak lacked some key skills: the ability to vet acquisition candidates well, to integrate the companies it had purchased and to negotiate profitable partnerships. “Kodak was so confident about their marketing capability and their brand, that they tried to take the easy way out,” says Mr Komori.
Fujifilm realised it needed to develop in-house expertise in the new businesses.