new technology features “ low margins B u s i n e s s F i n a n c e

new technology features “ low margins B u s i n e s s F i n a n c e

Management at Work

Kodak Fails to Focus on the Big Picture

As recently as 1994 Eastman Kodak was among the top 20 companies in the Fortune 500. In 1996, the renowned manufacturer of photographic film and equipment employed 145,000 workers and enjoyed revenues of more than $13 billion. As of 2005, the workforce had been trimmed to 51,000 but revenues still topped $14 billion. In 2017 what remained of Kodak employed only 6,400 and was controlled by several other companies.

What had happened to the one time corporate giant? Among other things, bankruptcy. Kodak filed for Chapter 11 bankruptcy protection in January 2012, citing “restructuring costs and recessionary forces” and claiming $5.1 billion in assets against $6.8 billion in debts. Since 2004, the company had posted only one full year of profit. Former Kodak executive Larry Matteson says that the company was hit by a perfect storm: “I can’t think of another major company in the U.S. that has undergone as tough a transformation as Kodak. When IBM changed,” explains Matteson, “its core capabilities remained essentially the same; at Kodak, everything changed, right through research, to marketing, to sales.”

So—more to the point—what changed everything and reduced a blue-chip corporation to a shadow of itself in just a couple of decades? Most analysts approach this question by citing the advent of digital technology—the capacity to store and process data as computerized bits and bytes rather than as streams of electronic signals loaded onto such physical materials as magnetic tape or silver halide film (known as analog technology). The so-called Digital Revolution—the widespread transition from analog to digital—took off in the 1980s and 1990s, as cellphones became ubiquitous and the Internet became a fixture in business operations.

According to Harvard’s John Kotter, a widely acknowledged authority on organizational change, “Kodak’s problem… . is that it did not move into the digital world well enough and fast enough.” It’s pretty much a consensus opinion, but Kotter is careful to add the qualifier “on the surface.” Below the surface, suggests Kotter, where Kodak made the business decisions that led to bankruptcy, it’s an opinion that needs further investigation. Kodak, for example, pioneered digital technologies throughout the 1970s and 1980s, including innovations in color digital cameras, digital print kiosks, and digital image compression. Kodak, says Bill Fischer, CEO of the private equity firm Manzanita Capital, “played along the entire ‘imaging’ value chain and was certainly in an excellent position to be intimately familiar with whatever was going on within and around the imaging business.”

Unfortunately, says Fischer, top Kodak managers “failed to take advantage of their unique perspective.” Fischer concludes that Kodak ultimately succumbed to “creeping disruption by digital imaging.” As for Kotter, he argues that Kodak was facing a “technological discontinuities challenge,” which occurs when a new technology features “low margins and cannibalizes your high-margin core business.” In Kotter’s estimation, “Kodak did not take decisive action to combat the inevitable challenges” posed by such technologies.

The challenge can be particularly difficult when the discontinuity comes from an unexpected source. The first “smartphone” was rolled out in 1994 and the first camera-equipped smartphone in 2000. By 2010, smartphone manufacturers were shipping more units (100.9 million) than PC makers (92.1 million). A year later, the iPad 2 hit the market. Says Bill Fischer: “We can suspect that Kodak, while recognizing the impending threat of a digital ‘something,’ probably did not immediately imagine that it would be a ‘telephone’ that would ultimately be the most damaging agent of disruption” to its core film- and camera-making businesses.

Some of the company’s critics charge that, even on the brink of bankruptcy, Kodak managers failed—or refused—to acknowledge that many of the company’s products had been marginalized by digital substitutions. According to George T. Conboy, chairman of Brighton Securities, Kodak “made a big mistake of riding the cash cow—film—to the point that there was simply no more milk coming from it.” During the bankruptcy process, for example, Kodak management hoped to sell one of the firm’s prized assets—a package of 1,100 digital-imaging patents—for as much as $2.6 billion. Ultimately, the portfolio brought in only $527 million. Says Jay T. Westbrook, a bankruptcy specialist at the University of Texas law school: “What that situation signified—which was part of the problem with the whole business model—is that they thought their technology and their patents were more valuable than they really were. They clung to that belief right until the end.”

Kotter agrees with the consensus opinion that Kodak’s demise was a result of “strategic decisions either avoided or made poorly.” He reminds us, however, that there’s still an underlying question to be answered: “Why did Kodak managers make the poor strategic decisions they made?” His own answer is fairly simple—on the surface: “The organization,” he charges, “overflowed with complacency.” In particular, says Kotter, Kodak failed to recognize that digital was a “huge opportunity” only if the company acted with equally “huge urgency.” As a matter of fact, Kodak had developed the first electronic photographic camera in 1975, and as of 2005, it was the number-one seller of digital cameras in the U.S. Within two years, however, it had slipped to fourth, and by 2010 it had plummeted to number seven.

Kodak, it seems, was too slow in realizing that in order to make the transition to digital, it would have to give up the comfort of dominance in an analog technology that was facing a rapidly diminishing market. In 1976, for instance, Kodak commanded 90 percent of film sales and 85 percent of camera sales in the United States. As of 1996, it controlled over two-thirds of global market share in both categories. According to Andrew Salzman, former VP of Kodak for worldwide marketing, top managers at the company were well aware that its markets were “being reinvented” but failed to commit themselves to

its next generation of revenue drivers… . Kodak had tomes of research on how digital would develop, how the whole notion of image capture, storage, manipulation, and retrieval would reinvent the category. But from a go-to-market point of view, from an organizational prioritization vantage point, it was tethered to the 95 percent of revenue coming from paper and film.

Or, as Kotter puts it, although “there were people who saw the problem coming,” they were “buried in the organization.” Says one former executive who was hired in the 1990s to help bring the company into the digital era: “I couldn’t get anywhere without running into the consumer product or professional division selling film or paper. Every time I wanted to make a move, they would argue that I was destroying margin and value.”

Kodak, concludes Allen Adamson of Landor Associates, a global consultant on branding research and design,

was built on a manufacturing mindset, a business model in which you build something, put it in front of consumers, and they come… . Despite an abundance of superior technology, it was this intransigent culture that was among the reasons Kodak failed to move forward. The world is moving so much faster that no matter how strong or powerful your brand name may be, you have to think in terms of revolution, not evolution.

Case Questions

Must also include a summary of the above case.

  1. Explain how—theoretically, anyway—making “change innovations” in each of the following Areas of Organizational Change might have helped Kodak ease the severity of the conditions that led it to bankruptcy and the challenges facing it now that it’s emerged from bankruptcy: changing organization structure and design, changing people and attitudes, and changing processes.
  2. Judging from the case, explain how, at one point or another, each of the following reasons for Failure to Innovate played a role in the process that brought Kodak to bankruptcy: lack of resources, failure to recognize opportunities, and resistance to change.
  3. You can still buy a digital camera with the Kodak name on it, and you can still print pictures at digital kiosks in many local drugstores. These businesses, however, are no longer owned by Kodak. In addition, Kodak no longer publishes photos online or makes pocket video cameras, camera film, or photographic paper. Having emerged from bankruptcy, Kodak tried to focus on the commercial side of the imaging business, such as packaging labels and graphics and printing solutions to client businesses. It also tried to make components and products that other companies can sell under their own brands. In what ways does each of the following Forms of Innovation figure to play a role in Kodak’s efforts to rebuild itself after bankruptcy: radical innovations, incremental innovations, technical innovations, product innovations, and process innovations?
  4. How about you? How surprised are you to learn how fast a blue-chip corporation with a line of household-name products can collapse? Do you think that we live in times that make such stories as Kodak’s more or less likely? In your opinion, what’s the most important downside of the demise of a company such as Kodak? What’s the most important upside?

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