You have probably heard the story a thousand times: Kodak was the camera and film giant that stubbornly kept milking its ever shrinking profits from their old business model based on film and got disrupted by new players producing digital cameras. Kodak went bankrupt and disappeared by ignoring the digital trend and being unable of adapting to the new paradigma. This despite the fact that it was the very Kodak company who developed the first digital camera back in 1975. Kodak is a wonderful example of management incompetence in the face of technological disruption.
The problem with this story, presented ad nauseam at countless conferences by innovation evangelists, is that it is a fabricated myth.
First of all, Kodak never went really bankrupt. In January 2012, the company filed for the so called Chapter 11, a regulatory instrument in USA which allows firms in financial distress to restructure the business together with its its debtors. In September 2013, it emerged as a viable company again. In 2015, Kodak posted 1,8 billion USD in revenues. It is also profitable, something that oh-so-admired companies like Twitter, Spotify or Uber still can’t claim.
Secondly, Kodak was never side-blinded by the digital revolution. The company knew exactly what would happen from the beginning. The first digital camera developed by Kodak in 1975 was a useless artifact, not able of satisfying any market segment or disrupting anything.
The technology was simply not mature enough. However, Kodak took its potential seriously. The management estimated that affordable digital cameras would hit the market about twenty years later, as it happened to be. Already in 1996, the management at Kodak understood that the time was ripe for digital cameras. The company reacted decisively and invested 2 bn USD in R&D. Already in 2001, Kodak digital cameras became the US top sellers in the critical holiday season. By 2005, Kodak was the market leader. Analysts were amazed and impressed by the capacity of Kodak of rapidly eating market share away from competitors (including Sony). The story doesn’t stop there.
Finally, the strategy of milking the film-based business model wasn’t a stubborn exercise in management hubris. It was good management, because the sad truth about the brave new world of digital cameras is that there was no money in it. A myriad of manufacturers (from Sony to unknown Chinese manufacturers) competed basically on standard components and price. Margins were razor-thin or inexistent, much like it happens with mobile phones today. Things soon got worse: When the iPhone and the Android mobile phones started integrating decent cameras, the industry became a living hell for those still in it.
The result of this against-the-book milking strategy? In the period 2000-2007 Kodak was able of accumulating almost 2 bn USD in net earnings for its shareholders. Meanwhile, the eager manufacturers of digital cameras were rewarding their shareholders with nothing else than huge losses.
So what happened? Why had Kodak to enter Chapter 11 and restructure its debt? How has it become a much smaller company than it once was?
First of all, as in the case of Nokia, changes happened very fast. The film market, and its profits, disappeared in just 8 years. That had put any management under great pressure.
In addition, the management was slow to recognize the new sales and profit situation and began shrinking legacy operations too late.
However, in my opinion the major issue was lack of strategic focus. The management of Kodak knew that their shareholders were accustomed to big revenues and high profits. As a result, it desperately tried to penetrate too many industries with too many different products at the same time hoping for the financial results the shareholder base wanted. From imaging software to printers to medical devices to self-service printing kiosks, almost everything was launched, tested…and abandoned or sold. The result was an exhaustion of company resources and accumulation of debt. Today, Kodak is a much smaller company, still very diversified (maybe still too much) and probably with a much different and patience shareholder base. By the way, they still make both digital cameras and film.
In the case of Kodak, the laws of disruption were, as they always are, ruthless. However, the rational response was not to just jump recklessly into the disrupting technology wagon, as most of us have read Kodak should have done. It rarely is. CEOs should keep in mind that almost all disruptive technologies are cheap and off the shelf by definition, and they most of the times to much lower margins, at least in the beginning.
The management at Kodak did the right thing when looking into new attractive opportunities to diversify away from the camera business. Their curse was that they never found them.
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Reblogged this on solheimconsult.
Independent thinking. Always nice to read; thanks.
“blind-sided”, “2012”, “most of the time _imply_ much lower margins”?
Good Reading and valueable.