KODAK GETS A HARD LESSON
KODAK GETS A HARD LESSON
2006-02-03 at 1:15:00 pm #14036
Embrace or die: Kodak gets a hard lesson
With the newspapers full of blockbuster merger deals with nationalistic overtones, including the $3.9-billion U.S. sale of Canadian icon Fairmont Hotels & Resorts Inc. to Saudi Prince Alwaleed bin Talal, it’s a pair of relative footnotes that have captured my attention.
The first is the closing of 50-year-old Ottawa camera and film supply retailer Eastview Photo; the second, the ongoing struggles at Eastman Kodak Co., which this week reported its fifth consecutive quarterly loss.
Whereas Eastview is a tiny retailer and Eastman Kodak a massive multinational, both are victims of what management gurus call a “disruptive” technology – in this case, the arrival of digital photography – that supplants the old business model.
“What happened?” asks Eastview Photo proprietor Jack Sheridan. “Digital photography happened. It’s changed everything, from the mix of product to the way photography’s used, and it just wasn’t viable for us to go on with that learning process, because we’re losing too much money.”
If small fish like Eastview can be forgiven for falling prey to a disruptive technology, the same can’t be said for Kodak, which, after all, invented the digital camera way back in 1975 and was in a better position than most to understand and capitalize on its industry-shaking potential.
The problem, however, was that Kodak was heavily invested in the old analogue model.
Indeed, Kodak founder George Eastman’s introduction of the inexpensive Brownie camera in 1900 was a Trojan horse, designed to popularize photography and fuel demand for his company’s real products: film and photographic paper.
For Kodak, the film and paper business proved lucrative enough that, by 1988, it had grown into one of the world’s largest companies, with close to 150,000 employees worldwide.
The flip side, however, was that Kodak was loath to abandon its long-time cash cow, even as it saw the digital photography revolution fast approaching.
“Disruptive technologies imply new value propositions, offering higher or differentiated performance often at lower price points,” explains Tom Kippola, a partner with California consultancy The Chasm Group LLC, which specializes in helping businesses navigate change.
“Unfortunately, faced with a disruptive technology, incumbents typically look away, or wish away, the new paradigm, simply because they’re afraid it will cannibalize their existing cash streams.”
By the time Kodak faced up to the fact that traditional print photography was in an irreversible state of decline, it had two choices: stay the course and accept a world of diminishing sales and margins, or massively re-invent itself as a digital camera company – in effect, join the disrupters.
That re-invention has been underway since 2003, with billion-dollar investments in digital technology, billion-dollar losses in its film and paper businesses, and a radical reduction in staff and overhead. (By 2008, the company’s payroll is expected to be less than a third of its 1988 peak.)
Kodak’s relatively late entry into the digital market also gave competitors – specifically, an array of Japanese manufacturers – the opportunity to develop their own technologies, establish their brands in the nascent market, and hone their business models.
Still, Kodak’s sheer size, and the fact it owns thousands of patents pertaining to digital photography, likely will allow it to remain a major, if somewhat reduced, player in the photographic industry.
While the digital camera revolution is an almost perfect lab for studying the impact of a disruptive technology on an established industry, it’s hardly the only example. WordPerfect failed to navigate the shift from DOS to Windows, allowing Microsoft to capture the word processing market. Likewise, Xerox clung to its light lens copier technology long after digital copiers hit the market.
Most recently, the recording industry is grappling with its own disruptive technology: file-sharing programs that allow music fans (or pirates, depending on whose definition is being used), to download songs from the Internet without having to pay for them.
File sharing has cut into traditional music sales and is in the process of re-ordering the entire industry, with ongoing tension between the Recording Industry Association of America (which is suing fans who illegally download music files), the Vancouver label Nettwerk Music (which is helping defend file sharers against RIAA suits), and the recording artists themselves (who want to derive royalties from their work, but don’t necessarily want to see music fans sued).
The ability to quickly download high-quality music has created a new paradigm for music delivery, and a new industry heavyweight – not Sony or A&M Records, but Apple Computer Inc., whose iPod digital music player best captures the new value proposition.
Why was an industry outsider like Apple allowed to seize the reins? Because incumbents, says Kippola, are often too busy mending tracks to see the train coming.
“Only a tiny percentage recognize the import of a disruptive technology at the time of its arrival in the market,” he says, “and fewer still successfully make the shift from the old technology to the new.”
Those that don’t, whether such minnows as Eastview or whales such as Eastman, more often than not end up on the beach.