*NEWS*KODAK GETS A HARD LESSON

[Anonymous]

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

[Author]

February 3, 2006 at 1:17 PM