*NEWS*KODAK GETS A HARD LESSON

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*NEWS*KODAK GETS A HARD LESSON

 user 2006-02-03 at 1:17:00 pm Views: 71
  • #14298

    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