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Kodak And The Digital Revolution Case Study Analysis

By Nitin Pangarkar March 5th, 2012StrategyInnovation

“You press the button, we do the rest.”

So went the advertising slogan coined by Kodak in the late 19th century.

It was a motto that opened the door to mass-market consumer photography – a popular culture pioneered by Kodak, but which its recent sorry decline has shown it failed to keep pace with.

The habit of button-pressing is of course more popular then ever – see Facebook, Tumblr, Flickr et al. But for Kodak, recently forced to file for bankruptcy protection, the company’s failure to reinvent itself to the instant gratification realities of the digital era meant there was increasingly little of “the rest” for it to do.

Founded by inventor and philanthropist George Eastman, Kodak’s little yellow film packages became one of the world’s most recognised brands. Indeed for much of the twentieth century Kodak was an American industrial icon – at one point enjoying a similar status as tech giant Apple does today.

Since the turn of the century however, the fortunes of the once mighty photographic firm have plummeted. By early 2012 Kodak’s shares were trading at around 40 cents, down from $40-45 just seven years earlier. The NYSE even went as far as to warn the company that it risked being delisted.

So where did it go wrong?

Kodak factfile
  • Kodak was founded by George
    Eastman in 1892, credited with
    inventing the first photographic film
    in roll form
  • Kodak was added to the Dow
    Jones Industrial Average in 1934,
    remaining a Dow component for
    seven decades
  • A Harvard study in 1976 found
    that Kodak accounted for 90
    per cent of film sales and 85
    per cent of camera sales in the US
  • In 1988 Kodak employed 145,000 worldwide. Most recent figures put it now at just over 18,000

One common explanation about Kodak’s demise is that it missed the digital revolution – or simply that the ubiquity of digital cameras made photographic film redundant while Kodak bosses buried their heads in the sand. While that explanation has some merits, it is far from the full picture. In fact Kodak was a pioneer in the development of digital cameras, producing the first prototype megapixel digital camera in 1975.

Presented to sceptical Kodak executives, the bulky device was powered by no less than 16 batteries and took a full 23 seconds to record a single image, using a cassette tape as the equivalent of today’s memory card. (You can see a picture of the camera on this Kodak blog, the title of which is a story in itself: “We had no idea”)

Even when digital cameras reached the consumer market in the mid- to late-1990s, some of Kodak’s early models vied with models from Olympus and Sony for top-selling spots.  In fact, the early cameras made by Canon, the current global leader in digital cameras, lagged well behind those of Kodak in terms of consumer acceptance as well as critical reviews.

Kodak didn’t lack technical expertise either and, even today, has considerable intellectual property in the digital imaging space with its thousands of patents worth several billion dollars.  Why then is Kodak struggling to survive despite a strong start in the promising – and still rapidly growing – arena of digital imaging?

Bridging the gap

Nitin Pangarkar’s book is available from Amazon by following this linkIn my recent book High Performance Companies: Successful Strategies from the World’s Top Achievers I suggest that successful innovators must be able to integrate (as in combine) external and internal knowledge.  An excellent example of this is the case of Fanuc, the Japanese maker of machine tool controls.

Based near the foot of Japan’s iconic Mount Fuji, Fanuc used to make mechanical and hydraulic controls in the 1970s. But after the first oil shock in 1973, operating costs of those controls became prohibitive because they consumed a lot of oil.

In response, Fanuc began a huge effort to shift to computer controls.  It overcame gaps in its own knowledge by partnering with diverse sources including the University of Tokyo, its customers, end-users and sometimes even existing as well as potential competitors, such as GE and Siemens which had their own aspirations in this industry.

The external knowledge from these partnerships was combined with a number of other elements including its own internal knowledge, some bold strategic bets (being the first to use an Intel microprocessor in a dusty, dirty and hot factory environment) and a far-sighted leadership which had the vision of global leadership.

Not only did Fanuc manage to successfully adopt new electronic technology, it also became a dominant leader. Indeed a recent Bloomberg article recently called it “The Microsoft of machine tools” – a company whose products effectively run the world’s factories.

Kodak’s failure to adapt to the new technology stands in stark contrast to Fanuc’s case because Kodak had greater resources in terms of its brand reputation, its finances and its technological prowess in digital imaging. Kodak’s failure lay in its strongly inward focus.

Although it was a pioneer in the technical aspects of digital imaging, it lacked skills in areas such as lens making and manufacturing (making efficient and reliable electronic devices) to successfully commercialise products based on its innovations in digital imaging.

Critical integration

Pioneers of their timeWhile Kodak did make efforts to outsource its camera manufacturing (and thus fill some gaps in expertise), the outsourcing arrangement did not achieve the integration of external knowledge with Kodak’s own internal knowledge that was so critical to continued innovation. As a result, Kodak remained stuck in the lower end of the digital camera spectrum and could never compete in the high end of the spectrum, which is where the bulk of the profits are.

That all begs the question: Why did Kodak fail to achieve the integration of external and internal knowledge?  After all, Kodak was for decades a greatly admired company which owned an iconic brand.  It had mastered all aspects of the film business including R&D, manufacturing, marketing and worldwide distribution.

The answer lies in the quality of management. Unlike Fanuc which had the towering figure of Dr Inaba, a key scientist in his field of robotics and numerical controls; in its effort to provide the visions needed to adapt to the new technologies and then lead the world market, Kodak went through a number of CEOs – it is on its fourth CEO since 1990.

The short tenure of each CEO made working towards a distant goal of industry leadership in the fast evolving technology of digital imaging rather difficult.

Very often, when CEOs change, they bring new priorities and the pursuit of a distant goal can be easily ‘misplaced’ in these reshuffles, or, worse yet, the goals themselves may be changed.  Kodak also went through numerous restructurings which were traumatic for the employees and sometimes also taking it into unfamiliar and hypercompetitive markets such as printers, again diluting its focus.

The key stumbling block was its inability to convert its technical expertise into tangible products that could be sold profitably

Complacency also played its part. Kodak is based in Rochester, New York, where it was the largest employer and has a towering influence. It has helped many local causes – in fact of one of the premier music schools in the world (the Eastman School of Music at the University of Rochester) bears the name of Kodak’s founder.

Possibly, in its efforts to continue to be good to the local community, Kodak let its costs get out of control.  Like many corporate peers such as GM, legacy costs (funding generous retirement packages) became a huge burden, especially when revenues started to decline.

So what lessons do Kodak’s problems hold for others?

From my perspective, the key stumbling block was its inability to convert its technical expertise into tangible products that could be sold profitably (in other words a sustainable business model). Kodak had several gaps in its expertise to design a complete business model but lacked the clarity of vision or the continuity of leadership to acquire the resources in a systematic fashion, let alone integrate them with its considerable internal knowledge of digital imaging.

Other companies facing similar technological discontinuities would do well to remember the critical role of integration of internal and external knowledge to achieve innovation, which would, in turn, improve their chances of successful adaptation.

Nitin Pangarkar is Associate Professor in the Department of Business Policy, NUS Business School, specialising in strategic management. He holds a PhD from the University of Michigan and an MBA from the University of Delhi.

Kodak and the Digital Revolution

Managing innovation MBA 678-Fall 2014

Dr. John Byrne

23rd September 2014

Ankush Perikal Jayaram

Executive Summary:

Kodak is classic example of a company that failed to adapt to new changes as it was rooted firmly in its past. Though Kodak had the vision for the future it failed to execute a strategy as it tried to achieve a number of objectives in different businesses. In this digital age of, companies must focus on its core competencies and supplement its deficiencies by forging joint ventures or partnership. This move will help them become efficient and innovative in their domains and to sustain changes in their industry.

The report analysis a few problems noted in the case ‘Kodak and the digital revolution’ and try to provide solutions. The first section analysis the current scenario and the businesses Kodak should hold on to and the businesses it should exit. The later section analysis the option Kodak should consider apart from its consumer business for the present and direction it should chart to the future.

Problem statement: Kodak is pursuing a number of businesses in order to provide the consumer end to end photography solution, whereas it should focus only on a couple of its core competencies.

Summary of Facts: Kodak since its inception is an end-to-end solution provider of photography from image capture to post processing of the photo films. It long believed in the razor blade strategy of selling its hardware at a low price and marking up the cost of photo films. This strategy along with monopoly market share drove Kodak revenues and profits for a long time.

The digital revolution of the last few decades and the aggressive strategy by its competitors cost Kodak its market share and decline in its revenue. Despite the poor performance the company is still pursuing a lot of objectives to provide a complete suite of photography solution whereas it should focus only core competencies that it can profitable monetize.

Analysis of facts: With the film cameras and its after sales services now sliding into history, Kodak must focus on its strengths, producing photography hardware, license the brand and its R&D technology and continue with its profitable digital minilabs, kiosks. The software services that it currently provides is a paid service that any other company can replicate. It is difficult for a company to sustain in the services industry unless it has a unique proprietary product, this requires the company to devote most of its resources to a vertical where it lacks competency and that can be better understood by a software company. Hence it should sell it services business and focus on hardware and other photography products.  The cameras is long been Kodak’s strength from being the pioneer of personal cameras to color photography. With this experience, R&D and a vast distribution network, the company should continue to produce high quality digital cameras, even though they are unprofitable now, as the future lies in these cameras. The digital cameras hardware must be unique and ahead of competition offering higher quality images and photography options in a compact size.  Higher image quality and compact size should be the key features that Kodak should focus on and improve on it. The Company must continue to devote majority of its R&D resources to achieve this goal.

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