Stock Research Eastman Kodak and the Power of Disruptive
November 30, 2006 Its simply amazing that ten years into the
digital revolution, Eastman Kodak is trying to figure out what
business they are in. For decades Kodak dominated the chemically based
photographic process. You shoot a roll of film, and then you
physically took the roll to a developer, and made a second trip to
pick up the finished prints. Their only competition in the industry
was the Japanese company, Fuji. The upstart would just eat away each
year at Kodaks market, but never becoming a real threat to Kodaks
Meanwhile from outside the industry, Polaroid back in the late 1950s
invented a camera where the chemical based development of the pictures
took place inside the camera. The picture was ready in about 60
seconds. Polaroid developed a wonderful business and made a fortune
for both its shareholders and its genius creator, Dr. Edwin Land.
What happened next was a business disaster, and Kodak should have
learned from Polaroids mistakes. Dr. Land came up with a moving
picture development system. They poured hundreds of millions of
dollars into a chemically based system. It would allow users to take
moving pictures. The movies would be developed chemically inside the
camera system, the same as the still picture system then utilized.
What Polaroid not only didnt plan for, but couldnt even
imagine was that a disruptive technology would be created from another
industry that would basically destroy Polaroids business model.
Japan would create digital photography. The first Japanese VHS and
Betamax camera systems became available. The electronic based
technology made so much more sense than Polaroid chemically based
system. It forced Polaroid to shut down its movie system products. It
also resulted in the immediate write off of hundreds of millions of
dollars (equivalent to billions today) that it would never recoup.
Now I ask you, Kodak was in the business, we know that. They saw
what this new technology did to Polaroid OVERNIGHT. Couldnt they
imagine that it could happen to them? The answer is apparently not.
The management team at Eastman Kodak has been brain dead for at least
20 years. The management team and the Board of Directors should have
been dismissed more than a decade ago for gross incompetence. They
took a magnificent cash generating machine, and allowed it to turn
into a boring, mundane second class company.
They simply chose to ignore what was coming, and what was coming
was a TIDAL WAVE, that would sweep away Kodaks traditional
business. Kodak could have chosen to lead the digital revolution. They
could have chosen to take the billions of dollars of cash generated by
their traditional chemically based systems, and redeploy in other high
end technology driven businesses like digital imaging in the medical
industry. No, neither choice happened. The company chose instead, to
DO NOTHING. Try to maintain the status quo was the order of the day.
Now Kodak is faced with a what do we do now decision?
It is just a question of how many years it takes before the Kodak way
of doing business (chemical processing) completely evaporates. There
are a number of lessons to be taken from this example of a formerly
world class company going belly up because of an inappropriate
business model. Among them are:
Every company must absorb the central thesis of Clayton
Christensens two books, The Innovators Dilemma,
and The Innovators Solution. Harvard professor
Christensen was the individual who coined the term, disruptive
technologies, or what happens when a new innovation comes in and
completely blows away a companys formerly dominant technology.
No company has the luxury of sitting on its rear end, and
counting on its cash hoard to keep it in business forever.
Theodore Levitt of Harvard always talked about What
business are you in? Youd better make sure that you are
constantly thinking about how to obsolete your own business, because
your competitors are thinking about it all the time.
Every company should have an internal team that is separate
and apart from the company. The sole function of this team would be to
come up with ways to destroy the company by developing better
products, or better yet technologies that would obsolete the companys
current technology. Xerox decades ago created Xerox PARC (the PARC
stands for Palo Alto Research Center) in 1970. They intentionally put
it in Palo Alto, California because they didnt want to have
their thinking contaminated by the atmosphere in Rochester, NY, a dead
town. The same town as Kodaks corporate headquarters by the way.
You want to talk about accomplishments; Xerox PARC came up with the
mouse that we use on personal computers. They also created the
graphical user interface that you use on your PC, and the basic design
of the personal computer was taken from Xerox PARC by Steve Jobs.
Xerox completely failed to cash in on any of these creations. The guys
in Rochester were just as asleep at the switch as the guys at Kodak.
There must be something about the air they breathe in Rochester that
lulls them into a sense of complacency.
Companies need to buy smaller companies who are creating the
innovating technologies that will put them out of business. If they
wait until the technology enters an actionable phase, it is too
expensive to purchase. Examples are Yahoo and Microsoft, both of whom
had an opportunity to buy Google for millions of bucks. Google now has
a market cap of $150 billion, and is virtually untouchable.
Is it too late for Kodak to save itself? The answer is probably
yes. Very rarely can a company in such a downward spiral find the
managerial talent, and more importantly COURAGE to transform itself
internally. The current management team is too interested in
continuing its own benefit package and retirement benefits, to make
the hard, tough, and necessary decisions to be transformative.
Hopefully, other American companies, and investors can learn from the
bitter story that Kodak has to teach us.
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