Disruption and Kodak
Poor Kodak. It's the classic case of a company knowing its foundation are crumbling, but unable to make the moves that might stop its slide. Kodak's oligopoly status in this case can't protect it from disruption, and its culture and size make it impossible to adapt fast enough to a changing world. Its dilemma is well outlined in a Slate.com article called "Photo Finished" (1/6/2004) by Daniel Gross.
Kodak has had its problems for wellover a decade, thanks to the aggressive competition from Japanese film rival Fuji. That competition has cut into its margins and market share in its standby film business. Even so, film and film processing have supplied a steady cash flow, one click at a time. But as digital cameras are replacing film cameras, many of the clicks are now going to memory cards and ink jet printers, and the concept of developing a roll of film may soon seem as quaint as using a typewriter to type your letters.
As the Slate article puts it: "With each passing year, the core audience for Eastman Kodak's film, film paper, and the cameras that use them is aging and shrinking. The company's sales have fallen steadily since 1995, and between 2000 and 2002 slid from $14.5 billion to $12.8 billion. In the United States, Eastman Kodak's most important market, sales of photography products fell nearly 17 percent between 2000 and 2002."
Kodak failed to adapt to the new reality, or rather it adapted in a half-hearted way. In the 1990s, it came out with Photo CD, a quasi-digital quasi-analog bridge product with some impressive technology. The company has flirted with selling digital cameras. But the plain fact of the matter is that the still disorganized and decentralized digital photography marketplace simply can't support the kind of regular high revenue that the photo industry offers. Even if it did dominate the digital camera market or the color printer market, there is no way Kodak to keep its revenue stream to early 1990s levels.
As Gross puts it, "Charting a new direction and devoting the resources to make Eastman Kodak a leader in the digital film era would have meant making bold new investments, sacrificing short-term profits, and undermining the brand equity it has built up over a century. It would also have required some imagination-which seems to be in short supply in Rochester. Between 2000 and 2002, the company actually cut its spending on research and development, even as it maintained healthy dividend payments."
In the past few months, Kodak has tried to respond at last. The company cut dividends and invested it n new technology. As is with most oligopolies, it started buying up digital innovators. These include:
- Scitex Digital Imaging, a division Tel Aviv-based Scitex, which makes high-speed digital color printers ($250 million)
- PracticeWorks, an Atlanta-based company that makes digital imaging systems for dentists ($460 million)
- Algotec, an Israeli company also in digital media imaging ($42 million)
- Laser Pacific Media, a company that specializes in movie and TV post-production for Hollywood ($232 million)
But as Gross points out, these acquisitions are minor side plays that don't change the grim reality. Unfortunately, there's nothing out these (short of the unlikely step of buying a Canon or a Sony) that would transform the company in a significant way into a digital power. And besides, Kodak doesn't have the cash or market capitalization any more to make a really big move.
It's almost certain that Kodak revenue will continue to sink, maybe gradually or maybe at an accelerating rate. That may soon make it an inviting acquisition target itself.
We might call their situation the "incumbent's dilemma," a play on the ideas contained in the excellent book by Claytom Christensen, The Innovator's Dilemma. You get to be so good at what you do and so successful that a radical leap into a new way of working makes no sense. You can extend and innovate within the current reality. Kodak has been very good at that over the years. But to innovate yourself into an unknown and unknowable new business, to leap off a cliff, just isn't going to happen. Without being horribly managed, Kodak has through inertia and the cruelty of a changed environment painted itself into a corner, one that it's hard to imagine them getting out from.
7:00:36 PM 
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