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Nothing is forever … take Kodak for example

July 28th, 2014

In the mid 1970s Steven Sasson, an employee of Kodak, demonstrated a prototype of a device that weighed 8 pounds and needed a suitcase to transport. It was the world’s first digital camera. The photos were stored on a cassette tape, they took 21 seconds to raster and boasted quality of 0.01 megapixels.

Digital Camera_first_Model_KodakAt the time the market cap of Kodak was $32 billion and the management team could not, for the life of them, understand why anyone would ever want to display a photo on a television screen.  When they asked Sasson how long he thought it would take for the device to be commercially viable he estimated 15-20 years citing Moore’s Law – way too long for them.

Fast forward to January 2012. Kodak filed a $6.75 billion bankruptcy. What went wrong?

These were smart guys – you didn’t get to be running a Fortune 100 company if you weren’t and surely they did not wake up one day in 1995 and say to themselves “what decisions can we take today that will ultimately destroy this company?”

A huge challenge management of all entrenched businesses have is dealing with innovations at the margin that are not an immediate threat to their existing business model or product franchise but which could potentially displace their existing franchise.

For example, if management had seen the potential of the emergence of digital photography it would have been hard for them to mentally get around the fact that their existing chemical processing business would be at risk if they used their resources to move into that business.

Would their shareholders have been pleased to see them invest in a technology that had the potential to destroy their current business?  We know that risk aversion is a stronger human emotion than the potential for gain which is something we see at a personal and we see it play out every day in so many businesses. The  long run cost to business development is enormous.

Clayton Christensen talks about this dilemma  in his seminal work The Innovators Dilemma and in a number of entertaining and instructive videos. Ironically, he suggests, failures like the Kodak experience is the result of “good management” and therein lies the dilemma. In the video below he talks about how and why this happens.

When management has a strong product franchise it seems to make more sense to build a strategy around strengthening your competitive position by focusing on improving your current operations i.e. pursuing operational excellence. It doesn’t make much sense to embrace a long term view and place a bet on a product that may never get traction or more particularly, one that might cannibalize your existing business.

With the benefit of hindsight it is reasonable to conclude that Kodak’s demise was inevitable and that there was absolutely nothing management could do other than accept it and harvest their product franchise as strongly as possible for as long as possible then file for bankruptcy then re-build a new business build around the Kodak brand and the new (but now refined and market tested) digital imaging technology with a focus on a different customer group. In other words do exactly what has played out.

On the other hand Kodak management could have seen what was coming and made a decision to invest heavily in developing the lead it had in digital technology and then figure out a way to integrate their product development with their existing customer base and most importantly, bring new customers into the photography space. Given the strength of their brand and their research leadership at the time it would have arguably been easier for them to do that than most of the other companies that did embrace digital.

Instead, believing they were invincible and that the market would never buy into the concept of digital photography they unwittingly licensed the patents they owned from their research in digital imaging to their competitors and the rest as we like to say with the benefit of hindsight is history.

The moral of this story is to never rest on your laurels. Your business is most at risk when it’s looking to be in great shape. Creative destruction is, according to Joseph Schumpter, the inevitable consequence of a capitalist system so given that prediction, why not anticipate it and constantly look for ways to re-invent your business? This is one of the functions of the business model design methodologies that we cover in the Practice Innovation Workshop.

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