Kodak’s missed moments
31 Oct
2005
In December, 1975, Steven Sasson, a young engineer
in Kodak’s R&D labs, prototyped the first digital camera. It captured a
black and white image on a digital cassette tape. The resolution was
.01 megapixels.
Kodak’s Steven Sasson with his 1975
Digital Camera Prototype
Over the next two decades,
Kodak research labs received over 1000 patents on technologies related
to digital photography. But Kodak businesses did very little with the
discoveries coming out of the labs. After all, encouraging digital
photography would directly threaten the company’s highly profitable film
business.
Kodak waited 26 years, to
2001, to enter the consumer market for digital cameras. While it now
has the market share lead in digital camera sales in the U.S., at 22%,
the business is very competitive and not very profitable.
Now it looks like the
company is caught in a cash bind. It must repay $750 million of debt
that comes due next year; at the same time, shutting down its obsolete
film and paper manufacturing will cost almost $1 billion. In April,
2005, S&P moved Kodak’s senior debt to below investment grade. On
October 20th, the ratings agency moved it down a notch
further, to B+ from BB-.
Kodak shareholders have
been suffering for a long time. In 1999, the stock traded at around $72
a share; it’s now around $22. The company no longer provides estimates
of its quarterly sales or profits, having missed its targets for
operating earnings in the first two quarters of 2005. Of the 10
analysts covering Kodak stock, only one recommends buying it.
Kodak’s predicament had
been anticipated by Kodak managers and business researchers for several
decades. Back in 1976, when Steve Sasson was demonstrating his
prototype digital camera to Kodak managers, a number of them recognized
the inevitability of the change.
"Many times people
talked about all the reasons why it would never happen. But there were
many people that quietly looked at it and said, 'Boy, it's a long time,
but I don't see that it won't happen.'"
Kodak Researcher Steve Sasson, Seattle
Post-Intelligencer
Kodak’s current problems
stem from the speed at which the shift is taking place. The company had
thought that developing countries would purchase film cameras before
moving to digital photography. Instead, countries like China are
skipping film cameras entirely. As a result, about a quarter of Kodak’s
consumer film business is disappearing each year – more than three times
faster than Kodak executives anticipated when they announced the
company’s digital strategy in 2003.
This kind of accelerating
decline typifies the later stages of many technological transitions,
giving rise to the “creative destruction” described by economist Joseph
Schumpeter in his 1942 book Capitalism, Socialism and Democracy.
Or, as Jim Chanos, a short-seller of Kodak stock, put it recently in
Business Week:
"Businesses with
these major paradigm shifts to digital products just see their cash
flows from analog products evaporate much faster than people are used
to."
James S. Chanos, founder of money manager
Kynikos Associates, in Business Week
Is Kodak’s
decline inevitable?
Product cannibalization is
a major challenge for almost all firms addressing disruptive
technologies. Cannibalization must have been a vital issue for Kodak.
Consider: Kodak’s film business had operating margins of 60 percent.
Even the most attractive of Kodak’s businesses in digital photography,
like paper, operate at lower volume than the film business with margins
of about 30 percent. The digital camera business itself is breakeven.
For the last decade, every
move away from film has reduced the company’s quarterly profitability.
For Kodak, this meant that those managers who could maintain the more
profitable film sales for as long as possible delivered more profits and
advanced more quickly than those managers who sought to transition the
company to new digital technologies.
One of the major
prescriptions for companies facing this kind of disruption is to
establish a separate business that is not influenced by the culture and
profit concerns of the declining core. In doing this, a company’s
leaders allow managers in both the old and new businesses to pursue
goals that are fundamentally divergent.
Kodak never chose this
path. It has certainly been very active in acquiring digitally-based
companies, like Ofoto, an online photo processing operation, or NexPress
solutions, a digital color printer manufacturer. But once acquired, the
company has worked integrate these businesses into Kodak’s existing
management structure. The intent has been to bring new people and
companies under Kodak’s umbrella, rather than to establish new
businesses that may have been able to find their own way.
Digital technology made
the decline of Kodak’s film business inevitable, as a few Kodak managers
were able to predict back in 1976 when Steve Sasson was demonstrating
his digital camera prototype. It didn’t make inevitable the decline of
Kodak the company, although maintaining the company remains a major
management challenge. Over the next year, we’ll see how Kodak fares
without its century-old cash cow. Most analysts are not optimistic.
More information:
-
Steve Sasson is interviewed in a 9 Sep 05 AP story that I picked
up from the Seattle Post-Intelligencer.
- Business Week ran a story on
Kodak’s impending cash crunch on 17 Oct 05.
- On 26 Jan, 2005, The New York Times ran
a story that indicated the
company had turned the corner and was returning to
profitability. Then Kodak missed its earnings targets for Q1 and Q2
2005, and stopped giving any guidance to investment analysts.
- Harvard’s Professor Clayton Christensen wrote
The Innovator’s Solution with Michael Raynor in 2003.
In it, he describes approaches that managers can take to address the
difficult kinds of problems faced by Kodak.
