How Kodak Failed

ByChunka Mui,
Former Contributor.
I focus on innovations aimed at making the world a much better place.
Jan 18, 2012, 09:56am EST
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This article is more than 10 years old.

(Update 1-19-2012 — Kodak has filed for bankruptcy protection.)

There are few corporate blunders as staggering as Kodak’s missed opportunities

in digital photography, a technology that it invented. This strategic failure was
the direct cause of Kodak’s decades-long decline as digital photography destroyed
its film-based business model.

A new book by my Devil’s Advocate Group colleague, Vince Barabba, a former

Kodak executive, offers insight on the choices that set Kodak on the path to
bankruptcy. Barabba’s book, “The Decision Loom: A Design for Interactive
Decision-Making in Organizations,” also offers sage advice for how other
organizations grappling with disruptive technologies might avoid their own
Kodak moments.

Steve Sasson, the Kodak engineer who invented the first digital camera in 1975,
characterized the initial corporate response to his invention this way:
But it was filmless photography, so management’s reaction was, ‘that’s cute—but don’t
tell anyone about it.’

via The New York Times (5/2/2008)

Kodak management’s inability to see digital photography as a disruptive

technology, even as its researchers extended the boundaries of the technology,
would continue for decades. As late as 2007, a Kodak marketing video felt the
need to trumpet that “Kodak is back “ and that Kodak “wasn’t going to play grab
ass anymore” with digital.

To understand how Kodak could stay in denial for so long, let me go back to a
story that Vince Barabba recounts from 1981, when he was Kodak’s head of
market intelligence. Around the time that Sony introduced the first electronic
camera, one of Kodak’s largest retailer photo finishers asked him whether they
should be concerned about digital photography. With the support of Kodak’s
CEO, Barabba conducted a very extensive research effort that looked at the core
technologies and likely adoption curves around silver halide film versus digital
photography.

The results of the study produced both “bad” and “good” news. The “bad” news
was that digital photography had the potential capability to replace Kodak’s
established film based business. The “good” news was that it would take some
time for that to occur and that Kodak had roughly ten years to prepare for the
transition.
The study’s projections were based on numerous factors, including: the cost of
digital photography equipment; the quality of images and prints; and the
interoperability of various components, such as cameras, displays, and printers.
All pointed to the conclusion that adoption of digital photography would be
minimal and non-threatening for a time. History proved the study’s conclusions
to be remarkably accurate, both in the short and long term.

The problem is that, during its 10-year window of opportunity, Kodak did little to
prepare for the later disruption. In fact, Kodak made exactly the mistake that
George Eastman, its founder, avoided twice before, when he gave up a profitable
dry-plate business to move to film and when he invested in color film even
though it was demonstrably inferior to black and white film (which Kodak
dominated).

Barabba left Kodak in 1985 but remained close to its senior management. Thus
he got a close look at the fact that, rather than prepare for the time when digital
photography would replace film, as Eastman had with prior disruptive
technologies, Kodak choose to use digital to improve the quality of film.

This strategy continued even though, in 1986, Kodak’s research labs developed
the first mega-pixel camera, one of the milestones that Barabba’s study had
forecasted as a tipping point in terms of the viability of standalone digital
photography.

The choice to use digital as a prop for the film business culminated in the 1996
introduction of the Advantix Preview film and camera system, which Kodak spent
more than $500M to develop and launch. One of the key features of the Advantix
system was that it allowed users to preview their shots and indicate how many
prints they wanted. The Advantix Preview could do that because it was a digital
camera. Yet it still used film and emphasized print because Kodak was in the
photo film, chemical and paper business. Advantix flopped. Why buy a digital
camera and still pay for film and prints? Kodak wrote off almost the entire cost of
development.
As Paul Carroll and I describe in "Billion-Dollar Lessons: What You Can Learn
From The Most Inexcusable Business Failures of the Last 25 Years," Kodak also
suffered several other significant, self-inflicted wounds in those pivotal years:

In 1988, Kodak bought Sterling Drug for $5.1B, deciding that it was really a
chemical business, with a part of that business being a photography company.
Kodak soon learned that chemically treated photo paper isn’t really all that
similar to hormonal agents and cardiovascular drugs, and it sold Sterling in
pieces, for about half of the original purchase price.

In 1989, the Kodak board of directors had a chance to take make a course change
when Colby Chandler, the CEO, retired. The choices came down to Phil Samper
and Kay R. Whitmore. Whitmore represented the traditional film business, where
he had moved up the rank for three decades. Samper had a deep appreciation for
digital technology. The board chose Whitmore. As the New York Times reported
at the time,

Mr. Whitmore said he would make sure Kodak stayed closer to its core businesses in
film and photographic chemicals.

via The New York Times (12/9/1989)

Samper resigned and would demonstrate his grasp of the digital world in later
roles as president of Sun Microsystems and then CEO of Cray Research.
Whitmore lasted a little more than three years, before the board fired him in
1993.

For more than another decade, a series of new Kodak CEOs would bemoan his
predecessor’s failure to transform the organization to digital, declare his own
intention to do so, and proceed to fail at the transition, as well. George Fisher,
who was lured from his position as CEO of Motorola to succeed Whitmore in
1993, captured the core issue when he told the New York Times that Kodak
regarded digital photography as the enemy, an evil juggernaut that would kill the
chemical-based film and paper business that fueled Kodak’s sales and profits for
decades.

via The New York Times (12/25/1999)

Fisher oversaw the flop of Advantix and was gone by 1999. As the 2007 Kodak
video acknowledges, the story did not change for another decade. Kodak now has
a market value of $140m and teeters on bankruptcy. Its prospects seem reduced
to suing Apple and others for infringing on patents that it was never able to turn
into winning products.

Addressing strategic decision-making quandaries such as those faced by Kodak is

one of the prime questions addressed in Vince Barabba’s book, “The Decision
Loom.” Kodak management not only presided over the creation technological
breakthroughs but was also presented with an accurate market assessment about
the risks and opportunities of such capabilities. Yet Kodak failed in making the
right strategic choices.

This isn’t an academic question for Vince Barabba but rather the culmination of
his life’s work. He has spent much of his career delivering market intelligence to
senior management. In addition to his experiences at Kodak, his career includes
being director of the U.S. Census Bureau (twice), head of market research
at Xerox , head of strategy at General Motors (during some of its best recent
years), and inclusion in the market research hall of fame.

“The Decision Loom” explores how to ensure that management uses market
intelligence properly. The book encapsulates Barabba’s prescription of how
senior management might turn all the data, information and knowledge that
market researchers deliver to them into the wisdom to make the right decisions.
It is a prescription well worth considering.
Barabba argues that four interrelated capabilities are necessary to enable
effective enterprise-wide decision-making—none of which were particularly well-
represented during pivotal decisions at Kodak:

1. Having an enterprise mindset that is open to change.Unless those at

the top are sufficiently open and willing to consider all options, the decision-
making process soon gets distorted. Unlike its founder, George Eastman, who
twice adopted disruptive photographic technology, Kodak’s management in the
80’s and 90’s were unwilling to consider digital as a replacement for film. This
limited them to a fundamentally flawed path.

2. Thinking and acting holistically.Separating out and then optimizing

different functions usually reduces the effectiveness of the whole. In Kodak’s
case, management did a reasonable job of understanding how the parts of the
enterprise (including its photo finishing partners) interacted within the
framework of the existing technology. There was, however, little appreciation for
the effort being conducted in the Kodak Research Labs with digital technology.

3. Being able to adapt the business design to changing

conditions. Barabba offers three different business designs along a mechanistic
to organismic continuum—make-and-sell, sense-and-respond and anticipate-
and-lead. The right design depends on the predictability of the market. Kodak’s
unwillingness to change its large and highly efficient ability to make-and-sell film
in the face of developing digital technologies lost it the chance to adopt an
anticipate-and-lead design that could have secured the it a leading position in
digital image processing.

4. Making decisions interactively using a variety of methods. This refers

to the ability to incorporate a range of sophisticated decision support tools when
tackling complex business problems. Kodak had a very effect decision support
process in place but failed to use that information effectively.
While “The Decision Loom” goes a long way to explaining Kodak’s slow reaction
to digital photography, its real value is as a guidepost for today’s managers
dealing with ever-more disruptive changes. Given that there are few industries
not grappling with disruptive change, it is a valuable book for any senior (or
aspiring) manager to read.