Focused on the Negatives

Sunday, April 1, 2012 - 12:32

Kodak's downfall was partly a result of being product-orientated, rather than customer-orientated. By Leon Gettler.

Kodak filing for bankruptcy protection is a lesson for managers. Commentators say Kodak was blind to the disruptive forces that transformed an industry, but it's more complicated than that.

Founded in 1888, Eastman Kodak was the Apple of its day with its pioneering technology, while its marketing was well ahead of its time. At one stage, Kodak gave away cameras in exchange for getting people hooked on paying to have their photos developed. And it innovated. In 1900, Kodak launched the Brownie camera, a basic cardboard box camera with a simple lens. It cost $1 and was marketed as the kind of camera anyone could use. The Kodak slogan said it all: "You press the button and we do the rest."

Former Telstra chief Ziggy Switkowski, who also served as chairman and managing director of Kodak Australasia, told Management Today Kodak's problem was its rigid orientation.

"They were not lacking in vision, but Kodak was a company built on success in chemistry, so it was staffed by chemical engineers and manufacturing people,'' Switkowski said.

"The notion that the management of Kodak, all of whom had risen up through the ranks of the photographic manufacturing side, could redirect their formidable resources and cash flows into this new digital imaging in a way that could shift the needle on the company was always beyond them and it would be beyond most management teams."

Switkwoski says it's a lesson for all companies, including powerhouses such as Google. Kodak learned that market dominance is a quick snapshot.

"One lesson out of this is that no company has a God-given right to survive, no matter what,'' Switkowski said. "Maybe there is natural cycle to companies - they will grow, be successful, then decline and end."

Some commentators have blamed Kodak's demise on its culture, which, despite its investment in research and technology, was still very much one of a complacent monopolist. Others talk about Kodak management's refusal to let go of the 80 per cent manufacturing margin the company enjoyed on film and equipment. Champions of low margin digital photography would have been shunned and marginalised.

In hindsight, it is easy to rubbish Kodak, but it was a management dilemma. Think back to the 1970s. Could one expect them to invest millions of dollars in a market they couldn't be sure would exist and to adopt a product that would provide lower margins than the existing product line?

You would be moving into a market where your margin would contract from 80 per cent to just 25 per cent, one where you would be confronted with a bunch of unfamiliar competitors like Sony, Sanyo and the Korean consumer electronics companies. That would be a tough call to make for any manager.

It is important to remember this dilemma was being confronted at a time when Kodak had a 90 per cent market share of the film industry and 85 per cent for cameras. Right into the '90s, it was ranked as one of the world's most recognised brands. So what went wrong?

Kodak embraced the low margin digital revolution. It built one of the first digital cameras in 1975 and introduced the first camcorder into the American market. But it stuck to a business model that focused on film. In 1992, for example, it launched the Photo CD, a product that had Kodak scanning negatives into a digital form and returning them on a compact disc. But the product was based on film and that technology was superseded by digital cameras and smartphones, eliminating the middleman. Kodak management could see it coming, but didn't act quickly enough.

In a sense, Kodak's problem mirrored the issues highlighted by Theodore Levitt in his seminal Harvard Business Review piece Marketing Myopia. Levitt argued the railroads did not stop growing because the need for passenger and freight transportation declined - the need grew, but it was picked up by other forms of transport.

"They let others take customers away from them because they assumed themselves to be in the railroad business, rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad-oriented, instead of transportation-oriented; they were product-oriented instead of customer-oriented,'' Levitt wrote.

Similarly, Kodak made the mistake of thinking it was in the film business rather than in the business of capturing and sharing memories. Like Levitt's railroads, it was product-oriented, not customer-oriented.

In retrospect, Kodak could have tried finding new applications for its core technology, much like Fujifilm, which began making optical films for LCD flat panel screens. Fujifilm has a 100 per cent market share in LCD. Or it could have gone the way of Corning, which has been making glass for 160 years. In 1908, half of Corning's revenues came from making glass bulbs. Today, most of its revenue comes from products that did not exist 10 years ago. Corning now makes cathode-ray tubes for TVs, fibre optics and screens for smartphones and high-definition TVs. It produces a laser that allows mobile phones to be fitted with micro projectors. And it does a roaring trade producing cook wear. Like Fujifilm, Corning found different applications for its core technology. By sticking to its old model, Kodak missed out on growth opportunities.

Instead, Kodak tried diversifying, but it made the mistake of moving into businesses removed from its core competencies. Kodak entered the copier business and tried taking on Xerox, the incumbent with an established market share. Canon, on the other hand, diversified out of cameras and into copiers by targeting small to medium-sized businesses. While Xerox emphasised the speed of its machines, Canon focused on quality and price. Canon didn't make Kodak's mistake of trying to beat Xerox at its own game.

Similarly, Kodak went into the pharmaceuticals business, thinking that chemicals its researchers had created could be used for drugs. It bought Sterling Drug for $5.1 billion. That not only saddled Kodak with too much debt, but it was a bad fit. Making chemicals was one thing, coming up with valuable patented drugs was something else.

Since filing for bankruptcy protection, Kodak has embarked on a strategy of mining its patent portfolio, a legacy of its past R&D prowess which generates millions of dollars annually. Kodak was required under its bankruptcy financing terms to produce a reorganisation plan and US Bankruptcy Judge Allan Gropper set a June 30 deadline for Kodak to get his approval of bidding procedures for the sale of 1100 patents that analysts estimate could fetch at least $US2 billion ($1.86 billion). With its brand name still recognised the world over and an extensive portfolio of valuable patents, a new management team might revive Kodak, but that remains to be seen.