Discontinuous Change and Organizational Response: Exploring the

Transcription

Discontinuous Change and Organizational Response:
Exploring the Moderating Effects of Resources and
Capabilities – the Case of Kodak
DISSERTATION
of the University of St. Gallen,
School of Management,
Economics, Law, Social Sciences
and International Affairs
to obtain the title of
Doctor of Philosophy in Management
Submitted by
Michael Shamiyeh
from
Austria
Approved on the application of
Prof. Steven W. Floyd, Ph.D.
and
Prof. Dr. Martin Hilb
Dissertation no. 4373
D-Druck GmbH Spescha, St. Gallen 2014
The University of St. Gallen, School of Management, Economics, Law, Social
Sciences and International Affairs hereby consents to the printing of the present
dissertation, without hereby expressing any opinion on the views herein expressed.
St. Gallen, October 22, 2014
The President:
Prof. Dr. Thomas Bieger
Table of Contents
Preface ............................................................................................................. i Acknowledgement .......................................................................................... v Zusammenfassung ...................................................................................... viii Abstract ......................................................................................................... ix Part I
Theoretical Background................................................................................ 1 1 INTRODUCTION ..................................................................................... 3 2 BACKGROUND........................................................................................ 7 2.1 Technology and Change ...................................................................... 7 2.2 Technological Change and Discontinuity ........................................ 13 2.3 Technological Change and Resource Requirements ...................... 21 2.3.1 Measuring Resource Relatedness ........................................... 34 3 THEORY.................................................................................................. 39 3.1 Discontinuous Change and Organizational Decline ...................... 39 3.2 Discontinuous Change and the Resource Allocation Process........ 44 3.2.1 Linking the RAP with the Resource-Based View .................. 46 3.2.2 Modelling the RAP to Include Resources and Capabilities.... 48 3.3 Discontinuous Change and Variables Moderating Adaptation .... 52 4 METHOD ................................................................................................. 59 4.1 Research Setting ................................................................................ 59 4.2 Research Design ................................................................................. 68 4.3 Data Collection................................................................................... 68 4.4 Data Analysis ..................................................................................... 73
Part II Analysis of the Case ..................................................................................... 75 5 CASE ........................................................................................................ 77 5.1 Preamble ............................................................................................. 78 5.2 Eastman Kodak Company ................................................................ 80 5.3 New Industry Environment .............................................................. 84 5.3.1 Changing Factor Markets ........................................................ 84 5.3.2 Changing Product Markets ..................................................... 88 5.4 Diversification and Exploration ....................................................... 96 5.4.1 Improving Efficiency .............................................................. 98 5.4.2 Trusting Partners ................................................................... 104 5.4.3 Exploring New Domains....................................................... 107 5.4.4 Accessing New Technologies ............................................... 115 5.4.5 Aftermath of Change............................................................. 118 5.5 Back to Core Business ..................................................................... 138 5.5.1 Management Change ............................................................ 140 5.5.2 New Vision ........................................................................... 141 5.5.3 Strategic Challenge ............................................................... 145 5.5.4 Improving Efficiency ............................................................ 147 5.5.5 Building Capabilities ............................................................ 157 5.5.6 Initiating Growth ................................................................... 163 5.5.7 Interim Results ...................................................................... 170 5.5.8 Another Turnaround.............................................................. 188 6 ANALYSIS ............................................................................................. 201 6.1 Period 1983-1989: Electronic Photography (Colby Chandler) ... 202 6.1.1 Cognitive Framing ................................................................ 203 6.1.2 Structural and Strategic Context ........................................... 206 6.1.3 Realized Strategy .................................................................. 207 6.1.4 Resources and Capabilities ................................................... 212 6.1.5 Realized Strategy .................................................................. 214
6.2 Period 1990-1993: Film-Based Digital Imaging (K. Whitmore) . 216 6.2.1 Cognitive Framing ................................................................ 217 6.2.2 Structural and Strategic Context ........................................... 224 6.2.3 Realized Strategy .................................................................. 225 6.2.4 Resources and Capabilities ................................................... 231 6.2.5 Capital Providers and Customers .......................................... 234 6.2.6 Realized Strategy .................................................................. 237 6.3 Period 1994-1999: Fully Digital World (George M. C. Fisher) ... 240 6.3.1 Cognitive Framing ................................................................ 242 6.3.2 Resources and Capabilities ................................................... 247 6.3.3 Structural and Strategic Context ........................................... 250 6.3.4 Realized Strategy .................................................................. 250 6.3.5 Resources and Capabilities ................................................... 253 6.3.6 Customers and Powerful Investors ....................................... 257 6.3.7 Cognitive Framing ................................................................ 258 6.3.8 Structural and Strategic Context ........................................... 262 6.3.9 Realized Strategy .................................................................. 269 Part III Discussion and Conclusion........................................................................ 273 7 DISCUSSION ........................................................................................ 275 7.1 Summary and Theoretical Contribution....................................... 275 7.2 Prioritizing Strategic Resource Allocations .................................. 280 7.3 Reversing Retained Resource Allocation ..................................... s286 7.4 Reinforcing Retained Resource Allocations.................................. 299 8 CONCLUSION ...................................................................................... 305 8.1 Recapitulation .................................................................................. 305 8.2 Limitations and Directions for Future Research ......................... 309 8.3 Practical Implications ..................................................................... 311 References................................................................................................... 319 About the Author ....................................................................................... 359 Index of Figures
Figure 1 Schematic Illustration of Technological Change ............................................. 9 Figure 2 Schematic Illustration of Discontinuous Change ........................................... 11 Figure 3 Schematic Illustration of Dominant Design ................................................... 16 Figure 4 Substitution of Silver-Halide Photography by Digital Imaging ..................... 18 Figure 5 Substitution of Printed Book by eBook.......................................................... 18 Figure 6 Substitution of Vinyl Records by Compact Discs .......................................... 18 Figure 7 Substitution of Compact Cassettes by Compact Discs................................... 18 Figure 8 Technological Evolution of Digital Interchangeable Cameras ...................... 19 Figure 9 Schematic Illustration of an Organization’s Response to Disruption ............ 22 Figure 10 Competence Requirement and Type of Technological Change ................... 25 Figure 11 Competence Requirements Kodak Funsaver ............................................... 26 Figure 12 Knowledge Management and Strategies for Corporate Entrepreneurship ... 28 Figure 13 Resource Development in Response to Discontinuous Change .................. 32 Figure 14 Adaptation to Evolutionary and Discontinuous Change .............................. 40 Figure 15 Relationship between Discontinuous Change and Organizational Decline . 42 Figure 16 Elaborated Resource Allocation Process Model .......................................... 49 Figure 17 Bower (1970) and Burgelman’s (1983a) ..................................................... 53 Figure 18 Pfeffer/Salancik (1978) and Christensen (1996) .......................................... 53 Figure 19 Gilbert’s (2006) ............................................................................................ 53 Figure 20 Aim of this Research .................................................................................... 53 Figure 21 Variables Moderating Adaptation to Substituting Technology ................... 58 Figure 22 Worldwide Imaging Industry ....................................................................... 62 Figure 23 US Imaging Industry .................................................................................... 63 Figure 24 Growth (Decline) of Films (rolls) Worldwide ............................................. 64 Figure 25 Growth (Decline) of Films (rolls) US .......................................................... 65 Figure 26 Prints (Film and Digital; 10x15 cm equivalent) Worldwide ........................ 66 Figure 27 Prints (Film and Digital; 10x15 cm equivalent) US ..................................... 67 Figure 28 Change of Imaging Chain by George Eastman (KODAK) .......................... 81 Figure 29 Sales per Employee ...................................................................................... 86 Figure 30 Decrease of Kodak’s Market Share in Film and Paper Business ................. 86 Figure 31 Profit Margin of Film ................................................................................... 87 Figure 32 Sales, Earnings, Employees, and Stock Price, Kodak, 1972-1992 .............. 97 Figure 33 Net Profit Margins ........................................................................................ 99 Figure 34 Return on Equity .......................................................................................... 99 Figure 35 Operating Return on Assets and Properties at Costs .................................... 99 Figure 36 R&D Expenditures ..................................................................................... 101 Figure 37 Gross Profit Margin .................................................................................... 101 Figure 38 Reduction of Workforce ............................................................................. 104 Figure 39 Sources of Revenues .................................................................................. 120 Figure 40 Sources of Earnings .................................................................................... 120 Figure 41 Change of Kodak’s Income Pillars............................................................. 122 Figure 42 Increase in Debentures (Long-Term Borrowings) .................................... 131 Figure 43 Total Debentures (Long-Term Borrowings) ............................................. 131 Figure 44 Total Liabilities to Equity........................................................................... 131 Figure 45 Earnings from Operations and Interest Expense ....................................... 131 Figure 46 Cash Flow From Operating Funds ............................................................. 133 Figure 47 Capital Additions in Relation to Sales ....................................................... 133 Figure 48 Kodak’s SGA Costs to Net Sales ............................................................... 135 Figure 49 Increase (Decline) Kodak’s Sales in Photography ..................................... 135 Figure 50 Sales, Earnings, Employees, and Stock Price, Kodak, 1983-2003 ............ 139 Figure 51 Cash Flow from Operating Funds .............................................................. 149 Figure 52 Earnings from Operations and Interest Expenses ...................................... 149 Figure 53 Total Long-Term Borrowings .................................................................... 151 Figure 54 Cash Flows and Long-Term Debts ............................................................. 151 Figure 55 Sales per Employee .................................................................................... 152 Figure 56 Operating Return on Assets and Properties at Cost ................................... 153 Figure 57 Gross Profit Margin and Overhead Costs .................................................. 153 Figure 58 R&D Expenditures ..................................................................................... 153 Figure 59 Capital Addition to Sales ............................................................................ 153 Figure 60 Kodak’s Financial Performance and Efficiency in Comparison ................ 171 Figure 61 Change of Kodak’s Income Pillars............................................................. 172 Figure 62 Changes in Kodak’s Consumer Photography Sales Worldwide ................ 174 Figure 63 Changes in Film Roll Sales (Units) Worldwide Photography Industry ..... 174 Figure 64 Currency Exchange Rates .......................................................................... 175 Figure 65 Changes in Film Roll Sales (Units) US Photography Industry ................. 175 Figure 66 Market Share of Kodak and Fuji in the US ................................................ 180 Figure 67 Profit (Loss) and Sales Digital Imaging (D&AI) ....................................... 183 Figure 68 Net Profit Margin ....................................................................................... 189 Figure 69 Return on Sales ........................................................................................... 189 Figure 70 Working Capital ......................................................................................... 190 Figure 71 Turnover of Receivables and Inventory ..................................................... 190 Figure 72 Major Workforce Reduction Programs ...................................................... 190 Figure 73 Restructuring Costs in Relative to Earnings from Operations ................... 190 Figure 74 Layoffs and Hires in Kodak’s Core Photography Business ....................... 191 Figure 75 Shareholders’ Equity .................................................................................. 196 Figure 76 Average Return on Equity and Average Change in Equity ....................... 196 Figure 77 Shareholders’ Equity, Retained Earnings, and Treasury at Stock.............. 197 Figure 78 Process Model of Eastman Kodak’s Resource Allocation ......................... 203 Figure 79 Silver-halide Photography Technology and Digital Imaging .................... 203 Figure 80 Eastman Kodak’s Framing of Emerging Technology (Early 1980s) ......... 204 Figure 81 Eastman Kodak Office of Innovation’s Idea Connection Process ............. 208 Figure 82 Eastman Kodak Consumer Business Portfolio Matrix (Mid-1980s) ......... 213 Figure 83 Eastman Kodak’s Framing of Emerging Technology (Mid-1980s) ......... 215 Figure 84 Process Model of Eastman Kodak’s Resource Allocation (Early 1990s) .. 217 Figure 85 Silver-halide (Film) and Electronic Photography (Early 1990s) ............... 217 Figure 86 Industry Trend (1991) ................................................................................ 219 Figure 87 Eastman Kodak’s Framing of Electronic/Digital Imaging (Early 1990s) .. 222 Figure 88 Analog (Chemical) and Digital Imaging Chains ........................................ 227 Figure 89 Kodak PhotoCD System ............................................................................ 228 Figure 90 Hybrid PhotoCD System ............................................................................ 229 Figure 91 Eastman Kodak Consumer Photography Portfolio Matrix (Early 1990s) 230 Figure 92 Eastman Kodak’s Framing of Emerging Technology (1993) .................... 237 Figure 93 Eastman Kodak’s First Major Divesture in Response to Threat ................ 239 Figure 94 Process Model of Eastman Kodak’s Resource Allocation (1990s) ........... 241 Figure 95 Silver-halide (Film) and Electronic Photography (1990s) ......................... 241 Figure 96 Enhancement of Kodak’s Digital Camera Technology.............................. 243 Figure 97 Eastman Kodak’s Framing of Emerging Technology (1990s)................... 246 Figure 98 Eastman Kodak Business Portfolio Matrix (1994) .................................... 248 Figure 99 Eastman Kodak’s New Strategy (1994) Schematic Depiction................... 251 Figure 100 Eastman Kodak’s Revision of Its 1994 Strategy (1997) .......................... 254 Figure 101 Transitions in the Customer Relationship in Photography....................... 264 Figure 102 and Figure 103 Overview: Kodak’s Response to Discontinuous Change 277 Figure 104 2003 Projection of Worldwide Photography Exposure............................ 288 Figure 105 2003 Projection of Worldwide Total “Photo” Prints by Type ................. 288 Figure 106 2003 Projection of Worldwide Shipments of Imaging Devices............... 288 Figure 107 2003 Projection of Shipments of Imaging Devices And Actual Data ..... 289 Figure 108 2003 Projection of Total “Photo” Prints by Type and Actual Data ......... 289 Figure 109 Decrease of Kodak’s Earnings from Operations by Restructuring Costs 291 Figure 110 Kodak’s Challenge in the Face of Disruption .......................................... 295 Figure 111 Eastman Kodak Company’s Structure and Autonomy of New Ventures 303 Index of Tables
Table 1 Examples of Past Substitutions with Rates...................................................... 19 Table 2 Kodak Archival Data ....................................................................................... 69 Table 3 Internal Informants & Interviewees ................................................................. 70 Table 4 External Informants & Interviewees External Informants .............................. 72 Table 5 Sales and Earnings of Commercial and Information Systems ...................... 122 Index of Abbreviations
CEO.................. Chief Executive Officer
CCD ................. Charged Coupled Device (imaging sensor)
CMOS .............. Complementary Metal Oxide Silicon (imaging sensor)
DSLR ............... Digital Single Lens Reflex (Camera)
KODAK ........... Eastman Kodak Company
MP .................... Megabyte Pixel
OLED ............... Organic Light-Emitting Diode
RAP .................. Resource Allocation Process
RBV ................. Resource-Based View
SLR .................. Single-Lens Reflex (Camera)
SGA.................. Selling, General and Administrative (Expenses)
USD.................. United States Dollar
Preface
This research seeks to enrich current understanding of a problem managers are facing
today more than ever: how to respond to discontinuous technological change.
The inability of companies to adapt to a rapidly changing environment when
threatened with discontinuous change has been an issue of continuous inquiry in both
scholarly research and managerial practice. Particularly the failure of industry leaders
to successfully adapt to new conditions – even when they had an awareness of the
need to change – seems to generate the keen interest in the topic.
In an effort to solve the problem, growing attention has been directed toward a
company’s capability to adjust its competence configuration to the new environmental
context, while simultaneously maintaining a tight fit to the traditional one. This
research builds on this body of scholarly work by offering a fine-grained view of the
requirements companies have to meet in order to successfully manage an
organizational change to a new environment.
Contrary to the current scholarly urge to figure out the best practices companies may
deploy in order to successfully adapt to particularly those disruptive forces that may
render their present businesses discontinuous in the future, findings of this research
suggest that such a move is only wise under certain conditions. Point in time of threat
perception, threat response, plus the disruptive force’s rate of development and
substitution are equally decisive for a company’s success in adapting to a new
environment, such as its stock of committed resources and the relatedness of its
existing capabilities to the new technology. In certain cases, companies are advised to
rather re-orient their operational objectives altogether and leverage their existing
competences in other domains, instead of attempting to reconfigure or extend them at
all costs to achieve a tight fit to the new and disrupting environment.
Eastman Kodak Company, the former industry leader in traditional chemical-based
photography, provided a fascinating and rich case to explore the topic of discontinuous
change – simply because it represented an anomaly with respect to current theories:
The company’s “failure” to adapt to digital imaging could not be explained on the
basis of theoretical findings available in current scholarly research; rather the opposite
ii
Preface
was the case: data gathered and phenomena observed suggested that “there is
something else going on,” whose detailed analysis promised the improvement of
available theories.
Contrary to models that suggest that companies usually fail in the face of
discontinuous change because they focus too closely on their most powerful customers
and thus direct strategic investments exclusively to their core business, Kodak did not
solely invest in traditional film (Christensen, 1997; Christensen & Bower, 1996).
Likewise the company did not always perceive digital imaging as a threat to its core
business, which would have resulted in rigid efforts to control and increase existing
resources in traditional film, rather than promoting autonomous initiatives in digital
imaging as suggested by other theoretical contributions on discontinuous change
(Gilbert, 2005, 2006). Furthermore, at Kodak it was not the case that the internal
bottom-up strategy process failed in the face of institutional barriers (Sull, 1999, 2005)
or volatile investment decisions (Eisenmann, 2002).
Quite the contrary, the world’s largest imaging giant actually invented digital
photography back in 1975. It also was not arrogant to the extent that it ignored new
technological changes. It had promoted multiple electronic-digital imaging initiatives
before anyone else in the industry had directed any attention to this issue. Its research
labs were full of technological inventions that anticipated many features of today’s
devices, such as Wi-Fi-equipped digital cameras or iPod-like designs for imaging
devices. The company also was not blindsided by missing business opportunities in
low-margin areas or small markets. Kodak was fully aware of the disruptive potential
of the nascent digital technology, invested billions in its development, and set up
autonomous structures to allow an independent and autonomous proliferation of the
business. In 2004 and 2005 Kodak even was no. 1 in digital camera sales in the US. It
fell to the 3rd position in 2006.
In fact, the data of this longitudinal study suggests that Kodak wrestled with a
completely different problem – a problem that had not been investigated thoroughly in
the context of discontinuous change: Adapting a competence configuration to a new
environment and trying to gain a dominant market share for purposes of profitability
depends primarily on the availability of uncommitted resources. In the case of Kodak,
Preface
iii
cash flows of the traditional photographic film and paper business were used to fund
digital imaging ventures that required extensive startup-costs and where costs
continued to be high far beyond any planned time horizon for realizing payback. This
worked well until Kodak’s core business dropped off in a steep and non-linear way
because of an unforeseeably quick digital substitution in every part of the imaging
chain; that is to say, it was not just that analog cameras were replaced by digital
cameras, but that people also unexpectedly changed their behavior with respect to
making prints, for instance, preferring to store and view pictures on the Internet.
Kodak believed that most digital camera users would still use film for “important”
photos, since this had been true of early digital camera users when the digital cameras
produced relatively poor quality images. The company’s overhang of absorbed
resources, mostly committed to the fast-declining chemical-based photographic film
and paper business – all its big, vertically integrated production facilities – then started
to burden the balance sheet. A gap between sales and costs emerged, forcing the
company to downsize belatedly, which tremendously constrained its response to
discontinuous change.
Kodak’s experience provided the valuable opportunity to build and extend theory on
discontinuous change in a way that illuminates the preconditions for a company’s
challenge to adapt to (or flee from) disruptive environments. Given that a theory’s
value depends on its ability to predict events or actions, the aim of this research is to
help researchers and practitioners to discern those parameters that might moderate a
company’s efforts in adapting to (or fleeing from) disruptive environments.
Acknowledgement
This research represents four years of thinking about Kodak, and the last seven years
of investigating and reflecting on core aspects of corporate entrepreneurship. During
this period I have worked as a researcher, consultant, and as a facilitator of several
mediation projects, offering the opportunity either to a diverse range of experts or a
larger public to examine what it takes to innovate. And most importantly, I had
innumerable opportunities to learn from many distinguished people who kindly offered
to share their valuable experiences. These are the “materials” out of which this
research has come.
Prior to entering the world of management, I was an Architectural Theory professor,
meaning that I was given the opportunity to teach graduate students while pursuing
several architectural design projects all over the world, ranging from luxury hotels in
the Caribbean Islands to unpretentious convents in Croatia. Post-professionally trained
at two of the world’s most prestigious architectural schools, the Graduate School of
Design at Harvard University in the US and the Architectural Association in London,
UK, coupled with thorough education at the Technical University of Vienna, I was
offered numerous projects abroad. At the same time, I had the opportunity to theorize
on practice in an academic context. One of the issues that concerned me most was how
we create desired futures. Architecture, here understood in its broadest sense, is very
much about the design of conditions underlying any social construction. And by
looking to other disciplines, we see that there are multiple approaches to this issue.
Hence the most inspiring thing I learned during this period in my life was the
importance of using different lenses, borrowed from other disciplines, to understand
and explain phenomena observed.
I mention this because I believe it is fundamental to the way in which research is
pursued in general and how this work was done in particular. Thomas Kuhn (1962)
discovered that the anomalies that led to a fundamental revision of scientific
paradigms were discovered by scholars who were “foreign” to the particular scientific
community; that is to say, discoverers of anomalies had a different disciplinary
background than those who had elaborated and defined the boundaries of the particular
paradigm. The innovators were able to attach meaning to a phenomenon that, when not
vi
Acknowledgement
viewed through different disciplinary lenses, might be dismissed as just an exception
to the general assertion, or overlooked altogether.
By no means do I want to suggest that this research has the potential to topple a
prevailing theory – I neither intended this nor do I feel qualified to do so. Rather, I
mention my role as an outsider to signify that I didn’t start my journey into Kodak
with a set of beliefs about existing theory, about what is legitimate and what is not.
Instead I almost “naïvely” observed phenomena and tested the data gathered against
existing theoretical models, unless an anomaly popped up that triggered iterative
cycles of reversing categorization schemes or articulating new causal statements. As a
result, I feel that I have observed something that was not in the focus of others so far.
The aim of this research was to find explanations for this circumstance. I hope that the
explanations enrich current theories.
I referred to my past also to emphasize that some seven years ago I was offered a
generous once-in-a-life-time privilege to explore these issues from a management
perspective. Professor Steven Floyd, then chair at the Institute of Management at the
University St. Gallen, Switzerland, showed great trust in me and granted me admission
to the PhD program. Seen from my perspective, as an architect and teacher who has
seen many schools abroad and at home from the inside, his openness towards my
different disciplinary background (and lack of any management education) was
unparalleled. Here I want to take the opportunity to express my deep appreciation of
his confidence and constructive support in helping me to take this path.
Professor Martin Hilb, too, I want to thank for his belief in me, the many words of
advice he kindly provided, and his ongoing efforts to bind me to the University of St.
Gallen. Since my early days at St. Gallen, he has been a great source of inspiration and
a person to learn from. At his annual management symposia, which he generously
allowed me to actively participate in, he showed the merits of the great facilitator that
every organization requires for innovating. I owe him a debt of gratitude.
Several “Kodakers” have offered ongoing input to and criticism of this research work.
These include, among others, Steven Sasson, inventor of the world’s first digital
camera, who in 2010 sparked my original interest in Kodak by kindly accepting an
invitation to participate in a symposium I organized in the Austrian Alps. Then there
Acknowledgement
vii
are Brad Paxton and Ken Parulski, who expended great efforts in supervising the
research in conversational and manuscript form. Additional wisdom was provided by
many other Kodakers or individuals close to the imaging giant who have provided
great support. In particular I want to mention Bob Shanebrook, Berry Brenner, and
Terry Faulkner. Todd Gustavson, Technology Curator at the George Eastman House
(GEH) provided great support in sharing his historical expertise and granting us to do
interviews in the GEH. Thank you to all of you.
Beyond that there are other people without whom this research would not have been
possible. The first of these is Rector and Professor Reinhard Kannonier, who in 2003
promoted the founding of the academic Design-Organization-Media (DOM) Research
Laboratory, which I am honored to have headed since then. A lot of my workload
related to this research was done alongside other agendas, which therefore had to be
reduced. Moreover, I was allowed to use institutional funds for financing trips and fees
for the film team, for doing interviews. In this respect I am particularly grateful to
Erich Goldman and Manuel Bauer, who did a wonderful job of capturing all the
interviews on film.
There remains a last group of people, who have been at the center of almost
everything: My wife Elke and my two sons Paul and George made countless sacrifices
and gave endless day-to day emotional support that made the pursuit of this research
possible. I am particularly indebted to Elke, who as the mother of my two wonderful
children and also as a credit analyst, gave me thorough-going advice in ”reading
between the lines” in balance sheets.
Linz, October 2014
Michael Shamiyeh
viii
Zusammenfassung
In den letzten Jahren hat das von Bower (1970) begründete und von Burgelman
(1983c)
substantiell
erweiterte
Modell
über
den
innerorganisatorischen
Ressourcenzuteilungsprozess eine umfangreiche Bestätigung als auch Erweiterung
erfahren,
insbesondere
durch
Forschungsarbeiten
im
Zusammenhang
mit
diskontinuierlicher Veränderung (Christensen, 1997; Christensen & Raynor, 2003;
Gilbert, 2005, 2006). Unter anderem gingen Wissenschafter der Frage nach, welchen
Einfluss zum Beispiel Kapitalmärkte, ein zu enger Fokus auf profitable Kunden, oder
die unternehmensinterne Beurteilung von jenen Kräften, die eine diskontinuierliche
Veränderung zur Folge haben, auf interne Investitionsmuster haben und damit auch die
realisierte Strategie des Unternehmens im Streben nach einer effektiven Anpassung an
die veränderte Umwelt beeinflussen. Im Unterschied dazu erhielt die Frage, welchen
Einfluss der Bestand an Ressourcen und deren Einsatz in der laufenden
Geschäftstätigkeit auf die Fähigkeit einer Organisation haben, effektiv auf
diskontinuierliche Veränderung reagieren zu können, eine geringe Aufmerksamkeit. In
der vorliegenden Arbeit wird dieser Frage nachgegangen und anhand einer Studie über
den Jahrzehnte langen Versuch der Eastman Kodak Company auf die Substitution der
traditionellen, auf Chemie stützenden Fotografie durch digitale Technologien zu
reagieren, eingehend erörtert. Mittels des Rückgriffs auf die ressourcenbasierende
Betrachtung
eines
Unternehmens
gelang
es,
das
generelle
Modell
zum
Ressourcenzuteilungsprozess substantiell zu erweitern. Jene im Zusammenhang mit
unternehmenspezifischen Ressourcen stehenden Variablen wurden identifiziert, die
eine Anpassung an diskontinuierliche Veränderungen wesentlich beeinflussen. Die
moderierende Wirkung der identifizierten Variablen wird in Form von Thesen
zusammengefasst und deren Implikationen für wissenschaftliche Forschung und
Unternehmenspraxis diskutiert.
ix
Abstract
In recent years, the Bower-Burgelman Resource Allocation Process Model has
received extensive support from scholars concerned with organizational dynamics in
the face of discontinuous change. In particular, scholars have addressed the question of
how powerful capital markets, an excessively narrow focus on profitable customers, or
the cognitive framing of forces leading to discontinuous change, shape an
organization’s investment pattern and thus the organization’s strategy to adapt to a
new environment; however, the question of how the stock of resources and their
deployment in ongoing business operations affect an organization’s capability to
allocate resources to new businesses, in response to discontinuous change, has been
less explored. I explored this question by using a longitudinal case study of Eastman
Kodak Company in its response to digital imaging. In linking the Resource Allocation
Process Model with findings of the Resource-Based View, I am able to extend the
general model by identifying variables that determine whether the stock of resources
and their deployment support or obstruct adaptation to the new environment. In the
concluding section, I discuss findings and address consequences for managerial
practice and academic research.
1
Part I
Theoretical Background
1 INTRODUCTION
Organizations are faced with numerous obstacles when they attempt to adapt to
discontinuous change. Scholars aiming to explain an organization’s inertia in the
course of environmental shifts have devoted attention to the nature of existing
competences (Benner & Tushman, 2002; Benner & Tushman, 2003; Cohen &
Bacdayan, 1994; Henderson & Clark, 1990; Kaplan, 2008; Leonard‐Barton, 1992;
Tushman & Anderson, 1986), retained resource commitments to address the needs of
powerful customers and capital investors (Christensen, 1997; Christensen & Bower,
1996; Danneels, 2003; Pfeffer & Salancik, 1978), and managerial cognition (Baron,
Hannan, & Burton, 1999; Gilbert, 2005, 2006; Staw, Sandelands, & Dutton, 1981;
Tripsas, 2009; Tripsas & Gavetti, 2000). In an effort to help companies to successfully
manage change, scholars of corporate strategy and organizational design have directed
an increasing amount of attention towards building dynamic capabilities (O’Reilly III
& Tushman, 2008; Teece, 2007). In this research, I expand upon this work by
exploring the moderating effects of an organization’s stock of resources and its
strategic deployment in an effort “to integrate, build, and reconfigure internal and
external competencies to address rapidly changing environments” (Teece, Pisano, &
Shuen, 1997).
Research in evolutionary economics reveals a long tradition of investigating how
existing capabilities limit an organization’s adaptive behavior (Arrow, 1974; Nelson &
Winter, 1982). By “capabilities,” I refer to the valuable utilization of a broad spectrum
of resources, including tangible and intangible assets as well as human resources. For
instance, March and Simon (1958) showed how an organization’s historical evolution
influences its prospective behavior. Organizational learning reveals a tendency to be
path-dependent, to invoke search strategies closely related to existing capabilities
(Levitt & March, 1988; Teece, 1988), and shows that companies often fall short
because of a rigid deployment of their capabilities (Leonard‐Barton, 1992). Scholars
have also shown how organizations tend to utilize existing capabilities in response to
change (Helfat, 1997; Teece, 1986). For instance, organizations tend to exploit their
capabilities based on the existing customer segment and to develop products and
services for their particular needs, rather than directing attention to a completely new
customer segment (Christensen, 1997). Tushman and Anderson (1986) distinguished
4
INTRODUCTION
between environmental changes that enhance or destroy an organization’s competence,
explaining how discontinuities require the mastery of an entirely new set of
capabilities. Henderson and Clark (1990) offer a more detailed perspective on the
competence-destroying or -enhancing nature of technological shifts, by directing
attention to changes in “architectural knowledge,” which is applied for integrating
various components in an overall system. Hence scholars concerned with moderating
effect of resources and capabilities in an organization’s struggle to respond to new
environmental contexts by and large focus on the distinctive nature of existing
capabilities; that is to say, they investigate how tangible and intangible assets, resource
bundles, and/or routines constrain or direct the development of a new competence
configuration.
The aim of the research presented here, by contrast, is to investigate how stocks of
resources and their retained strategic deployment to ongoing business operations
moderate an organization’s effort to change in the face of discontinuous change.
Organizations attempting to respond to discontinuous change are usually faced with a
dilemma: Discontinuous change occurs when a new technology disrupts and erodes an
organization’s resource base, by getting a foothold in the market of the firm’s
traditional business (Abernathy & Utterback, 1978; Christensen & Bower, 1996;
Christensen & Rosenbloom, 1995; Dosi, 1982; Foster, 1986; Utterback, 1994;
Utterback & Abernathy, 1978). For organizations, the objective is not to change from
one state to another in a sequential manner (as may be appropriate in environments
with minor changes); rather, an effective response requires an organization to redirect
resources (from its profitable businesses) to the development of new businesses (to
address requirements of the emerging environment), while retaining resource
commitments to existing businesses that must continue their tight fit with the
traditional (and potentially disrupted) environment (Christensen & Bower, 1996;
Christensen & Raynor, 2003; Christensen, Suárez, & Utterback, 1998; Gilbert, 2005,
2006; Masini, Zollo, & van Wassenhove, 2004; Siggelkow & Levinthal, 2003;
Siggelkow & Rivkin, 2006). Organizations are required to reconfigure and orchestrate
multiple competences simultaneously, simply because in order to stay viable – unless
the new business achieves payback to fund its growth – they must stay competitive,
and address the most pressing challenge facing most organizations today: increasing
the returns from initial investments.
INTRODUCTION
5
In order to explore the interdependence among discontinuous change, stocks of
resources and their strategic deployment, and an organization’s resource allocation
process, I analyze Eastman Kodak Company’s response to the rapid substitution of its
traditional chemical-based photographic film and paper business by digital
photography. This industry leader provides a compelling case in that the extremely fast
erosion of the traditional business environment ate away valuable resources required to
fund the development of competences necessary to adapt to the new environment. In
contrast, most recent case studies available to better understand discontinuous change
refer to examples in which a profitable core business remains viable in parallel to the
development of new ventures. For instance, Gilbert and his colleagues (2012; 2005)
discuss challenges of newspaper companies in the face of online news, or of publishers
and book retailers in the face of the advent of e-books. Christensen (2003) discusses
the challenges for traditional businesses caused by the emergence of mini steel mills,
online banks, and online travel agencies. In all these cases, the slow loss of market
share due to disruption only marginally affects the availability of resources to fund
development or acquisition of new competences. Moreover, because availability of
sufficient funds is presumed but not discussed, the likely need to fall back on existing
resources in the face of scarcity has been ignored. In short, in current cases, the
moderating effect of stocks of resources and their strategic deployment have by and
large escaped notice.
This in-depth longitudinal and multilevel case study yields additional explanations of
organizational inertia. Based on the analysis of Kodak, I propose to extend the current
model on the Resource Allocation Process to include “resources and capabilities” as an
additional component shaping an organization’s response to discontinuous change,
depending on two subordinate variables identified: the rate of technological progress
and substitution, as well as the time of threat perception and response. This later
variable builds on Gilbert’s (2005, 2006) findings for the most part. Contrary to
current scholarly intentions to elaborate best practices in an effort to adapt to
disruptive forces, my findings suggest that under certain conditions, organizations are
advised to leave their traditional business environment altogether and leverage existing
resources to more closely related domains, instead of trying to build or integrate
completely new and unrelated resources in an effort to achieve a competitive
advantage in the new environment.
6
INTRODUCTION
This research is structured in the following manner: First, I begin to define the
conceptual scope by exploring two broad sets of questions: How does discontinuous
change affect an organization’s resource base, and how does the level of committed
resources influence an organization’s resource allocation process (and thus strategy
process) in the face of discontinuous change? In this part, I explain the chosen
methodology of this research and address particularities with respect to the research
setting, site selection, data collection, and how I extended the current findings on the
Resource Allocation Process model to incorporate the component of committed
resources. In the second part, I analyze the case by using the refined model to draw a
series of conclusions. In the third and final part, I discuss findings for evolutionary
theory, show directions for possible future research, and address implications for
practice.
2 BACKGROUND
The challenges that organizations encounter by adapting to discontinuous change have
been well researched across various industries (Christensen, 1997; Gilbert, 2006;
Kaplan, 2008; Tripsas, 2009; Tushman & Anderson, 1986). Scholar’s findings have
resulted in theories explaining the obstacles organizations are facing in their effort to
build, reconfigure or import new resources and capabilities in the face of substantial
alterations in the environment that destroy competences (Glasmeier, 1991; Landes,
1984; Rosenbloom, 2000; Sull, Tedlow, & Rosenbloom, 1997); the incumbent’s
failure to seize the potential of innovations that disrupt and redefine the product
performance demanded by customers in existing markets (Christensen & Bower, 1996;
Christensen & Rosenbloom, 1995); and, the consequences of framing environmental
shifts as either threats or opportunities for an organization’s response to discontinuous
change (Gilbert, 2005, 2006; Jackson & Dutton, 1988; Ross & Staw, 1993; Sitkin &
Weingart, 1995; Staw et al., 1981). This chapter aims to extend this literature stream
by directing the focus to the source of any organizational effort to adapt – namely, the
particular stock of resources and capabilities which an organization can utilize to
become adaptive. I argue that discontinuous change threatens the viability of an
organization by potentially eroding its resource base and thus the means to become
adaptive.
2.1 Technology and Change
Change – whether incremental, radical, or discontinuous – requires organizations to
adjust their competence configuration (Gilbert, 2006; Tushman & Anderson, 1986). In
order to assess their adaptation to a new environment, organizations have to define the
extent of required new resources and capabilities (Henderson & Clark, 1990; Kogut &
Zander, 1992; March, 1991). In effect, depending on the requirements relative to an
existing base of resources and capabilities, organizations either have to leverage,
extend, or import new ones (Collis & Montgomery, 1998; Kazanjian, Drazin, &
Glynn, 2002). Paradoxically, in the literature stream on discontinuous change little
research efforts are devoted to the issue of resource requirements in general and
resource relatedness in particular, despite different consequences for competence
development in the face of the need to adapt: Developing resources and capabilities
8
Technology and Change
that are new and unrelated to an organization’s stock is certainly more costly and
difficult than undertaking small or incremental changes (Hannan & Freeman, 1984;
Nelson & Winter, 1982). In the following, I will demonstrate the linkage between
discontinuous change and resources required relative to a current resource base..
An elaboration of the linkage between discontinuous change, which is a particular
form of technological change, and an organization’s stock of resources and capabilities
requires clear definitions. Particularly the term “technology” has too many diverse
connotations, ranging from an object of material culture to the pool of applied
scientific knowledge (Sahal, 1981). Traditional economic theory conceptualized
“technology” as a production function that expressed the causal relationships among a
set of factors of production and certain outputs, which were defined in qualitative and
quantitative terms (Dosi, 1982). I therefore begin with defining the term “technology,”
to continue with a discussion on discontinuous change and its relationship to resources
and capabilities.
Building upon the rich work of Sahal (1981), Dosi (1982), Foster (1986), Tushman &
Anderson (1986), and Christensen (1992a), I view technology from a systemic
perspective, which emphasizes its performance characteristics: Dosi (1982), for
instance, defined “technology” as “a set of pieces of knowledge, both directly
‘practical’ (related to concrete problems and devices) and ‘theoretical’ (but practical,
applicable although not necessarily already applied), know-how, methods, procedures,
experience of successes and failures and also, of course, physical devices and
equipment” (p. 151f.). Foster (1986) conceived technology more broadly as “the
general way a company does business or attempts a task – the production line versus
batch processing or the sidelong high jump technique versus the backward-first
Fosbury flop” (p. 33). Tushman and Anderson (1986) circumscribed technology as
“those tools, devices, and knowledge that mediate between inputs and outputs (process
technology) and/or that create new products or services (product technology)” (p.
440); and, finally, Christensen (1992a) defined technology “as a process, technique, or
methodology embodied in a product design or in a manufacturing or service process
which transforms inputs of labor, capital, information, material, and energy into
outputs of greater value” (p. 336). The achievements of technology, according to this
view, are “embodied,” so to speak, in two parts: On the one hand it exists in a
BACKGROUND
9
particular product or process, and, on the other it exists in a “disembodied” part that
relates to the particular skills, experiences, and knowledge used in previous
technological solutions. In this sense, technology is distinct from knowledge, which is
non-specific to particular products and processes.
This performance-based view of technology, as a technique that processes inputs of
resources into outputs of greater value, appears useful for discussing patterns of
technological change (and thus discontinuous change). Technological change,
according to the view presented above, first and foremost means a change in technique
and/or inputs of resources that aim to achieve performance improvements of a
particular product or process (Sahal, 1981). Consequently, the close association of
products and process to technology always necessarily sets boundaries to possible
technological variations and paths of progress (Foster, 1986):
Upper Boundary
Performance
p
Trajectory
Solutiont
Paradigm
Lower Boundary
Performance
t
Figure 1
Schematic Illustration of Technological Change
Dosi (1982) showed, by referring to the seminal work of Kuhn (1962), that the
direction of every technological change follows a “trajectory,” that is, a pattern of
actions related to searching and solving problems based on a particular logic or
“paradigm” that is immanent to the very technology itself. This “technological
10
paradigm” defines the relevant problems, the patterns of inquiry, and, consequently,
the pattern of solutions of the selected problems. In this sense, technological
paradigms embody strong determinations in regard to the directions technology can
change. Dosi (1982) depicted this trajectory as a kind of conduit of possible directions
along which technological change can occur. It is defined by variables related to
techniques and matters of input, and the outer boundaries are set by the nature of the
technological paradigm itself. Technological change, according to Dosi, means to
move along the trajectory and to trade off variables in an effort to solve technological
problems; progress, in particular, means to improve the trade-offs (and thus the
technology’s performance) [see Figure 1].
In the large body of literature on technological change, there seems to be a consensus
that institutional (Gilfillan, 1935), social (Schumpeter, 1954; Taton, 1958), and
economic (Merton, 1968; Schmookler, 1966) factors are at work in technological
change, and that variety and chance matter just as much as prevailing patterns and
structures (Sahal, 1981). What is of interest here is how these factors operate as a
selection and “focusing” (Dosi, 1982) or “filtering” (Henderson & Clark, 1990)
mechanism, which channels the direction of problem-solving activities along the
technological trajectory as soon as the technology has been selected. Once a
technology (and thus a technological trajectory) has been selected and established, it
takes on a directing momentum of its own (Nelson & Winter, 1975; Rosenberg, 1976).
New technologies are selected likewise in the course of the complex interplay of
economic factors with social and institutional factors (Dosi, 1982). Organizations in
search of new business opportunities or improved operations search for new
technologies given their particular interests and prevailing structures. Tushman and
Anderson (1986), for instance, noted that fundamental improvements of a technology
may have limits, to the extent that no advancements in performance can render the
prevailing technology competitive with the new one. The focus on new technologies
then is essential. Foster (1986) and Constant (1980) support this explanation with case
studies on technologies that matured and yet were replaced by newer technologies,
such as steam technology replacing wind-powered shipping technology or turbojet
technology replacing piston-jet aircraft technology. Sahal (1981) put forward a theory
of technological discontinuance by arguing that every technology has limits in
BACKGROUND
11
performance improvement; at a certain stage, the technological process becomes either
too complex or the effort required too large. The only feasible way to push the limits
of performance are to redefine the technological paradigm altogether, argued Sahal. It
is in this respect that incremental or continuous changes are related to advancements in
technology along the given trajectory that is determined by the paradigm, while
discontinuous change is associated with the advent of a new paradigm [see Figure 2].
New Technology A’’
(Same market as A)
p
Discontinued
Technology A
Point of
Disruption
Disruptive
Technology A’
t
Figure 2
Schematic Illustration of Discontinuous Change
EXAMPLE 1:
A
Reflex Camera
A’’
Automatic Camera
A’
Digital Camera
EXAMPLE 2:
A
Xerography
A’’
Digital Copier
A’
Tabletop Copier
EXAMPLE 3:
A
Mechanical Typewriter
A’’
Electrical Typewriter
A’
Microsoft Word
Limits of a technology, however, are difficult to predict, especially when they rely on
a complex interplay of multiple factors. In his research on “wicked problems,” Rittel
(1973) explained the difficulty of finding solutions to problems in which the
interdependency of contradictory and changing requirements is difficult to understand.
His thoughts about wicked problems addressed issues in engineering as much as in
management and other domains. Churchman (1967) introduced Rittel’s concept into
management science, and Foster (1986) supports Rittel’s conclusion in discussing the
difficulty of engineers foreseeing the performance limits of future discoveries or
12
creations, because of the complexity of natural laws; their work is characterized more
by moving the boundaries than by working towards a well-understood barrier.
Christensen’s (1992a, b; 1995) research on the disk-drive industry offers additional
insights on the nature of discontinuous change. His examples support the conclusion
that there exists a causal linkage between discontinuous change and the emergence of
a new paradigm; however, he specifies that discontinuity of technological progress
does not necessarily happen at times of technological maturation. Rather, on the basis
of his studies, he was able to show that technologies with different performance
attributes are able to “disrupt” the progress of prevailing technologies, even before
they reach a state of maturity. These “disruptive technologies,” according to
Christensen, have two important characteristics: first, they reveal performance
attributes that, at least in the nascent period, are not valued in the context of the
prevailing technology; second, they continue to improve their performance to the
extent that they suddenly invade the context (or market) of the prevailing technology;
that is to say, mainstream users (or customers) of the old technology start to value the
new technology and substitute it for the old one. As a consequence, change in the old
technology likely discontinues.
Foster (1986), in his study of the wind-powered vessels that were replaced by
steamships, made a compelling case. He showed that both technologies continued in
parallel for 75 years, despite the fact that the physics of wind and water posed
insurmountable performance limits for the engineers of wind-powered ships. In fact,
initially the two technologies operated complementarily. In the early days, according
to Foster, steam-powered vessels could not be used for transatlantic voyages for
reasons of reliability. As a result, the technology was used in ships on lakes and rivers,
which led to a completely different customer set and performance demand. Only after
the performance of the steam technology had advanced to the point that it became
competitive with the technology of wind-powered ships did substitution swiftly occur.
The phenotypical sequence of a (fairly long) period of technological progress that
takes place independently from changes in the old technology, as evident in the case of
the transoceanic shipping industry, raises a question about the predictability of
technological progress.
BACKGROUND
13
2.2 Technological Change and Discontinuity
Technological trajectories embody the course of progress in advance within a given
technological paradigm (Dosi, 1982). In other words, a technological paradigm defines
which directions of technological change to pursue and which to neglect. But neither a
technological paradigm nor its trajectory provides information on the speed of
technological progress or the rate it potentially substitutes another technology. Rather,
factors other than technology come into play.
As noted earlier, institutional, social, and economic and market factors all seem to
trigger technological evolution and change. Anticipating the advent of major
technological changes or even their rate of progress, therefore, seems difficult.
Utterback (1994) noted that the formation of new firms or the changing focus of large
enterprises in an effort to exploit new ideas may become a valuable source of
information in identifying the advent of technological changes. However, an analysis
of firm activities can only signal some very broad directions in which a technology can
progress, without providing a clear picture of how fast the technology will change to
the point that it reaches wide market acceptance or disrupts a prevailing technology;
for example, the advent of electronics in the context of a growing typewriter industry
certainly signals the potential that there might be electronic typewriters (or even word
processors) in the future, but to predict a definite rate of technological progress would
be difficult, due to uncertainties surrounding factors other than the technology itself,
such as co-specialized assets described by Teece (1986), the diffusion of the
technology in the market as it has been extensively researched by Rogers (1962) since
the early 1960s, or the strategic maneuvering by individual firms (Christensen, 1997;
Suárez & Utterback, 1995; Utterback, 1994).
Teece (1986) showed that an organization’s particular assets, such as the image of its
brand, channels of distribution to reach customers, or customer switching costs tend to
reinforce a technology. The experience of Kodak in introducing the new 126 film
standard for their point-and-shoot Instamatic cameras is a case in point. In the early
1960s, there were several firms on the market trying to compete against Kodak. For
instance, Agfa tried to position its version of a small and easy to load film cartridge on
the market and to convince several camera manufacturers to switch to the Agfa Rapid
film system. However, Kodak’s brand dominance and extensive global network, which
14
Technological Change and Discontinuity
meant that service would be widely available, encouraged the industry to largely
conform to the 126 standard.
How organizations manage communication with customers has been identified as
another significant moderator for technological diffusion (and thus its evolution)
(Moore, 2002; Moore, 2005). The aim of every communication is to share information
between participants, to reach a mutual understanding (Pask, 1975, 1976; Pask &
Scott, 1972). Diffusion is a special form of communication though; it aims to spread
messages whose content is to be perceived as being related to new ideas (Rogers,
1962). In our case, it is a particular case of market learning, giving customers the
opportunity to make up their mind about the benefit of adapting to a particular new
technology. Close attention to customers may even inform organizations about how a
particular technology succeeds or fails to meet customer demands or how changes in
the technology might close the gap between technology performance and customer
requirements (Von Hippel, 1986, 1988). Conversely, Christensen (1996) showed that a
close focus on customers can blind organizations to the need to change.
Finally, Christensen (1992a, b) showed, in the same thorough research on the diskdrive industry, that the strategic maneuvering of organizations determines
technological progress too. In charting the annual evolution of the Ferrite-Oxide
technology for disk-drive heads at two companies, Fujitsu and Control Data
Corporation, he could show that after several years of performance increase, the
technology plateaued, suggesting that it had reached its limit, but continued increasing
steeply thereafter. Based on interviews, Christensen (1992a) explained that the sudden
flattening slope of the technology’s trajectory was caused by the reallocation of
resources to other engineering efforts. Both companies believed, according to
Christensen, that the technology had reached its performance limits, and so they
started to focus on thin film heads. Because of some technical problems that prevented
an early market launch of the new technology, both firms returned to the old
technology, spending their efforts to increase – in fact triple – their previous
performance.
Given the uncertainties associated with the various factors that determine the
emergence and evolution of technological progress, it is difficult to anticipate a rate of
technological change (and thus of the potential for substitution), at least in the nascent
BACKGROUND
15
period of the newly emerging technology. This can be recognized only in retrospect, as
many scholars have confirmed (Christensen et al., 1998; Suárez & Utterback, 1995;
Utterback, 1994). Also Fisher and Pry (1971) confirm, in their seminal work on the
substitution model of technological change, that their method “is not to be applied to
substitutions prior to their achieving a magnitude of a few percent.”
More assurance about the likely evolution of a technology can be obtained at times
when variations of multiple technical solutions for a particular problem are
synthesized into a “dominant design,” as formulated by Utterback (1994). To briefly
explain the characteristics of a dominant design and its impact on the industry, it is
beneficial to shift, at least for the moment, the perspective from a technology to the
particular product or process that embodies the achievements of a deployed technology
(Dosi, 1982).
Henderson and Clark’s (1990) framework for technological change and its impact on
an organization’s capabilities is beneficial for the discussion here. By focusing on the
development of new products, they suggested thinking of a product as a complex
system of multiple components arranged in a unique architecture. And depending on
whether technological change takes place at the level of components or their system’s
architecture, or even on both levels, changes in the product’s performance are either
radical or incremental. While a change in a component typically entails a change in the
technology embodied in the particular part, a change in the system’s architecture
leaves the technology of components untouched. Henderson and Clark established this
more finely grained categorization framework to show that each type of technological
change has different requirements in terms of knowledge.
The essence, which is of significance here, is that the performance of a product is
dependent on both the architecture that links the various components into a larger
system, and various technologies that are deployed in the components. Christensen
(1992a, b) had taken this view in his research on the disk-drive industry, to argue that
the notions of “architecture” and “component” are always necessarily relative. While
the read-write head of a disk drive, to use his example, may be considered as the
architecture of a complex system comprising various components, at the next level the
head may be conceived as a component in the overall system of the disk drive. This
constitutes “sort of nested systems of architectures” (Christensen, 1992a, p. 341). The
16
system’s performance, for instance a particular product like a disk drive, then is
determined by the performance of each component and/or the system’s architecture at
all lower levels.
p
Dominant
Design
Various technologies
that define coalesce into
a product class
t
Figure 3
Schematic Illustration of Dominant Design
The important point I want to make is that the trajectory of a product’s performance
(and thus its likelihood of becoming disruptive) becomes better recognizable when the
ferment of technologies applied at various levels of the product – architectural or
component – synthesizes into a specific product class that wins the race for acceptance
in the marketplace (Tushman & Anderson, 1986; Utterback, 1994) [see Figure 3].
Utterback (1994) called this product class a “dominant design”:
“A dominant design drastically reduces the number of performance requirements to be
met by a product by making of those requirements implicit in the design itself. Thus,
few today would ask if a car had an electric starter and electric windshield wipers, or
whether a typewriter could produce upper- and lowercase letters, or whether a personal
computer had a built-in disk drive, though these were unique features in models that
precede the dominant design. Today, these features are implicit in designs that the
market expects and that all producers find themselves compelled to emulate. They are
no longer serious issues nor are they advertised as advantages of one or another
manufacturer’s product. They are subsumed within the popularly accepted design.”
(Utterback, 1994, p.25f.)
BACKGROUND
17
Several studies have shown that the coalescence of several technologies into a
dominant design defines a significant milestone for the competitive dynamics in the
industry (Abernathy & Clark, 1985; Christensen et al., 1998; Suárez & Utterback,
1995; Utterback, 1994; Utterback & Abernathy, 1975). As soon as the performance
criteria of a product (and thus of its underlying technology) change from an uncertain
and ill-defined stage to a well-articulated one, the focus of competing organizations
shifts from exploration to exploitation, in an effort to enhance economies of scale and
market growth (Dutton & Thomas, 1985; Myers & Marquis, 1969). On the basis of a
rich data set on the disk-drive industry, Christensen (1998) could support the
assumptions of Utterback and Suárez (1993), that after a dominant design coalesced,
many firms (are forced to) exit the business, precisely because a dominant design
triggers efforts to exploit economies of scale and to build entry barriers to competitors.
The dominant design of digital cameras is an example [see Figure 4]. Invented by
Kodak in 1975, it took the industry about 20 years to arrive at a design that won
acceptance in the marketplace by basically replicating traditional point-and-shoot 35
mm cameras in design and usability. Earlier variations on the theme led to cameras
that recorded the digitally captured information to analog, or digital capturing devices
that could be attached to the back of analog SLR cameras, or even e-film, a replica of
the traditional 35mm film roll, but equipped with a digital imaging sensor and memory
that could be placed in the film slot of a regular camera. At least since the late 1990s,
digital imaging technology evolved into a dominant design that quite clearly showed
signs of the rate of technological evolution and the potential threat of substitution [see
Figure 4 and Figure 8]. Kodak’s DC210 digital camera probably reveals at first the
dominant design of digital cameras. It was introduced in 1997 and was the top selling
camera model in 1998. It had a traditional film camera shape, zoom lens, LCD display
with a rich GUI, used JPEG compression and a removable flash memory card.
18
p
Substitution
90% (2011)
Silver-halide
Technology
p
TP
II (1994)
PD (2001)
Printed Book
DD (1996)
TP I (1981)
MAVICA
Substitution
15% (2020)
DD, TP
(1998)
Digital Technology
PD (2003)
Still Video Technology
First Digital Camera (Kodak)
1970
1980
1990
26Y
2000
Sony
eBook
t
1970
1980
10Y
1990
Figure 5
Substitution of Printed Book
by eBook
Substitution
90% (2000)
Substitution
90% (1988)
Vinyl Record
Cassette
TP (1982)
TP (1982)
PD (1983)
PD (1983)
DD (1982)
DD (1982)
Compact Disk
Compact Disk
6Y
1990
t
>?Y
p
p
1980
2000
33Y
Figure 4
Substitution of Silver-Halide
Photography by Digital Imaging
1970
Amazon
2000
t
5Y
Figure 6
Substitution of Vinyl Records
by Compact Discs
1970
1980
6Y
1990
2000
t
17Y
Figure 7
Substitution of Compact Cassettes
by Compact Discs
TP…Threat Perception; PD…Point of Disruption; DD…Dominant Design
BACKGROUND
19
Product
Year for the new
product to go from
1% to 91% of the
total market
Compact Disk player for LP players
4
ICs for Transistors
8
Video cameras/ camcorders for 8 mm home movie cameras
8
Color TV for B&W (early years)
12
Minilabs for wholesale photofinishing
13
35 mm NSLR cameras for Box (110, 126, DSC) cameras
21
Digital Cameras for Film Cameras
17
35 mm for all other cameras
33
Color prints for B&W prints
43
Table 1
Examples of Past Substitutions with Rates
Source: Eastman Kodak Company
45 MP
40 MP
35 MP
30 MP
25 MP
20 MP
15 MP
10 MP
5 MP
0 MP
1992
1994
1996
1998
2000
Max Performance Boundary
2002
2004
2006
2008
Min Performance Boundary
2010
2012
Trajectory
Figure 8
Technological Evolution of Digital Interchangeable Cameras
Source: Adapted from Digital Photography Review, 2013
2014
20
The collaborative effort in the definition of an industry standard for compact discs is
another compelling case [see Figure 6 and Figure 7]. Invented in 1974 at Philips,
Eindhoven in the Netherlands, the technology was developed as a sort of skunkworks
(Peek, 2010). A small team of engineers thought of an optical audio disc the size of a
fragile vinyl record, for purposes of error detection. It was not until 1977 that Philips
decided to push the technology and to establish laboratories (Peek, 2010). Around the
same time, Sony started to develop their version of the optical disc technology. Both
publicly presented their compact disc technology in early 1979 and joined forces to
collaboratively develop what they had started independently (2007a; Doi, Itoh, &
Ogawa, 1979). A year later, an industry standard was established that was quickly
adopted by various international standards. By 1983, the first compact discs and
players were globally introduced on the market (2007b). After that, substitution of
vinyl records and compact cassettes advanced unevenly. Within less than 5 years,
vinyl records disappeared almost completely from the market; cassettes resisted wideranging substitution for about 17 years after the dominant design emerged.
In research on strategies that organizations should adopt to survive quickly changing
technologies, Christensen, Suárez, and Utterback (1998) concluded that switching to a
new technology before it coalesces into a dominant design bears the risk that initially
developed competences may become worthless; they also argue that adopting a
technology too late after the dominant design has emerged bears the risk that the
organization will face strong entry barriers that earlier adopters have thrown up, such
as economies of scale, distribution channels, and brand name. Here again, Kodak is a
good case in point. In 1997, each of the three tech companies, Hewlett-Packard,
Epson, and Canon, started to commercialize their version of a consumer home photo
printer on the basis of a low-cost ink-jet technology, basically all confirming a new
product class that soon invaded homes worldwide. Kodak too was considering entering
the market and evaluated various technologies, including ink-jet printing, thermal
printing, silver-halide printing, and electrophotographic printing. They too concluded
that ink-jet technology was the lowest-cost solution (except electrophotography, which
was even lower-cost, but did not meet the quality standard of those days), but they did
not own the technology. Actually, Kodak had sold its ink-jet division just five years
earlier, for financial reasons. In 1999 Kodak partnered with Epson to introduce home
ink jet printers. However, they were not very popular, and the partnership lasted only a
BACKGROUND
21
few years. Some four years later, in 2003, when Kodak finally decided to make a bold
move in the home photography market with ink-jet technology, Hewlett-Packard had
already built extensive resources and financially had more at stake than the troubled
photography company, whose core business was eroding due to digital substitution.
Moreover, Hewlett-Packard had begun to outsource manufacturing of its cartridges
and printers to companies that promised lowest costs. Hence a faltering Kodak entered
(as a newcomer) a battle against the market leader. The research by Rosenbloom
(2000) on National Cash Register and Christensen (2003) on IBM shows how difficult
(if not impossible) it is for industry entrants to outmuscle incumbents in their effort to
sustain their leading position in a technology trajectory.
To summarize: Forecasting technological evolution and change (and thus substitution)
is difficult due to the interplay of institutional, social, and economic factors. Dominant
design brings more certainty about the direction of technological progress; however, it
too can only be assessed in retrospect. Once a dominant design coalesces,
organizations are advised to use a “window of opportunity” – to take a term from
Christensen, Suárez, and Utterback (1998) – in order to adapt to technological change
most efficiently in regard to deployed resources.
The work of Christensen et al. (1998), Suárez et al. (1995), and Utterback (1994),
however, had scant discussion of particular resource requirements to respond to
technological change. Therefore, it is the aim of the following section to discuss the
most important contributions related to the issue.
2.3 Technological Change and Resource Requirements
In innovation research, the finding that technological changes may vary in their impact
on an organization’s established resources and capabilities has been an important issue
since Schumpeter’s (1911) concept of creative destruction. Change – whether
incremental, radical, architectural, component, continuous, or discontinuous – requires
organizations to adjust their competence configuration (for an overview see, e.g.,
O’Reilly III & Tushman, 2008). There is a large consensus within the scholarly field
that the development and adjustment of capabilities is difficult (see, e.g., Nelson &
Winter, 1982; Tushman & Anderson, 1986). Likewise there is also common agreement
that resource development in an effort to adapt to a radically new environment is more
22
Technological Change and Resource Requirements
costly and difficult to achieve than small or incremental changes (Glasmeier, 1991;
Landes, 1984; Rosenbloom, 2000; Sull et al., 1997). Steel (1983), for instance,
observed that most progress is achieved by pursuing the less risky path of
incrementally changing a known technology, rather than developing a radically new
one, which he found usually required far more investment and time to develop than
initially planned.
p
Performance
Technology A
Threat
Perception
Point of
Disruption
Performance
Technology A’
t
Figure 9
Schematic Illustration of an Organization’s Response to Disruption
What is of interest here is the question of how to assess the resource efforts required in
response to discontinuous change. As outlined earlier, the discontinuity of a
technology does not necessarily happen solely because of the appearance of a radically
new technology; (disruptive) technologies that make use of existing technologies but
are offered in a different marketplace, at least initially, likewise render prevailing
technologies obsolete. In response to discontinuous change, organizations therefore
have to define in a more nuanced way the newly required resources and capabilities.
Nevertheless, in the literature stream on discontinuous change there has been less
attention directed to the specific resource requirements. Scholars tend to oscillate
between the two extremes of radical or incremental, competence-destroying or
competence-enhancing. Moreover, often the research focus has remained narrowed on
the technological aspect, ignoring the fact that changes in technologies may require
additional competence in functional areas other than research and development, such
as marketing or business modelling in general. In the following, therefore, I link
BACKGROUND
23
theories of discontinuous change with findings of the resource-based view (Kogut &
Zander, 1992), in particular one of its extensions, the knowledge-based view (Conner
& Prahalad, 1996; Foss, 1996; Grant, 1996; Nonaka & Takeuchi, 1995), which
recently offered a more fine-grained view of an organization’s effort to leverage its
existing resources in accordance with different innovation efforts (Dess et al., 2003;
Kazanjian et al., 2002).
Tushman and Anderson (1986) suggested portraying technological changes from the
perspective of their impact on competences, “because they either destroy or enhance
the competence of existing firms in an industry” (p. 442). In particular, by drawing on
Abernathy and Clark’s (1985) research findings they note: “The former require new
skills, abilities, and knowledge in both the development and production of the product.
The hallmark of competence-destroying discontinuities is that mastery of the new
technology fundamentally alters the set of relevant competences within a product
class” (p. 442; italics added). Limited to the technological side of the product, this
classification is partially misleading in the face of discontinuous change. Clark’s
(1987) observation on Xerox’s experience in response to the emergence of tabletop
copiers and Christensen’s (1992a, b) research into the technological evolution of disk
drives are cases in point. In the mid-1970s, a number of Japanese companies used the
copier technology that Xerox had invented to commercialize small, reliable, and cheap
tabletop copiers. The development and “production” of these new tabletop copiers
required little new knowledge, but massively threatened Xerox’s product class (Clark,
1987).
Christensen’s (1992b) observation of the continuous replacement of the former rigid
disk-drive technology with the next smaller version – from 14-inch to 8-inch disk
size, etc. – is even more illuminating, because it truly initiated a discontinuous change.
The ongoing substitution by one technology after another did not happen because of
the deployment of a new technology, but rather because of its deployment in a
different market, at least in their nascent periods (Christensen, 1992b). Both examples
of discontinuous change reveal that a classification of the “new” technology as
competence-destroying becomes misleading, simply because technical competences
remained the same for the most part, while marketing competences were destroyed.
Xerox and rigid disk-drive manufacturers failed first and foremost in the marketplace.
24
Henderson and Clark (1990) offer a model of categorization to address different types
of changes and their impact on established capabilities of an organization. As
discussed earlier, they differentiate between changes at the system level of products –
that is, the architecture of the linkages between various components – and changes in
the components themselves. While an architectural change of a product leaves the
components and the associated technologies (and thus engineering knowledge)
unchanged, a change on the level of components is meant to accompany a new
technology. Nevertheless, a change in component does not automatically require
redesigning the whole product architecture. Radical innovations change both
architecture and component, whereas incremental innovations, according to Henderson
and Clark, are concerned with the improvement of components. Their classification
provided a useful framework to show that disruptive technologies for the most part are
architectural in nature (Christensen, 1992b), and that organizations that aim to
compete in new markets tend to be more successful with an architectural innovation
than those that innovate in components. However, their framework too is of limited
help for organizations in their effort to assess resource requirements in the face of
discontinuous change, because of its pure focus on technological competences. With
reference to the previous two cases, I will clarify the point.
Both the tabletop copier and the rigid disk-drive manufacturer disrupted prevailing
technologies because these were architectural innovations, which, as a consequence,
led to their application in a different market. In other words, the architectural
reconfiguration of existing technologies led to a redefinition of the product’s
functionality (and thus performance). New competence was required first and foremost
in bringing the technology to a new market (Christensen, 1992b). Thus, two products
that ostensibly rely on the same component technology led to different competence
requirements [see Figure 10]. Henderson and Clark’s framework, however, does not
bring to bear this fact.
Another case of (disruptive) technology that relies on existing components
(architectural innovation) and redefines the technology’s performance (market
innovation) was the invention of the disposable or single-use cameras in late-1980.
Changed
Radical
Reinforced
SYSTEM OF COMPONENTS
New
25
Architectural
Incremental
Modular
Reinforced
Changed
Marketing
COMPETENCE DEVELOPMENT
BACKGROUND
TECHNOLOGY IN COMPONENT
Current
New
Technology
Figure 10
Competence Requirement and Type of Technological Change
The “film with a lens,” as Fuji called it, basically relied on existing components (and
thus engineering competences). In fact, the idea of a single-use camera was not
entirely new. Almost a hundred years earlier, George Eastman built his Kodak
company around a similar business model. What was new was the products’ market
application. Low cost and inferior in performance compared to 35 mm film and
photography equipment, it had all the characteristics of a disruptive technology, which
would sooner or later lead to discontinuous change in the superior technology. In fact,
to some extent it replaced the conventional film roll market. In the mid-1990s, it was
the fastest-growing product in the film market, with growth rates of 40 percent.1 Sales
of 35mm film rolls actually stalled, while growth in the total photographic film and
paper market continued, increasing 3 to 4 percent, while processing remained flat.2
The point that is of interest here is that Kodak (as opposed to other competitors) did
1
Nully, P., & Rao, R. 1995. Digital Imaging Had Better Boom before Kodak Film Busts. Fortune, 131(8) 8083.
2
Blömer, H. J. 1996a. 1994/1995 Pma Industry Trends Reports. International Contact, 15(3) May June.
26
not require new competences, neither in technology nor in marketing, to compete with
this innovation. Kodak had extensive experience in marketing low-end consumer
photography products and had access to the required distribution channels on a global
Changed
Reinforced
SYSTEM OF COMPONENTS
scale [see Figure 11]. Today, it is the only type of cameras that Kodak still sells.
Architectural
Radical
Single-use
Camera
Incremental
Modular
Reinforced
Changed
New
Marketing
TECHNOLOGY IN COMPONENT
e.g., 3M,
*
KODAK
Current
New
Technology
* an exception to the general rule
Figure 11
Competence Requirements Kodak Funsaver
Building on these arguments and examples, it becomes evident that technical
competences are closely interrelated with other functional competences such as
marketing, and that their interplay has an important role in an organization’s response
to discontinuous change. The effort to respond to discontinuous change therefore
certainly must be accompanied by a vision about the business the new technology
entails. That is to say, aside from reflections on the particular technological and
functional characteristics a new product or service process should possess, a vision for
BACKGROUND
27
an organizational response to discontinuous change must comprise thoughts about the
markets to be pursued and the resources and capabilities to be deployed. The literature
on corporate entrepreneurship (Ireland, Covin, & Kuratko, 2009; Morris, Kuratko, &
Covin, 2002; Phan, Wright, Ucbasaran, & Tan, 2009; Schindehutte, Morris, &
Kuratko, 2000; Zahra, Kuratko, & Jennings, 1999a, b) and business modelling
(Chesbrough, 2013; Chesbrough & Rosenbloom, 2002; Johnson, Christensen, &
Kagermann, 2008; Magretta, 2002) has extensively addressed this issue. Each of these
attributes of the new business represents potential requirements to develop resources
and capabilities that go beyond those currently existing in the organization. I therefore
propose to assess the resources an organization requires in order to respond to
discontinuous change, relative to its current base of resources and capabilities.
Unlike the industrial organization perspective, which asserts that the market and
industry structure determine an organization’s performance (Porter, 1979; Porter,
1991), the Resource-Based View holds that a unique combination of resources and
their deployment shapes an organization’s performance and competitiveness (Barney,
1986; Wernerfelt, 1984). There are tangible resources (e.g., physical assets such as
machinery and equipment, as well as liquid resources such as cash or cash
equivalents), intangible resources (e.g., an organization’s brand, trade secrets, or
reputation), and human resources (e.g., knowledge, experience, or skills of managers
or employees) (Grant, 2002). Capabilities refer to the skillful combination of resources
to generate value (Amit & Schoemaker, 1993; Winter, 2000). Dynamic capabilities
enable organizations to build, extend, or integrate new capabilities (Teece et al., 1997).
Recent attention to a company’s knowledge base has led to extensions of the
Resource-Based View (Nonaka, 1991; Nonaka & Takeuchi, 1995), asserting that
organizations are capable of leveraging their knowledge to build a competitive
advantage (Conner & Prahalad, 1996; Foss, 1996; Grant, 1996). A core assumption
underlying this perspective is that organizations exploit the knowledge they have
created in the course of entrepreneurial actions (March, 1991; Nonaka, 1994).
Given the question I am concerned with here – namely how to assess the extent to
which an organization has to either leverage or extend its current resource base or
integrate completely new ones in response to discontinuous change – current findings
from the knowledge-based view offer valuable insights. Building on Collis and
28
Montgomery (1998), who suggested that resources and not businesses are the
appropriate measure to define relatedness in an organization’s effort to diversify,
Kazanjian, Drazin, and Glynn (2002) offered an integrative model that defines
knowledge requirements for entrepreneurial activities with some degree of relatedness
to a current stock of knowledge (see also, e.g., Dess et al., 2003). In particular, they
suggest that an organization that aims at developing and commercializing a new
product necessarily has to adjust its knowledge base. To give an example, if the
additional knowledge needed to develop and commercialize a new product is closely
related to the organization’s current base, small or incremental changes in the stock of
knowledge
become
necessary.
Alternatively,
if
the
development
and
commercialization of a new product are largely dependent on the integration of new
knowledge, then the effort in learning or acquiring new knowledge is more radical
New
Marketing
(relative to the organization’s current knowledge base).
Import
PRODUCT-LINE
EXTENSION:
NEW PLATFORM
DEVELOPMENT
NEW BUSINESS
DEVELOPMENT
Leveraging
existing
knowledge
Recombining
& extending
existing
knowledge
Importing
new
knowledge
Recombine
Leverage
Current
New
Technology
Figure 12
Knowledge Management and Strategies for Corporate Entrepreneurship
Source: Adapted from Kazanjian, Drazin, and Glynn (2002)
BACKGROUND
29
Kazanjian, Drazin, and Glynn (2002) portray three major corporate entrepreneurship
strategies and associate them with the required types of knowledge development. In
the following, I briefly introduce their contingency approach, to show how it could be
transferred to the literature stream of discontinuous change. Kazanjian, Drazin, and
Glynn (2002) basically differentiate between “product line extensions, new product
platforms, and new business creation” and the knowledge requirement related to either
technology or marketing [see Figure 12]. Although they stress that the model could be
extended by more than these two dimensions, I find this limitation (for the sake of
parsimony) constructive in regard to a later discussion of resource requirements in a
response to discontinuous change. At any event, discontinuous change embraces a
change in resources related to either technology or marketing – as evident in the
particular case of disruptive technologies – or both.
The photography industry in general and Kodak in particular provide examples to
explain the three strategies for entrepreneurial activities. The first strategy, according
to Kazanjian, Drazin, and Glynn (2002), is product line extension. An organization
introduces a variation of a product that requires little development of new knowledge
in regard to the technology or targeted markets. For example, the launch of the
disposable camera, a “film with a lens,” was critical for Kodak and Fuji in the 1990s,
when 35mm film photography was flagging. Both companies enjoyed the advantage
that they could quickly leverage their existing knowledge for developing and
launching the new product.
The second strategy is a new product platform, which is pursued when organizations
aim to compete with a current technology in a new customer segment and/or
commercialize newly developed technologies in markets they currently service. In this
strategy, an organization is either developing some new technology to be taken to its
existing market, or is targeting a new market with technologies the organization
currently owns. Kodak’s hybrid PhotoCD system is a case in point. The new system
targeted existing customers allowing them to electronically store and view their
pictures, which they had captured on conventional, silver-halide film, on a regular TV
set. Because the product aimed at Kodak’s most important existing consumer market,
new knowledge was primarily required on the technical side. To create the advanced
technology for scanning silver-halide-based films, correcting electronic images, and
30
incorporating the compact disc technology from Philips, Kodak redeployed existing
technologies and developed new ones. Because of the flop in the consumer market –
the PhotoCD system was too expensive – Kodak was forced to develop additional
knowledge also in the marketing domain to position the product in a new niche within
their commercial market. The central task for Kodak’s knowledge development was to
recombine and extend a current stock of knowledge.
Finally, an organization may decide to develop an entirely new business by bringing a
new technology to a market that the organization did not serve previously. For
instance, the commercialization of digital cameras in the 1990s required Kodak to
import new knowledge both for developing the technology and for marketing. The
company had to build and acquire engineering and manufacturing skills to fabricate
electronic devices, which were completely unrelated to its current stock of chemicalbased competences. Opportunities to leverage existing competences were few. For
instance, in the early 1970s Kodak stopped manufacturing 35mm single reflex
cameras. In an effort to bring digital image capturing to professional cameras, Kodak
had to rely on cooperation with Canon and Nikon. Both Japanese companies
maintained a respected knowledge base for manufacturing camera lenses and bodies.
By the same token, Kodak was required to learn (and thus to develop new
competences) to bring their digital cameras to market. Initially, models had been
extremely expensive, up to $20,000, and their performance was poor in terms of image
resolution. Hence this new technology allowed Kodak to target only a small
photography market to which it was more or less foreign. In particular, it joined with
the Associated Press to gain direct access to journalists who were required to quickly
integrate low-resolution images in document processing.
A conflation of Kazanjian, Drazin, and Glynn’s (2002) contingency model with
Henderson and Clark’s (1990) product-innovation framework shows that knowledge
management in response to discontinuous change can vary extensively [see Figure 11].
For instance, in an organization facing discontinuous change, the emergence of a
disruptive innovation does not necessarily result in complete competence-destruction
(Tushman & Anderson, 1986), or, to formulate it in the terms of Kazanjian, Drazin,
and Glynn’s (2002) knowledge-based view, does not necessarily lead to a need to
import new knowledge. Henderson and Clark (1990) referred to the example of large
BACKGROUND
31
ceiling-mounted fans to explain various types of technological change – incremental,
radical, architectural, and modular. Their focus relied exclusively on capabilities
related to product development. I will extend their example to show that despite
different types of technological changes, the development (technology) and
commercialization (marketing) of a product can lead to similar knowledge
management tasks.
In an organization that manufactured large ceiling-mounted fans, the upgrade from a
spring recoiled hose reel to an electric motor drive certainly sustained the dominant
design of the product class, but it meant discontinuous change of the particular
technology at stake (except for purposes of nostalgia). Limited in performance, the
spring recoiled hose reel sooner or later had to give way to electronics. However, this
change didn’t rendered businesses of ceiling-mounted fans obsolete (and thus its
associated competences), because the modular alteration barely had any impact on the
existing customer base. According to Landes’ (1984) and Glasmeier’s (1991), who
investigated the challenges Swiss watch-manufactures encountered in their effort to
adapt to electronics, we might suppose that such a modular change from mechanics to
electronics required the recombination and extension of current knowledge (e.g., the
design of the blades, etc., vs. the newly required knowledge of engineering
electronics).
Viewed from a knowledge-based perspective, the development of a portable fan leads
to a similar knowledge management task. Despite its little demand for new knowledge,
it has the potential to disrupt the business of ceiling-mounted fans: Architecturally
constructed according to a different system (e.g., legs instead of a ceiling suspension,
smaller size), but engineered on the basis of components similar to those found in the
large ceiling-mounted fans, the knowledge requirements are less than in the case of
modular change (Henderson & Clark, 1990). In fact, the construction of a portable fan
promises the virtues of leveraging current technological knowledge. However, as
Christensen (1992a) showed, architectural innovations typically bring about different
performance characteristics and thus need to be positioned in a different market, thus
requiring new marketing knowledge. According to Kazanjian, Drazin, and Glynn
(2002), this then would result in the recombination and extension of existing
knowledge, similar to modular changes. However, by contrast with modular changes,
32
this type of innovation embodies the potential to disrupt businesses of the prevailing
product class, while temporarily sustaining current knowledge of deployed technology.
Finally, the radical innovation of a central heating system certainly required
manufacturers of fans to integrate completely new knowledge in both technology and
marketing. Radical innovation, according to Henderson and Clark (1990), embraces a
change in the product’s system architecture of linked components, as well as of the
components themselves.
Relatedness
Additional
Resources and
Capabilities
Competence Set
Discontinued
Technology
Competence Set
New/ Disruptive
Technology
Figure 13
Resource Development in Response to Discontinuous Change
To summarize, discontinuous change leads to different knowledge management
requirements relative to the knowledge base an organization currently maintains, and
depending on the type of change. Building on the notion that knowledge is a particular
form of resource and that other intangible, tangible, or human resources are likewise
leveraged, extended, or imported in an effort to develop new products or processes, I
propose to generally speak of relatedness of resource requirements (rather than
knowledge requirements) for an organization, in an effort to respond to discontinuous
change [see Figure 13]. Unlike categorizations that either focus on two extremes, such
as competence-destroying/competence-enhancing, or radical/incremental, this finegrained model illuminates the particular management task associated with resource
BACKGROUND
33
development. Given my interest in the moderating effects of resources and capabilities
on an organization’s response to discontinuous change, the relatedness of current
resources to a target domain embodies a crucial variable in adaptation. It defines how
much an organization has to leverage or stretch its existing resources, or develop new
ones.
The use of this contingency model reveals another virtue. It correlates with recent
models of strategic renewal and effects on management roles (Dess et al., 2003). In
synthesizing the strategic roles of managers, Floyd and Lane (2000) proposed three
primary approaches to renew an organization’s strategy: “competence deployment,
modification, and definition.” Competence deployment refers to the process in which
managers either reinforce current product markets or deploy existing resources to
compete in new markets: “Change is based on an established strategic principle and is
guided by an accepted definition of strategic ends and means” (Floyd & Lane, 2000);
that is to say, competences to be deployed must have already established a particular
set of assumptions about conditions. That said, competence deployment first and
foremost leverages existing resources.
Competence definition is the process that maintains the activity, as opposed to
deployment. The organization encourages “experimentation with new skills and
exploration of new market opportunities” (Floyd & Lane, 2000). Both the definition of
strategy as well as deployed competences with which the organization competes is
going to be changed. This sub-process conforms to Burgelman’s (1983b, c) description
of “autonomous” strategic behavior. Building on Kazanjian, Drazin, and Glynn’s
(2002) contingent model, this process entails the development or acquisition (and
internalization) of new knowledge on the basis of an emergent strategic intent, which
is at the core of this process.
Finally, competence modification recognizes the need for change. Situated between
the two other sub-processes, it questions an organization’s existing strategy and
motivates adaptive behavior (Huff, Huff, & Thomas, 1992). Hence it acknowledges a
current stock of competences, but questions the extent of modification or stretch
required to achieve strategic fit with an altered external environment. The
reconfiguration and expansion of current competences present new opportunities to
compete.
34
To conclude, the threefold categorization framework of resource relatedness –
leverage, recombine and extend, or import – allows a more fine-grained assessment of
the recourses an organization requires in its move to a new domain, in response to
discontinuous change. The extension from the Knowledge-Based View to a broader
perspective of the relatedness of required resources and capabilities, or competences as
an organization’s unique resources, capabilities, and routines, conforms to three subprocesses in strategic renewal.
2.3.1 Measuring Resource Relatedness
The fine-grained contingency model proposed by Kazanjian et al. (2002) has an
informative value for organizations pursuing a new strategy, for instance, in response
to discontinuous change. The new business opportunity an organization opts to pursue
is defined by the degree of relatedness between an existing stock of resources (or
knowledge base) and a targeted one. Depending on whether the organization
leverages, recombines and extends, or imports resources, different resource
management and implementation strategies are required. Nevertheless, Kazanjian et al.
(2002) are not explicit about how to measure relatedness, an issue that has gained
extensive attention in the diversification literature with respect to financial
performance. In fact, they note that in their framework, the “degree of relatedness is
defined relative to a firm’s extant knowledge bases rather than as a business-level
construct” (p. 175), as Rumelt (1974) among others did. That is to say, in their model,
resource requirements are defined by the relatedness of the strategy to existing firm
resources, but issues of available resources, such as the surplus of cash available in the
short run to fund development or acquisition of new resources, are not addressed. In
the context of the discussion here, however, this matter is of importance for two
reasons:
First, resources are difficult and costly to develop. Scholars have shown that precisely
for this reason, organizations tend to adjust to those technologies that deploy current
stocks of resources and capabilities (Helfat, 1997; Teece, 1986). Nevertheless, in the
particular case of discontinuous change, when technologies are altered such that the
way things are currently done or have been done previously is no longer of value
(Sahal, 1981), organizations need to change their stock of resources and capabilities.
In such a circumstance, it makes no sense to try to leverage existing resources. Rather,
BACKGROUND
35
organizations are required to at least recombine and extend, if not import, new
resources. The question is then at what cost. Given that organizations facing
discontinuous change are likely to face resource constraints due to a performance
decline in the traditional business – as will be shown in detail in chapter 3 – issues of
available (uncommitted or financial) resources become relevant.
Second, an organization’s response to discontinuous change resembles efforts towards
diversification with respect to achieving superior performance by operating multiple
businesses. Although this issue will be given more attention in the following chapter,
here is it is sufficient to note that under conditions of discontinuous change,
organizations are challenged by the dilemma that they cannot simply transform their
current business from one state to another, but are required to develop and orchestrate
multiple businesses simultaneously. Operating multiple (or at least two) businesses
then poses the question of how to exploit any synergies between the businesses in
order to achieve a cost or differentiation advantage over rivals – rivals that might even
operate as non-diversifiers that do not have a parent that incurs additional costs
(Goold, Campbell, & Alexander, 1994). As Hill, Hitt, and Hoskisson (1992) explained,
“resource sharing and skill transfers enable the diversified firm either to reduce overall
operating costs in one or more of its divisions, and/or to better differentiate the
products of one or more of its divisions (thus enabling a higher price to be charged)”
(Hill et al., 1992, p.502). This accomplishment usually requires that the organization
identify resources required in generating value in each of the businesses and maintain
structures and processes enabling them to be used in the others (Hill, 1988; Hill &
Hoskisson, 1987). Therefore, achieving superior performance in operating multiple
businesses depends on leveraging existing resources rather than extending them or
even importing new ones. For this reason, this elaboration on relatedness should, to be
comprehensive, include a brief review of the literature on measuring relatedness
between businesses.
Traditionally, scholars have measured the relatedness between businesses to identify
economies of scope in two basic ways (Montgomery, 1982): On the one hand, an
organization’s diversity was measured according to how much two (or more)
businesses relied on the same SIC (Standard Industrial Classification) code (Caves &
Porter, 1980; Jacquemin & Berry, 1979). This measurement procedure rested upon the
36
assumption that businesses relying on the same industry code likely share similarities
in input requirements or technology function in production. Rumelt (1974, 1984), on
the other hand, proposed a mere subjective measure to categorize the extent to which
two (or more) businesses are related to each other. Businesses are related, he proposed,
“when a common skill, resource, market, or purpose applies to each” Rumelt (1974).
In identifying the shortcomings of the different degrees of breadth the SIC code shows
and by holding onto a single variable that reflects the degree of diversity, he proposed
to measure the relatedness of businesses by using a set of seven categories of
diversification strategy. In particular, he proposed to measure the relatedness of one
business to another by how much a business shared similarities with the dominant
business on the corporate or operational level.
Both approaches, however, revealed limitations: For instance, researchers have argued
that neither measure takes into account whether the resources being shared could be
obtained at an equivalent or even lower cost for organizations that do not diversify
(Barney, 1986; Montgomery & Hariharan, 1991). More recently, Markides and
Charitou (2004) showed that diversification enhances performance only when it allows
businesses to share strategic resources. Barney (1991) defined strategic resources (or
assets) as being valuable and rare for competitors to assess, imperfectly tradable, and
costly to imitate. The measurement of relatedness, following Markides and Williamson
(1996), then should be based on the opportunities for sharing such strategic resources
between two businesses. Certainly such a measure takes into account the
organizational structure enabling strategic relatedness. Only by finding ways to allow
multiple (or at least two) businesses to exploit strategic resources in a value-generating
manner, Markides and Williamson argue, will diversifying organizations be able to
maintain superior financial performance over the long run.
There is no reason for going more into detail here. The important point I want to make
is that an organization that diversifies – or, to be more precise, that simultaneously
operates two or more businesses in response to discontinuous change – can achieve
superior performance only when it manages to allow its businesses to capitalize on
existing strategic resources. If this is not possible, for instance, in the case of radical
technological changes, stretching existing or importing new resources is not just costly
and difficult, but presupposes, first, that the organization has the required levels of
BACKGROUND
37
available or unabsorbed financial resources to do so, and, second, that despite the costs
a corporate parent incurs, the organization achieves a cost or differentiation advantage
(or both) over (non-diversified) rivals.
As will be shown in the particular discussion of the Kodak case, the company’s
strategic decision to engage in digital imaging and to pursue electronics-oriented
businesses rather than chemical-based engineering as in traditional film and paper
production, required financial resources that Kodak was hard-pressed to provide in the
face of a declining core business due to digital substitution. Moreover, it will be shown
that Kodak barely managed to maintain a cost or differentiation advantage over rivals,
despite the fact that it had acquired core resources required to compete in the digital
domain. A corporate overhead well beyond the standard in electronics industries
rendered superior performance difficult.
3 THEORY
Discontinuous change differs from evolutionary change in that it represent an advance
so significant that it drastically alters the way things are currently done or have been
done previously (Sahal, 1981). Such discontinuities offer performance improvements
over traditional technologies. Neither an increase in efficiency nor a new design can
render the old technology superior to the new one (Tushman & Anderson, 1986).
Thus, changes in an organization’s stock of resources and the way it is deployed
become necessary. In this section, I am concerned with the question of how stocks of
resources and their deployment moderate an organization’s response to discontinuous
change. In particular I am interested to examine how the level of committed resources
determines the alteration of a once selected and retained resource allocation process
(and thus an organization’s response to change). For this very reason, it is appropriate
to first distinguish between “committed” and “uncommitted” resources, and second, to
show how a new technology potentially erodes an organization’s resource base by
getting a foothold in the market of the traditional business.
3.1 Discontinuous Change and Organizational Decline
Drawing on the literature of slack resources , I use the term “committed resources” as
equivalent to “absorbed” slack (Smith, Grimm, Gannon, & Chen, 1991), “low
discretion slack” (Sharfman, Wolf, Chase, & Tansik, 1988), or “recoverable” slack
(Cheng & Kesner, 1997); for instance, manufacturing, selling, and general expenses.
Mone et al. (1998) argued that these resources are entrenched with a particular
business and there therefore cannot be freed quickly. “Uncommitted resources,” by
contrast, refer to the opposite end of the continuum. Like cash or cash equivalents
(e.g., marketable securities), these resources are available, unabsorbed, and thus equal
to high discretion slack (Smith et al., 1991).
Many scholars have shown how uncommitted resources enable organizations to
explore new business opportunities and to take risks (Bourgeois, 1981; Cyert &
March, 1963; Mone et al., 1998; Singh, 1986) or how it enables managers to engage in
actions directed towards joint ventures or acquisitions (Barker III & Duhaime, 1997).
Drawing on this line of argument, I propose that the availability of uncommitted
resources potentially facilitates adaptation to any kind of change.
40
Discontinuous Change and Organizational Decline
Transformation of business A (adaptation)
Firm
A
Transformation of old business A (discontinued)
Development of new business A’ (in parallel)
A’’
A’’
A
Firm
A’
t
A’
t
Figure 14
Adaptation to Evolutionary and Discontinuous Change
Adaptation to discontinuous change poses a particular dilemma: As soon as a
substituting technology gains a foothold in the traditional market, it begins to replace
the traditional business. In this sense it affects the performance of the organization’s
traditional business. This may lead to reductions in market share (Christensen &
Rosenbloom, 1995; Foster, 1986; Willard & Cooper, 1985), destruction of
competences (Tushman & Anderson, 1986), financial losses, and/or substantially
reduced product sales (Christensen, 1997; Klein, 1984; Solow, 1957). As a
consequence, organizations challenged by discontinuous change may become
substantially, materially affected and may suffer consequences such as negative net
cash flow, or, in the worst case, the death of the organization (Meyer, 1988).
Paradoxically, in the face of discontinuous change the objective is not to change from
one state to another in a sequential manner (as may be appropriate in environments
with minor changes), but rather to reconfigure and orchestrate multiple competences
simultaneously (Christensen & Raynor, 2003; Christensen et al., 1998; Gilbert, 2005;
Masini et al., 2004; Siggelkow & Levinthal, 2003; Siggelkow & Rivkin, 2006) [see
Figure 14]. In such a setting, a new context emerges that requires organizations to
allocate resources to the development of a different competency configuration, while
retaining a resource commitment to existing competences. (In the previous chapter I
elaborated on the issue that the rate of substitution dependents on multiple “diffusion”
factors and that an old technology not necessarily becomes obsolete immediately.)
THEORY
41
In addition, whereas traditional views on organizational change required a measurable
evidence of a decline in the performance to motivate a change in resource
commitments (Cyert & March, 1963; Levitt & March, 1988), for instance, to invest in
new technologies to meet the demand of new customer markets, under conditions of
discontinuous change, no immediate impact on performance occurs – precisely
because the competence configuration of the old business continues to fit the
traditional business environment (Christensen & Rosenbloom, 1995; Tushman &
Romanelli, 1985). Thus, an effective response to discontinuous change requires
managers to commit resources to multiple and even competing competencies at the
same time, while lacking an impetus to do so.
In order to show that discontinuous change threatens an organization’s adaptability by
potentially eroding the resource base an organization can draw upon to be adaptive, I
will link the literature on discontinuous change with that on organizational decline.
For scholars investigating discontinuous change, the issue of available resources is not
of prime concern, because the emergence of a potentially substituting technology does
not necessarily affect an organization’s performance immediately (Christensen et al.,
1998; Gilbert, 2005); unless the new technology gains a foothold in the traditional
environment, an organization’s existing capabilities might still retain a tight fit, and no
performance gap may be experienced. Thus organizational adaptation to new contexts
is not necessarily constrained, since the organization is not substantially or materially
impacted. However, the new technology can threaten an organization’s viability as
soon as it gets a foothold in the traditional environment [see Figure 15].
The literature on organizational decline portrays the effects of discontinuity from the
other end of technological substitution: Scholars in this field discussed organizations
and their potential to change and adapt at a time when they are already facing a
performance gap (Cameron, Whetten, & Kim, 1987; Cyert & March, 1963; Levitt &
March, 1988; McKinley, 1993). The change – whether it be derived from alterations in
the environment or from the organization itself – has already affected the
organization’s viability. In such a situation, the organization is substantially, materially
affected and may face multiple consequences, ranging from negative cash flows to
organizational decline.
42
Discontinuous Change and Organizational Decline
Theoretical Perspectives
Discontinuous
Org.
Change
Decline
p
Performance
Technology A
Technology Discontinued
Threat
Perception
Low-end performance A
demanded by customers
α
Point of
Disruption
Performance
Technology A’
tp
t
α Rate of technological
progress and substitution
tp Time of threat perception
and response
Uncommitted Resources Available
high*
low
c
Actual Cash Curve A
Ct Level of uncommitted
resources
Ct
t
*
Assuming that business
A achieved the cash
payback on initial
investment of money,
time, and people
Uncommitted Resources Required
Speed to
Market
Scale to
Volume
c
Problematic
Cash Curve A’
tp
Ideal Cash Curve A’
t0
t
t0 Time of breakeven
(cumulative cash reaches zero)
Figure 15
Relationship between Discontinuous Change and Organizational Decline
THEORY
43
Acknowledging a decreasing resource base, scholars of organizational decline raised
the question of how organizations are able to renew their businesses at times of
resource scarcity (Mone et al., 1998). Scholars of this literature stream suggested that a
decreasing resource base hampers the organization in its effort to engage in actions
that would either put it into a new strategic domain or decisively change the way it
serves existing customers or constituents. For instance, Barker and Duhaim (1997)
reported that companies having unabsorbed resources are more likely to be able to
make acquisitions or to introduce new offerings than companies that suffer from
having little or no unabsorbed resources. Moreover, scholars have found that actions
directed towards bottom-line efficiencies, cost cutting, or downsizing usually cannot
be easily converted into uncommitted resources in a way that pushes an organization
beyond its current strategy (Cascio, 1993; McKinley, Sanchez, & Schick, 1995;
Mishra & Spreitzer, 1998).
The timespan between threat perception – the recognition that a new technology may
potentially affect an existing business in the future – and the point of market disruption
then becomes a critical factor for organizations aiming to adapt to new conditions,
because the availability of uncommitted resources may become limited. In the
previous section on “Technological Change and Discontinuity,” I addressed the
difficulty of assessing the future development of a new technology, its trajectory,
particularly before the coalescence of a dominant design.
In the face of discontinuous change, two additional factors render the availability of
uncommitted resources problematic. First, and as outlined in the previous chapter too,
discontinuous change drastically alters the way things are currently done or have been
done for some time. For this very reason, it begins to threaten causal relationships in
the traditional environment. That is to say, discontinuous change alters existing
competences of an organization. The traditional competence configuration of the
organization, its skills and know-how, which have been built in a tight fit with the
traditional environment, suddenly become improper. Depending on resources required
to adapt to a targeted new business domain relative to the existing one, opportunities to
convert committed resources into uncommitted ones are limited. The current set of
competences to develop and commercialize a new technology might be too different
from that required in the new context. In other words, the organization cannot just
44
Discontinuous Change and the Resource Allocation Process
leverage its competences, but is required to reconfigure and extend or even import new
resources and capabilities. Particularly in the case that newly required competences are
entirely unrelated, resources are then available only to the extent that they refer to
uncommitted resources such as cash or cash equivalents.
Second, in times of discontinuous change, when basic causal relationships in the
environment have changed and the dominant design of a technology is still in flux, a
prior, well-learned response can become maladaptive and dysfunctional (Campbell,
1965; Weick, 1969). In such a situation, only a flexibly planned response has survival
value. In an iterative action-reaction process, organizations have to learn step-by-step
about the parameters of the newly emerging context over time (Alvarez & Barney,
2007; Chesbrough, 2003; Ries, 2011). Certainly, this process entails different timing
and resource allocation than a one-time response according to a prior, well-learned
rigid plan. The literature on organizational decline and crisis suggests that scarcity or
absence of uncommitted resources triggers counterproductive reactions, creating a
context that is more conducive to rigid behavior than a context in which resources are
available (Mone et al., 1998; Ross & Staw, 1993; Whyte, 1986).
The study of Kodak supports these findings, showing a strong interdependence among
the rate of technological substitution, the time of threat perception (and thus response),
and the availability of uncommitted resources an organization could use to be
adaptive. The tsunami-like speed of substitution of Kodak’s traditional silver-halide
photographic film and paper business by digital technologies, as well as the decision to
delay discontinuous change (and thus to continue to commit resources to traditional
technologies in order to generate investments necessary for developing and importing
resources related to digital imaging), quickly eroded the resource base that the
company could have fallen back on in its effort to respond.
3.2 Discontinuous Change and the Resource Allocation Process
The drivers of innovative activity (and hence technological change) have been well
researched (Dosi, 1982, 1988a, b; Foster, 1986; Nelson & Winter, 1977; Sahal, 1981).
Scholars have identified two main and distinctive sources for change: on the one hand,
internal forces, which stem from autonomous entrepreneurial activities starting at the
operating and middle level of organizations. Burgelman (1983a, c, 1991) and Floyd
THEORY
45
(1999) enriched this literature stream by directing attention to the influence of
managers at the middle level who substantially shape resource allocations (and thus
strategy) by deciding to support or withhold funds from other new ventures (Bower,
1986; Dess et al., 2003; Floyd & Lane, 2000). On the other hand, there are external
forces, which are directed by external stakeholders such as customers, investors
(Cooper & Schendel, 1976; Foster, 1986; Mowery & Rosenberg, 1979; Pfeffer &
Salancik, 1978), users, suppliers, and partners (Chesbrough, 2003; Von Hippel, 1988).
Recent research on discontinuous change has directed its focus on the impetus that
drives and reshapes internal investment patterns. For instance, Christensen and his
colleagues showed how an organization’s existing customers set can shape resource
allocations (Christensen & Bower, 1996; Danneels, 2003; Tripsas, 2008). Industry
leaders succeed in coming up with all those technologies that address current or
potentially future demands of customers. The very same organizations may fail in new
markets, because of a lack of impetus to invest in ventures for which no customer yet
exists. Gilbert’s (2006) study explains how a structural differential to enact different
behaviors simultaneously, as well as senior-team frame integration to embrace
diversity of competing cognitive frames across sub-units, have been identified as
successful mechanisms to actively intervene in an organization’s investment pattern
(and thus to develop a strategic response to discontinuous change). Sull’s (1999, 2005)
research on Firestone’s response to new tire technologies directed attention to top
management’s capability to actively reverse a bottom-up process of a vertically
integrated manufacturing company in the face of disruptive changes in existing
markets, and Eisenman and his colleagues (2002; 2000) bring new insight by
investigating the top-down strategic decision making in media firms.
Many of these new findings resulted from the combination of different theoretical
perspectives that led to the discovery of anomalies that spurred further theoretical
development (Gilbert & Christensen, 2005). For instance, Christensen (1992a, b)
showed how theories of modular, architectural, or radical change could not explain
incumbent firm failure by linking resource allocation process theory with the theory of
resource dependence (Pfeffer & Salancik, 1978). Gilbert (2005, 2006) integrated
prospect theory (Kahneman & Tversky, 1979) and the organizational behavior
perspective under conditions of threat (Staw et al., 1981) to show how to actively
46
intervene in and reshape a retained investment pattern. Eisenman (2002) combines
agency theory (Fama, 1980) with transaction cost theory (Williamson, 1975) to
question the predictability of an organization’s response to risk in diversified
companies. The research on Kodak too suggests a synergetic combination, with a
different theoretical lens.
While the many findings in evolutionary theory contribute much to our understanding
of the resource allocation process, by directing a focus toward the competitive forces
shaping and redirecting an internal resource allocation process, the moderating effect
of stocks of resources and their strategic deployment has received less attention. In the
following section I therefore explore this issue by linking the Resource Allocation
Process and the Resource-Based View, which are two comparatively close
perspectives.
3.2.1 Linking the Resource Allocation Process with the Resource-Based View
Organizations are faced with numerous obstacles when they attempt to adapt to
environmental changes: Existing routines and capabilities (Benner & Tushman, 2002;
Cohen & Bacdayan, 1994; Leonard‐Barton, 1992), resource commitments
(Christensen, 1997; Christensen & Bower, 1996; Danneels, 2003; Pfeffer & Salancik,
1978), and cognitive frames (Baron et al., 1999; Staw et al., 1981; Tripsas, 2009;
Tripsas & Gavetti, 2000) constrain the organization to the extent that the very same
features that initially helped it to successfully compete in a particular environment
become inertial forces, limiting its ability to adapt appropriately and leading to poor
performance (Benner & Tushman, 2003; Henderson & Clark, 1990; Kaplan, 2008;
Tushman & Anderson, 1986).
In an effort to understand the variables that moderate an organization’s response to
environmental change, organizational theorists have referred to evolutionary theory,
adopting a variation-selection-retention perspective to explain an organization’s
evolution (Aldrich, 1979; Campbell, 1965; Weick, 1969). The evolutionary
perspective invites the application of various theoretical lenses. As this study
introduces a grounded theory of the impact of committed strategic resources and
capabilities in the face of discontinuous change, I propose to combine the Resources
Allocation Process model with the Resource-Based View, in which patterns of
THEORY
47
resource accumulation are regarded as the source for competitive success and
organizational performance (Penrose, 1959; Wernerfelt, 1984).
The combination of the RAP model and the RBV promises to improve our
understanding of inertial responses to major environmental changes for the following
reasons: Both theoretical lenses, the RAP model and the RBV, share an affinity to
evolutionary models (e.g., Barnett & Burgelman, 1996; Burgelman, 1991, 1994;
Helfat, 2000; Helfat & Peteraf, 2003; Lovas & Ghoshal, 2000). Likewise, both are
concerned with internal resources and capabilities; however, whereas RAP model
researchers direct their attention to the competitive forces for resources internal to the
organization, RBV scholars are focused on how internal resources shape external
competitive dynamics. Drawing on this distinction, the pattern of resource
commitments becomes an indicator of competitive success and performance of a
multi-business organization. I explore this linkage in the face of resource scarcity.
Scholars building on the Resource-Based View have shown that organization’s
continued success and growth is based on exploitation of distinctive resources and the
capability to build new ones (Teece et al., 1997; Wernerfelt, 1984). This holds true
particularly in the face of organizational change, as the literature on organizational
learning, knowledge accumulation, and capability development suggests (Helfat,
2000). The dynamic Resource-Based View directs attention to “dynamic capabilities”
to understand the role of leadership in adapting, building, and integrating existing and
new organizational competences to match the environmental change (Eisenhardt &
Martin, 2000; Helfat, 1997; O’Reilly III & Tushman, 2008; Teece, 2007; Teece et al.,
1997).
Researchers on organizational strategy in multi-business corporations have extensively
investigated the question of the optimal positioning of business segments to build
competitive advantage (e.g., see the work of Boston Consulting Group; Hax & Majluf,
1996; Henderson, 1979). Acknowledging that internal resources determine external
competitive processes and outcomes, the pattern of resource commitments to various
business units indicates competitive success and organizational performance. For
organizations engaged in various businesses this means to invest available resources
strategically (Henderson, 1979). Viewed through an RAP lens, every business unit,
each trying to gain a competitive advantage and significant market share due to
48
experience effects, will compete for available resources. However, managers running
multi-business organizations are confronted with the problem that resources needed to
capture dominant market shares are probably not available for all the company’s
businesses. Fruhan (1972) makes a compelling case for this problem by discussing
General Electric’s dilemma of not being able to afford its profitable computer business
in the face of IBM’s formidable cash flows. GE would have had to reduce investment
commitments to other profitable and competitive businesses to successfully compete
against IBM. Hence, choices have to be made regarding investment commitments
based on prospective strategic conditions and available resources for the needs of each
business unit. Certainly, such choices can be made only by taking into account the
company’s viability in the portfolio of all its businesses (Schoeffler & Buzzell, 1974).
3.2.2 Modelling the RAP to Include Resources and Capabilities
Strategic management scholars have explored the questions of optimal investment
comprehensively. Less attention has been devoted to organizations removing resources
from an ongoing business operation. Managers from multi-business organizations may
have to consider the possibility of reducing productive capacity, such as by closing
factories or reducing work force, without divesting the business completely. While
there exists an extensive literature that gives us an elaborate understanding of
organizations exiting a business altogether – for instance, by divesting a business
within a larger portfolio (Burgelman, 1996; Hoskisson, Johnson, & Moesel, 1994;
Ross & Staw, 1993) – this study, in contrast, aims to explore how resource
commitments that cannot be quickly reversed moderate an internal resource allocation
process. I investigate this link in situations in which an organization is challenged by
discontinuous change, which threatens its resource base.
I therefore view the process of reversing a once selected and retained resource
allocation process from the perspective of the strategic process, which unfolds as an
intra-organizational evolutionary process (Burgelman, 1991; Lovas & Ghoshal, 2000).
Viewed from this perspective, the reduction of particular investments poses the
question of how organizations reverse once selected and retained business units.
Building upon the Burgelman-Bower intra-organizational resource allocation process,
I propose a model that builds upon previous findings but integrates resources and
capabilities as an additional moderating component [see Figure 16].
THEORY
49
ORGANIZATION
ENVIRONMENT
Resources/ Capabilities
Shamiyeh:
RAP & Resources/ Capabilities (RBV View) ↔
Strategic-Structural Context
Resource Allocation
Customers & Capital Providers
← Resource Dependence (Pfeffer/Salancik, 1978)
→ Customer Power (Christensen/Bower, 1996)
RAP (Bower, 1970; Burgelman, 1983) ↔
RAP & Cognitive Framing (Gilbert, 2006) ↔
Cognitive Framing
Figure 16
Elaborated Resource Allocation Process Model
An organization’s resource allocation process maintains the central component of the
framework: Burgelman (1983b, c) distinguishes between a behavior that falls within
the boundaries of an institutionalized strategy and one that emerges bottom-up from an
operational level, challenging the existing strategic context, to address the importance
of autonomous activities for change.
An organization’s strategic and structural context is the first variable that affects
internal resource allocations. Bower (1970) and Burgelman (1983c) showed that new
strategic initiatives – new product developments or processes changes – typically
originate at lower levels of an organization’s hierarchy. Although employees at the
operative levels usually are equipped with the experience and know-how to initiate
autonomous initiatives, middle managers maintain the critical role in shaping strategy,
to the extent that they decide which new initiative to support or withhold from others.
This view gets support by more recent work by Steven Floyd and his colleagues
(Floyd & Wooldridge, 2000; Wooldridge, Schmid, & Floyd, 2008) Bower also
observed that a manager’s risk behavior in deciding which new initiative to support is
closely linked to career management, because backing unsuccessful projects can have
severe consequences (see also, e.g., Dutton & Ashford, 1993). The following
discussion on Kodak’s resource allocation process will show that the company did not
50
suffer from a lack of new ideas or project developments. Rather, structures put in place
extensively fostered the emergence of new organizational initiatives – even to the
extent that CEOs claimed that there were too many of them, which, as a consequence,
blurred a clear focus.
The second variable concerns powerful customers and capital providers whom an
organization is dependent upon or chooses to serve, because they secure the means the
organization needs to survive. Resource dependence, as it was explored by Pfeffer and
Salancik (1978), essentially describes a perspective that looked outside the company to
explain internal investment patterns with respect to new initiatives. Scholars in this
research stream suggested that the strategic alternatives an organization can pursue are
usually constrained to the extent that customers and shareholders force managers
invest in those initiatives that secure survival. Other work supported this view (see,
e.g., Cooper & Schendel, 1976; Foster, 1986). Christensen, on the contrary, observed
that resource dependence can develop at a company’s own request. By linking the
research on resource dependence with Bower and Burgelman’s intra-organizational
variation-selection-retention process, Christensen showed that the impetus for change
in investment patterns (and thus innovation) can emerge from an internal and
uncoerced desire to address the needs of powerful customers (Christensen, 1997;
Christensen, 1992a, b; Christensen & Bower, 1996). This latter view does not really
describe Kodak’s behavior until recently, because the company always tended to
define standards in the consumer market, rather than to respond to customer needs. In
contrast, Capital Markets in general and Wall Street in particular maintained an
immense influential factor on the company’s decision making.
Cognitive frames are the third category of important variables that trigger a company’s
internal resource-allocation process. Schön and Rein define frames as the “underlying
structures of belief, perception, and appreciation” that filter an individual’s reflection
of a state of affairs (1995, p. 23). Scholars have shown that differences in cognitive
frames lead to multiple behavioral outcomes (Kahneman & Tversky, 1979; Staw et al.,
1981; Tripsas & Gavetti, 2000). Of particular interest here are Gilbert’s (2005, 2006)
findings on threat versus opportunity perception in relation to an intra-organizational
resource-allocation process: In drawing on the threat research in organizational
behavior (Dutton & Jackson, 1987; 1988; Staw et al., 1981), Gilbert showed that
THEORY
51
framing an external stimulus as a threat leads to deep organizational rigidity. Incidents
that bear the risk of a potential loss and cannot be controlled by the organization itself
motivate concentration on the current resource base and limit interest in exploring new
ventures (Jackson & Dutton, 1988). Hence, threat framing triggers a high resource
commitment, but one that is directed towards existing businesses (Gilbert, 2006).
Opportunity framing, on the contrary, can relax rigidities generated by threat, but does
not trigger the same level of resource commitment. Rather, by interpreting the event
positively, likely to provide benefits and in one’s control, it motivates a flexible course
of search activities. This research on Kodak supports the importance of cognitive
frames as an influential component of an organization’s internal resource allocation
process.
Resources and capabilities are the final variable that influences an intra-organizational
resource-allocation process. Resources are a company’s most elementary building
blocks, including tangible, intangible, and human assets (Grant, 2002). Companies
compete on the ground of their distinctive resource base and its deployment (Amit &
Schoemaker, 1993; Penrose, 1959; Teece et al., 1997; Wernerfelt, 1984). Here,
considering variables that affect a company’s resource allocation, two aspects are of
interest: first, the company’s current resources and their deployment in a particular
strategic business. It has been well shown by research that an organization’s
competitive advantage rests upon differences in resources and capabilities (Barney,
1991; Barney, 1995; Peteraf, 1993). Research has also shown – in particular the work
of the Boston Consulting Group – that because of experience effects, companies have
to invest strategically to achieve a leading position in the market (Hax & Majluf, 1996;
Henderson, 1979). Empirical research has confirmed a causal relationship between
relative market share and profitability (Fruhan Jr, 1972; Ghemawat, 2002; Schoeffler
& Buzzell, 1974). According to Bower , these findings have major implications for the
strategic allocation of resources, precisely because every business will compete for
available funds in its aim to build a competitive advantage. This leads to the second
aspect of interest here, the level of uncommitted resources to be used to fund new
ventures. As outlined earlier I prefer to use the terms “unabsorbed,” “available,” or
“high-discretion” slack as equivalent to “uncommitted resources” (Cheng & Kesner,
1997; Sharfman et al., 1988; Singh, 1986). Those resources are not entrenched in the
cost structure of a particular business and thus immediately available – for example,
52
Discontinuous Change and Variables Moderating Adaptation
the amount of cash or cash equivalents such as marketable securities – and therefore
do not represent a commitment that cannot be undone immediately, such as
manufacturing, selling, and administration. Hence, the level of uncommitted resources
sets limitations to a company’s resource-allocation process. As outlined earlier,
General Electrics, for instance, could not afford to compete in the computer business
because of IBM’s remarkable cash flow (Fruhan Jr, 1972).
3.3 Discontinuous Change and Variables Moderating Adaptation
The aim of this section is to briefly review the most important contributions to the
field of discontinuous change by scholars of the resource allocation process, to
summarize the research gap or problem that has been ignored in the literature so far,
and, finally, to synthesize variables that tend to moderate resource development of an
organization in its aim to respond to discontinuous change. Propositions and a general
model of the interaction between discontinuous change, organizational response, and
resource development are presented.
Burgelman’s (1983a) research on the strategic behavior of large and complex
organizations illuminated reasons that certain initiatives for driving technological
progress are either promoted or dismissed. In particular, he directed attention to an
organization’s “autonomous” behavior, which subverted existing strategies. His study
on Intel and its transition from memory chips to microprocessors was a case in point
(Burgelman, 1994). Burgelman’s findings enriched our understanding to the extent
that he identified behavioral patterns that inform an organization’s strategy aiming
either to develop a new technology or to remain with their current one [see Figure 17].
Pfeffer and Salancik (1978) and Christensen (1996) showed why organizations tend to
sustain selected and retained technologies, even in the face of emerging technologies
that potentially disrupt existing ones. Their approaches, however, drastically differed
from each other. Pfeffer and Salancik (1978) basically looked outside the company to
investigate forces that shape an organization’s investment pattern (and thus the sources
for technological progress). Dependency on external resources, such as capital
providers or powerful customers, was identified as a factor that constrains a manager’s
array of possible decisions in developing alternative businesses (or technologies).
THEORY
How organizations define a technological
trajectory to be pursued
53
Why organizations reinforce a technological
trajectory
p
p
t
t
Figure 18
Pfeffer/Salancik (1978) and
Christensen (1996)
Figure 17
Bower (1970) and
Burgelman’s (1983a)
How framing of a new technological
trajectory affects organizations
p
What are the challenges organizations faces
in adapting to new technological trajectory
p
t
Figure 19
Gilbert’s (2006)
t
Figure 20
Aim of this Research
54
Christensen (Christensen & Bower, 1996), on the contrary, located the causes of
continued reliance on current technologies inside the organization. He argued that
because organizations focus too closely on their customers and they become
blindsided to potential disruptive forces. The sustaining of a current technology, in any
case, is central to both perspectives [Figure 18].
Gilbert (2005, 2006) elaborated on the question of how to respond to an emerging
disruption once it is recognized. The primary concern of his studies was how cognitive
framing of potentially threatening new technologies moderates strategic behavior and
thus investment patterns. Gilbert reckoned that organizations are capable of
overcoming prevailing dependencies and identified the organizational structures and
cognitive frames that are required to promote resource commitments necessary to
adjust to new and potentially disruptive technologies [see Figure 19].
My research builds upon the findings of the authors mentioned above and aims to
illuminate the moderating effect of resources and capabilities in an organization’s
response to discontinuous change. In simple terms, here it is presumed that an
organization has recognized a potentially threatening new technology and decided to
respond to it. I am reluctant to speak about adaptation, though an organization may
decide not to adapt to a disruptive technology at all, but rather to direct its strategic
focus elsewhere. Agfa, for instance, decided to leave the photography market
altogether and to leverage its competences to pre-press or health-care IT solutions.
How resources and capabilities moderate an organizational response to discontinuous
change is synthesized in the following.
Once an organization comes to the realization that a retained technology is likely to
become discontinuous and that action must be taken for the organization to survive,
the level of committed and/or uncommitted resources becomes determining in its
response [see Figure 20]:
Other scholars have shown that organizations tend to adjust to those technologies that
deploy current stocks of resources and capabilities, because resources are difficult and
costly to develop (Christensen & Bower, 1996; Helfat, 1997; Teece, 1986; Tripsas,
1997). Because they are embedded in an organization’s cost structure, I consider, for
the sake of parsimony, these resources as committed. Kodak’s decision to install
publicly accessible print stations is a case in point. In the 1990s, the emergence of two
THEORY
55
technologies suggested the discontinuity of silver-halide photofinishing technology:
the cheap and low-quality ink-jet technology, which was available for consumers in
the form of home photo printers since 1997, and the costly but reliable thermal
printing technology, which was used in photo kiosks that allowed customers to add
text, graphics, and backgrounds to their photos. Throughout the 1990s, thermal dye
transfer printing provided significantly better photo image quality than ink jet. Kodak
decided to promote the latter technology, because the company could rely on an
extensive set of competences. It used thermal dye printing in its Creation Station,
which was introduced in the US in 1994 and even earlier in Australia. Adapting to inkjet technology would have required Kodak to acquire additional competences. That a
stock of resources and its deployment moderate an organization’s path of exploring
and exploiting a new technology is known, and is mentioned here only for the purpose
of completeness.
While committed resources moderate an organization’s choice regarding targeted
technologies, it is the level of uncommitted resources that moderates an organizational
respons as such. New technologies render existing sets of competences partially
obsolete (component or architectural innovation) or completely so (radical innovation).
By competences, I do not exclusively refer to those resources, capabilities, and
routines that are required to develop the new technology as such, but cover all the
obligatory processes, from idea generation to commercialization. Demand for
additional resources to effectively adapt to a new technology then depends on the
relatedness between competences required for a current technology (and its associated
business) and a targeted one. The more closely a currently deployed set of
competences is related to those required for the competing with a targeted technology,
the more an organization will be able to leverage its (committed) resources.
Conversely, the more an organization’s stock of resources deployed in a current
technology is unrelated to the new technology, the more uncommitted resources are
required to fund expansion of existing competences or acquire new ones. In sum, the
higher the level of uncommitted resources to fund development of additionally
required resources and capabilities, the more positive the efforts at adaptation.
Aside from relatedness, two other variables moderate the level of uncommitted
resources required to adapt to a new technology: time of threat perception and
56
response, as well as rate of technological progress and substitution. Extending a
current competence set or acquiring new competences requires uncommitted
resources. Paradoxically, as soon as a new technology starts to substitute for a
prevailing technology, it begins to erode an organization’s retained resource base –
and thus also its liquid or uncommitted resources. As a consequence, valuable sources
of income to fund resource development get lost. Ideally, therefore, a new technology
is developed, commercialized, and sized to volume before possible sources of
investments ebb away. Time of threat perception and response, coupled with rate of
technological progress and substitution, determine the time frame in which an
organization ideally should develop and commercialize its version of the new
technology and achieve breakeven of cumulative cash invested and earned. Beyond
that time frame, the organization risks running short of valuable sources of income to
provide start-up and post-launch investments. Hence the earlier an organization
recognizes a potentially threatening technology and the slower the new technology
progresses, the more positive the effect will be for efforts towards adaptation. In the
following I elaborate this proposition in greater detail:
In drawing on Christensen, Suárez, and Utterback’s (1998) findings, I specify that an
adaptation before the new (and threating) technology has coalesced into a dominant
design may become counterproductive, because uncommitted resources may be used
to develop or acquire competences that might become obsolete. Likewise, I specify, in
accordance with Christensen et al., that adaptation too late after the dominant design
coalesced may result in excessive demands for uncommitted resources, because an
organization will face stiff entry barriers from competitors, such as economies of scale
or strong brand names. As a result, the organization would require high post-launch
investments (and thus uncommitted resources).
Scholars have focused attention (directly or indirectly) on issues that affect the level of
uncommitted resources required to respond to discontinuous change. Christensen et al.
(1998) revealed that in fast-changing industries many organizations were forced to exit
the business altogether, after having missed the opportunity to switch fast enough to a
new technology, particularly after the emergence of a dominant design. Those
organizations that were able to quickly build resources and capabilities required for
speeding up product development and manufacturing in high volumes, they argued,
THEORY
57
had a much higher probability of surviving than those that adapted late. The latter
organizations failed to overcome rigid entry barriers that had been built in the
aftermath of the coalescence of dominant design. An economy of scale was named as
one entry barrier among others. Hence the available period of time for resource
development is a crucial moderating factor in adaptation. Regardless of whether the
competence set required for new technology is related or unrelated to the current one,
the available time frame to bring a new technology to market and to scale it to volume
may be too short to be accomplished with the current stock of resources and capacities.
Given a short time for response, organizations prefer to acquire additional resources
rather than risk long development time and therefore increasing barriers to entry.
Andrew and Sirkin (2003) addressed another issue that is of relevance here. They
showed that early adaptation to a new technology or an accelerated development
process to enter the markets before others do and to quickly achieve scale can lead to
excessive investments (and thus additional demands for uncommitted resources). On
the one hand, they showed that an early move into the market may require an
organization to educate customers in the use of the new technology. For instance, as a
developer and supporter of new imaging technologies from the start, Kodak had to
spend excessive budget allocations to promote and explain the new technologies to
potential customers. Their new Advanced Photographic System was one example. The
company had to spend about $100 million a year for advertising – a sum unparalleled
in the photographic industry. The other facet both authors identified is the ancillary
effect of an aggressive market entry that may result in poor product or service qualities
that affect the ability to achieve scale. In both cases, the demand for uncommitted
resources increases.
Figure 21 depicts the causal relationship between relatedness of resources, required
resources to adapt to a new technology, and required level of uncommitted resources
[please refer also to diagram shown in Figure 15].
58
MODERATING
VARIABLES
Related
ORGANIZATIONAL
LEVEL
Early
Time of
Threat
Perception &
Response
(+)
Leverage
Committed
(+)
(-)
Late
Resource
Deployment
and/ or
Development
Resource
Relatedness
Level of
Resources
Required
EFFORTS TO ADAPT
TO SUBSTITUTING
TECHNOLOGY
High
Rate of
Technological
Progress &
Substitution
Unrelated
Lo
(-)
(-)
(+)
Import
Uncommitted
ENVIRONMENTAL
LEVEL
Figure 21
Variables Moderating Adaptation to Substituting Technology
(portrayed from a resource-based view)
To explore a possible interdependence of resources and capabilities and an
organization’s resource allocation process I pursued an in an in-depth longitudinal and
multilevel case study on Eastman Kodak Company at times its core business got
disrupted. I analyze the company’s responds to the rapid transition from chemicalbased photography to digital imaging. In the following chapter I will describe the
research method applied.
4 METHOD
The study of an intra-organizational resource allocation process poses a
methodological problem. The dynamics in the internal competition for resources are
complex and span various levels of the organizational hierarchy. Many initiatives
never reach the status of public announcement or are kept secret for competitive
purposes. For instance, Kodak’s invention of the world’s first digital camera in 1975
was kept secret for about thirty years. Moreover, a strategy process can unfold over
many years. Measureable strategic outcomes of initiatives and decisions, such as the
retrenchment of a business or initiatives to improve a technology, may require an
extensive period of observation. Thus, to exclusively rely on external, publicly
available sources is precluded. Based on the need to rationalize the past in retrospect,
a serious account of an organization’s internal strategy process is always challenged by
faulty memories (Golden, 1992; Miller, Cardinal, & Glick, 1997). This research design
aims to deal with these obstacles.
4.1 Research Setting
Studying the impact of digital imaging on a traditional photography organization
supported my research intentions for the following reasons: First, digital imaging
technologies were disruptive for the chemical-based photography film and paper
business. Initially, digital cameras were used by different customers than those who
used analog cameras. Different performance attributes accounted for this difference.
For instance, customers of early digital cameras valued features such as electronic
transmission, manipulation and publication of images, searchable image databases,
immediate visibility of the image on the camera, and so forth. These features differed
substantially from those that were available with analog cameras. Similarly, the advent
of digital imaging meant a transition of power to personally take part in the complete
imaging chain, ranging from image capture to image storage to image finishing. While
in analog photography, Kodak’s marketing slogan, “You push the button, we do the
rest,” vividly circumscribes the roles and competences customers and photography
companies are ascribed, in digital imaging customers could do everything by
themselves, excluding photo companies almost altogether: digital imaging rendered
the consumable film roll obsolete and partly even the service of photo finishing,
60
Research Setting
because since then there was no need any more to develop negatives chemically in the
photo lab to check the quality of the photos, or to get prints. For this very reason, the
digital imaging business required the development of a business model that relied on
other sources of revenues.
The second reason for investigating the response of a chemical-based photography
company to digital imaging is that, unlike previous accounts of discontinuous change,
the rapid growth of the new technology threatened the traditional photography film
business to the extent of complete extinction within a few years [see Figure 22 and
following]. Extensively discussed cases on disruptive technologies, such as online
news or e-books, did not introduce an immediate loss of fundamental consumer base
(Christensen & Raynor, 2003; Gilbert et al., 2012; Gilbert, 2006; Johnson et al., 2008).
The substitution rate of these technologies is relatively low compared to digital
imaging, giving organizations an extensive amount of time and liquid resources to
develop new competences, while keeping their existing business in a tight fit with
traditional context [see, e.g., Figure 5].
Finally, studying discontinuity of analog photography by means digital substitution
presents an anomaly to existing explanations of disruptive innovations (Gilbert &
Christensen, 2005). By and large, researchers on disruptive innovations acknowledge
that incumbents are usually the ones that come up with technologies that are new to
the industry, but fail to bring these successfully to market, because of their careful
listening to their powerful customers (Christensen, 1992a, b; Gilbert, 2005). Powerful
customers impose limitations on organizations in regard to changes that can be
pursued or not (Christensen & Bower, 1996). Hence, incumbents fail not in innovating
new technologies, but in bringing them to market, because there is no impetus to do so.
Unlike the incumbents as described above, Kodak, the global leader of the imaging
industry, had always set the technological standards of the entire imaging chain
throughout its company history – regardless of consumer demand. Moreover, it was
the first company professionally developing and commercializing digital cameras in
the world. Leading companies inside and outside the imaging industry, such as Nikon,
Canon, and Apple, relied heavily on Kodak’s technologies. Hence, in this case the
incumbent did innovate in the laboratory as well as in the market.
METHOD
61
I chose Eastman Kodak Company as a preferred research site for another reason: the
company was the world leader of traditional photography, serving all elements of the
imaging value-chain. Top global and US market shares rendered Kodak a reasonably
representative imaging company. It has made a number of original contributions to the
digital imaging chain in an effort to set and sustain their competitive position,
including the wireless fidelity for electronic transmission of images among countless
other astonishing inventions. Considering the valuable nature of these past inventions,
Kodak maintained a lucrative portfolio of intellectual property and patents, which
leading technology companies such as Apple, Google, and Microsoft, among many
others, made use of.
Finally, I selected the photography company because I was offered valuable access to
organizational personnel and archival sources, which allowed me to pursue the
research. Data for the research covers the years prior to Kodak’s major period of
diversification, extending from the early 1973 to its formidable battle with digital
imaging, which found its point of culmination in 2012.
62
Research Setting
1.400.000
Pérez
Whitmore
4.000.000
Carp
4.500.000
Fisher
Cameras
in thousands
Chandler
Film (rolls) Kodak CEOs
in thousands
(2001)
3.823.064
1.200.000
3.500.000
1.000.000
3.000.000
800.000
2.500.000
2.000.000
600.000
1.500.000
400.000
1.000.000
200.000
500.000
0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Films* (rolls)
Film Cameras
Digital Cameras
Figure 22
Worldwide Imaging Industry
Source: Adapted from Photo Imaging News, 2013
0
Cameraphones
METHOD
63
140.000
Pérez
Whitmore
Carp
1.400.000
Fisher
Cameras
in thousands
Chandler
in thousands
(2001)
1.137.553
1.200.000
120.000
1.000.000
100.000
800.000
80.000
600.000
60.000
400.000
40.000
200.000
20.000
0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Films* (rolls)
Film Cameras
Digital Cameras
Figure 23
US Imaging Industry
0
Cameraphones
64
Research Setting
Pérez
Carp
Fisher
15%
Whitmore
20%
Kodak CEOs
Chandler
Growth
(Decline)
10%
5%
0%
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
Average Change in Film Roll Sales Worldwide per Year [Geom. Mean]
Changes in Film Roll Sales Worldwi
Figure 24
Growth (Decline) of Films (rolls) Worldwide
METHOD
65
Pérez
Carp
Fisher
15%
Whitmore
20%
Chandler
Growth Kodak CEOs
(Decline)
10%
5%
0%
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
Average Change in Film Roll Sales US per Year [Geom. Mean]
Changes in Film Roll Sales US
Figure 25
Growth (Decline) of Films (rolls) US
66
Research Setting
4.000.000
Pérez
Carp
140.000.000
Fisher
4.500.000
Whitmore
10 x 15 Prints
in thousands
Chandler
in thousands
(2001)
3.823.064
120.000.000
3.500.000
100.000.000
3.000.000
3-4 Y
2.500.000
80.000.000
2.000.000
60.000.000
1.500.000
40.000.000
1.000.000
20.000.000
500.000
0
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Films* (rolls)
Combined
Consumer
Professional
Figure 26
Prints (Film and Digital; 10x15 cm equivalent) Worldwide
0
METHOD
67
1.200.000
Pérez
Carp
40.000.000
Fisher
1.400.000
Whitmore
10 x 15 Prints
in thousands
Chandler
in thousands
35.000.000
(2001)
1.137.553
30.000.000
1.000.000
25.000.000
3-4 Y
800.000
20.000.000
600.000
15.000.000
400.000
10.000.000
200.000
0
5.000.000
1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Films* (rolls)
Combined
Consumer
Professional
Figure 27
Prints (Film and Digital; 10x15 cm equivalent) US
0
68
Research Design
4.2 Research Design
Researching an intra-organizational process requires in-depth data, which suggested
studying a single case rather than many (Burgelman, 1996). The longitudinal study
was designed to position an organization’s internal resource allocation process at the
core of analysis. I regarded this research strategy as appropriate for theory building
(Flick, 2009; Glaser & Strauss, 1967; Yin, 1984). The research was pursued in three
steps combining inductive, abductive, and deductive methodologies to derive at an
elaborated resource allocation process model.
In the first step, I collected public data and conducted semi-structured interviews with
company personnel on Kodak’s response to digital imaging. This merely inductive
phase resulted in a description of Kodak’s evolution of initiatives related to both
digital and analog imaging business.
In a second step, I was searching for theoretical models that could explain Kodak’s
trajectory. In this abductive phase, I found confidence in the appropriateness of
existing theories on the strategic process (Bower, 1970; Burgelman, 1983c) and intraorganizational ecology (Burgelman, 1996; Floyd & Lane, 2000; Floyd & Wooldridge,
1999; Lovas & Ghoshal, 2000). These seminal readings, plus theoretical extensions on
resource dependence (Christensen, 1992a, b; Christensen & Bower, 1996; Christensen
& Rosenbloom, 1995; Pfeffer & Salancik, 1978) and social psychology (Gilbert, 2005,
2006; Jackson & Dutton, 1988; Staw et al., 1981), provided the core building blocks I
applied to build a model that integrates the variable of resource commitment.
In a third step, I iteratively cycled between collected data and existing theory, which
enabled me to test and readjust the proposed model to gain a high level of validity and
connectedness to existing research (Eisenhardt, 1989; Glaser & Strauss, 1967).
4.3 Data Collection
Getting access to Kodak personnel and establishing a relationship of mutual trust took
about three years, starting in 2010. The collection of data itself took approximately one
and a half years, commencing at the beginning of 2013. I have taken Jick’s (1979)
advice and searched for a variety of data contributing to a comprehensive
understanding of the same issue, to improve accuracy of research. Three main sources
METHOD
69
of data helped me to triangulate the survey: archival material, recorded interviews, and
public documents:
Kodak’s archival material including a complete set of annual reports ranging from
1973 to 2014, reports to annual shareholders’ meetings, external and internal financial
reports, venture initiatives and strategy documents, which provided a basis for
documenting each phase of the company’s historical trajectory. Kodak’s filing for
Chapter 11 bankruptcy protection rendered collection of internal archival sources
difficult for reasons of legal discretion. Therefore, I tried to collect available
documents related to intra-organizational evolution as much as possible from
individuals involved. (I could not identify situations in which individual withheld
sources intentionally.) For instance, I have gotten documents pertaining to Kodak’s
strategic quantification process or new venture developments [see Table 2]:
Table 2
Kodak Archival Data
I interviewed twenty-seven individuals affiliated to Kodak and seven individuals
outside the company but closely related to the imaging industry. To get a
comprehensive picture of Kodak’s evolution, I talked to individuals at all levels of the
company, ranging from staff members in multiple functional areas to members of the
board of directors. I tried to find personnel present at different points in time, to cover
the entire period specified in the survey. For this reason I also talked to retired
employees and employees who had left Kodak [see Table 3 and Table 4].
70
Data Collection
Table 3
Internal Informants & Interviewees
(current and ex Kodak employees)
Continued on next page
METHOD
Continued on previous page
71
72
Data Collection
Table 4
External Informants & Interviewees External Informants
(individuals with close to photography industry but no affiliation to Kodak)
I conducted the interviews in two sessions and in an open-ended and semi-structured
manner. Interviews lasted at minimum about half and an hour; however, most of them
exceeded two hours. Some individuals were contacted multiple times to continue the
interview or to clarify open issues by e-mail or phone. In total I conducted 44
interviews. I recorded all interviews and I hired a professional US transcription service
to tape and transcribe them. Every interviewee was given the opportunity to edit the
documents.
The interview protocol for the first session was designed to understand Kodak’s
internal venturing process. Public sources, such as business reports, press releases, and
books on the company’s history and so forth, helped me to develop a profile of the
company’s technologies, which subsequently constituted a reliable source for
interview questions. Burgelman’s (1983c) definition of “autonomous” and “induced”
strategic behavior guided the nature of the questions. A particular set of questions was
designed to understand whether ventures towards digital imaging were hampered in
favor of improvements in chemical-based silver halide technology and how that was
managed. In the second session, I changed the interview protocol, because findings of
the first session revealed that Kodak’s challenge was not to spur technological
innovation but rather that top management (not middle management) was reluctant to
commercialize these developments. In the second session, I therefore asked
respondents to address this phenomenon. The interview protocol of this session
METHOD
73
included questions addressing mainly issues related to managerial cognition and
strategic decision making. Subsequently, I tried to confirm the accuracy of the data
with alternative sources where possible, to uncover potential inconsistencies (Glaser &
Strauss, 1967).
Finally, I studied a tremendous number of public sources that covered the survey
period between 1972 and 2014, including press releases, business reports, and industry
articles. In particular, I plowed through 5,297 Wall Street Journal articles on Kodak,
346 articles from other newspapers (e.g., New York Times, Financial Times) and
magazines (e.g., BusinessWeek, Fortune, Forbes), dating back to the late 1970s, 15
case studies, and 18 chronologies on either George Eastman, the founder of Kodak, or
the company itself. I found the coverage of Kodak’s evolution by the Wall Street
Journal of particular value. Excluding weekend days, on average the journal reported
about Kodak every day and a half. Moreover, the journal published press releases by
Kodak and letters to the editor, in which Kodak sometimes clarified wrong “public”
perceptions. I summarized these sources, coded them, and imported them into an
atlas.ti database, which allowed me to triangulate again what was being said by the
interviewees or external parties (Jick, 1979; Yin, 1984).
4.4 Data Analysis
The gathering and categorization of data, its study, and the elaboration of a new RAP
model have been iterative (Eisenhardt, 1989; Glaser & Strauss, 1967). In a first phase,
the collected data led to the pragmatic development of a chronology about Eastman
Kodak Company. Data from internal archives, interviews, and public sources, such as
business reports, were assembled in a large spreadsheet structured by year. This
spreadsheet contained hard facts (financial data, changes in the organizational
structure, legacy of CEOs, new technologies, etc.) and soft facts (new strategic
directions, new venture initiatives, etc.) and became the basis for the preparation of the
interview protocols and a narrative description of the company’s history.
In the second phase I drew on existing theoretical models to identify those elements
that enabled me to conceptualize a model descriptive of Kodak’s evolution. It was in
this phase that I realized that the question of the level of committed resources and their
retention was not present in existing literature on the strategy process.
Part II
Analysis of the Case
5 CASE
The currently available literature on Kodak and its founder, George Eastman, is
voluminous. Certainly it is legitimate to wonder, why write another historical account
about the company. There are a tremendous number of biographies on Eastman, dating
back 1930;3 then there are multiple volumes on the company itself, depicting its
comprehensive spectrum of technologies and products;4 and there are plenty of
business analyses in the financial press and case studies that discuss Kodak’s operative
performance.5 However, a valuable perspective that seems to be missing is a
longitudinal study of Kodak’s stocks of resources and its deployment. The company’s
cash or cash equivalents, assets, equity, as well as the debts that the company was
required to amortize, certainly determine to its ability to allocate resources for
innovation projects, new ventures, or new initiatives (Barker III & Duhaime, 1997;
Cyert & March, 1963; Mone et al., 1998; Singh, 1986). Therefore, a discussion of
Kodak’s evolution, in consideration of its financial position, promises to provide a
deeper understanding of the company’s scope for action.
3
See, e.g., Ackerman, C. W. 1930. George Eastman. Boston: Houghton Miflin Company, Brayer, E. 1996.
George Eastman: A Biography. Baltimore: John Hopkisn University Press, Brooke-Ball, P. 1994. George
Eastman and Kodak. Watford: Exley, Mitchell, B., & Smith, J. H. 1987. Click!: A Story About George
Eastman: Lerner Publishing Group, Pflueger, L. 2002. George Eastman: Bringing Photography to the People:
Enslow Publishers, Incorporated.
4
See, e.g., 1989c. Journey: 75 Years of Kodak Research. Rochester, NY: Eastman Kodak Company, Collins,
D. 1990. The Story of Kodak. New York: Harry N Abrams, Ford, C., & Museum, K. 1989. The Story of
Popular Photography: Trafalgar Square Pub, Frangos, S. J. 1993. Team Zebra: How 1500 Partners Revitalized
Eastman Kodak's Black & White Film-Making Flow: Wiley, Gustavson, T. 2009. Camera: A History of
Photography from Daguerreotype to Digital Toronto, Ontario: Sterling Publishing, Lieser, E. 1974. Die KodakUnd Nagel-Cameras Aus Stuttgart Wangen. Stuttgart: KODAK, Paxton, K. B. 2013c. Pictures, Pop Botttles
and Pills. Kodak Electronics Technology That Made a Better World but Didn't Save the Day. Rochester, New
York: Fossil Press, Shanebrook, R. L. 2010. Making Kodak Film. The Illustrated Story of State-of-the-Art
Photographic Film Manufacturing. Rochester, NY: Robert Shanebrook Photography.
5
See, e.g., Finnerty, T. C. 2000. Kodak Vs. Fuji: The Battle for Global Market Share: Pace University, Lubin
School of Business, New York, Gavetti, G., Henderson, R., & Giorgi, S. 2005. Kodak and the Digital
Revolution (a) Case Study 9-705-448. Cambridge, MA: Harvard Business School, Grant, R. M. 2006. Eastman
Kodak: Meeting the Digital Challenge (Case Six), Jones, G. R. 2004. "You Push the Button, We Do the Rest":
From Silver Halide to Infoimaging at Eastman Kodak. In C. W. L. Hill, & G. R. Jones (Eds.), Cases in Strategic
Management: C614-C628: A&M University, Texas, Kanter Moss, R. 1989. When Giants Learn to Dance. New
York: A Touchstone Book, Simon&Schuster Inc, Kochan, T. A. 1999. Eastman Kodak (Task Force Working
Paper #Wp09): MIT Sloan School of Management, Institute for Work and Employment Research, Lehmkuhl,
D., Liebl, J., Lien, L., & Ong, S. 1998. Kodak: The Challenge of Consumer Digital Cameras (Case No. 9):
University of Michigan Business School, Passow, S. 1997. Snapshot: Kodak V. Fuji (Case No. Cr1-97-1379.0).
Cambridge, MA.: Harvard College/ Kennedy School of Government, Swasy, A. 1997. Changing Focus: Kodak
and the Battle to Save a Great American Company: Times Business New York.
78
Preamble
5.1 Preamble
The following chapter aims to shed light on Kodak’s stock of resources and its
deployment in order to explore how it supported (or constrained) the company in its
response to discontinuous change.
The following case description of the Eastman Kodak Company starts with a brief
introduction on the origins of Kodak, to establish the context of the company’s
business model. Audiences interested in more in-depth information on the pre-1970s
era of Eastman Kodak Company or its founder may refer to the literature referenced
above. I then move on to the early 1970s, to continue with my thorough description of
Kodak’s response to discontinues change. In this period, Kodak was still cash-heavy
due to its monopoly position in the US photographic industry. However, that was also
the time that Kodak faced the advent of disruptive technologies in photography: In
mid-1970, Bryce Bayer of Kodak invented the color filter that later became part of
every imaging sensor embedded in digital cameras; and, in the same company but
independently of Bayer, the young engineer Steve Sasson invented the prototype of the
world’s first digital camera.
The case description is structured along the major strategic directions that various
Kodak CEOs set forth, and ends at the turn of the millennium, when the traditional
chemical-based photography industry collapsed. Even though in researching the case I
investigated the entire period between the 1970s and 2012, the year Kodak filed for
bankruptcy, here there I decided to elaborate on the period between 1970 and 2000 in
detail, because in this time span I find all the information required to support the
arguments put forward in the theory section. Of course, diagrams, financial data, and
tables on facts and figures give a full picture of the fully researched period when
necessary. Likewise, in the discussion section, the full spectrum of Kodak’s behavior
and commitment of resources in response to discontinuous change is presented from
1970 to 2012.
The following chronology primarily relies on three main sources: Kodak’s complete
annual reports and more detailed 10-K statements, plus supplements between 1973 and
2014; all Wall Street Journal coverage of Kodak between 1984 and 2014 plus articles
from other newspapers (e.g., New York Times, Financial Times) and magazines (e.g.,
BusinessWeek, Fortune, Forbes), dating back to the late 1970s; 44 interviews with
CASE
79
individuals at all levels of the company and ranging from staff members in multiple
functional areas. Interviews with employees, retired employees, or employees who had
left Kodak as well as individuals outside the company but closely related to the
imaging industry were conducted between 2012 and 2014. In this respect, the
chronology of Kodak presented here also poses a limitation. An annual consolidated
statement of operations, equities, and cash-flow does provide some fundamental
information about a company’s financial position; however, it conceals off-balancesheet requirements and circumstances that are non-accountable. (Kodak’s filing for
Chapter 11 bankruptcy rendered internal sources that might have enriched the analysis
of data difficult or impossible to access.) To improve the accuracy of research, the
three main sources of data were triangulated (Jick, 1979; Yin, 1984). For ease of
reading in this chapter, sources cited are placed in footnotes, including the complete
reference.
80
Eastman Kodak Company
5.2 Eastman Kodak Company
“You press the button, we do the rest.” 6
George Eastman
Fueled by personal interest, George Eastman became acquainted with photography as
a teenager in the 1870s, when daguerreotype and calotype technologies had given way
to new methods of capturing pictures.7 Photography was still a skilled craft, requiring
extensive experience and expertise in chemistry and mechanics. The coating of glass
plates with liquid emulsions before a picture was taken, as well as controlling the time
of exposure, depended upon highly skilled workmanship.8 Eastman, like many other
amateur photographers, was frustrated by the inconvenient and messy procedure – a
leaking bottle of emulsion, carried in his luggage, once soiled his belongings.9
Endowed with frugality and a love of tinkering with chemical and mechanic processes,
he soon started to search for more convenient solutions. He acquainted himself with
the new dry-plate technology that was being extensively discussed in European
photography journals.10 In the US, however, photographers were slow to adopt this
process, which had many operative as well as economic virtues. Unlike the timeconsuming and messy wet-emulsion technology, in which photographic plates had to
be processed while still wet, gelatin dry plates could be prefabricated, stored, and
shipped to customers on demand. Moreover, dry emulsion shortened the exposure time
to seconds (thus allowing snapshots). In 1880, two years after his demonstration of the
convenience of gelatin dry plates, Eastman’s company was one of the few in the US
that manufactured dry plates.11
6
Eastman, G. 1888. Camera Advertisment. Scientific American, September 28.
Brayer, E. 1996. George Eastman: A Biography. Baltimore: John Hopkisn University Press.
8
Jenkins, R. V. 1975. Images and Enterprise: Technology and the American Photographic Industry 1839 to
1925 (Reprint 1987 ed.). Baltimore, MD: The Johns Hopkins University Press.
9
Collins, D. 1990. The Story of Kodak. New York: Harry N Abrams.
10
Ibid.
11
Kodak,
"History
of
Kodak:
MilestonesChronology,"
http://www.kodak.com/ek/US/en/Our_Company/History_of_Kodak/Milestones_-_chronology/Milestones_chronology.htm, accessed on April 14, 2013.
7
CASE
81
P


Amateur
Entrepreneur
A
M
1: As an amateur (A), George Eastman referred
to professional photographers (P) to learn skilled
craft; 2: as an entrepreneur he made photography
popular by developing his own proprietary
imaging process and offering it the mass (M).
 BEFORE KODAK
(Photography)
Professionals
 POPULAR (KODAK) PHOTOGRAPHY
Mass
(Film)
(Camera)
(Finish)
PREPARE
the snapshot
TAKE
the snapshot
DEVELOP
the
Sensitize glass
plate with emulsion
Operate Aperture
for right exposure
Expose negative to
light or chemicals
(access to photography only via professionals)
Professionals
TAKE
the snapshot(s)
Mass
(Amateurs)
KODAK
(George Eastman)
DEVELOP
the snapshot(s)
PREPARE
the snapshot(s)
Sensitize film and
load roll in camera
Press the button
and forward film
Expose negative to
light or chemicals
Figure 28
Change of Imaging Chain by George Eastman (KODAK)
82
Eastman Kodak Company
In the course of establishing his first company, the Eastman Dry Plate Company,
Eastman also formulated his four fundamental business principles, revealing his
conviction that photography promises vast business opportunities, in particular when
adopted by the masses: “(1) Production in large quantities by machinery; (2) Low
prices to increase the usefulness of his products; (3) Foreign as well as domestic
distribution; and (4) Extensive advertising as well as selling by demonstration.”12
While all four principles guided the company throughout its 130 years of existence, it
is important to note that it is no. 1 upon which the others depend.
Parallel to his belief in the potential of photography for the masses, Eastman’s
subsequent entrepreneurial actions reveal another important aspect that accounted for
the company’s success: To bring photography to broad layers of consumers (which,
from an economic perspective, was a prerequisite for mass production), the process of
taking and developing pictures had to be easy; that is to say, photography had to be
unburdened of the need for chemical and mechanical skills. Hence, the whole
photographic system had to be redesigned, including the device for capturing images
(camera), the media for storing images (film), and the finishing process for replicating
images (prints) [see Figure 28].
After George Eastman succeeded in making photography more convenient by the use
of dry plates, it was still a skilled craft. Amateur photographers were still obliged to
use to the same devices that professionals were using, and, above all, dry-glass plates
were heavy, lacked tensile strength, and were expensive to manufacture.13 It was
Eastman’s patented film that paved the way for popular photography.
The term “film” originally referred to the gelatin coating on paper, a technology that
Eastman explored, to investigate the potential of paper as a carrier of negatives. Paper
negatives promised an economical and convenient substitute for glass dry plates on
several grounds: First, paper was cheap, light, and could be rolled, unlike glass plates,
allowing photographers to load the camera with light-sensitive material for more than
one shot; second, there was no need to develop the exposed material immediately as
long as it remained in the (dark) interior of the camera.14 Paper negatives therefore
12
Ackerman, C. W. 1930. George Eastman. Boston: Houghton Miflin Company. P. 42.
14
Ibid.
13
CASE
83
enabled Eastman to conceive of a proprietary photographic system in which amateurs
could take some hundreds of pictures without ever bothering about chemicals.
George Eastman’s first engineered camera, a wooden case that contained a simple
roller mechanism wound with a fifty-foot length of film, completed the system.15 Easy
to use, amateurs could take pictures by pulling a string to cock the camera’s cylindrical
shutter and then pressing a button to exposure the film. Fresh film was then brought
into the focal plane by twisting a clock key. When the photographer had finished
shooting the pictures, the camera was boxed and mailed back to the factory. There the
film was developed and the camera loaded with new film to be returned to the
customer, along with the prints.
Eastman’s photographic system, which he commercialized successfully under his
trademark “Kodak” since 1888, quickly received international acclaim.16 By bringing
together film, camera, and photofinishing service in an easy-to-use system, he made
photography convenient and affordable for the masses without requiring skills in
chemistry or mechanics. The then newly renamed Eastman Kodak Company sold over
5,000 cameras in the US, and was printing up to 6-7,000 negatives a day.17 Just five
years later, the company released its tiny pocket camera, selling over 100,000 in the
first year at a price of $5.18
As a consequence, the heavily capitalized company expanded its operations, opening
retail and wholesale outlets in the US and Europe. One innovation followed another.
Paper negative film was replaced by transparent film made of cellulose; pictures
started to move; and finally, color triumphantly entered the scene. Perhaps one of the
most efficient, foolproof, and popular cameras ever marketed by the Eastman Kodak
Company – the Instamatic – sold over 70 million worldwide.19
15
Gustavson, T. 2009. Camera: A History of Photography from Daguerreotype to Digital Toronto, Ontario:
Sterling Publishing.
16
Kodak,
"History
of
Kodak:
17
Ford, C., & Museum, K. 1989. The Story of Popular Photography: Trafalgar Square Pub.
18
Ibid.
19
84
New Industry Environment
5.3 New Industry Environment
“We’ve come out of an environment where we were the single world leader; we had a
technology that nobody else could really match, and we were able to dominate that
field. The world doesn’t allow companies to do that anymore. So we’ve got to change,
and that's a very hard lesson to learn.”20
Kay R. Whitmore, President, Kodak, 1985
For almost a century, consecutive innovations placed Eastman Kodak Company in the
position to lead technological development in the photography industry, indeed
holding a virtual monopoly in the photographic market in the United States for most of
its existence. With more than 90 percent of the market for conventional color film, and
pre-tax earnings of about 60 percent, sales of the company went beyond the $10 billion
mark in 1980 – a century after its foundation.21 Nevertheless, environmental changes,
coupled with a series of disappointing product launches suddenly began to affect the
company’s performance.
5.3.1 Changing Factor Markets
In the 1980s, three unforeseeable environmental changes depressed Kodak’s sales and
earnings: the rise of a strong US dollar along with higher prices for raw materials, the
aggressive capture of market shares by rivals, and the lost patent-infringement lawsuit
against Polaroid Corporation.
Already early in the early 1970s, Kodak had begun to realize that there were shortages
of some raw materials (and thus higher prices for them). For example, in 1974 the
average cost of propane and ethylene glycol doubled in one year, which put a great
stress on earnings from the company’s chemical division.22 In the early 1980s,
Kodak’s earnings were depressed even further by the price of silver, which soared to
20
Elaine, J. 1985. Kodak Facing Big Challenges in Bid to Change --- Slowing of Photo Business Forces Firm to
Look Elsewhere. Wall Street Journal, 1985 May 22: 1.
21
Numbers on market share and profitability are stated, e.g., in 1982b. Kodak Fights Back. Everybody Wants a
Piece of Its Markets. Business Week(February 1) 36-38.; or, Rudnitsky, H. 1982. Snap Judgments Can Be
Wrong. Forbes(April 12) 106-107. For data related to Kodak’s financial position see Eastman Kodak Company
Annual Reports, e.g., 1981b. Eastman Kodak Company Annual Report. Rochester, NY, 1982a. Eastman Kodak
Company Annual Report. Rochester, NY, 1983a. Eastman Kodak Company Annual Report. Rochester, NY. An
overview of Kodak’s financial position throughout the years of 1963 to 2013 can be found in the Appendix.
22
1974. Eastman Kodak Company Annual Report. Rochester, NY.
CASE
85
$50 an ounce.23 Silver was one of the company’s main raw materials in the making of
photographic film.24 The company had never paid so much; thus, the prospect shocked
management.25
Another external factor that impacted Kodak’s financial results in the mid-1980s was
the strong dollar.26 For Colby Chandler, then CEO of Kodak, the strong dollar made it
a “challenging task” to match results from previous years:27 “Earnings would have
been $0.60 [or about 10 percent] higher if exchange rates had prevailed the same,”
and, the company’s annual report continues, “the upward surge of the dollar reduced
the company’s earnings by more than $500 million in the last four years.”28
The strong dollar also increased the attraction of imports, which were sold in the US at
lower prices. Between 1973 and 1984, Kodak’s sales outside the US grew
continuously from 35 up to 47 percent.29 Accounting for the loss by competitive
adversity at home and abroad Kodak, estimated a total loss in annual earnings between
1980 and 1984 of about $1 billion because of the strong dollar.30 A Fortune analyst
estimated Kodak’s fall in profits at about $3 billion in the same period.31
Kodak’s conservative business strategy was threatened on another ground too: Highly
efficient Japanese film and photographic paper manufacturers entered the lucrative US
market. In the past, a number of companies, including DuPont Corporation, tried to
enter the photography market in the United States; but they either became discouraged
by Kodak’s market dominance or failed to develop film matching Kodak’s quality,
which consumers had long accepted as standard.32 In the 1970s, however, Kodak faced
some of the same attacks other US corporations had been suffering earlier: intense
competition triggered by a number of Japanese firms that aimed at the US
photographic market. Although Kodak and Fuji are not entirely comparable –Fuji
23
Deutsch, C. H. 1988. Kodak Pays the Price for Change. The New York Times(March 6).
Shanebrook, R. L. 2010. Making Kodak Film. The Illustrated Story of State-of-the-Art Photographic Film
Manufacturing. Rochester, NY: Robert Shanebrook Photography.
25
26
1985c. Kodak Posts Drop of 28% in Profit for Its 2nd Period. Wall Street Journal, 1985 Aug 01: 1.
27
Ibid.
28
1984a. Eastman Kodak Company Annual Report. Rochester, NY.
29
Annual Reports between 1972 and 1984.
30
31
Taylor, A. I., & Caminiti, S. 1986. Kodak Scrambles to Refocus. Fortune(March 3).
32
1982b. Kodak Fights Back. Everybody Wants a Piece of Its Markets. Business Week(February 1) 36-38.
24
86
originally did not maintain manufacturing sites abroad – the Japanese sold almost
twice as much per employee [see Figure 29].33
In the photographic paper franchise, the sales pitch in the US of Fuji Film,
Konishiroku, and Mitsubishi was compelling: The Japanese offered products that were
almost comparable at a discount of up to 20 percent.34 As a consequence, by 1977 the
Japanese had captured almost half of the US photo paper market and Kodak was
forced to cut prices and its pretax profit margins from about 60 percent to as low as 45
percent.35
$380.000
100%
92%
82%
$140.000
50%
$161.000
$85.000
1984
Kodak
1989
Fuji
Figure 29
Sales per Employee
Source: Eastman Kodak Annual Report
and FujiFilm Annual Report 1986/198936
33
1
1970s
Film
2
Paper
Figure 30
Decrease of Kodak’s Market Share in
Film and Paper Business
Source: (Taylor & Caminiti, 1986)
Snyder Hayes, L. 1981. What's Kodak Developing Now? Fortune(March 23) March 23: 78-91.
35
Ibid.
36
See also Pae, P. 1989c. Kodak to Again Restructure Operations --- Earnings Plunge Spurs Latest Round of
Cost Cuts. Wall Street Journal, 1989 Aug 18: 1.
34
CASE
87
In the film market, Fuji pursued a similar strategy. It improved the quality of its film to
the point where it appealed to consumers’ preferences in the US. By cutting profit
margins and keeping prices 10 percent below Kodak, Fuji did not gain immediately
substantial market share, but its pricing policy forced Kodak to keep its margins low.37
However, as a consequence, Kodak’s US photography market share plummeted from
100 percent to about 85 percent, and its share of the paper business fell from originally
92 percent to about 50 percent in the 1970s. 38
$10.6 billion
Other
Film/
paper $2.3 billion
21%
60%
Sales
Earnings before tax
Figure 31
Profit Margin of Film
Source: Adapted from Merrill Lynch, Pierce, Fehner & Smith Inc.
Estimates of 1981 results; see also Rudnitsky (1982)
37
Taylor, A. I., & Caminiti, S. 1986. Kodak Scrambles to Refocus. Fortune(March 3).; see also Chakravarty, S.
N., & Simon, R. 1984. Has the World Passed Kodak By? Forbes, November 5 184-192.
38
Moore, T. 1983. Embattled Kodak Enters the Electronic Age. Fortune(August 22) 120-128.
88
While Kodak did little to increase efficiency in the face of rising costs for raw
materials, a continued strong dollar, and competition, its technological superiority had
still made the company all but invulnerable. Figures on the profitability of the amateur
photography business illuminate the impact of Japanese rivals upon Kodak’s earnings.
In the early 1980s, about one-third of Kodak’s sales centered on amateur
photography.39 Significantly, the amateur photographic business, which includes film
and paper, accounted for about two thirds of the company’s total earnings before taxes,
with profit margins of about 60 percent [see Figure 31].40 As Ty Govatos, an analyst at
Bache Halsey Stuart Shields, explained, “There is where the money is, and there is
really no consumer product quite like it. [In 1981] Kodak’s amateur film sales were
about $900 million, but the operating profit was nearly $530 million.”41
Perhaps the biggest sign that Fuji was a real threat came when Kodak lost the
tendering procedure for sponsorship as the official film partner of the 1984 Olympics
to its Japanese rival. The organizing committee of the 1984 Los Angeles Olympic
Games asked potential sponsor to pay a rights fee of at least $3 million.42 Kodak,
however, was only willing to spend some $1 million and provide film.43 Fuji offered to
pay $7 million and was awarded the contract, which Peter Palermo, Kodak’s senior
vice president of imaging at this time, called “Kodak's Pearl Harbor.”44
5.3.2 Changing Product Markets
Kodak’s lost chance to sponsor the 1984 Olympics made another aspect clear to the
world leader in imaging: Ever since George Eastman had introduced the first portable
camera in 1888, which used his own patented film and was tightly bound to his
proprietary method of photo finishing, Kodak had become so powerful that it
controlled the US market for photographic products, rather than the other way around.
39
1981b. Eastman Kodak Company Annual Report. Rochester, NY.
See, e.g., estimates by Merrill Lynch, Pierce, Fenner and Smith Inc. cited in 1982b. Kodak Fights Back.
Everybody Wants a Piece of Its Markets. Business Week(February 1) 36-38. or Snyder Hays similar estimates a
year earlier cited in Snyder Hayes, L. 1981. What's Kodak Developing Now? Fortune(March 23) March 23: 7891. Following his notes sales of the amateur photography segment, which includes cameras aside of film and
paper too, accounted for about 40 percent of Kodak's 1980 revenues of $9.7 billion and almost two-thirds of
earnings before tax. Sales for color film and paper are the flashiest moneymakers - they account for 15 percent of
the company's total sales.
41
Rudnitsky, H. 1982. Snap Judgments Can Be Wrong. Forbes(April 12) 106-107.
42
Chakravarty, S. N., & Simon, R. 1984. Has the World Passed Kodak By? Forbes, November 5 184-192.
43
Ibid.
44
Palermo, P. 2013. Personal Interview. November 22. With M. Shamiyeh. Palermo’s reference to Pearl Harbor
can be found also in a commentary published in Swasy, A. 1997. Changing Focus: Kodak and the Battle to
Save a Great American Company: Times Business New York. page 29.
40
CASE
89
But after the bid for Olympics, the market started to gain control – a possibility that
had long been ignored by Kodak. Late or disappointing product launches confirm this
assessment.
For instance, Kodak was late with the introduction of “mini labs.” Mini labs are small
and relatively inexpensive photo-finishing machines that develop and print photos on
the spot within an hour.45 In contrast to “macro labs,” large photofinishing facilities
that process thousands of rolls of film a day on behalf of commercial dealers or
consumers that drop off their rolls of film in the nearest drop-box, mini labs can be
installed almost anywhere.46 The great virtue of mini labs was their convenience –
customers received their prints in less than an hour – as well as their unprecedented
profitability. After installing a mini lab, department stores, drug stores, and food
chains and the like reported an increase in net profitability for their photo-finishing
business of about roughly four times, compared to contracting it to wholesale labs.47 In
addition, the convenience of mini labs increased the number of people visiting the
stores.48
In 1984, the Photo Marketing Association assessed the rapid growth rate of the US
mini lab market and estimated that since 1980, some 8,000 mini labs had been
installed, capturing about 20 percent of the photofinishing market originally served
by macro labs alone.49 Although the growth rates of installed mini labs were lower
than initially estimated – in 1984 there was a base of some 5,200 installed mini labs,
according to a 1988 survey by the Photo Marketing Association – it was clear to the
industry that the small one-hour-processing units were the wave of the future.50 Kodak,
in contrast, was late with the introduction of mini labs because it “underestimated the
potential” of minilabs, as Wilbur J. Prezzano, then the company’s group vice president
of photographic products, admitted.51 When mini labs captured an estimated 36
percent of the massive $5 billion US photofinishing market in 1988, Kodak’s sales
45
1984d. One-Hour Film Processors Leave Photo Kiosks in a Blur. Business Week(January 23) 28.
Neblette, C. B. 1977. Neblette's Handbook of Photography and Reprography: Materials, Processes, and
Systems (Seventh ed.): Van Nostrand Reinhold.
47
Omura, G. S. 1988. Mini Labs: Strategies for the Future. In P. M. A. International (Ed.): 80. Jackson,
Michigan.
48
Sasson, S. 2013b. Personal Interview (Follow-up). November 22. With M. Shamiyeh.
49
50
Omura, G. S. 1988. Mini Labs: Strategies for the Future. In P. M. A. International (Ed.): 80. Jackson,
Michigan.
51
46
90
plunged to $60 million, from $200 million in 1982.52 Kodak’s late introduction of
mini labs is not the only case that demonstrates the company’s reluctance to quickly
adapt to new trends (or to set new trends, as it had done originally).
Kodak did not enter the copier business at the time it was invented and developed into
a multimillion-dollar market by Xerox. Only in 1975 did Kodak finally enter the
copier market, with its Ektaprint 100.53 Kodak spent a decade of research and an
estimated budget of $100 million in bringing this copier to market. The company
simply did not want to risk glitches in performance, since it had always branded its
focus on quality and reliability.54 The machine employed a series of new technologies
that Kodak employed before anyone else in the industry.55 When the Ektaprint was
brought to market, it received immediate public acclaim and caught Xerox at a very
vulnerable moment.56 Xerox, which dominated the market with its expensive and
powerful machines, was focusing on the disruptive force of cheap and poorly
performing tabletop copiers, which Canon and other Japanese companies began to
develop in the early 1980s.57 Xerox did not offer any copier in the Ektaprint segment,
and Kodak therefore quickly gained market share in an industry that grew some 46
percent between 1978 and 1983.58
Kodak’s annual reports of the early 1980s tirelessly highlighted the growing demand
for Ektaprint copy products and pointed to their impressive growth. According to a
Kodak executive, the Ektaprint copier product line was the fastest growing business in
the company, which could, if run as a separate firm, maintain the status of a Fortune
500 firm.59 Likewise, the Wall Street Journal acknowledged that the gap between
Kodak and market leader Xerox had closed.60 However, Kodak was slow in bringing
52
Ansberry, C. 1987e. Uphill Battle: Eastman Kodak Co. Has Arduous Struggle to Regain Lost Edge --- Beset
by Rivals from Japan, Customers' Complaints, It Abandons Its Traditions --- Getting over Disk Disaster. Wall
Street Journal, 1987 Apr 02: 1, Ansberry, C. 1988h. On Photography. Wall Street Journal, 1988 Sep 26: 1. In
its Annual Report of 1988, Kodak attributes to mini labs about 25 percent of the US market for color prints.
53
54
55
Paxton, K. B. 2013c. Pictures, Pop Botttles and Pills. Kodak Electronics Technology That Made a Better
World but Didn't Save the Day. Rochester, New York: Fossil Press.
56
See, e.g., 1983a. Eastman Kodak Company Annual Report. Rochester, NY.; or, Chakravarty, S. N., & Simon,
R. 1984. Has the World Passed Kodak By? Forbes, November 5 184-192.
57
Christensen, C., Craig, T., & Hart, S. 2001. The Great Disruption. Foreign Affairs 80-95.
58
59
60
1984c. Kodak to Repurchase 'Significant' Amount of Stock as Investment. Wall Street Journal, 1984 May 04:
1.
CASE
91
the next generation of the copier to market: It took the company seven years to come
up with the follow-up model, which was launched in 1982. Meanwhile, Xerox had
launched a competitive product and Kodak was forced to suffer a loss of market
share.61 Kodak also lost market share to IBM, which decided to enter the copier
business in the same year. Above all, Kodak’s long-awaited follow-up machine proved
to have a poor performance in terms of speed and functions. All these factors,
according to an industry analyst, erased Kodak’s competitive advantage in copy
quality.62 By 1984, Kodak had lost about 50 percent of its US copier market share,
which by then was up to only 25 percent.63
The launch of the Ektachem 400, a blood diagnostic apparatus tells a similar story:
Introduced in 1980, it was launched late.64 Until the late 1970s, the market was
growing at 15 percent per year; by the time Kodak entered the market, growth rates
were flat.65 DuPont had already introduced its Automatic Clinical Analyzer in 1970,66
which performed up to 30 different blood tests, whereas Kodak’s analyzer, which
came a decade late, performed only 12 tests and proved unreliable.67 Kodak was
hoping for better results with Ektachem 700, the next generation of blood analyzers
introduced in 1983. It performed 25 tests, again half the amount of one of Kodak’s
competitor’s products.68 People familiar with the market estimated that Kodak never
really had a chance to recoup what they had invested in the product line.69
Significantly, during the 1970s and early 1980s, Kodak also suffered from failed
product launches in its core market, the amateur photography. The world’s leading
61
See comment by Mark Myers, then head of Xerox Research Labs, who thanks Bradley Paxton, at this time
general manager and vice president of Kodak’s Electronic Photography Division, “for coming out with the
Ektaprint in 1975:” “it gave us the shot in the arm we needed. And I want to also thank you for letting us catch
up!” Paxton, K. B. 2013c. Pictures, Pop Botttles and Pills. Kodak Electronics Technology That Made a Better
World but Didn't Save the Day. Rochester, New York: Fossil Press. p. 29.
62
63
1984c. Kodak to Repurchase 'Significant' Amount of Stock as Investment. Wall Street Journal, 1984 May 04:
1.
64
65
66
Pont,
D.,
"Innovation
Starts
Here:
1969
Medical
Products,"
http://www2.dupont.com/Phoenix_Heritage/en_US/1969_c_detail.html, accessed on April 11,
67
1980. Eastman Kodak Company Annual Report. Rochester, NY, Moore, T. 1983. Embattled Kodak Enters the
Electronic Age. Fortune(August 22) 120-128.
68
69
”They are very, very late in the game. They've invested at least $600 million, and they don't have a snowball's
chance in hell of ever getting their money back”; comment by Donald Sutherland, then director of DuPont’s
Diagnostic Systems division, cited in Chakravarty, S. N., & Simon, R. 1984. Has the World Passed Kodak By?
Forbes, November 5 184-192.
92
imaging company always released technologically superb photographic products
which were easy to use and thus were applauded by the consumers. Tremendous
efforts at Kodak’s research labs made photography ever more user-friendly and thus
more popular, but two important new product launches proved to be disappointing in
the 1970s:
The first flop was Kodak’s Instant Camera. The company originally dismissed the idea
of instant photography when Edwin Land began to develop it after World War II.70 It
just agreed to produce the film for Edwin Land’s “Polaroid” cameras.71 As Polaroid’s
success grew, so did the interest of competitors, including Kodak. In 1975, after
almost a decade of research and estimated costs of well over $200 million, the
company launched an instant camera, which offered performance equal to Polaroid’s
camera but used a different finishing process.72 Kodak was forced to aggressively
advertise its me-too-product by spending some $13 million annually.73 At the bottom
line, Kodak captured only a fraction of the market. In 1985, Polaroid had some 75
percent of the instant camera and film market; Kodak accounted for the rest.74
The final blow came from a decade-long patent-infringement suit between Kodak and
Polaroid. In 1985, Kodak was accused of having infringed on seven Polaroid patents
for instant cameras and film.75 While for Polaroid the loss of the lawsuit could have
had much larger effects, because 90 percent of its business was tied to instant
photography, Kodak’s instant photography segment was a disappointing business,
accounting for only about 2 percent of sales or $200 million a year.76 Kodak saw great
market opportunities in the technical applications of instant photography, including
imaging instruments used in hospitals or for producing copies of video stills, which
already accounted for some 40 percent of Polaroid’s sales.77
70
71
Ibid. In an interview, Kodak Germany’s former CEO Ernst Lieser confirmed this information. He explained
that when Polaroid stopped purchasing film from Kodak, Rochester engineers believed that the company would
never be able to do the instant film by themselves. However, they were wrong. Lieser, E. 2014. Personal
Interview (by Telephone). April 4. With M. Shamiyeh.
72
73
74
1985d. Polaroid Says Injunction Was Issued against Kodak. Wall Street Journal, 1985 Oct 14: 1.
75
Ibid.
76
Nielsen, J., & Serwer, A. E. 1986. Instant Exit from Instant Cameras. Fortune(February 3).
77
Ibid., Taylor, A. I., & Caminiti, S. 1986. Kodak Scrambles to Refocus. Fortune(March 3).
CASE
93
Ernst Lieser, CEO of Kodak AG Germany between 1980 and 1990, recalled that the
patent-infringement suit could have been resolved quickly, with a settlement offered
by Polaroid’s former vice president Robson: By paying a lump sum of some $60
million to Polaroid, Kodak would have been allowed to continue its instant
photography business; however, Kodak refused the offer.78 Others recalled that
Polaroid offered to settle the dispute for $200 million.79
In January 1985, when Federal courts decided on the patent-infringement suit Polaroid
Corporation filed almost a decade earlier, Kodak decided to exit the instant camera
market.80 Ignoring the loss of brand damage, Kodak’s journey into instant photography
burdened the company’s financial position tremendously – even twice. In 1985 the
company reported costs before taxes of some $563 million (half of the company’s total
operational earnings) for discontinuance of instant photography operations, including
the closure of facilities.81 In 1990, its pre-tax earnings were reduced by an additional
$925 million as a result of the court award in the patent-litigation suit with Polaroid.82
This time the costs incurred by Kodak amounted to about one third of its pre-tax
earnings.
The Kodak Disc camera was the other disastrous failure for Kodak in those days.
Kodak Disc was an ingenious camera, developed to replace the company’s profitable
and popular Instamatic series, which had been Kodak’s most successful camera for
more than 20 years. Released in early 1982, the disc camera was fully automatic:
Exposure, flash adjustments, and film advance required no settings by the user; images
were recorded on small negatives of Kodacolor HR disc film, which rotated into place
after each exposure. It is important to note, that this new camera required Kodak to
redesign the complete imaging system, from camera, to film, and finally to
photofinishing, which was supposed to transform the negatives into sharp, clear
prints.83
78
Lieser, E. 2014. Personal Interview (by Telephone). April 4. With M. Shamiyeh.
Parulski, K. 2014a. Email Conversation. June 6. With M. Shamiyeh.
80
1985b. Eastman Kodak Company Annual Report. Rochester, NY.; 1986. Eastman Kodak Company Annual
Report. Rochester, NY.
81
1985b. Eastman Kodak Company Annual Report. Rochester, NY, 1990a. Eastman Kodak Company Annual
82
1991c. Kodak to Pay Polaroid $925 Million to Settle Suit. Wall Street Journal, 1991 Jul 16: 0-PAGE C13.
83
79
94
The process that brought the new disc cameras and film to the point of introduction
took Kodak six years and an investment of many millions.84 In the year of its
introduction, more than 850 photofinishing laboratories around the world had to install
special processing machines to develop the disc film and print disc pictures.85 While
the Kodak Disc camera was unquestionably Kodak’s most successful launch ever – the
company shipped more than 10 million units in its first year, double the number of
Instamatic cameras released in that model’s first year – the camera had a big problem:
The picture quality was extremely poor. The camera used small 8.2 x 10.6-mm
negatives, which accounted for almost one tenth of the area of regular 24 x 36-mm
film. An industry insider summarized the problem as follows: “The technical
compromise to get the [Disc's] size down was greater than the result was worth.”86
Besides the problem in performance, the disc camera ignored changing consumer
preferences. In Europe and in Japan, consumers were more accustomed to the 35 mm
standard, and 35 mm cameras offered by competitors were almost as cheap and easy to
use as the Kodak Disc camera with its propriety format.87 As a consequence, sales
flagged.88 Millions of disc cameras remained on the shelves during its first Christmas
season. Six years after its introduction, in 1988, after Kodak had sold an estimated 30
million disc cameras, in the company’s largest marketing campaign ever, the company
stopped production of the camera.89 Although the company continued to manufacture
Disc film for about 10 years after discontinuing camera production, Kodak never
turned on a plant it built in Colorado just to make disc film.90
In summary, during the turn of the 1970s Kodak was challenged by various
unforeseeable changes in the environment, for instance, the rise of costs for raw
materials and the strong dollar, and internally generated problems such as entering
growth markets late or launching products that did not meet market demand. These
challenges clearly meant the end of Kodak’s long-term profit trend. In 1983, when
84
Ibid.
86
Carl Chapman, vice president of Fuji Photo Film U.S.A., quoted in Chakravarty, S. N., & Simon, R.
1984. Has the World Passed Kodak By? Forbes, November 5 184-192.
87
Competing cameras were, for instance, Canon’s AE-1 or Konica’s C35AF. Buell, B., & Aikman, R. 1985.
Kodak Is Trying to Break'out of Its Shell. Business Week(June 10) 92-95.
88
Taylor, P. 1983. Kodak Loos to a Leaner and Meaner Future. Financial Times(Wednesday November 16) 22.
89
Ansberry, C. 1988g. Kodak Suspends Its Production of Disk Camera --- Poor Sales Cited by Firm; Analysts
Note Problems with Picture Quality. Wall Street Journal, Feb 02: 1.
90
85
CASE
95
Colby Chandler was appointed Chief Executive Officer, the company reported losses
for the first time in decades. Kodak was required to take action.
96
Diversification and Exploration
5.4 Diversification and Exploration
“It was clear to us that it would take more than a new Kodacolor film or a new disk
camera. It would take a whole new area – like life sciences – or it would take massive
expansions into areas we hadn't participated in very much before.” 91
Colby Chandler, Chief Executive, Kodak
“It's very hard to find anything with profit margins like color photography that is legal.” 92
Leo Jack Thomas, Director of Research, Kodak
In the early 1980s, Kodak aimed at “making the elephant dance,” as Walter Fallon,
long-serving CEO, liked to say.93 Aware of the challenges posed by the changing
industry environment, he forwarded the following statement to shareholders before
handing over his job to Colby Chandler: “We [Kodak] are making fundamental
changes in the way we do business. We'll continue to look for opportunities. But one
thing we don’t want to be is a conglomerate going in directions that have nothing to do
with photography.”94 Two broad strategic directives guided the company’s course of
actions between 1983 and 1992: On the one hand, protection and growth of core
business by improving efficiency and entering new markets; and, on the other,
diversification into new fields. Kodak’s new strategy led to mixed results: First, net
earnings remained equal or even below those of the early 1980s despite a doubling in
sales. Likewise, the stock price languished at some $45, one third of the price paid in
the early 1970s. Second, massive investments into electronics did not pay off.
Commercial and information systems like copiers or print and publishing systems
burdened annual income. One of Kodak’s biggest innovations, the PhotoCD system,
which involved the scanning of ordinary silver-halide photographs into digital form
and their transfer onto compact discs, had failed to take off in the company’s most
important consumer market. And, finally, the move into pharmaceuticals promised
benefits after a decade or more, but got Kodak heavily into debt, limiting its liquidity
and making it difficult to flexibly respond to emerging threats.
91
92
Ibid.
93
Walter A Fallon quoted in 1982b. Kodak Fights Back. Everybody Wants a Piece of Its Markets. Business
Week(February 1) 36-38.
94
Taylor, P. 1983. Kodak Loos to a Leaner and Meaner Future. Financial Times(Wednesday November 16) 22.
140
Chandler
Fallon
160
97
Whitmore
CASE
Instant Camera
120
100
Fling
Disc Camera
80
PhotoCD
35 mm
60
Copier
40
Blood Analyzer
20
Minilab
3-2 Split
3-2 Split
0
1972
1972 1974
1974 1976
1976 1978
1978 1980
1980 1982
1982 1984
1984 1986
1986 1988
1988 1990
1990 1992
1992
Stock Price
Launch of New Product Category:
Film
Digital
Dollars
in millions
Employees
Worldwide
22.000
160.000
20.000
140.000
18.000
120.000
16.000
14.000
100.000
12.000
80.000
10.000
60.000
8.000
6.000
$563 $520
$200
4.000
$875
$1,605
20.000
2.000
0
40.000
1972
1974
Net Sales
Strong Dollar
1976
1978
1980
1982
1984
Earnings from Operations
High Costs for Raw Materials
1986
Net earnings
1988
1990
1992
0
Employees Worldwide
Discontinuance of Instant Photography
Restructuring Costs Including Employment Reduction & Rationalization of Operations
Figure 32
Sales, Earnings, Employees, and Stock Price, Kodak, 1972-1992
All stated costs affected earnings before tax. Dollar amounts in millions.
Source: Data adapted from Eastman Kodak Annual Reports and Yahoo Finance
98
For many decades, at least throughout the 1960s and ’70s, Kodak’s conservative
strategy paid off. Sales and earnings moved ahead each year, each reaching record
levels. The company’s competence in chemical engineering, combined with
economies of scale from massive manufacturing plants, gave the imaging giant a
monopoly position in the photographic film and paper industry, allowing it to become
of the world’s Fortune top 500 companies.
On July 1, 1983, when Colby Chandler, newly appointed chairman and chief executive
officer, began to direct the Kodak’s future, the trend of long-term profit was clearly
down. Earnings and profit margins had been cut in half [see Figure 32 and Figure 33],
and return on equity had fallen below average [see Figure 34].95 And while expensive
ventures into copiers, blood analyzers, and new camera systems doubled Kodak’s
capital investments, the operating return on these assets had fallen to one third [see
Figure 35]. Kodak was certainly forced to take action. Comforted by prosperity and
lack of competition, the company was forced to change its corporate habits, to improve
its costs, and to enter volatile markets it was unfamiliar with.
5.4.1 Improving Efficiency
In the early 1980s, Kodak invested heavily in its manufacturing facilities to benefit
from economies of scale. The company aimed for added reliance upon its distribution
channels, to enhance its service quality to customers worldwide, and to generate
savings in manufacturing.96 In Europe, for instance, Kodak utilized a pair of modern
high-rise central distribution facilities – one at Chalon, France, which opened in 1982,
and the other at Swallowdale, England, which opened in 1983.97 However, Kodak’s
facilities operated uneconomically for several reasons. First, at many manufacturing
sites a full line of products was pursued, even though their runs were so small as to be
inefficient. The plant manager, following Neil Murphy, then group vice president in
charge of the international photographic division, “[had] to prove that any product he
makes cannot be made somewhere else, and shipped to his territory, for less.”98 As a
consequence, the company’s gross profit fell by half [see Figure 37].
95
97
Ibid.
98
96
10%
10%
5%
5%
0%
0%
Net Profit Margin
Return on Equity
Figure 34
Return on Equity
Whitmore
Chandler
25%
Fallon
Figure 33
Net Profit Margins
30%
Whitmore
15%
Chandler
15%
1992
20%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
20%
Fallon
25%
99
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
25%
30%
Whitmore
Fallon
30%
Chandler
CASE
20%
25.000
20.000
15.000
15%
10.000
10%
5.000
0%
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
5%
Operating Return on Assets
Properties at Cost
Figure 35
Operating Return on Assets and
Properties at Costs
Sources, all figures: Dollar amounts in
millions. Data adapted from Eastman
Kodak Company Annual Reports
100
Second, Kodak’s research lab employed more than 2,000 scientists and technicians
with an annual budget of about 6 percent of sales, which in 1983 accounted for some
$746 million [see Figure 36].99 There was scarcely another company in the US that
invested so heavily in research.100 At Kodak, however, there was a weak translation of
research findings into commercialized offerings.101 Puru Purushotham, who served in
the early 1980s as a scientist at Kodak’s research lab, compared the unit with a country
club: “It was so comfortable, you had infinite resources, literally infinite resources to
do anything that you wanted. And then, at lunchtime, most of us would go play some
tennis in one of the local clubs, take a two-hour lunchtime, come back and work for an
hour, go back to the cafeteria again for coffee. It was like a thousand people are doing
this.”102 Although Purushotham’s depiction may not be representative for all research
lab divisions, as other Kodakers noted,103 certainly there was a need of massive
restructuring. For the first time in its history, a manager was required to downsize the
workforce extensively – a procedure which would be repeated again and again until
2012, when Kodak filed for bankruptcy.
Kodak’s investment in people was well recognized by those who had joined the
company to pursue a life-long career at the “Yellow Family.”104 For instance, among
its top officers, more than 90 percent had dedicated their entire careers to Kodak, and
the company boasted an employee turnover rate one-fourth the industry average.105
Colby Chandler, who started out as an engineer, had spent some 34 four years at
Kodak before being appointed CEO; Kay Whitmore, who reported to Chandler in his
capacity as president of the company, was trained as an engineer and had worked there
some 27 years.106 Absorbing Kodak’s culture during their entire professional lives,
both manager then suddenly had to make sharp cuts in the workforce.
99
1978. You and Kodak in Perspective: Careers in Engineering, Science, Administration and Marketing.
Rochester, NY: Eastman Kodak Company.
100
101
“There was a lot of innovation taking place, but there was weak translation into commercial products.” Jack
Thomas, quoted in Purushotham, P. 2013. Personal Interview. November 19. With M. Shamiyeh, Snyder Hayes,
L. 1981. What's Kodak Developing Now? Fortune(March 23) March 23: 78-91.
102
Purushotham, P. 2013. Personal Interview. November 19. With M. Shamiyeh.
103
Parulski, K. 2014b. Written Feedback on Research Per Email. September 20. With M. Shamiyeh.
104
This life-long investment was confirmed by every interviewed employee or retired employee of Kodak.
105
106
Buell, B., & Aikman, R. 1985. Kodak Is Trying to Break'out of Its Shell. Business Week(June 10) 92-95,
Chakravarty, S. N., & Simon, R. 1984. Has the World Passed Kodak By? Forbes, November 5 184-192,
Holusha, J. 1989. Click: Up, Down and out at Kodak. The New York Times, December 9.
1.200
1.000
800
600
400
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
200
Whitmore
50%
Chandler
60%
Fallon
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
101
40%
30%
20%
10%
0%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1.400
Whitmore
1.600
Chandler
1.800
Fallon
CASE
R&D Expenditures
Gross profit margin
R&D Expenditures per Sales
Figure 36
R&D Expenditures
Expenditures in millions
Figure 37
Gross Profit Margin
Sources, all figures:
Data adapted from Eastman Kodak Company Annual Reports
Dollar amounts in millions.
In 1983, when management suddenly announced an early retirement plan, Kodak’s
“family” feeling was rudely shattered. To balance manufacturing schedules with
volume expectation, some 11,000 of the 136,000 employees worldwide, or 8 percent,
had to leave the company, either “voluntarily” or by layoff.107 Kodak justified the
reduction of the workforce by the realities of the business.108
People close to the 1983 layoffs recall that these were almost certainly due, at least in
part, to the fact that Disc film sales were way below expectations. From 1981-1982,
Ken Parulski remembers having spent one week each fall interviewing prospective
employees on college campuses such as MIT. In 1983, according to him, the planned
trip was cancelled at the last minute, along with all other college recruiting. Some
offers to new employees were rescinded. “Of course, Kodak was not going to admit
107
108
102
publicly that the layoffs were due to Disc, since this would be further evidence that
Disc was a failure.”109
While Kodak’s first retirement plan had affected its income moderately, the reduction
of costs amounting to some $200 million, or about 20 percent, from $1 billion in total
earnings before tax, the 1986 layoff lowered pre-tax earnings significantly, by some
$520 million. Excluding companies acquired, a total of 12,765 employees were asked
to leave to meet the goal of a 10 percent personnel reduction; about 70 percent left on
a voluntary basis.110 The latter workforce reduction surprised even analysts, who had
not expected such tremendous cuts.111 Some industry analysts, however, contended
that Kodak was in need of even further workforce reductions to stay competitive. They
argued that Kodak generated sales only four times that of its rival Fuji, despite the fact
that it employed seven times more employees [see also Figure 29].112 Although Fuji
still served its foreign markets from Japan, Kodak’s sales remained literally flat after
four consecutive years.
Parallel to its reduction of employees, Kodak also began to drastically reduce its
portfolio of deliverable products. In 1987 it eliminated one third of some 20,000
products.113 The cuts in the workforce and other costs finally paid off in 1987, when
after five years of stagnation, sales began to climb and to exceed the 1982 results.
Nevertheless, the benefits of effects of cuts in the workforce and improvements in
efficiency did not last for long. In 1989 Kodak announced another massive layoff,
designed to generate some $1 billion in savings in the following year.114 Stiff
competition in the photographic industry, unfavorable currency exchange, and
Kodak’s engagement in the information and commercial businesses again led to
109
111
“We had expected cuts in 1986 and 1987 as the cost structure was too high,” said Eugene Glazer, an analyst
with Dean Witter Reynolds Inc. “But I'm surprised [the cuts] have been accelerated. The company must have
realized it didn't have the luxury to drag [cost-cutting measures] on.” Quoted in Ansberry, C. 1986c. Kodak
Unveils Plan to Reduce Work Force 10% (Feb 12).
112
Ibid.
113
Ansberry, C. 1987c. Kodak to Unveil Still-Video Photo Line, Shed Many Marginal, Outdated Items. Wall
Street Journal, 1987 Jun 04: 1.
114
Ansberry, C., & Carol, H. 1989. Last Chance: Kodak Chief Is Trying, for the Fourth Time, to Trim Firm's
Costs --- Chandler, to Retire in May, Faces Takeover Rumors and Polaroid Settlement --- Boost from New Color
Film. Wall Street Journal, 1989 Sep 19: 1, Pae, P. 1989c. Kodak to Again Restructure Operations --- Earnings
Plunge Spurs Latest Round of Cost Cuts. Wall Street Journal, 1989 Aug 18: 1.
110
CASE
103
disappointing operating results.115 Kodak first moved to consolidate its decentralized
photographic divisions – consumer products, photofinishing systems, and sales – into a
single imaging division.116 Rising costs for the management of autonomously run
business units forced the company to restructure its operations.
The bottom line was that “more than” 7,500 employees were asked to leave, endowed
with generous severance packages.117 The Wall Street Journal reported the elimination
of some 10,000 employees, or roughly 8 percent of the total workforce worldwide.118
Restructuring efforts reduced earnings before tax by an (incredible) $875 million, or
one third of earnings from operations.119 The layoff was also followed by a change in
compensation. Kodak began to link pay more closely to financial performance and to
place more of management's compensation at risk, with as much as 40 percent of
annual compensation dependent on corporate performance; for middle managers, less
than 15 percent of annual compensation was linked to the company’s results.120
Finally, in 1991, Kodak announced its fourth massive employment reduction program,
as part of the company’s de-emphasis on electronic imaging technologies. Ongoing
poor performances in the commercial and information systems segment compelled
Kodak to focus on its traditional consumer photographic business and hybrid
technology such as the PhotoCD system. Initially the company announced a reduction
in its US workforce by some 3,000 employees.121 To render early retirement attractive,
Kodak offered high incentives to employees, at an average cost of about $120,000 per
employee.122 Kay Whitmore, then Kodak’s Chief Executive Officer, conceded that the
program was “too rich.”123 The early retirement plan was signed by a total of 8,354
employees, and Kodak lost even many top executives.124 The cost of the early
115
Pae, P. 1989b. Kodak Is to Take $225 Million Charge, Signaling Bigger Restructuring Plans. Wall Street
Journal, 1989 Jul 25: 1.
116
Ansberry, C. 1989a. Kodak Consolidates Core Operations into One Division in Bid to Trim Costs. Wall
117
118
Hirsch, J. S. 1990. Kodak Hopes Electronic Imaging Clicks, as Company Faces Fuzzy Photo Future. Wall
Street Journal, 1990 Jul 16: 0-PAGE B5.
119
120
Ibid.
121
Rigdon, J. E. 1991d. Kodak Shuffles Executives, Operations, Announces Plans to Cut 3,000 Workers. Wall
Street Journal, 1991 Aug 13: 0-PAGE A3.
122
Rigdon, J. E. 1993c. Kodak Is Said to Plan Layoffs of 2,000 to 4,000. Wall Street Journal, 1993 Jan 08: 0PAGE A6.
123
Ibid.
124
1992b. Kodak's Early Retirement Plan. Wall Street Journal, 1992 Oct 05: 0-PAGE B5.
104
retirement plan was some $1.6 billion before taxes or $1 billion after taxes!125 In fact,
the program reduced two thirds of the company’s earnings from operations!
8%
10%
7%
8%
67%
1983
1986
1989
1991
Figure 38
Reduction of Workforce
5.4.2 Trusting Partners
Since its early days, what Kodak sold was made by Kodak.126 It was one of the most
fully integrated manufacturers in the US. It operated this way so as to ensure the
quality standards it had valued ever since its founder, George Eastman, began
commercial production of dry plates and experienced tremendous problems when
customers returned their plates due to a supplier’s faulty gelatin base.127 Since then,
the company was reluctant to rely on outsiders, but rather to be in full control of its
products. For this reason, Kodak produced its own gelatin to secure the high quality of
its photographic film and paper, ran its own chemical division to produce every
component of the film brought to market, and engineered its own manufacturing
plants.128 Kodak even decided to generate its own electricity, purify used water, and
125
Chandler, C. H. 1986. Eastman Kodak Opens Windows of Opportunity. Journal of Business Strategy, 7(1)
5-8.
127
Collins, D. 1990. The Story of Kodak. New York: Harry N Abrams. p. 43
128
Kodak,
"History
of
Kodak:
126
CASE
105
operate its own steam power plant at the Kodak Park in Rochester.129 During Colby
Chandler’s tenure, the company got more reliant on outside help to cut costs and to be
able to compete quickly in new domains.
Since the 1970s, Kodak’s capital additions had tripled, while return on assets had not
kept pace [see Figure 35]. Changes in the industry and the malaise resulting from a
series of disappointing product launches affected Kodak’s financial position. Hence, in
the advent of electronic technologies, which more and more affected Kodak’s
businesses, the company could not afford to take further risks.130 Rather than proving
wrong again, it decided to partner with other companies and to leverage its brand and
distribution channels. As Kodak’s President Kay Whitmore, who reported to Colby
Chandler, put it: “We've come out of an environment where we were the single world
leader; we had a technology that nobody else could really match, and we were able to
dominate that field. The world doesn't allow companies to do that anymore.”131
First of all, Kodak outsourced the production of its new non-SLR 35-mm camera to
Chinon Industries Inc. in Japan.132 After 17 years of absence from the market, during
which it left the 35-mm camera business entirely to the Japanese, Kodak announced its
return in 1986.133 The new single-lens-reflex camera, which featured a fixed focus,
automatic flash, and film sensing, was aimed at young buyers who demanded highquality photos without the necessity of mastering sophisticated adjustments of the
camera. Accordingly, the price was set to meet these demands, between $88 and $140,
as compared to 35-mm SLR cameras, which sold for at least $200.134 Although Kodak
entered the market late, and Canon and Minolta as well as other Japanese producers
already dominated it, the company’s globally respected brand name and wide
distribution network triggered quick and effective market diffusion. Within two years
129
Kirkpatrick, D., & Sookdeo, R. 1991. Why Not Farm out Your Computing? Fortune September 23.
Dennis Deleo, responsible for Kodak’s Corporate Commercial Affairs division between 1976 and 1985,
extensively elaborated the reasons for Kodak’s risk aversion. Deleo, D. 2013. Personal Interview. November 18.
With M. Shamiyeh.
131
132
Ansberry, C. 1988e. Kodak Introduces Four New Cameras, Expanding Both Ends of Its Model Line. Wall
Street Journal, 1988 Jan 22: 1.
133
Lieser, E. 1974. Die Kodak- Und Nagel-Cameras Aus Stuttgart Wangen. Stuttgart: KODAK.
134
Ansberry, C. 1986d. ...While Kodak Confronts Doubts About Its 35-Mm. Wall Street Journal, 1986 Mar 25:
1.
130
106
of rejoining the 35-mm camera market, Kodak had become a market leader for 35-mm
non-SLR cameras in the US.135 Kodak also turned to Japanese suppliers to quickly get involved in the consumer video
recorder market. In 1984 the company released the Kodavision camcorder.136 The 8mm system was developed in concert with Matsushita Electric Industrial Co. and
TDK.137 In the copier business, Kodak settled an arrangement with Canon to quickly
enter the mid-volume copier marketplace. Canon designed and manufactured the
Ektaprint 85, which Kodak sold under its brand name.138 For the development of the
Ektaprint electronic publishing system (KEEPS), which was introduced in 1985 and
aimed at companies that wanted to edit, print, and update text and graphics for their
own publications, Kodak utilized Canon printers.139 The system also incorporated a
computer from Sun Microsystems Inc. and software from Inter Leaf Inc.140 Over a
short period, Chandler’s strategy promised success. In 1986, when the non-impact
printer business was growing at a rate of 20 to 25 percent, it provided some 40 percent
of Kodak’s total revenues.141
In entering partnerships, Colby Chandler hoped to shift manufacturing only
temporarily to the Far Eastern suppliers.142 By claiming that Kodak’s manufacturing
skills still existed, he publicly announced in 1986 that he would return to production as
soon as it became economically viable in the US again.143 In subsequent years,
however, Chandler actually broadened partnerships with other companies, either to
jointly pursue product development or to outsource internal workflows. For instance,
in 1988 Kodak began to partner with the Matsushita Electric group to establish a
jointly owned and operated manufacturing facility for the production of alkaline
batteries, and with Olivetti to jointly develop, manufacture, and market optical disc
135
137
Ibid.
138
Ibid.
139
Buell, B., & Aikman, R. 1985. Kodak Is Trying to Break'out of Its Shell. Business Week(June 10) 92-95.
140
141
Ansberry, C. 1986a. Kodak Introduces High-Volume Model for Growing Electronic Printer Market. Wall
Street Journal, 1986 Sep 04: 1.
142
143
Ibid.
136
CASE
107
drives for personal computers.144 In the same year, Kodak joined with Fuqua to create
the world’s largest photofinishing company, to better service customers.145
Likewise, many corporate information services had been outsourced with the aim of
allowing Kodak to focus its resources on its core operations. For instance, IBM was
handed the responsibility to operate Kodak’s data center, and Digital Equipment
Corporation was put in charge of Kodak's telecommunications services.146
5.4.3 Exploring New Domains
Parallel to the necessity for efficiency improvements, Kodak also started to consider
extending operations beyond its traditional photographic business. There were several
reasons for this: Growth in traditional photography had slowed down to some 4
percent a year, from 8 to 10 percent in previous years.147 Home video, however, had
become a profitable $3 billion market in the US, accounting for some 20 percent of the
entire photographic industry.148 New electronic image-capturing technologies became
available, technologies that did not rely on Kodak’s traditional chemical-based
competences, and showed signs of threatening its life-long cash cow. Hence, Chandler
decided Kodak should switch to rather than fight the electronic revolution, which had
finally caught the imaging industry. New ventures and acquisitions ought to fill
competence gaps in Kodak’s technology base.149
The other reason for Kodak’s entry into new domains was its base of some 500,000
chemical formulations and extensive capabilities in biotechnology, which it aimed to
leverage.150 For more than a hundred years since its foundation, the root source of
Kodak’s success was its proficiency in chemicals and engineering. To apply the
company’s traditional core competence in chemical engineering to the health and
pharmaceutical industry promised strong revenue streams. But Kodak never identified
144
1987. Eastman Kodak Company Annual Report. Rochester, NY, 1988b. Eastman Kodak Company Annual
Report. Rochester, NY, 1989a. Eastman Kodak Company Annual Report. Rochester, NY.
145
Report. Rochester, NY, 1989a. Eastman Kodak Company Annual Report. Rochester, NY.
146
147
148
149
5-8.
150
108
a product or business in the burgeoning electronic photography market that could
compete with the proprietary position of its color film, which had generated
blockbuster profit margins at a minimum of 50 percent.151
To move rapidly and position the company successfully in electronic imaging and
pharmaceutical business, Chandler embraced a massive restructuring process, to
launch a venture program and to engage in massive acquisitions.
In August 1981 Kodak was annoyed when Sony unveiled its prototype for a
“revolutionary” new electronic still video camera; the Japanese firm presented its
MAVICA (MAgnetic VIideo Camera) in a triumphant publicity tour in the United
States, and promised to bring it to market soon.152 The single-lens reflex camera was
able to store the analog video signal of up to 50 color shots on a rotating magnetic disc
and show it instantly, without processing, on a standard TV set. Although Kodak was
familiar with some of the technologies integrated in Sony’s MAVICA, it had only
developed a breadbox-sized prototype, which was far from being a “product”; that is to
say, Kodak was nowhere near ready to make such a small, integrated electronic
camera:
Already in 1972, Kodak had focused on devices that could capture images
electronically, the so-called charged coupled devices (CCDs).153 Roger Van
Heyningen, then director of Kodak’s Physics Division, convinced management that a
full-scale commitment would be required for the company to seriously explore the
potential of CCDs in future products, which finally led to the development of a
“world-class electronics research facility” in 1975, even before the Japanese got into
the business.154 Kodak Research scientists quickly began making sensors with ever
greater numbers of pixels, or picture elements, and began to develop electronic still
cameras that were able transfer images to TVs; however, Kodak declined to
commercialize these products because of their production costs.155 Certainly there
151
152
Drukker, L. 1982. How Two Giants View Electronic Photography's Future. Popular Photography(January)
75f.
153
1989c. Journey: 75 Years of Kodak Research. Rochester, NY: Eastman Kodak Company.
154
Ibid., Van Heyningen, R. 2013. Personal Interview. April 14. With M. Shamiyeh.
155
See comment by Gerald B. Zornow, who served as the President of Eastman Kodak Company from 1970 to
1972 and as Chairman of the Board from 1972 to 1977: “We had a hell of a good product. We had both a videomovie and a still camera, and the quality of the image was excellent on a TV screen. We killed it off, though,
CASE
109
were also concerns about launching products that would reveal the potential of
cannibalizing Kodak’s profitable traditional silver-halide business.
For instance, in 1975, when Kodak engineer Steve Sasson invented and patented the
world’s first digital camera, the R&D project basically did not progress beyond the
prototypical stage.156 The 8½-pound camera captured pictures in black-and-white with
a resolution of 100 x 100 pixels (0.01 megapixels).157 The images were stored on a
tape recorder and could be shown on a TV set or printed on a dot-matrix printer.
Sasson recalled that after an internal presentation of the camera to Doug Harvey, then
head of the Kodak Apparatus Division, Harvey allowed the project to continue but said
he hoped it would fail.158 The camera clearly revealed the potential for an upcoming
threat to Kodak’s core business, while raising too many issues that could not be
resolved at that time.
A Kodak product that employed an electronic imaging sensor and which made it to the
market was announced in 1980. The Kodak SP2000 motion analysis system captured
images at high speed and allowed review in slow motion.159 However, it addressed the
needs of the commercial market and was not designed for consumers.
The other reason for Kodak’s initial reluctance to push electronic photography was the
poor quality of the image sensors. Kodak’s management by and large regarded the
quality of electronic imaging sensors as inferior to the silver-halide film technology for
use in consumer photography. In response to Sony’s announcement in 1982, Chandler
made his thinking clear:
“An electronic sensor with one million individual elements (pixels) could produce an
acceptable 3R print. That’s almost four times the number of elements in currently
available sensors, and even that falls far short of current film standards. A single 110size frame of Kodacolor II film has a resolution equivalent to a hypothetical sensor
with over two million elements, and a 35-mm frame of the same Kodacolor II film
offers the equivalent of more than 10 million sensor elements. We have on the drawing
when we found out what the costs were.” Quoted in Moore, T. 1983. Embattled Kodak Enters the Electronic
Age. Fortune(August 22) 120-128.
156
Sasson, S. 2013a. Personal Interview. April 9. With M. Shamiyeh.
157
Sasson, S. 1977. Technology Report: 47. Rochester: Eastman Kodak Company.
158
159
110
boards new products that have the potential to increase those numbers by 50
percent.”160
Kodak’s towering presence in the consumer marketplace, coupled with its carefully
cultivated reputation for high picture quality, rendered an early engagement in
electronic imaging, with its mediocre quality, risky. In fact, in the early 1980s, image
sensors were far inferior to every type of film system. Therefore, the development and
commercialization of consumer digital cameras would have been a bigger failure then
the Disc film was. From this perspective, Kodak’s decision not to develop and market
digital cameras in the 1970s and 1980s was understandable – a view that was widely
shared by other photographic companies at the time.161 Kodak had done much to make
quality a vital element in its reputation. Since its founder, George Eastman, recalled a
large shipment of products – enough to nearly bankrupt his fledgling business –
because of an unsatisfied customer, Kodak had carefully managed its brand and the
quality it stands for and for which it was well known and respected in the worldwide
photographic community.162
It is also important to note that the advent of electronic still cameras in the early 1980s
was not considered as an immediate threat to traditional chemical-based photography –
not even after first cameras were brought to market, such as the Canon RC-701 in
1986. 163 Photographic journalists and industry leaders remained undecided for a long
time about the progress of the technology and its potential for the future. Casio, for
instance, was convinced that consumers would be attracted quickly by the advantages
of still video cameras, because pictures could be stored in just a few inches of shelf
space or erased if they were not appealing; moreover, there was no need for consumers
to go to photofinishers to look at their pictures.164 Others were skeptical, because of
the picture quality and the considerably higher costs compared to media used in
160
75f.
161
See commentary by Polaroid scientist Conrad H. Biber who explains, “[T]he prints [from electronic still
video cameras] aren't very good. A true photographic company can't come out with a product that
mediocre.” Quoted in Beam, A. 1985. The Filmless Camera Is Here, but Will It Sell? Business Week(April 15)
151f.
162
Collins, D. 1990. The Story of Kodak. New York: Harry N Abrams. See also notes in the annual reports of
1985 and 1986 on the maintenance and enhancement of the company’s quality image. 1985b. Eastman Kodak
Company Annual Report. Rochester, NY, 1986. Eastman Kodak Company Annual Report. Rochester, NY.
163
Leavitt, D. 1985. Imaging Materials: Electronic Innovations Made News, but Conventional Photogrpahy
Showed Steady, Solid Improvements. Popular Photography(January) 62f.
164
Ansberry, C. 1987d. Makers of 'Still-Video' Cameras Refocus Marketing Efforts on Commercial Users. Wall
CASE
111
traditional photography: Casio charged about $7 per disc or 14 cent an image; 35-mm
color slides, by contrast, were about 35 to 40 cents apiece, including processing.165
Still others expressed doubts about people’s interest in watching their pictures on a TV
or getting low-quality prints from video signals: Polaroid, for instance, was skeptical
about the quality of the filmless still video cameras that many Japanese companies
believed would revolutionize traditional picture-taking, because of the poor quality of
the image reproduction – an assumption that was echoed in surveys.166 Nevertheless,
in the late 1980s, when Canon and Sony were already selling several thousand still
video cameras a year, half of the people asked about their interest in seeing pictures on
a TV said they were not interested; only some 19 percent of those surveyed said they
would accept prints at a quality inferior to those of 35-mm film.167 Some companies,
including Kodak, did not believe that electronic cameras would succeed in the
consumer market due to the lack of affordable devices to make paper copies of video
images.168 In this regard Kodak was right as history has shown.
In any case, in the early 1980s, when it became clear to Kodak that its traditional
chemical-based film and paper business would be increasingly affected by electronics
in the future, the company decided to enter the burgeoning electronic-imaging
businesses – after watching and waiting for a decade. But unlike its Japanese
competitors, it decided to strike a balance between electronics and chemistry; that is to
opt for a hybrid system, the best of both worlds: for example, to use a video converter
to allow consumers to see their chemically produced color images; edit and enlarge
them electronically on a TV; encode instructions on a magnetic strip on the edge of the
film; and then transmit the film back to the photofinisher, where an automatic printer
would turn out prints to Kodak’s specification at an affordable price.169 Kodak showed
such a system for the first time at the Photokina in Cologne in 1992, by its
demonstration of a Disc film-to-video player. Although the system was never
commercialized for several reasons, the main purpose was to demonstrate how, if
consumers continued to take pictures on film, their images could later be shown on TV
165
Ibid.
Beam, A. 1985. The Filmless Camera Is Here, but Will It Sell? Business Week(April 15) 151f.
167
Harrand, B., Lewis, B., Matsumoto, Y., & Fox, T. 1993. 1993 Photo Marketing Association International
U.S. Consumer Photographic Survey. In P. M. A. International (Ed.): 158. Jackson, Michigan.
168
Ansberry, C. 1989c. On Photography. Wall Street Journal, 1989 Feb 28: 1.
169
75f.
166
112
– and the TV picture would look better than if it had been taken with an
electronic/digital camera.170
To implement electronics in every sphere of photography, or “imaging” chain as it is
now called, Kodak decided to spend one-fourth of its research budget on electronics
and for every new chemical engineer, 10 electrical engineers would be hired.171
The strategic decision to enter electronic photography was followed by massive
structural changes. One of Kodak’s two traditional divisions, the Photographic
Division, was split into 17 independent and autonomously managed business units; the
Chemical Division remained untouched.172
Each of the 17 business units became independent and autonomous in the sense that
each business unit was in charge of its own financial analysis, business planning,
marketing and sales for the US, product development, equipment manufacturing,
materials manufacturing, and international operations. For each business unit, Kodak
made one general manager in charge for the unit’s financial performance, product
development and marketing, coordination with functional and geographic units,
manufacturing activities, and strategic planning.173
One of the new business units, the Consumer Electronics Division, was created to
directly focus on the development of electronic cameras equal to the Japanese ones.
The separation of the company’s traditional consumer products division was expected
to ensure independence of the interests of traditional photography.174
By breaking Kodak into smaller business units, the company abandoned a decades-old
management structure in which marketing and manufacturing executives reported
along separate chains of command. At the old Kodak, a suggestion from a marketing
manager for altering a manufacturing process would have to filter all the way up the
management ladder and back down the manufacturing ranks. By opting for
170
Leo Thomas, then Kodak Research director, quoted in Moore, T. 1983. Embattled Kodak Enters the
Electronic Age. Fortune(August 22) 120-128.
172
1984a. Eastman Kodak Company Annual Report. Rochester, NY. See also 1984b. Kodak Reorganizes
Photographic Division Along Business Lines. Wall Street Journal, 1984 Nov 19: 1.
173
174
See comment by Wilbur J. Prezzano, quoted in Beam, A. 1985. The Filmless Camera Is Here, but Will It
Sell? Business Week(April 15) 151f.
171
CASE
113
decentralization, Chandler aimed to promote innovation, speed to market, and
adherence to clear profit goals.175
Kodak’s new age of entrepreneurialism received immediate acclaim for its
effectiveness from within the company, in the industry, and in academia. For instance,
the time from product idea to market for Kodak’s Create-a-Print Machine, a do-ityourself photo enlarger, had been reduced from four years to only 22 months.176 Other
benefits of Kodak’s decentralization had been well documented in the manufacture of
black-and-white film.177 The transfer of the primary responsibility for the entire
workflow resulted in impressive reduction of production costs by some $40 million
and inventory by about $50 million; moreover, the time required for certain filmfinishing routines was reduced to two days from six weeks; routines in film coating to
about half the time.178 The increase in the number of innovation reports created by
Kodak scientists documents another payback of the restructuring process: Within five
years, Kodak's research laboratories, which had been aligned with the business units to
focus their aim and speed to the process of commercialization, nearly doubled the
number of patent applications filed by the company's technical community.179
Industry analysts commented positively on the remarkable turnaround of Kodak’s core
business.180 For instance, Harvard professor Rosabeth Moss Kanter praised the success
of Kodak’s restructuring process in her book When Giants Learn to Dance, to support
her arguments in favor of corporate change.181
While Kodak’s restructuring process aimed to make the way clear for new approaches
to markets served by the company already, the goal of the newly establishment
Venture Board was to nurture ideas that did not fall neatly into existing lines of
business.182 A board of managers was set up to review promising ideas for new
business opportunities outside the company's mainstream business. The Offices of
175
William J. Janawitz, then manager for manufacturing equipment of the photofinishing systems division,
quoted in Deutsch, C. H. 1988. Kodak Pays the Price for Change. The New York Times(March 6).
177
Frangos, S. J. 1993. Team Zebra: How 1500 Partners Revitalized Eastman Kodak's Black & White FilmMaking Flow: Wiley.
178
Ibid.
179
180
Flint, J. 1988. Faces Behind the Figures. Forbes(March 21) 174.
181
Kanter Moss, R. 1989. When Giants Learn to Dance. New York: A Touchstone Book, Simon&Schuster Inc.
182
176
114
Innovation maintained drop-in centers.183 At these offices, which were located all over
the company's premises, including in Europe and Asia, employees were asked to hand
in ideas that were not directly related to their daily work.184 These were then screened
by company staff and external consultants and checked for their viability and
objectives for growth in revenues and earnings. Kodak promised to provide
preliminary grants of some $25,000 for work on a laboratory-scale project to
determine the viability of new initiatives.185 In 1985, one year after its commencement,
the office recorded some 28,000 submitted ideas on productivity and efficiency,
translating into $18.5 million in savings; about one third of employees’ suggestions
were adopted, resulting in payments of nearly $4 million to Kodak people, according
to the Annual Report 1985.186
Dennis Deleo, who was running Kodak’s venture portfolio as corporate vice president
at the time, recalled a series of diverse ventures that either made use of the company’s
technologies or required the acquisition new ones. Among others he named Pathtech, a
venture which had a technique for molding parts that contained electrical conducting
paths; and Videk, an operation that applied high-resolution image scanning for product
inspection for industrial purposes.187
In 1987, Kodak was glad to report the establishment of three new businesses that
promised opportunities outside the company's mainstream businesses.188 One venture
that even encouraged the creation of a new division at Kodak, was the Lamdek Fiber
Optics Division. The unit leveraged core capabilities in optics, developed in the wake
of Kodak’s Disc Camera. The venture grew to a global business with its own brand
identity and worldwide manufacturing, marketing, distribution, operations, and
product development.189 Another venture that made it to market was Kodak’s
innovative nine-volt lithium battery, which was designed to have a 10-year shelf life
183
5-8.
184
Deleo, D. 2013. Personal Interview. November 18. With M. Shamiyeh.
185
Look Elsewhere. Wall Street Journal, 1985 May 22: 1. In an interview the number had been confirmed by
Dennis Deleo. Deleo, D. 2013. Personal Interview. November 18. With M. Shamiyeh.
186
187
188
189
Brenner, B. S. 2013. Personal Interview. November 20. With M. Shamiyeh.
CASE
115
and last twice as long as its alkaline counterpart.190 The new product made use of the
company’s expertise in chemical engineering. Coupled with Kodak’s strong brand
name and distribution network, Kodak managed to bring the product to a $2 billion-ayear market, with annual growth rates of 10 to 12 percent, in just two and a half
years.191 Nevertheless, the product suffered from quality problems and Duracell’s
strong market position.192
5.4.4 Accessing New Technologies
The other big change Colby Chandler initiated was to abandon Kodak’s historically
strong vertical integration, by aggressively acquiring new technologies through
cooperative arrangements. There was a clear awareness that electronic businesses in
particular have a rapid rate of obsolescence; thus there is a need to rapidly acquire
technical capabilities that Kodak did not have in-house or would require a long time to
build up internally.193 Moreover, there was a clear sense of the cost savings the
company could generate by acquiring technologies from others, rather than relying on
“slow and meticulous” internal capacities to develop and market new products.194 For
this reason, Chandler embarked upon an acquisition and investment program that was
unprecedented for the photographic giant. In less than five years, the company spent
some $6 billion, or four times its annual net earnings, to buy into companies that made
everything from computer work stations to anti-cancer drugs.
Until 1983, Kodak had acquired only three companies: In the 1930, facilities in
Peabody, Massachusetts, which manufactured gelatin; Spin Physics of San Diego in
1972, which developed for Kodak high-performance magnetic heads; and Atex in
1981, which developed computer-based newspaper publishing systems.195 Within four
190
Ansberry, C., & Robert, L. R. 1986. Kodak's Entry into the Battery Business Includes First Mass-Market
Lithium Cell. Wall Street Journal, 1986 May 23: 1.
191
192
Ansberry, C. 1990. Eastman Kodak Is Pulling Plug on Its Ultralife. Wall Street Journal, 1990 Apr 10: 0PAGE B1, Deutsch, C. H. 1988. Kodak Pays the Price for Change. The New York Times(March 6).
193
“One of the things we've learned is that one company can't do everything,” Mr. Whitmore said. “We're
prepared to acquire if it fits our strategic plan and gets us there sooner, or gives us a technical capacity we don't
have in-house, or buys a market share that would be hard to build.” Quoted in Elaine, J. 1985. Kodak Facing Big
Challenges in Bid to Change --- Slowing of Photo Business Forces Firm to Look Elsewhere. Wall Street
Journal, 1985 May 22: 1.
194
“Kodak can no longer afford to go alone,” said Chandler to security analysts; quoted in 1983c. New Kodak
Policy: Grow from Outside. Schenectady Gazette, Nov 11: 48.
195
Report.
Rochester,
NY,
Kodak,
"History
of
Kodak:
116
months after Chandler was named chairmen of Kodak in 1983, the company acquired
two additional companies: Mead Digital Systems, an Ohio-based manufacturer of ink
jet printers, which Kodak later renamed Diconix; and the Datatape division of Bell &
Howell, which developed high-tech digital tape recorders.196
Two years later, in 1985, the imaging giant made seven acquisitions. Among these
were: Eikonix, a design and manufacturing corporation for digital image-processing
equipment, which was bought for approximately $53 million;197 and Verbatim
Corporation, a manufacturer and marketer of flexible disc for use in computers and
word-processing systems, bought by Kodak for about $175 million.198 The following
year, Kodak acquired Fox Photo Inc., a large photofinisher which operated wholesale
photo labs and mini labs in 23 states, for approximately $95 million; and the
photographic distributorship business of Nagase & Co.199 In 1987, the company
acquired, for $43 million, American Photographic Group, a privately held wholesale
photofinishing company operating in 17 states.200
In 1988 Kodak agreed to acquire IBM’s copier business in the US.201 IBM had entered
the copier business quite late, in 1982; however, the company quickly gained one
fourth of the market due to Kodak’s cautious expansion nationwide.202 The acquisition
of IBM’s copier business – to service all existing IBM copiers in the US and sell IBMmade copiers and supplies – opened for Kodak a window to woo a broad customer
base for future sales. Kodak was well known for its attention to quality and customer
service.203 In the late 1980s, IBM was in a transitional phase, and the company was
seriously considering withdrawal from the copier business; for Kodak, it was the right
time to pick up the pieces.
196
1983a. Eastman Kodak Company Annual Report. Rochester, NY, 1983b. Kodak-Mead Pact. The New York
Times, November 8.
197
198
Ibid.
199
200
201
Ansberry, C., & Paul, B. C. 1988. Kodak Agrees to Purchase Most of Ibm's U.S. Copier Business; Terms
Undisclosed. Wall Street Journal, 1988 Apr 20: 1.
202
203
CASE
117
Kodak also used acquisitions to reduce its dependency of its traditional photography
and information-imaging business. Leveraging its core capabilities in chemical
sciences, it searched for applications beyond imaging. With some half a million
chemical formulations in its files, Kodak thought it owned a big asset worth
exploiting.204 Life sciences, in particular health and pharmaceuticals, promised a
natural extension of the root of its success, and the $110 billion-a-year worldwide
pharmaceutical industry alone promised profit margins as high as Kodak has received
from silver-halide film.205
Kodak’s established its Life Sciences Division in 1984, with the goal of developing
and commercializing new pharmaceutical products growing out of Kodak’s
capabilities in chemistry and biotechnology.206 Leo J. Thomas, then general manager
of the Life Sciences Division and former director of Kodak Research, was aware that
the division could not entirely rely on its hundred years of work in the chemical
sciences for photography.207 Kodak had neither experience in the legal approval
process necessary for new drugs nor an adequate distribution network for medical
products. The company knew that help from outside was necessary and therefore
aggressively surveyed the market for possible acquisitions.208
In a series of investments and joint ventures with bio-technology companies, Kodak
aimed at backing its efforts with third parties. In particular, it targeted companies that
had products nearly ready for clinical trials and looking to bring forward drugs relating
to the immune, cardiovascular, and central nervous systems. For instance, it acquired
Bio Image Corporation, a Michigan-based and privately held company supplying
instrumentation and software for medical and biotechnology applications.209 In 1987,
the acquisition of International Biotechnologies Incorporated expanded Kodak's
capability to produce biological agents and molecular instrumentation for universities,
hospitals, and research firms.210 However, it was the $5.1 billion acquisition of the
204
Koenig, R., & Clare, A. 1988. Kodak Seeks New Drug from Its Shelves --- Firms Hired to Test Inventory of
Compounds. Wall Street Journal, 1988 Jul 07: 1.
205
206
207
Ansberry, C. 1988a. Dreams Come True for Kodak's Thomas. Wall Street Journal, Jan 26: 1.
208
Ansberry, C. 1987b. Kodak Exit from 8mm Camera Business Reflects Disappointing Sales in Market. Wall
Street Journal, 1987 Oct 26: 1.
209
210
118
New York-based Sterling Drug Inc. that at first glance promised to give Kodak what it
coveted. Sterling and its Lehn & Fink division, then a well-known supplier for
household goods, had a number of blockbusters on the market, including Bayer aspirin
and Lysol disinfectant;211 moreover, it was experienced in international drug
registration and maintained marketing infrastructure that promised Kodak to be able to
commercialize its own research findings quickly.212
5.4.5 Aftermath of Change
Kodak’s strategic diversification, which was accompanied by an extensive
restructuring and acquisition program, was not without drawbacks. While sales
climbed to $20 billion compared to some $10 billion a decade earlier, earnings on
average remained below the income of the early 1980s. Kodak’s many restructurings
and efforts to ease the pain for those who had to leave the company certainly translated
into increased costs for retirement and separation benefits, extensions of life insurance
and health care coverage, and outplacement counseling services [see Figure 32]. In
1983, costs associated with the Optional Retirement and Separation Program cut
earnings before tax by some $200 million;213 the weak financial performance in 1985
reflected the impact of $563 million
(or half of Kodak’s total earnings from
operations!) spent for the discontinuance of instant photography;214 and the bad result
in 1986 was due to charges relating mainly to the company's employment reduction
program, which reduced earnings before taxes by some $520 million, primarily
because of $434 million spent for the reduction in force program, and $78 million for
facilities closures.215 Expenditures of some $875 million in 1989 and $1.6 billion in
1991 depressed pre-tax earnings again.216 Kodak’s quarterly announcement of
depressed earnings was observed by Wall Street with concern and the stock price fell
[see Figure 32].217
211
1988b. Eastman Kodak Company Annual Report. Rochester, NY, Ansberry, C. 1988b. Kodak Agrees to
Acquire Sterling Drug --- Offer of $5.1 Billion Ends Roche Bid, Would Give Buyer Major Drug Role. Wall
Street Journal, 1988 Jan 25: 1.
213
214
215
216
1989a. Eastman Kodak Company Annual Report. Rochester, NY, 1991a. Eastman Kodak Company Annual
217
See e.g.,1991b. Kodak Is Expecting Information Systems Division to Improve. Wall Street Journal, 1991
Mar 28: 0-PAGE C18, 1992c. Kodak's Imaging Sales for July, August Undermine Hope for Rebound in Sector.
212
CASE
119
Several factors contributed to the company’s poor performance:
First, its lack of extensive experience in volatile electronic businesses, coupled with
the promise of low profit margins in that domain compared to the its experience with
the chemical-based film and paper business, encouraged Kodak to focus on its core,
traditional photographic business, thus losing valuable time that could have been used
to build a competitive position in the new electronic domain. As a consequence, high
investments were never paid back and many of the new electronic ventures were shut
down or sold.
Second, Kodak’s bureaucratic and centralized management style was not a good match
for the culture of newly acquired or established organizational units, and thus
constrained any new entrepreneurial spirit; quite often managers had to be changed or
had to report negative results.
And, third, the massive acquisition program put great stress on the company’s
financial position and thus its flexibility to pursue costly innovation projects or to
embrace new initiatives, such as efficiency improvements in the production process or
new product development. The actions of Chandler’s successors, Kay Whitmore and
especially George Fisher, were greatly affected by this burden.
All three factors will be discussed in detail in now:
Kodak’s trouble with electronic businesses: Since its early days, Kodak’s income had
relied on two revenue streams: the photography business, which was launched in 1880,
and the chemical business, launched in 1918.218 The latter was at the beginning of
World War I, which caused a scarcity of raw materials, and Kodak’s founder, George
Wall Street Journal, 1992 Sep 17: 0-PAGE B4, 1993e. Kodak Has $299 Million 4th-Period Net, Cites Sales of
Certain Small Businesses. Wall Street Journal, 1993 Feb 03: 0-PAGE B4, Ansberry, C. 1986b. Kodak Reports
Profit Fell 58% for 1st Quarter --- Net Included $77.3 Million Pre-Tax Charge Related to Cost-Cutting Effort.
Wall Street Journal, 1986 May 01: 1, Rigdon, J. E. 1991b. Kodak Posts $118 Million Loss in Quarter after $435
Million Restructuring Charge. Wall Street Journal, 1991 Oct 29: 0-PAGE A2, Rigdon, J. E. 1991c. Kodak
Reports 4th-Quarter Net of $326 Million --- but Turnaround from '89 Doesn't Satisfy Analysts, Who Cut '91
Estimates. Wall Street Journal, 1991 Feb 07: 0-PAGE A4, Rigdon, J. E. 1992d. Kodak Reports 4th-Period Loss
of $400 Million. Wall Street Journal, 1992 Feb 05: 0-PAGE C15.
218
Kodak,
"History
of
Kodak:
120
Eastman, concentrated on securing supplies necessary for his photography business.219
Until 1998, the photographic business accounted for some 80 percent [see Figure 39].
100%
80%
60%
40%
20%
0%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1990
1992
-20%
-40%
Photography
Information Systems
Health
Chemical
Figure 39
Sources of Revenues
Source: Data adapted from Eastman Kodak Annual Reports
100%
80%
60%
40%
20%
0%
1972
1974
1976
1978
1980
1982
1984
1986
1988
-20%
-40%
Photography
Information Systems
Health
Chemical
Figure 40
Sources of Earnings
219
Company,
E.
C.,
"History,"
http://www.eastman.com/Company/About_Eastman/History/Pages/Introduction.aspx, accessed on April 17,
2014.
CASE
121
In the 1970s, Kodak began to generate income by commercializing electronic products
that made use of the company’s chemical and optical engineering capability.
Electronic products belonged to either commercial information systems, like copiers
and publishing stations, or to diversified technologies, such as diagnostic and health
instruments. Kodak did not expel financial information on these businesses until 1988,
but rather credited sales and earnings to its core business. As of the 1988 and 1989
annual reports, details were disclosed on sales and earnings generated in the health as
well as commercial and information systems segments, mirroring the four strategic
directions in which Kodak aimed to compete: Photographic (then renamed “Imaging”),
Chemicals, Health, and Commercial and Information Systems [see Figure 39 and
Figure 40].220
A review of operational figures shows that since Kodak began to disclose sales and
earnings of its four strategic businesses, the company relied on only three sources of
income: photography, chemicals, and health [see Figure 41]. The commercial and
information systems business was not a vital pillar of Kodak’s income. On the
contrary, at the beginning of the 1990s, the business impaired the company’s financial
position, despite the fact that it received one-fourth of the company’s total allocated
R&D funds [see Figure 36].221 During these years, the division developed and
marketed, among other things, digital copiers (in a collaborative effort with Canon),
document image management systems (computer terminals, scanners), printers (inkjet, thermal), digital cameras, and the Kodak PhotoCD system – all technologies that
are related to the electronic/digital world, as opposed to the company’s traditional
chemical-based photography business. Kodak explained its negative earnings in the
electronic business on the basis of the heavy costs of restructuring, higher operating
costs, higher research and development expenditures, and a weakened capital
equipment market in the US [see Table 5].222
220
222
1989a. Eastman Kodak Company Annual Report. Rochester, NY, 1990a. Eastman Kodak Company Annual
Report. Rochester, NY, ibid., 1991a. Eastman Kodak Company Annual Report. Rochester, NY, ibid., 1992a.
Eastman Kodak Company Annual Report. Rochester, NY, 1993b. Eastman Kodak Company Annual Report.
Rochester, NY.
221
20%
1972
70%
10% 20%
1988
60%
20%
20%
70%
CHEMICAL
(INFORMATION)
HEALTH +
STERLING
IMAGING
CHEMICAL
(INFORMATION)
HEALTH +
STERLING
IMAGING
CHEMICAL
HEALTH
INFORMATION
IMAGING
PHOTOGRAPHIC
80%
CHEMICAL
INFORMATION
HEALTH
122
30%
1993
1989
Figure 41
Change of Kodak’s Income Pillars
Sales
Restructuring costs
Earnings (Loss)
1989
4.200
417
-360
1990
4.140
5
1991
3.968
623
-688
1992
4.063
123
-151
1993
3.862
278
-137
Table 5
Sales and Earnings of Commercial and Information Systems
In 1991, Kodak informed Wall Street analysts that it expects its “problem child,” the
commercial and information systems division, to achieve 10 percent operating margins
in about four years.223 In amateur photography, Kodak generated margins at least five
times higher.
Efforts to compete in non-silver-halide film and paper businesses were also burdened
by Kodak’s lack of experience in manufacturing electronic consumer products. It
always had to rely on other companies, and therefore could not generate lucrative
businesses. Product developments of the Kodavision camcorder series in the 1980s and
the PhotoCD in the early 1990s illustrate this:
223
1991b. Kodak Is Expecting Information Systems Division to Improve. Wall Street Journal, 1991 Mar 28: 0PAGE C18.
CASE
123
Kodak products largely centered on the use of traditional film. The Instamatics and the
Disc camera, among other products, aimed at selling more silver-halide film. This was
the domain where Kodak had its manufacturing capabilities, recalled Larry Matteson,
who, as vice president of Kodak’s Apparatus Division in the early 1980s, was
responsible for the company’s 20,000-person organization in charge for R&D and
manufacturing of all Kodak's equipment.224 Equipment for taking movies, on the other
hand, always encumbered the imaging company. “Movies are fairly complicated
compared to taking a snapshot,” according to Matteson. “And some sound movies are
more complicated than silent movies, because you’ve got to worry about where the
sound’s coming from, and it keeps coming from behind you, and all kinds of goofy
things. The last movie camera that we [Kodak] made any serious attempt at doing was
in 1976, with the Ektasound movie camera, which was a bust. And we never really
made a lot of money on movies.”225
In the early 1980s, when the VHS/Betamax battle was determined and home movies
became popular, Kodak had been out of manufacturing movie cameras for almost a
decade.226 Nevertheless, available forecasts on industry growth suggested that
investments in motion photography were a good idea, because digital still cameras
were not a viable alternative from a price and performance standpoint at the time.227
Moreover, the still camera market in the US was completely saturated – in 1981 some
92 percent of all households owned a still camera, compared to some 23 percent who
owned a video camera.228 Three years later, one out of three people surveyed was
inclined to purchase a video camera – a trend that was actually mirrored in the
quadrupling of camcorder sales each year in the mid-1980s.229
When Colby Chandler established the Consumer Electronics Division in 1984 and
hired electrical engineers to bring the company into the new era, Kodak was forced to
224
Matteson, L. 2013. Personal Interview. November 20. With M. Shamiyeh.
Ibid.
226
For more information on the VHS/Betamax battle see, e.g., Cusumano, M. A., Mylonadis, Y., &
Rosenbloom, R. S. 1992. Strategic Maneuvering and Mass-Market Dynamics: The Triumph of Vhs over Beta.
Business history review, 66(1) 51-94, Rosenbloom, R. S. 2000. Leadership, Capabilities, and Technological
Change: The Transformation of Ncr in the Electronic Era. Strategic Management Journal, 21(10-11) 10831103.
227
LaPerle, B. 2013. Personal Interview. November 21. With M. Shamiyeh.
228
1981a. 1981 Consumer Photographic Survey. In P. M. A. International (Ed.): 70. Jackson, Michigan.
229
1985a. 1985 Consumer Photographic Survey. In P. M. A. International (Ed.): 51. Jackson, Michigan,
International, M. R. D. o. P. M. A. 1987. Guide to the Photo Market for Mass Merchandisers. In P. M. A.
International (Ed.): 140. Jackson, Michigan.
225
124
rely on partners. It approached the Japanese OEM Matsushita to manufacture an 8-mm
compact camcorder with magnetic tapes, to be distributed then under the brand name
of Kodak. Matsushita had just won the video recorder battle against Sony, although its
VHS system was inferior to Sony’s Betamax. Matsushita had gained extensive market
share (and thus market diffusion) by joining forces with other companies in the US and
Europe, such as Sears as a distributor and Phillips in the Netherlands. Hence,
Matsushita was a perfect partner for Kodak, which was fearful of risking any further
product flops.
A year later, the new Kodakvision camcorder was launched under the brand name of
Kodak.230 However, the business generated almost no profit margins for Kodak,
because the volumes were relatively low and the prices Kodak was being charged by
Matsushita fairly high, according to Bob Laperle, who was then head of market
planning.231 In considering the alternatives, to either take a billion dollars and develop
its own competences in manufacturing or to quit the business altogether, Kodak
decided to exit the camcorder business in late 1987.232 Certainly this move reduced its
presence and ability to actively engage in consumer electronics, which Kodak’s
management considered to be a “defective” business anyway.233
Kodak’s exit from the 8-mm camera business was not entirely unforeseeable. For one
thing, the company had not engaged in any initiatives to develop a follow-up model of
the compact movie camera; also, in 1984 Kodak quite clearly signaled the public at the
Photokina world fair in Cologne, Germany, that it had quietly opted to do things the
old-fashioned way.234 Innovative products like the Videk system, which combined
optics and electronics to supplement chemical film, then had to make room for
products that unmistakably aimed to “extend the lively future of silver halide
photography.”235
230
Ibid.
232
Bob LaPerle recalled that Matsushita offered Kodak to help them develop manufacturing skills in their home
country. See ibid.
233
Matteson, L. 2013. Personal Interview. November 20. With M. Shamiyeh, Paxton, K. B. 2013b. Personal
Interview (Follow-up). November 19. With M. Shamiyeh, Paxton, K. B. 2013c. Pictures, Pop Botttles and Pills.
Kodak Electronics Technology That Made a Better World but Didn't Save the Day. Rochester, New York:
Fossil Press.
234
Leavitt, D. 1985. Imaging Materials: Electronic Innovations Made News, but Conventional Photogrpahy
Showed Steady, Solid Improvements. Popular Photography(January) 62f.
235
231
CASE
125
Kodak’s disinterest in consumer electronics was mirrored in the company’s
reorganization of its divisional structure. Kodak’s Consumer Electronics Division,
which was founded in 1985, was then renamed the Electronic Photography Division,
its manager sent to Latin America, and products still under development, mostly 8
mm-related products, were transferred to the Consumer Products Division, which dealt
with general product development related to traditional silver-halide film or
photofinishing products, among others.236
It is important to note that Kodak did not stop developing electronic imaging systems
completely. They continued exploring the potential of electronic/digital imaging for
commercial applications, but developments occurred at “skunkworks” outside the big
research labs, and investments remained small.237 For instance, a group of Kodak
engineers developed the Still Video System,238 which permitted photographers to view
images captured with a digital camera or scanned from a traditional negative film on a
TV set, to store them on 3½-inch floppy discs, to transfer pictures electronically via
telephone wire to receivers placed in distant locations, to manipulate them on a screen,
or to print them on a thermal printer. The system targeted the needs of commercial
users such as security dealers.239 One year after its launch, in 1987, the company
closed the business. Roughly at the same time, a small group of engineers started to
build prototypes of portable digital cameras, at the request of a US government
customer. In the wake of Kodak’s development of the world’s first 1.4 million-pixel
imaging sensor, the team applied imaging sensors to conventional 35-mm camera
bodies.240 The development finally led to Kodak’s line of DCS cameras, which also
addressed only the needs of professional users. The high price rendered sales in the
consumer market impossible. The program was stopped 17 years later, in 2004, by
which time the number of digital cameras sold exceeded that of film cameras.241
236
1987. Eastman Kodak Company Annual Report. Rochester, NY, Ansberry, C. 1987a. Analysts Speculate
Kodak Is Considering Leaving 8-Mm Video Camera Market. Wall Street Journal, 1987 Jan 29: 1.
237
McGarvey, J. 2013. Personal Interview. April 10. With M. Shamiyeh.
238
For a detailed account on Kodak’s Still Video System refer to Paxton, K. B. 2013c. Pictures, Pop Botttles
and Pills. Kodak Electronics Technology That Made a Better World but Didn't Save the Day. Rochester, New
York: Fossil Press.
239
240
1989c. Journey: 75 Years of Kodak Research. Rochester, NY: Eastman Kodak Company, Gustavson, T., &
McGarvey, J. 2013. The First Digital Single-Lens Reflex Cameras. IMAGE(Winter 2012/2013) 5, McGarvey, J.
2004. The Dcs Story: 17 Years of Kodak Professional Digital Camera Systems. 1987-2004, McGarvey, J. 2013.
Personal Interview. April 10. With M. Shamiyeh.
241
McGarvey, J. 2004. The Dcs Story: 17 Years of Kodak Professional Digital Camera Systems. 1987-2004.
126
Other electronic product developments for commercial markets included electronic
printing, for instance, by employing proprietary LED (light emitting diode)
technology, which had never before been used in a high volume; electronic publishing
systems (KEEPS); automated document retrieval systems (KAR); and pre-press color
proofing systems.242
The PhotoCD system, probably one of Kodak’s biggest electronic product
developments under the direction of Chandler and his successor, Kay Whitmore, also
failed to take off in the consumer market – Kodak’s most important market.243
Originally considered as a product for millions of US households, the system aimed at
establishing a new standard of electronic image quality for television display,
transmission, and printing. Images captured on traditional silver-halide film and
transferred to a compact disc provided quality superior to even the most advanced
electronic still photography systems, while giving both consumers and professionals
the convenience of digital storage, display, and manipulation.244 The PhotoCD thus
combined the virtues of both the analog and the digital worlds.245 It extended the life
of traditional film and thus aimed at protecting Kodak’s core business, while
competing with electronic photography. 246 Despite its immediate industry acclaim for
its quality, the system was simply too expensive for consumers.247 Kodak charged
some $400 for the CD player and some $20 for every roll of film to be stored on the
compact disc.248 As a consequence, PhotoCD did not become a profit blockbuster and
Kodak had to shift its target group, turning to business users within a year after
product launch.249 Throughout the late 1980s and early 1990s, Kodak did not manage
242
Dickson, M. 1993. Focusing on Grander Horizons. Financial Times, Novemeber 1(11), Press, A. 1991.
Kodak Bets on Film-Digital Format : Photography: 'Photo Cd' Is Seen as a Bridge from Imaging to Electronics.
Los Angeles Times, October 14.
244
245
Rigdon, J. E. 1992b. Kodak Focuses on Rolling out Photo Cd. Wall Street Journal, 1992 Aug 24: 0-PAGE
C1.
246
“We believe the film business is going to survive much longer than we did before PhotoCD,” said Stephen
Stepnes, general manager of Kodak's Worldwide Electronic Imaging Systems; quoted in Press, A. 1991. Kodak
Bets on Film-Digital Format : Photography: 'Photo Cd' Is Seen as a Bridge from Imaging to Electronics. Los
Angeles Times, October 14.
247
Burgess, J. 1991. Kodak Focuses on the Future - Company Responds to Japanese Electronic Challenge by
Developing Cd Technology. The Washington Post, September 15(h.01), Fisher, A. B., & Ehrenfeld, T. 1992.
The Big Drive to Reduce Debt with Credit Tight and Bond Ratings in the Tank, Companies Are Pursuing New
Strategies to Deleverage. But Good Luck Selling Assets -- Unless an Overseas Buyer Turns Up., Fortune,
February 10 ed.
248
Taylor, A. I. 1993. Eastman Kodak Higher Rewards in Lowered Goals, Fortune.
249
Collingwood, H. 1992. Scoping Cd Potential at Kodak. Sepember 06, Rigdon, J. E. 1992c. Kodak Is Aiming
Photo Cd Concept at Business Firms. Wall Street Journal, 1992 Aug 25: 0-PAGE B7.
243
CASE
127
to commercialize any electronic imaging product in the consumer market, its core
market.
The second factor that hampered the company’s performance was Kodak’s
overbearing management style: Ernst Lieser, engineer and later chief executive officer
of Kodak AG Germany, directed attention to several incidents that illuminated
Kodak’s overbearing management style.250 The German subsidiary was run to large
extent autonomously from Rochester, because it had emanated from the August Nagel
camera factory, which had set the origins for the famous 35-mm Kodak Retina. Due to
its engineering and manufacturing competence and the success of its cameras, Kodak
AG Germany was granted extensive freedom in decision-making, although mangers
were asked to attend board meetings in Rochester. Hence, German managers
maintained probably the unique position of experiencing the Kodak-Rochester
management style from the inside, but as a kind of “outsider.”
Lieser recalled a meeting in which he disagreed with CEO Fallon, which caused
immediate turmoil. In Rochester, Lieser said, managers were asked to attend premeetings at which the whole session was rehearsed to ensure that the proceedings and
final decisions were in line with management’s directives. Likewise, CEOs from
Rochester, whether “Mr. Fallon, Mr. Chandler, or Mr. Whitmore,” according to Lieser,
never adjusted to foreign cultural norms, which led to numerous gaffes at foreign
business meetings, on international marketing tours, and in the organization of fairs
abroad. For instance, to promote Kodak shares in Germany, the US headquarters set up
a press conference in a (third-class) hotel in Frankfurt, rather than at Deutsche Bank,
which was the common procedure, and the company’s local executives were not
informed of the fact; in another case, Kodak’s stand at one of Europe’s most important
photographic trade fairs, the Photokina in Cologne, Germany, was arranged from a US
perspective and therefore received bad reviews.
Similar incidents are known about Kodak’s engagement in Japan. According to a
senior manager, the company never adjusted to the Japanese way of doing business,
250
128
insisting on enforcing its US policies.251 For instance, the company’s Japanese
managers were not granted standard benefits such as housing assistance, and imprints
on Kodak’s film packaging was written in English until 1985.252
Kodak’s overbearing and autocratic management style also troubled executives in
newly acquired subsidiaries. Atex Inc., which commercialized computer-based
newspaper publishing systems and was acquired by Kodak in 1981, is an example.
Three entrepreneurs had started the business in 1972, literally working in the garage,
but it quickly grew to a $50 million business and become the leader in the industry.253
Run as a subsidiary of Kodak, the executives soon grew dissatisfied with Kodak’s
management, claiming that it was slow and did not understand the quick pace of the
electronic businesses.254 As a consequence, Kodak’s overbearing management style
spurred an exodus of a several key people, including the company’s founders.255 The
young subsidiary immediately lost its leading position in the industry.
The final and probably most important factor leading to a mixed performance was
Kodak’s high indebtedness.
The third and final drawback of Chandler’s urge to diversify the company was the
company’s step into the life sciences, which was coupled with the acquisition of
Sterling Drug Inc. for $5.1 billion, which definitely affected the Kodak’s future
performance.
The purchase of Sterling Drug Inc. fulfilled a long-term Kodak strategy of leveraging
its base of some 500,000 chemical compounds into the pharmaceutical industry.256
Kodak had a dozen of chemical formulations in development to treat cancer,
cardiovascular illness, and other disorders, but lacked experience in international drug
registration and distribution channels. Sterling, on the contrary, had developed a
pipeline of important prescription drugs and ran a world-wide portfolio of over-the251
Ansberry, C., & Carol, H. 1989. Last Chance: Kodak Chief Is Trying, for the Fourth Time, to Trim Firm's
Costs --- Chandler, to Retire in May, Faces Takeover Rumors and Polaroid Settlement --- Boost from New Color
Film. Wall Street Journal, 1989 Sep 19: 1.
252
Ibid.
253
254
255
Ansberry, C. 1987e. Uphill Battle: Eastman Kodak Co. Has Arduous Struggle to Regain Lost Edge --- Beset
by Rivals from Japan, Customers' Complaints, It Abandons Its Traditions --- Getting over Disk Disaster. Wall
Street Journal, 1987 Apr 02: 1.
256
CASE
129
counter drugs. With this structure in place, Kodak’s friendly takeover was intended
first and most and foremost to gain access to channels for both, drug registration and
distribution.
Kodak intended “to rank among the top twenty pharmaceutical companies worldwide
by the year 2000.”257 The pharmaceutical business promised high profit margins and
difficult barriers to entry, which was certainly attractive to Kodak, since it was
accustomed to those features (and required them to fund its massive cost-structure).258
Perhaps there were also considerations about possible cost savings in R&D that could
be result from combined efforts, as Leo Thomas, then Kodak’s general manager of the
Life Science division, pointed out;259 however, in the pharmaceutical industry it was
well known that Sterling had a rather unimpressive track record in developing
pharmaceutical drugs.260
While Kodak was optimistic about finding novel compounds;261 industry analysts
remained skeptical, since the company’s main thrust was related to imaging and
information storage.262 Analysts and shareholders also expressed concerns about the
extensive amount of long-term borrowing required. The $5.1 billion purchase of
Sterling Drug Inc. required Kodak to issue a new long-term loan that increased the
company’s debentures to about $8 billion, or some $16 billion in total liabilities [see
Figure 42 and Figure 43]. Kodak’s long-term borrowing was more than double its
shareholders’ equity [see Figure 44].
Throughout Kodak’s history, the company had assiduously avoided debt. At the 1970s,
the Kodak’s long-term borrowings had been as low as some $66 million. Kodak’s
capital was indebted by some 30 percent, whereas short-term liabilities accounted for
257
ibid., Ansberry, C. 1988b. Kodak Agrees to Acquire Sterling Drug --- Offer of $5.1 Billion Ends Roche Bid,
Would Give Buyer Major Drug Role. Wall Street Journal, 1988 Jan 25: 1.
258
See Colby Chandlers note on the pharmaceutical industry: “Health care is the highest-margin business of the
future with a high cost of entry.” Quoted in Deutsch, C. H. 1988. Kodak Pays the Price for Change. The New
York Times(March 6).
259
Ansberry, C. 1988f. Kodak Predicts Sterling Will Add to Profit by 1990. Wall Street Journal, 1988 Feb 26:
1.
260
Ansberry, C. 1988a. Dreams Come True for Kodak's Thomas. Wall Street Journal, Jan 26: 1, Ansberry, C.
1988b. Kodak Agrees to Acquire Sterling Drug --- Offer of $5.1 Billion Ends Roche Bid, Would Give Buyer
Major Drug Role. Wall Street Journal, 1988 Jan 25: 1.
261
Koenig, R., & Clare, A. 1988. Kodak Seeks New Drug from Its Shelves --- Firms Hired to Test Inventory of
Compounds. Wall Street Journal, 1988 Jul 07: 1.
262
Ansberry, C. 1988c. Kodak Confirms That It Plans to Retain Sterling's Household-Products Business. Wall
Street Journal, 1988 Aug 18: 1.
130
96 percent of total liabilities; that is to say, Kodak was heavy in cash and lightly
indebted.This mindset had changed in the course of many acquisitions and the costs of
early retirement plans. Under the direction of CEO Chandler, the company gradually
started to rely on long-term borrowings. For instance, in 1982 it issued $275 million
debentures for general corporate purposes, including capital expenditures and
additions to working capital.263 Four years later, in the face of many investments and
retirement programs, the company again increased its debentures by some $647
million. The ratio of long-term borrowing to shareholders’ equity grew to about 85
percent, from 40 percent in 1982, and the company’s total capital became indebted by
6 percent from previously 30 percent. Some even regarded Kodak’s corporate debt as
an advantage. Corporate raiders were thought to be after Kodak in the later 1980s and
management was worried about the possibility of a hostile takeover. Loading up the
company with debt was one way to keep them away.264
Nevertheless, a cash flow analysis of this period shows that with its declining
profitability (see Figure 37), Kodak began to rely on its cash or cash equivalents for
operations; that is to say, earnings from operations, adjusted by depreciation and other
charges, did not provide sufficient funds to pay dividends and to set aside funds for
capital additions necessary to support sales, without reducing cash or cash equivalents
[see Figure 46]. In 1985, 1986, and 1988, the company was forced to resort to longterm borrowing to be able to pay dividends and provide funds for capital additions,
although expenditures for the latter remained average [see Figure 45]. Hence, Kodak
began to show signs of little cash momentum – which is a sign for a poor level of
diversification – cash that was required to promote new technologies in the electronic/
digital domain.
263
264
7.000
6.000
5.000
4.000
3.000
2.000
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1.000
Debentures (Long term borrowing)
Increase in Debentures (long term borrowing)…
1.400
Whitmor
1.600
Chandler
Whitmore
Chandler
Fallon
1.800
Fallon
Figure 43
Total Debentures
(Long-Term Borrowings)
Figure 42
Increase in Debentures
(Long-Term Borrowings)
1.200
1.000
800
600
400
0
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
200
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
500%
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
Whitmore
8.000
Chandler
9.000
Fallon
Whitmore
Chandler
131
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
500%
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
Fallon
CASE
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
R&D Expenditures
Total Liabilities to Equity
Figure 44
Total Liabilities to Equity
Figure 45
and Interest Expense
Sources all Figures: Data from Eastman Kodak Company Annual Reports
132
Kodak’s $5.1 billion acquisition of Sterling Drug Inc. exacerbated this situation
greatly. Whitmore, the newly appointed chief executive officer as of July 1989,
considered employment reduction plans as the most suitable means to generate the
cash flow required. Kodak estimated that the 1989 restructuring would generate “up to
$1 billion in operating cash flow during 1990.”265 In the end, layoffs affected cash
flow only marginally; even worse, early retirement benefits again increased the
company’s debts and thus interest expenses. In 1992, cash flow was about $146
million compared to some $20 billion in sales! Also the 1993 initiative to cut some
10,000 jobs, or 8 percent of Kodak’s workforce, to increase cash flows by a total of
$2.7 billion for the next three years, remained more or less unsuccessful.266
The Sterling Drug Inc. acquisition also added tremendous debt to Kodak’s total
capitalization, which became indebted to about 70 percent, while short-term liabilities
accounted for only 60 percent. In the early 1980s, Kodak’s indebtedness was some 30
percent, while short-term liabilities accounted for 96 percent. Sterling was paid for
entirely from new long-term borrowings, which generated an extraordinary amount of
additional leverage on Kodak’s balance sheet and charges for interest. In 1990,
Kodak’s interest expenses climbed up to some $900 million per year, from $180
million in 1987, the year before it acquired Sterling. After that, costs for interest
payments cut net earnings by about half [see Figure 45].
Sterling’s net income also rendered Kodak’s amortization plan for the acquisition
problematic. The drug company barely generated the funds required to pay back debts.
Since 1988, Kodak’s and Sterling’s health operations had been united into one
business. Assuming that Kodak’s former health business had not grown at all between
1988 and 1992, Sterling generated about $304 million a year on average, which barely
covered Kodak’s costs for the interest expenses related to the long-term borrowing, let
alone annual amortization of debt itself.267
265
Ansberry, C. 1989b. Kodak Plans to Cut Work Force by About 4,500, and to Sell Units --- Restructuring Is
the Fourth since '83, Follows Plunge in Firm's 1st-Half Profit. Wall Street Journal, 1989 Aug 24: 1.
266
Rigdon, J. E. 1993d. Kodak to Cut 8% of Work Force, or 10,000 Jobs --- Move Viewed as First Step as
Whitmore Leaves; Spending Cuts Planned. Wall Street Journal, 1993 Aug 19: 0-PAGE A3.
267
This perception receives support by a Wall Street analysis of the early 1990 that estimated Sterling gains of
only $29 million a year to pay debts. See Rigdon, J. E. 1992a. Kodak's Changes Produce Plenty of Heat, Little
Light --- Extended Series of Restructurings Has Failed to Generate Clear Benefits. Wall Street Journal, 1992
Apr 08: 0-PAGE B4.
20%
-600
-800
15%
-1.000
10%
5%
0%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
Whitmore
-1.800
Fallon
-1.400
Chandler
-1.200
-1.600
Whitmore
25%
-400
Chandler
-200
30%
133
Fallon
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0
1972
CASE
Financed with liabilities
Financed with cash and cash equivalents
Figure 46
Cash Flow From Operating Funds
(After Paying Dividends and Setting
Aside Capital Additions)
Capital additions in relation to sales
Figure 47
Capital Additions in Relation to Sales
Sources all Figures: Dollar amounts in
millions. Source: Data adapted from
Eastman Kodak Annual Reports
Analysts expressed serious concerns about Kodak’s weak cash flow and long-term
debts, which climbed up to some $8 billion in 1988.268 (A year earlier, Kodak had
entered into foreign currency swap agreements that increased its long-term debts by an
additional $1.3 billion.)269 For instance, analysts estimated that the company had to
pay 22 times the earnings of fiscal year 1988 for Sterling Drug Inc., a company that
was not of major interest to Kodak.270 Some 40 percent of Sterling’s earnings came
from the pharmaceutical business; the rest came from its household-products
operation, sold by the company’s subsidiary Lehn & Fink.271 Other analysts worried
about Kodak’s optimism in regard to amortization of the goodwill that occurred in the
Sterling acquisition.272 Analysts expected the 40-year amortization of $4.2 billion in
268
Jaffe, T. 1990. Still out of Focus. Forbes, 146(2) 388-389.
270
Ansberry, C. 1988b. Kodak Agrees to Acquire Sterling Drug --- Offer of $5.1 Billion Ends Roche Bid, Would
Give Buyer Major Drug Role. Wall Street Journal, 1988 Jan 25: 1.
271
Ibid.
272
Ansberry, C. 1988d. Kodak Enters Credit Accord for $5 Billion --- Pact to Finance Acquisition of Sterling
Drug Marks Coup for Bankers Trust. Wall Street Journal, 1988 Feb 08: 1.
269
134
Sterling goodwill alone to stress the common share paid by at least 32 cents, or about
one third of the shares paid per year.273
As a consequence, rating agencies lowered Kodak’s debt rating (and thereby increased
the company’s costs for interest). For instance, shortly after Kodak announced its offer
to acquire Sterling Drug Inc., Moody Investors Service Inc. lowered the company’s
rating to single-A-2 from double-A-1.274 Kodak’s officials maintained that the
anticipated dilution costs were overestimated, arguing that the company would
generate savings through consolidation, economies of scale, and selling of assets for
appropriate prices.275 Four years later, in 1992, however, Kodak’s level of debts was
only marginally altered. The company did not reduce its debts; rather it preferred to
use its discretionary cash flow to invest in sales and advertising instead of lowering its
debts.276 Faced with a slowdown of sales in Kodak’s traditional photography business,
the company increased its investment in sales and advertising continuously by about 1
percent a year [see Figure 48 and Figure 49]. The company allocated money for its
cash cow in the hopes of generating growth.277 At the same time it became evident that
the hoped-for income generated by Sterling did not take off, and new blockbusters – if
any – would require years to come to fruition. Therefore, in the face of a growing
concern about Kodak’s debts and its preference for using its available cash, Moody's
again lowered Kodak’s debt rating.278 Standard & Poor’s also lowered its rating of the
the company’s senior debts.279 S&P believed that it would be difficult for Kodak to
improve its cash flow in the face of lower profitability.280 Share prices fell from more
than $100 to the unprecedentedly low price of about $40 [see Figure 32].
273
Ansberry, C. 1988c. Kodak Confirms That It Plans to Retain Sterling's Household-Products Business. Wall
274
1988a. Credit Ratings: Kodak Debt Rating Lowered by Moody's. Wall Street Journal, 1988 Feb 23: 1,
Ansberry, C. 1988a. Dreams Come True for Kodak's Thomas. Wall Street Journal, Jan 26: 1, Taylor, P. 1983.
Kodak Loos to a Leaner and Meaner Future. Financial Times(Wednesday November 16) 22.
275
Ansberry, C. 1988f. Kodak Predicts Sterling Will Add to Profit by 1990. Wall Street Journal, 1988 Feb 26:
1.
276
1992d. Kodak Debt Ratings Covering $7.6 Billion Are Cut by Moody's. Wall Street Journal, 1992 May 19:
0.
277
Rigdon, J. E. 1992a. Kodak's Changes Produce Plenty of Heat, Little Light --- Extended Series of
Restructurings Has Failed to Generate Clear Benefits. Wall Street Journal, 1992 Apr 08: 0-PAGE B4.
278
1992d. Kodak Debt Ratings Covering $7.6 Billion Are Cut by Moody's. Wall Street Journal, 1992 May 19:
0.
279
1993c. Kodak's Debt Ratings Are Lowered by S&P; Unit's Spinoff Is Cited. Wall Street Journal, 1993 Dec
06: 0-PAGE C14.
280
Ibid.
15%
-10%
10%
-20%
5%
-30%
0%
-40%
1992
0%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
20%
Sales, Advertising, Distribution,
Administration to Net Sales
Profit Margin
Figure 48
Kodak’s SGA Costs to Net Sales Whitmore
Chandler
10%
Fallon
20%
135
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
25%
30%
Whitmore
30%
Chandler
35%
Fallon
CASE
Increase (Decrease) Sales Photography
Trend Sales Photography
Figure 49
Increase (Decline) Kodak’s Sales in
Photography
Sources all Figures:
Data adapted from Eastman Kodak Company Annual Reports
In its first response to Wall Street’s pressure, Kodak decided to sharpen its focus and
to shed all operations that did not add value.281 Hoping to save some $1 billion, the
company shut down or sold about 20 businesses,282 including: Floppy-disc
manufacturer Verbatim, whose business had been always criticized for generating
small profit margins, was sold to the Japanese Mitsubishi Corporation;283 Kodak’s
mini-lab equipment business was eliminated precisely when one-hour photodeveloping services were capturing some 41 percent of the $5 billion-a-year US
photofinishing market, allowing Kodak to focus on selling consumables rather than
281
1989a. Eastman Kodak Company Annual Report. Rochester, NY, Pae, P. 1989c. Kodak to Again Restructure
Operations --- Earnings Plunge Spurs Latest Round of Cost Cuts. Wall Street Journal, 1989 Aug 18: 1.
282
1990b. Verbatim Unit to Be Sold to Mitsubishi Kasei Corp. Wall Street Journal, 1990 Mar 22: 0, 1992e.
Kodak to Sell 10 Non-Imaging Units, Expand Its Alliance with Canon U.S.A. Wall Street Journal, 1992 Jul 10:
0-PAGE B6.
283
1990b. Verbatim Unit to Be Sold to Mitsubishi Kasei Corp. Wall Street Journal, 1990 Mar 22: 0, Ansberry,
C. 1989b. Kodak Plans to Cut Work Force by About 4,500, and to Sell Units --- Restructuring Is the Fourth since
'83, Follows Plunge in Firm's 1st-Half Profit. Wall Street Journal, 1989 Aug 24: 1.
136
equipment;
284
the Ultra-life lithium battery business, which initially promised high
growth rates due to Kodak’s breakthrough in designing batteries that were supposed to
last 10 years, was shut down;285 the business never took off due to early problems in
battery durability. Others businesses Kodak sold included Biolmage Corporation,
Sayett Technology, the manufacturer and marketer of Datashow liquid crystal display
equipment, Kodak Video Programs, and Aquidneck Data Corporation.286
Then Kodak divested businesses that were creating problems in its commercial and
information systems division: Atex, the newspaper-publishing system; Videk, which
made digital inspection equipment; Datatape, which made magnetic data-recording
equipment; Estek, which developed cleaning and inspection systems for computer
chips; and several businesses that supplied imaging systems to the federal
government.287
But given Kodak’s continuing lackluster performance and increasing pressure from
investors, in 1993, CEO Kay Whitmore decided to shed one of the company’s oldest
and most profitable assets: the Kodak Eastman Chemical Company.288 Since his
appointment as chief executive officer in 1989, Whitmore had repeatedly promised
shareholders to turn Kodak around, but success eluded him. The early leave of the
newly appointed chief financial officer, Christopher J. Steffen, rendered the situation
worse. Steffen, an industry outsider, enjoyed a good reputation as a restructuring
specialist. His abrupt resignation, after just a few weeks in place, due to disagreements
with Whitmore, made investors even more edgy.289 Under fire from investors and the
board of directors to finally deliver a comprehensive restructuring plan, Whitmore
decided to spin off Eastman Chemical.290
Kodak Eastman Chemical contributed 20 percent in earnings to Kodak’s annual
income. For better or worse, Whitmore’s demonstration of willingness to manage the
company differently did not result in reductions of Kodak’s debts nor did it change the
284
Pae, P. 1989a. Eastman Kodak Plans to Eliminate Minilab Division. Wall Street Journal, 1989 Dec 05: 1.
Ansberry, C. 1990. Eastman Kodak Is Pulling Plug on Its Ultralife. Wall Street Journal, 1990 Apr 10: 0PAGE B1.
286
287
1992a. Eastman Kodak Company Annual Report. Rochester, NY, 1992e. Kodak to Sell 10 Non-Imaging
Units, Expand Its Alliance with Canon U.S.A. Wall Street Journal, 1992 Jul 10: 0-PAGE B6.
288
289
Rigdon, J. E. 1993e. Kodak to Shed Chemical Unit in Restructuring --- Spinoff Is Expected at End of Year,
and Chairman Hints at Joint Ventures. Wall Street Journal, 1993 Jun 16: 0-PAGE A3.
290
Ibid.
285
CASE
137
company’s debt rating; rather as many industry observers had reckoned, it was more or
less a “PR response.”291 Kodak shareholders were given the amount of shares in the
chemical unit proportional to those they owned in Kodak,292 and Kodak’s assets were
reduced by Eastman assets. In setting aside an entity with some 18,500 employees and
sales of $3.9 billion, Kodak basically paved the way for the chemical unit to be sold
afterwards. After that, Kodak had only two – instead of three – profitable pillars of
income: photography and health [see Figure 41].
To conclude, Kodak’s urge to leverage its resources had led to great efforts to
diversify the company. Its drive into electronics (commercial and information systems)
put a huge burden on the balance sheet. The move into pharmaceuticals did generate
additional streams of revenues; however, it did so at the price of massive debts (and
thus high interest costs that stressed annual income). Weakening results in the
traditional photography business, which Kodak had tried to enhance by pouring its
discretionary cash flow into sales and advertising, forced the company to reduce its
workforce and to divest several businesses, including its chemical business, which had
always been the pillar of Kodak’s income. Moreover, the lack of liquid resources,
coupled with the divesture of many businesses related to new technologies, made it
difficult to make an effective move into consumer electronic/digital photography.
291
1993g. Why Kodak's Dazzling Spin Off Didn't Bedazzle. BussinessWeek June 27.
292
138
Back to Core Business
5.5 Back to Core Business
“Silver halide will be a big business for a long time if we continue to innovate.
But everyone in photography must come to terms with digital.
If we don't, there are powerful players who will.”293
Georg M. C. Fisher, Chief Executive, Kodak
And, in a company newsletter he added,
“. . . if this company is going to be healthy,
it has to be healthy in the core . . . film business.”294
Georg M. C. Fisher, Chief Executive, Kodak
Kodak’s diversification strategy in the 1980s did not pay off. The company’s income
remained equal to or below that of prior years and the stock price fell to a historical
low. Moreover, the company’s total liabilities accounted for three fourths of total
assets, due to numerous several-billion-dollar acquisitions that rendered any serious
pursuit of new initiatives all but impossible. In 1993, after years of frustration, board
of directors therefore decided to appoint an outsider, George M. C. Fisher, to manage
Kodak. Prior to his new engagement, Fisher successfully transformed Motorola Inc.
into the leading pager and cellular manufacturer worldwide. Never before in the
company’s history was a manager hired from outside the chemical-based company.
The new chief executive redirected the company’s focus on its core business – pictures
– while emphasizing a move into the digital world. He divested most of Kodak’s nonimaging businesses, reduced 90 percent of the company’s long-term debts, cut
overhead costs to a competitive level, and set the basis for digital imaging businesses.
Strategies for growth and product differentiation were aimed at extending the life of
the mature silver-halide business until digital imaging could take off and build
appropriate sources of income. However, three decisive circumstances thwarted the
plan: the fierce competition with Fuji in the US, the slow growth of developing
markets, and the continuing losses in digital imaging endeavors. The result: a
considerably smaller company with a consolidated balance sheet and an above-average
return on equity, but no significant growth in earnings compared to Kodak’s prediversification era.
293
Blömer, H. J. 1994b. The Resolution Revolution Kodak Dcs 460; George M. C. Fisher Interview; New
Professional Color Negative Films. International Contact, 13(5) September/ October: 36-39.
294
Bounds, W. 1994h. Kodak to Reorganize Imaging Division to Emphasize Electronic Technology. Wall Street
Journal, 1994 Feb 24: 0-PAGE A4.
CASE
139
140
Carp
Fisher
Chandler
160
Whitmore
USD
www.kodak.com
Kodak Photo Online net
120
100
Fling
80
DCS 100
35 mm Camera
APS
4MP CCD PhotoCD
Picture Disk
Quicktake
60
40
Minilab Create-a-Print Station
20
3-2 Split
Creation Station
Picture Maker
3-2 Split
0
1983
1983 1985
1985 1987
1987 1989
1989 1991
1991 1993
1993 1995
1995 1997
1997 1999
1999 2001
2001 2003
2003
Stock Price
Launch of New Product Category:
Film
Digital
Dollars
in millions
Employees
worldwide
22.000
160.000
(1)
20.000
140.000
(2)
18.000
(4)
16.000
(5)
120.000
14.000
100.000
(3)
12.000
80.000
10.000
60.000
8.000
6.000
4.000
1.
2.
$200
3.
$563 $520
$875
4.
$1,605
5.
6.
$538 + $1.976
7.
$1,455
40.000
$350
20.000
2.000
0
-2.000
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
0
-4.000
Net Sales
Strong Dollar
Net earnings
High Costs for Raw Materials
Employees Worldwide
Discontinuance of Instant Photography
Restructuring Costs Including Employment Reduction & Rationalization of
After-tax Charge Associated with Postretirement Benefits
Spin-off /Sale of Business
Figure 50
Sales, Earnings, Employees, and Stock Price, Kodak, 1983-2003
140
5.5.1 Management Change
Kodak’s 1993 financial position was disastrous. The balance sheet reported a loss (of
$1.5 billions), which never happened to the company before.295 The company’s
liabilities and overhead costs had grown to a historical high, while profit margin and
stock price reached an unrivaled low. Kay Whitmore, Kodak’s chief executive and
chairman since 1990, dissipated energies into ever more businesses, while being slow
to respond to environmental changes in the core business. Aggressive competition in
the US cut Kodak’s profit margins at a time when the photography industry faced
stagnation anyway. Stodgy film sales failed to compensate for ever-growing spending.
The CEO himself acknowledged that his reluctance to change had fueled the
company’s lack of a sense of urgency in these turbulent times: “I regret we didn’t
move faster,” he said, and was quick to add, that he was “taken by surprise by the
speed with which change has taken place.”296 In a letter to shareholders on August 18,
1993, Mr. Whitmore declared that Kodak is “not in crisis,” but wrote a few lines later
that “it is clear we must change more and faster.”297
For a long time, investors had urged management to cut costs and reduce the
workforce substantially.298 They contended that Kodak’s continuous restructuring
efforts at most amounted to “strategic trimming,” but were not enough to turn Kodak
around.299 There was also a lack of trust that Mr. Whitmore was capable of managing
the company under new and uncertain environmental conditions. After more than a
century of a monopoly position in the US photo film market, Kodak was hurt by fierce
competition from rival Fuji and private-label retailers. Furthermore, electronic
photography, such as camcorders, started to depress film sales and a sluggish economy
295
Rigdon, J. E. 1993a. Contrasting Images: The New Finance Chief at Kodak Has a Style Quite Unlike His
Boss's --- While Chairman Whitmore Abhors Cutting Workers, Steffen Doesn't Flinch --- Yellow Giant's Little
Steps. Wall Street Journal, 1993 Apr 28: 0-PAGE A1.
297
298
See e.g., Ansberry, C., & Carol, H. 1989. Last Chance: Kodak Chief Is Trying, for the Fourth Time, to Trim
Firm's Costs --- Chandler, to Retire in May, Faces Takeover Rumors and Polaroid Settlement --- Boost from
New Color Film. Wall Street Journal, 1989 Sep 19: 1, Hirsch, J. S. 1990. Kodak Hopes Electronic Imaging
Clicks, as Company Faces Fuzzy Photo Future. Wall Street Journal, 1990 Jul 16: 0-PAGE B5, Rigdon, J. E.
1993a. Contrasting Images: The New Finance Chief at Kodak Has a Style Quite Unlike His Boss's --- While
Chairman Whitmore Abhors Cutting Workers, Steffen Doesn't Flinch --- Yellow Giant's Little Steps. Wall Street
Journal, 1993 Apr 28: 0-PAGE A1, Rigdon, J. E. 1993c. Kodak Is Said to Plan Layoffs of 2,000 to 4,000. Wall
Street Journal, 1993 Jan 08: 0-PAGE A6.
299
Pae, P. 1989c. Kodak to Again Restructure Operations --- Earnings Plunge Spurs Latest Round of Cost Cuts.
Wall Street Journal, 1989 Aug 18: 1.
296
CASE
141
in Europe and Japan cut film sales overseas. As a consequence, Kodak was no longer
able to use film sales to offset lagging sales of a stagnating industry. In a board
meeting on July 14, 1993, Mr. Whitmore signaled his ineptness by turning to investors
for advice on how to deal with particular business problems. Investors were stunned
that the person in charge of Kodak turned to outsiders for advice.300 It seemed logical
that the board of directors would bow to pressure from investors and start to search for
a new manager, after years of frustration.
The new chief executive was expected to be an outsider and a savvy marketer who
would be allowed to bring in a new team of senior managers.301 The list of potential
candidates to manage Kodak was topped by prominent managers from various
industries, including, among others, John Sculley, chairman of Apple Computer Inc.;
Goodyear’s chief executive and chairman Stanley Gault, chairman; and former Kodak
vice chairman J. Phillip Samper, who was then working as a management
consultant.302 In a surprise to people close to the industry, Kodak put Motorola’s
chairman George M. C. Fisher at the top of the troubled photo company.303 Fisher,
who had been chief executive of Motorola since 1988, had transformed that company
into a global cutting-edge communication equipment manufacturer, at a time when the
US electronic industry was struggling to compete successfully against Japanese rivals.
Evolving from Motorola’s dynamic, fast paced, and flexible culture, Fisher’s
capability to combine brilliant assessment of technology with a competent leadership
style was lauded throughout the industry.304
5.5.2 New Vision
George Fisher’s new vision for Kodak centered on the picture – in particular on the
exploration of the five key elements of the imaging chain: “image capture, processing,
storage, output, and delivery of images for people and machines anywhere in Kodak’s
300
Rigdon, J. E. 1993b. Kodak's Chief Said to Retire by Year End. Wall Street Journal, 1993 Aug 06: 0-PAGE
A3.
301
Rigdon, J. E., & Lublin, J. S. 1993. Kodak Seeks Outsider to Be Chairman, Ceo --- Search for Savvy
Marketer, Cost Cutter Follows Dismissal of Whitmore. Wall Street Journal, 1993 Aug 09: 0-PAGE A3.
302
Ibid.
303
Weber, J. 1993. Kodak Puts Motorola's Chairman in the Picture : Executives: The Choice of Fisher as the
Troubled Photo Company's New Ceo Comes as a Surprise to Analysts. Los Angeles Times, October 28.
304
Rigdon, J. E., & Hill, G. C. 1993. Kodak Names Motorola Chief to Top Posts. Wall Street Journal, 1993 Oct
28: 0-PAGE A3.
142
worldwide market.”305 In this sense, he built upon George Eastman’s heritage. The
father of modern photography and founder of Kodak had created an entire industry by
making it easy for people to take pictures. “Today,” Fisher stated, “Kodak is extending
Eastman’s vision to lead a new industry, one based on making it easy for people to use
digital technology to make their pictures more useful.”306 And Kodak’s part, Fisher
envisioned, would be to generate “the equivalent of the spreadsheet and word
processor in the digital-imaging world.”307
Fisher’s vision of the future did not suggest that Kodak’s traditional silver-halide
photography business was to be replaced by electronics; rather, he was convinced that
traditional film would stay for a while. “Silver halide will be a big business for a long
time,” he affirmed, “if we continue to innovate. But everyone in photography must
come to terms with digital. If we don’t, there are powerful players who will.”308
“Kodak,” he concluded elsewhere, “always half-heartedly pursued digital imaging –
thinking that it would hurt traditional photography.”309 In contrast, digital technologies,
according to his credo, rendered it possible to make far greater use of pictures than in
traditional chemical photography.310 Pictures in a digital format could be transmitted to
remote locations, manipulated, and displayed on a TV or computer screens or printed
in hard copy.311 By embracing the digital part of the imaging chain, Fisher intended to
enhance picture-taking (and thus traditional photofinishing). “The future is not some
hare-brained scheme of the digital Information Highway or something,” he said. “It’s a
step-by-step progression of enhancing photography using digital technology.”312
Industry forecasts even supported Fisher’s hold on the traditional silver-halide film
business. Analysts estimated sales of digital cameras alone at about $35 million in
1993, compared to Kodak’s total imaging sales of about $7.2 billion in the same
305
1994d. Eastman Kodak Company Annual Report. Rochester, NY, Holusha, J. 1994b. New Kodak Strategy:
Just Pictures. The New York Times, May 04.
306
Blömer, H. J. 1995c. The Picture Is Just the Beginning. Kodak President/ Ceo M. C: Fisher Devises Global
Strategy for Digital Future. International Contact, 14(3) May/ June: 4-7.
307
1994f. Picture Imperfect. The Economist May 28.
308
Blömer, H. J. 1994b. The Resolution Revolution Kodak Dcs 460; George M. C. Fisher Interview; New
Professional Color Negative Films. International Contact, 13(5) September/ October: 36-39.
309
Bounds, W., & Rigdon, J. E. 1995. Kodak, Seeking Inroad in Digital Arena, Opens up Proprietary Photo Cd
System. Wall Street Journal, 1995 Mar 29: 0.
310
311
Holusha, J. 1994a. Company News; Kodak to Consolidate Units to Stress Electronic Growth. The New York
Times, March 29.
312
Maremont, M. 1995. Kodak's New Focus. BusinessWeek January 29.
CASE
143
year.313 In 1997, the figures for sales of digital cameras were expected to grow up to
$180 million, including new growth markets such as medical applications or insurance
company documentation. 314
Small or home offices and households were still the most important customer segment
in the early stage of his digital imaging vision. Kodak estimated that in the US, three
fourths of offices and one third of households were using computers or PCs.315 Kodak
thought that the installed base of computers and PCs, along with simple equipment and
software, would enhance the use of “electronic pictures” – from estate agents and
realtors to insurance agents who wanted to document cases of damage, to consumers
who would use their PCs to correct, enhance, and make creative changes to their
pictures.316 A kind of kiosk system for amateur enthusiasts, like shop-in-shop systems
that are propagated in cooperation with retailers, would allow consumers – in his view
– to have films developed, enlarged, and put onto PhotoCDs. To think of a regionwide service network of kiosk systems similar to the distribution of ATM terminals
was not absurd, given the lack of adequate alternatives to make hard copies of pictures.
In the early 1990s, it was clearly understood that electronic photography would be the
future, but there were no reasonable methods of producing hard copies in acceptable
quality at acceptable costs.317 At the same time, these outlets would offer software for
post-processing the pictures on a home computer.318
Thus Fisher’s vision, which certainly was years ahead of its time, was twofold: It
foresaw the growth of both the silver-halide and digital parts of the “picture” business;
the digital one would become the company’s bright future and the chemical-based one
would fund that growth and generate dividends to shareholders as long as possible.
The company would push its traditional photography consumer film and paper
business, while moving into digital imaging in areas where “Kodak can profitably
313
Bounds, W. 1994c. Fuji Photo, Taking a Cue from Kodak, Plans Digital Imaging Unit in the U.S. Wall Street
314
Ibid.
315
316
Ibid.
317
Blömer, T. 1995d. The Future Lies in Marketing. International Contact, 14(2) March/ April.
318
144
compete.”319 This implied that there were substantial growth rates possible in an
already maturing photographic film and paper business.
In part, Kodak was confident that it could generate growth by expanding
geographically to China, India, Brazil, and Russia.320 Part of this conviction was fueled
by the observation that “half the people in the world have yet to take their first
picture,” concluding that “the opportunity is huge, and it’s nothing fancy; we just have
to sell yellow boxes of film.”321 To expand to China was one of George Fisher’s top
priorities. As Motorola’s chairman and chief executive, he had acquired extensive
experience in conquering the Chinese market, which then became the world’s largest
supplier of mobiles phones. The photography market there was barely tapped. Only
one eighth of China’s 1.3 billion people owned a camera at that time, but growth rates
of picture taking equaled those of Japan.322 Nations such as Russia, India, and Brazil,
where traditional photography was still in its beginning phase, promised dramatic
growth rates too.323
Greater product differentiation, especially in the traditional photographic business, was
expected to be the other driver for growth.324 The new chief executive expected growth
rates between 7 to 9 percent a year over the next decade, while consumption of film in
the Western world had slowed from around 10 percent a year to a about 4 percent in
the early 1990s.325 A move into bargain film, priced 15 to 20 percent below premium
products such as the Kodak Gold film, to make up for the loss of market share to
privately branded film labels, was conceivable, as were new product categories in the
premium segment, like the company’s Advanced Photographic System (APS) and
high-quality Gold Max film.
319
Holusha, J. 1994b. New Kodak Strategy: Just Pictures. The New York Times, May 04.
1994d. Eastman Kodak Company Annual Report. Rochester, NY.
321
Maremont, M. 1995. Kodak's New Focus. BusinessWeek January 29, Nulty, P. 1994. Kodak Grabs for
Growth Again. Fortune May 16.
322
Smith, C. S. 1996. Photo Frenzy: Kodak, Fuji Face Off in Neutral Territory: China's Vast Market. Wall Street
323
Bounds, W. 1995d. Kodak's Ceo Plans to Avoid Overhaul with More Layoffs. Wall Street Journal, 1995
May 03: 0.
324
325
Dickson, M. 1993. Focusing on Grander Horizons. Financial Times, Novemeber 1(11).
320
CASE
145
5.5.3 Strategic Challenge
The move into digital imaging was certainly a bold maneuver, given the big difference
between the silver-halide and the digital imaging businesses. The new vision meant
that the chemical company Kodak had to find ways to transform at least parts of itself
into an electronic company. The chemical silver-halide-based photography industry
was mature and slow in growth, with turnaround cycles of several years. Changes in
the technology tended to be more evolutionary than revolutionary. By contrast, the
electronic industry, which required the conversion of pictures into the language of
digital computing, was a fast-paced industry full of start-ups and turnaround cycles
measured in months (rather than years). In that industry, existing technologies became
obsolete very quickly.326 But profit margins on electronic equipment were thin and
opportunities to sell consumables, such as film, with high profit margins were limited.
Plus, the fast-paced electronic industry, in particular the nascent digital imaging
technology, required a great deal of innovation (and thus investments in R&D) without
yet having the promise of viable business models, as Leo J. Thomas, then Kodak’s
executive vice president, once observed.327
Kodak had failed to research and buy its way into electronics more than once. For
instance, the company acquired Atex in 1981, which developed computer-based
newspaper-publishing systems, for $79 million in stock.328 The acquisition promised to
arrive at total desktop publishing systems, as they are known today, by merging Atex’s
text-editing capabilities with Kodak’s imaging capabilities. Instead, it lost its leading
position in the late 1980s. Kodak spent $10 to $20 million a year on the venture and
sold the subsidiary for $5 million in 1992.329 Other initiatives, such as Kodak’s entry
into the camcorder market, tell a similar story. Of importance here is the fact that
Kodak spent as much as $5 billion on to develop digital imaging throughout the 1980s;
once it pursued 23 separate digital scanner projects at a time, scattered over several
divisions.330 But by the time George Fisher arrived, few projects left the research labs
and made it to the market, either because of fear that digital gadgets might cannibalize
326
Partalon III, W. 1994. Betting on Future of Digital Imaging. Democrat Chronicle: 1f.
Ibid.
328
1981b. Eastman Kodak Company Annual Report. Rochester, NY, Chakravarty, S. N., & Simon, R. 1984. Has
the World Passed Kodak By? Forbes, November 5 184-192.
329
Nulty, P. 1994. Kodak Grabs for Growth Again. Fortune May 16.
330
327
146
high profit margins from the film and paper business, or because of strategic resource
allocations to businesses with superior performance prospects.
Kodak faced another challenge in the electronic domain: It was just one of many
competing companies in an emerging industry. Kodak itself counted no fewer than
about 600 global companies exploring optical storage technology, which could
compete with its PhotoCD.331 At the turn of the 1980s, many companies started to
chase after the emerging digital camera market. According to a survey conducted by
the editorial team of a journal closely linked to the German based photokina, one of
the world leading trade shows for the photographic industry, in 1994 no fewer than 21
digital camera models in differing price and quality categories were on the market, not
including systems introduced at the photokina ’94, like the Kodak DCS 460 and the
joint development between Fuji and Nikon.332 Two years earlier there were almost no
digital cameras available.
The other dilemma Fisher faced was the need for cash to maintain the company’s
resource allocation to the digital imaging business he believed to become lucrative. To
seriously engage in digital imaging, it was necessary to suck money out of Kodak’s
core photography business, which was becoming more and more commoditized and
relatively poor in terms of profit margins, and was starting to show signs of stagnation.
Hence, the new chief executive had to bet on what most capital providers had given up
on – to stem the photography market erosion in the US.
In the US, sales of photography products plateaued, film and paper manufacturers
faced fierce price competition, and more and more people turned to video cameras to
capture their memories. For instance, in 1992 more than 25 percent of US households
decreased picture-taking, according to a Photo Marketing Association consumer
survey; and the number of households turning away from photography steadily
increased by 7 percent between 1987 and 1992.333 But what was worse, more and more
households in the US turned to electronic video camcorders – a business opportunity
Kodak had clearly missed, as former CEO Whitmore once admitted with dismay.334
331
Ibid.
Blömer, H. J. 1994a. The Photo Sector Puts on a New Face in Cologne. A Digital Photokina? International
Contact, 13(5) September/ October: 3.
333
334
????
332
CASE
147
Almost every fourth US household that owed photographic equipment owned a
camcorder,335 and more than one out of two customers planned to purchase a
camcorder rather than a traditional still photo camera.336 Hence, there were clear signs
that customers were willing to adapt to electronic photography equipment.
At the same time, fierce price competition continuously eroded Kodak’s market share
in the US. Fuji announced that its US film share had soared from 5 to 10 percent,
which was noteworthy in the slow-growth market of the early 1990s.337 And privately
branded film sellers, such as Polaroid and Kmart, which obtained their film from 3M
or Konica, lowered Kodak’s market share from 80 percent to about 70 percent within a
decade [see also Figure 66].338 Rivals set their price below Kodak’s; Fuji’s was about
10 percent lower, and retailers of privately branded film set their prices even 20 to 30
percent below Fuji.339 Kodak was facing the dilemma that it was not able to reduce its
prices much because of the company’s excessive cost structure. Fisher was therefore
asked to refocus and streamline the company’s massive overhead costs.
In May 1994, a turnaround plan was laid out, comprising essentially three strategic
actions that were pursued basically in parallel.340 First, management enforced actions
aiming at consolidation of the sluggish photographic business. Second, the company’s
efforts in electronic-digital imaging were quickly set apart from its traditional
chemical-based silver-halide business, and new capabilities were built and acquired by
joining with other companies. Finally, Kodak steered for overall growth by product
differentiation in the traditional businesses and geographical expansion in the
developing world.
5.5.4 Improving Efficiency
Kodak’s strategic actions to consolidate its core business and to return to a viable
financial position essentially meant the liquidation of most of the company’s long-term
335
336
Bounds, W. 1994j. Photography Companies Try to Click with Children. Wall Street Journal, 1994 Jan 31: 0PAGE B1.
337
Bounds, W. 1994b. Focus on Photography. Wall Street Journal, 1994 Jun 10: 0-PAGE B1.
338
339
Ibid.
340
148
debts, including the divesture of the most of Kodak’s non-imaging businesses, and the
reduction of costs through process redesign.
5.5.4.1 Divestures
George Fisher’s envisioned “total commitment to imaging” (and thus an expansion
into electronics) required significant cash flows which the company was lacking.341
Since the late 1980s, the company had shown signs of little cash momentum and was
forced to resort to long-term borrowing to be able to pay dividends and provide funds
for capital additions, although expenditures for the latter remained average [see Figure
51] “We [at Kodak] were passing up too many opportunities to make small
investments because we were so strapped for cash,” he acknowledged. “If we
attempted to retain both health and imaging, we would have short-changed both.”342
The former generation of Kodak managers had always weighed the high-margin film
business against all other kinds of opportunities, including consumer electronic
photography. When several attempts had proven predictably fruitless, the company
made the decision to diversify into a potentially profitable pharmaceutical business.
The $5.1 billion acquisition of Sterling Drug Inc. in 1988 burdened Kodak’s financial
position significantly. At the end of 1993, long-term borrowings of the company stood
at about $7 billion and debt to equity was up to 70 percent [see Figure 53].343 Between
1988 and 1993, the company paid 40 percent of its earnings from operations for
interest expenses [see Figure 52]. Kodak’s core photography business generated a lot
of the cash that was used to pay interest expenses, rather than funding new product
development or business initiatives. “We,” Fisher said, “were going to milk the
imaging business to death.”344 One of the first priorities, therefore, was to shed nonimaging businesses and to reduce the company’s debt load.345
Earlier, in need for cash to relieve its financial pressure, the imaging giant had turned
to its profitable business units. In 1993, it spun off its chemical unit, Eastman
341
Bounds, W., & Moore, S. D. 1994. Kodak to Sell Sterling Winthrop Drug and Two Other Units to Focus on
Film. Wall Street Journal, 1994 May 04: 0-PAGE A3.
342
Ibid.
343
344
345
Pulliam, S., & Bounds, W. 1994. Heard on the Street: Investors Are Betting That Kodak Will Shed Drug
Line. Wall Street Journal, 1994 May 03: 0-PAGE C1.
CASE
149
Chemicals, along with other non-imaging businesses.346 To gain independence, Kodak
burdened its former unit with a $1.8 billion long-term debt, based on the division’s 20
2.500
-600
-800
2.000
-1.000
1.500
Carp
2001
2003
0
1991
1993
1995
1997
1999
500
1983
1985
1987
1989
Carp
-1.800
1.000
Fisher
-1.600
Whitmore
-1.400
Chandler
-1.200
Fisher
3.000
-400
Whitmore
-200
3.500
Chandler
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
0
1983
percentage portion of the company’s total sales.347
Financed with liabilities
Financed with cash and cash equivalents
Interest Expense
Figure 51
Cash Flow from Operating Funds
(After Paying Dividends and Setting
Aside Capital Additions)
Figure 52
Earnings from Operations and Interest
Expenses
Sources for all Figures: Data adapted from Eastman Kodak Annual Reports
Five months after taking over as Kodak’s CEO, Fisher showed that he was willing to
go for even more dramatic measures, by announcing the divesture of Kodak’s nonimaging units, including Sterling Winthrop Inc., which made pharmaceuticals and
over-the-counter drugs; L&F Products, which made Lysol and other home and
personal-care goods; and Kodak’s Clinical Diagnostics Division, which produced
medical testing devices.348 Other medical imaging businesses, such as related to X-ray
346
1993b. Eastman Kodak Company Annual Report. Rochester, NY, Holusha, J. 1994b. New Kodak Strategy:
Just Pictures. The New York Times, May 04, Rigdon, J. E. 1993e. Kodak to Shed Chemical Unit in
Restructuring --- Spinoff Is Expected at End of Year, and Chairman Hints at Joint Ventures. Wall Street
Journal, 1993 Jun 16: 0-PAGE A3.
347
348
150
film and paper, stayed with the company.349 Kodak expected the auction to fetch about
$5.4 billion for the three business units, which equaled the book value of Sterling
Whinthrop Inc. alone. 350 The spin-off of the company’s chemical unit, which had $3.9
billion in sales, reduced Kodak’s total revenues by one fifth, to $16.2 billion for 1993.
The second large divesture reduced the company’s total revenues by an additional one
fourth, or $3.7 billion down to $12.5 billion [see Figure 50; note (2)].351
Fisher’s first move was to hire Harry Kavetas, who directed IBM’s credit division, to
become Kodak’s new chief financial officer.352 By refinancing existing loans, he cut
Kodak’s debts by $1 billion right away. By the end of 1994, Kodak had completed the
sale of all three businesses, for aggregate gross proceeds of $7.8 billion.353
The pharmaceutical operations of Kodak’s Sterling Whintrop Inc. were sold to Elf
Sanofi SA for $1.68 billion in cash.354 Kodak was engaged with the French company
in several joint programs, and therefore it was given priority in buying the
pharmaceutical part of Sterling Whintrop Inc.355 The other portion of Sterling
Whintrop’s pharmaceutical business, the company's over-the-counter medicine
business, was acquired by Smith Kline Beecham PLC for $2.93 billion.356
Kodak’s L&F Products business was also sold in two pieces.357 Reckitt & Colman
PLC purchased the household-product business, including the popular Lysol brand, for
$1.55 billion.358 The investment firm Forstmann Little & Co. acquired the rest of L&F
Products for $700 million, which comprised the paints, stains, and sealants lines.359
349
Maremont, M. 1994. The New Flash at Kodak. BusinessWeek May 15.
Bounds, W. 1994a. Eastman Kodak Says Net Fell 29% in Second Quarter. Wall Street Journal, 1994 Jul 27:
0-A4.
351
1993b. Eastman Kodak Company Annual Report. Rochester, NY, 1994d. Eastman Kodak Company Annual
352
353
354
Bounds, W., & Stern, G. 1994. Kodak to Sell Pharmaceutical Business to Sanofi of France for $1.68 Billion.
Wall Street Journal, 1994 Jun 24: 0.
355
356
1994a. Business Brief -- Eastman Kodak Co.: Company Completes Sale of Health-Products Unit. Wall Street
Journal, 1994 Nov 03: 0-B7.
357
Bounds, W. 1994f. Kodak Is Trying to Sell L&F in Two Pieces --- Failure to Receive $2 Billion Sought for
Entire Unit Is Said to Drive Decision. Wall Street Journal, 1994 Aug 11: 0-A3.
358
1995c. Eastman Kodak Sells Part of L&F Products to Reckitt & Colman. Wall Street Journal, 1995 Jan 04:
0, Milbank, D., & Bounds, W. 1994. Reckitt to Buy Kodak Business for $1.55 Billion --- U.K. Firm Outbids
Rivals in the U.S. That Sought L&F Household Line. Wall Street Journal, 1994 Sep 27: 0-A3.
359
Welch, J. 1994. Forstmann to Buy Part of Kodak's L&F --- Investment Firm Would Pay $700 Million for
Paints, Stains, Sealants Lines. Wall Street Journal, 1994 Oct 17: 0-A4.
350
CASE
151
The sale of Kodak’s clinical diagnostic business completed George Fisher’s first major
divesture program. Johnson & Johnson acquired the unit for $1.01 billion.360 Kodak’s
unit generated $535 million in sales; together with Johnson & Johnson’s existing
diagnostic operations of an estimated $822 million, the new owner became one of the
top players in the medical-testing industry.361
2.000
2.000
0
0
-2.000
-2.000
-4.000
-4.000
-6.000
-8.000
-6.000
-8.000
Debentures (Long term borrowing)
Figure 53
Total Long-Term Borrowings Carp
4.000
Fisher
4.000
Whitmore
6.000
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
6.000
1989
1991 Whitmore
1993
1995 Fisher
1997
1999
2001 Carp
2003
8.000
1983 Chandler
1985
1987
8.000
Chandler
Cash Flows for Investments Less Sales of
Investments
Increase (Decrease) in Debentures (longterm borrowing)
Figure 54
Cash Flows and Long-Term Debts
Kodak’s divesture of Sterling Winthrop Inc., including L&F Products and the
company’s unit for Clinical Diagnostics, generated proceeds of $7.9 billion. The
company used the cash to extinguish $6.6 billion of their long-term borrowings [see
Figure 53 and Figure 54].362 Fisher’s back-to-core-business strategy, which basically
reversed previous diversification efforts, paid off – at least for the time being; he
basically freed the company of its long-term borrowings, cut annual interest charges
by 80 percent, and freed the company’s cash flows. In 1994, cash flow was over $750
360
Hwang, S. L. 1994. J&J to Acquire Unit of Kodak for $1.01 Billion --- Clinical Testing Purchase Furthers
Diversification by Big Drug Company. Wall Street Journal, 1994 Sep 07: 0-A3.
361
Ibid.
362
152
million, and it was over $1 billion in 1995.363 Cash and cash equivalents increased to
$2 billion at year-end 1994 from $1.6 billion at the end of 1993.364 Wall Street
applauded Kodak for the decisive reduction of its debts and paid tribute to George
Fisher.365
5.5.4.2 Cost-cutting
Kodak maintained an extensive cost structure. Manufacturing expenses were equal to
those of Fuji, according to Fisher, but overhead was certainly well above the industry
standard.366 A Kodak employee generated $144,000 in sales per year, compared to the
$385,000 a Fuji employee produced [see Figure 55].367 In 1994, sales, advertising,
distribution, and administration diminished Kodak’s total revenues by 30 percent,
while a benchmarked best practice showed 22 percent [see Figure 57].368
$385
$380
$161
$144
$140
$85
1984
1989
Kodak
1994
Fuji
Figure 55
Sales per Employee
Dollar amounts in thousands.
Source: Data adapted from Eastman Kodak Annual Reports 363
365
Bounds, W. 1994i. Management: Kodak under Fisher: Upheaval in Slow Motion. Wall Street Journal, 1994
Dec 22: 0.
366
367
1993b. Eastman Kodak Company Annual Report. Rochester, NY, Nully, P., & Rao, R. 1995. Digital Imaging
Had Better Boom before Kodak Film Busts. Fortune, 131(8) 80-83.
368
1993b. Eastman Kodak Company Annual Report. Rochester, NY, Nully, P., & Rao, R. 1995. Digital Imaging
364
CASE
153
20%
Carp
Fisher
50%
20.000
Whitmore
60%
25.000
Chandler
Carp
Fisher
40%
15.000
30%
15%
10.000
10%
5.000
0%
0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
5%
20%
10%
0%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
25%
Whitmore
30%
Chandler
Gross profit margin
Operating Return on Assets
Properties at Cost
Overhead [SG&A] to Sales
Figure 56
Operating Return on Assets and
Properties at Cost
Figure 57
Gross Profit Margin and Overhead
Costs
1.000
800
600
400
0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
200
Carp
Fisher
25%
Whitmore
30%
Chandler
Carp
1.200
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
20%
15%
10%
5%
0%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
1.400
Fisher
1.600
Whitmor
1.800
Chandler
R&D Expenditures
Capital additions in relation to sales
Figure 58
R&D Expenditures
Figure 59
Capital Addition to Sales
Sources for all Figures: Data adapted from Eastman Kodak Annual Reports 154
Kodak’s prosperous years in the 1970s, as well as its diversification efforts, had
clearly left marks on the company’s performance. The gross profit margin, increased
to 51 percent in 1993 from 38 percent a decade earlier, when Colby Chandler started to
diversify operations [see Figure 57]. During the years when the company concentrated
almost exclusively on its photography business, operating returns on assets were less
than 20 percent. After Kodak’s diversification efforts, in the early 1990s the ratio
dropped to 4 percent on average [see Figure 56]. Properties at cost, the company’s
resource commitments in assets that maintain value for longer than one year and which
cannot be undone quickly, such as land, plants, and equipment, had grown to a
historical maximum of $20 billion [see Figure 56]. When Kodak focused exclusively
on photography R&D, expenditures per sale averaged 6 percent. During the years of
diversification, the company increased its investments in research and development
twice. In the mid-1980s, when Kodak tried to move into consumer electronics, the
company increased its R&D funds by 3 percent; in the early 1990s, a focus on health
and hybrid technologies led to an additional increase of 2 percent. In the decade before
George Fisher took over, the company spent an additional budget of as much as $3
billion on R&D (without achieving sustained success) [see Figure 58]. Only capital
additions remained essentially flat relative to sales [see Figure 59].
Fisher recognized the need for trimming corporate fat; however, he was circumspect
about radical and quick cuts in costs, ignoring in the first instance Wall Street’s pleas
for extensive workforce reduction.369 In 1994, the massive layoff of about 10,000
employees, which reduced the company’s global workforce to below 90,000 – an
initiative which was launched by his predecessor, Kay Whitmore – was still in
progress and he simply did not wanted to risk discouraging employees in the process
of the forthcoming move into Kodak’s “total imaging” future. He preferred to chart the
riskier path of focusing on growth, expanding the company’s operations in foreign
markets and digital products.370 “Rather than simply take an ax to budgets and
369
Bounds, W. 1995e. Kodak Expects Its Unit Volume to Grow 7% to 9%. Wall Street Journal, 1995 Feb 16: 0A2, Nully, P., & Rao, R. 1995. Digital Imaging Had Better Boom before Kodak Film Busts. Fortune, 131(8) 8083.
370
Bounds, W. 1995b. George Fisher Pushes Kodak into Digital Era. Wall Street Journal, 1995 Jun 09: 0.
CASE
155
manpower,” Fisher said, “we are trying to change, in significant ways, how this
company operates.” 371
In a private conversation with analysts, he conceded that the company’s manufacturing
cycle times and the defect rate of products were too high.372 Elsewhere he noted that
“decisions are too slow; people don’t take risks.” 373 Chief Financial Officer Harry
Kavetas, who joined several teams that Fisher pulled together to explore cost-savings
issues such as manufacturing cycle-time improvement and R&D productivity,
identified a potential for major savings in Kodak’s sales, marketing, and administrative
staff, and in high expenses of several unneeded properties.374 But Kodak’s innovation
process, from developing products to bringing them to market, was “a confused
process, at best.” 375
Fisher approached these problems with the aim of enhancing the company’s operative
performance rather than cutting jobs. He initiated an internal communication
campaign, announcing that the company would center around five core values:
“integrity, trust, credibility, continuous improvement and respect for the individual.”376
“We will work intensely to reduce operating costs and enhance asset utilization rates,”
he said, “improve cycle time and defect reduction, and invest in operations aimed at
driving revenue growth as we go forward.”377 Hence, in the first instance his focus
relied on basics, hoping to shrink costs and to produce a dynamic culture. The
communicated goal was to at least double return on net assets during his leadership.378
5.5.4.3 Compensation
In Kodak’s annual planning process, Fisher and his team tried hard to teach their
managers to come up with realistic financial forecasts, because managers generally
failed to meet their targets without suffering consequences.379 Kodak’s ingrained
371
Blömer, H. J. 1995b. Kodak Bares Its Soul to Wall Street. International Contact, 14(3) May/ June: 8,
372
Bounds, W. 1995d. Kodak's Ceo Plans to Avoid Overhaul with More Layoffs. Wall Street Journal, 1995
May 03: 0.
373
374
375
Ibid.
376
377
O'Neill, J. 1995c. U.S. Industry News. International Contact, 14(2) March/April: 12-20.
378
379
156
culture of venerated authorities, which led to a diffusion of responsibility, was
identified as the main culprit.380
The company followed two phases in its strategic planning process: the long-term,
which encompassed the current year plus at least three years (the Strategic
Quantification Process [SQP]); and the annual strategy review process, which was
actually an operating plan which had to take place later in the year.381 The latter
basically determined what the company’s quarterly resource commitments were and
the information the CEO was giving to Wall Street in regard to of how the unit was
going to make required changes or was pursuing its trajectory. Moreover, it also
determined a manager’s bonus. Fisher and his corporate staff quickly realized that “the
quantification couldn’t be trusted” and concluded that hard work was required to assist
(and strictly control) managers in the annual planning process.382 But Fisher was also
adamant that he would hold idlers responsible for missed targets and set up a new
management compensation plan that increased management accountability: top level
managers were required to own a substantial amount of company stocks and wages of
executives were linked closely to the financial performance of Kodak.383
Previously Kodak had paid a “wage dividend” directly linked to the company’s
performance during the year, but which was independent of the particular employee’s
performance.384 Fisher changed this compensation program by tying it more directly to
the unit’s and individual’s (not just the company’s) performance. The new
compensation plan calculated 50 percent of the bonus based on shareholder
satisfaction, including growth in sales and earnings, as well as improved cash flow and
return on net assets; an additional 30 percent of the bonus would be based on growth
of market-share, better customer satisfaction, fewer product defects, and increased
speed in bringing products to market; the remaining 20 percent would be granted to
managers for promoting diversity in Kodak’s personnel and for decreasing health,
safety, and environmental violations.385 Moreover, top managers were required to take
380
382
Ibid.
383
384
Grant, L. 1997a. Can Fisher Focus Kodak? Maybe, but Ceo George Fisher Faces What One Expert Calls "a
Howlingly, Horrifically Difficult Challenge.". Fortune January 13, Parulski, K. 2014b. Written Feedback on
Research Per Email. September 20. With M. Shamiyeh.
385
1995b. Eastman Kodak Company Annual Report. Rochester, NY, Bounds, W. 1995c. Kodak's Ceo Got $1.7
Million Bonus in 1994 Despite Below-Target Profit. Wall Street Journal, 1995 Mar 13: 0.
381
CASE
157
bonuses in the form of stock options.386 The new compensation plan certainly was not
very popular – “a lot of people assumed we had a treacherous motive,” Fisher said.387
For him the plan was natural, required by any company intending to drive permanent
improvements by awarding a bonus that depended on an employee’s performance.388
5.5.4.4 Culture
A tough task Fisher set out to deal with was the need for changing Kodak’s filmcentric and bureaucratic culture, which he believed to be a hindrance to challenging
the fast-paced digital world. To push Kodak into a high-tech-firm and to prepare it to
compete with Microsoft and the like, he needed to wring resistance to change out of
the employees. Given Kodak’s past complacent behavior, this was not an easy
endeavor. “My biggest job over the next two years,” he said, “is not how we develop
the market, not even how we gain growth; it is how we get people to start thinking of
systemic, rather than incremental, change.”389 He broke with Kodak’s tradition of
promoting people from within, and turned to Silicon Valley to hire executives familiar
with the digital world.
5.5.5 Building Capabilities
Besides his efforts to consolidate Kodak’s core business, Fisher started to tackle a
long-standing internal problem which he considered responsible for many mistakes:
the company’s reluctance to fully engage with electronic photography, or digital
imaging as it was called then. In his effort to generate growth in digital imaging, he
resolved Kodak’s internal struggle with the new technology by separating the
management structure and forming a new digital division.390 New managers closely
related to the digital world were hired to run that independently operating unit, and
partnerships with industry leaders were created to acquire capabilities where required.
386
Howlingly, Horrifically Difficult Challenge.". Fortune January 13.
387
Ibid.
388
Bounds, W. 1995c. Kodak's Ceo Got $1.7 Million Bonus in 1994 Despite Below-Target Profit. Wall Street
Journal, 1995 Mar 13: 0.
389
Howlingly, Horrifically Difficult Challenge.". Fortune January 13.
390
158
5.5.5.1 Restructuring
One of Fisher’s first actions after he was appointed Kodak’s new chairman, president,
and chief executive was to reorganize the company’s core photography business to
emphasize digital technologies.391 Driven by the strong “belief this [technology] can
be a very good business for Kodak,” the new Digital and Applied Imaging business
unit was established.392 The new unit aimed at putting an emphasis on the new
electronic technology separately (and thus independently) from the company’s
traditional photographic film and paper business. Technologies such as Kodak’s
PhotoCD, software for the digital manipulation of pictures, and filmless digital
cameras were allocated to this unit.393 However, the new unit did not exclusively
develop or sell all of Kodak’s digital products. For instance, the Consumer Imaging
division, which sold film to consumers, also sold photo kiosks to retailers and in the
early days even sold consumer digital cameras.
The Professional Photography
division, which sold film to professional photographers, sold Kodak D-SLR cameras,
digital printers, and digital imaging software.394
There were two prime reasons for the split of Kodak’s photographic division. First,
there was a clear perception of the dull feeling of unease towards the new technology
that permeated the company. Kodak’s past in the late 1980s and 1990s had proven that
there was no way, without having an independent business group tied to the new
technology, that Kodak’s digital imagining was going to survive. But either there was
no permission given to pursue projects related to purely digital imaging, or if
permission was given, it was not likely that these projects survived.395 “We need to
separate the two,” Fisher explained to Wall Street analysts, because “there’s been too
much fear that the new technology would kill the old business.”396 The other reason
was related to the difference in culture, speed of product cycles, and the nature of
businesses the electronic industry embraced, as compared to the traditional
photography industry. In order to compete successfully in the electronic industry,
391
Holusha, J. 1994a. Company News; Kodak to Consolidate Units to Stress Electronic Growth. The New York
Times, March 29.
392
Dickson, M. 1994. Kodak Launches Unit for Electronic Imaging. Financial Times, April 5(19), Partalon III,
W. 1994. Betting on Future of Digital Imaging. Democrat Chronicle: 1f.
393
Bounds, W. 1994h. Kodak to Reorganize Imaging Division to Emphasize Electronic Technology. Wall Street
Journal, 1994 Feb 24: 0-PAGE A4.
394
395
Fisher, G. M. 2014. Personal Interview. Jan 3. With M. Shamiyeh.
396
1994c. Eastman Kodak Co.: Computer Industry Partners Sought for Digital Imaging. Wall Street Journal,
1994 Mar 16: 0-PAGE A4.
CASE
159
Kodak was required to relax its traditional grip on consumables and focus on large
royalties, and to cultivate a staff that was willing to commercialize hardware – a
challenge Kodak never really felt comfortable with. “This has been difficult for us in
the past,” confirmed Jack Thomas, who was initially appointed to oversee both the
traditional and digital imaging units. “That’s one reason we are forming this unit – to
put a team including marketers into place to function by the rules of the electronic
industry we are moving into.”397 Moreover, as Fisher noted, there was a need for
people from the outside who understood digital technology from a business standpoint,
and not merely from a technology standpoint, which Kodak already had.398
In the early days, the newly founded unit centered primarily on image capture and
photography software, leaving aside other parts of the total imaging chain, such as
output devices.399 In 1995, a year after Digital and Applied Imaging was established, it
was split into five sub-units, aiming to align more appropriately with the various
functions and customers of the full imaging chain.400 After that, cameras were
allocated to the capture unit, while products such as PhotoCD and printers were
transferred to the output unit. Previously, Kodak’s digital products had been scattered
throughout the company, without maintaining logical connections. For instance, digital
cameras and the sensors used in them were handled in different divisions. Likewise,
developments on scanners and digital cameras that both were sold to similar customers
and related to the same link in the imaging chain – picture capture – were pursued in
different locations within the company. A study by Barry Mazer, editor of Advanced
Imaging magazine, showed that Kodak had 46 separate product lines using electronic
imaging, ranging from scanners to document management system.401 The
reorganization was intended to reflect customer demand.
In the course of Kodak’s reorganization of its core imaging division, Fisher also
changed the structure of its Professional & Printing Imaging Division to become fully
versed in the transition to digital imaging.402 The division provided film, paper,
397
Bounds, W. 1994g. Kodak to Ask Computer Firms for Alliances --- Revamp Plan Will Separate Company's
Film Line, Electronic Technology. Wall Street Journal, 1994 Mar 29: 0-PAGE A3.
398
399
Bounds, W. 1995g. Kodak Reorganizes Its Sales Force at Imaging Group. Wall Street Journal, 1995 Jan 24:
0, Fisher, G. M. 2014. Personal Interview. Jan 3. With M. Shamiyeh.
400
McCoy, C. 1995. Eastman Kodak to Reorganize Digital Imaging. Wall Street Journal, 1995 May 05: 0.
401
402
Nelson, E. 1996c. Kodak Remakes Its Professional Imaging Unit. Wall Street Journal, 1996 Sep 11: 9.
160
equipment, and services to professional photographers. Here too, the aim was to better
serve customers. Previously arrayed geographically, Kodak’s sales personnel who
were related to professional photography had to serve customers with radically
different needs, from portrait and wedding photography, to photojournalism and
graphic arts. The result was an increase in customer complaints about poor service.403
In response, Fisher split the sales force into groups serving specific types of consumers
with particular demands, rather than based on geographical location.404
5.5.5.2 Management
Kodak’s managers historically had a strong background in the traditional photographic
film and paper business. Fisher was the first outsider to be brought in to change the
company’s fate in a digital world. He understood clearly that he would need to look
outside the company for a few key leaders to take charge of the digital side of the
company.
After a transitional phase in which Richard Bourns, Kodak’s former director of
imaging manufacturing and supply, directed the Digital and Applied Imaging unit, the
43-year-young outsider Carl Gustin was hired to take the lead.405 Gustin had a
marketing background and was put in charge to commercialize high-tech products – a
capability in which Kodak had a poor record, for obvious reasons.406 John Sculley,
former chairmen of Apple Computer Inc., was hired as a marketing adviser.407 Harry
Kavetas, who directed IBM’s credit division, became Kodak’s new chief financial
officer.408
In the aftermath of Fisher’s first moves to bring Kodak back to its core photography
business, he was relieved of some of its centralized power as chairman, president, and
chief executive by creating a second-in-command position. In 1995, Daniel Carp and
Carl Kohrt were promoted to position of an executive vice president; Carp was also
named assistant chief operating officer. A year later, in 1996, Carp was appointed
403
Bounds, W. 1995f. Kodak Plans to Reorganize No. 2 Division --- Professional & Printing Unit Is Target;
Complaints of Clients to Play Role. Wall Street Journal, 1995 Jan 17: 0-A4.
404
Bounds, W. 1995g. Kodak Reorganizes Its Sales Force at Imaging Group. Wall Street Journal, 1995 Jan 24:
0.
405
1994b. Eastman Kodak Co. Details New Structure of Imaging Business. Wall Street Journal, 1994 May 17:
0-PAGE B2.
406
Bounds, W. 1994e. Kodak Hires Gustin to Lead Digital Imaging. Wall Street Journal, 1994 Aug 10: 0-B8.
407
Bounds, W. 1994d. Kodak Confirms Scully Will Be Adviser to Firm. Wall Street Journal, 1994 Jun 27: 0.
408
CASE
161
president under pressure from the board; this was widely regarded as a signal that Carp
was going to become the next CEO.409 Carp, who until then had overseen the
consumer and professional photography business and health, was then also put in
charge of Digital and Applied Imaging among other units and Kodak’s Chineese
market – units that previously had reported directly to Fisher.410 This latter change is
noteworthy, because it put a veteran of Kodak’s traditional photography business on
top of the company’s digital endeavors.
5.5.5.3 Alliances
Breaking with Kodak’s legendary insularity and unwillingness to form partnerships,
Fisher immediately started to work actively with other companies, especially in the
computer industry, to form strategic alliances that promised a long-term impact on the
availability of imaging solutions for customers.411 The imaging giant was always
reluctant to forge such strategic alliances with companies in the electronic world,
precisely because it always aimed at having its propriety technology adopted as an
industry standard. Fisher felt confident that the opposite holds true in the electronic
world: “We used to try to do it by ourselves,” he said, but “we’ve learned very quickly
that in this digital world, the opportunities are just too massive for any one company to
do it on its own.”412 He was equally explicit about his intention that there wouldn’t be
“one master partner” and that constructive collaboration with companies in the
electronic world would require the opening of previously restricted standards, such as
the imaging compression standard of the PhotoCD.413
Fisher, however, faced a dilemma. In order to push the potentially lucrative digital
imaging business, which in the early 1990s was still in its fledgling stage, he required
cash that couldn’t be endlessly sucked out of the photographic business. Photographic
film and paper, the company’s high-margin business, had become increasingly a
409
1995b. Eastman Kodak Company Annual Report. Rochester, NY, Nelson, E. 1996b. Kodak's Carp Is Widely
Seen as Next Ceo. Wall Street Journal, 1996 Dec 06: 0-B, 1:6.
410
Nelson, E. 1996b. Kodak's Carp Is Widely Seen as Next Ceo. Wall Street Journal, 1996 Dec 06: 0-B, 1:6.
411
412
413
Strategy for Digital Future. International Contact, 14(3) May/ June: 4-7, Bounds, W. 1994g. Kodak to Ask
Computer Firms for Alliances --- Revamp Plan Will Separate Company's Film Line, Electronic Technology.
Wall Street Journal, 1994 Mar 29: 0-PAGE A3.
162
commodity (and thus less profitable), and photography was starting to show signs of
stagnation, requiring larger and larger advertising and marketing budgets. The decision
to depend more on strategic alliances – as the company had done even in its silverhalide business, when it began to cooperate with Fuji and other Japanese firms (Nikon,
Canon, and Minolta) to develop and promote collaboratively the new Advanced
Photographic System – made a virtue out of necessity.
Fisher confirmed that in the early 1990s, Kodak had also needed to work with others,
because the company “did not have all of the digital technologies or capabilities that
we needed.” There was no lack of technical knowledge, but there was a considerable
lack of competence in manufacturing, marketing, and business model issues.414 To
accept this circumstance was very hard in those days, because “Kodak was king.”
Fisher explained, “It made so much money on film; therefore, it was hard to get us to
talk to other people with a feeling that we needed them.”415
In 1995, Kodak was working with Sprint Corp., IBM, Hewlett Packard, and Microsoft,
among many others, to develop a new file compression format for images that would
make it possible for users on virtually all platforms to work more easily with pictures
in documents and stand-alone applications.416 In particular, Kodak teamed up with
Sprint Corp. to develop a process allowing customers to store and distribute pictures
over telephone lines; the collaboration with IBM promised to boost capabilities in the
domain of networks and data management in the transfer of pictures and documents
over the World Wide Web; and the collaboration with Hewlett-Packard Co. aimed at
strengthening the capabilities of both parties in printing pictures with inkjet printers.417
To offer faster and more convenient ways to send pictures via computers, Kodak
formed a pact with Microsoft, which led to the use of Kodak’s color management in
the Windows OS.418
The imaging giant also formed partnerships with start-ups in the industry. For instance,
the company made an equity investment in a California-based software concern, Live
414
Faulkner, T. 2013a. Personal Interview. November 04. With M. Shamiyeh.
416
417
418
Bounds, W. 1996h. Kodak, in Pact with Microsoft, to Offer Faster Way to Send Images by Computer. Wall
Street Journal, 1996 May 29: 1, Maremont, M. 1995. Kodak's New Focus. BusinessWeek January 29.
415
CASE
163
Picture Inc., which was headed by Apple’s former chairman John Scully. The
company developed software that allowed people to edit digital pictures easily on
computers with inferior performance.419 A year later, in 1997, Picture Network
International Ltd. was acquired, to boost Kodak’s capability to provide services for
managing the content of pictures across networks.420
5.5.6 Initiating Growth
Fisher believed that the continuation of permanent workforce-reduction programs only
led to short-term results and further demoralization of the company’s employees.
Instead, he regarded growth in Kodak’s core photographic business as the proper
means to get the company’s severe cost problems under control. His vision for Kodak
was to become “the World Leader in Imaging.”421 At least three major pathways for
growth promised viable long-term prospects:422 first, greater product differentiation
(especially in traditional businesses); second, geographical expansion in the
developing world; third, digital and applied imaging.
5.5.6.1 Product Differentiation
In the photography industry, every decade a new film format was introduced to make
picture-taking more convenient and easier. Kodak, the industry leader, set new
standards in 1963 with the Instamatic camera series, which was loaded with an easy
drop-in 126 film cartridge; in 1972 with the Pocket Instamatic camera series, which
used the new 110 film format; and in 1982, with the fully automatic (and thus
foolproof) Disc camera series. However, in the absence of truly new innovations, sales
of traditional film and photography paper slowed down to mediocre 4 percent growth
rates in the 1990s.423 The popularity of video camcorders added to these low growth
rates.424 Disposable cameras, which were merely 35mm films with a lens, accounted
419
Smith, G., Symonds, W. C., Burrows, P., Neuborne, E., & Judge, P. C. 1997a. Can George Fisher Fix Kodak?
(Cover Story). BusinessWeek(3549) 116-128.
420
1997b. Kodak Buys Picture Network. Wall Street Journal, 1997 Jul 24: 0-No Page Citation.
421
422
Ibid.
423
Dickson, M. 1993. Focusing on Grander Horizons. Financial Times, Novemeber 1(11).
424
Blömer, H. J. 1996a. 1994/1995 Pma Industry Trends Reports. International Contact, 15(3) May June.
164
for the fastest growing segment in the early 1990s, but could not bolster film sales
too.425
For this very reason, Fisher was counting on the new Advanced Photographic System
(APS) technology to trigger growth in the stagnating consumer photography market.
The APS film and camera system was developed by a consortium of competing
companies including Kodak, its archrival Fuji, as well as Nikon, Canon, and
Minolta.426 Development activity for the new technology started in the mid-1980s and
was scheduled to be launched in early 1996.427 The easy-to-load film cartridge which
solved the problem of misloading also allowed the digital recording of user
adjustments like picture size and shutter speed. Kodak’s internal worldwide surveys
suggested that the new system would induce people to take more pictures.428
Kodak also instituted a film segmentation strategy to stimulate future picture-taking,
based on the recognition that one type of film could not meet the needs of all
consumers and retailers.429 For instance, Kodak began to launch a discount film,
branded under the name Colorburst to conceal Kodak’s role, and the high-quality Gold
Max film for the premium segment.430 The company also initiated special marketing
efforts directed at young families and youth, with the aim of repositioning the
traditional yellow label in a more “cool” light.431
In established markets, Kodak set the stage for future growth by putting up digital
print stations.432 These free-standing stations with user-friendly controls allowed
customers to preview their pictures on a screen, edit them or add special effects, and
print them right away (without requiring an hour’s waiting time).433 The self-service
concept of the print stations relied on the idea of automatic teller machines that
425
Blömer, T. 1995d. The Future Lies in Marketing. International Contact, 14(2) March/ April.
1995a. Business Bulletin: A New Photography System. Wall Street Journal, 1995 May 18: 0, Bounds, W.
1994k. Technology: Photography Companies Hope People Smile over 'Smart Film'. Wall Street Journal, 1994
Jul 25: 0.
427
Atkinson, B. 2013. Personal Interview. November 19. With M. Shamiyeh.
428
429
430
Murray, M. 1997. Kodak Considers Selling Discount Film to Compete with Private-Label Brands. Wall
Street Journal, 1997 Jun 04: 0-A4.
431
Bounds, W. 1996f. Kodak Focuses on Young Buyers, with View to Sharpening Its Image. Wall Street
Journal, 1996 Apr 12: 0.
432
433
McNamara, M. J., & Myer, T. 1995. Who Needs a Darkroom. Popular Photography(October) 68.
426
CASE
165
enjoyed great popularity.434 Then in late 1996, Kodak began testing a new retail
identity program in several Fox Photo locations and other retail sites.435 The company
rolled out Kodak Image Centers, a sort of shop-in-shop concept by which store owners
benefitted from co-branding Kodak products.436 Consumer acceptance of digital print
stations was big, increasing the market for reprints and enlargements at some sites by
as much as 500 percent.437 By 1997, Kodak had installed some 13,000 print stations
worldwide, and in 1999, the company had an installed base of about 19,000 of these
do-it-yourself printers.438
5.5.6.2 Geographical Expansion
It was in developing markets such as China, India, and Russia that Fisher saw large
potentials for growth.439 China was one of the most important markets for Kodak,
becoming its third-largest market for consumer film: The average Chinese household
took fewer than 18 pictures a year – less than half a roll of 36-exposure film; in Japan
and the US, households were using more than 8 rolls of film per year on average.440
Kodak estimated that if the average Chinese household started using one whole roll of
film a year, it would be like adding another entire market the size of Germany.441
In 1997, Kodak started its efforts to get a foothold in China and to build its own
manufacturing base for this fast-expanding market.442 Until then, Kodak (as well as its
archrival Fuji) gained much of its market share in China only through franchised
retailers.443 In 1998, Kodak invested about $1 billion to be allowed to deliver film and
paper directly from the US to China, instead of importing it via Hong Kong
434
Bounds, W. 1994b. Focus on Photography. Wall Street Journal, 1994 Jun 10: 0-PAGE B1.
436
Blömer, H. J. 1997. Kodak Image Centre Solutions. International Contact, 16(1) Jannuary/ February: 38.
437
438
1997a. Eastman Kodak Company Annual Report. Rochester, NY, 1999c. Eastman Kodak Company Annual
439
440
441
Ibid.
442
Nelson, E. 1997d. Kodak Is in Talks to Make Film, Paper in China. Wall Street Journal, 1997 Apr 08: 0-A,
10:13.
443
Bulkeley, W. M., & Craig, S. S. 1998. Business Brief: Kodak to Invest in China in a Bid to Improve Its
Strategic Position. Wall Street Journal, 1998 Mar 24: 1-B4.
435
166
subsidiaries.444 This investment equaled the annual earnings of the company and was
considered to be a high price for getting direct access to the country.
Likewise, only a small portion of India’s 950 million people were taking pictures.445 It
was believed that photography is expensive. Surveys reported that just one fifth of all
urban households owned a camera, while in the countryside, only 4 percent of
households did. Triggered by India’s free-market reforms that had given more income
to Indians (and thus opportunities to travel), the nation’s demand for film was growing
15 to 20 percent a year, constituting another big business opportunity for Kodak.446
Besides Kodak’s expansion into emerging markets, the company aimed at gaining a
leading position in photofinishing services worldwide. In the US, Kodak acquired the
other half of Qualex Inc., one of the major photofinishers that the company jointly
owned, for $150 million.447 In 1996, Kodak acquired the majority of Fox Photo, one of
the largest photo specialty retailers in the US, for about $52 million.448 The company
operated approximately 550 minilabs.449
In the same year, Kodak bought out Nagase, a distributor of chemical goods as well as
of Kodak products. The purchase ended the Kodak-Nagase relationship, which went
back more than 70 years. Kodak Japan was set up in 1986 as a joint venture between
Kodak and Nagase, and over the ten years prior to the buyout, Kodak has increased its
percentage of ownership.450
In Europe, Kodak concluded a long-term cooperation agreement with the Belgian
Spector Photo Finishing Group, which “sent shock waves throughout the industry.”451
Shortly before Kodak announced the deal, the Belgian company had taken over the
majority holding of Germany’s Porst Holding AG, as well as full ownership of
444
Ibid.
Bailay, R. 1999. In India, Kodak Seeks to Turn Many into Shutterbugs. Wall Street Journal, 1999 Jan 18: 1B5B, Shanebrook, R. L. 2013c. Personal Interview (Follow-up). November 21. With M. Shamiyeh.
446
Bailay, R. 1999. In India, Kodak Seeks to Turn Many into Shutterbugs. Wall Street Journal, 1999 Jan 18: 1B5B.
447
Bounds, W., & Frank, R. 1994. Kodak Is to Buy Actava Group's Half of Photofinisher Qualex for $150
Million. Wall Street Journal, 1994 Aug 08: 0, O'Neill, J. 1994. U.S. Industry News. International Contact,
13(5) September/ October: 42-43.
448
449
1996b. Kodak Acquires Majority of Fox Photo. International Contact, 15(5 [photokina '96 issue])
September/ October 1996: 22.
450
O'Neill, J. 1996. U.S. Industry News. International Contact, 15(3) May/June: 12.
451
Blömer, H. J. 1996b. Earthquake in Europe. The Alliance between Spector and Kodak Alters the Map of the
Imaging Market. International Contact, 15(5 [photokina '96 issue]) September/ October: 5.
445
CASE
167
lnterdiscount France. The acquisition positioned Spector Photo Finishing Group to
increase the company’s sales of around $270 million to about $1 billion, making it an
international retailing and photofinishing concern.452 To the same end, the cooperation
agreement secured Kodak a big share of the European photographic paper market and
access to more than 3,000 retail outlets.453 Kodak also invested in new manufacturing
facilities in Europe: For instance, in 1997 it opened a $167 million plant to
manufacture APS film cartridges in Limerick, southwest Ireland.454 It was Kodak’s
first APS facility outside the US.
It is important to note that all these resource commitments – which certainly couldn’t
be undone quickly in the face of a rapid industry decline – were made at a time when it
was widely accepted that digital imaging would take off in less than a decade.
However, in 1998, Kodak’s annual report notes that “film will remain a preferred
format for consumers for decades; it's easy to use, people like it, and it's economical –
yet digital imaging and digitization offer definite advantages, enabling people to do
more with their pictures.”455 Kodak’s many acquisitions supported this mindset: first,
there was a strong conviction that digital imaging was going to increase rather than
decrease the number of prints; that is to say, that digital technologies would start to
supplant traditional cameras along with silver-halide film on the capture side of the
imaging chain, but that on the output side, photographic paper (and thus photofinishing
services) would grow. Second, there was no anticipation of a rapid decline of the
traditional photography industry in general. “Even if we believed that there was going
to be a systemic downturn in the film business,” Fisher said, “we felt we could deal
with it, because we did not think it was going to happen overnight.”456 It is noteworthy
that a Forbes online survey of late 1993 supported the assumption that paper prints
would survive digital imaging. Sixty-three percent of respondents shared this belief,
while only a bit less than the rest was convinced of the opposite.457
452
Ibid.
Blömer, H. J. 1996e. Spector, Interdiscount and Porst Go Kodak. Photo Group with Sales of Newaly Dm 1.5
Billion Combines Servies and Retailers. International Contact, 15(5 [photokina '96 issue]) September/ October
1996: 8.
454
O'Neill, J. 1997. U.S. Industry News. International Contact, 16(1) January/ February: 20.
455
456
457
Moreno, K., & Pappas, B. 1997. Digital George? Forbes, 160(10) 40-40.
453
168
5.5.6.3 Digital Imaging
Digital and applied imaging was Fisher’s third major pathway for growth. Until 1994,
a few months after Fisher assumed leadership, Kodak’s digital camera technology
continued to exist without public awareness. Started as skunkworks in the Federal
Systems division, Kodak’s researchers spent a lot of time visiting different government
agencies and demonstrating cameras to sell them, but never got a big sale.458 Despite a
passing mention in Kodak’s 1992 annual report, the company never made an issue out
of digital cameras in public. Wall Street too was quiet about Kodak’s revolutionary
technology. Fisher changed all this. His goal was “to enable everyone to use more
pictures, more easily, more creatively and less expensively than ever before.”459
The 1994 annual report depicted Kodak’s new digital Associated Press News Camera
2000 [AP NC2000] and presented it in the context of its potential customers – photo
journalists – right next to a newspaper.460 The report clearly signaled that the
company’s aim was also to offer its advanced digital camera technology to the
consumer market by depicting the Apple QuickTake consumer camera, Kodak
developed for the computer company. Since then the Wall Street Journal started to
cover the technology. For instance, it announced Kodak’s agreement with the
Associated Press to jointly develop a filmless camera, “the first of its kind specifically
for news photographers.”461 The new Kodak AP NC2000, which was the first camera
to bring multi-megapixel image quality to a state-of-the-art 35mm single lens reflex
camera, was distributed exclusively by the Associated Press. Jim McGarvey, the chief
scientist behind the $26,000 camera, recalled that this was when Kodak’s digital
cameras took off. The Rochester Democrat and Chronicle was the first major
newspaper to go all-digital, using the NC 2000 cameras, and shutting down the
newspaper’s photo lab.462
Then in early April 1994, Fisher took advantage of a huge Photo Marketing
Association trade show to present the Apple QuickTake 100 – a digital camera which
458
Gustavson, T., & McGarvey, J. 2013. The First Digital Single-Lens Reflex Cameras. IMAGE(Winter
2012/2013) 5.
459
460
461
1994e. Kodak, Ap Unveil Camera without Film for News. Wall Street Journal, 1994 Feb 09: 0-PAGE B12.
462
Gustavson, T., & McGarvey, J. 2013. The First Digital Single-Lens Reflex Cameras. IMAGE(Winter
2012/2013) 5, McGarvey, J. 2013. Personal Interview. April 10. With M. Shamiyeh.
CASE
169
was developed jointly by Kodak and Apple; 75,000 units were shipped in 1994.463
This wasn’t the first digital camera on the consumer market; Dycam, Casio, and
Logitech, among others, had steered for the market earlier; however, Kodak’s “Apple”
camera offered superior features at an affordable price for the first time.464 Other
digital cameras made and branded by Kodak followed shortly. In 1995, Kodak
launched the DC40, which exceeded the company’s sales projections.465 A year after,
Kodak trumped with another mass market camera, the DC25, just a couple of months
after introducing the breakthrough digital snap shooter DC20.466
Fisher urged new concepts and software to make photos easily available for processing
on home computer platforms, and even lifted them into the virtual reality of
cyberspace. For instance, he re-launched Kodak’s poorly commercialized PhotoCD
system to allow home computers users to work with it, and started to market a lowcost photo scanner, which offered exceptional value for the money. Under Fisher’s
leadership, Kodak also went online, providing users with a platform full of information
about recent news and the company’s history, specifications of its products, and
samples of PhotoCD digital images, and delivered.467 Here too, it was Fisher who
made use of employees’ skunkwork.468
In 1997, Kodak launched its online photofinishing service, to position itself in the
digital world and allow customers to view, edit, and make prints of their uploaded
pictures.469 Kodak was not the first to offer such a service. In the US, Wolf Camera
had introduced its Picture On Disk mail-order photofinishing service already in
1994.470 The Seattle-based company teamed up with other powerful players in the
463
Blömer, H. J. 1996c. Kodak's Imaging Universe - Interview with Dan A. Carp, Kodak Executive Vice
President. International Contact, 15(5 [photokina '96 issue]) September/ October, Partalon III, W. 1994. Betting
on Future of Digital Imaging. Democrat Chronicle: 1f.
464
Mossberg, W. S. 1994. Personal Technology. Wall Street Journal, 1994 May 19: 0-PAGE B1.
465
466
467
O'Neill, J. 1995c. U.S. Industry News. International Contact, 14(2) March/April: 12-20.
468
Jahnke,
A.,
"Kodak
Stays
in
the
Digital
Picture,"
http://edition.cnn.com/TECH/computing/9908/06/kodak.ent.idg/, accessed on May 4, 2013.
469
1997c. Kodak Is Launching Service on Internet to Store, Print Photos. Wall Street Journal, 1997 Aug 26: 0B, 18:13.
470
Franz, D. 1997. Wolf Camera on the Internet. Tomorrow's Images for Everybody. International Contact,
16(1) Jannuary/ February: 14-16.
170
industry, such as Konica Corporation among many others.471 Kodak teamed up with
Microsoft to develop Picture It! software that was tied in to Kodak’s Image Magic
digital print service. A simple click with the mouse on the “Print to Kodak” button
linked the computer automatically to a Kodak Internet site offering digital
photofinishing. Kodak’s expectations of the service were small. In the first year it
expected only a few thousand customers to use the platform; five years later, the
company expected about a million customers.472 Unlike picture platforms established
in the new millennium, at Kodak’s 1997 webpage, customers were asked to subscribe
for a monthly fee of $4.95 and were allowed to store up to 100 images.473
5.5.7 Interim Results
But Fisher’s growth strategy was thwarted: Additional earnings due to increased unit
volumes were offset by flagging consumer demand for film, low selling prices because
of a fierce competition, and negative effects of currency exchange. As a consequence,
Kodak’s sales remained flat, adjusted by the exclusion of revenues from divestures.
Efforts to outgrow the company’s cost problem and to build a new supporting pillar
with digital imaging were thwarted, and Fisher could not prevent Kodak from making
further deep cuts in the workforce and taking measures to shrink the company’s assets.
In 1994, the year after Fisher took over, Kodak was scaled down extensively [see
Figure 60]. The company’s net earnings were cut in half compared to those in 1992,
before Kodak decided to shed several of its non-imaging businesses, and the total sales
as well as number of employees were down to two thirds. The spin-off of Kodak’s
chemical operations and the sale of most of its health businesses, which in sum
accounted for about $7.6 billion in sales, lowered total sales to $12.7 billion in 1993,
compared to $20.2 billion one year earlier [see Figure 50].
471
Bounds, W. 1996a. Big Photo Retailer to Offer Service on the Internet. Wall Street Journal, 1996 Feb 21: 0,
Franz, D. 1997. Wolf Camera on the Internet. Tomorrow's Images for Everybody. International Contact, 16(1)
Jannuary/ February: 14-16.
472
1997c. Kodak Is Launching Service on Internet to Store, Print Photos. Wall Street Journal, 1997 Aug 26: 0B, 18:13.
473
Ibid.
CASE
171
400%
350%
300%
250%
200%
150%
100%
50%
0%
1983
1992
1994
1999 YE
Before
Peak
Fisher
Fisher
Diversification Diversification Appointed CEO Leaves Kodak
Net Sales
Net Earnings
Net Earnings per Employee
Figure 60
Kodak’s Financial Performance and Efficiency in Comparison
Data of 1983 is point of reference (100%)
As for net earnings, the company had returned to the size of its pre-diversification era.
Its 1994 net earnings of $557 million corresponded to those of 1983, which were $565
million. But the company was quite different. While Kodak a decade earlier rested on
two profitable pillars of income, photography and chemicals, which accounted for 80
percent and 20 percent of earnings, respectively, and was on its way to establishing the
third one, Fisher basically centered the new Kodak on one single pillar – imaging –
betting that the traditional film business would stay around long enough to generate
the viable cash stream required to fund the new digital technology that was said to be
the substitute (at least on the capture side of the imaging chain) for the chemical-based
silver-halide technology [see Figure 61].
20%
CHEMICAL
HEALTH
DIAGNOSTICS
(INFORMATION)
IMAGING
90%
10%
HEALTH
CHEMICAL
20%
CHEMICAL
(INFORMATION)
HEALTH +
STERLING
60%
IMAGING
(CONSUMER)
(COMMERCIAL)
20%
IMAGING
PHOTOGRAPHIC
80%
CHEMICAL
(INFORMATION)
(HEALTH)
172
100% (25/75)
Before 1984
1989
1994
Figure 61
Change of Kodak’s Income Pillars
For operational reasons, Fisher split the imaging concern into a consumer and a
commercial segment. Adjusted by losses or gains due to the divesture of non-imaging
businesses, growth rates of Kodak’s total sales remained flat throughout Fisher’s
tenure (while general consumer demand for the photography industry declined).
Excluding the revenues of the divested non-imaging businesses in 1993 and 1994,
Kodak was able to leverage total sales of a year earlier and to realize an average
growth rate of about 4.6 percent for both years [see Figure 50, note (1) and (2)].
Increases in sales were primarily achieved in the consumer imaging segment and not
in its commercial counterpart. Significantly, here Fisher’s strategy to extend market
share in the photofinishing business paid off. The increase in sales was mostly due to
the inclusion of revenues from Qualex Inc., a photofinishing concern that was acquired
in August of 1994.474
Kodak’s sales in 1995 and 1996 showed signs – at first glance – that the company’s
new marketing and advertisement initiatives were making inroads [see Figure 50, note
(4)]. Annual reports of those two years presented record double-digit growth figures:
Worldwide consumer imaging grew 15 percent in 1995 compared to 1994, and 12
474
CASE
173
percent in 1996, growth rates were about ten basis points above the industry’s average,
impressive gains at a time of stagnation.475 In the early 1990s, worldwide growth in
sales of film declined to about 4 percent from at least double that the decade earlier
[see Figure 63].476 Kodak used this as an opportunity to disparage the skeptics who
considered imaging as a “dead” business with marginal single-digit growth rates.477
However, a close look at the reported figures presents a different picture – a prelude to
an industry change ominous for the imaging giant. Excluding Kodak’s sales of its
Qualex photofinishing subsidiary and effects of foreign exchange growth rates, the
growth rate actually fell by more than half [see Figure 62, note (1)]. In 1995, the
exchange rate for dollars to German marks and Japanese yen reached an all-time low
[see Figure 64]. For European and Japanese photographic film and paper
manufacturers, this was of major concern.478 In contrast, unfavorable effects of
exchange rates affected sales by about 40 percent in 1995.479 An additional 20 percent
share of 1995 sales was buoyed by Kodak’s more recent aggressive acquisition of
photofinishing services.480
In the mid-1990s, analysts questioned whether Kodak would be able to achieve growth
rates above the industry average in the United States when its archrival Fuji Photo
started selling paper in the US.481 In 1995, Fuji opened its first paper-manufacturing
facility in Greenwood, SC.482 In 1997, the Japanese company became an even more
formidable competitor to Kodak by investing heavily in its US facilities to
manufacture film and to bolster its existing capacities related to paper manufacture.483
475
1995b. Eastman Kodak Company Annual Report. Rochester, NY, 1996a. Eastman Kodak Company Annual
476
Franz, D. 2014. Cameras + Film Rolls, 1984-2012. In P. News (Ed.). Bonita Springs, FL, Nelson, E. 1997f.
Kodak Says Sales Are 'Essentially Flat,' and Stock Price Gets Pummeled 10.5%. Wall Street Journal, 1997 Mar
24: 0-A, 4:1.
477
478
Blömer, H. J. 1995a. Higher Prices Are the Only Way Out. Currency Upheavals Cast a Glom over Profits in
the Photo Industry. International Contact, 14(3) May/ June: 3, Gerlach, K. 1995. More Prints Than Ever Before.
International Contact, 14(3) May/ June.
479
480
Bounds, W. 1996e. Kodak's Net Jumped 17% in Quarter, Buoyed by Growth in Photofinishing. Wall Street
481
Bounds, W. 1995h. Kodak Third-Period Net Surged 75%; Buyback Plan of up to $1 Billion Is Set. Wall
Street Journal, 1995 Oct 18: A3.
482
Bounds, W. 1996c. Fuji Invests $100 Million in U.S. Plant. Wall Street Journal, 1996 Feb 21.
483
Nelson, E. 1997b. Fuji, Challenging Kodak, to Make Film in U.S. Wall Street Journal, 1997 May 08: 0-A,
3:1.
Adjusted Changes in Kodak's
Consumer Photography Sales
Changes in Kodak's Consumer
Photography Sales
Trend Changes in Kodak's
Consumer Photography Sales
2003
Carp
2001
1999
1997
Whitmore
Chandler
Fisher
1995
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
-20%
1983
-15%
1993
-10%
1991
(2)
-5%
1989
0%
1987
5%
1985
Carp
(1)
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1983
10%
Fisher
15%
Whitmore
20%
Chandler
174
Changes in Film Roll Sales Worldwide
Trend Changes in Film Roll Sales Worldwide
Trend Changes in Film Roll Sales US
(1) Changes in sales exclude sales of the company’s
Qualex photofinishing subsidiary and the negative
effects of dollar exchange rates.
(2) Changes in in sales adjusted for lower selling prices
due to fierce competition, the unfavorable effects of
currency exchange.
Figure 62
Changes in Kodak’s Consumer
Photography Sales Worldwide
Source: Data adapted from Eastman
Kodak Annual Reports
Figure 63
Changes in Film Roll Sales (Units)
Worldwide Photography Industry
Source: Data adapted from
Photofinishing News
Moreover, in 1997 the tide had turned and the strong dollar started to negatively affect
sales; Kodak was forced to cut its prices to stay competitive, despite the dramatic price
cuts that had already been taken on photographic film and paper due to the price war
with Fuji and discount retailers. Kodak’s sales results in the years after 1996 were
disastrous. Year after year, total sales declined by 7 to 8 percent. A big part of the
disastrous sales results was the failure of the new APS film system to meet its sales
goals.484 Kodak had to focus a large part of its development and marketing dollars on
this system, diverting money from other product lines like 35 mm film and single-use
cameras. This is similar to the poor results in 1983, which were primarily due to the
failure of the new disc film system to reach its goals.
484
USD/DEM
USD/JPY
USD/EUR
Figure 64
Currency Exchange Rates
OANDA Corporation
Carp
2003
1999
1997
2001
Whitmore
Chandler
Fisher
1995
-45%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
-35%
1993
-25%
1991
-15%
1989
-5%
1987
5%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1985
Carp
15%
175
1983
25%
Fisher
35%
Whitmore
45%
Chandler
CASE
Trend Changes in Film Roll Sales US
Figure 65
Changes in Film Roll Sales (Units)
US Photography Industry
Photofinishing News
It was in 1999, Fisher’s last year before handing over direction to Dan Carp, that the
company increased sales by five percent. In Kodak’s most important consumer
imaging segment, the results were not impressive. In 1997, the company reported sales
at the same level as the previous year; 1998 saw a decrease of 7 percent; and only in
1999 was there a sales increase of 5 percent compared to 1998. Even if the negative
effects of currency exchanges were excluded, which mostly accounted for 3 to 4
percent of total sales, and losses due to divestures in the photofinishing sector were
subtracted, Kodak’s growth rates languished at zero, or about 4 basis points below the
176
industry average [see Figure 62, note (2), and Figure 63].485 The consequences were
devastating. Kodak massively lost market share.
What happened? Why did Kodak, like an airplane, suddenly lose power and stop
climbing? Even with a strong dollar, the company’s sales fell apart for three major
reasons: First, Kodak’s competitive disadvantages put Fuji in a superior position in a
price war that lowered Kodak’s revenues, market position, and profitability (and thus
ability to invest for the future); second, growing markets, such as China, could not
compensate for losses in Kodak’s domestic market due to recurring economic
setbacks; and third, innovations such as the Advanced Photographic System, which
were intended to boost consumer demand for photographic products, came late and
were poorly launched.
Since the early 1980s, when Fuji got a foothold in the US market by winning the pitch
for the 1984 Los Angeles Olympics against Kodak, the world’s two largest
manufacturers of photographic film and paper had each been trying to crack the
other’s domestic stronghold. Kodak and Fuji owned some 80 and 70 percent,
respectively, of their roughly $3 billion domestic markets.486 By the mid-1990s in the
US, Fuji had clawed its way to about 11 percent; in Japan, it was a near mirror image –
there Kodak’s market share was about 9 percent.487 However, unlike in the US, in
Japan it was difficult for foreign companies to get access to consumers due to a
complex distribution system that was largely controlled by Fuji.488
According to Kodak, the Japanese distribution system was effectively controlled by
four major wholesalers responsible for the majority of photographic products supplied
to retailers in Japan. Since the mid-1970s, each of the four wholesalers distributed Fuji
products exclusively. Fuji, in turn, used its leverage to keep the wholesalers and their
retailers in a state of financial dependency, establishing a sophisticated system of
target bonuses, discounts, capital shares, low-interest credits – even underwriting of
485
Symonds, W. C. 1998. Finally, a Good Kodak Moment. BusinessWeek(3588) 34-34.
Chakravarty, S. N., & Simon, R. 1984. Has the World Passed Kodak By? Forbes, November 5 184-192,
Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond Film: 132-138: Bloomberg, L.P, Nelson, E., & White, J.
B. 1997. Blurred Image: Kodak Moment Came Early for Ceo Fisher, Who Takes a Stumble --- Bet on Digital
Photography Has Been a Money Loser; Fuji Is Gaining Ground --- Dennis Rodman's Film Flop. Wall Street
Journal, 1997 Jul 25: 0-A1, Smith, G., Symonds, W. C., Burrows, P., Neuborne, E., & Judge, P. C. 1997a. Can
George Fisher Fix Kodak? (Cover Story). BusinessWeek(3549) 116-128.
487
Maremont, M., Bremner, B., & Updike, E. 1995. Next, a Flap over Film? BusinessWeek July 09.
488
O'Neill, J., & Blömer, H. J. 1995. American Government to Support Eastman Kodak. International Contact,
14(4) July/ August: 4.
486
CASE
177
debts when bankruptcy threatened.489 Retailers, which didn’t belong directly to Fuji,
would have been lost without its backing.490 As a consequence, retailers removed
foreign products from their shelves or at best banished them to some remote corner.491
Agfa, a large German manufacturer of photographic products, accepted the
omnipresence of Fuji in Japan and sold their film at low cost in unbranded packs of
three 24-exposure rolls in a Japanese discount chain.492 Kodak, however, did not
accept this unfavorable situation. On May 23, 1995, it filed a petition alleging that the
Japan government had created a “profit sanctuary” for Fuji by restricting Kodak’s
access to the nation’s photographic market.493 Kodak argued that its market share in
Japan was as low as 7 percent, compared with some 40 percent in many other
countries.494 It accused Japan of maintaining “a tightly-controlled distribution system
and other non-competitive practices [which] have hurt our chances to deliver products,
infrastructure and marketing programs that meet the specific needs of Japanese
consumers.”495 The US government took up the case and Kodak hoped that US trade
representatives could persuade Japan to open its market; nevertheless, in 1997 the
World Trade Organization rejected the company’s claim that Japan was protecting its
photographic market.496
For Kodak, the access to Japan’s photographic market was important for another
reason. Japan’s “profit sanctuary” not only protected Fuji from foreign competitors,
but also allowed the company to charge above-market prices in Japan, giving Fuji
financial reserves which enabled it to subsidize low pricing in other countries.497 In
1995, Kodak estimated that Fuji’s “war chest” totaled nearly $10 billion, while the US
photography giant lost about $5.6 billion in revenues from Japan between 1975 and
1993.498 Fisher recalled that Fuji made “a lot of money in Japan and basically
subsidized its incursions into the US market, although the profit margins were so high,
489
Köhler, R. 1995. The Kodak/ Fuji Case. International Contact, 14(6) November/ December.
Company, E. K. 1995. Kodakery(20).
491
Köhler, R. 1995. The Kodak/ Fuji Case. International Contact, 14(6) November/ December.
492
Ibid.
493
Bounds, W. 1995a. Fuji Photo Lashes Back at Kodak, Says Rival Uses Anticompetitive Ploys in U.S. Wall
Street Journal, 1995 May 24: 0.
494
495
496
By James, C. A. 1997. Kodak Is Wrong: Japan's Market Isn't Closed. Wall Street Journal, 1997 Dec 23: 1A14, O'Neill, J. 1995d. U.S. Industry News. International Contact, 14(4) July/ August.
497
498
Ibid.
490
178
they made money [there] too.”499 Kodak estimated that the price for a Fuji color film
sold in Japan was about 3 to 4 times higher than outside Japan.500
By 1997, when the WTO ruled against Kodak’s petition against Japan, the “war”
between Kodak and Fuji wasn’t settled; rather the opposite. The battlefield was
transferred to the US, putting the US photo giant under severe cost pressure. A year
earlier, Fuji had started to produce color negative paper in their newly established US
manufacturing site in Greenwood, SC, a move that earned worldwide recognition.501 A
decade earlier, Fuji almost exclusively manufactured in Japan; in 1997 about one third
of the company’s total manufacturing was abroad.502 And Fuji’s moves accelerated. To
ensure a market for the paper, Fuji started to aggressively acquire the largest US filmprocessing wholesalers. For instance, in 1996 Fuji purchased the wholesale
photofinishing business of 2,252 Wal-Mart stores for the next ten years, plus the paper
business of the its 1,200 minilabs, for an estimated budget of $500 to $600 million.503
Until then, Kodak had controlled about 80 percent of the US wholesale photofinishing
business; losing Wal-Mart’s business meant a reduction by 15 to 20 percent.504 Kodak
countered the move just a few weeks later by taking over 51 percent of the shares of
CPI Fox Photo, the fifth-largest minilab and retail chain, with around 550 shops in the
USA.505 At the same time, Kodak set up an agreement with the Belgian Spector Photo
Finishing Group, one of Europe’s leading retailing and photofinishing concerns.506
Fuji then won a pitch to provide paper to Ritz Camera Centers Inc., the third-largest
minilab chain in the US, and, again, Kodak responded with an agreement with WalMart to install its Image Magic Print stations, kiosks that allowed customers to scan,
499
O'Neill, J. 1995a. Kodak Watch. International Contact, 14(6) November/ December.
501
Franz, D. 1996. New Fuji Photo Photographic Paper Plant Opens. International Contact, 15(3) May June.
502
Desmond, E. W., & Kahn, J. 1997. What's Ailing Kodak? Fuji While the U.S. Giant Was Sleeping, the
Japanese Film Company Cut Prices, Marketed Aggressively, and Now Is Stealing Market Share. Fortune
October 27.
503
Bounds, W. 1996d. Fuji Will Buy Wal-Mart's Photo Business --- Finishing-Operations Pact with Major
Retailer Is Coup against Kodak. Wall Street Journal, 1996 Jul 09: 0-A3, Desmond, E. W., & Kahn, J. 1997.
What's Ailing Kodak? Fuji While the U.S. Giant Was Sleeping, the Japanese Film Company Cut Prices,
Marketed Aggressively, and Now Is Stealing Market Share. Fortune October 27.
504
Bounds, W. 1996d. Fuji Will Buy Wal-Mart's Photo Business --- Finishing-Operations Pact with Major
Retailer Is Coup against Kodak. Wall Street Journal, 1996 Jul 09: 0-A3, Desmond, E. W., & Kahn, J. 1997.
What's Ailing Kodak? Fuji While the U.S. Giant Was Sleeping, the Japanese Film Company Cut Prices,
Marketed Aggressively, and Now Is Stealing Market Share. Fortune October 27.
505
Imaging Market. International Contact, 15(5 [photokina '96 issue]) September/ October: 5, Nelson, E. 1996d.
Kodak Signs Pact with Price/Costco, Dealing Fuji Blow. Wall Street Journal, 1996 Dec 05: 0-B16.
506
Imaging Market. International Contact, 15(5 [photokina '96 issue]) September/ October: 5.
500
CASE
179
edit, and print their photographs in about 1,400 stores in the US.507 Kodak also
provided chemicals and papers required for the processing of photos. The deal was
settled a year after Fuji clinched the lucrative agreement to obtain Wal-Mart’s
photofinishing service of films that customers drop off in the stores.508
The many acquisitions by both firms led to a broad consolidation in the photofinishing
industry, basically turning large portions of the business over to Kodak and Fuji. This
was not without strategic consequences for both companies. Betting heavily on the
longevity of photographic paper, the two photography giants committed extensive
resources to a business that could not be undone quickly at periods of rapid downturn.
But the two competitors conducted their acquisitions from different financial positions.
While in 1997 Fuji had access to low-interest borrowings of about 2 to 3 percent and a
high amounts of cash or cash equivalents of $4.5 billion, Kodak was in the midst of a
turnaround that burdened the company by $1.5 billion, not to mention the $600 million
in long-term debts the company had incurred at as much as 6 to 8 percent.509
But what really troubled Kodak was Fuji’s aggressive cutting of film prices in the US
and its capture of Kodak’s market share, which reduced the company’s cash flow
when Fisher needed it most for his strategic move into digital imaging. The “price
war” clearly helped to stall Kodak’s turnaround.510 In early 1996, Fuji cut its US prices
for color films by one fourth, explaining the action by its lost agreement with Costco
(which Kodak got). A holdover of 2.5 million film rolls needed to be brought to
market at a big discount.511 Nevertheless, Fuji kept prices low in general. Their films
were usually 10 to 15 percent cheaper than Kodak’s films. About 18 months later, in
mid-1997, a survey showed that discount film had dropped to 25 to 35 percent below
507
1997f. Wal-Mart Picks Kodak Kiosks. The New York Times, August 28, Nelson, E. 1996a. Fuji Beats out
Kodak to Win Ritz Contract. Wall Street Journal, 1996 Oct 10: 1.
508
1997f. Wal-Mart Picks Kodak Kiosks. The New York Times, August 28, Nelson, E. 1996a. Fuji Beats out
Kodak to Win Ritz Contract. Wall Street Journal, 1996 Oct 10: 1.
509
1997a. Eastman Kodak Company Annual Report. Rochester, NY, Desmond, E. W., & Kahn, J. 1997. What's
Ailing Kodak? Fuji While the U.S. Giant Was Sleeping, the Japanese Film Company Cut Prices, Marketed
Aggressively, and Now Is Stealing Market Share. Fortune October 27.
510
Nelson, E. 1997g. Kodak Stock Falls on Analyst Fears of a Price War. Wall Street Journal, 1997 Jun 12: 0B, 7:1.
511
October 27.
180
Kodak’s prices.512 Occationaly Fuji sold packs of multiple film rolls for the half
price.513 The manufacturing pace at Fuji’s new plant in Greenwich, SC, had tripled
within less than two years.514
80,0%
10,0%
81,1%
12,3%
76,2% 74,8%
17,3% 15,1%
70,3%
21,9%
1993 1994 1995 1996 1997 1998 1999
Kodak US Market Share (dollars)
Kodak US Market Share (units)
Fuji US Market Share (dollars)
Fuji US Market Share (units)
Figure 66
Market Share of Kodak and Fuji in the US
Source: See Footnote 515
512
Johannes, L. 1997a. Fuji Photo Ties Lower Prices to Bid to Cut Stocks, Not to a War with Kodak. Wall Street
Journal, 1997 Aug 25: 0-A9B.
513
Smith, G., Wolverton, B., & Palmer, A. T. 1997b. A Dark Kodak Moment. BusinessWeek(3538) 30-31.
514
Bulkeley, W. M. 1998. Kodak Profit, Helped by Cost Cutting, Hits Forecasts Despite 7% Sales Decline. Wall
Street Journal, 1998 Apr 15: 1-A4.
515
October 27, ibid., Johannes, L. 1997c. Kodak Profit Fell 43% in 3rd Quarter on Losses in Digital-Imaging
Products. Wall Street Journal, 1997 Oct 15: 1-B3, Johannes, L. 1998a. Kodak Reports Loss of $744 Million
Including Big Restructuring Charge. Wall Street Journal, 1998 Jan 16: 1-A4, Klein, A. 1998. Kodak's Share of
Film Sales Stabilizes, Leading Analysts to Lift Profit Estimates. Wall Street Journal, 1998 Oct 08: 1-B10,
Klein, A. 1999d. Kodak and Fuji Enjoyed Strong December Sales --- Buying of 35mm-Film Rolls Jumped 18%,
Reflecting Aggressive Price Cutting. Wall Street Journal, 1999 Jan 12: 1-A4, Klein, A. 1999f. Kodak Losing
U.S. Market Share to Fuji --- Surveys Represent Setback Amid Signs Major Rival Is Lowering Film Prices. Wall
Street Journal, 1999 May 28: 0-A3, ibid., Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond Film: 132138: Bloomberg, L.P, Nelson, E., & White, J. B. 1997. Blurred Image: Kodak Moment Came Early for Ceo
Fisher, Who Takes a Stumble --- Bet on Digital Photography Has Been a Money Loser; Fuji Is Gaining Ground -- Dennis Rodman's Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1, Smith, G., Symonds, W. C., Burrows,
P., Neuborne, E., & Judge, P. C. 1997a. Can George Fisher Fix Kodak? (Cover Story). BusinessWeek(3549)
116-128.
CASE
181
As a result of Fuji’s aggressive price cutting, its US film sales rose 4 percent, but
dropped 8 percent in dollar terms.516 Film prices of the US giant had fallen by 11
percent.517 Kodak estimated that every 1 percent reduction in its film prices leads
roughly causes earnings per share to drop by 1 percent.518 And as of 1997, Kodak had
to acknowledge that Fuji had finally arrived in the US. After that, Kodak’s market
share lost at least 3 percent a year [see Figure 66]. Whereas in the mid-1990s Kodak
managed to gain market share in dollars by sticking with high profit margins, in the
late 1990s the tide turned. Kodak had to cut its prices.
In 1997, Fisher admitted that “we would have hoped that our growth initiatives would
have kicked in by now.” 519 His original strategy called for a three-year period in which
Kodak would manage to fix its balance sheet and begin to invest heavily in emerging
markets with growth potential. Price pressure by Fuji, however, thwarted his plan.
Even worse, sales in the emerging markets grew slowly.
Fisher’s growth strategy brought China into focus, not only for the imaging giant in
the US, but for its Japanese rival too. Fuji, like Kodak, entered the Chinese market
with the aim of get control of a distribution network.520 In 1997, Kodak gained some
30 percent market share, compared to Fuji, which led the market with more than 40
percent, and Luck Film Co., the local brand, with 20 percent.521 However, sales in the
Pacific Rim countries “moderated considerably”; in 1997, for instance, Kodak’s sales
in China remained low at about $200 million or 1 percent of total sales.522
In the following years, sales were also poor in markets Fisher was counting on for
considerable growth potential. Due to the continuing financial crisis in Asia, sales in
516
Klein, A. 1999b. Eastman Kodak Net Income Falls a Bit, but Operating Earnings Rise by 9%. Wall Street
Journal, 1999 Jul 22: 1-A4, Klein, A. 1999h. Kodak Profit Falls 15% after Charge, but Sales Climb for 1st Time
in 2 Years. Wall Street Journal, 1999 Apr 19: 1-A4.
517
Klein, A. 1999b. Eastman Kodak Net Income Falls a Bit, but Operating Earnings Rise by 9%. Wall Street
Journal, 1999 Jul 22: 1-A4.
518
519
Maremont, M. 1997. Kodak Chief's Picture of Growth Is Slow to Develop --- Decision to Seek New Markets
over Cost Cuts Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4.
520
Smith, C. S. 1996. Photo Frenzy: Kodak, Fuji Face Off in Neutral Territory: China's Vast Market. Wall Street
521
522
Ibid., Nelson, E. 1997f. Kodak Says Sales Are 'Essentially Flat,' and Stock Price Gets Pummeled 10.5%. Wall
Street Journal, 1997 Mar 24: 0-A, 4:1.
182
anticipated growth markets dropped 14 percent.523 In 1999, Fisher’s last year as
Kodak’s chief executive, the Chinese market finally grew by some 45 percent;
nevertheless, it merely offset losses in other emerging markets.524
Meanwhile, the new Advanced Photographic System, a product line Kodak was hoping
would revitalize the sluggish photography market, was introduced late and poorly.525
Manufacturing problems, miscalculations of consumer demand, and a bad marketing
strategy led to a disappointing launch of the new system in 1996.526 While unclear
packaging in regard to systems compatibility spurred many consumers to buy film
cartridges, in the belief that they would fit in their old 35mm film cameras, many
retailers were waiting desperately for the new APS cameras. For instance, Wal-Mart,
the largest photofinishing franchise in the US, sold APS film but was desperately
waiting for APS cameras, missing even the big summer holiday picture-taking
business.527 Fuji, one of the developers of the new system among others like Kodak,
trimmed its camera shipments to the US because it was still uncertain about consumer
acceptance and therefore feared negative press; Kodak, however, blamed start-up
problems and unexpectedly high consumer interest for the shortage.528 In 1997, a year
after the system’s launch, Kodak was forced to invest heavily into advertising – some
sources mention a $100 million budget and more per year – to re-launch the new
product line.529 Fisher conceded that the APS system was “about a year behind” the
plan and that Kodak had its “share of screw-ups last year in the Advantix launch.”530
The CEO’s disappointments in the emerging markets coincided closely with
disappointments in his efforts to generate growth by product differentiation.
523
Klein, A. 1999h. Kodak Profit Falls 15% after Charge, but Sales Climb for 1st Time in 2 Years. Wall Street
Journal, 1999 Apr 19: 1-A4.
525
Nelson, E. 1997a. Advertising: For Kodak's Advantix, Double Exposure as Company Relaunches Camera
System. Wall Street Journal, 1997 Apr 23: 0-B, 1:3.
526
Bounds, W. 1996i. Marketing: Camera System Is Developed but Not Delivered. Wall Street Journal, 1996
Aug 07: 4.
527
Ibid.
528
Ibid.
529
Bounds, W. 1996b. Don't Blink: Photo Industry Launches Global Blitz to Tout New Cameras, Film. Wall
Street Journal, 1996 Feb 01, Nelson, E., & White, J. B. 1997. Blurred Image: Kodak Moment Came Early for
Ceo Fisher, Who Takes a Stumble --- Bet on Digital Photography Has Been a Money Loser; Fuji Is Gaining
Ground --- Dennis Rodman's Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1.
530
Nelson, E., & White, J. B. 1997. Blurred Image: Kodak Moment Came Early for Ceo Fisher, Who Takes a
Stumble --- Bet on Digital Photography Has Been a Money Loser; Fuji Is Gaining Ground --- Dennis Rodman's
Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1.
524
planned
Carp
Breakeven
?
actual
Breakeven
planned
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
actual
1993
4.000
3.500
3.000
2.500
2.000
1.500
1.000
500
0
-500
-1.000
183
Fisher
CASE
Profit (loss); points indicate reported figures
Sales; points indicate reported figures
Estimate Profit (loss)
Estimate Sales
Figure 67
Profit (Loss) and Sales Digital Imaging (D&AI)
Source: Data adapted from sources in footnote 531
531
1994f. Picture Imperfect. The Economist May 28, 1995b. Eastman Kodak Company Annual Report.
Rochester, NY, 1999a. Business Brief -- Eastman Kodak Co.: Digital-Imaging Revenue Is Set to Reach $2
Billion. Wall Street Journal, 1999 Oct 06: 1-No Page Citation, 1999c. Eastman Kodak Company Annual
Report. Rochester, NY, 2000. Eastman Kodak Company Annual Report. Rochester, NY, Bounds, W., & Rigdon,
J. E. 1995. Kodak, Seeking Inroad in Digital Arena, Opens up Proprietary Photo Cd System. Wall Street
Journal, 1995 Mar 29: 0, Johannes, L. 1997b. Kodak Names Shih as New President of Its Digital Unit. Wall
Street Journal, 1997 Aug 08: 0-B14, Johannes, L. 1997c. Kodak Profit Fell 43% in 3rd Quarter on Losses in
Digital-Imaging Products. Wall Street Journal, 1997 Oct 15: 1-B3, Johannes, L. 1998a. Kodak Reports Loss of
$744 Million Including Big Restructuring Charge. Wall Street Journal, 1998 Jan 16: 1-A4, Klein, A. 1999a.
Costs Hit Kodak Net, and Stock Falls 10% --- Disappointment over Halt in Curbing Outlays Stirs Doubts on
Turnaround. Wall Street Journal, 1999 Jan 15: 1-A3, Klein, A. 1999b. Eastman Kodak Net Income Falls a Bit,
but Operating Earnings Rise by 9%. Wall Street Journal, 1999 Jul 22: 1-A4, Klein, A. 1999h. Kodak Profit
Falls 15% after Charge, but Sales Climb for 1st Time in 2 Years. Wall Street Journal, 1999 Apr 19: 1-A4,
Klein, A. 2000a. Kodak Expects Digital-Imaging to Yield 45% Revenue by 2005. Wall Street Journal, 2000 Jun
15: 0-B14, Klein, A. 2000b. Kodak Reports 51% Jump in Earnings, but Revenue Unexpectedly Edges Lower.
Wall Street Journal, 2000 Apr 18: 0-A4, Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond Film: 132138: Bloomberg, L.P, Maremont, M. 1995. Kodak's New Focus. BusinessWeek January 29, Maremont, M.
1997. Kodak Chief's Picture of Growth Is Slow to Develop --- Decision to Seek New Markets over Cost Cuts
Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4, Maremont, M., & William, M. B. 1997b. Kodak to
Slash 10,000 Jobs, Take Charge --- Moves Aim to Cut Costs by at Least $1 Billion; Shares Still Fall Sharply.
Wall Street Journal, 1997 Nov 12: 1-A3, Symonds, W., Smith, G., & Judge, P. 1999. Fisher's Photo Finish.
BusinessWeek(3634) 34-36.
184
Finally, the digital imaging business did not take off either [see Figure 67]. Fisher’s
hope was that it would offset the slack when demand for film declined. In 1994, the
traditional consumer photography business accounted for 45 percent of Kodak’s total
$13.6 billion revenues and some 75 percent of its profits.532 The company’s digital
products, such as digital cameras, CD-ROMS, and some digital printers, accounted for
$500 million in revenues or roughly 4 percent of total sales, while generating no profit.
Kodak actually lost money on the new business, hoping to reach the breakeven point
soon. Challenged by the necessity for the digital business to grow faster than the
decline of the traditional chemical-based business in order to provide cash for start-up
innovations, he addressed the big questions of how and when the digital business
would begin to make money overall.533 The challenge was enormous, as he himself
conceded, because “how will companies be competitive in a world [in which]
technology will be virtually free?”534
Analysts remained skeptical of future prospects. Alex Henderson, an analyst at
Prudential Securities Inc., estimated that even if Kodak managed to push the
technology into a $1 billion business within five years and generate respectable
operating margins of about 10 percent, profits would remain as low as $100 million – a
fraction of the company’s 1995 $1.3 billion earnings from $6.9 billion sales in the
traditional consumer photography business.535 Fisher, on the contrary, was optimistic.
For him it was not about hardware alone, but the complete imaging business: “If we
think our past was film and our future is digital, we’re going to have problems. But if
we think of our past being pictures and our future being pictures, we’ll use whatever
technologies are available.”536 With his different thinking about imaging, Fisher
estimated that by the end of 1997, the digital imaging business would reach the
breakeven point, with sales growth rates of about 20 to 50 percent a year [see Figure
67].537
532
1994d. Eastman Kodak Company Annual Report. Rochester, NY, Nully, P., & Rao, R. 1995. Digital Imaging
533
534
Gross, N., Coy, P., & Port, O. 1995. The Technology Paradox. BussinessWeek March 05.
535
536
Grant, L. 1998. Why Kodak Still Isn't Fixed America's Other Famous Troubled Giants--Ibm, Gm, Sears--Got
Turned Around. Not This One. Can Ceo George Fisher's Big New Shakeup Do the Job? Fortune May 11.
537
1994f. Picture Imperfect. The Economist May 28, 1995b. Eastman Kodak Company Annual Report.
Rochester, NY, Blömer, H. J. 1995b. Kodak Bares Its Soul to Wall Street. International Contact, 14(3) May/
CASE
185
To the disappointment of Kodak (and Wall Street), by 1997 the business continued to
lose money, despite heavy investments, and management was uncertain as to when the
unit would be profitable.538 Some explain the loss of 1997 by referring to the dramatic
drop in the price of CD-R media.539 This had been a high-margin business until then
and provided significant and growing revenue. But price cutting from Taiwan in the
mid-1990s dropped the price from $5 per disc to 20 cents per disc within a few years,
and made this digital business unprofitable. Kodak shut it down in late 1997. In fact,
Kodak did not lack a viable stock of knowledge in the field of electronics; however,
fear of cannibalization of its profitable film business paralyzed the company,
preventing it from accumulating experience in commercializing and marketing its
electronic products.
Fisher spent some $500 million a year to develop new digital technologies that could
do away with conventional film,540 yet the Digital and Applied Imaging (D&AI) unit
had to report operating losses of $440 million.541 Faced with harsh criticism, Fisher
responded convincingly: “You call it losses, I call it investment. If this were a standalone start-up company, I’d be a hero on Wall Street. I'm growing the business 40
percent a year, and if I were losing $100 million as a start-up, investors would say ‘big
deal.’ ”542
In 1998, when $1.6 billion sales for digital products already accounted for 17 percent
of Kodak’s total revenues, the D&AI again lost money – a trend that continued well
June: 8, Bounds, W., & Rigdon, J. E. 1995. Kodak, Seeking Inroad in Digital Arena, Opens up Proprietary Photo
Cd System. Wall Street Journal, 1995 Mar 29: 0, Nully, P., & Rao, R. 1995. Digital Imaging Had Better Boom
before Kodak Film Busts. Fortune, 131(8) 80-83.
538
Johannes, L. 1997c. Kodak Profit Fell 43% in 3rd Quarter on Losses in Digital-Imaging Products. Wall Street
Journal, 1997 Oct 15: 1-B3.
539
540
over Cost Cuts Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4, Rotenier, N. 1996. Back in Focus.
Forbes, 157(1) 114-114.
541
Turned Around. Not This One. Can Ceo George Fisher's Big New Shakeup Do the Job? Fortune May 11,
Johannes, L. 1998b. Kodak, Intel Join to Make Slimmer, Cheaper Cameras. Wall Street Journal, 1998 May 01:
1-B6.
542
Deutsch, C. H. 1999. Chief Says Kodak Is Pointed in the Right Direction. The New York Times, December
1999.
186
into the next millennium.543 At the turn of the millennium, sales of the unit’s digital
products accounted for $2.8 billion, or 20 percent, of the company’s $14 billion total
revenues. The company predicted that digital products would generate about $3.5
billion to $4 billion in revenues by 2004.544 By then Dan Carp, who succeeded George
Fisher as Kodak’s chief executive, had adjusted the forecasts on profits of the digital
imaging business. He expected the business to grow to 42 percent of the company’s
overall revenue by the end of 2005 and to reach breakeven by 2002.545
There were several reasons that rendered it difficult for Kodak to generate profit with
digital cameras, CD-ROMS, and some other digital products such as thermal printers.
First, the PictureCD, which Fisher had positioned at the center of his “picture”
strategy to offset losses in the digital imaging operations, turned out “not to be a big
profit contributor.”546 On the one hand, it did not meet consumer demand. Kodak
resurrected Kay Whitmore’s faltering PhotoCD, which was launched in 1992 and
poorly marketed as an expensive high-tech gadget for consumers wanting to see their
photos on a TV set. The second time, Kodak was aiming at the PC user. The price was
much lower than the one of the PhotoCD, and the images were lower resolution JPEG
format, rather than Kodak's proprietary PhotoCD format. Moreover, PictureCD
pursued an open licensing strategy and added new software, making it easier for
consumers to retrieve their photos and to import them into all kinds of electronic
documents. However, people were reluctant to pay an addition dollar per picture to
transfer it to a compact disc.547 On the other hand, manufacturing costs of CDs had
dropped dramatically. A Taiwanese company entered the market and reduced prices by
40 percent, turning Kodak’s profitable $100 million business into a $100 million loss
maker.548
543
1999c. Eastman Kodak Company Annual Report. Rochester, NY, Symonds, W., Smith, G., & Judge, P. 1999.
Fisher's Photo Finish. BusinessWeek(3634) 34-36.
544
Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond Film: 132-138: Bloomberg, L.P.
545
Klein, A. 2000a. Kodak Expects Digital-Imaging to Yield 45% Revenue by 2005. Wall Street Journal, 2000
Jun 15: 0-B14.
546
547
Strategy for Digital Future. International Contact, 14(3) May/ June: 4-7, Maremont, M. 1995. Kodak's New
Focus. BusinessWeek January 29, Smith, G. V., & Parr, R. L. 2004. Intellectual Property: Licensing and Joint
Venture Profit Strategies: Wiley.
548
CASE
187
Second, Kodak was facing stiff competition that brought along monthly (compared to
annual) product cycles in which new cameras were put on the market, with ever better
quality and lower prices. When Fisher announced his digital imaging strategy in 1994,
there was a handful companies that manufactured digital cameras; in 1997, Kodak was
facing ten times as many competitors, including Hewlett-Packard, Sony, Canon, and
Epson.549 Kodak had a strong foothold in the business due to its competence; however,
competitors aggressively followed the imaging giant with their own innovations.
Digital camera sales almost doubled every year, listing some 300,000 units in 1996
and 500,000 in 1997.550 In 1999, Sony was no. 1 in the US market, with Kodak
second.551
Third, consumers had been slow to adapt to the technology. Compared to film, digital
photography still had been a fairly small market, in 1996 accounting for about $200
million, compared to the $9.5 billion film market.552 Test reports mirrored the
problems many consumer photographers were facing: Picture-taking with digital
cameras sounded liberating, but transferring images to the computer wasn’t as easy as
it is today; the software for editing images was complex and time-consuming, and
printing pictures was not cheap.553 Moreover, the resolution of digital cameras was still
poor, while their price was high compared to traditional cameras, and access to the
Internet was scarce. Hence, consumers weren’t really ready to go for digital
photography at the turn of the millennium. Actually, Kodak as the incumbent had to
“teach” consumers first.
549
October 27, Johannes, L. 1997b. Kodak Names Shih as New President of Its Digital Unit. Wall Street Journal,
1997 Aug 08: 0-B14.
550
1996d. Polaroid Corp.: Its First Digital Camera Targets Midrange Market. Wall Street Journal, 1996 Mar 12.
551
Smith, G. 1999. Film Vs. Digital: Can Kodak Build a Bridge? BusinessWeek(3640) 66-69.
552
Port, O. 1996. The Digital Camera Finds Its Photo Op. BusinessWeek April 14.
553
Himowitz, M. J. 1998. Kodak's Cool Digital Pix Site Drop Off Your Photos at the Drugstore, Go Home, and
See Them Online. Kodak's Got a Hot New Web Service. Fortune September 28, Johannes, L. 1998c.
Photography: For New Film, a Brighter Picture. Wall Street Journal, 1998 May 05: 0-B1, Lee, J. 1998. Ipix?
What's an Ipix? Digital Photography Gets Fortune October 26, Nelson, E., & White, J. B. 1997. Blurred Image:
Kodak Moment Came Early for Ceo Fisher, Who Takes a Stumble --- Bet on Digital Photography Has Been a
Money Loser; Fuji Is Gaining Ground --- Dennis Rodman's Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1,
Sandberg, J. 1998. Digital Cameras Are Better, but Still Waste a Lot of Time, Money. Wall Street Journal, 1998
Jan 15: 0-B1, Weber, T., E. 1999. The Internet --- Advancing the Film: For Those Who Want to Beam Photos
over the Internet, Digital Cameras May Be the Way to Go. Wall Street Journal, 1999 Mar 22: 0-R6.
188
5.5.8 Another Turnaround
After two prosperous years with marvelous returns on assets, Kodak’s financial
position changed dramatically in 1997 [see Figure 68, note (1), and Figure 56]. After
Fuji set up its facilities in the US to bypass punitive tariffs, an aggressive price war
started to harm Kodak’s performance, with a disastrous outcome. The US imaging
giant did not just lose market share, but was also forced to reduce its profit margins on
its most important photography film business [see Figure 66]. In its first full year of
operation in the US, Fuji cut about three to four basis points of Kodak’s market share.
For Kodak, this meant a drop in operating earnings of one fourth.554 “For a while we
believed it was tactical and was going to go away,” Fisher conceded. “Now we’re not
sure what it is, so we’re going to have a cost structure in the company which assumes
it’s real, and assumes it’s not going away; Kodak will have to be leaner to compete in
the digital arena, too.”555 Fuji stayed.
Three years earlier, Fisher had hoped to outgrow the company’s problem of
maintaining a heavy cost-structure. His original plan had called for a transitional phase
in which Kodak would fix its balance sheet while promoting growth through
geographic expansion and product differentiation. By 1997, he had arrived at a
conclusion Wall Street analysts had been advising for years: to cut costs, which were
too high to remain competitive. “We would be much better off today, if we had been
more aggressive in cutting costs earlier on,” he noted, “ but that’s 20-20 hindsight; the
most significant factor the company failed to foresee was the aggressive pricing by
competitors.”556 As a consequence, he advised the company to reduce costs by about
$1 billion or about 15 percent over the next two years, to change senior and mid-level
managers in the core photography business, and to divest the last remaining nonimaging operations.557 The pragmatic reason for his rough course of action:
Conquering the digital world required cash, which had to be earned with chemicalbased photography products – because there was no other business left that could
provide the needed funds.
554
555
Patalon III, W. 1997. Kodak Chief Outlines Photo Giant's Challenges. Denver Post, November 9(J-07).
556
over Cost Cuts Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4, Pereira, J., & Maremont, M. 1997.
Kodak Warns It Plans to Fire 200 Managers. Wall Street Journal, 1997 Sep 26: 0-A, 3:4.
557
15%
10%
20%
(2)
(3) (4)
15%
5%
0%
0%
(1)
-10%
-15%
-15%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Carp
Fisher
(4)
(3)
-5%
-10%
Net Profit Margin
(2)
10%
5%
-5%
Whitmore
25%
Chandler
Carp
30%
189
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
20%
Fisher
25%
Whitmore
30%
Chandler
CASE
Return on Sales
(1) Kodak realized positive effects of 1993 turnaround;
return on net assets figures soared to the company’s
high.
(2) Return on sales and net profit margins dropped due to
an aggressive price war.
(3) Kodak enters its sixth major restructuring program,
aiming to cut 20,000 employees and $1 billion in costs.
Charges for the restructuring burdened Kodak’s
financial position and thus economic ratios.
(4) Price war continued to burden Kodak.
Figure 68
Net Profit Margin
Sources all Figures: Data adapted from Eastman Kodak
Annual Reports
Figure 69
Return on Sales
Fisher’s cost-cutting program aimed to reduce Kodak’s expensive overhead from
about 28 percent of its $16 billion annual revenues, which was well above the industry
average and double the costs commonly accepted in the digital businesses, with 15 to
20 percent [see Figure 57].558 Cutting Kodak’s overhead by half, or bringing it at least
close to the 20 percent barrier, required cuts in costs for sales, advertising, distribution,
and administration by $1 to $2 billion. This was certainly no easy endeavor, though
there was also the need to invest, in the hope of generating greater productivity.
558
8,0
7,0
6,0
5,0
0,0
Carp
1,0
Fisher
2,0
Chandler
3,0
Whitmore
4,0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
1993
1995 Fisher
1997
1999
2001 Carp
2003
9,0
Working Capital
Receivable Turnover
Inventory Turnover
Figure 70
Working Capital
Figure 71
Turnover of Receivables and Inventory
0%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
0%
2,8
2,4
2,0
1,6
1,2
0,8
0,4
0,0
-0,4
-0,8
-1,2
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
3.500
3.000
2.500
2.000
1.500
1.000
500
0
-500
-1.000
-1.500
1983 Chandler
1985
1987
1989
1991 Whitmore
190
-10%
-20%
-5%
-30%
-40%
-50%
-10%
Workforce Reductions (Layoffs),
Excluding Leaves Due to Divestures
Figure 72
Major Workforce Reduction Programs
Carp
-100%
Fisher
-90%
Whitmore
Carp
-80%
Chandler
-70%
Fisher
-20%
Whitmore
-15%
Chandler
-60%
Decrease of Earnings from
Operations by Restructuring Costs
Figure 73
Restructuring Costs in Relative to
CASE
191
At the end of Fisher’s legacy, in 1999, Kodak’s overhead was cut by $1.1 billion in
absolute terms compared to costs in 1996; however, in the same period, total revenues
declined from $16 billion to $14 billion, which leveraged overhead to 23 percent. The
company greatly improved turnover rates and inventory patterns, hired fewer
consultants, set rigid targets to achieve high quality in manufacturing, and slowed
down manufacturing [see Figure 71].559
ca. 105.000
-50 %
Layoffs
(Film)
Beginning of 1983
Before Diversification
Efforts
+20 %
Hires
(Digital)
End of 1999
After Diversification
and Consolidation
Employees Worldwide
Photographic Business
Figure 74
Layoffs and Hires in Kodak’s Core Photography Business
Between 1983 and 1999 [Before and After Diversification Efforts]
Sources: Eastman Kodak Annual Reports and Footnote 560 and 564
Certainly one of the most drastic – but expected – measures was Kodak’s
announcement of substantial layoffs in 1997. Initial plans to cut the workforce saw
about 4,000 employees leaving; however, during the course of the year the number
was gradually increased to 10,000, and finally, by the end of the year, to 19,900 of the
company’s worldwide 94,800 employees.560 It is important to note that the layoff plan
559
Bulkeley, W. M. 1998. Kodak Profit, Helped by Cost Cutting, Hits Forecasts Despite 7% Sales Decline. Wall
Street Journal, 1998 Apr 15: 1-A4, Klein, A. 1999a. Costs Hit Kodak Net, and Stock Falls 10% --Disappointment over Halt in Curbing Outlays Stirs Doubts on Turnaround. Wall Street Journal, 1999 Jan 15: 1A3, Smith, G., Symonds, W. C., Burrows, P., Neuborne, E., & Judge, P. C. 1997a. Can George Fisher Fix
Kodak? (Cover Story). BusinessWeek(3549) 116-128.
560
Johannes, L. 1998a. Kodak Reports Loss of $744 Million Including Big Restructuring Charge. Wall Street
Journal, 1998 Jan 16: 1-A4, Kerber, R. 1997. Kodak Boosts Layoff Plan, Restructuring Charge. Wall Street
Journal, 1997 Dec 19: 1-A, 3:1, Nelson, E. 1997e. Kodak Plans Big Job Cut, Takes Charge. Wall Street
192
did not include the number of employees related to businesses divested a year earlier,
such as the 1996 sale of the office imaging unit, with 10,400 employees.
The layoff plan substantially burdened the company’s 1997 results [see Figure 73]. A
$1.5 billion charge was taken that mostly covered the separation plan, but also
included asset impairments.561 Kodak closed the year with net earnings of a marginal
$5 million. The whole program was planned to be completed by the end of 1998 and
aimed to trim the company’s annual costs by $1 billion.562 By the end of 1998, Kodak
had improved operating margins and achieved nearly 75 percent of the projected
figure.563 Nevertheless, strong price competition forced the company to incur another
round of restructuring. Kodak decided to shed 2,000 to 2,500 jobs within the next two
years. Before handing over his position to his second in command, Dan Carp, Fisher
increased the number of layoffs to 3,400.564 By the end of 1999, Kodak was trimmed
to 80,650 employees, from its all-time high of 145,300 in 1988. Between 1984, when
Kodak started to diversify its business portfolio, and 1999, after returning to its core
business and consolidating the balance sheet, about half of Kodak’s employees in the
photographic segment had been laid off and partially replaced by digital employees
[see Figure 74].
Layoffs also affected 200, or one fifth, of Kodak’s 1,000 high-level managers.565
Fisher admitted that it was time to become more aggressive and to change middle and
senior managers in the company’s core business. New managers were brought in from
Silicon Valley, while long-established ones retired. For instance, he named Willy Shih
as president of Kodak’s Digital & Advanced Imaging group. Shih succeeded Bob
Journal, 1997 Jan 17: 0-B2, Patalon III, W. 1997. Kodak Chief Outlines Photo Giant's Challenges. Denver Post,
November 9(J-07), Smith, G., Symonds, W. C., Burrows, P., Neuborne, E., & Judge, P. C. 1997a. Can George
Fisher Fix Kodak? (Cover Story). BusinessWeek(3549) 116-128.
561
562
Maremont, M., & William, M. B. 1997b. Kodak to Slash 10,000 Jobs, Take Charge --- Moves Aim to Cut
Costs by at Least $1 Billion; Shares Still Fall Sharply. Wall Street Journal, 1997 Nov 12: 1-A3.
563
564
Journal, 1998 Jan 16: 1-A4, Klein, A. 1999b. Eastman Kodak Net Income Falls a Bit, but Operating Earnings
Rise by 9%. Wall Street Journal, 1999 Jul 22: 1-A4, Klein, A. 1999c. Kodak's Results Exceed Expectations on
Global Film Sales and Cost Savings. Wall Street Journal, 1999 Oct 19: 0-A8.
565
Pereira, J., & Maremont, M. 1997. Kodak Warns It Plans to Fire 200 Managers. Wall Street Journal, 1997
Sep 26: 0-A, 3:4.
CASE
193
Unterberger, who resigned to follow other opportunities.566 Previously the new
president had been in charge of commercializing high-end computer workstations at
Silicon Graphics and enjoyed good connections to many technology companies, which
made him predestinated for developing strategic alliances.567 The director of Kodak’s
professional photography unit, however, retired at the age of 54.568
Kodak also divested the remaining few non-core-imaging businesses and outsourced
where it was economically worthwhile. Shortly after his appointment as chief
executive, Fisher had considered the strategic alternative of repositioning Kodak’s
Office Imaging businesses, which comprised copiers, document management systems,
and publishing systems, in order to improve its poor performance.569 At that time, he
even seriously considered shedding the copier business altogether; the division had
suffered from high R&D costs, stiff competition from market leader Xerox, and its
products had underperformed.570 The 20 percent market share of Kodak’s copier
business was too small to compete successfully; Xerox’s share was twice that.571
Hence, in the face of severe price pressure in the company’s core film business, Kodak
finally decided to divest the struggling unit, which generated annual revenues of $1.8
billion but poor earnings.572 In late 1996, Kodak sold its copier service business to
Danka Business Systems PLC for $688 million.573 While sales and marketing moved
to Danka, the manufacturing and development of copiers remained at Kodak.
Approximately 10,400 Kodak employees supporting the unit worldwide were offered
employment by Danka.574 After continued price pressure, in 1999 Kodak sold the
manufacturing part of its copier operations to Heidelberg Druckmaschinen AG, a
566
Johannes, L. 1997b. Kodak Names Shih as New President of Its Digital Unit. Wall Street Journal, 1997 Aug
08: 0-B14.
567
Grant, L. 1997b. Missed Moments Critics Say Kodak's Fisher Made Three Big Mistakes. Fortune October
27, Johannes, L. 1997b. Kodak Names Shih as New President of Its Digital Unit. Wall Street Journal, 1997 Aug
08: 0-B14.
568
569
570
Bounds, W. 1996g. Kodak Planning to Sell Copier Division; Poor Earnings, Stiff Competition Cited. Wall
Street Journal, 1996 Jan 16.
571
Nelson, E., & Wendy, B. 1996. Kodak Is in Talks with Britain's Danka to Sell at Least Part of Copier
Business. Wall Street Journal, 1996 Sep 06: 0-A2.
572
Bounds, W. 1996g. Kodak Planning to Sell Copier Division; Poor Earnings, Stiff Competition Cited. Wall
Street Journal, 1996 Jan 16, ibid., Nelson, E., & Wendy, B. 1996. Kodak Is in Talks with Britain's Danka to Sell
at Least Part of Copier Business. Wall Street Journal, 1996 Sep 06: 0-A2.
573
574
ibid., 1996c. Kodak Sells Office Imaging Business to Danka. International Contact, 15(3) May June.
194
German manufacturer of offset printers.575 Kodak and Heidelberg had collaborated
since 1994 in the manufacturing of digital printing machines.576 Close to the end of the
year, the deal was signed for $200 million and 1,500 Kodak employees were
transferred to the German manufacturer.577
Other businesses that Kodak sold or shut down in the course of its massive cost-cutting
program were, among others, the manufacturing of disc film; the digital motion
imaging business, which developed hardware and software for films but was never
profitable; the manufacturing of compact discs; and, last but not least, Kodak’s gelatin
plant, which it had acquired in 1930 to secure the quality of an essential component in
the making of film.578 The divesture of Kodak’s Image Bank – a collection of photos –
was the company’s last divesture during Fisher’s leadership. It sold the electronic
collection to Getty Images for $183 million.579
Finally, the company considered possibilities to outsource operations or to engage in
collaborative agreements to reduce expenses. For Kodak, it did not make sense either
to manufacture in-house compact discs or to compete in the digital camera hardware
business with the rest of the world, particularly with Asian competitors.580 For
instance, a new Taiwanese manufacturer started to produce compact discs at one
fourth of Kodak’s price. Kodak’s $100 million profitable compact disc business,
which was selling blank CD-R discs for non-PhotoCD users, suddenly turned into a
$100 million loss operation.581 Likewise, Kodak was seeking to engage in
collaboration or to merge with companies with capabilities the company was lacking
in its effort to conquer the digital world, but could not afford to build by itself due to
price pressure. Kodak approached Hewlett Packard, IBM, Xerox, and Canon, among
575
Klein, A. 1999g. Kodak Plans to Sell Copier Unit to Heidelberger. Wall Street Journal, 1999 Mar 17: 1-A3.
Ibid.
577
1999d. Heidelberger Agrees to Buy Copier Unit from Eastman Kodak. Wall Street Journal, 1999 Mar 18: 1B19.
578
1997d. Kodak May Spin Off or Sell a Unit as Part of Cost-Cutting Plan. Wall Street Journal, 1997 Oct 21: 1C30, 1997e. Kodak to End Disc Film. Wall Street Journal, 1997 Jan 27: 0-B, 10:13, Klein, A. 1999i. Who
Knew Kodak Would Keep So Many Skeletons in Its Closet? --- Company Grinds Cow Remains but Has to Keep
Its Costs Close to the Bone to Survive. Wall Street Journal, 1999 Jan 18: 0-A1, Maremont, M., & William, M.
B. 1997a. Kodak's 10,000 Job Cuts May Really Amount to Just 8,000 at End of the Day. Wall Street Journal,
1997 Nov 13: 1-A4.
579
1999b. Business Brief -- Getty Images Inc.: Kodak Photo-Archive Sale to Be Set at $183 Million. Wall Street
Journal, 1999 Sep 22: 1.
580
581
576
CASE
195
others, but none of these negotiations were successful.582 Terry Faulkner, then Kodak’s
corporate strategist, identified the company’s obligations to hundreds of thousands of
retired employees, as well as environmental issues, as the cause for breaking off
negotiations.583 In the mid-1990s, a lot of publicity was given to the contamination of
the land at Kodak Park, where chemicals had been dumped over the years.584 An
acquisition or merger with Kodak would certainly be associated with unpredictable
cleanup costs.
In conclusion, George Fisher’s strategy to re-focus on Kodak’s core photography
business and to outgrow the company’s cost problems by promoting growth did not
take off. It was thwarted by a fierce price competition in its domestic markets,
stagnation of the photography industry in general, and the slow development of
emerging markets. Moreover, the digital imaging business remained a loss maker
throughout the 1990s. Kodak’s balance sheet was in trouble, and in order to
consolidate the company’s core business and to secure the continuation of a viable
cash stream for digital ventures, the CEO was forced to overcome his opposition to
huge workforce reductions and to massively cut costs. In fact, he was required to
continue a course of action previous executives had heavily relied on.
But unlike his predecessors he achieved a financial performance such as neither Colby
Chandler nor Kay Whitmore had managed to accomplish between 1983 and 1993, –
albeit his achievements in giving the company a clear vision to challenge a nascent
disruptive technology and to face an unprecedented fierce competition. In particular,
Fisher greatly improved return on equity, achieving a financial ratio the company had
witnessed for the last time during the 1970s [see Figure 76].
582
Faulkner, T. 2009. Draft for a Talk That I Gave at Oak Hill to Retired Ek Managers.
Faulkner, T. 2013a. Personal Interview. November 04. With M. Shamiyeh, Faulkner, T. 2013b. Personal
Interview (Follow-up). November 26. With M. Shamiyeh.
584
1989b. Environmental Group Says Kodak Is Major Emitter of Chemical. Wall Street Journal, 1989 Jun 20:
1, 1992g. Whatever Its Merits, Photography Can Be Incredibly Wasteful --- Film Spools and Packages Are Very
Difficult to Recycle; Kodak Signs a Contract. Wall Street Journal, 1992 Feb 11: 0-PAGE B2, Bounds, W., &
Noah, T. 1994. Kodak Will Settle Government Claims on Environment. Wall Street Journal, 1994 Oct 07: 0.
583
Additional Capital Paid Less
Accumulated Translation Adjustment
Retained Earnings
Common Stock
Less Treasury Stock at Cost
Carp
Fisher
Whitmore
(1)
Chandler
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2003
2001 Carp
1999
1997
1995 Fisher
1993
1991 Whitmore
1989
1987
9.000
7.500
6.000
4.500
3.000
1.500
0
-1.500
-3.000
-4.500
-6.000
1983 Chandler
1985
196
Average Return on Equity
[geom. means; CEO Period]
Average Change in Equity
[geom. Means; CEO Period]
Return on Equity Adjusted
[geom. Means; CEO Period]
Shareowners' Equity
(1) Shareholders’ equity adjusted for the
favorable gains Kodak generated through
sales and the deletion of debts.
Figure 75
Shareholders’ Equity
Figure 76
Average Return on Equity and
Average Change in Equity
On average, he returned 23 percent of shareholders’ equity, more than double what
Chandler had realized – not to speak of Whitmore’s performance during the early
1990s. One might wonder how he was able to do this. At a first glance, the increase of
stock buybacks during his leadership suggests that he used the income of the many
divestures to reduce equity and to improve the return on equity ratio, which would be
completely detrimental to shareholders’ interests. A detailed analysis of Kodak’s cash
flows and financial position shows, however, that the opposite was true. In fact, Fisher
slightly increased shareholders’ equity during his tenure, freed the company of its high
long-term borrowings, and substantially improved efficiency.
CASE
197
8.000
8.000
8.000
6.000
6.000
6.000
4.000
4.000
4.000
2.000
2.000
2.000
0
0
0
-2.000
-2.000
-2.000
-4.000
-4.000
-4.000
-6.000
-6.000
-6.000
-8.000
Colby Chandler
(1983-1989)
Changes in Shareholder's Equity
[CEO Period]
-8.000
Kay R. Whitmore
(1990-1993)
-8.000
(1)
George M. C. Fisher
(1994-1999)
Changes in Treasury at Stock
[CEO Period]
Changes in Retained Earnings
[CEO Period]
Changes in Long-Term
Borrowings [CEO Period]
Adjusted Change of Shareholders’
Equity [CEO Period]
(1) Shareholders’ equity
adjusted for the favorable
gains Kodak generated
through sales and the
deletion of debts.
Figure 77
Shareholders’ Equity, Retained Earnings, and Treasury at Stock
Changes on Average in CEO Period. Dollar amounts in millions.
Sources all Figures: Data adapted from Eastman Kodak Annual Reports
In 1982, shareholders’ equity reached an all-time high of $7.5 billion [see Figure 75].
In the following decade, equity remained relatively constant. Chandler’s business
development neither increased nor decreased equity significantly. Additions to
retained earnings on average compensated expenses for the few share buybacks,
offsetting the favorable effectof a lower equity in regard to financial ratios such as
return on equity. Figure 77 synthesizes the matter. The diagram to the far left shows
the relative increase or decrease of shareholders’ equity during Chandler’s leadership
(black bars), the amount of share buybacks, which decrease equity (middle bars), and
the increase or decrease of retained earnings (on the far right).
198
In 1993, the situation changed tremendously when the company’s equity suddenly was
almost cut to half. This drop occurred because Kodak spun off its chemical unit. As a
consequence, about twenty percent of the company’s equity left with Eastman
Chemical, which equaled the unit’s share of earnings in the company’s overall income.
Hence, the spin-off had no favorable effect on the return on equity ratio, because the
reduction of shareholders’ equity mirrored the reduction of income. The other thirty
percent, however, severely altered the level of equity (and thus financial ratios).
During the late 1980s and early 1990s, Kodak’s overwhelming cost structure burdened
the company’s balance sheet, to the extent that it was not able to retain earnings (and
thus increase its shareholders’ equity); rather the opposite happened. Kodak started to
extensively consume its retained earnings, shrinking the company’s equity. Kodak’s
expensive retirement plan accounted for a good deal of the reduction. As a
consequence, Kay Whitmore realized a negative return on equity on average [see
Figure 76 and Figure 77].
During George Fisher’s era, the level of equity at first went up, but then fell
continuously in consecutive years; changes in retained earnings almost mirrored
changes in the company’s treasury stock, suggesting that Kodak used its discretionary
cash flow to repurchase outstanding shares [see Figure 75]. Indeed, the company
invested heavily in its own stock, but on average equity remained stable, even growing
by 3 percent [see Figure 76]. The company basically leveraged additions to equity it
had achieved earlier due to high income. And the cash-for-stock buybacks did not
come from proceeds the company generated in the course of divestures, but from
improved efficiency.
A cash flow analysis of Kodak between 1994 and 1999 reveals that Fisher’s divesture
of the company’s non-imaging businesses generated proceeds as high as $7.8 billion,
of which he used $7.1 billion to extinguish long-term debts for the most part
associated with Chandler’s diversification efforts and the acquisition of Sterling Drug
Inc., among other businesses. The vast bulk of cash from sales was earned in 1994, in
Fisher’s first year as chief executive. Even if one adjusts shareholders’ equity for the
favorable gains Kodak generated through sales and the deletion of debts, the return on
equity was still about 21 percent (see Figure 76 and Figure 77 note (1)].
CASE
199
Kodak’s buyback of outstanding shares started in 1996, which indicates improvements
in efficiency. During Fisher’s tenure, the company doubled the ratio of net earnings
per employee compared to the performance Kodak was used to in the 1970s and 1980s
[see Figure 60]. Moreover, it is important to note that until the 1990s, Kodak basically
maintained a monopoly. Competition in the US was marginal. Fisher was the first
Kodak executive to be challenged by the impact of fierce global price competition
under unequal conditions. From this point of view, George Fisher’s achievements had
been fruitful.
6 ANALYSIS
This chapter refers to the elaborated process model of resource allocation discussed in
the theory section to categorize and interpret observations from the Kodak study.
Underlying intention of developing an expanded model of the resource allocation
process, to recap, is to explain Kodak’s intra-organizational investment pattern in
response to the emergence of electronic/ digital photography. The new imaging
technology disrupted and redefined the product performance demanded by customers
in the company’s traditional chemical-based film markets.
Kodak, previously one of the top Fortune 500 companies, pursued multiple businesses.
Numerous entrepreneurial initiatives competed for funding within the company’s
intra-organizational ecology. This situation renders a close examination complex, if
not problematic. The following elaboration, therefore, puts the prime focus on Kodak’s
photography business. That is to say, it illuminates aspects that are important to
understand the company’s strategic decisions related to investments in (or
disinvestments of) businesses, but provides detailed information only of incidents that
are directly connected with the photography business. Hence, the consequences of
strategic investments for non-photographic businesses are not covered in detail.
Based on the argument outlined in the theory section, four variables influence an intraorganizational resource-allocation process – the structural and strategic context,
powerful customers and capital providers, cognitive frames, and an organization’s
current resources and capabilities.
In the following section, findings are structured according to these four variables. The
discussion is organized in three separate eras: Electronic photography (Colby
Chandler, 1983-1989), Film-based Digital Imaging (Kay Whitmore, 1990-1992), Fully
Digital World (George Fisher, 1993-1999):
202
Period 1983-1989: Electronic Photography (Colby Chandler)
6.1 Period 1983-1989: Electronic Photography (Colby Chandler)
“On a product basis, they [Kodak’s senior management] paid attention to film;
other products could be handled by lower levels of management.”585
Bob Shanebrook, Worldwide Product Manager Kodak Film
Sony’s worldwide presentation of its prototype for a “revolutionary” new electronic
still video camera in 1981 annoyed Kodak – not so much because of the camera, but
because of Sony’s public announcement of the beginning of the filmless era. Sony’s
MAVICA (MAgnetic VIdeo CAmera) clearly marked the advent of an emerging
disruptive technology, although industry leaders shared the belief that it would take
decades to replace traditional silver-halide film. Kodak was therefore reluctant to bring
its own developments in electronic photography to market. However, in the face of
Sony’s move, the industry leader accepted the challenge willy-nilly.
In response to Sony, Kodak announced that it was moving into consumer electronics
late in 1983. In the course of a large restructuring process, the company created the
autonomous and independent Consumer Electronics Division (CED). The plan
appeared to be coming to fruition. A year later, Kodak launched the world’s first 8-mm
camcorder system, the Kodavision 2000 Series, among other products. The movie
camera was developed in cooperation with Matsushita and built in Japan. Unique
manufacturing know-how and low costs for manufacturing compared to those in the
US rendered the cooperation feasible. Two years later, however, Kodak decided to
leave the consumer electronic business.586 The lack of manufacturing resources,
coupled with the promise of low profit margins compared to traditional film,
motivated the company to exit the business altogether, preferring to strengthen its
traditional photography business and to continue to deploy electronics solely in
commercial applications.
585
Shanebrook, R. L. 2013a. Email Conversation. November 10. With M. Shamiyeh.
Some people close to the case suggest that one key reason Kodak created a “Consumer Electronics Division”
was to sell videotape, which was had high margins at the time. In electronics, following their view, Kodak
initially thought that selling the electronic recording media was the key to making these businesses profitable. In
fact, aim of selling 8 mm camcorders was to generate a buzz as a high-tech company, so that it would be better
positioned to sell videotape, which the company continued to do so for many years, well after stopping sales of 8
mm camcorders. Parulski, K. 2014b. Written Feedback on Research Per Email. September 20. With M.
Shamiyeh.
586
ANALYSIS
ORGANIZATION
ENVIRONMENT


Resource
Allocation

Cognitive
Framing
CEO
Chandler
[mid 1980’s]
p
Resources &
Capabilities
StrategicStructural
Context
203
Silver-halide
Photography
Customers &
Capital
Providers

Electronic
Photography
t
Early 1980s:
(1) Kodak frames electronic photography as an opportunity
(2) Kodak creates independent business units to drive innovation
(3) Kodak makes low commitment to electronic ventures
Mid-1980s:
(4) Kodak trades investments in electronics against film
(5) Kodak exits consumer electronics
Figure 78
Process Model of Eastman Kodak’s Resource
Allocation
Figure 79
Silver-halide Photography
Technology and Digital Imaging
6.1.1 Cognitive Framing: Electronic Photography = Business Opportunity
Kodak had already started to explore the potential of electronic-imaging sensors in the
early 1970s, even before the Japanese got in. In 1980, for instance, Kodak built an
electronic industrial camera deploying a black-and-white image sensor with 240 lines
and 192 pixels per line, which is less than 50 thousand pixels, which cost between
$11,500 and $18,000.587 However, Sony’s presentation of its prototype for a filmless
camera in 1981 “shocked” the company – an event that three out of four interviewees
recalled:
587
Ansberry, C. 1987d. Makers of 'Still-Video' Cameras Refocus Marketing Efforts on Commercial Users. Wall
204
Bob Laperle, for instance, who then was Kodak’s senior marketing planning specialist,
remembered the announcement of the Sony MAVICA as “one of the best things that
ever happened to the company, because it sent a shockwave through the company,
because even though it was based on a floppy disc, and even though all you could do is
look at it on a TV, it was filmless; we all felt that shockwave, that was a healthy
shockwave to feel.”588 Peter Palermo, Kodak’s senior vice president of imaging at the
time, described the announcement as a “disaster, because it caused senior management
to panic.”589
FRAMING IN
RESOURCE
COMMITMENT
FRAMING IN
IMPLEMENTATION
Threat
Opportunity
Threat
Rigid Plan
High Commitment
Flexible Plan
High Commitment
Opportunity
Rigid Plan
Low Commitment
Flexible Plan
Low Commitment
Figure 80
Eastman Kodak’s Framing of Emerging Technology (Early 1980s)
Diagram adapted from Gilbert (2006)
Nevertheless, Kodak did not regard electronic photography as an immediate threat.
According to Kodak and other individuals close to the industry, it was still in its
infancy and not competitive with chemical-based photography in terms of quality,
cost, and performance. Most available image sensors produced photos with some
300,000 picture elements or pixels to be viewed on a TV set whose standard resolution
was a fraction of that of regular 35-mm film, which equaled some 18 million pixels;
the costs of conventional cameras was low compared to electronic still video cameras,
which were sold for several thousand dollars; and finally, some considered the contrast
588
589
Palermo, P. 2013. Personal Interview. November 22. With M. Shamiyeh.
ANALYSIS
205
range of TV sets to be limited and the television image too far away to allow close
scrutiny.
Just a few days after Sony's announcement in New York of its MAVICA system,
Kodak’s president Colby Chandler said that an all-electronic camera may have
appeal for some consumers, but
“it remains to be seen whether such a camera could be offered at mass-market
prices, and whether the filmless camera could – or would – offer benefits
comparable to those available from traditional products. Silver-halide-based
photography continues to be far and away the technology of choice for the
creation of color photographs under the wide range of shooting and lighting
conditions encountered by the typical amateur.”590
To illustrate his point with respect to the differences in performance between the two
technologies, Chandler presented the following case:
“If you were to calculate the storage capacity of today's Kodacolor II film in terms
of ‘bits of information,’ you would find that one 35-mm frame of film can store more
than the maximum internal memory capacities of 100 home computers. If this image
were displayed on television, you would need less than one-quarter of a 110-size film
frame – or one-twentieth of a frame of 35-mm film – to get a full-color, acceptable
image by today's TV standards.”591
Chandler concluded that “it was unclear whether consumers would be satisfied with a
picture generated from a million-element sensor,” and that they “would continue to
demand the high picture quality of current products.”
It is important to note that Chandler’s announcement received extensive support from
Kodak’s technical staff; that is to say, rather than trying to downplay the impact of a
new disruptive technology, management’s statement seemed to reflect a widely shared
conviction. Larry Matteson, for instance, then vice president of Kodak Apparatus
Division, explained in response to Sony’s MAVICA that
“images fly by so fast on a TV screen that no one notices that by the standards of still
photography, each individual image is pretty poor. The still-photography
challenge is to produce a camera with enough electronic ‘brainpower’ to record the
590
75f.
591
Ibid.
206
same amount of detail that can now be captured on a piece of conventional film –
and to build it cheaply enough to appeal to an average consumer.”592
Kodak’s perception of electronic photography as being no threat to traditional silverhalide photography was echoed widely in the industry. There was a general belief that
electronic imaging wouldn’t hit consumer markets before 1990.593 To demonstrate the
industry’s skepticism about the new technology, two leading authorities are quoted:
Six years after the announcement of the MAVICA, in 1987, the professional journal
Popular Photography noted that
“these filmless cameras, which use video floppy disks as the recording medium,
present no immediate threat to traditional silver halide-based photography, but
the new crop now hitting the market shows that there is some fire behind all the
smoke.”594
The 1987 Industry Report by the American Photographic Association supported this
view, even expressing concerns about ever newer technologies. It said:
“From Sony’s 1981 introduction of the MAVICA electronic still camera, and
subsequent prolonged gestation period, to Samsung's ‘dance of the veils’ flirtation
with a 4mm DAT camcorder, the video industry continues to show a propensity to
dazzle the trade while confounding the consumer. This consumer confusion is aided
and abetted by business, trade and consumer press giving extensive coverage to the
newest technological breakthroughs and product developments. The downside is the
potential for lost sales as a result of the ‘wait till you see what’s coming next’
syndrome.”595
6.1.2 Structural and Strategic Context: Integrated and Film-Centric
Kodak shared the “wait-and-see” attitude. The company’s towering presence in the
consumer marketplace, together with its carefully cultivated reputation for high
quality, largely blunted Sony’s attack. Rather than perceiving electronic imaging as a
threat, the US photography giant arrived at the conclusion that the new technology
represents an opportunity that would eventually contribute to consumer’s desire to
592
594
Goldberg, N. 1987. Electronic Imaging Today: Fast-Breaking Developments Have Sti Rred New Interest in
Video and in Electronic Still Photography. Here's the Latest from Our Reporters in the Field. . Popular
Photography(September) 68-71.
595
Lewis, B., Washburn, P., & Harrand, B. 1988. The 1987 Pma Industry Trends Report - a Performance and
Trend Analysis of the Worldwide Photo/ Video Market. In P. M. A. International (Ed.): 146. Jackson, Michigan.
593
ANALYSIS
207
have the “convenience of electronic viewing.”596 In 1981 Chandler noted, for Kodak
“the best approach for the future was toward ‘synergistic combinations of the two
technologies – chemical imaging and electronics – uniquely joined to make picturetaking easier and more enjoyable.”597 As a consequence, at Kodak electronic imaging
was explored within the boundaries of its bedrock business, traditional photography,
which accounted for some 80 percent of Kodak’s sales.598 Ken Parulski, for instance,
recalled that two days after the Sony announcement, the CEO came to the labs and
asked, “What are you going to do to respond to Sony's MAVICA, what are we going to
do with Disc [camera]?”599 Back then Ken Parulski was a research scientist at the
Image Science Laboratory of Kodak Research and could not remember exactly who
came up with the idea of bringing images from the disc film-negatives to video, but
they were told, “Hey, drop what you’re doing; that’s what you’re going to work on for
the next year.”600 Management’s note in the annual report mirrored that course of
action; it said: “As we continued to promote and to maintain our foundation in
traditional photography on a worldwide basis, we also strengthened our position in
newer technologies.”601 The Disc film to video player, which was later presented at
Photokina in 1992, introduced the “hybrid” strategy that later gave rise to PhotoCD.
6.1.3 Realized Strategy: Flexible Plan, Low Commitment
In 1984, Kodak decided to restructure Kodak’s photographic division into 17
independent and autonomous business units, to direct thrust at the marketplace and not
at functional disciplines, as had been the case in the past. Since then, line managers
were responsible for all aspects of their own products. Major intention of this
restructuring program was to increase reaction time to market changes, motivate
innovation, and to define clear financial targets. To nurture ideas which did not fall
neatly into existing lines of business, the company established a Venture Board and the
Offices of Innovation, where new ideas were collected and screened for new
opportunities.
596
75f.
597
Ibid.
598
599
Parulski, K. 2013b. Personal Interview (Follow-up). November 20. With M. Shamiyeh.
600
Ibid.
601
208
The Consumer Electronics Division was created within the company’s Photographic
Products Division. Its mission included electronic imaging. Wilbur J. Prezzano,
general manager of photo products, insisted that the new division “won't be distracted
by our [Kodak’s] traditional interest in photography.”602
Figure 81
Eastman Kodak Office of Innovation’s Idea Connection Process
Source: see Footnote 603
Within a year, Kodak’s strategic focus had changed. In its 1984 annual report, the
company presents its newest efforts to integrate “optics and electronics to supplement
602
5-8.
603
ANALYSIS
209
its chemical-based products.”604 Kodak’s management publicly acknowledged that
“there are excellent growth opportunities for our current products, as well as for those
future offerings that combine the benefits of photographic and electronic imaging;”605
and Edwin Przybylowicz, Kodak’s director of Research, outlined the cornerstones of
the company’s growth: “concentrating on imaging sciences and leading to innovative
products based on silver halide, electrophotography, and electronics.”606 Kodak had
clearly committed itself to electronic imaging and was pushing the development of
multiple electronic imaging applications, building upon the “hybrid” approach. Among
others there was: Kodak Information Management System (KIMS) to electronically
manipulate images and texts stored on microfilm or magnetic tape; the Color Video
Imager, which could make instant prints from a video signal; and the Eikonix
Designmaster, which allowed the editing of scanned images for printing. In consumer
electronics, Kodak launched the world’s first 8-mm camcorder, the Kodavision 2000
Series.
Nevertheless, Kodak’s commitment particularly to consumer electronics was low. In
the mid-1980s, Kodak employed some 130,000 employees worldwide and 80,000 in
the US. The Apparatus Division, the equipment-manufacturing organization for
Kodak, counted some 20,000 employees at the same time;607 and, Kodak’s research
lab was staffed with some 2,000 employees in 1978.608 Between 1978 and 1985, R&D
budgets tripled, which suggests that the number of researcher increased too during this
period. At the Consumer Electronic Division, however, at its peak there were about
300 people.609 Given that this division addressed the needs of customers (or potential
customers) of Kodak’s most important market, the company’s commitment was low.
The division was also small compared to Japanese engineering divisions. Sony,
Matsushita, and other large Japanese manufacturers of video equipment were already
years ahead in electronic still photography.610 Kodak entered the market late and with
low commitment. Moreover, Kodak tried to push a single product type – a camcorder
604
606
Ibid.
607
608
1978. You and Kodak in Perspective: Careers in Engineering, Science, Administration and Marketing.
Rochester, NY: Eastman Kodak Company.
609
Paxton, K. B. 2013b. Personal Interview (Follow-up). November 19. With M. Shamiyeh.
610
605
210
plus videotape – through a channel it had never been part of and where competing
companies like Sony, Panasonic (Kodak’s supplier), and RCA were already well
positioned with a broad range of products.611
Kodak’s commitment to electronic photography was also low in terms of funding.
Many new product initiatives never made it to the market or were stopped shortly after
their introduction, as happened with the Kodavison camcorder, the Modular Video
System, the Color Video Imager, and the Still Video System. There was a congruent
observation among engineers, product managers, and the president of the division that
they never got the resources required to really become successful.612 Don Pophal, for
instance, described the situation as follows: “They never got the resources they needed
to bring it out the door. It was always a battle for funding, for resources, for R&D
dollars, to get the resources that you needed to get the job done.”613 He led several
teams of people to commercialize a product from concept to manufacturing.
Management’s lack of confidence in the new technology was regarded as one
important reason for the shortcomings. Statements such as, “This will never fly,” “We
have this thing called film – why would anybody want digital?” or, “Sorry, why would
anyone want this video-imaging technology when they had film?” are just
representative of the many accounts team members heard from management.614 The
uncertainty about the success of new electronic photography products rendered
initiatives risky, compared to consumer products in film where investments had a
proven track record and fast payback, with little risk. Electronic photography simply
did not reveal this strength. For people involved in electronic photography, in
particular consumer electronics, it was difficult to put forth an effective plan, with the
players, management, products, strategy, target markets, tactics, and organization all in
constant flux.615 Bob Shanebrook, a worldwide product manager for Kodak film who
had earning responsibility for each product-line, including R&D for product
development and commercialization, summed up the situations as follows:
611
Paxton, K. B. 2013a. Personal Interview. April 08. With M. Shamiyeh, Paxton, K. B. 2013b. Personal
Interview (Follow-up). November 19. With M. Shamiyeh, Pophal, D. 2013. Personal Interview. November 4.
With M. Shamiyeh, Wolcott, D. 2013. Personal Interview. April 10. With M. Shamiyeh.
613
Pophal, D. 2013. Personal Interview. November 4. With M. Shamiyeh.
614
Wolcott, D. 2013. Personal Interview. April 10. With M. Shamiyeh.
615
612
ANALYSIS
211
“I had to compete for R&D funding with emerging technologies. For the twenty years
I was the product manager for professional films, we met every development product
goal for features, cost, sales, and schedule. The success of the professional film
community allowed us to obtain funding for our projects. We were funded because the
risk to the corporation was low and the payback high. This success made it difficult for
emerging technologies to obtain sustained funding. In a sense, the success of the film
business provided barriers to emerging technologies.”616
Management’s short-term thinking, coupled with the prospect of low profit margins in
a hardware business (as opposed to Kodak’s consumable film business), rendered the
“fight for funds” even more difficult for all those engaged in electronic imaging. Both,
employees from Kodak’s traditional photography film business and those from
electronic imaging, reported similar observations: First, the company’s strategic
process, the Strategic Quantification Process, motivated short-term thinking.
Management was looking forward a year or two, not beyond that, which had a
negative effect on all business plans on consumer electronics that could not rely on a
proven track record.617 Second, only initiatives with prospective profit margins close
to film received attention from senior management.618 Film proposals made access
easy; others need not apply.
It is important to note that at Kodak, management’s response to new initiatives was not
clear in the first instance. Indeed, initiatives related to electronic imaging received
“personal” attention from management, but resources were not made available as
required if project did not meet expectations. Employees from several organizational
levels support this finding. Brad Paxton, for instance, who was running the Electronic
Photography Division, was well connected to senior management and could make a
case for the Still Video System; however, resources were never made available to
bring it to market.619 According to Don Pophal, a common procedure was to be asked
to take ten or twenty percent out of next year’s budget. This did not lead immediately
to a shutdown of the project; but many projects eventually got shut down because of
this.
616
Ibid.
Shanebrook, R. L. 2013b. Personal Interview. April 09. With M. Shamiyeh.
618
Pophal, D. 2013. Personal Interview. November 4. With M. Shamiyeh, Shanebrook, R. L. 2013a. Email
Conversation. November 10. With M. Shamiyeh.
619
617
212
6.1.4 Resources and Capabilities: Low Discretionary Cash Flow, Film-Centric
Kodak’s Consumer Electronic Division faced several problems in developing and
launching the Kodavision camcorder: First, Japanese companies were years ahead in
consumer electronics. The last movie camera Kodak made serious attempts at
developing was in 1976. As a consequence, the company decided to design and
manufacture the new camcorder in partnership with Matsushita in Japan, which
resulted in poor profit margins for Kodak.
Second, hardware for electronic photography was sold through different distribution
channels than film companies used to sell their equipment and consumables. Most
notably, consumers bought the counterparts to standard photographic cameras and
film, including video cameras/camcorders, blank videotapes, video camera
accessories, etc., at mass merchandisers that specialized in electronics.620 This
generated a severe problem for Kodak. Japanese firms such as Panasonic or Sony were
already selling TVs and VCRs and all the other equipment. For Kodak, which entered
consumer electronics late and with only an 8-mm camcorder, it was very hard to get
shelf space. Moreover, people had already become accustomed to the VCR, whose
unit sales nationwide grew by some 50 percent a year in the mid-1980s.621 Hence,
Kodak required a large sales staff (and thus money) to get into the market. One
employee close to the commercialization process of the Kodavision described the
situation as follows:
“When we [Kodak] were starting up, any time you start up, you just cannot afford to
spend a lot of cash without sales. And we were spending a lot of cash on putting
salespeople out into the marketplace to buy shelf space so we could sell the product
[Kodavision]. But we were spending so much money on those people that we were
never going to make it back, no matter how much of the products we sold. Because
the products in the hardware business are not profitable, and certainly not like film.
And so, the business case just didn’t fly at that time for Kodak.”622
Thirdly, which is closely related to the other two issues, the hardware business did not
return high profits. In the case of Kodavision, it was even worse, because volumes
620
International, M. R. D. o. P. M. A. 1987. Guide to the Photo Market for Mass Merchandisers. In P. M. A.
621
622
ANALYSIS
213
were relatively low and the prices Kodak was being charged by Matsushita fairly high.
Thus, the alternative to enhance profitability by building internal manufacturing
capabilities for the cost of some $1 billion was weighted against investments in film.
High
( )
Sony
Panasonic
Hitachi
MARKET GROWTH
Electronic/
digital imaging
business
Loss of market
share due to fierce
competition
( )
Silverhalide film
business
Fuji
Agfa
3M
Low
Low
RELATIVE MARKET
High
Figure 82
Eastman Kodak Consumer Business Portfolio Matrix (Mid-1980s)
In the mid-1980s, Kodak’s traditional photography business was in trouble too. Return
on assets had fallen from some 25 percent in the late 1970s to 5 percent [see
Chronology Figure 8]; Fuji had aggressively captured market share in the US and
forced Kodak to cut its profit margins; and, finally, the imaging giant was still
suffering from the disappointing product launches and the discontinuance of instant
photography following its loss in the Polaroid patent-infringement suit. As a
consequence, in 1985 and 1986, Kodak was forced to fall back on long-term
borrowing to pay dividends and provide funds for capital additions. Kodak was not
able to cover expenses with earnings from operation, let alone with reserves in cash or
cash equivalents such as marketable securities. Thus, in the mid-1980s, Kodak was
confronted with the choice between (at least) two competing businesses in the
consumer market: to extensively fund (with long-term borrowings) either consumer
214
electronics with a prospect of low profit margins and the challenge of competing
against Japanese rivals in order to achieve a leading market position, or, to strengthen
the leading market position of its traditional photography business by investing heavily
in efficiency improvements and advertising.
6.1.5 Realized Strategy: No Commitment
At the time electronic-imaging technologies were brought to market, technologies that
were not based on the traditional silver-halide-based film that had long maintained
Kodak’s cash cow, the US imaging giant decided to exit consumer electronics. As
people both inside and outside Kodak observed, there was no new product that
approached the proprietary position and the high profit margin of Kodak's blockbuster
color film. Kodak was fully aware of this situation when Leo J. Thomas, then director
of Kodak Research, noted that “it's very hard to find anything [with profit margins]
like color photography that is legal.”623 And CEO Colby Chandler added, “It was clear
to us that it would take more than a new Kodacolor film or a new disc camera. It
would take a whole new area – like life sciences – or it would take massive expansions
into areas we hadn't participated in very much before.”624
In other words, Kodak was less certain about its leap into consumer electronics and
therefore exited the business altogether, after two years of struggling to define the
company’s role in that volatile market.625
After that, Kodak decided to apply
electronics to a limited array of non-consumer products. Besides the reasons
elaborated above, Kodak was certainly cautious about marketing products that would
take business away from its highly profitable photographic segment. Electronicimaging equipment such as still video cameras and optical discs promised to compete
with traditional photography for consumer dollars in the near future.
Significantly, employees from both the traditional and electronic photography
divisions observed an obvious lack of management interest in alternatives to film, By
comparison, the other businesses were poor performers; staying with a business that
was never going to have the return of film was considered a poor choice and not worth
the effort.
623
624
Ibid.
625
Ibid.
ANALYSIS
215
FRAMING IN
RESOURCE
COMMITMENT
FRAMING IN
IMPLEMENTATION
Threat
Opportunity
Threat
Rigid Plan
High Commitment
Flexible Plan
High Commitment
Opportunity
Rigid Plan
Low Commitment
Flexible Plan
Low Commitment
Figure 83
Eastman Kodak’s Framing of Emerging Technology (Mid-1980s)
“This also goes back to ‘looking for the big idea,’ commented a person close to
decision-making; “we kept looking for a business that was as good as the film
business. When it became apparent that a new venture wasn't going to come close to
the standard set by film, interest was lost and yet another new venture was
explored.”626
The behavior was partly explained by the typical career path of managers. Kodak
managers usually advanced from Kodak Park, which is where the company
manufactured film, to a leadership position. They were very much embedded in the
silver-halide world, employees noticed, so that they were by and large reluctant to do
anything that might hurt their asset called Kodak Park. The omnipresent phrase, “It’s
not Ektachrome,” weighted all developments against film.627
626
627
Paxton, K. B. 2013b. Personal Interview (Follow-up). November 19. With M. Shamiyeh.
216
Period 1990-1993: Film-Based Digital Imaging (Kay Whitmore)
6.2 Period 1990-1993: Film-Based Digital Imaging (Kay Whitmore)
“Don't expect huge announcements. The changes will be incremental.”628
Kay Whitmore
In the late 1980s, Kodak again saw itself faced with the question whether it should
enter consumer electronics. Japanese companies began to market their versions of
analog-electronic cameras to consumers, and industry insiders more and more
accepted the belief that in the 1990s, the rapid development of electronic imaging
would change the traditional silver-based photography business in many areas:
consumer
products,
photo
(image)
processing,
printing,
publishing,
and
communication.
Kodak’s threat-induced response to the upcoming industry change was a half-hearted
attempt to control existing resources, rather than searching for new solutions:
Constrained by its former strategic choices (and thus resource commitments) to silverhalide developments and by increased pressure by shareholders to rely on business
with prospects of high profit margins, the company decided to “enhance and sustain
the life of traditional photography” by betting on hybrid technologies, that is, by using
both traditional silver-halide and electronic imagining for the benefit of customers.629
The PhotoCD system was the embodiment of Kodak’s new film-based digital imaging
strategy. It aimed at establishing a new standard of electronic image quality for
television display, transmission, and printing. Images captured on film and transferred
to PhotoCD provided quality superior to even the most advanced electronic still
photography systems, while giving both consumers and professionals the convenience
of digital storage, display, and manipulation. However, the PhotoCD flopped in
Kodak’s most important consumer mass market.
628
Hymowitz, C., & Alecia, S. 1989. Kodak Chooses Whitmore for Top Job; Samper Quits. Wall Street
Journal, 1989 Dec 11: 1.
629
Developing Cd Technology. The Washington Post, September 15(h.01).
ANALYSIS
ORGANIZATION
217
ENVIRONMENT
CEO
 Chandler
[1980s]
 Whitmore
[Early 1990s]
p
Resources &
Capabilities

StrategicStructural
Context

Resource
Allocation

Cognitive
Framing
Silver-halide
Photography
Customers &
Capital
Providers


 Threat
Perception
Electronic
Photography

t
(1)
(2)
(3)
(4)
(5)
(6)
Kodak frames electronic/digital imaging as a threat
Kodak decides to be best in traditional and electronic imaging
Kodak sustains film business by betting on hybrid systems
Kodak trades investments in electronics against film
Capital providers and customers urge Kodak to focus on film
Kodak divests non-imaging units to increase cash flow
(1) Photography industry (and Kodak) frames
electronic/digital imaging as a threat.
Recognition that it will take a decade before
electronic imaging matches silver halide in
quality and cost.
Figure 84
Allocation (Early 1990s)
Figure 85
Silver-halide (Film) and Electronic
Photography (Early 1990s)
6.2.1 Cognitive Framing: Threat and Opportunity
In the late 1980s, Kodak framed electronic imaging in a more nuanced way. It
perceived electronic imaging partly as a threat and partly as an opportunity: Viewed
from the perspective of image capture and storage, the company considered the
technological process in electronics as a short-term enhancement to conventional
photography, but as a long-term threat to replace silver halide in the mass market,
which was Kodak’s most important market. Seen from the other end of the imaging
chain, from the photofinishing perspective, Kodak framed advancements in electronics
as an opportunity to extend its promised new sources of entrepreneurial growth. The
company’s framing of electronic imaging was tempered by another threat Kodak
perceived to its traditional silver-halide film and paper businesses: Fierce competition
in its home market was eroding the incumbent’s market share.
Sales of products based on electronic photography posed no threat to companies
engaged in the silver-halide film business in the early 1980s, because the base of the
218
newer technology was relatively small. But as the household penetration of video
cameras and camcorders increased, electronic imaging began to consume more of
the disposable dollars consumers allocated to lifestyle activities in general, and
imaging specifically. In 1987, for instance, camcorder sales in the US equaled sales of
35-mm SLR cameras, with a total of 1.6 million units sold; however, while sales of
SLR cameras declined 15.8 percent, camcorder sales increased 37.2 percent from 1986
figures.630 In the same year, conventional 35-mm camera sales stabilized and film rolls
and processing growth rates fell.631 Kodak clearly “missed the opportunity to
participate in video.”632
It is important to note that electronic imaging did not match traditional photography in
quality and cost; nevertheless, there were other benefits that showed signs of a threat
to the traditional industry. Electronic imaging allowed easy and more flexible
manipulation of images, quick turnaround of soft or hard copies of images, and speed
of image transmission. These benefits were considered to draw down the base of silver
halide well before quality and cost standards were met.633
While industry analysts were cautious in forecasting a particular point in time that
electronic imaging would rival silver-halide photography, at the turn of the 1980s the
shared belief was that it would take “a decade before electronic imaging matches silver
halide in quality and cost.”634 A 1987 conference presentation stated the following:
“The improvements in conventional silver systems provide a constantly moving target.
Far too much speculation is required to compare these two improvement rates:
·conventional photo systems and electronic imaging. I, therefore, find it extremely
difficult to predict a definite time span . . . 5 years, 10 years, or 15 years, by which
time electronic still picture taking will become our primary means of recording
amateur events. However, I am certain that this evolution will certainly occur.”635
630
631
Ibid.
632
Chairman Kay Whitmore quoted in Rigdon, J. E. 1991e. Kodak Tries to Prepare for Filmless Era without
Inviting Demise of Core Businesss. Wall Street Journal, 1991 Apr 18: 0-PAGE B1.
633
Omura, G. S. 1991. Imaging Technology Trends: Transition to a New Industry. In P. M. A. International
(Ed.): 51. Jackson, Michigan.
634
Ibid.
635
Stein, H. 1987. Future of Imaging-Emerging Technologies. Paper presented at the GRETAG Photofinishing
Symposium.
ANALYSIS
219
Figure 86
Industry Trend (1991)
Source: Omura, G. S., & Lewis, B. (1992). Photo/ Imaging in the Year 2000 - Report
of the PMA 1991 Strategic Planning Conference. Jackson, Michigan.
“In the chart, two curves are shown. The dashed line represents one possible shape of traditional silver-based photography,
with 1991 being the zenith of the bell-shaped curve. The solid line represents the possible shape of the photo imaging
industry. The current leveling of industry sales may or may not signal an industry peak in 1991.”
Thus, film – following the general opinion – would remain as a prime medium for
image capture until well into the next decade, while the technology for producing hard
copy and transmission of images would face a rapid change. A report on the PMA
1991 Strategic Planning conference illuminates the state of affairs by depicting several
assessments of industry leaders.
By and large, participants agreed that “the next decade will see very rapid
movement towards the electronic imaging environment,” but that the traditional
photography market will continue “maintaining its reliance
636
technology.”
on
silver-halide
“Electronic imaging will certainly play a major role in the years
ahead,” some speculated, “although it will not take over any segment of our industry
100 percent”; “consumer mass market usage – in any significant volume – of
electronic imaging technology is 10 years away.”637 The immediate advent and
636
Omura, G. S., & Lewis, B. 1992. Photo/ Imaging in the Year 2000 - Report of the Pma 1991 Strategic Planing
Conference. In P. M. A. International (Ed.): 70. Jackson, Michigan.
637
Ibid.
220
application of all-electronic cameras was anticipated for a large part in photo
journalism and catalogue photography, which “had absolutely no need for silveranything anymore!”638
While assessments by industry leaders seemed to reflect a general reluctance in
acknowledging electronic imaging, companies engaged in traditional silver-halide film
and paper business, such as wholesalers and wholesale finishers, clearly framed the
progress of electronic imaging as a threat. Some even went so far as to express the
need “to continue promoting quality silver-based imaging at least through the end of
the century.”639
The prospect of filmless cameras scared Kodak too; however, their framing of the
technological progress in electronics was subtly nuanced. It regarded electronic
imaging as a long-term threat to its core business related to color film, but not to the
photographic paper business. Its first reaction to new all-electronic consumer cameras
was, “Holy cow, let's circle the wagons,” William Fowble, vice president and general
manager for consumer imaging products, recalled.640 He tried to get employees
thinking about the possibility of a filmless world by running around telling people,
“Look, we cannot stem the pace of technology, [but] if the lunch is on the table and it's
going to be eaten, your choice is do you eat it or does somebody else eat it?”641
Kodak’s officials made efforts to calm the situation by publicly announcing that
filmless cameras wouldn’t be a serious threat for at least a couple of decades. “Our
forecast well beyond 2000 is for traditional photography to continue growing, although
electronic imaging may grow faster,” CEO Kay Whitmore conceded. “We don’t think
traditional photography will shrink and die. That’s one thing I don’t worry about.”642
Internal forecasts by Kodak predicted that by 2010, the costs of electronic imaging
would have fallen to a point where amateurs would use it; one third of all images
would be captured electronically by then.643 The company’s belief in traditional
chemical photography was partly fueled by the massive stock of existing film cameras
638
Ibid.
Ibid.
640
Rigdon, J. E. 1991e. Kodak Tries to Prepare for Filmless Era without Inviting Demise of Core Businesss.
Wall Street Journal, 1991 Apr 18: 0-PAGE B1.
641
Ibid.
642
Martin, T. J. 1991. The New Look of Photography. Fortune July 1.
643
639
ANALYSIS
221
in the consumer market and the potential growth opportunities in developing
countries.644 Another aspect that triggered Kodak’s faith in traditional film was their
misleading comparison of the different technologies in terms of performance. Kodak
argued that an Ektachrome color print film can capture about 18 million pixels of
visual information, while their latest $20,000 digital camera captured only 1.4 million
pixels.645
The company's internal actions, however, rendered a different picture. Indeed, they
showed that Kodak had concluded that electronics would play a big role in
photography's future. By 1988, Kodak had focused its research on PhotoCD. The
digital imaging system was based on the use of film. At least for the moment it aimed
to preserve Kodak’s core product line. “We clearly set a hurdle for electronic
cameras,” said Mr. Fowble. 646
In contrast to Kodak’s threat framing of devices that capture electronically images, the
company regarded newly emerging opportunities on the side of photofinishing
positively. They believed that the excitement generated by electronics would trigger a
growth in the photographic print market.647 So far, every new camera technology had
created voracious surges in film demand, Kodak’s strategists contended. Their
argument was:
“In 1970, when simple, inexpensive 35-mm cameras began to roll into the market,
Americans took five billion photographs a year. In 1980 they took ten billion, and last
year 17 billion. As anybody who works in an office knows, computers have not done
away with paper. Sales of bonded paper, used for printouts and other things, have
increased over 50 percent since 1980.”648
644
645
See, e.g., Drukker, L. 1982. How Two Giants View Electronic Photography's Future. Popular
Photography(January) 75f, Verity, J. W. 1993. Does Film Have a Future? Business Week November 14.
646
Rigdon, J. E. 1991e. Kodak Tries to Prepare for Filmless Era without Inviting Demise of Core Businesss.
Wall Street Journal, 1991 Apr 18: 0-PAGE B1.
647
648
222
FRAMING IN
RESOURCE
COMMITMENT
FRAMING IN
IMPLEMENTATION
Threat
Opportunity
Threa
Opportunity
Rigid Plan
High Commitment
Flexible Plan
High Commitment
Rigid Plan
Low Commitment
Flexible Plan
Low Commitment
Figure 87
Eastman Kodak’s Framing of Electronic/Digital Imaging (Early 1990s)
Besides, at Kodak there was the strong conviction that Americans would always
demand high-quality prints. “You ask people in a burning house, what are you going to
take out?” said Peter M. Palermo, Kodak’s general manager of consumer imaging.
“After the kids and the dog, the answer is the family photo album.”649 Electronic
imaging, therefore, “won’t eliminate demand for prints, any more than computers
ended the need for paper,” Leo J. Thomas, Kodak’s president of Imaging, concluded.
“The number of hardcopy pictures that people have and hold is not going down.”650
Kodak’s nuanced framing of electronic imaging as a threat on the one hand and an
opportunity on the other was tempered by the perception of another threat:
Competition in Kodak’s traditional silver-halide film and photographic paper business
had become extremely fierce. The world’s largest manufacturer of film, which ever
since the 1970s had set the standards and the prices at will on everything related to
photography, had been forfeiting sales increases to stave off Fuji and others. In the
early 1980s, Fuji had a small foothold in the US market. At the turn to the 1990s,
however, Fuji aggressively captured market share in photography film and paper.
Within less than five years, Kodak’s US market share in color film dropped from 85
649
650
Press, A. 1991. Kodak Bets on Film-Digital Format : Photography: 'Photo Cd' Is Seen as a Bridge from
Imaging to Electronics. Los Angeles Times, October 14.
ANALYSIS
223
percent to 80 percent.651 In the same period, Kodak had to cut margins and to protect
its leading market position from rivals who sold their own branded goods at a
discount.652 For instance, 3M, which sold its ScotchColor 100 under the brand name of
various retailers such as Target and Kmart, priced a roll of film at $4.40, which is
about two thirds of the price at which Kodak sold its Gold 100 Plus film. 653 Fuji and
Agfa slashed prices likewise.654
What Kodak (and its shareholders) were threatened by was the combination of
sluggish sales growth, loss of market share, and pressure on prices that reduced profits,
while the company sucked cash from this business for other endeavors such as the
sluggish information operations. The company could not rely on high growth rates in
its traditional film business to offset stagnation or losses in other segments, such as
information. In 1989, Kodak’s earnings could not keep pace with a viable growth rate
of 9 percent by volume.655 Four years later, Kodak reduced its expectations regarding
annual growth rate from its core film and photographic paper business to 3 percent.656
The acquisition of the Sterling Drug Inc. was meant to ease the pain. However, Kodak
soon recognized that the pharmaceutical company wouldn’t make any meaningful
contributions to the company’s income until the mid-1990s.657 Likewise, ongoing
restructuring efforts in the organization to lower the costs of Kodak’s traditional
business failed to deliver substantial improvements. In summary, Kodak felt its most
important consumer market threatened on two fronts: by electronic imaging and fierce
competition. Negatively associated prospects of electronic image capture and the fear
of loss in its core businesses outweighed the virtues seen in electronics as a means to
make photofinishing easier.
651
Dickson, M. 1993. Focusing on Grander Horizons. Financial Times, Novemeber 1(11), Martin, T. J. 1991.
The New Look of Photography. Fortune July 1.
653
654
1993d. Kodak Alleges Fuji Photo Is Dumping Color Photographic Paper in the U.S. Wall Street Journal,
1993 Sep 01: 0-PAGE B6.
655
Hammonds, K. H. 1989. Kodak May Wish It Never Went to the Drugstore - Coughing up $5 Billion for
Sickly Sterling Drug Hasn't Paid Off Yet. Business Week December 4.
656
657
Hammonds, K. H. 1989. Kodak May Wish It Never Went to the Drugstore - Coughing up $5 Billion for
Sickly Sterling Drug Hasn't Paid Off Yet. Business Week December 4.
652
224
6.2.2 Structural and Strategic Context: Integrated and Film-Centric
In the years following Kodak’s exit from consumer electronics in 1986, the company
focused on strengthening its core photography and high-profit businesses: “We must
continue to maximize the value of our product line-up,” the 1986 annual reports
declared, “nourishing the growth of those products which enjoy superior rates of
return.”658 Film clearly remained at the core of the company’s strategy and the
company spent record sums to “extend the lively future of silver halide photography,”
in capital projects that drove for greater efficiency in manufacture and in products that
perform better than ever.659 All photography-related acquisitions that Kodak made in
the aftermath of its consumer electronic business strengthened its traditional silverhalide business. There was no sign that the company would seriously look for
opportunities in electronic photography. For instance, in 1986 Kodak acquired Nagase
& Co. to extend its photographic distributorship, and Fox Photo, a large photofinisher
which operates wholesale photo labs and mini labs in 23 states.660 In 1987, Kodak
acquired American Photographic Group, a privately held wholesale photofinishing
company operating in 17 states; and, in 1988, the company’s US photo finishing
operations were combined with those of Fuqua Industries Inc., operating since then
under the brand Qualex Inc.661 Still, in 1989, when electronic cameras such as video
camcorders revealed tremendous growth rates compared to the stagnating 35-mm
SLRs and the decline of Disc cameras, Kodak decided to stick to its core businesses in
film and photographic chemicals. The 1989 annual report synthesized Kodak’s
thinking:
“Traditional photography has tremendous growth ahead – in its largest markets, such
as North America, Japan and Europe, and in newer world markets which represent
enormous potential. Is traditional photography a mature business? Far from it – it is a
business still rich in opportunity. We will continue to aggressively exploit those
opportunities.”662
658
Ibid.
660
Ibid.
661
662
659
ANALYSIS
225
6.2.3 Realized Strategy: Rigid Plan, High Commitment
Kodak’s response to the perceived threat of electronic imaging and fierce competition
in traditional photography triggered a sudden turn in the company’s strategic
orientation and structural organization. The company, which had focused on traditional
film photography for more than a century, suddenly announced that its impetus for
growth must be electronic imaging. Kay Whitmore, shortly after his appointment as
chief executive officer as of June 1989, decided that the company should aim to be
“the world's best in both electronic and (traditional) imaging.”663 In a statement to
shareholders and employees, he explained that “We [at Kodak] are exploring and
defining the best ways to manage the convergence of conventional imaging science
with electronics.”664 For years, Kodak managers had recognized the impact this new
technology could have on the silver-halide company, but previous management had
never dared to take a definite stand on it. Mr. Whitmore, who took over the reins from
Colby Chandler, was the first to do so.
In practical terms, Kodak’s strategic turn meant to sustain and strengthen existing
resources by pursuing the development of hybrid systems, rather than searching for
new alternatives. Kodak’s competitors by and large focused on the development of
electronic/digital image capture devices that rendered traditional silver-halide film
obsolete as a storage medium and allowed direct transmission to photofinishing
services or other means for output and manipulation, such as printers, television
displays, computer terminals, and storage devices [see Figure 88 (middle)]. For
instance, in 1988 Canon marketed its RC-250 Xapshot to consumers in Japan and the
US. The $499 camera used a 200K pixel CCD, and the extra $999 kit allowed users to
send a video signal to a TV-set or video cassette recorder, to store images on a floppy
disc, or to manipulate images by connecting the camera via interface card and software
to a Macintosh computer.665
Kodak, in contrast, decided to focus on developments that put traditional silver-halide
film at the core of any consumer product. The core intention was to preserve and
extend the life of silver-halide film [see Figure 88 (bottom)]. Kodak’s Create-A-Print
663
ibid., Hirsch, J. S. 1990. Kodak Hopes Electronic Imaging Clicks, as Company Faces Fuzzy Photo Future.
Wall Street Journal, 1990 Jul 16: 0-PAGE B5.
664
665
CANON RC-250 XAPSHOT explained in Popular Photography. December 1991. p 108. See also
http://www.digicamhistory.com/1988.html.
226
station and the PhotoCD in particular were examples that represent merely the tip of
the iceberg of the company’s (hybrid) film-based digital imaging strategy.
The Kodak Create-A-Print allowed consumers to manipulate their own pictures, for
instance, to make enlargements in a few minutes. The machine scanned the negatives
of a 35-mm film, showed the positive on a screen, and made prints.666 The
development of the PhotoCD system was Kodak’s biggest response to the threat of
electronic imaging. It was hoped that this would be widely accepted in the consumer
market.
Kodak expected to reach 100 million or 15 percent of all US households.667 The
system aimed at establishing a new standard of electronic image quality for television
display, transmission, and printing. Images captured on a 35-mm film and transferred
to PhotoCD provided quality superior to even the most advanced electronic still
photography systems, while giving both consumers and professionals the convenience
of digital storage, display, and manipulation [see Figure 89 and Figure 90]. The logic
behind the project was clear: “We believe the film business is going to survive much
longer than we did before PhotoCD,” explained Stephen Stepnes, who was in charge
of Electronic Imaging Systems at Kodak.668 The company’s credo was then:
“Kodak will continuously improve its photographic films, papers and allied products
while adding to their appeal the flexibility offered by electronics. As this company did
with black-and white photography and with color, we intend to set the standards and
lead the way in film-based digital imaging.”669
Accordingly, major investments in the photography film and paper business were
driven by Kodak’s (unavoidable) belief in the long life of photographic film, which,
management believed, would continue to offer unsurpassed quality and remain the
premier image-capture medium.670 Certainly the company was facing a conundrum:
Any electronic imaging product would succeed at the expense of the lucrative film and
paper business. At the turn of the 1980s, Kodak had 80 percent of the US photography
market; hence, the incentive to change was very small.
666
667
Press, A. 1991. Kodak Bets on Film-Digital Format : Photography: 'Photo Cd' Is Seen as a Bridge from
Imaging to Electronics. Los Angeles Times, October 14.
668
Ibid.
669
670
ANALYSIS
Silver-halide
Photography
INPUT
Photo
Capture
analog
Camera
Electronic/Digital
Imaging
INPUT
Image
Capture
STORAGE
Photo
Recording
OUTPUT
Photo
Finishing
Film
Print
digital
Digital Camera
Video Camera
STORAGE
Photo
Recording
227
OUTPUT
Image
…
(no consumable)
Print
Retrieval
Manipulation
Transmission
Projection
digital
Floppy Disc
SD Card
KODAK
Film-based
Digital Imaging
(Hybrid)
INPUT
Photo
Capture
Camera
analog
STORAGE
Photo
Recording
CONVERSION
Photo
Digitalization
Film
OUTPUT
Photo
Finishing
Print
digital
OUTPUT
Image
…
Print
Retrieval
Manipulation
Transmission
Projection
Figure 88
Analog (Chemical) and Digital Imaging Chains
228
Figure 89
Kodak PhotoCD System
ANALYSIS
Figure 90
Hybrid PhotoCD System
229
230
Kodak’s internal investment pattern and structural changes mirrored the new strategic
focus. Research budgets for the development of products such an all-electronic camera
for consumers were cut, and the Electronic Photography Division – where the
exploration of the new technology had taking place originally – was transferred from
the company’s most important Photographic Products Segment to the commercial
Information sector.671 Within the Federal Systems Division, the research into
electronic imaging systems was continued, but on a marginal scale.
High
Electronic/
Digital imaging
business
MARKET GROWTH
X
Health
(Sterling)
business
Non-imaging
businesses
Office
(copier)
business
X
Divestures to fund
silver-halide
photography and
health business
Loss of market
share due to fierce
competition and
video camcorders
Chemical
business
X
Silver-halide
photography
business
Low
Low
RELATIVE MARKET
High
Figure 91
Eastman Kodak Consumer Photography Portfolio Matrix (Early 1990s)
Schematic Depiction of Circumstance
Gary Connors, who served as program manager on several major contract projects for
the US government and ran the Federal Systems Division, remembered the fateful day
when his budget was cut to almost nothing. He recalled the events as follows:
671
1989a. Eastman Kodak Company Annual Report. Rochester, NY, Connors, G. 2013. Personal Interview.
November 18. With M. Shamiyeh, Rigdon, J. E. 1991a. Eastman Kodak Puts the Focus on Leo Thomas. Wall
Street Journal, 1991 Aug 14: 0-PAGE B1.
ANALYSIS
231
“So we may have had wonderful ideas about where we were going in the electronic
systems and the electronic imaging systems and all of that. But we weren’t going
anywhere because there was not going to be any more money for us to invest except
for what I had in my little purse in the government business. And that was I must say a
day that I will always remember as part of my Kodak experience. People slammed the
door and walked out. And that was pretty much the end.”672
Paradoxically, research on electronic imaging was continued in the form of
skunkworks, and thereby became the basis for the first Kodak commercial electronic
cameras.673 The division used some of its Independent Research and Development
(IRD) budget to develop electronic imaging products. Every year the division received
several million dollars it could use any way it wanted.674 Later, Connors regretted that
the project was kept secret:
“As I look back on it, it was something we were able to do without telling anybody
because we had the money and we could spend it however we wanted. So that was a
good thing. The bad thing was probably we should have told, we should have tried to
sell it more throughout the company. I guess I feel that I never did that as much as I
should have. I kind of kept quiet about it and we did our thing and didn’t get into that
kind of discussion.”675
Others at Kodak supported Mr. Connors’ reluctance to discuss the issue of electronic
cameras within a silver-halide based company. Right around the same time, Don
Pophal, a project manager on many early digital projects at Kodak, recalled a meeting
with his senior manager in which he expressed his intention to become a project leader
for a digital camera project. The manager slammed his fist on the table, according to
Pophal, and said, “There will never be a digital camera at Kodak as long as I’m
here.”676
6.2.4 Resources and Capabilities
Kodak’s strategic investment into film-based digital technologies cannot be fully
explained on the grounds of cognitive framing. Indeed Kodak’s amount of cash or cash
equivalents and deployable resources moderated the company’s resource allocation
process in the early 1990s too as did the pressure from shareholders.
672
Connors, G. 2013. Personal Interview. November 18. With M. Shamiyeh.
Ibid., McGarvey, J. 2013. Personal Interview. April 10. With M. Shamiyeh.
674
675
Ibid.
676
673
232
Since the early 1980s, Kodak’s preference to strategically invest in its most important
business – the color film and photographic paper business – to protect and gain market
share had not changed in favor of other businesses; rather the opposite. Due to a fierce
competitive environment, the multi-business corporation was forced to defend its
market share by strategically investing even more in its core business. “For every year
that film could be conserved and for every percentage point and market share that we
could gain,” Kodak’s business analysts concluded, “it was worth hundreds of millions
of dollars and so in net present value; quantity was established, and that formed the
basis for a new direction for the company.”677 There was simply no incentive to fund a
business with inferior profit margins and market share, such as all-electronic consumer
cameras.
Moreover, Kodak’s competences related to hardware-manufacturing had not changed
since its exit from consumer electronics in the mid-1980s, which explains another
aspect of the company’s reluctance to commercialize its world-class expertise in
electronics. During its hundred years of existence, Kodak had built an extraordinary
stock of technologies, which made photography ever easier and protected the
company’s leading market position. Kodak was granted about 1,000 patents per year in
the US alone, which was second among US companies, and fourth worldwide in the
early 1990s.678 Besides its unbeaten competence in silver-halide photography, Kodak
managed to build up world-class competences in electronics. For instance, Kodak was
the world’s first developer of the 1.4 and 4.2 megapixel sensors. In 1990, the company
received its 18th R&D 100 award from Research and Development magazine for this
latter innovation.679
The bulk of Kodak’s electronic competences, however, remained trapped in the labs.
Several managers in charge of running operations directed attention to lack of
manufacturing competences. Dennis DeLeo, for instance, who managed Kodak’s
development of businesses for CCD electronic image sensors, image capture, and
transmission products between 1990 and 1992, explained that Kodak was never an
efficient volume manufacturer, except when it generated a new film in camera system,
677
Melnychuck, P. 2013. Personal Interview. November 20. With M. Shamiyeh.
679
678
ANALYSIS
233
for instance the film size 126 or 110.680 But the company was never, he clarified, a
volume manufacturer in the same way as the Japanese were when they introduced
manufacturing process improvement programs back in the 1960s and 1970s.681 Others
confirmed Kodak’s lack of hardware-manufacturing competence.682 Kodak’s decision
to exit 35-mm SLR camera production in the early 1970s, was seen as another case in
point.683 Kodak lacked the manufacturing competence to produce electronic products
and always had to rely on third parties. The company’s reluctance to enter and fund
hardware businesses was certainly fuelled by the lack of high profit margins and
distribution channels, as discussed earlier. The PhotoCD, which was built by Philips,
was a special case, as Kodak intended to garner royalty income by licensing its
proprietary system.
In this circumstance of aggressive competition in the consumer market and Kodak’s
lack of electronic hardware-manufacturing expertise, the company’s photographic
business did not yield the massive cash flow needed to fund new project development,
let alone new ventures in electronics. Throughout the late 1980s and early 1980s, the
company did not manage to increase its cash and cash equivalents substantially – gains
never exceeded about $250 million a year, and by and large the company could not
fund its capital additions and pay dividends to its shareholders without diminishing its
cash and cash equivalents or resorting to long-term debt. Therefore, in the late 1980s,
year after year, management cut the workforce to increase cash flow. In 1993, for
instance, CEO Kay Whitmore announced another major cut in workforce – the fifth
within less than ten years – to increase cash flow. The layoff of 10,000 employees, or
about 8 percent of the company’s global workforce, was expected to help Kodak to
achieve $700 million in cash flow in 1993, $1 billion for the year after, and $1.1
billion in 1995.684
680
Ibid.
682
Connors, G. 2013. Personal Interview. November 18. With M. Shamiyeh, LaPerle, B. 2013. Personal
Interview. November 21. With M. Shamiyeh.
683
Deleo, D. 2013. Personal Interview. November 18. With M. Shamiyeh, Lieser, E. 2014. Personal Interview
(by Telephone). April 4. With M. Shamiyeh.
684
681
234
Besides, Kodak’s photography business had to make up for the loss generated in the
information businesses, which focused on commercial products such as copiers,
printers, and publishing systems. This segment continued to report negative figures.
Thus, the incentive to invest in new technologies and products such as all-electronic
cameras, which included the prospect of cannibalizing the company’s most important
consumer business, was certainly not very high, especially given low levels of
uncommitted resources and high high capabilities predominantly deployable in the
silver-halide business.685
6.2.5 Capital Providers and Customers: Film-Demanding
By the end of the 1980s, shareholders were concerned about Kodak’s weak cash flow
and considerably high level of long-term debt.686 In 1989, the company’s balance sheet
already showed $8.7 billion of long-term borrowings, despite some $1.7 billion in
deferred income taxes. Total liabilities had grown to a sum nearly two-and-a-half
times as great as shareholders’ equity. Yet Kodak continued to base its resource
commitments on growth predictions higher than 7 percent a year, while the result
remained several points below that.687 Hence, staff plans and funding for
administration, selling, and general overhead as well as R&D, which had been the
highest in the industry, grew apace. Since the early 1980s, net earnings had been cut in
half, from a peak of $7.12 per share in 1982 to $3.53 in 1992.
Kodak’s consecutive but ineffective efforts to cut workforce and to become more
efficient showed that it was difficult to undo or even reverse retained resource
commitments quickly. Kay Whitmore always deferred severe cost-cutting programs, in
the belief that the company's most important photography business would recover
from stagnation and return to high growth rates.688 But competitors and retailers of
generic brands continued to capture market share and to vaporize Kodak’s margins.
Efforts to bring about change with the help of outsiders failed due to frictions with the
corporate culture. Kodak’s newly appointed chief financial officer, Mr. Christopher J.
685
Rigdon, J. E., Hill, G. C., & Naik, G. 1993. New Focus: Hiring Fisher, Kodak Gambles on a Future in
Multimedia World --- a Builder, Not a Bloodletter, He Conjures Bold Course on the `Digital Highway' --- the
Board's Priorities Shift. Wall Street Journal, 1993 Oct 29: 0-PAGE A1.
686
687
Richman, L. S., & Skookdeo, R. 1993. When Will the Layoffs End? Not Soon, Maybe Never. For Many
Large Companies in the Nineties, the Big Shrink Has Become Not a Onetime Event but a Way of Life., Fortune.
688
Maremont, M., & McWilliams, G. 1993. Kodak: Shoot the Works. Business Week November 14.
ANALYSIS
235
Steffen, who enjoyed an outstanding reputation as an excellent cost cutter, quickly left
the company after conflicts with Kay Whitmore.689
No wonder that in the early 1990s, shareholders aggressively criticized Kodak for its
bad performance, demanding extensive cuts in administration and R&D spending. A
particular frustration of many large investors stemmed from their perception that the
company had been allocating too much money for new electronic technologies that
delivered small returns on investment.690 This concern was even shared by people who
were familiar with Kodak’s unique organizational culture. Scott Brownstein, a former
Kodak executive in charge of the PhotoCD system, noticed that “Kodak has thrown
too much money and management too haphazardly at high-tech products at the
expense of its $5 billion film franchise. Lots of us are excited about electronics; the
question is how do you make money at it.”691 Therefore, in the opinion of many
shareholders, Kodak should rather become an “aggressive follower by capitalizing on
rivals’ inventions instead of mostly developing its own.”692
In response to shareholder pressure, Kay Whitmore announced a strategic change in
1991: “Our view of the future suggests,” he conceded, “that we should concentrate our
energies and resources in three areas of imaging activity: silver-based products, hybrid
imaging systems, and imaging systems that offer photo-quality pictures. Electronic
imaging,” Mr. Whitmore continued, “doesn’t yet offer photo-quality pictures.”693
People close to the industry cheered the move. The Wall Street Journal applauded
Kodak’s focus on traditional photography with the following comments: “This is a big
689
Loomis, C. J. 1993. The Battle to Shape up Kodak the Board Is Backing Kay Whitmore -- Coolly and for
Now. Will He Be the Next Bigtime Ceo to Fall?, Fortune.
690
Dickson, M. 1993. Focusing on Grander Horizons. Financial Times, Novemeber 1(11), Rigdon, J. E. 1991d.
Kodak Shuffles Executives, Operations, Announces Plans to Cut 3,000 Workers. Wall Street Journal, 1991 Aug
13: 0-PAGE A3. For a detailed discussion on how security analysts reacted to Kodak’s undertakings in regard to
the development of radical technological change one might refer to the work of Mary J. Benner from the
Wharton School, Philadelphia, Pennsylvania: Benner, M. J. 2010. Securities Analysts and Incumbent Response
to Radical Technological Change: Evidence from Digital Photography and Internet Telephony. Organization
Science, 21(1) 42-62.
691
Rigdon, J. E., Hill, G. C., & Naik, G. 1993. New Focus: Hiring Fisher, Kodak Gambles on a Future in
Multimedia World --- a Builder, Not a Bloodletter, He Conjures Bold Course on the `Digital Highway' --- the
Board's Priorities Shift. Wall Street Journal, 1993 Oct 29: 0-PAGE A1.
692
Rigdon, J. E., & Lublin, J. S. 1993. Kodak Seeks Outsider to Be Chairman, Ceo --- Search for Savvy
Marketer, Cost Cutter Follows Dismissal of Whitmore. Wall Street Journal, 1993 Aug 09: 0-PAGE A3.
693
Rigdon, J. E. 1991d. Kodak Shuffles Executives, Operations, Announces Plans to Cut 3,000 Workers. Wall
236
positive,” and “It's excellent. It dramatically de-emphasizes research and development
spending in electronic imaging.”694
But it was not only shareholders’ concern that affected Kodak’s strategic investments
from outside the company. Customers’ reluctance to embrace new electronic imaging
products such as the PhotoCD led to an even bigger effort to sustain the company’s
traditional silver-halide business.
Kodak’s move to hybrid systems, in response to the threat of electronic photography,
never aimed at searching for radical new alternatives. Rather, it was a rigid reaction, as
Kodak intended to sustain the company’s traditional photography business precisely
because silver-halide film was still the basis for every new Kodak electronic product.
The PhotoCD system, which was Kodak’s embodiment of their new film-based digital
imaging strategy, failed in the consumer market. Conceived as a blockbuster item to be
sold to millions of US households, consumers simply did not take to the idea of
looking at their images on a television screen using a $400 player and paying $20 to
have their film roll transferred to a compact disc.695
The other customers, whom Kodak considered of secondary importance, such as
developers of desktop computer applications, were also reluctant to embrace the new
technology. Kodak plans to commercialize the PhotoCD system relied on two different
markets. The company would develop the system for its home consumer market itself
and would generate royalty income from all others that wanted to incorporate the
system in their applications. Software developers, manufacturers of players, or system
integrators such as Apple or Adobe were considered part of the latter group. They
could make use of the system by licensing particular patent portfolios.696 Nevertheless,
these customers were also reluctant to purchase licenses or to invest in developments
to incorporate the new technology in their applications, because of the uncertainty of
demand. Thus, the product failed in the consumer market and Kodak had to turn to
businesses and professional photographers. 697
694
Ibid.
696
Smith, G. V., & Parr, R. L. 2004. Intellectual Property: Licensing and Joint Venture Profit Strategies:
Wiley.
697
Rigdon, J. E. 1992c. Kodak Is Aiming Photo Cd Concept at Business Firms. Wall Street Journal, 1992 Aug
25: 0-PAGE B7.
695
ANALYSIS
237
6.2.6 Realized Strategy: Exit Consumer Market, Spin-off Eastman Chemicals
Kodak’s foray into film-based digital imaging systems did not take off in the
company’s most important consumer market, while its traditional silver-halide
photography suffered from fierce competition. To sustain and strengthen its core
business, cash flow was needed, which the company lacked. Retained resource
commitments in administration and R&D could not be undone quickly, and
shareholders put more and more pressure on management to focus on cutting costs and
on the traditional photography business.
FRAMING IN
RESOURCE
COMMITMENT
FRAMING IN
IMPLEMENTATION
Threa
Opportunity
Threat
Rigid Plan
High Commitment
Flexible Plan
High Commitment
Opportunity
Rigid Plan
Low Commitment
Flexible Plan
Low Commitment
Figure 92
Eastman Kodak’s Framing of Emerging Technology (1993)
As a consequence, Kodak decided to concentrate on its core businesses and to shed a
variety of profitable non-imaging units, to generate cash flow. Among those sold were
the Verbatim CD manufacturing unit, the Ultralife lithium battery production unit, and
several other businesses related to its troubled information division [see Figure 91].698
Gary Connors, who led the Federal Systems Division, remembered the days early in
1992, when Kodak was aggressively searching for profitable businesses to be sold. He
698
1990b. Verbatim Unit to Be Sold to Mitsubishi Kasei Corp. Wall Street Journal, 1990 Mar 22: 0, 1992e.
Kodak to Sell 10 Non-Imaging Units, Expand Its Alliance with Canon U.S.A. Wall Street Journal, 1992 Jul 10:
0-PAGE B6, Ansberry, C. 1990. Eastman Kodak Is Pulling Plug on Its Ultralife. Wall Street Journal, 1990 Apr
10: 0-PAGE B1, Pae, P. 1989a. Eastman Kodak Plans to Eliminate Minilab Division. Wall Street Journal, 1989
Dec 05: 1.
238
too was asked to find someone to acquire that business. The person to whom he was
asked to report, Bob Hamilton, said:
“We don’t want to be in the business that you are in anymore. Kodak doesn’t want to
be in that government business. We need cash. We know that your business is
profitable; sell it as quickly as you can to anyone, anyone who will buy it; sell it.”699
At the turn of the 1980s, Kodak had three pillars of income. Imaging accounted for
about 60 percent of the company’s earnings, Health, together with the newly acquired
Sterling Drug Inc., and Eastman Chemical each accounted for 20 percent [see Figure
61]. The Information segment did not generate returns for years. In mid-1993, Kay
Whitmore decided to shed Eastman Chemical in response to shareholders’ pressure to
“shed a major asset and focus on its core imaging business.”700 Kodak’s chemical
operation was one of the company’s oldest pillars of income. After that, Kodak still
had two viable businesses: traditional photography and health.
699
700
60%
1989
20%
20%
70%
CHEMICAL
(INFORMATION)
HEALTH +
STERLING
239
IMAGING
CHEMICAL
IMAGING
(INFORMATION)
HEALTH +
STERLING
ANALYSIS
30%
1993
Figure 93
Eastman Kodak’s First Major Divesture in Response to Threat
240
Period 1994-1999: Fully Digital World (George M. C. Fisher)
6.3 Period 1994-1999: Fully Digital World (George M. C. Fisher)
“And if that [digital imaging] eats up some of the film business, so be it.”701
George Fisher, Chairman and CEO, Kodak, 1994
“Imaging offers Kodak tremendous opportunities for long-term success and growth.
To achieve maximum success, we have concluded that we must commit our entire
resource base to imaging opportunities and divest noncore businesses.” 702
“Our projections are that the square footage of film coming out of our factories will
carry on growing for the next 10 years. Beyond that we stop guessing.”703
George Fisher, Kodak’s newly appointed chairman and chief executive, reversed
several assumptions the company was used to. First, he regarded digital imaging as an
opportunity with great growth potential and the ability to enrich the company’s core
business. Second, he felt that Kodak had committed resources to too many activities,
passing up too many opportunities and generating an economically unviable cost
structure. If the company retained its core business, he concluded, Kodak could change
rapidly. As a consequence, Fisher reversed previous efforts towards diversification by
divesting most of the company’s non-imaging businesses, used the proceeds from the
sales to free the company of its long-term borrowings as well as to fund digital
imaging ventures, and created an autonomous unit to promote the development of
digital imaging products independently from the traditional silver-halide business. The
core objective of his strategy was growth to overcome the company’s cost problem
and to generate a viable source of cash for dividends to shareholders and the
investments required to push digital. Three years after Fisher took over, it became
clear that Kodak’s growth strategy was not paying off. Both environmental changes
and internal failures thwarted the growth plan. As a result, retained resource
commitments started to stress Kodak’s balance sheet and the company was forced to
return to previous strategies of workforce reduction and asset divestiture.
701
703
Jackson, T. 1995. Pictured from a New Angle. Financial Times, May 11(13).
702
ANALYSIS
ORGANIZATION
ENVIRONMENT



Resource
Allocation

CEO
 Chandler
 Fisher
[1990s]
[1980s]
 Whitmore
[early 1990s]
p
Resources &
Capabilities
StrategicStructural
Context
241
Silver-halide
Photography
Customers &
Capital
Providers

Cognitive
Framing


 Performance
Improvement
 Threat
Electronic
Photography
Perception
t
1994:
(1) Kodak frames digital imaging as an opportunity
(2) Kodak supports the development of too many diverse
businesses. Result: Just the photography business
maintains a strategic position. Furthermore, Kodak suffers
from liquid resources to promote digital imaging.
(3) Kodak focuses on core competence – pictures – and creates
autonomous business unit to promote independent
development of digital imaging. Strategic objective: growth
in traditional business to generate cash flows required to
promote digital imaging.
(4) Kodak divests non-imaging businesses and makes high
commitments to both digital and traditional silver-halide
ventures
1997:
(5) Kodak suffers from its overbearing cost structure due to
declining sales in its photographic film and paper business.
(The company loses money because of fierce price competition
and general stagnation in consumer demand.)
(6) Investors exert pressure to provide high returns on
investments.
(7) Kodak recognizes an industry change. Computer
manufacturers enter the photography industry by getting
people to print photos at home.
(8) Kodak upholds its strategy to combine the high quality of film
with digital imaging and forces people to make their prints at
professional photofinishing facilities.
(9) Kodak trims the company by cutting costs and reducing
workforce – in both digital and silver-halide business.
Figure 94
Allocation (1990s)
1994-1999:
(3) Electronic (digital) photography does
not yet consume a significant share of
the market for traditional silver-halide
photography; however, there are signs
in the industry that digital image
capture devices will catch on rapidly,
gaining substantial appeal to consumers
in the early 2000s.
Experts disagree on whether paper
prints will survive digital imaging. A
continued growth in photofinishing
services suggests that digital imaging
promotes the making of paper prints,
rather than extinguishing the
photofinishing market altogether.
Figure 95
Silver-halide (Film) and Electronic
Photography (1990s)
242
6.3.1 Cognitive Framing: Digital Imaging = Opportunity
In 1994 there was no doubt that digital cameras were catching up. A leading
international photography characterized the industry change as follows:
“The escalating importance of digital technology, which could only be surmised two
years ago in the shape of various electronic imaging processing systems, has this year
become very tangible indeed. The digital chain of image processing has now been
expanded to include the field of image capture. When our editing team set about
drawing up a market survey of digital camera systems, they were astonished to find
that, whereas camera systems of this kind with their limited performance for specific
fields of application could be counted on one hand two years ago, there were this year
no fewer than 21 different models in differing price and quality categories. This does
not even include systems introduced just before or even at photokina '94, like the
Kodak DCS 460 and the joint development between Fuji and Nikon.”704
People who were immediately engaged in the business reported similar observations.
For instance, in the same year, Bob Banasik, then president and CEO at Best Photo
Lab, Inc., said, “Digital cameras seem to be making real progress. I don’t know
whether or not that is ‘interesting – good’ or ‘interesting - like a train is heading at
me.’ Labs may find opportunities here, but we had better do so quickly.” 705
Kodak’s own research and development efforts certainly hinted at similar findings.
Almost a decade before George Fisher was appointed chairman and chief executive,
the company invented the world’s first 1.4 megapixel imaging sensor.706 Engineers
enhanced the technology to the extent that the resolution doubled almost every four
years, besides the improvement of other performance attributes such as color, shutter
speed, etc. Kodak also developed professional image capture devices in close
collaboration with leading camera manufacturers such as Nikon and Canon, not to
mention the digital projects it pursued in the era of professional graphics, such as prepress approval proofing systems.707
704
Blömer, H. J. 1994a. The Photo Sector Puts on a New Face in Cologne. A Digital Photokina? International
Contact, 13(5) September/ October: 3.
705
O'Neill, J. 1995b. Pma 1995: "A Clearer Picture of the Industry's Direction". International Contact, 14(2)
March/ April.
706
1989c. Journey: 75 Years of Kodak Research. Rochester, NY: Eastman Kodak Company.
707
Connors, G. 2013. Personal Interview. November 18. With M. Shamiyeh, Gustavson, T., & McGarvey, J.
2013. The First Digital Single-Lens Reflex Cameras. IMAGE(Winter 2012/2013) 5, McGarvey, J. 2004. The
Dcs Story: 17 Years of Kodak Professional Digital Camera Systems. 1987-2004, McGarvey, J. 2013. Personal
Interview. April 10. With M. Shamiyeh, McGee, J. 2013. Personal Interview. April 11. With M. Shamiyeh,
Zongrone, N. A. 2013. Personal Interview. November 18. With M. Shamiyeh.
14
243
25.000
Carp
Fisher
Whitmore
16
Fallon
18
Chandler
ANALYSIS
20.000
12
15.000
10
8
10.000
6
4
2006
2004
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
2002
$1.300/MP
$400/MP
2
5.000
0
1975-1976 Megapixels of Available Image Sensor
1977-1988 Projected Increase of Megapixels as of 1975
1989-2005 Megapixels per Image Sensor used by Kodak
1989-2005 Best Image Sensor developed by Kodak
Costs per Megapixel in US Dollars
Trend Costs per Megapixel in US Dollars
l/mm
b [mm] h [mm]
Equivalent Pixels
Film (135)
150
36
5400
24
3600 19.440.000 (19 MP)
Instamatic (110)
150
13
1950
17
2550
4.972.500
(5 MP)
Kodak Disc
150
8
1200
10,5
1575
1.890.000
(2 MP)
The image quality of a typical consumer 36 x 24
mm, ISO 100-speed film was considered to be
equivalent to the resolution of a digital image
containing roughly 20 million pixels. The diagram
above shows that this image resolution could have
been achieved in about 2003. At the same time,
costs per megapixel became affordable for
consumers, which supported forecasts from the
early 1990s that by 2003, half of all cameras sold in
the US market would be digital.
Figure 96
Enhancement of Kodak’s Digital Camera Technology
Source: Data adapted from source in footnote 708
In the early 1990s, Kodak also joined with Apple to launch the Apple QuickTake
camera, which aimed at the consumer segment.709 Progress in Kodak’s own
technology clearly suggested that digital image capture devices would become
available for the mass market sometime in the early 2000s [see Figure 96].
708
McGarvey, J. 2004. The Dcs Story: 17 Years of Kodak Professional Digital Camera Systems. 1987-2004.
1994d. Eastman Kodak Company Annual Report. Rochester, NY, Parulski, K. 2013a. Personal Interview.
April 10. With M. Shamiyeh.
709
244
An internal forecast supported this view too. Terry Faulkner, who then was director of
Strategic Initiatives and reported directly to Fisher, recalled that a key event was the
1994 technology substitution forecast that he and some members of the Technical
Intelligence Group developed under his direction. They predicted that “digital cameras
would replace film cameras more rapidly than 35mm NSLRs replaced box cameras but
less rapidly than video cameras substituted for Super 8 movie cameras.”710 But more
important, the forecast predicted that “in 2004 50% of all re-useable cameras sold in
the US market would be digital; film sales would collapse with a lag of three years but
parallel to the collapse in camera sales” – conclusions, according to Faulkner, that
“George Fisher and Harry Kavetas did accept (although not publicly) and they
responded to them.”711
Significantly, the 1994 forecast was not shared by all of Kodak’s senior managers.
Faulkner remembered a meeting during the mid-1990s with about 20 of Kodak’s top
managers to discuss various issues.712 The meeting happened within the scope of a
senior management initiative called “strategic frame-working,” which took place a
couple of times a year. In one meeting he submitted a questionnaire, asking senior
managers when they thought that 50 percent of all reusable cameras sold in the US
market would be digital.713 Answers to that question ranged from 2002 to 2025, but the
majority was close to 2008-2010. The only person who was really early, according to
Faulkner, was Willy Shih, who then directed the Digital & Applied Imaging unit; he
suggested 2002.714 The truth turned out to be 2003 [see Figure 22 and following].
Many senior managers at Kodak – as well as external industry observers – had
difficulty believing in Faulkner’s forecast for several reasons.715 On the one hand,
there was a large installed base of film cameras that rendered quick substitution
implausible. In the mid-1990s, analysts estimated that there were about 630 million
710
Ibid. Annotation according to original document.
712
Faulkner, T. 2013b. Personal Interview (Follow-up). November 26. With M. Shamiyeh.
713
Ibid.
714
Ibid. Given that Willy Shih participated in the survey, the meeting must have taken place between 1997 and
1998, the year Faulkner retired.
715
Burgess, J. 1995. Digital: Back into the Picture; for Now, Digital Products Are Focused on Special Markets.
The Washington Post, November 13(F. 15), Faulkner, T. 2009. Draft for a Talk That I Gave at Oak Hill to
Retired Ek Managers, Faulkner, T. 2013a. Personal Interview. November 04. With M. Shamiyeh, Faulkner, T.
2013b. Personal Interview (Follow-up). November 26. With M. Shamiyeh.
711
ANALYSIS
245
cameras in use worldwide and a demand for 2.8 billion rolls of film every year, not to
mention the opportunities for film in emerging countries.716
On the other hand, not long before, the industry had witnessed the advent and
immediate flop of electronic photography. The still video cameras convinced
customers and camera manufacturers alike that electronic imaging-capture devices did
not change the world of silver-halide photography. As a consequence, the system
disappeared from the shelves. People close to the industry remembered that this first
attempt to knock silver-halide photography out of the saddle with electronic
technology was a miserable failure. The second generation of electronic cameras came
along with similar flaws, despite significant improvements in pixel resolution, up to
several megapixels, and exposure times that ranged from a few thousandths of a
second all the way to several minutes. But they were substantially more expensive than
a regular 35mm SLR or APS camera, from about $1,000 to almost $25,000. Thus,
these cameras aimed at commercial applications, signaling the provisional retreat of
electronic imaging technology from the consumer segment – Kodak’s most important
target group. In contrast, only about 1 to 2 percent of the camera base was used
commercially.717 The largest user group in photography was the snap-shooters who,
by purchasing compact cameras, demonstrated that they wanted mementos that are
pleasing to the eye and easy to obtain at low cost. No wonder the cheap, single-use
cameras – “a film with a lens” – maintained its position as the fastest growing segment
in the photography market, with growth rates of 40 percent a year and a market share
of one fifth of the total camera base.718
Journals of this transitional period reflected the widely shared observation that the
second generation of filmless cameras did not address the demands of the consumer
market and therefore was not considered a threat. For instance, a leading photography
journal argued that
“the printed quality of the inexpensive cameras designed for amateur enthusiasts is
still unsatisfactory and the prints are also usually more expensive than normal
photographic prints. No consumer is likely to want to take a digital camera on
716
Hujer, F. 1995. Will Photo Go Digital? International Contact, 14(4) July/ August: 40-42.
Ibid.
718
ibid., Nully, P., & Rao, R. 1995. Digital Imaging Had Better Boom before Kodak Film Busts. Fortune,
131(8) 80-83.
717
246
vacation with him to capture his holiday memories. Digital cameras should therefore
not be offered as a substitute for the normal photo cameras – 35mm or Advanced
Photo System.”719
Others claimed that “old-fashioned film is still the best way of storing and recording
images” and that “the conversion from film to electronics may take 30 years or ten
years or (watch out!) five years.”720 Hence there were considerable reasons for the
belief that silver-halide technology would remain the major technology for consumers
in picture-taking.
FRAMING IN
RESOURCE
COMMITMENT
FRAMING IN
IMPLEMENTATION
Threat
Opportunity
Threat
Rigid Plan
High Commitment
Flexible Plan
High Commitment
Opportunity
Rigid Plan
Low Commitment
Flexible Plan
Low Commitment
Figure 97
Eastman Kodak’s Framing of Emerging Technology (1990s)
George Fisher too believed in a slow and gradual transition of film in the face of
digital imaging; however, in opposition to the view of many people close to the
industry, he regarded digital imaging as a valuable opportunity. “Film is cheaper than
electronic imaging, and will stay that way for a while,” he quite pragmatically
explained. “That will change, but slowly.”721 He acknowledged that digital cameras
will “grow over the next decade,” but did not hesitate to make clear that “most of the
pictures they take will merely add to the pictures taken by conventional cameras.”722
Hence, for Fisher, then in charge of Kodak’s new strategy, digital imaging clearly
719
Blömer, H. J. 1996d. The Photo Trade Must Not Miss the Boat When It Comes to New Technologies - We
Need Advanced Retailing Channels! International Contact, 15(3) May June.
720
Jackson, T. 1995. Pictured from a New Angle. Financial Times, May 11(13), Nully, P., & Rao, R. 1995.
Digital Imaging Had Better Boom before Kodak Film Busts. Fortune, 131(8) 80-83.
721
722
Ibid.
ANALYSIS
247
remained a valuable opportunity that would enhance traditional photography, rather
than threatening or cannibalizing it. “Imaging offers Kodak tremendous opportunities
for long-term success and growth,” he declared publicly, and speculated that the
market for digital imaging would be about $15 billion, growing about 35 percent every
year.723 The traditional photography market was about $9.5 billion at the time.724
Since the mid-1980s, Kodak had been developing a tremendous array of digital
products, but by the time Fisher became the company’s new chief executive, little had
been brought to market. By and large, senior executives – mostly those with a film
background – had been fearful of launching digital products they thought would
cannibalize the company’s high-margin silver-halide photography business.725 Memos
in the archives showed Fisher that previous executives had even prohibited resource
allocations to digital projects.726 “There’s been too much fear that the new technology
would kill the old business,” Fisher concluded.727 “It’s a supplement to our traditional
business and a major element of future growth.”728 Thus, by framing digital imaging as
a business that could live in a fruitful symbiosis with traditional silver-halide business,
Fisher replaced Kodak’s long-lasting fear with a passion for digital technology [see
Figure 97].
6.3.2 Resources and Capabilities: Low Uncommitted Resources, Diversification
Soon after Fisher took over, he faced a severe dilemma: Kodak was spreading
available resources over too many activities while underfunding each activity, leaving
each business in an unfavorable competitive position [see Figure 98]. To invest in the
potentially lucrative digital imaging business, however, he was required to take
resources from available businesses, first and foremost from Kodak’s most important
and profitable core photography business. But it appeared that that business too was
becoming increasingly commoditized and thus relatively unprofitable.
723
Blömer, H. J. 1995b. Kodak Bares Its Soul to Wall Street. International Contact, 14(3) May/ June: 8,
724
725
Partalon III, W. 1994. Betting on Future of Digital Imaging. Democrat Chronicle: 1f, Smith, G., Symonds,
W. C., Burrows, P., Neuborne, E., & Judge, P. C. 1997a. Can George Fisher Fix Kodak? (Cover Story).
726
727
1994 Mar 16: 0-PAGE A4.
728
Rotenier, N. 1996. Back in Focus. Forbes, 157(1) 114-114.
248
High
MARKET GROWTH
Digital
imaging
business
Health
(Sterling)
business
Loss of market
share due to fierce
price competition
Chemical
business
Office
(copier)
business
X
Silver-halide
photography
business
Low
Low
RELATIVE MARKET
High
Kodak’s investment program before George Fisher took over:
The company spread available resources over too many businesses, each trying to
gain market share and to build a competitive advantage, while underfunding each
activity. Each business was put in an unfavorable competitive position, except
Kodak’s traditional core business.
Fisher’s dilemma: How to fund the move into digital future.
Figure 98
Eastman Kodak Business Portfolio Matrix (1994)
Schematic Depiction of Competitive Setting
Between 1983 and 1993, Kodak’s years of diversification, the company spent $12.7
billion on research and development, but net earnings remained stable at an average of
$550 million or about $3.10 a share. Even worse, in the early 1990s Kodak’s market
share per unit felt from about 80 percent to 70 percent [see Figure 66].729 Both Fuji’s
cross-subsidization of film and paper products by means of a profit sanctuary in Japan,
and private labels’ offering of discount products at 20 to 30 percent below Kodak’s
price, extensively eroded the company’s market share. Yet the US imaging giant still
maintained probably the highest overhead costs in the industry, being thereby
729
Nully, P., & Rao, R. 1995. Digital Imaging Had Better Boom before Kodak Film Busts. Fortune, 131(8) 8083, Nulty, P. 1994. Kodak Grabs for Growth Again. Fortune May 16.
ANALYSIS
249
constrained in its ability to undercut competitors’ prices. Hence, rather than being able
to suck money from Kodak’s core business to fund development of the nascent digital
imaging business, Fisher needed to stem the erosion of its declining business in the US
by extensively allocating resources to it.
There were no other businesses Fisher could look to for cash. In particular, Eastman
Chemical, Kodak’s former chemical unit, was spun off when he arrived at Kodak. It
remained one of the company’s four strategic areas of operations and consistently
accounted for 20 percent of Kodak’s annual income. The information unit, with its
copier or other commercial businesses that Kodak tried to start, or acquired, during
this period, actually lost money throughout the 1980s and 1990s [see Table 5].
Kodak’s copier business, for instance, lost significant market share to Xerox during the
1980s. Kodak maintained about half of Xerox’s 40 percent market share for high-end
copiers.730 In order to stem that competition, Kodak would have to invest heavily.
Finally, Kodak’s Sterling Winthrop drug unit, with its over-the-counter pharmaceutical
business, had continued to perform weakly since its acquisition in 1988.731 While
burdening the company with a huge debt, the unit failed to pay back the investment.
The unit announced that it had a number of potentially lucrative products in the
pipeline, but admitted that it would take several years to launch them in the market.732
The alliance with Sanofi promised to enhance Kodak’s access to a global market and
research; however, an ongoing industry consolidation rendered their collaborative
efforts marginal compared to the big players. While the Sterling-Sanofi collaboration
was considered to be one of the world’s top 20 operations in the pharmaceutical
industry, it was far from being number one or two, as Kodak was in the photography
industry.733 Kodak’s Sterling was simply too small to prosper, given its current
resource commitment.734 Thus, based on the dilemma that Kodak’s retained resource
commitments posed for its strategic positioning, Fisher’s new strategy was to be
multilayered but straightforward.
730
Nelson, E., & Wendy, B. 1996. Kodak Is in Talks with Britain's Danka to Sell at Least Part of Copier
Business. Wall Street Journal, 1996 Sep 06: 0-A2.
731
Pulliam, S., & Bounds, W. 1994. Heard on the Street: Investors Are Betting That Kodak Will Shed Drug
Line. Wall Street Journal, 1994 May 03: 0-PAGE C1.
732
1992f. Technology Brief -- Eastman Kodak Co.: Sterling Winthrop Discloses Some Products in Pipeline.
Wall Street Journal, 1992 Dec 18: 0-PAGE B3.
733
1991d. Technology Brief -- Eastman Kodak Co.: Sterling Drug Unit, Sanofi Initiate Joint Operations. Wall
Street Journal, 1991 Aug 06: 0-NO PAGE CITATION.
734
250
6.3.3 Structural and Strategic Context: The Move Towards Separation
Largely reversing Kodak’s earlier diversification efforts, Fisher abandoned most of the
company’s non-imaging units, including Sterling Winthrop Inc., which made
pharmaceuticals and over-the-counter drugs; L&F Products, which made Lysol and
other home and personal-care products; and the Clinical Diagnostics division, which
produced medical testing devices. He used the proceeds from sales to free the
company of its long-term borrowings, and directed the company’s focus entirely to its
core competence – pictures, in the broadest sense of the word and without
differentiating between silver-halide and digital technology. The goal was to exploit
the five key elements of the full spectrum of imaging, comprising “image capture,
processing, storage, output, and delivery of images for people and machines anywhere
in Kodak’s worldwide market.”735 Growth strategies by means of geographical
expansion and product differentiation aimed at strengthening Kodak’s market share to
gain a competitive advantage and to fuel new ventures in the digital world.
To secure autonomous and independent development of digital ventures, Fisher
separated digital operations from silver-halide ones, forming the Digital and Applied
Imaging Division. “We need to separate the two [digital and silver-halide operations],”
he said. “There’s been too much fear that the new technology would kill the old
business.”
736
Key managers to direct the division were hired from outside, while
Kodak kept one person to which both sides were asked to report.
6.3.4 Realized Strategy: Flexible Approach, Heavy Investment
“The company was trying to do too many things at once and wasn’t able to afford to
do any of them well enough,” Fisher asserted.737 Moreover, Kodak’s efforts to
diversify its businesses consumed cash the company required to push the digital
imaging business. “Imaging offers Kodak tremendous opportunities for long-term
success and growth,” but “to achieve maximum success, we have concluded that we
must commit our entire resource base to imaging opportunities and divest noncore
businesses.”738 As a consequence, Fisher divested most of the company’s non-imaging
735
1994d. Eastman Kodak Company Annual Report. Rochester, NY, Holusha, J. 1994b. New Kodak Strategy:
Just Pictures. The New York Times, May 04.
736
1994 Mar 16: 0-PAGE A4.
737
738
ANALYSIS
251
businesses, used most of the proceeds of the sales to redeem the company’s long-term
borrowings, and pushed Kodak straight back to its roots.
High
(3)
MARKET GROWTH
Digital
imaging
business
Health
(Sterling)
business
(
X
Office
(copier)
business
)
under
consideration
Divestiture of
Sterling Winthrop
Inc., L&F Products,
Clinical Diagnostics
(2)
Chemical
business
X
?
(1)
Silver-halide
photography
business
Low
Low
RELATIVE MARKET
High
George Fisher’s strategic actions to gain market share in the company’s core business
and to strengthen its competitive advantage:
(1) Divestiture of non-imaging divisions, amortization of the company’s long-term
borrowings with proceeds from sales, and support of core business with
remaining cash
(2) Growth in core business by means of geographical expansion and product
differentiation (to overcome the company’s cost problem and to generate funds
for the development of digital ventures)
(3) Investment in digital business with profit from core business until business
achieves payback, which was expected to happen in 1997
Figure 99
Eastman Kodak’s New Strategy (1994)
Schematic Depiction
After Kodak’s debt-to-capital was down from 70 percent, when Fisher took over, to 12
percent, he started to heavily invest in the core film business, with the aim to “send a
clear signal to everyone in the film business.”739 For instance, Kodak acquired the
739
252
other half of Qualex Inc., the largest US wholesale photofinisher, for $150 million.740
A year later, it acquired the majority of Fox Photo for about $52 million.741 Outside the
US the company bought Nagase, a distributor of chemical goods as well as of Kodak
products, and concluded a long-term cooperation agreement with Belgian Spector
Photo Finishing Group, one of Europe’s leading retailing and photofinishing
concerns.742 Smaller competitors in the imaging business got the message: DuPont and
3M planned to sell or spin off their film operations.743
Fisher also redirected a lot of resources to the development of emerging markets and
product differentiation. For example, the company “set aside a lot of money in 1995
and beyond for China” and gave manufacturing of photographic film and paper there
“a high priority.” 744 Likewise Kodak spent huge budgets on the new Advanced Photo
System (APS). Fisher remembered that
we spent a lot of money on it and I remember sitting in meetings where people had to
make the final decision, were we going to go ahead with it? And I agreed with going
ahead with it, given all we had invested in it and given the fact that nobody really
knew how fast digital was going to come on, that maybe this would satisfy a lot of the
needs that digital satisfied.
Elsewhere he became more explicit on the virtues of the new product, saying that “I
think this system promises to be one of the greatest growth drivers for film this
company has seen in decades.”745 His strong belief in the system was reflected in
Kodak’s resource allocation. In 1995 alone, the company invested $300 million in new
manufacturing facilities at its Kodak Park complex in Rochester, and budgeted about
$100 million for an advertising campaign, after spending an estimated $1 billion to
develop the system.746 In Europe, the company invested $167 million in new plant to
740
Bounds, W., & Frank, R. 1994. Kodak Is to Buy Actava Group's Half of Photofinisher Qualex for $150
Million. Wall Street Journal, 1994 Aug 08: 0, O'Neill, J. 1994. U.S. Industry News. International Contact,
741
742
Imaging Market. International Contact, 15(5 [photokina '96 issue]) September/ October: 5, O'Neill, J. 1996.
U.S. Industry News. International Contact, 15(3) May/June: 12.
743
744
Maremont, M. 1995. Kodak's New Focus. BusinessWeek January 29, Nelson, E. 1997d. Kodak Is in Talks to
Make Film, Paper in China. Wall Street Journal, 1997 Apr 08: 0-A, 10:13.
745
O'Neill, J. 1995d. U.S. Industry News. International Contact, 14(4) July/ August.
746
Bounds, W. 1996i. Marketing: Camera System Is Developed but Not Delivered. Wall Street Journal, 1996
Aug 07: 4, Johannes, L. 1998c. Photography: For New Film, a Brighter Picture. Wall Street Journal, 1998 May
05: 0-B1, Maremont, M. 1996. Will a New Film Click? BusinessWeek February 02.
ANALYSIS
253
manufacture APS film cartridges.747 Investments in the APS system were widely
regarded as “record amounts” in the industry.748
Fisher’s resource allocation to developments related to digital technology caused great
tumult at Kodak.749 For years, the company had dabbled with this technology,
conscious that it was the wave of the future, but threatened by the prospect it would
render its core business obsolete. Fisher bundled various efforts that had been scattered
through the company, allocated them to a separate unit, and pumped nearly half of the
company’s annual budget for research and development – about $500 million – into
the digital future, expecting the division to be profitable by 1997 [see Figure 67].750
6.3.5 Resources and Capabilities: Low Uncommitted Resources, Imaging
In 1997, it became evident that Kodak’s retained (and even enhanced) resource
commitment to its silver-halide photography business had become a burden,
tremendously stressing the company’s balance sheet at times of industry stagnation
and fierce competition. While George Fisher was cautious about substantially cutting
resources in view of his forthcoming growth program, three years later, in the absence
of growth, the overbearing costs of overhead started to eat up the company’s profit.
Kodak reported declines in sales in every division, rendering the company’s resource
commitment blatantly out of proportion to returns on investments. In particular, total
1997 sales decreased by 9 percent compared to the previous year. Kodak explained the
decline on the ground of the sale of the Office Imaging operations and the negative
effects of currency exchange; however, a close examination of Kodak’s performance
in the consumer segment reveals a similar situation. According to Kodak, sales in the
Consumer Imaging segment were basically flat for the year. The growth in unit
volumes Kodak managed to generate for film and paper products, likewise, were
basically compensated by the negative effects of the dollar exchange rate and low
retail price for film. Certainly, the poor performance of the photography business was
also affected by the flop of the new Advanced Photography System (APS).
747
O'Neill, J. 1997. U.S. Industry News. International Contact, 16(1) January/ February: 20.
Bounds, W. 1996b. Don't Blink: Photo Industry Launches Global Blitz to Tout New Cameras, Film. Wall
Street Journal, 1996 Feb 01.
749
750
Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1, Rotenier, N. 1996. Back in Focus. Forbes, 157(1) 114-114,
Smith, G. 1997. What Kodak Is Developing in Digital Photography. BusinessWeek(3534) 108-109.
748
254
High
Digital
imaging
business
MARKET GROWTH
(3)
Office
(copier)
(1)
business
Divestiture
of last remaining non-core
imaging business
X
Low
Low
RELATIVE MARKET
(2)
Silver-halide
photography
business
High
Kodak’s growth strategy is thwarted by a fierce price competition in the US and slow
growth rates in emerging markets. The result: Kodak loses market share and
struggles financially.
(1) Divestiture of remaining non-core imaging businesses such as the Office
Imaging (copier) business and use of proceeds to support core business;
(2) Cost cutting in core business (by means of efficiency improvement, cuts in
R&D budget, significant workforce reduction by 20%, and slowdown of
manufacturing);
(3) Search for alliances to jointly develop digital ventures (and to share
development costs).
Figure 100
Eastman Kodak’s Revision of Its 1994 Strategy (1997)
Schematic Depiction
With respect to digital imaging, Kodak was facing a similar situation, although the
source of the problem was different. Indeed, heavy investments increased sales of
digital products such as cameras and scanners, but the unit continued to lose money.
The huge drop in prices for CD-R media due to Taiwanese companies entering the
market largely increased the poor performance. Thus, contrary to early expectations,
efforts in digital imaging did not reach the breakeven point to start paying back
investment. Rather, in 1997 it became clear that the unit would continue to rely on
external funds.
ANALYSIS
255
Kodak’s resource base burdened the company’s performance also from another
perspective. For more than a century, the company had been building a worldwide
network of distribution channels and customer relations, mainly serving the company’s
photographic film and paper business. Kodak’s push for digital imaging posed the
problem of how to get digital products, such as filmless cameras, into the market
without cannibalizing the profitable silver-halide empire. In practical terms, it raised
the question of whether Kodak should go for one or multiple sales forces, as well as
whether a different market (and thus distribution channel) would be necessary.
Accounts from several marketing managers confirmed that a lot of the company’s
problems while moving into digital imaging were caused by this challenge.
For instance, Paul Melnychuck, then in charge of marketing digital products in
Hollywood and Los Angeles, summed up the challenge as following:
“In the early days of Kodak’s efforts to sell electronic imaging products, the company
was struggling with the problem of whether to use its established skilled sales force for
both silver-halide and electronic products or to add a new one. While the use of its
film sales force promised the benefit of well-established relationships with retailers, a
separate sales force for electronic products would be more related to the fast-paced
industry.
You have people with a sales quota based on the traditional portfolio of products.
They owned those relationships by and large maintained control of the customer. And
then there is a new breed of people, like myself, who were new to sales. Now I come in
wanting to sell to the same customer the new products, which are PhotoCD, cameras,
and printers.
What I discovered was friction.
I didn’t own the customer relationship; I didn’t have that relationship, so I had to rely
on the cooperation of the sales organizations that had those relationships. And what
would you do if your paycheck is based on selling the products that you have in your
portfolio and someone is asking for help to basically take away your sales and replace
it with new products? It’s ill conceived. It doesn’t invite cooperation.
So the problem was not here in the research labs, it was not here in terms of
developing it. It was outside of Rochester. It was in the selling and in the marketing of
it, because you have a conflict between two very different paradigms.”751
751
256
Jerry Magee, marketing manager for Kodak’s professional digital cameras in the
1990s, remembered similar challenges, despite the fact that he was developing new
distribution channels in his efforts to introduce digital technology to professionals as
an alternative to film. In 1994, Kodak launched the NewsCamera 2000, a fully digital
camera developed for and distributed exclusively by the Associated Press. Magee set
up the collaborative effort, which was discontinued due to an internal competition a
year later:
“The Professional Photography unit controlled us because we were part of them. They
didn’t like that we had given exclusivity to the Associated Press and therefore killed
our digital-only customer to make their film customers happy. They weren’t as
concerned about losing photographic film, because they didn’t see that right in front of
them. It was their relationship with their dealers that they were concerned about. And
they were probably being played at that time, because Fuji was making big inroads
with better films, so they had to keep that customer happy. So that’s where the tension
was. So in 1995, it wasn’t a film displacement story. It was a customer-dealer
relationship issue.
I just remember we were forced into going into New York, telling the Associated Press
that the exclusivity was over. And almost from that day on, we sold so few [digital]
cameras.”752
A similar experience but on a different matter was related by Nicoletta Zongrone,
general manager for ink-jet media at Kodak and later vice president of the company.
She remembered that even the naming of digital products became problematic in the
face of the two competing imaging businesses – a circumstance that in the end put the
company in an unfavorable competitive position in the marketplace, which was
flooded by companies from industries that had no background in the photography
industry (and thus no valuable resources to defend):
We developed ink-jet papers for home printing. What was great about that was we
were able to re-purpose film and paper machines, coating machines, coating ink-jet
photo papers. And we achieved Number One Market Share over HP. We didn’t have
our own printer and we got to Number One Market Share photo printing.
I still remember this meeting I had down at Kodak office. The CMO [Chief Marketing
Officer] Carl E. Gustin and Dan Carp was in the room as the CEO and we had the
head of the Consumer Imaging Business Film and they wanted to see my packaging
752
McGee, J. 2013. Personal Interview. April 11. With M. Shamiyeh.
ANALYSIS
257
because we were putting photos on the package and we wanted to call it Kodak Photo
Paper. I was told it was not a photo; I could not call it photo paper.
And then we had, on the highest end one, you know we wanted to call it professional.
Oh my gosh, I could never call it professional. This is not professional paper and one
of the pictures was of a bride, no way could you put a bride on there. You can’t put
weddings; we can’t be printing wedding pictures at home. This is not photos; we can’t
teach people that these are photos.
We were up against HP in the category. We’re up against Canon; we’re up against all
these other printer manufacturers. They’re calling it photo paper and we are Kodak
and we couldn’t call it photo paper.”753
These three reports on personal experiences in bringing digital products to market
clearly document the dilemma the company was facing: Kodak’s resource base – its
predominantly film-centric nature – rendered a transition to new frontiers more
difficult, particularly because film-related products were the sole source of income.
Coupled with the problem of an evident decline of this sole source of income, the
company was required to revise its 1994 strategy. Customers and powerful capital
providers too maintained a decisive force in the revision of the strategy.
6.3.6 Customers and Powerful Investors
Investors had long criticized Kodak for not reducing its workforce, which many
considered as bloated compared to rivals. In the course of recurring poor quarterly
results, they had been asking again and again for substantial layoffs.754 People close to
Wall Street paid attention to investors’ clamoring for massive layoffs. For instance,
Alex Henderson, a Prudential Securities analyst, noted the following in regard to a
press release Kodak sent out to inform the public about its plans to fire 200 managers:
“It doesn’t sound like Kodak is going to do enough to satisfy Wall Street. We’ll have
to wait and see how this plays out. There's a lot of pressure on management to do
something quickly.”755
While Kodak had been quite reluctant in terms of providing numbers of layoffs in the
early days of 1997, investors were precise in pressing Fisher to cut the workforce by as
753
755
Pereira, J., & Maremont, M. 1997. Kodak Warns It Plans to Fire 200 Managers. Wall Street Journal, 1997
Sep 26: 0-A, 3:4.
754
258
many 20,000 employees to save $1 billion in cash from its annual costs.756 In January,
Kodak announced that “job cuts will be mainly in European photofinishing operations,
Latin American retail stores and administrative and support personnel at the copier
business,” but did not specify how many employees would have to leave; in fact, it
was announced that Kodak's employment level of about 90,000 worldwide won’t
change because the company is adding personnel in other areas, such as digital
imaging.757
In the course of the year, Kodak successively increased its projections for an
impending layoff. Late in January 1997, it announced the layoff of about 3,900
employees; in September the figure was raised to 10,000, to finally come close to the
amount requested by investors. “We’ve learned that [the] wishful thinking that we’ve
been guilty of in the past won’t change the facts,” said Fisher. “I think we’re out of
denial. We’re dedicated to getting back on track.”758 Shortly afterward, he declared
that he would substantially cut the company by 19,900 employees by the end of 1999
and save at least $1 billion in costs to “boost investors’ confidence.”759
6.3.7 Cognitive Framing: Digital Imaging = (Still) Opportunity
Despite recurring negative headlines in the press about Kodak’s poor performance in
traditional photography and continued losses in digital imaging, Fisher kept holding on
to Kodak’s strategy. “I don’t have the slightest hesitation that we’re on the right track,”
he said, specifying elsewhere that “the company’s basic strategy remains on
course.”760 Given the industry change, this stand was remarkable, but understandable:
In the mid-1990s, two observations – coupled with a pragmatic view of the company’s
resources – apparently affected Kodak’s mindset and thus its subsequent strategic
756
757
Nelson, E. 1997e. Kodak Plans Big Job Cut, Takes Charge. Wall Street Journal, 1997 Jan 17: 0-B2.
758
Maremont, M., & William, M. B. 1997b. Kodak to Slash 10,000 Jobs, Take Charge --- Moves Aim to Cut
Costs by at Least $1 Billion; Shares Still Fall Sharply. Wall Street Journal, 1997 Nov 12: 1-A3.
759
Kerber, R. 1997. Kodak Boosts Layoff Plan, Restructuring Charge. Wall Street Journal, 1997 Dec 19: 1-A,
3:1, Maremont, M., & William, M. B. 1997a. Kodak's 10,000 Job Cuts May Really Amount to Just 8,000 at End
of the Day. Wall Street Journal, 1997 Nov 13: 1-A4, ibid., Maremont, M., & William, M. B. 1997b. Kodak to
Slash 10,000 Jobs, Take Charge --- Moves Aim to Cut Costs by at Least $1 Billion; Shares Still Fall Sharply.
Wall Street Journal, 1997 Nov 12: 1-A3, Patalon III, W. 1997. Kodak Chief Outlines Photo Giant's Challenges.
Denver Post, November 9(J-07).
760
over Cost Cuts Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4, Smith, G., Wolverton, B., & Palmer,
A. T. 1997b. A Dark Kodak Moment. BusinessWeek(3538) 30-31.
ANALYSIS
259
behavior: the perception that digital cameras actually increase rather than decrease
picture-taking and the debut of low-cost home printers, designed exclusively for
printing photos at home. Whereas the former strengthened Kodak’s framing of digital
imaging as an opportunity that complements traditional photography instead of killing
it, the latter motivated an inconsistent framing. The production of photo-paper for
home printers certainly remained a lucrative opportunity, because for Kodak it
promised a consumable business on the basis of its coating capabilities. The lack of
competences in manufacturing consumer printers, plus the prospect of consumers
printing their photos at home (and thus not at Kodak’s photofinishers), however,
undoubtedly posed a threat.
Fisher never tired of repeating that digital imaging tended to create additional images
rather than to replace conventional photographic ones. “Despite fears that digital will
cannibalize film, we haven’t seen it,” he said, though admitting that the graphic arts
industry today uses less film and more digital technology.761 Although experts
disagreed about how long it would take for digital imaging to substantially shrink
traditional photography, Kodak for itself concluded that it would take 40 to 50 years to
become a purely digital business.762 “We know film will remain a preferred format for
consumers for decades,” the company announced, simply because “it’s easy to use,
people like it, and it's economical. Yet digital imaging and digitization offer definite
advantages, enabling people to do more with their pictures.”763
Kodak’s projection was surely exaggerated to ease investors’ scruples, but the
company had come to realize that digital imaging would not replace photographic film
and paper immediately. Subsequent estimates specified Kodak’s expectations two
years later. In 1999 the company assumed that by 2005, silver-halide film and paper
would add $3-7 billion in annual revenues, with emerging markets having a
significantly larger share; digital products, by contrast, would add approximately $3.5761
Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1, O'Neill, J. 1996. U.S. Industry News. International Contact,
15(3) May/June: 12.
762
Film Flop. Wall Street Journal, 1997 Jul 25: 0-A1, Smith, G. 1999. Film Vs. Digital: Can Kodak Build a
Bridge? BusinessWeek(3640) 66-69.
763
260
4 billion.764 Only about 20 percent of all US households were expected to own digital
cameras by 2005.765 Hence, Kodak’s way of seeing digital technology as a means to
generate more pictures (and thus prints), even though it would take a long time to
replace traditional capturing devices, seemed to justified further investments in the
chemical-based photography business – at least on the output side of the imaging
chain, paper production.
In contrast to varying estimates about the speed at which digital image-capturingdevices might diffuse into the market, Kodak was certain that its business would have
to move from the capture side of the imaging chain – mainly cameras and film – to the
output side. “We did believe for a long while that at the end of the day, the money was
going to transition from color film to output and processing and that’s proving to be
true today,” said Fisher.766 The debut of low-cost photo printers made by computer
manufacturers, therefore, suggested the need for a substantial change in Kodak’s
strategic behavior; however, the company decided to stay on course, for
understandable reasons.
In 1996, it became apparent that printing technology had improved so rapidly in recent
years that manufacturers were ready to conquer a new marketplace: photography, with
about 70 billion pictures taken annually.767 Several leading computer manufacturers,
for instance Hewlett-Packard, Epson, and Canon, launched their first low-cost photo
printers, which could produce color prints that were close in quality to those from
professional film developers.768 Moreover, these companies also started to offer
accessories to turn the home computer into a home photo studio.769 Hence, there were
764
Klein, A. 1999e. Kodak Executives Say They Forecast 8%-12% Annual Revenue Rise by 2004. Wall Street
Journal, 1999 Apr 28: 1-B13.
765
1999c. Eastman Kodak Company Annual Report. Rochester, NY.
766
767
Franz, D. 2014. Cameras + Film Rolls, 1984-2012. In P. News (Ed.). Bonita Springs, FL, Gomes, L. 1996.
New Pc Printers Take on Market for Home Photos. Wall Street Journal, 1996 Aug 13: 4, Nelson, E., & White,
J. B. 1997. Blurred Image: Kodak Moment Came Early for Ceo Fisher, Who Takes a Stumble --- Bet on Digital
768
16(1) Jannuary/ February: 14-16, Franz, D. 2014. Cameras + Film Rolls, 1984-2012. In P. News (Ed.). Bonita
Springs, FL, Gomes, L. 1996. New Pc Printers Take on Market for Home Photos. Wall Street Journal, 1996
Aug 13: 4.
769
16(1) Jannuary/ February: 14-16, Franz, D. 2014. Cameras + Film Rolls, 1984-2012. In P. News (Ed.). Bonita
Springs, FL, Gomes, L. 1996. New Pc Printers Take on Market for Home Photos. Wall Street Journal, 1996
Aug 13: 4.
ANALYSIS
261
clear signs of a new technology that brought along with it the prospect of replacing the
other end of the already staggering traditional imaging chain, replacing traditional
photofinishing services with the home printer.
However, there was less certainty about how fast the technology would progress or
how soon consumers would switch to it. For instance, some analysts argued that “it
will be years before home photo printing becomes as easy, inexpensive, and highquality as traditional photo processing [because] manipulating photos on a computer
may be convenient, but it’s also time-consuming.”770 This evaluation was widely
shared by people close to the industry, as well as by consumers, during the 1990s.771
Others were confident that digital images would render photofinishing obsolete (and
thus a several billion-dollar business).772
Kodak for itself apparently acknowledged the emergence of home photo printers, but
remained seesawing for plausible reasons. The company saw the potential of being
able to leverage its coating competences to commercialize special paper for use in
home photo printers, but by the same token it was aware that it owned no capabilities
for manufacturing a low-cost consumer printer.773
According to Steve Sasson, then in charge of developing photographic quality thermal
printing systems at Kodak, the company tried to get to a consumer level for printers.
However, most of its printers were commercial, deploying an expensive thermal
printing technology.774 “We didn’t make that many consumer products,” recalled
Sasson, “certainly not in the US.”775
Nicoletta Zongrone confirmed senior management’s quest for a consumer printer back
then, in order to compete against manufacturers of low-cost home photo printers:
“We had this constant technology assessment about ink-jet printing, thermal printing,
silver-halide printing, electro-photographic printing and there was tons of work done
770
Sandberg, J. 1998. Digital Cameras Are Better, but Still Waste a Lot of Time, Money. Wall Street Journal,
1998 Jan 15: 0-B1.
772
Alsop, S. 1997. Digital Photography Is the Next Big Thing. Fortune August 04.
773
Gomes, L. 1996. New Pc Printers Take on Market for Home Photos. Wall Street Journal, 1996 Aug 13: 4,
Sasson, S., & Zongrone, N. A. 2013. Personal Interview (Steve Sasson and Nicoletta Zongrone in
Conversation with Michael Shamiyeh). November 18. With M. Shamiyeh.
774
775
Ibid.
771
262
around comparing all those technologies, comparing their cost per print, comparing
total cost to ownership, trying to really understand the technologies and figure out
what kind of consumer printing should we as Kodak get into.
We always knew ink-jet was the lowest cost. But we didn’t have the technology.
Electrophotography was even lower-cost, but it never met the quality standard in those
days. And then thermal dye-sub was always going to have this barrier, because there
were multiple layers, multiple pieces of material, two pieces of material, you are never
going to get to one consumable. And the printing technology was precise enough and
controlled enough that it also – with print head cost and everything – you are never
going to get down below a certain barrier. We were trying to get down to $200, but
were sure that it was never going to get down there; it was more like $400 or $500
cost I am talking about. So, you are never going to get to a home printer with a
thermal printer that was as low-cost as an ink-jet home printer. And so that is another
reason why paper was continued to be invested in.”776
It is important to note that Kodak once owned competence in ink-jet technology, but
had sold it just four month before Fisher took over.777 Dayton Operations, or Diconix
as it was called previously, manufactured ink-jet printers and received international
recognition by launching the world’s first portable ink-jet printer.778 The company was
acquired by Kodak in 1983 and sold in an effort to return to profitability after
diversification efforts.779
6.3.8 Structural and Strategic Context: Efforts to Enhance Autonomy
In the mid-1990s, the excess of retained resources started to burden the company’s
financial and operative performance in every domain; as a result, powerful capital
providers put Kodak under pressure to lay off about 20 percent of its workforce; and,
above all, the entry of computer manufacturers into the photography industry
suggested the need for altering long-established business models. Despite all these
challenges, Fisher’s 1994 strategy basically remained unchanged, with just some
nuanced modifications in certain eras, particularly in regard to the photofinishing part
of the imaging chain. In its annual report, Kodak reveals its slightly adjusted plan:
776
1993a. Eastman Kodak Co. Wall Street Journal, 1993 Jun 08: 0, 1993f. Scitex Corp. Wall Street Journal,
1993 Jul 08: 0.
778
779
777
ANALYSIS
263
“Our strategy is to enable people to keep using film, while helping them obtain and
appreciate the benefits of digital imaging. Best of all, our strategy embraces both
internet solutions and photo retailing. Simply put, we see more growth in digitization
by including everyone – and not excluding anyone.”780
The recurring theme that digital technology sits alongside film, and may even assist it,
found its practical expression in a new Kodak product, the digital print station. These
print stations were essentially kiosks that allowed consumers to upload their pictures
locally, edit them on a touch screen, and make prints without being obliged to wait an
hour for the copy. Kodak expected to have a kiosk on every street corner, reaching a
distribution network as dense as that of ATM machines.781
Kodak based its expectation on the assumptions that by the turn of the century
consumers would take about 75 billion pictures annually, while continuing to use
mostly traditional film, which was cheap and provided high quality. Kiosks held the
advantage, in the company’s view, so that for consumers there was no need to connect
to their personal computer to get high-quality prints, to upload an image on the web, or
to send pictures electronically to friends.782 Consumers should “be able to store and
index images on a worldwide server and to send pictures to a friend halfway around
the globe or even to interact with photofinishers to preview images over phone lines
and select sizing and editing of the pictures they want.” 783
The view that home printers could replace Kodak’s long-established and recently
extensively enlarged resource base of photofinishing facilities was not considered by
senior management – at least not according to their public comments. “Nonsense,”
commented Fisher, on the launch of HP’s $500 PhotoSmart printer, adding that “HP is
probably caught up in the hype of the industry.”784 Kodak believed that consumers
would prefer the easy way to have their pictures scanned or printed, at a local retailer
or a digital-imaging kiosk.785
780
782
783
784
785
781
STORAGE
Film
OUTPUT
Print
PLATE
 DRY
PHOTOGRAPHY
INPUT
Camera
We do
everything
for you
STORAGE
Film
OUTPUT
Print
 SILVER-HALIDE
PHOTOGRAPHY
INPUT
Camera
You press the
button, we do
the rest
INPUT
Camera
+
STORAGE
Memory
 DIGITAL
IMAGING
264
X
STORAGE
Film
OUTPUT
Print
You do
everything
yourself
X
X
Figure 101
Transitions in the Customer Relationship in Photography
ANALYSIS
265
Hence, in viewing two distinct markets – the digital darkroom at home on a PC and
kiosk-based digital imaging at retailers – Fisher apparently decided to go for the
alternative that leveraged the company’s core resources in silver-halide photofinishing
and strengthened the relationship between consumers and Kodak in the face of an
upcoming transition in photography towards a do-everything-yourself mentality [see
Figure 101]. While Hewlett Packard, among other computer manufacturers, put its
focus on home printing and thus allowed consumers to take charge of the entire
imaging chain, Kodak tried hard to keep control of the last remaining part of the
imaging chain – the editing, viewing, sending, and printing of images:
“Some of the hard decisions we’ve got to make over the next few years in the digital
world will be: ‘What parts of that chain do we participate in, which parts do we
partner, which parts do we just source?’ In the end, the answers will be different by
product, by business, so there’s not just one answer for the whole company,” declared
George Fisher. 786
Likewise, while Hewlett Packard felt certain that its technology was going to capture
substantial shares of the photofinishing market of traditional photographic film and
paper manufacturers, Kodak was convinced that its own model would boost sales.787
“In a good number of venues, like with digital print stations,” Fisher explained, “we
see digital supplementing traditional imaging and providing us with new profit streams
for media.”788 Kodak expected kiosks to spur profits by at least 10 percent.789 By 1997,
it had installed some 10,000 kiosks and planned to triple the number within a year.790
Opting for only one market while sidestepping the potentially larger market in the
future certainly contributed to Fisher’s decision to focus the company’s efforts first on
its money-losing Digital Imaging unit. Kodak had no ink-jet technology, which was
required to compete successfully in the low-cost home printing market, and the unit
was far away from turning digital projects such as PhotoCD or digital cameras into
profit-makers. On several occasions, Kodak’s senior executives announced that they
would not approach the consumer printer market until digital photography became a
hit at home; meanwhile, they hoped for a “windfall” from their installed base of kiosk
786
Ibid.
788
789
790
1998. Eastman Kodak Company Annual Report. Rochester, NY, Smith, G. 1997. What Kodak Is Developing
in Digital Photography. BusinessWeek(3534) 108-109.
787
266
and photofinishing retailers.791 Robert Unterberger, then head of the Digital Unit,
specified that Kodak wanted to wait until ink-jet technology was on the market with
high picture quality, and Fisher considered reselling printers made by another
manufacturer, which was more closely related to a lack of resources than to allegedly
weak consumer interest.792
Fisher’s commentary also directs attention to another issue in Kodak’s response to the
ongoing computerization of the photography business. Despite the fact that Kodak had
no brand for computer peripherals – “the Kodak brand meant the yellow box to most
people” – its low resource commitment to computer-related businesses relative to
competitors from the semiconductor industry prevented the photography company
from competing successfully.793 Fisher illuminated Kodak’s thinking at the time by
explaining particular conditions in the semiconductor industry:
“The semiconductor industry has found it too expensive for the most part to build
these big $4 billion facilities. And even before that, when the memory card had split off
from Micron Technology to the Koreans, most of the semiconductor companies got out
of the DRAM [Dynamic Random-Access Memory] business and later out of the SRAM
[Static Random-Access Memory] business, because it was so fiercely competitive and
it needed scale.
For Kodak to think that we could compete in that space would’ve been just ridiculous,
even though we had people who understood the technology.
And on the [image] sensor side, we had to make a decision. We talked to IBM on their
CMOS [Complementary Metal Oxide Silicon] technology extensively and it was very
good; it was world class. But we had to make the decision, do we go into it – because
we had the capability and prototype labs to build devices – or do we let somebody else
do that. And for the most part, those decisions always ended up on, let somebody who
has more scale do it rather than build up our costs.”794
Kodak’s strategic choice was to solidify the separation of its digital unit as an
autonomously operating organizational entity. Fisher wanted to take decisive actions
to turn the digital imaging business finally into the profit zone. The business was
791
Patalon III, W. 1997. Kodak Chief Outlines Photo Giant's Challenges. Denver Post, November 9(J-07),
792
793
794
Ibid.
ANALYSIS
267
expected to reach breakeven by the end of 1997, but continued losses rendered that
goal unlikely.
Ever since Kodak restructured its activities related to photography into several
business units back in 1984, the operating philosophy was that they were “independent
and autonomous.”795 Each business unit was to develop its own strategy to achieve the
financial goals that it was given. As a result, separate business unit strategies
continued to exist even during the company’s renewal under Fisher’s direction.
According to Terry Faulkner, then director of Strategic Initiatives, this circumstance
generated a serious problem at a time when the coming replacement of silver halide by
digital technologies had become obvious, because senior corporate management
accepted the structural context of independent and autonomous entities and made no
attempt to dictate any changes in business unit strategy.796 Instead of demanding
concrete solutions to the problem of a prospective digital substitution, they continued
to assign financial performance goals:
The business unit strategies were what mattered. When he [Dan Carp] talked to
business unit presidents, it was never about anything but financial performance. I
never ever heard him try to suggest that they should be doing something different. He
urged them in respect to financial results. “You’ve got to improve your financial
performance; here’s the goal I’m setting for you; you’ve got to achieve this financial
performance. I want to be assured you’re going to get it, and you’re not doing as well
as you should, etc., etc.”
I never heard him say to a business unit manager, “You need to have a strategy that’s
more focused on coping with digital.” The subject just didn’t come up.797
Certainly, business units could achieve their performance goals just with their own
product lines, which were based on silver-halide technologies for the most part. Fisher
addressed this shortcoming by establishing a structurally separate entity focusing
exclusively on digital imaging technologies, where a loss associated with the start-up
period was accepted. According to Terry Faulkner, Kodak’s corporate strategist back
then, the 1994 founded unit “didn’t accomplish much of anything until 1997.”798
Initially, it was managed by Richard Bourns, who had a strong background in
795
Faulkner, T. 2013b. Personal Interview (Follow-up). November 26. With M. Shamiyeh.
797
798
Ibid.
796
268
traditional photography manufacturing; he was succeeded by Carl Gustin, who was
promoted to chief marketing officer shortly after. In subsequent months, Robert
Unterberger, a 57-year-old IBM executive, managed the unit, but he was not very
effective.799 But of course, one has to keep in mind is that D&AI was not given
responsibility for consumer digital imaging until 1997. Until then, the consumer
photography division, which sold film, and was responsible for kiosks, also had
responsibility for consumer digital cameras, and initially developed the Kodak DC25
camera as a response to the Casio QV-10 camera.800
In the course of a layoff of more than 200 top and middle-level managers, Fisher
brought Willy Shih, a 45-year-old computer veteran, to take over the Digital and
Applied Imaging unit.801 Shih had earned a good reputation in commercializing highend graphic workstations. At Kodak he successfully reinforced the autonomy of the
digital imaging unit and managed to foster a Silicon Valley culture, foreign to the
philosophy the film and paper company was accustomed to.
Team members of the unit recalled that Kodak and its digital imaging unit were “like
two companies; [at] the digital group were really different kind of people.”802 Others
recalled that “Willy Shih was doing some really novel stuff, not just from the
technology point of view, but from a marketing point of view and from a channel point
of view. He was penetrating channels and managing to do this with cameras and paper
without getting the traditional CI [Consumer Imaging] channels.”803
“We [at the Digital Imaging Unit] went and built the consumer electronic channels for
Kodak, because there was no Best Buy or Circuit City. We built it with cameras; we
also went into office product super-stores like Staples and Office Max and Office
Depot with the ink-jet paper. The ink-jet paper was profitable, very profitable;
cameras weren’t so, but both were a good pair. We used to call it the power of two.
You have to sell both, because you have to sell something that is profitable as well as
cameras. And then we went into Wal-Mart and into CVS and other places and we had
to make sure that our meeting was separate from the consumer imaging people. The
sales people knew what we were doing. But we had our own sales people and we
799
08: 0-B14.
800
801
08: 0-B14.
802
803
ANALYSIS
269
talked to different people, and we didn’t place our digital products necessarily always
in the photo section; we had it in stationery or in electronics. We weren’t talking to the
same buyers as the film guys.”804
6.3.9 Realized Strategy: Flexible Plan, High Commitment
The reason for selling most of Kodak’s non-core-imaging businesses, including
Sterling Winthrop operations, in 1994, was to free up capital to finance the new move
into digital imaging. But neither the company’s traditional silver-halide photography
business nor digital imaging provided the growth Kodak required. Even worse,
expectations that digital imaging, which was endowed with an annual budget of $500
million a year for research and development, would start to return investments had
been elusive. The unit continued to lose money and Fisher needed additional capital,
he thought, to compensate with profits from Kodak’s core business. However, there an
increasingly commoditized industry, coupled with fierce price competition, reduced
cash flow when needed the most. Excessive overhead of retained (and even enlarged)
resource commitments in Kodak’s traditional business started to depress the results.
The dilemma: “We couldn’t kill the goose that laid the golden egg, namely color film,
even if some of us believed that ultimately, maybe quicker than we had hoped, digital
would take over.”805
No wonder that in 1997, the company had to increase its efforts to cut costs and
improve efficiency, put more energy into growth by means of geographical expansion
and product differentiation, and spur the search for potential alliances for joint
development of new products, particularly in the domain of digital imaging. In 1997,
Kodak had taken $1.5 billion – or one year’s net earnings – in restructuring and other
pretax charges to cut costs of operations (which totaled $13 billion excluding the
restructuring charge) by $1 billion.806 The layoff of some 20,000 employees, a
workforce reduction the company had never made before, significantly improved
Kodak’s operating margins, despite strong price competition.807 In one year, the
company achieved nearly 75 percent of the $l billion in net cost savings it had pledged
804
806
Kerber, R. 1997. Kodak Boosts Layoff Plan, Restructuring Charge. Wall Street Journal, 1997 Dec 19: 1-A,
3:1.
807
Journal, 1998 Jan 16: 1-A4.
805
270
to make over a two-year period.808 In addition, the company started to reduce its
resource commitments to research and development. Before Fisher took over, the
company was spending up to 9 percent of its total revenues on R&D. In the course of
the company’s 1997 cost savings program, the budget was lowered by 1 percent every
year. This reduction made the search for partners necessary. Kodak also continued to
divest its last remaining non-core imaging operations, such as the office imaging
business and digital motion-imaging business, which was losing money and eating up
valuable resources.809
Cuts in costs enabled Kodak to grow, to expand geographically, and to introduce new
products. The company started to aggressively invest in China’s fast-growing
photographic film and paper market, of which it had a 40 percent share. In 1997, it
spent $375 million on manufacturing in China, to bypass China’s duty on imported
film.810 A year later, Kodak spent $380 million in China to rescue three state-owned
film manufacturers from bankruptcy, in return for more operating freedom and
improved distribution channels.811 Part of the budget was also used to improve existing
facilities. In 1999, Kodak even spent $1 billion in China to improve its own strategic
position, counting on big growth.812 Indeed China showed significant growth rates of
up to 30 percent between 1997 and 1999; however, total sales outside the US had
fallen to 3.8 billion from 4.2 billion in the same period.813 Growth in China could not
stem the decline in other regions. “The big question,” Fisher said, “is when it will
begin to make money overall.”814 The other question he raised, which was also of
concern to his successor, Dan Carp, was “how do we win in the digital space in China,
because it was likely to move very fast, as it did for us [while I was CEO at Motorola]
in the cellular telephone area, where we leapfrogged.”815
Fisher invested heavily in product differentiation. Kodak poured an all-time high
budget into advertisement to smooth away the flawed product launch of the new
808
810
Roberts, D., & Barnathan, J. 1997. Will Kodak Get Lucky in China? BusinessWeek(3537) 48-48.
811
812
Ibid.
813
814
815
809
ANALYSIS
271
Advanced Photographic System and to launch a marketing campaign that aimed at the
vast children’s market.816 In 1997, the company spent $100 million to introduce the
new camera system; a year later it spent another $100 million on the system.817
Nevertheless, the big marketing budget could not compensate for the circumstance that
one third of consumers didn’t want to buy a camera that was more expensive than a
regular 35mm camera.
On the side of digital imaging, Kodak came to the conclusion that it had made the
mistake of trying to do it all alone. “I think we’re finding is that the opportunities are
just too many, too diverse, that we can’t afford it,” concluded Fisher, and he started to
engage in alliances to jointly develop products.818 Kodak joined with Intel to re-launch
its PhotoCD, then called Picture CD; with AOL on its internet services, featuring
pictures of 22 million consumers online; and with Lexmark to launch a home ink-jet
printer in 1999.819 Such collaboration saved R&D costs and allowed Kodak to focus
and reallocate resources to the expansion of its global retail network of Picture Maker
kiosks and digital cameras. By the end of 1999, Kodak’s number of global placements
of Picture Maker kiosks was over 23,000.820 And in the US, Kodak was the number
two supplier of digital cameras, accounting for 20 percent of all shipments, compared
to Sony with 35 percent.821
816
over Cost Cuts Proves Expensive. Wall Street Journal, 1997 Sep 17: 0-B4, Nelson, E. 1997c. Kodak Focuses on
Putting Kids Behind a Camera. Wall Street Journal, 1997 May 06: 0-B, 8:3, Nelson, E., & White, J. B. 1997.
Blurred Image: Kodak Moment Came Early for Ceo Fisher, Who Takes a Stumble --- Bet on Digital
817
818
819
Johannes, L. 1998b. Kodak, Intel Join to Make Slimmer, Cheaper Cameras. Wall Street Journal, 1998 May
01: 1-B6, Johannes, L., & Alec, K. 1998. Eastman Kodak and Intel Join Forces to Offer Photographs on
Compact Disk. Wall Street Journal, 1998 Sep 28: 1-B8, Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond
Film: 132-138: Bloomberg, L.P.
820
1999c. Eastman Kodak Company Annual Report. Rochester, NY, 2000. Eastman Kodak Company Annual
821
Kunii, I. M., Smith, G., & Gross, N. 1999. Fuji: Beyond Film: 132-138: Bloomberg, L.P.
Part III
Discussion and Conclusion
7 DISCUSSION
7.1 Summary and Theoretical Contribution
This research started with an elaboration on discontinuous change, directing attention
to particular characteristics that distinguish this type of change from mere incremental
or evolutionary change. I showed that unlike evolutionary change, where an
organization adjusts its competences to small alterations in the environment,
discontinuous change requires organizations to develop an additional competence
configuration in parallel to the existing one, to address requirements in the new
environment while keeping a tight fit of operations with the traditional environment. I
made this argument building on two important premises: First, that the discontinuity of
a prevailing technology is foreseen; and, second, that organizations can use a time
period between perception of a potentially threatening new technology and complete
replacement of the old one to reconfigure their competences. I have generally referred
to technologies rather than products or processes to emphasize that it is the particular
technique or methodology that changes or is discontinuous, and not the other way
round.
I further suggested assessing the level of additional resources and capabilities required
to effectively respond to discontinuous change, on the basis of relatedness between a
current set of competences and a required one. Instead of building on more simplified
frameworks of technological change and their impact on an organization’s
competences – frameworks, which usually fluctuate between two extreme poles of
competence destruction or enhancement, radical or incremental – I offered a more
fine-grained contingency model to assess demands for resource development.
I
adapted the proposed model from a theoretical extension of the current ResourceBased View. Depending on the level of new competences required to develop and
commercialize a new technology, I argued, different implications evolve for
organizations with respect to the provision of liquid (uncommitted) resources or the
leverage of currently deployed (committed) resources. While the effort to develop
competences unrelated to a current set indicates that an organization needs high levels
of uncommitted resources to acquire additional competences, to leverage closely
276
Summary and Theoretical Contribution
related and thus existing competences indicates a low demand for uncommitted
resources, because the organization can exploit economies of scale.
In addition, I linked discontinuous change with organizational decline to demonstrate
that the process of technological replacement may be accompanied by erosion of an
organization’s resource base (and thus valuable sources of income that could fund
resource development in an effort to respond to discontinuous change). I showed that
as soon as a new technology gets a foothold in the market of a prevailing technology,
it potentially eats away the stock of resources of those organizations that deploy the
traditional technology. This confronts these organizations with a dilemma: they are
required to allocate resources to the quick development and commercialization of the
new technology, while simultaneously sustaining (and thus investing in) their
traditional business, to stem its decline and to generate the funds required in the new
domain. Organizations have to make choices regarding resource allocations to
competing businesses.
I addressed this issue in the final section of the theory chapter by integrating the stocks
of resources and their deployment in current models of the Resource Allocation
Process, with the aim to explore their moderating effect. Current research has proposed
multiple factors that shape an organization’s resource allocation process. In particular,
scholars have directed attention to the moderating effect of resource dependency
(Pfeffer & Salancik, 1978), the blindsidedness towards new technologies due to too
close a focus on current customers and businesses (Christensen & Bower, 1996), and
the mismanagement of multiple cognitive frames in responding to discontinuous
change (Gilbert, 2006). The moderating effect of stocks of resources and their
deployment in multi-business organizations (which is symptomatically characteristic
of organizations responding to discontinuous change) has received less attention. I
therefore built upon and expanded current research.
Findings in the Kodak case yield a series of insights enriching current research on the
Resource Allocation Process model. To start with the minor discovery, findings
suggest that a more fine-grained perspective of organizational inertia may be adequate,
because Kodak was not late in its response; rather, search activities and new venture
development, particularly related to digital endeavors, did not result in valuable
sources of income to sustain the company’s growth. As a consequence, the strong
DISCUSSION
277
strategic and financial value of core assets fueled tendencies to retain and reinforce
once selected internal capital investment decisions. Observations indicate a limitation
of current models on the resource allocation process: resource scarcity seems to offset
positive effects of structural differentiation in an organization’s effort to manage
competing cognitive frames in their response to discontinuous change.
The important insight derived from the analysis of the Kodak case is that adaptation to
the disruptive technology is only wise under certain (favorable) conditions. The
relatedness of the current business to a targeted one and the requirements for resource
development derived from that, as well as the time frame available for developing and
sizing the new business to volume, to gain a competitive market share, primarily
define these conditions. Findings clearly suggest that in certain cases an organization
are better off by searching for business opportunities that allow leveraging of current
resources, rather than adapting to the disruptive business at all costs. That is to say, I
propose that adaptation as a response to discontinuous change is not in every case
useful. The particular conditions are discussed in detail.
The research brings forward other implications of a strategic character: It shows that a
bottom-up strategy process, which is essential in dynamic environmental change, can
stall in reverse in the face of resource scarcity. Proposals for reversing a once selected
and retained resource allocation process, for instance to exit a business or to reduce
operating budgets, do not emerge from the bottom up. This finding directs attention to
the role of top management and their capability to actively intervene in an
organization’s variation-selection-retention process. It challenges common assumption
in Resource Allocation Process research, that middle managers’ capabilities are
determinants of an organization’s performance. The research shows that top
management’s distinctive managerial skill spectrum maintains a significant role in
moderating an organization’s response to change.
In the following these findings will be discussed in detail.
Figure 102 and Figure 103
Overview: Kodak’s Response to Discontinuous Change
See next two pages
1972-1982
(Walter A. Fallon)
t
Early prototypes of
electronic photography
Electronic
SilverHalide
Market Share
H
p
L
Photo
Chem.
Market Share
Office
Health
X
L…Low; H…High; O…Opportunity; T…Threat
H
T Implementation O
Popularity of video
camcorders and first
prototype of still-video
cameras
t
Electronic (Mavica)
SilverHalide
1983-1989
(Colby Chandler)
Investment:
Investment:
Photo and Chemical business
Diversification
L
Photo
Chem.
RESOURCE ALLOCATION
Not on the Radar
COMPANY RESPONSE
p
TECHNOLOGICAL CHANGE
H
Growth
L
O Commitment T
H
Growth
L
p
O Commitment T
H
Growth
t
Electronic
(Still-video)
L
X
Photo
Market Share
XOffice
Health
X
H
T Implementation O
Launch of commercial
still-videos and prototypes
of first full digital cameras
SilverHalide
1990-1993
(Kay Whitmore)
Investment:
Health and Photo business
Divesture:
Some Non-imaging
businesses
L
p
Digital
t
Market Share
Photo
H
Investment:
Photo business
Divesture:
Health business and
all Non-imaging businesses
L
XX
X
Digital
X
T Implementation O
Launch of commercial
and consumer digital
cameras; still-video flops
Fierce competition!
SilverHalide
1994-1999
(George M. C. Fisher)
O Commitment T
H
Growth
L
p
O Commitment T
H
Growth
Digital
t
L
Market Share
Digital
X
H
T Implementation O
Popularity of consumer
digital cameras and
decline of silver-halide
photography
Performance gap!
SilverHalide
2000-2005
(Daniel Carp)
Investment:
Photo business
L
p
Digital
t
Market Share
Investment:
Ink-jet business
Divesture:
Photo businesses
L
Ink-jet
Photo
(Finish)
Exit
H
Discontinuity of silverhalide photography; rapid
commodification of
digital cameras;
Performance gap!
SilverHalide
2006-2012
(Antonio M. Pérez)
H
Growth
L
278
Summary and Theoretical Contribution
Technology
N
Costs
Sales
EBI
20
C…Current; N…New
Sustaining Silver-halide
REALIZED STRATEGY
LEVEL OF RESOURCES
Uncommitted Resources:
High
Committed Resources:
Film-Centric
80
100
PRETAX EARNINGS
Leveraging current resources
C
Expand
Leverage
(Photography)
Import
RESOURCE DEVELOPMENT
N
Marketing
C
N
Marketing
C
Technology
(Photography)
Costs
90
EBI
12
10
Diversification
(e.g., electronics)
Mediocre
Film-Centric
Sales
100
N
(Electronics)
1983-1989
(Colby Chandler)
Acquiring new resources
C
N
Marketing
a
b
I
II
C
Technology
I
N
Costs
95
EBI
a, b
13
5
Sustaining silver-halide
Developing health
no competitive market share
achieved due to av. resources
Low
Film/ Health-Centric
1/3 EBIT interest expense
1/3 EBIT restructuring costs
Sales
100
Expanding current resources
C
II
(Health)
(Imaging)
I failed
1990-1993
(Kay Whitmore)
b
Technology
N
Costs
90
EBIT
b
14
10
Developing digital
Mediocre
Imaging-Centric
Sales
100
C
(Imaging)
1994-1999
(George M. C. Fisher)
N
Marketing
C
N
Marketing
b
C
Technology
N
Costs
97
EBIT
b
8
3
Sustaining digital
Low
Imaging-Centric
Sales
100
Leveraging current resources
C
(Imaging)
2000-2005
(Daniel Carp)
a
b
Technology
N
Costs
112
-6
EBIT -12
a, b
Divesting silver-halide
Developing ink-jet
Negative
Imaging/ Printing-Centric
1/4 EBIT interest expense
Sales
100
Expanding current resources
C
(Ink-jet)
2006-2012
(Antonio M. Pérez)
N
Marketing
C
1972-1982
(Walter A. Fallon)
DISCUSSION
279
280
Prioritizing Strategic Resource Allocations
7.2 Prioritizing Strategic Resource Allocations
Literature on population ecology suggests that structural inertia prevents organizations
from engaging quickly enough in a strategic behavior conducive to adaptive change to
environmental shifts (Carroll, 1988; Hannan & Freeman, 1984). Once an organization
selects and retains a trajectory of evolution, the permanence of this selection makes it
hard to introduce a change (Campbell, 1965; Hannan & Freeman, 1989). Observations
in this research suggest that a more fine-grained perspective on inertia may be more
suitable to explain Kodak’s response to discontinuous change. The organization’s
response to the disruptive force of digital imaging cannot be described simply as being
delayed. The company responded early by promoting and investing in multiple search
activities, even beyond opportunities that leveraged existing core competences;
however, the delay was partly limited by the reluctance to engage in business
opportunities strategically and financially inferior to traditional silver-halide
photography film and paper business.
The literature on the Resource-Based View has extensively outlined the relationship
between resources and competitive advantage (Barney, 1991; Peteraf, 1993). Central
to their work was the question of what makes some resource bundles superior to others
and what are the criteria that render these resource bundles, or “strategic assets” (Amit
& Schoemaker, 1993), difficult to easily acquire, copy, or imitate. Kodak’s foremost
strategic asset was chemical engineering. It drove the company’s growth and
maintained a strong barrier for rivals wishing to enter the market, and prevented others
from easily imitating these assets. For decades the company enjoyed a market share
almost equivalent to a monopoly. Moreover, the silver-halide photography film and
paper business generated high profit margins with which no other conceivable
business could possibly compete. Continued capital investments strengthened the
company’s strategic assets, but equally reinforced resource commitments which were
difficult to change. Hence every business unit, in particular those that suggested
opportunities for replacing the traditional photography business – for instance, digital
imaging – had to meet the test of comparative strategic analysis, by offering
competitive prospects in terms of strategic advantage and earnings. Obviously, the
commodity business of digital imaging, which competed with a low profit margin
similar to other electronic hardware businesses, had a hard time competing against a
consumable business that, as in the case of Kodak, revealed an extraordinary high
DISCUSSION
281
profit margin and extensive market share. “It's very hard to find anything (with profit
margins) like color photography that is legal,” a Kodak senior executive once
noticed.822 Kodak’s film and paper business absorbed the majority of the overhead, the
fixed costs of the company, such as manufacturing and research and development.
Every potentially new business intending to replace the film business, therefore, had to
meet the test of competitive strategic analysis. (The other facet of Kodak’s delay,
which was limited to the difficulty of removing resources from ongoing operation
without exiting the business altogether, will be discussed later.)
A quote from a senior executive may illuminate the corporate perspective of the
resource allocation process, in contrast to a senior manager’s view:
Senior Executive: “We had a bar chart for earnings and a bar chart for revenue and
the revenue obviously was strongly positive, everything was north of the zero access.…
You had a lot of very tall bars, very high earnings and then you had probably half of
our strategic product groups, which were negative in earnings. That’s where all the
digitals lived.”823
Senior Manager: “We kept looking for a business that was as good as the film
business. When it became apparent that a new venture wasn’t going to come close to
the standard set by film, interest was lost and yet another new venture was explored.…
The digital guys were competing for investment dollars. I don’t think the film
programs took investment dollars from the digital guys, but we certainly got
everything we asked for. Film investment could offer a proven track record and fast
payback with little risk. Digital did not have this strength.”824
Thermal printing is an interesting case in point, because it was a digital business that
didn’t lose money. Digital printing of photos was largely a bottom-up initiative in the
1990s and was largely successfully implemented over the next 10 years. The
development manager for the thermal printers of that time noticed the following:
“I can tell you that although there were very good margins on the media sales and a
good synergy with the existing chemical coating expertise on paper and donor of the
company , we were still threatened almost yearly with extinction, because the growth
and margins could not keep up with the promises made by our middle
822
823
824
282
management. This was a successful digital business and still you often felt like a loser,
because you failed to meet the AgX [silver-halide] dream model.”825
The data on Kodak clearly reveal that the strategic/structural context triggered the
bottom-up development of multiple new venture initiatives, initiatives that even
challenged the existing strategic context; however, activities that did not leverage the
company’s critical resources or capabilities or did not have financial viability
comparable to film in the portfolio of all businesses were typically abandoned at the
point of high-volume commercialization. “Our strategy is to come back and
concentrate on those markets where we are presently very strong,” a senior executive
said; “if we can’t establish substantial margins in these [electronic camera] businesses,
we will get out of them.”826
This behavior was made further problematic by Kodak’s ingrained culture (another
kind of retained resource), defined by its high quality standards. Kodak valued some
aspects of the imaging chain, specifically image quality captured and the value of a
print (versus electronic display) more than its new competitors did in the emerging
digital business. This constrained a number of initiatives within Kodak until George
Fisher’s arrival. If the promise of a “photographic quality” result was not going to be
met, no resources were allocated.
Kodak well understood the disruptive nature of digital imaging and that a
groundbreaking transition needed bold investment decisions. “You need big portfolio
moves to get through this kind of transition … and we made lots of big bets,” said
Kodak’s corporate strategist.827 Kodak was not reluctant to invest heavily in new
opportunities in its effort to respond to discontinuous change. For instance, it invested
considerable funds in the copier business and paid $5.1 billion (about half its annual
sales) for the acquisition of the pharmaceutical firm Sterling Drugs. A move into the
pharmaceutical industry promised high profit margins and the opportunity to leverage
some of Kodak’s core competences related to chemicals. But in both cases, postlaunch investments to size the business to volume, to get market share and build a
competitive advantage, were not available to the extent required. Therefore, both
businesses maintained a minuscule competitive position. As a consequence, here too
825
Rigdon, J. E. 1991a. Eastman Kodak Puts the Focus on Leo Thomas. Wall Street Journal, 1991 Aug 14: 0PAGE B1.
827
826
DISCUSSION
283
the company decided to promote the businesses that showed prospective returns, and
thus sold the non-core imaging businesses. “While I [George Fisher] was there, the eye
had to be on not investing in too many things, but in being more careful about how you
invested.”828 “The company was trying to do too many things at once and wasn’t able
to afford to do all of them well enough”829
The observation that the stock of resources and its deployment in a multi-business
organization is a moderating factor that shapes the resource allocation process
challenges recent findings on managing competing cognitive frames, which is worth
detailed discussion:
In his research on discontinuous change, Gilbert (2005, 2006) identified contradictory
findings in inertia research, which he explained on the grounds of a poor
differentiation between two phenomena: the failure to change the retained process of
resource allocation and the failure to change the process of implementing these
resources. Building on theories of organizational behavior (Dutton & Jackson, 1987;
1988; Staw et al., 1981), Gilbert argued that framing an external stimulus as a threat
motivates an increased resource commitment, while at the same time causing deep
organizational rigidity; that is to say, rather than being willing to invest in new
ventures and to search for new business opportunities, threat framing usually limits
organizations to focus on developing current resources. For this reason, organizations
are required to structurally differentiate between operations to stem decline in the
traditional context and new venture operations in the emerging context, because
managers cannot start out to frame an external stimulus as a threat and at the same
time switch to an opportunity frame in the course of implementation. Based on an indepth study of newspapers challenged by Internet news, Gilbert (2005) identified
structural differentiation, external personnel, and different cognitive framing in various
contexts as moderating variables positively affecting response to discontinuous
change.
The Kodak case suggests that an organization’s particular stock of resources and
strategic deployment offset the positive effects that Gilbert (2005) identified. In the
mid-1990s, Kodak was fully aware of the need to separate development of digital
828
829
284
endeavors from its core business and to bring in people from the outside to embrace
opportunity framing. People in charge of the company’s traditional photography
business felt too threatened by digital technologies to positively engage in this
business. Therefore, the autonomously operating Digital and Applied Imaging unit was
founded and people almost exclusively from the electronic world were hired.
In line with Gilbert’s (2005, 2006) findings, the perception of a threat triggered a
substantial change in investment patterns. Kodak had redirected half of its research
and development budget to its digital imaging unit. Moreover, structural differentiation
and hiring people from outside aimed to promote exploration of new possibilities in
the digital world. And indeed, people started to explore digital technologies in the
form of cameras, scanners, printers, data compression algorithms, web technologies,
etc. Hence up to this point, the case fully supports Gilbert’s propositions. However, the
Kodak case shows that conditions of resource scarcity motivate a return to efforts to
control existing strategic assets, instead of promoting new ones, despite positive
effects of structural and personnel differentiation. Kodak’s response to ink-jet home
printing is an example.
In 1997, Hewlett-Packard, Epson, and Canon, among others, launched their first
models of home photo printers. All these companies made use of the technological
progress in ink-jet technology. Due to their low price, industry observers predicted the
end of chemical-based photofinishing, which forces consumers to send digital pictures
(either physically on a CD or electronically) to wholesale photofinishers. The advent
of the ink-jet home printers caught Kodak at a bad moment. It was suffering from
significant losses in its traditional photography business due to a fierce price war, an
overhead too expansive relative to the industry standard, and continued losses in its
digital division. Moreover, it had sold its ink-jet business five years earlier, assuming
that the advent of digital cameras would not affect conventional photofinishing. In the
end, Kodak decided not to go for ink-jet technology (which was a viable path at the
time), but to conceive a product that makes use of both worlds: The print stations,
which used Kodak’s traditional (and reliable) thermal printing technology and were
aligned with computer terminals, allowed consumers to get their prints within seconds
at drugstores or supermarkets.
DISCUSSION
285
This observation suggests an extension of Gilbert’s finding, to the extent that his
recommendations for how organizations should respond to discontinuous change are
viable only under conditions of resource abundance. How do we explain the fact that
the moderating effect of stocks of resources and their deployment offset the positive
effects of Gilbert’s findings under conditions of resource scarcity? I attribute that to
the fact that case studies used to support the argument of a successful response to
discontinuous change typically reveal a situation in which the traditional and the new
businesses remained viable in parallel for a long time. Hence organizations adapting to
new technology experienced no significant decline of the traditional business (and thus
did not face resource scarcity). For instance, scholars have shown how companies such
as Xerox, Hilti, and IBM have launched services while revamping their core business
(Christensen & Raynor, 2003; Johnson et al., 2008); how the newspaper firm Desert
News managed to stay in print while going digital; or, how Barnes & Noble managed
to sell books and e-book reading devices simultaneously (Gilbert et al., 2012; Gilbert,
2006). However, while all these cases reveal a success in managing the coexistence of
competing cognitive frames within one firm, they all have in common that the
substitution rate of the core business was (and partially still is) relatively low.
Therefore, in all these cases the resource base of the organization maintained a viable
level high enough to allow explorative activities in another environment. But what
happens if an entire environment crashes fairly quickly? What happens if the
overlapping time of traditional and new businesses is relatively short?
The imaging industry was witnessing a reduction of the worldwide demand for
traditional silver-halide film by about two-thirds within less than five years, as of 2001
[see Figure 25]! Moreover, it is important to note that Kodak experienced another form
of disruption starting to burden the company about a decade earlier: Fuji and private
label discounters aggressively entered the US photography market Kodak previously
owned almost alone. In short, changes in the industry caused Kodak a severe resource
problem.
In the discussion above, I have shown how the stock of resources and its deployment
in a multi-business organization such as Kodak shapes the resource allocation process
and thus strategy. The assessment of the strategic and financial viability of each
business commonly motivated the reinforcement of the company’s retained investment
286
Reversing Retained Resource Allocations
pattern, which prioritized the chemical-based photography film and paper business.
Moreover, I have shown how priority-setting based on current resources and
capabilities may offset the positive effects of structural and personnel differentiation,
in an effort to manage competing frames in resource commitment and implementation.
In the following, I discuss the major challenge Kodak was facing in its response to
discontinuous change: the difficulty of sustaining its traditional business, to generate
funds required for adaptation, while being compelled to downsize the business in face
of a forthcoming decline. Implications will be drawn for theory of discontinuous
change and managerial practice.
7.3 Reversing Retained Resource Allocations
In the discussion above, I have drawn on evolutionary theory with its variationselection-retention framework to direct attention to a particular force shaping the
competition for resources within an organization. I have adopted the conceptual lens of
evolutionary theory to show how a once selected and retained path of resource
commitments – which is assumed to be difficult to change because of its permanence
(Campbell, 1965; Hannan & Freeman, 1989) – ignites search activities that continue
the path’s trajectory rather than redirecting it. Much of the research to date takes on a
similar perspective; however, few research was done on the question of how an
organization can reverse a once selected and retained path of resource commitment
without exiting the business altogether. There is a difference between downscaling a
business by reversing a retained investment pattern, and withdrawal from a business
altogether by means of a strategic business exit, as discussed by Burgelman (1994) in
his study on Intel, or the divestiture of a business as part of a diversified portfolio
(Gilmore & Hirschhorn, 1983). Reversing a once selected and retained resource
allocation process first and foremost means removing resources from an ongoing
business, and not to divest it.
In the face of discontinuous change, organizations are challenged by a particular
dilemma related to the reversal of retained resource allocations: Resources have to be
removed from the current business in order to fund competence development in the
new businesses (which may replace the current one), while additional resources are
required to stem decline (in order to secure a viable source of income for the new
business). Hence organizations aiming to respond to discontinuous change are
DISCUSSION
287
challenged by the trade-off between decline-stemming investments in their current
business and start-up (or post-launch) investments in the new business. Because each
business places a demand on available funds, choices have to be made based on the
prospective rate of substitution and anticipated investments needed. It does not make
sense for an organization to downscale its current (and potentially to be discontinued)
business too early, because of the risk of losing a valuable source of income, nor does
is it wise to promote the current business for too long, because of the risk of generating
an overhang that burdens the company’s financials when that business drops off.
Two factors problematize decision making in the face of this trade-off: First, every
exploration of a new venture is unpredictable and thus costly in its outcome,
depending on the entrepreneurial actions taken (Alvarez & Barney, 2007). Therefore,
it is difficult to estimate when the cash curve of a new business will reach breakeven
and the business will become viable enough to entirely rely on the returns it generates.
New ventures usually require start-up and post-launch investments to size the business
to volume before generating a payback (Andrew & Sirkin, 2006; Christensen,
Kaufman, & Shih, 2010). The difficulty in assessing the rate of substitution (which
usually can be estimated accurately only in retrospect) contributes its share to the
uncertainty. Second, initiatives for retrenchment – for instance, efforts to downscale a
declining business by closing manufacturing facilities or cutting budgets – do not
evolve from the bottom up, from individuals at the operative or middle management
level.
288
250.000
250.000
200.000
200.000
150.000
150.000
100.000
100.000
50.000
50.000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Dye Sub & Other
Professional Digitial
Professional CN Film
Consumer Digital
Ink-jet (inkl. Home Use)
Silver-halide
Figure 104
2003 Projection of Worldwide
Photography Exposure
Figure 105
2003 Projection of Worldwide Total
“Photo” Prints by Type
250
200
150
100
50
0
2000
2001
2002
2003
Conventional Cameras
2004
2005
2006
Digital Still Cameras
Camera Cellphone
Figure 106
2003 Projection of Worldwide
Shipments of Imaging Devices
All amounts in millions
Sources all Figures: Data adapted from
Photofinishing News, 2003
DISCUSSION
289
600.000
YEAR OF PROJECTION
500.000
400.000
300.000
200.000
100.000
0
2000
250 %
148%
64%
2001
2002
2003
2004
2005
2006
Film Cameras (Forcast)
Digital Cameras (Forcast)
Cameraphones (Forcast)
Film Cameras
Digital Cameras
Cameraphones
Figure 107
2003 Projection of Worldwide Shipments of Imaging Devices And Actual Data
250.000.000
150.000.000
100.000.000
50.000.000
0
2000
Dye Sub & Other
YEAR OF PROJECTION
200.000.000
2001
Total Prints
2002
2003
Ink-jet
260 %
187%
Silver-halide
2004
2005
2006
2007
2008
Total Prints (Forcast)
Figure 108
2003 Projection of Worldwide Total “Photo” Prints by Type and Actual Data
All amounts in thousands
Sources all Figures: Data adapted from Photofinishing News, 2003
Projection data before 2003 may vary from actual data due to a timing difference of
data assessment. Figures on actual data are assessed retrospectively and are based on
a data set dated from 2014.
290
Kodak’s struggle in its response to discontinuous change was marked by difficulty in
managing the trade-off: The company always scaled up its chemical-based
photographic film and paper operations worldwide, because of its strong strategic
position in the overall business portfolio (see previous discussion) and the need to
sustain its only viable source of income required to fund the company’s transition to
digital imaging. Moreover, forecasts on digital imaging did not suggest an immediate
exit from the chemical-based photographic film and paper business. Rather the
opposite: Still in 2004, three years after the decline of global sales in traditional
photography might have indicated the start of an ongoing substitution by digital
technologies, Don Franz, a respected industry insider and consultant to Kodak,
projected “worldwide combined amateur and professional film sales to fall from 3.5
billion rolls in 2000 to 2.9 billion in 2008, taking into account that, outside of the
U.S.A. , Canada Western Europe and Japan, film usage is still growing in most other
countries.”830 Certainly there was awareness that by around 2004, about half of film
cameras would be replaced by digital cameras; however, by and large people close to
the industry believed that film and paper would be around for a long time. It was
assumed that the photofinishing side of the imaging chain in particular would last. As
a consequence, Kodak generated an overhang of absorbed resources, mostly
committed to the fast-declining chemical-based photography business. When the
business unexpectedly dropped off in 2001, this overhang tremendously burdened the
company’s balance sheet and subsequently its response to discontinuous change. For
Kodak it then was very hard to go in the other direction and to scale down rapidly.
First, because removing (committed) resources from a current business and developing
new ones is costly – particularly when opportunities for leverage are limited; and,
second, because organizations require (uncommitted) resources for the exploration of
new and uncertain opportunities. In the following, both aspects are discussed in detail.
Adapting parts of an organization to a new business while maintaining a tight fit
between the current business and the traditional environment is expensive. Kodak
spent about one-third of its total earnings from operations for restructuring from 1989,
when it decided to adapt to digital technologies, to bancruptcy [see Figure 103 and
Figure 109]. From then until Kodak filed for Chapter 11 bankruptcy in 2012, charges
830
Franz, D. 2004. Will Digital Cameras Generate Prints for Retailers? International Contact, 23(1) February/
March.
DISCUSSION
291
for restructuring accounted for $10 billion and included the severance payments made
to employees whose positions were eliminated, charged due for the write-down of
several assets, and costs related to the execution of plans to redefine nonstrategic
operations. To get a sense of the drastic measures Kodak had to take, a look at the
change in workforce is illustrative: By 2000, that is, one year before Kodak
experienced a performance gap due to digital substitution, half of the company’s
workforce related to chemical-based businesses left (or had to leave) [see Figure 74].
For one out of three people leaving, a new person was hired from the field of
Pérez
Carp
Fisher
Whitmore
Chandler
Fallon
0%
-20%
-40%
-60%
-80%
-100%
-120%
-140%
-160%
-180%
-200%
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
electronics.
-756%
Decrease of Earnings from Operations by Restructuring Costs
Figure 109
Decrease of Kodak’s Earnings from Operations by Restructuring Costs
All Years up to Bankruptcy
With a reduced level of uncommitted resources of about two thirds of the company’s
operating earnings, Kodak basically had to fund two businesses. On the one hand, it
was required to provide start-up investments for ventures related to digital imaging,
endeavors that were losing money well beyond 2000; and, on the other, the company
needed to invest heavily in its traditional chemical-based photography business to
sustain its primary source of income, but also to offset losses due to fierce competition
with Fuji and private label discounters. In fact, initially Kodak could “afford” spending
one third of its earnings for restructuring just because the film business continued to
promise favorable earnings, in spite of the lower margins the company had had to
292
accept since the early 1990s. Moreover, the company was basically debt free. George
Fisher sold most of Kodak’s non-imaging businesses to generate cash to redeem longterm borrowings. Hence in the 1990s, restructuring the company to meet the demands
in digital imaging was only possible on the premises of a profitable film and paper
business and the divesture of valuable assets.
Kodak’s earlier effort to actually buy its way into a new business by taking out loans
was an even more counterproductive response to discontinuous change. In the late
1980s, the company decided to acquire Sterling Drugs to gain access to the
pharmaceutical industry. Kodak thought it could leverage its competences related to
chemistry, which turned out to be a misjudgment; its base of about half a million
chemical formulation did not result in new drug with a big commercial success and the
company was required to heavily invest in product development (not to mention
product commercialization). What it is of importance here is that charges for interest
expenses related to the acquisition of the pharmaceutical company reduced Kodak’s
earnings from operations by an additional one third. Hence Kodak had to spend onethird of its earnings from operations, on average, for restructuring charges necessary
for the transition to the pharmaceutical industry (e.g., merging research and
development divisions of the two companies), plus one-third to redeem long-term
borrowings. As a result, little cash remained to promote the core photography
business, which was under pressure from fierce competition, while funding initiatives
in the pharmaceutical business. Kodak could not generate the investments necessary to
quickly develop a “blockbuster” drug or to size its pharmaceutical division to volume
to achieve a competitive market share, because its core business was losing market
share
and
required
excessive
investments
in
product
development
and
commercialization to defend its incumbent position. Fisher understood the dilemma
and therefore divested all non-imaging businesses, including those related to health.
“Kodak’s future calls for nothing less than total commitment to imaging,” he said.
“We were passing up too many opportunities to make small investments because we
were so strapped for cash. If we attempted to retain both health and imaging, we would
have short-changed both.”831
831
Bounds, W., & Moore, S. D. 1994. Kodak to Sell Sterling Winthrop Drug and Two Other Units to Focus on
Film. Wall Street Journal, 1994 May 04: 0-PAGE A3.
DISCUSSION
293
I want to emphasize here again, that spending one third of its operational earnings for
restructuring was not a one-time charge, but continued to burden the company’s
financial position until it filed for Chapter 11 bankruptcy. Based on this constraint, the
company was required to invest its remaining available resources in both its core
business, to stem decline, and the new business. Scholars have argued extensively that
organizations require resources to explore new opportunities and to take risks
(Bourgeois, 1981; Cyert & March, 1963; Singh, 1986). At Kodak, developing
unrelated business was extremely expensive, compounded by the problem that such
ventures lost money well beyond the 2000s, when Kodak’s core business was rapidly
declining in the face of digital substitution.
Operations in Kodak’s Digital and Applied Imaging unit were expected to become
positive three years after its inception in 1997 [see Figure 67]; however, the unit
continued to lose money well beyond the 2000s. Rapid technological change and a
growing number of competitors, as well as Kodak’s lack of competences to
successfully compete, rendered it difficult for the business to turn a profit or even
reach breakeven. Fisher recalled, that “if we made a mistake in those days, it was
probably not so much the structure as it was that we didn’t really have the right people.
We had brilliant people, but they had never run businesses before and that made the
whole process a little awkward and ineffective.”832
Kodak’s cumulative investments in digital imaging business did not reach breakeven
before the disruption of its traditional chemical-based business. Hence the decline in
the core business fueled a demise in the digital imaging business: The drop in profits
in Kodak’s core business due to high fixed costs relative to the rapidly falling sales
figure led to a reduction of investments in digital and thus to a downturn spiral. Less
earnings (or low uncommitted resources that the company would have required to
adapt to digital imaging) motivated the divestiture of the last remaining imagingrelated businesses such as the copier business, as well as further cuts in the workforce
and budgets for research and development, which in turn once again triggered a
downturn. The nascent digital imaging industry was still unexplored and required more
from the budget rather than less.
832
294
By the end of the 1990s, Kodak realized that it could not afford to pursue all of its
digital imaging endeavors alone. “We’ve learned very quickly,” Fisher acknowledged,
“that in this digital world, the opportunities are just too massive for any one company
to do it on its own.”833 Competences required for digital imaging were too unrelated to
the company’s current ones in chemical-based engineering. From a value chain
perspective, there was almost nothing allowing Kodak to leverage its current
competences. Therefore, to form a relationship with another company that had the
abilities it lacked was considered the only viable path forward. The main options
considered were the sale of Kodak to or a merger with one of several companies that
were approached. When these options proved impossible, the company continued to
downsize to the point of bankruptcy. After 2003, the company reported operating
losses every year.
The divesture of all non-imaging business opportunities in the early 1990s led to a
troubling constellation in the face of discontinuous change: Kodak’s exclusive
strategic focus on imaging limited the number of potentially viable sources of income
to the one that might potentially be discontinued. In other words, in the belief that
traditional photography would be around for a long time, Kodak enforced the trade-off
between discontinued and new business by eliminating all other potentially viable
sources of income that could have funded developing and sizing to volume the digital
imaging business, as the traditional photography business declined. This led to a
tremendous overhang and then destruction of valuable resources at times of disruption
– in both businesses.
Hindsight is easier than foresight. Kodak’s decision to divest all non-imaging
businesses is understandable on the background of its strategic considerations and
resource requirements. The company required excessive sources of revenues to sustain
growth in the core photography business and therefore could not maintain multiple
businesses that all were trying to build a competitive position in the market, let alone
develop emerging technologies that required extensive exploration.
833
DISCUSSION
c
Cash Curve Silverhalide Photography
Business (A)
A
?
Ct
295
t
1995
c
A’
t
1995 t
0
1995
Cash Curve Digital &
Applied Imaging
Business (A’)
c
Silver-halide business
declined before digital
imaging business
achieved payback
(let alone breakeven)
Cash Curve Silverhalide Photography
Business (A)
A
Ct
2004
t
c
Ideal Cash Curve
missed
Cash Curve Digital &
Applied Imaging
Business (A’)
A’
t0
2004
t
2004
Figure 110
Kodak’s Challenge in the Face of Disruption
No other source of
income available due
to earlier divestures
B
296
The case of Kodak allows us to derive the following conclusions for managerial
practice in general and for theory of discontinuous change in particular: The stock of
resources and its deployment shape an organization’s resource allocation process and
thus its strategy. The observations summarized here contribute to this finding by
confirming a trade-off between reversing a retained resource allocation pattern and
building or sustaining a new one. The relatedness of current competences to those
required in a targeted domain, coupled with the time of threat response and rate of
substitution that define the time available to develop a new business to the point of
cash payback, moderate the level of required uncommitted resources [see Figure 111].
The more unrelated a targeted business is and/or the shorter the time period available
for adaptation, the higher the demand for uncommitted resources. Depending on
available sources of income (one or multiple businesses), a manager therefore may
choose between adapting to the new technology or leaving the market altogether and
looking for opportunity that embraces leverage.
In the case of Kodak, management only seriously questioned the value of its
engineering capability related to coating film and paper when it was too late. For
instance, Kodak’s efforts to commercialize, license, or partner in OLED technology,
which started well before 2003, received sufficient funding after that.
In the introduction to this section, I briefly referred to two factors that plague the tradeoff between decline-stemming investments in a current (and potentially to be
discontinued) business and start-up (or post-launch) investments in a new business. I
discussed the moderating effect of uncommitted resources. In the following, I discuss
the other moderating factor: the lack of initiatives for retrenchment; for instance,
efforts to downscale a declining business by closing manufacturing facilities or cutting
budgets.
Contrary to Burgelman’s (1983b) description on an organization’s strategic renewal by
means of autonomous and bottom-up behavior, initiatives for retrenchment do not
evolve from the bottom up, from individuals at the operative or middle management
level. Kodak’s evolution in the face of discontinuous change proves to be an
informative case to illustrate this phenomenon. Initiatives to remove resources from an
ongoing business do not evolve from the bottom up for a simple reason: Individuals at
the operative level, who maintain the richest knowledge of an organization’s strategic
DISCUSSION
297
assets (for instance, particular research and development knowledge of projects), tend
to propose investments that improve and sustain their fortunes or those of their
divisions rather than to scale down or exit the business (hence risking their job
security).
This finding is in line with Sull’s (1999) study on Firestone, in the face of substantial
changes in tire design and production, which required severe changes or closures of
manufacturing facilities. Burgelman’s (1994, 1996) reports on Intel’s change from
fabricating memory chips to microprocessors, in contrast, show that an organizational
context may alter this tendency; however, it is worth noting that Intel was neither
faced with the problem of unavailable resources nor did the change destroy existing
competences. Rather, seen from a Resource-Based View, Intel’s bottom-up strategic
change leveraged and enhanced available strategic assets. Employees used an
opportunity offered by a managerial change in the structural context to gradually shift
away from the commodity fabrication of memory chips toward advanced
microprocessor chips. In contrast, Kodak’s lack of alternative business opportunities
that leveraged the company’s strategic assets rendered necessary the reversal of a
retained investment pattern in the face of discontinuous change.
The Kodak study reveals another reason for the reluctance to reverse retention – the
organization’s structural alignment. In 1984 Kodak went to a global business structure.
It installed a number of “autonomous and independent” business units. Before that,
the company for its entire life had been functionally organized. The company’s
information architecture, however, was never fundamentally changed. Each business
unit was assigned the job of developing its own strategy and achieving the financial
goals that they were given by top management. There was actually no corporate
strategy. Rather, there was a loose conglomerate of separate business unit strategies.
In the 1990s, when the threat of digital replacement of silver-halide film had become
obvious, top management tried hard to reverse this retained strategy process. General
managers of business units had to promise the result that had clearly been
communicated of what the financial expectations for the business were; and, at the
same time they had to deliver on the other expectation of top management, which was
to get a credible assessment of what could be accomplished immediately or in the long
run against the substitutions that were taking place, changes in distribution channels,
298
competition, and so forth. It is in the nature of things that the definition of the problem
space and knowledge applied in search of solutions to prevent substitution were by and
large determined by the very technology (and associated paradigm) embraced by the
particular business unit. In other words, requesting a business unit level manager to
come up with solutions that would offset negative effects of substitution assumes that
it is possible to fight substitution with the techniques employed by the substituted.
Certainly this endeavor was doomed to failure. Fisher, the first outsider to head the
company, recognized the shortcomings of this mode thinking and hired personnel from
the digital world to run digital operations. Asked about the role of individuals
downscaling the company’s chemical-based operations and the push in digital
endeavors, Fisher replied: “I don’t think people were ill willed or trying to torpedo
anything; it was just natural that they were champions of film. There weren’t any
champions to speak of in digital imaging. There were handfuls of people around the
digital labs. And you had to have somebody championing that on the business level
and we didn’t have those people.”834
Scholars investigating the internal strategy process generally argued that managerial
influence to shape the internal variation-selection process is limited to the
manipulation of the structural context (Burgelman, 1991, 1994; Lovas & Ghoshal,
2000; Noda & Bower, 1996). More recent studies indeed argue that top management
can more actively intervene (Eisenmann, 2002; Eisenmann & Bower, 2000; Lovas &
Ghoshal, 2000); however, their findings rather depict a management that intervened in
the process by reshaping the organizational context. The Kodak case study unearths a
perspective of top-level managers who actively intervened in the organization’s
internal resource allocation, and shows that such a reversal of the bottom-up process
may be not just possible, but even necessary under certain conditions. When critical
resources and capabilities are becoming obsolete, individuals at operative or lower
levels of management simply have no incentive to propose initiatives that reverse
retention (and thus put their job security at risk). At Kodak, the initiative to remove
resources from an ongoing business was moved by top management and did not
emerge bottom-up from individuals at the operative or middle management level. This
phenomenon was observed also by Sull (1999) in his investigation of Firestone’s
834
DISCUSSION
299
challenge to adapt to new tire designs, as well as by Gilmore and Hirschhorn (1983) in
their study of management challenges under conditions of decline and retrenchment.
The necessity for managerial intervention at times of retrenchment directs attention to
the question of whether the locus and process of resource allocation (and hence
strategy making) differs depending on the particular managerial skills. I will address
this question in the following section. The Resource-Based View again will allow me
to establish a linkage between managerial capabilities and an organization’s response
to discontinuous change.
7.4 Reinforcing Retained Resource Allocations
Findings in organizational ambidexterity and the resource allocation process seem to
converge on a key capability essential for organizations in their attempt to adapt to
discontinuous change (see, e.g., Gilbert, 2006; O’Reilly III & Tushman, 2008):
“dynamic capabilities” “to integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments” (Teece et al., 1997). Rather
than abandoning traditional business altogether in response to discontinuous change,
the challenge for organizations is to manage explorative and exploitative efforts in
parallel: on the one hand, the adaptation of current business to the changing market
conditions; and, on the other, the creation of a new business to develop sources of
future growth (Gilbert et al., 2012). As is evident in the case of the advent of the
digital imaging technology, it can takes years for an innovative initiative to become
large enough to replace the revenue stream an organization has lost. Christensen’s
(1997) early conclusion, that organizations confronted with discontinues change can
resolve the “innovator’s dilemma” only in a separate, exploratory organizational
entity, may hold some limitations.
Two mechanisms in organizational design have been found to support response to
discontinuous change: first, the creation of a differential organizational alignment
allowing enacting multiple behaviors simultaneously (though transforming from one
business to another in a sequential manner is not an option in times of discontinuous
change); and, second, senior-team frame integration to embrace a diversity of
competing cognitive frames across sub-units (Gilbert et al., 2012; Gilbert, 2006;
O’Reilly III & Tushman, 2008). Drawing on the findings in the fields of social
300
Reinforcing Retained Resource Allocations
psychology and organizational behavior, scholars have argued that the framing of
external stimuli as a threat elicits resource commitments, but then typically invokes a
behavior that aims to focus on existing resources instead of pursing new initiatives
(Jackson & Dutton, 1988). Threat perception typically reinforces rigid behavior,
motivating managers to enhance traditional routines and behavioral patterns (Staw et
al., 1981). In contrast, opportunity framing relaxes the constraints produced by routine
rigidities and initiates new search processes (Dutton, 1992); however, it usually does
not create the same level of resource commitment necessary to effectively respond to
change (Dutton & Jackson, 1987). Thus, an effective response to discontinues change
requires the solicitation of threat and opportunity framing simultaneously. To invoke a
change in resource investment patterns, therefore, managers need to frame external
stimuli as threats to the organization’s vitality, and, to initiate then a change in the
behavior of applying those resources, managers need to enhance opportunity framing
(Gilbert, 2006). The separation of structural contexts coupled with an integration of
senior-teams enable organizations to embrace this cognitive paradox by decoupling
threat perception from threat response.
In 1994, Kodak developed independent contexts to embrace competing frames in
response to the advent of disruptive digital technologies. The company separated its
digital imaging operations from its core silver-halide film business to enable an
independent development of new business. Managers from outside were hired to run
the new Digital and Applied Imaging Division. Kodak’s move towards structural
differentiation and opening for outside influence relaxed routine rigidity and opened
the path for the new division to explore new business opportunities that would have
been constrained in the context of the traditional business. The division successfully
began to offer numerous products and services to multiple customer segments. In
short, Kodak’s competence development to address discontinuous change confirms
research findings in organizational ambidexterity and resource-allocation process.
However, the study of Kodak also enriches these scholarly works by showing that
managerial capabilities can play an influential role in the interaction among
differentiated sub-units. Depending on their distinctive experience and intimate
knowledge of the core business, managers actively tightened or loosened the links
among differentiated units and thereby changed the locus and process of strategy
DISCUSSION
301
making. This finding is in line with the earlier-discussed phenomenon that an active
intervention in the resource allocation process by managers is possible and even
optimal under certain conditions.
The Resource Allocation Process model directs strong attention to the capabilities of
middle managers, arguing that these are direct determinants of an organization’s
performance (Floyd & Lane, 2000; Wooldridge et al., 2008). The Resource-Based
View, in contrast, focuses on managerial resources by directing attention to “the skills
and abilities of managers” (Castanias & Helfat, 2001). This stream of research regards
the qualities of top management as critical for attaining a competitive advantage over
rivals, presuming that managerial qualities differ significantly across organizations
(Adner & Helfat, 2003; Castanias & Helfat, 1991). Acknowledging the possibility and
necessity for top managers to actively intervene directly into the strategy process, the
findings of the Kodak study enrich existing Resource Allocation Process theory: The
data show that top managers’ distinctive operating skills and cognitive structures can
influence an organization’s response to change by shifting the locus and process of
strategy making.
Managers (and other individuals) often rely on learned patterns in their response to
problems that are structurally and cognitively reinforced as opposed to pursuing the
search for new opportunities (March & Simon, 1958). Part of the explanation is that an
organization’s effort to tightly align its operating processes to an environment
becomes self-reinforcing (Miller & Friesen, 1980; Siggelkow, 2001). The underlying
logic is then often manifested in the manager’s cognition (Prahalad & Bettis, 1986;
Tripsas & Gavetti, 2000). Schein (1988) showed that this cognition can also become
tacit, which then makes it even more challenging to decipher the sources that generate
the problem within routines.
Castanias and Helfat (1991, 2001) introduced the concept of transferability of
managerial skills to enrich the concept of routine rigidity by distinguishing between
“generic” and “specific” skills. Generic skills comprise those top managerial
capabilities that could be transferred to virtually any organization in any type of
industrial setting. In contrast, firm-specific skills refer to a manager’s organizational
and industry-specific skills that are not easily transferred (Castanias & Helfat, 2001).
Top-level managers’ capabilities then vary in the degree to which they possess more
302
specific or generic capabilities with respect to the particular organization (Bailey &
Helfat, 2003). Hence different types of experience and learning opportunities will lead
to different managerial capabilities, as well as to different sets of beliefs or structures
underlying perception through which subsequent interpretations of external stimuli are
made (Schön & Rein, 1995).
The active intervention of basically two different types of Kodak managers – one hired
from outside, who mainly revealed generic capabilities, and others who reached their
position only after years of experience within the company, bringing with them a deep
cumulative experience of chemical engineering – suggests a more nuanced
conceptualization of the classic model on the Resource Allocation Process. Their
significant operational or firm-specific experience enabled them to more or less
successfully take an effective hand with shaping the resource-allocation process (and
thus strategy) in the face of discontinuous change.
George Fisher was the first CEO appointed by Kodak to be hired from outside. Prior to
Kodak, he had managed Motorola to become the world’s leading wireless carrier. By
1995, Fisher and his CFO clearly recognized the potential of digital technology to
replace Kodak’s chemical-based photography business, accepting an internal forecast
that by 2003 half of all cameras sold in the US market would be digital. In realizing
the insurmountable differences between traditional silver-halide film and digital
business (e.g., revenues, margins, customer channels), he separated digital imaging
from the rest of the company, to enable its autonomous development and to prevent a
negative impact across sub-units. Managers outside the film industry were hired to run
the new Digital and Applied Imaging unit [See Figure 111].
Within a few years, Fisher’s decision enabled the development of coexisting
competing cognitive frames and the embrace of appropriate behaviors: Opportunities
in digital imaging were explored flexibly. Kodak started to offer numerous products
and services to multiple customer segments. For instance, Fisher pushed the
introduction of multiple print stations that had been sold to semiprofessionals and
minilab owners, to allow customers to digitize and manipulate their images; new
digital cameras; and thermal printers and papers to print images once they had been
transferred to computers.
DISCUSSION
A(b)
KODAK
303
A
A
Silver-halide film business
(e.g., Consumer Imaging,
Kodak Professional etc.)
Electronic/ digital imaging
ventures scatters over many
divisions
B(b)
A’
A
Sale of core
business
(failed)
Digital imaging
structurally and
operatively
separated from
core business
(autonomy)
Gradual exit**
A’
Sustaining
some level of
interaction
between
subunits
n(b)
A
A’
Consolidating
digital imaging
businesses
(exit in 2013
altogether)
C
Kodak creates many divisions
(e.g., Commercial and Government etc.)
CEO
Managerial
Capabilities*
A
Commercial
Printing
(new focus)
1983
1990
1994
Colby Chandler
specific
K.Whitmore George Fisher
specific
generic
2000
Dan Carp
specific
2006
t
Antonio Pérez
generic
* The distinctive skills and abilities of managers related to Kodak’s traditional silver halide business
** In 2004 Kodak stops selling traditional film cameras; in 2009 it stops selling Kodachrome film
Figure 111
Eastman Kodak Company’s Structure and Autonomy of New Ventures
Schematic Illustration
Fisher’s rigid separation of the sub-unit rested on the view that Kodak would not be
able to change its existing business model, cost structure, and culture quickly enough
to become successful in digital imaging. Forming a relationship with another company
that had the abilities that Kodak lacked was believed to be the only viable path
forward. The main options pursued were a sale of Kodak to or a merger with one of
several companies including HP, Xerox, Canon, Gillette, P&G, and others, which,
however, proved to be impossible after several years of effort, due to the company’s
liabilities and obligations to employees.835
835
304
A retained investment in the chemical-based photography film and paper business
meant the continual neglect of non-imaging business opportunities and thus value
destruction in the wake of the progressing replacement of film with digital. Under
these conditions, George Fisher’s successor, Dan Carp, loosened the linkage between
digital sub-units and parent, sustaining strong interaction in order to use digital
technology to improve the silver-halide film business, rather than to replace it.
Unlike Fisher, Carp had held a variety of positions at Kodak before becoming
president in 1996 and CEO in 2000. In his thirty-year career at Kodak, Carp had
gained an intimate knowledge of the company’s core business. He and other members
of management did not share Fisher’s perspective. They believed that the installed
base of film cameras, along with opportunities in developing countries, would ensure
that film sales would only decline slowly. The profits from film over this long period
would support a gradual shift from film to digital. This belief led to further
investments in the silver-halide film business, aiming to extend its lifespan.
Kodak’s ventures in the digital domain, for instance the Internet platform Kodak
Gallery or Picture Kiosk to allow customers to print digital images on paper, mirrored
the price points and product specifications of the traditional business model, ignoring
completely the fact that consumers’ behavior regarding photographs had changed
dramatically. These commitments proved difficult to change. As a consequence, the
business they built failed in both the traditional environment and the new one.
One product manager summarized the phenomenon in the following words: “Fisher
intellectually understood the issue, but couldn’t move the organization via internal
forces; Carp culturally understood the organization, but didn’t feel comfortable with
the emerging new technology and marketplace; and Perez tried to make the
organization into the HP inkjet organization he previously had success with. The top
person’s biases and comfort zone were very important to the future of the organization
in reacting to discontinuous change.”836
836
CONCLUSION
305
8 CONCLUSION
8.1 Recapitulation
In this study I explored how the stock of resources and its deployment in ongoing
business operations affects an organization’s capability to allocate resources to new
businesses in response to discontinuous change. I did so in order to understand a
problem managers are facing today more than ever: how to respond to a substituting
technology that gains a foothold in the traditional market and thus begins to replace the
traditional business.
Of course, the topic of discontinuous change has been an issue of ongoing inquiry in
both scholarly research and managerial practice for years. However, in looking at
Kodak, the former industry leader in traditional chemical-based photography, I
realized that the company’s challenge to adapt to digital imaging could not be
explained on the basis of theoretical findings available in current scholarly research;
rather the opposite was true: Data gathered in my longitudinal case study suggested
that Kodak presented a sort of anomaly, offering the opportunity to elaborate existing
theories:
To start with the most important theory I am building upon, I found that the Resource
Allocation Process Model as described by Bower-Burgelman and extended recently by
many scholars provided a valuable source to explain organizational dynamics in the
face of discontinuous change. In this stream of literature, scholars have addressed the
question of how external dependencies such as capital markets, or internal factors such
as an excessively narrow focus on profitable customers, or the cognitive framing of
forces leading to discontinuous change, shape an organization’s investment pattern and
thus its strategy to adapt to a new environment.
Data of this study suggests that, contrary to models that suggest that companies usually
fail in the face of discontinuous change because they focus too closely on their most
powerful customers and thus direct strategic investments exclusively to their core
business, Kodak did not solely invest in traditional film (Christensen & Bower, 1996).
Likewise the company did not always perceive digital imaging as a threat to its core
business, which would have resulted in rigid efforts to control and increase existing
306
Recapitulation
resources in traditional film, rather than promoting autonomous initiatives in digital
imaging, as suggested by other theoretical contributions on discontinuous change
(Gilbert et al., 2012; Gilbert, 2005, 2006). Furthermore, at Kodak it was not the case
that the internal bottom-up strategy process failed in the face of institutional barriers
(Sull, 1999, 2005) or volatile investment decisions (Eisenmann, 2002).
Quite the contrary, the world’s largest imaging giant actually invented digital
photography back in 1975. It also was not so arrogant as to ignore technological
changes. It had promoted multiple electronic-digital imaging initiatives before anyone
else in the industry had directed any attention to this issue. Its research labs were full
of technological inventions that anticipated many features of today’s devices, such as
Wi-Fi-equipped digital cameras or iPod-like designs for imaging devices. The
company also was not blindsided by missed business opportunities in low-margin
areas or small markets. Kodak was fully aware of the disruptive potential of the
nascent digital technology, invested billions in its development, and set up
autonomous structures to allow an independent and autonomous proliferation of the
business.
In fact, the data of this longitudinal study suggests that Kodak wrestled with a
completely different problem: how to develop a completely new competence
configuration in an unrelated business environment while being forced to provide
extensive support for the core businesses to prevent decline. Organizations attempting
to respond to discontinuous change are usually faced with the dilemma that a new
technology disrupts and erodes an organization’s resource base by getting a foothold in
the market of the firm’s traditional business. For organizations, the objective is
therefore to reconfigure and orchestrate multiple competences simultaneously. The
traditional business must remain viable unless the new business achieves payback to
fund its growth.
The case of Kodak clearly showed that building a new competence configuration for
digital imaging, which is completely unrelated to its core competence of chemical
engineering, and trying to gain a dominant market share for purposes of profitability,
depend primarily on the availability of uncommitted resources. In such a situation,
existing competences cannot be leveraged, but must (at least) be reconfigured and
stretched, or replaced by newly acquired or developed competences. Kodak provided a
CONCLUSION
307
compelling case in that stemming the extremely fast erosion of the traditional
chemical-based photography business ate away valuable resources required to fund the
development of competences necessary to adapt to the new environment. The
company’s low level of uncommitted (or quickly available) resources, such as cash or
cash equivalents, simply constrained Kodak in its effort to adapt to digital imaging.
In directing attention to an anomaly present in current literature on discontinuous
change, I have also addressed the question of why the moderating effects of committed
(or uncommitted) resources and a firm’s resource allocation process might have been
overlooked in current research. I have argued that scholars concerned with
understanding discontinuous change have usually referred to examples in which a
profitable core business remained viable for a long time, in parallel to the advent of
disrupting technologies. For instance, Gilbert and his colleagues (Gilbert et al. (2012);
Gilbert (2005) discussed challenges to newspaper companies from online news, or to
publishers and book retailers from e-books. Christensen and Raynor (2003) discussed
the challenges traditional businesses faced from the emergence of mini steel mills,
online banks, and online travel agencies.
Moreover, these studies presumed that sufficient funds to promote the development of
new competences existed. The likely need to fall back on stocks of resources that
might not be available due to the decline of the core business in face of substitution
has by and large escaped notice.
To elaborate on the identified research gap, I followed the following methodology:
At the beginning I defined the relevant terms and constructs common in the relevant
literature. Relying on this background, I then linked discontinuous change with
organizational decline to show that there exists interdependence between stocks of
available resources an organization can choose to be adaptive and the substantial
material damage organizations may face in the course of ongoing substitution. In short,
I suggested that stocks of resources and their deployment moderate an organization’s
response to discontinuous change. For this very reason, I proposed to elaborate the
current Resource Allocation Process model with findings of the Resource-Based View.
In the course of the following discussion I was able to derive the following insights:
308
Recapitulation
First, Kodak shows that in multi-business organizations, the strategic and financial
viability of resources deployed in each business relative to overall portfolio guides
internal capital investment decisions; the company failed in its response to digital
imaging not because it was late in response, but rather because its search activities and
subsequent acquisitions did not result in appropriate business opportunities viable
enough to sustain growth. I therefore suggested a more nuanced conceptualization in
theories of organizational inertia.
Second, for organizations, discontinuous changes poses the problem of being required
to reverse retained resource allocation to a business rather than exiting the business
altogether. This presents organizations with the dilemma that they have to remove
resources from current business to fund development of the new businesses (which
may eventually replace the current one), while simultaneously adding resources to the
current one to stem decline (and to secure a viable source of income needed for the
new business). It is in this sense that I argued that under certain conditions,
organizations might be better off to leverage current resources and capabilities in
related but different markets, rather than trying to adapt to new and unrelated
environments at all cost.
Kodak was primarily a chemical engineering company with great capabilities in
coating film. To change from chemicals to electronic circuits meant extensive
(financial) efforts which the company could not undertake, due to its declining core
business. The lack of other profitable businesses that could have absorbed the initial
loss in building up digital businesses rendered the situation even worse. Kodak’s early
diversification efforts failed to produce value, but rather negatively affected the
company’s balance sheet. Coupled with financial troubles in the 1980s and 1990s that
were largely the result of two failed film format introductions (Disc in 1982 and APS
in 1996), Kodak entered a new business environment without a solid and durable
resource base. In contrast, Fuji entered digital imaging with a superior financial
background (it managed to build, due to its profit sanctuary) and a profitable portfolio
of business, because the company had diversified early on.
CONCLUSION
309
Other findings related to the implications for strategy research are: Proposals for
reversing a retained resource allocation process do not emerge from the bottom up, a
finding which challenges current understanding of the role of top management and
their capability to actively intervene in an organization’s variation-selection-retention
process. Finally, this research shows that top management’s distinctive managerial
skill spectrum maintains a moderating role in shaping an organization’s response to
discontinuous change. Implications for further research and managerial practice are
addressed.
These findings suggest recommendations for future research and managerial practice,
which I will address in the following, to conclude:
8.2 Limitations and Directions for Future Research
The research presented here has several limitations that suggest pathways for further
studies. The conclusions were derived from a single case. Future investigations should
go beyond the presented research site. Particularly interesting could be the comparison
of Kodak with its most important rivals, Fuji and Agfa, which all survived. Neither
Kodak nor Fuji nor any other photography company could have prevented
discontinuous change of chemical-based photography film business. The imaging
businesses of both Kodak and Fuji reveal similar declines in sales. What distinguishes
the two companies with respect to the issue discussed here, however, is their response
to discontinuous change. Fuji entered the digital imaging era with a good economic
background and leveraged its competences into other industries early on, for instance
into cosmetics, and thus relied on multiple sources of income to fund digital imaging
ventures and to stem decline in conventional photography. Kodak, in contrast, entered
digital business with a troubled balance sheet and made some bold investment
decisions in various areas in digital imaging that turned out to be wrong.
The benefit of looking at a single case, however, was that it made it possible to explore
the general construct proposed, related to the moderating effects of an organization’s
stock of resources and its deployment in the resource allocation process. Findings may
invite the development of more measurable constructs, particularly concerning the
issue of relatedness.
310
Limitations and Directions for Future Research
Also, the issue of partial or regional differences in discontinuous change received less
attention in this work. Scholars investigating discontinuous change have elaborated
theories of technology maturity (Sahal, 1981), determinants and directions of
technological change (Dosi, 1982, 1988a), the S-curve and its limitations (Christensen,
1992a, b; Foster, 1986), the different complexity of innovations (Henderson & Clark,
1990), the impact of technological discontinuities on competence (Tushman &
Anderson, 1986), and the distinction between sustaining and disruptive technological
changes (Christensen & Bower, 1996). In the literature stream on discontinuous
change, less attention has been directed to a more nuanced view of discontinuous
change, which may be appropriate to understanding challenges faced by globally
operating organizations in response to discontinuous change.
I briefly summarize my findings, which reveal the limitations of prevailing views of
discontinuous change: First, Kodak’s chemical film business was based on a customer
value proposition requiring activities in multiple areas of the traditional imaging chain,
which, for the sake of parsimony, may be circumscribed here as image capture,
storage, and finishing. While image capture required skills to engineer hardware
devices for capturing light on photographic film, image storage and finishing required
the skill to coat chemicals on media. Important, the advent of digital imaging did not
replace the entire traditional imaging business; rather, the finishing part of the business
has remained comparatively unaffected up to the present day, leaving core
competences of Kodak intact, since customers continue to purchase prints made from
digitally captured and stored images, although in lower units.
Second, the emergence of an eco-system required to process and manipulate digital
images advanced differently in various geographical locations. For instance, at times
when the impact of digital imaging for chemical-based photography business severely
affected Kodak’s performance in the US and Europe, countries such as China or India
still offered growth opportunities in the traditional film business. Also, while the photo
kiosk business was met with extensive resistance in the US due to its inferior photo
quality relative to photofinishing in labs and offense against professional
photographers, the product was embraced in the Australian market. In fact, Australia’s
persistence in promoting photo kiosks saved the emerging business from closure. In
the end, one of the only “digital” businesses worth selling to get out of bankruptcy in
CONCLUSION
311
2013 was this kiosk business. Without taking advantage of this regional difference,
Kodak probably would not have been nearly as successful in this business as they
ended up being.
Finally, in response to an aggressive competition in sales of digital cameras that
disrupted the traditional camera business, traditional photography companies moved
upmarket with their product offerings, as observed in other industries by Christensen
(2003); for instance, Fuji, Canon, and Nikon redirected their focus to digital single lens
reflexive cameras to address the needs of professional photographers. Kodak,
however, could not move upmarket for two reasons: On the one hand, it lacked the
necessary competencies to produce professional cameras, because it stopped
manufacturing these in the end-1960s, focusing since thereafter on comparatively
simply engineered point-and-shoot consumer cameras; and, on the other, unlike its
Japanese rivals, Kodak could not make use of a professional retailer network in its
home market. Whereas Europe and Japan have dense networks of professional
retailers, in the US the market is served by supermarket chains, which usually lack a
professional sales advisory service.
Thus, regional differences can constrain alternatives in responding to discontinuous
change. A discussion of these three aspects would enrich our current understanding of
discontinuous change and help to explain challenges in adaptation.
8.3 Practical Implications
In a fairly recent article in the Harvard Business Review, Gilbert and his colleagues
(2012) argued that for organizations aiming to bring about the dual transformation
needed in the face of discontinuous change, “each organization must operate as if the
future of the company depended on it alone.…The idea is to exploit the disruption
without being encumbered by the legacy margins, revenue requirements, or practices
of the core business.” (p. 70). As a case in point, they refer to Barnes & Noble’s move
into the e-book reader business and praise it as a success story. The traditional
bookseller launched an initiative far from its New York City headquarters, in a former
Palo Alto bread bakery, where a new team conceived the Nook e-book reader; the
introduction of a color e-reader and the capturing of some 27 percent of the e-reader
market in only two years surprised the book world. Two years later, in 2014, however,
312
Practical Implications
Barnes & Noble’s move into the digital world reveals a different picture. It is
worthwhile to look again at this case in order to show the relevance of the conclusions
drawn in the research presented here, and to continue with some general
recommendations for managerial practice.
In the article mentioned above, the authors applaud Barnes & Noble’s strategy to
launch the new business outside the core business, while capitalizing on shared
resources (Gilbert et al., 2012). The new e-book business made extensive use of
Barnes & Noble’s large network of brick-and-mortar bookstores. Before buying an ebook reader, potential customers could easily try out the device, which was something
Amazon could not offer in its merely virtual presence on the web. It is mentioned only
in passing that the development of the e-book business loses millions of dollars a
quarter. In fact, the bulk of Barnes & Noble’s $7 billion in revenues came from its
retail brick-and-mortar business (Gilbert et al., 2012). No information is given on how
Barnes & Noble is going to fund start-up costs and the costs required to scale the ebook reader to a volume competitive against Amazon.
In fact, back in the 1990s, Barnes & Noble was known as a strong competitor with the
power to aggressively expand its retail chain and to wipe out independent
bookstores.837 However, already in early 2012, the traditional bookseller needed to
acknowledge how costly it can be to reinvent itself by moving into the completely
unrelated digital e-book reader business. The nation’s largest bookstore chain had to
warn its shareholders that “it would lose twice as much money this fiscal year as it
previously expected,” and that “it is weighing splitting off its growing Nook digitalbook business from its aging bookstores.”838
Paradoxically, Barnes & Noble was one of the first to foresee the business opportunity
associated with digital books. Already in 1998, about a decade earlier than Amazon
started selling its Kindle, it invested in NuvoMedia Inc., a company that developed ebook readers. Even though Barnes & Noble exited the still nascent business in 2003
due to lack of any profitability, it managed to re-enter the business in 2009 and to
capture a 27 percent share of the market.839 By the end of 2011, however, it became
837
Trachtenberg, J. A., & Peers, M. 2012. Barnes & Noble Seeks Next Chapter. Wall Street Journal, 2012 Jan
06.
838
Ibid.
839
Ibid.
CONCLUSION
313
evident that heavy investments in the Nook development to achieve a competitive
share of the market had tremendously weakened the company’s annual results.
Competing with Apple and Amazon, the company confirmed, is now becoming
difficult and might requires partners.840 Spending on advertising alone abruptly soared
from about the $10 million the company spent to promote its traditional book
businesses in 2008 to some $50 million in 2011, of which some $40 million was spent
exclusively on the digital book business.841
In early 2014, Barnes & Noble decided to spin off its loss-making digital book
business from its struggling retail-store business.842 The full separation is expected to
be completed by March 2015. An ever-shrinking market for print books, fierce
competition with Amazon, and heavy investments in the e-book reader business made
it necessary to separate the business, to better highlight the value of the core business.
Throughout the last two fiscal years, the loss of the e-book business was nearly equal
to the profit of the brick-and-mortar bookstore business.843 Since 2012, Microsoft
Corporation and other shareholders have been helping finance the Nook business.
However, in mid-2014 Barnes & Noble had to take steps to reduce its spending on the
Nook: It decided to buy Samsung co-branded tablets, to reduce staff by almost half,
and to move out of its costly Palo Alto technology campus into cheaper space
nearby.844 Since then, revenues from the Nook digital business have fallen 54 percent,
indicating a tremendous decline in device and accessory sales.845 In December 2014,
Barnes & Noble disclosed that it is even trying to attract a buyer for the whole
enterprise.846 In the same month, Microsoft Corporation announced the end of its
840
Trachtenberg, J. A. 2014b. What's Barnes & Noble's Survival Plan? --- Former Ceo Cuts His Holding to 20%,
but Says, 'the Story Isn't Written Yet'. Wall Street Journal, 2014 Apr 18.
841
Trachtenberg, J. A., & Peers, M. 2012. Barnes & Noble Seeks Next Chapter. Wall Street Journal, 2012 Jan
06.
842
Trachtenberg, J. A. 2014a. Corporate News: B&N to Carve Off Its Nook Business --- Retailer Is Splitting in
Two, with Underperforming E-Book and E-Reader Unit as a New Company. Wall Street Journal, 2014 Jun 26.
843
Ibid.
844
Trachtenberg, J. A. 2014c. Wsj.D Technology: Samsung Will Supply Nooks --- Barnes & Noble Strikes Deal
to Reduce Its Costs to Compete in Tablets. Wall Street Journal, 2014 Jun 06.
845
Alpert, L. I. 2014. Barnes & Noble's Loss Narrows on Cost Cuts Ahead of Split; Bookseller Says Plans to
Split Retail, Nook Operations Are Progressing. Wall Street Journal (Online), 2014 Sep 09.
846
Gottfried, M. 2014. Barnes & Noble Poised to Close Chapter; Bookseller Is in a Better Position to Split Itself
in Two or Attract a Buyer for Whole Company. Wall Street Journal (Online), 2014 Dec 03.
314
partnering with Barnes & Noble; it decided to accept a loss on its investment, but
won’t have to make any further financial commitments.847
To sum up, despite its position as the leading national US bookseller, Barnes & Noble
could not manage to scale the digital book business to volume, to achieve a leading
market position and to make it profitable. Stagnating revenues or even losses in the
core business rendered it impossible to sufficiently fund the loss generated in the Nook
business. Significantly, Barnes & Noble managed to stem weakening performance in
its core business by leveraging its resources to related businesses. Sales of games,
calendars, and coffee, among other things, kept the company far from collapsing in the
face of discontinuous change; indeed, Barnes & Noble managed to keep its overall
performance stable in the face of declining revenues from print books.
What are then recommendations for managerial action to respond to discontinuous
change? To be quite specific on this point, we may finally look at Apple’s
announcement of a digital watch and possible strategies for the Swiss watch industry,
with its world-leading competence in precision mechanics:
On September 9, 2014, Apple announced the launch of a digital watch allowing users
not only to keep time, but also to collect data on their health and fitness, to be notified
about new emails or short text messages, and even to get travel directions, among
other features.848 This announcement triggered passionate debates in Switzerland,
which has positioned itself as the world leader in precision mechanics.849 Of particular
concern was whether people would like having access to personal data on their wrists
or would still prefer to access and handle it on their smartphone. A look at technology
forums and news agencies revealed that reactions were split.
Some recalled the drama of the 1970s, when the traditional Swiss watch industry was
flat on its back, having missed the invention of more accurate and cheaper quartz or
847
Trachtenberg, J. A., & Dulaney, C. 2014. Barnes & Noble, Microsoft End Nook Pact; Bookstore Chain Buys
out Tech Giant's Stake in E-Reader Division. Wall Street Journal (Online), 2014 Dec 04.
848
Inc., A., "Apple Unveils Apple Watch—Apple’s Most Personal Device Ever (Apple Press Info, Sept 09,
2014)," Apple Inc., http://www.apple.com/pr/library/2014/09/09Apple-Unveils-Apple-Watch-Apples-MostPersonal-Device-Ever.html, accessed on Sept 11, 2014,
849
Fischer, T. 2014. Gerangel Ums Handgelenk - Die Apple Watch Könnte Den Markt Intelligenter Uhren
Beleben. Der Schweizer Uhrenindustrie
Erwüchse Damit Konkurrenz Aus Der Computerbranche. Wie Stark, Ist Umstritten. Tagblatt, September 11.
CONCLUSION
315
electronic watches.850 Thanks to the realignment of the luxury segment and the
development of trendy Swatch watches, the industry got back on its feet. But now the
question is whether the Apple iWatch means a repetition of the quartz watch tragedy
for the Swiss watch-making industry. Jonathan Ive, Apple’s design chief, gleefully
said, “Switzerland is in trouble.”851
Others, on the contrary, see in the new Apple watch an opportunity for the Swiss
watch industry. For instance, Jean-Claude Biver, Chairman of Hublot, believes that the
new “smart” watch will open up a new group of buyers who no longer wear watches
today. Once the young generation gets used to wearing an information device on the
wrist, Biver believes, sooner or later they will look for more durable watches. In
contrast to mechanically built Swiss watches, the short life cycles of technological
development will quickly overtake smart watches – an opinion that is shared by Ryan
Rafaelli, a Harvard professor and expert on the Swiss watch industry.852
On the basis of the findings of the research presented here for organizations facing
discontinuous change, the following actions might be advisable: First, it is important to
recognize the likely threat of a new technology for one’s own business. The Swiss
watch-manufacturing industry seems to have done so already, because they are not just
trying to assess the possible impact of smart watches, but have also already expressed
concern for the local industry.853 There seems to be a consensus that the smart watches
compete in the low-end price segment of functional watches such as Swatch. For the
Swiss market of high-priced luxury watches, the new technology is not considered to
pose a threat.
Second, given that there is serious concern about disruption, organizations are advised
to assess three important variables: (A) Organizations need to judge how related
resources required to compete in the new business environment are, compared to
existing core competences. That is to say, they have to question whether they can
leverage existing competences in order to target the new business or whether they are
required to reconfigure and stretch or even import new (and costly) resources.
850
Landes, D. S. 1984. Revolution in Time: Clocks and the Making of the Modern World. Cambridge, Mass.:
Harvard University Press.
851
Bilton, N. 2014. Tech, Meet Fashion - Intel and Opening Ceremony Collaborate on Mica, a Stylish Tech
Bracelet. New York Times: E2.
852
Husmann, N. 2014. Geschenk Für Die Schweizer Uhrenindustrie. Handelszeitung, September 10.
853
Ibid.
316
Organizations may also measure the relatedness in terms of strategic assets to ensure a
sustained (or at least temporary) competitive advantage. (B) Based on the measure of
relatedness, organizations are able to assess the level of uncommitted resources
required to fund resource development. This variable directs attention to the pragmatic
question of whether the organization can afford to compete in the new business
environment or whether it should move up-market by offering a premium. Of course
there is also the option to move to a related business environment and to exit the
current business altogether. In fact, this variable helps to answer the question of
whether there are enough resources to start the business and size it to volume in order
to achieve a leading market position. (C) Finally, organizations are required to
evaluate the rate of technological progress and substitution. Is there a need to
immediately partner with someone competent in the new business environment, due to
lack of time, or are the chances good to develop the required resources in time by
oneself? In the case of the Swiss watch manufacturers, it is believed that there is no
urgency, because there are neither “killer apps” on the market yet that render smart
watches absolutely essential, nor are there convincing solutions to the problem of
battery load.854 For instance, most smart watches have to be charged every day. In
regard to resources required, there exists an understanding that the computer
technology underlying the new watches is certainly distinct from mechanical precision
engineering; however, several leading Swiss manufacturers are well positioned in the
sense that they have launched businesses delivering various key components. For
instance, Renata and EM Microelectronic, which are subsidiaries of the Swatch Group,
produce batteries or energy-efficient processors and sensors that are used in several
smart watches.
Finally, given that there is a need to respond to a new technology – as would make
sense for Swatch – organizations are advised to establish a separate business unit with
its own business model, dedicated staff, and organizational culture. This structural
differentiation helps to launch a new business outside the threatened legacy business.
In order to scale up the business to become a growth engine, however, the new
business requires a structure that allows the old and the new business to share strategic
assets. Only by sharing their strengths can superior performance be achieved. Aside
from their competence in precision mechanics, the Swiss watchmakers certainly have
854
Martel, A., & Rütti, N. 2014. Mir Fehlt Die Killer Applikation. Neue Züricher Zeitung.
CONCLUSION
317
world-class competence in design, such as how to design watches to comfortably rest
on the wrist, how to place setting wheels or buttons to allow pleasant operation, and
how to make watches resistant to environmental influences such as water. That said,
joining forces with partners on this basis would allow Swiss watch manufacturers to
leverage existing resources while avoiding the risk of having to develop costly
resources in unrelated domains, such as computer chips.
In conclusion, it can be stated that contrary to the current scholarly urge to figure out
the best practices companies may deploy in order to successfully adapt to particularly
those disruptive forces that may render their present businesses discontinuous in the
future, findings of this research suggest that such a move is only wise under certain
conditions. The stock and deployment of resources, as well as their relatedness to
resources required in a targeted business, are decisive for a company’s success in
adapting to a new environment, irrespective of the point in time of threat perception,
threat response, and the disruptive force’s rate of development and substitution. In
certain cases, companies are advised to reorient their operational objectives altogether
and leverage their existing competences in other domains, instead of attempting to
reconfigure or extend them at all cost to achieve a tight fit to the new and disrupting
environment.
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About the Author
Michael Shamiyeh
Born in May 4, 1969
Citizen of Austria
Academic Experience (most important)
2000 PROFESSOR AND HEAD OF DOM RESEARCH LAB
LINZ
The Design-Organization-Media (DOM) Research Lab is based at the
University of Arts and Design Linz, Austria
Professional Experience (most important)
2000 PRINCIPAL OF SHAMIYEH ASSOCIATES GMBH
LINZ
Architectural practice and consultancy
1998 - 2000
TRINIDAD
FREE-LANCE ARCHITECT AND PROJECT LEADER
Realization of hotels and resorts in the Caribbean Islands
Education (most important)
2008 - 2014 UNIVERSITY OF ST. GALLEN, CH
ST. GALLEN PhD in Management (Steven Floyd, Martin Hilb)
2006 - 2008
LONDON
ARCHITECTURAL ASSOCIATION, UK
MA in History and Critical Thinking (Mark Cousins)
2000
LINZ
PUBLICLY AUTHORIZED AND SWORN EXPERT, A
Certification by chamber of architects & chartered engineering consultants
1996 - 1998
BOSTON
HARVARD UNIVERSITY GSD, USA
MArch in Architecture II-postprofessional (Rem Koolhaas, Michael Hays)
1994
INTERNATIONAL SUMMER ACADEMY OF THE FINE ARTS, A
SALZBURG Masterclass Architecture (Daniel Libeskind)
1988 - 1994
VIENNA
TECHNICAL UNIVERSITY OF VIENNA, A
Dipl-Ing. in Architecture (Anton Schweighofer)
Selected Awards (most important)
2010
Gold medal for Invention Solar-Display: KIWIE 2010, Seoul, Korea
Gold medal for Solar-Display: World Intellectual Property Organization
Nomination of Solar-Display for Energy Globe 2010
2009
Innovation Prize 2008 by Austrian Ministry for Science and Research

Discontinuous Change and Organizational Response: Exploring the

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