The Real Disruption Lessons From Kodak

Kodak is one of those totem exemplars of digital disruption, often characterised as a business whose leaders ignored or failed to recognise the impending developments in (and implications of) digital technology. Yet the reality is far more nuanced and enlightening, as this account from Willy Shih, a former Kodak staffer, spells out.

Famously, it was Steven Sasson, an engineer who worked for Kodak, who invented digital photography and made the first digital camera in 1975. Management were, it seems, initially sceptical about the early prototype. But when the technology began to develop further and gain scale, Kodak management were ‘acutely aware of the approaching storm’, and continuously tracked the rate at which digital was replacing film. The disruption however, brought challenges on multiple fronts which, rather than catalysing change, contributed to inertia. Most notably:

  • Making film was an enormously complex manufacturing process meaning that barriers to entry were high, competition limited.
  • Digital imaging on the other hand, based on general-purpose semiconductor technology which had its own scale and learning curves but also broad applicability, had far fewer barriers to entry
  • The technology was well outside Kodak’s core capability, making it difficult to compete and to offer something distinctive
  • The modularity of digital cameras (any engineer could put one together with component parts) meant that you no longer needed highly specialised skills and experience (modularisation commoditises)
  • A large incumbent business like Kodak had invested over time in manufacturing and distribution efficiencies and benefitted from economies of scale – when sales and production decline, those benefits matter less, and many of the gains that you could once capitalise on work against you as volumes decline
  • The problem of declining scale and securing sufficient shelf space through its retail distribution network was exacerbated since in Kodak’s case, the cause wasn’t new competitors – the entire category was disappearing
  • Management didn’t talk about the issues publicly for fear of making it a self-fulfilling prophecy but Kodak were caught – they couldn’t abandon billions of dollars of profits when they didn’t have any new products to capture demand
  • Kodak’s entire ecosystem that had been built over decades, was one that only supported film-based photography (retail parters made large profits from photo finishing for example, which brought customers in-store multiple times). As these advantages reduced, management under appreciated the rapidity of the decline in photo printing, and retailers became less loyal to the Kodak brand
  • Kodak did actually have a separate division (unconstrained by legacy approaches) which was established to explore and develop the digital opportunity. This did see some success, achieving a good share position in digital cameras, only then to be consumed in the tsunami of smartphones with built-in cameras.
  • Kodak experienced great difficulty in managing the complex (and emotionally-charged) people issues surrounding a business in decline – thousands of staff who knew that they were managing decline but struggling with transferrable skills, managers fighting for control of diminishing resources, or feeling entitled to be reassigned, which fuelled internal politics and strife.

Kodak faced huge challenges on multiple fronts – competitive, category, operational and ecosystem – but it is too simplistic to say that their downturn to eventual bankruptcy protection was solely down to their inability to recognise that digital was coming. Yes, they failed to look ahead and anticipate the level and type of impact that the next wave of technology (and its application) would have. But along the way, there was a litany of compounding factors that made change difficult, and which are instructive for any legacy business. I’m reminded of what Jeff Bezos of Amazon said about being willing to be misunderstood:

“A big piece of the story we tell ourselves about who we are, is that we are willing to invent. We are willing to think long-term. We start with the customer and work backwards. And, very importantly, we are willing to be misunderstood for very long periods of time. I believe if you don’t have that set of things in your corporate culture, then you can’t do large-scale invention.”

Having this kind of vision and willingness to reinvent is key. Shih says that in hindsight, one approach that Kodak might have taken would be to refocus the business to compete on capabilities rather than on the markets it was in. This kind of thinking is helpful in that it might allow the business to apply it’s skills and knowledge in different ways to explore new value, but also to challenge the kind of toxic assumptions that Kodak fell victim to.

In the book we talk about how, in the age of more transient competitive advantage businesses have to be more adept at disengaging from existing advantage, and ready to reorient talent and focus around opportunity. Kodak is a salutary lesson for all.

Also published on Medium.