Hang around with executives in industries as diverse as: automobiles, book publishing, telecom networks, wrist-watches, personal computers, digital cameras, postal services, cigarettes, credit cards, smartphones, steam-irons, oil & gas and even laundromats (among many others) and you'll undoubtedly hear reference to their determination to avoid what has come to be known as "Kodak moments," or instances of catastrophic disruption of industry incumbents. What a mistake! Not only are their industries as they know them in serious danger of disappearing, but they are trying to build a strategy by relying upon a metaphor that never really existed. How unfortunate a decision-making situation is that!
It is true that change is unceasing and ubiquitous, and disruption is seemingly everywhere, but let's be clear that in understanding this phenomenon of disruption there are no "Kodak moments" to fear. This misplaced allusion is one of a handful of characteristics that need to be addressed, clarified or put to rest before we can really understand what disruption is, and how best to respond to it.
1. There are no Kodak moments in disruption; but there are Kodak decades: Kodak created the first electronic photographic device in 1975, with an eight-pound, 0.01 megapixel prototype Electronic Still Camera that saved images to an audiocassette tape in about 20 seconds. In the thirty-seven years between this invention and Kodak's eventual bankruptcy, Kodak authored many, many interesting innovations in a wide variety of fields, including: photo-satellites, color digital still cameras, digital print kiosks, digital image compression, HDTV movies from film and OLED displays. Since so many of these activities were directly connected to the taking, storing and sharing of images, there should have been ample time to appraise the market trends and to make strategic corrections. In many respects, Kodak played along the entire "imaging" value-chain and was certainly in an excellent position to be intimately familiar with whatever was going on within and around the imaging business; but they failed to take advantage of their unique perspective. A while ago, I wrote about sloooowprise and that is exactly what we were watching at Kodak for all those years; a slow, painful, tragic demise of a still strong company, and tragedy for the local community, the national economy and for a customer base that had great loyalty to the Kodak brand.
In the face of creeping" disruption by digital imaging, Kodak kept on innovating across a wide range of applications. Brad Paxton, a former director of Kodak's Electronic Imaging Research Laboratories, and former GM and vice-president of the Electronic Photography Division, has provided a rich portrait of the endless stream of Kodak innovations that took place during this period in his fascinating new book Pictures, Pop Bottles and Pills, which puts to rest any notion that the organization, going through the uncertainties of disruption as it was, had ever lost its innovative energies.
2. Organizations being disrupted often "lose their way": True! Kodak did lose its way! One well-placed observer characterized it as "Kodak could not find the path to the sea!" Disruption is frightening; it is unprecedented and seemingly unceasing. More often than not, there are many plausible alternatives appearing in a marketplace, and it is not at all clear which of them will have the attractiveness and "staying power" to be successful. Many you don't even see, because they come from worlds that are so different from the ones that the incumbents know well that they are not even looking in the right direction. We can suspect that Kodak, while recognizing the impending threat of digital "something," probably did not immediately imagine that it would be a "telephone" that would ultimately be the most damaging agent of disruption. In such situations, the budget of managerial attention is limited, and the options to consider can appear unlimited. On top of this, there is also typically a portfolio of ongoing initiatives, many of which were probably justified on the basis of "business salvation" -- had they suddenly lost their potency? Could we have possibly been wrong in so many different places? The secret to anticipating the disruption potential of new entrants is for the successful incumbent market leaders -- organizations that you would think should know more about their business than anybody else -- to be willing to recognize that the new entrants, without historical legacies and with laser-like clarity of purpose, could be better able to understand the dreams of customers in ways that had never been considered before.
Kodak was a technical treasure-chest, but the problems that it faced were more marketing than technical, and had less to do with the product(s) than they did with the role that the products played in the customers' lives. Kodak lacked the ability to either interpret those roles or articulate them in a way that could drive innovations with a higher probability of adoption. It undoubtedly did not help that Kodak attempted to reduce the risks it was under in the imaging business by diversifying (and dispersing scarce resources and top management attention) into such unfamiliar businesses as pharmaceuticals [with its purchase of Sterling Pharmaceuticals], which further blurred the vision of what the firm stood for and what it aspired to achieve.
3. Substitution doesn't have to be complete to hurt: you just have to loose the juicy bits to have cash-flows impacted. In fact, most substitutions are partial, at least at first, but they hurt enough to inflict serious damage on the rest of the organization's activities. Ask yourself: "how much of your cash flow could you afford to lose before you would begin to cutback on marketing, R&D or talent-development?"
Resource allocation among projects for the present and for the future becomes an art-form in the face of disruption. Between 1982 and 2001, Kodak spent more than $20 billion on R&D, with its R&D/sales ratio rarely going below 6%, and while most of this was spent on traditional product lines, there was also a significant commitment to the future as well. Yet Chris Houston, who as a consultant witnessed Kodak's demise close-up and inside, recalls that "when we looked at the portfolio of investments in digital technology, it was massive, but on closer inspection, most were at a level of investment that was sub-critical... for what it would take to win. ... To navigate the substitution you have to buy a variety of technology options, invest enough to own enough lead on the [eventual] winning option and jettison the rest at just the right moment. It may well be that there never could be enough money in any company, even as wealthy as Kodak, to invest in enough options to win in the digital space." Kodak, in fact, was not a company that was stingy on research, yet as market-share slipped and revenues fell, they eventually had to give things up, and the question then became: "give up the uncertain future or the successful past?" All too often, we discover that substitution is really death by a thousand-cuts, rather than one quick and final decapitation. And, keeping on top of all of these little surprises can bleed the energy out of top managements' attention budget, to the point where the ship is perceived as being "rudderless."
4. Personal interests of key stakeholders often conflict with the strategic interests of the firm: The engineers at Kodak cold well appreciate what was happening to them in the marketplace and why. After all, they invented digital imaging and recognized that it could only get better as it evolved from its awkward beginnings. What they probably also recognized, but were in no position to influence, was that the technical performance of their products, the dreams of their customers and the business model rewards of key stakeholders were not necessarily well-aligned. Chris Houston has observed that at Kodak: "Certainly there were mistakes in management, but they [were] dwarfed by the colossal error of the regular and shrill insistence by owners, the shareholders and their representatives -- the Board of Directors -- that the immensely profitable film business be preserved at the expense of an inherently less profitable digital business. At the precise moment when clear and long-term thinking was most needed, it was much more attractive to extract one more pound of flesh from today's business than to risk it for an uncertain tomorrow," and he further points out that the "the digital 'picture' business is a very different profit model from the silver halide film business. Margins in film are much more attractive than margins in digital technology, at least as practiced by companies like Sony and Canon, with whom Kodak competed in the consumer space. [One major consequence of this was that there were important stakeholder groups, ranging from shareholders to incentivized senor management, whose reward expectations had been shaped by decades of silver halide model profits, and who were afraid to see that change.] To shift profit models would have required governance courage of which there never seemed to be much." This, then, become more than allowing one insightful manager to make a risky all; this is about depriving influential political forces of receiving what they have long believed is rightfully due to them.
5. Past success is the biggest inhibitor of future success: Being a successful incumbent in the prior generation of offerings is typically the most telling predictor of future failure in the next. If a company makes all the right choices to evolve from being a creator of a new idea into a high-volume producer of a mass-consumed product, then the obligation to pursue efficiency overcomes any passion for novelty & effectiveness, and the organization becomes protective of the basis for its present success -- think Nokia, think Blackberry! In observing Kodak, Brad Paxton recalls that Kodak's management would not even allow their digital products to use the term "photo-quality" to describe their benefits for fear that this could accelerate the substitution for film. It is this fear of cannibalizing existing streams of cash-flow that leads to denial and hesitancy when the early signs of disruption first appear: when the unthinkable happens to firms that are now suddenly vulnerable to disruption, they don't think.
6. Substitution is typically an industry phenomenon, not the failure of a single firm: Steve Jobs was celebrated for (among many other things) suggesting that relying upon your customers for insights into the future at times of great uncertainty is not the best way to work [what he actually said was: "For something this complicated, it's really hard to design products by focus groups. A lot of times, people don't know what they want until you show it to them"], but he was right. Don't ignore your customers, but remember that in times of disruption they will likely be as surprised as you are. The same is true, however, for your traditional competitors as well. As a result, benchmarking your performance against your incumbent peers is probably an excellent way to set an entire industry's leadership up for a big, and bad surprise, all at the same time. We speak so often about Kodak and Nokia, without remembering that Agfa and Fuji, and Motorola and Sony-Ericsson, also failed in film and handsets at about the same time. All of the incumbent leaders of a mature market have typically bought-into price-centric competition, which almost inevitably blinds them to any innovative alternative that is not cost-sensitive. Since price competition is a full-time job in itself, it is unlikely that any of the incumbent leaders in an industry will be looking outside for big departures from the existing status-quo. Benchmarking against such peers only raises the likelihood that will all be disrupted at the same time.
7. Brand, alone, is not enough to withstand disruption: Kodak had an old, established and venerated brand, but it was all about the past. Chris Houston suggests that at Kodak: "The power [such as it was] in consumer imaging lay in a sales force that had long been accustomed to taking orders for a product that was originally superior..... The power in Kodak's brand was in consumers' ability to take something complicated and [have it made] easy. Silver Halide chemistry was an impossibility until the Brownie camera democratized memory capture, [but] the promise of "you push the button, we do the rest" was meaningless in digital photography and the brand simply did not have the legs to move to a new place. Without a real marketing insight the famous logo had no ground to claim. The very idea of a "kodak" ... was so anchored in the consumer's mind that they simply could not believe the required claims of digital imaging which were all about pixels (sensor technology) and zoom length (lens technology). In many ways, Kodak's hugely powerful brand marooned it on an island of irrelevance from which any departure was as much blocked by consumers as by management choice. Consumers knew what Kodak meant and it did not mean something relevant in consumer imaging as the digital camera began to define it." Houston adds: "To [speak of] 'miss[ing] the boat' infers that [Kodak] was oblivious to its departure... but alot of people tried very hard to 'catch the boat' but the consumer kept saying in one way or another that Kodak did not belong on the boat. The 'social license" for the brand was around eas of use, but this was not really a relevant value proposition to many [consumers] as the [digital imaging] arms race went on." With such assets, it's tough to build a sustainable future in the face of serious and customer-centric challenges.
8. Visionary leadership is key to moving an organization forward in the face of disruption: From its founding, Kodak was a purpose-driven organization, and that purpose was George Eastman's founding belief in the importance of simplifying photography. Eastman's success was never as easy as it seemed, nor entirely straight-forward, but he was clearly successful enough to not only dominate the amateur and professional market segments of the photography business, with hardware, film and paper, but to also democratize image-taking to the extent that we might indeed give him credit for creating much of modern "memories," as well. Eastman was not a "natural" leader, but he was a visionary and that vision continued to drive progress at Kodak until he thought that he had accomplished all that he had set out to achieve. While we can only speculate on what he might have done in the face of the growing digitalization of images, but had it happened on his watch there is considerable reason to believe that he would have drawn different conclusions and made different managerial choices than did those who came after him in Kodak's leadership. Brad Paxton feels that if George Eastman were to have seen the innovations that Kodak had made in electronic photography, he would have said: "This is very interesting -- if our customers want their pictures this way, I think that we should give it to them;" a view that Todd Gustavson, Technology Curator at the George Eastman House, and an expert on George Eastman, agrees with: "That's absolutely right! People don't realize that Eastman was a radical, and when he came out with the Eastman $1 camera, everybody thought that he was crazy! I think that's what he would have said." Of course, this is all speculation, but at the moment of disruptive challenge from digital imaging what Kodak needed from its leadership was a continuity of purpose that legitimized risk-taking, and that is exactly what it did not receive. It might be a cliché, but leaders closer to the origins of an organization are often much more sensitive to the customers' needs that the organization was created to serve than their successors, who are often much more attuned to the financial performance of that same organization.
We seem to speak about Kodak endlessly, to the point where it has become a caricature of disruption. Yet, Kodak was a central part of our lives for many years, and to lose it was unimaginable for many. Paul Simon got it exactly right when he wrote [and sang]:
Kodachrome
They give us those nice bright colors
They give us the greens of summers
Makes you think all the world’s
A sunny day, oh yeah
I got a Nikon camera
I love to a photograph
So mama, don’t take my Kodachrome away
Yet, taken away it was! It is important to appreciate that Kodak's demise was not so much about innovation, or "disruption", as it was a failure of leadership; an inability to appreciate what was going on in the customers' lives, an unwillingness to do anything that could "hurt the film business", and an inability to make the necessary choices to change the corporate culture. There were really few surprises here!
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This blog benefited greatly from conversations with: K. Bradley Paxton, author of Pictures, Pop Bottles and Pills, Chris Houston, who writes the Telosity blog, and Todd Gustavson, Technolgy Curator of the George Eastman House. Joe DiStefano made these conversations possible.
