Don't Become the Next Kodak

Don't Become the Next Kodak 01/19/2012

January 19, 2012

Don't become the next Kodak

By THERESE POLETTI

MarketWatch SAN FRANCISCO (MarketWatch) - Eastman Kodak Co., the photography company founded during America's Gilded Age by inventor and entrepreneur George Eastman, is again warding off rumors of a looming bankruptcy filing.

Now investors and pundits are trying to figure out at what point the iconic company did itself in, and whether or not it can still be saved. Read more about Kodak's bankruptcy discussions.

One simple answer is that Kodak got fat and complacent relying too heavily on its highly profitable cash cow, the film business. That made it fearful and skeptical of what are now called disruptive new technologies, such as the digital camera, which one of its own engineers invented in 1975.

KodakKodak's Brownie camera, introduced in 1900, cost $1, and a roll of film was 15 cents. Its introduction brought amateur photography to the masses. "They decided themselves at some point, 'I no longer need to be in the innovation game,'" said Hal Gregersen, a professor of leadership at Insead, a global business school. When company engineer Steve Sasson pitched an electronic camera to upper management, and they didn't know what to do with it, Gregersen said, "they sealed the fate of the company."

Years later, Sasson, who described his invention as a toaster-size prototype that took photos with a resolution of 0.01 megapixels, told the New York Times that Kodak's management told him, "That's cute but don't tell anyone about it."

The first cracks in Kodak's world dominance of photography began to show when Fujifilm arrived in the U.S. in the late 1970s, and Kodak's executives steadfastly refused to believe the Japanese giant would become a real competitor, even though it was selling film at lower prices.

"Corporate failures are incremental," said Gregersen. "Kodak had a complete corner on the market until Fuji came along. He said that when companies rely on the same business models for decades, "senior managers lose the capacity to discover the next business model."

"That happens because they stop engaging in the behavior to do something different," he added.

Gregerson, who is also a co-author of "The Innovator's DNA" along with Clayton Christensen, sees this happen frequently at large companies too dependent upon one product and therefore are afraid to kill their own very profitable children, as Apple Inc. co-founder Steve Jobs was famous for doing. This business conundrum was famously explored and analyzed in Christensen's bestseller, "The Innovator's Dilemma."

"The fact that they couldn't see what that [digital camera] might become reflects to me years, if not decades, of senior management behavior that disabled or incapacitated their ability to see," he added. "That comes from leading a fairly insular life, not stepping out of the office."

Current Kodak Chief Executive Antonio Perez made a full-on push to embrace digital photography when he was named CEO in 2005. But some analysts believe he also muddied up the company's focus by making an expensive gamble on consumer inkjet and commercial printing.

In printing, Kodak still lags far behind the dominant Hewlett-Packard Co. ), Perez's former employer, with market share in the single digits in the U.S. It doesn't even show up in IDC's third-quarter peripherals market research, except under the blanket category of "other."

"Printers are a commodity," Gregersen said. "If I were Kodak - where there is this rich enormous history and brand - the question to ask is do the senior people have an authentic, real connection to the people today taking pictures?"

As an example, Gregersen points to Apple co-founder Jobs. As private as the late Jobs was, he lived in relative modesty compared to most CEOs, in a walkable neighborhood in leafy - if expensive - Palo Alto, Calif. Jobs was also known to answer emails from customers and was occasionally seen out in Silicon Valley, where some have recalled talking to him in line in stores.

"He was out looking at Cuisinart machines but he also had that broader experience," Gregersen said. "We laugh at the fact that he lived in India on an ashram and didn't like the noise of a fan. But he used life experience that was not normal to create incredible products and services."

Working with his other company, Pixar Animation Studios, now part of Disney , also gave Jobs a much broader view of another industry, entertainment. Over the weekend, a conference of innovators called The Intersection was held at Pixar's campus in Emeryville, Calif., where one of the themes was how innovation can come from learning about other industries and making connections in previously unrelated things.

Kodak, which invented the Brownie camera that popularized the field of photography for the masses, ironically missed one of the biggest shifts in consumer behavior: amateur photography with camera phones, and now smartphones.

An example of how Kodak has lagged in recent years was seen at the Consumer Electronics Show last week. The company introduced a new feature on its Easyshare digital cameras with built-in WiFi. Consumers can now upload higher-res photos directly to social networks like Facebook, a feature already available in smartphones for over a year.

Now, the company is looking to add more cash to its operations, is suing rivals for intellectual property violations, and trying to sell off some of its vast patent portfolio, to stave off bankruptcy.

"There is little doubt that they have technology and IP of tremendous value," said Anthony Sabino, a professor at St. John's University's Peter J. Tobin College of Business. He applauds the company's efforts to try to stay out of bankruptcy and isn't giving up hope that the company can avert filing for Chapter 11.

Gregersen would argue that Kodak's business model and path to innovation is already bankrupt.

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