Disruptive Innovation
p
and the Bankruptcy of
Polaroid

In 2001, Polaroid declared bankruptcy.
The disruptive shift from analog to
digital photography put this industrial
giant out of business.

One of the most fascinating things
about capitalism is how powerful,
huge companies can almost
instantly become history.

The beauty of Polaroid cameras was
that photos could be viewed instantly.
When digital imaging enabled this to
be done in a much cheaper way the
competitive advantage of Polaroid was
destroyed within only a f
d d i hi l few years.

Today there is a movement called
”Save Polaroid”, which tries to
Save Polaroid
persuade film manufacturers to keep
making the Polaroid film…
g

There’s even a website devoted to the
task of saving Polaroid.
g

How could this happen?

How could this happen?
Did they recognize the threat from
digital technology?

How could this happen?
Did they recognize the threat from
digital technology?
How did Polaroid react?

How could this happen?
Did they recognize the threat from
digital technology?
How did Polaroid react?
Let s
Let’s take a look at this amazing story
story…

Polaroid made their money by selling cheap
cameras and then charge a lot of money for
the Polaroid film. Since film is used
continuously this turned out to be a fantastic
y
business model with fantastic profits.

Just like Gilette makes great money by selling
razor blades Polaroid made great money by
blades,
selling film. The main source of profit is not
the razor or the camera, it’s the continuous
,
consumption of blades and film.

Polaroid was founded in 1937 by Edwin
Land. The business was based upon
instant photography
photography.

A photo like
this would
come out
from the
camera.
A fantastic
innovation!

The firm made improvements of this
technology over the decades. Polaroid
experienced a remarkable growth and
soon became a household name.

The firm made improvements of this
technology over the decades. Polaroid
experienced a remarkable growth and
soon became a household name.
Between 1948 and 1978 sales grew 23
percent and profits grew 17 percent,
both annually!

This remarkable success was based
upon technological innovation. Hence,
Polaroid became a technology-driven
company which always looked for new
challenges.
challenges

This remarkable success was based
upon technological innovation. Hence,
Polaroid became a technology-driven
company which always looked for new
challenges.
challenges
Edwin Land himself held over 500
patents, how many CEOs have that
nowadays?

Polaroid believed firmly in innovation:
‘Do not undertake the program unless the
g
goal is manifestly important and its
y p
achievement nearly impossible. Do not
do anything that anyone else can do
readily.’
dil ’
// Edwin Land, annual report 1980

The firm was so successful and profitable
that Kodak just couldn’t keep away
from the instant photography business
business.
Kodak made its own version, was sued
by Polaroid for huge patent infrigements
and had to leave the market in 1986.

As we all know, something has
g
happened to photography…

It is digital nowadays.

Sony launched one of the first digital
cameras, the Mavica in 1981. The photos
were stored on a floppy disk and had a
photo quality of 0,3 Megapixel.
During the 1980’s digital imaging was still in
1980 s
its infancy. The different ’Mavicas’ that
were launched by other firms did not turn
into any commercial successes.

Bill M C
McCune t k over as CEO
took
after Land in 1975.
Being firmly committed to
tec o ogy, cCu e dec ded a
technology, McCune decided that
Polaroid should move into digital
imaging in the early 1980’s.
g g y

In 1986 Polaroid invested 30 million USD in a new unit
called ”The Microelectronics Laboratory”.

In 1989, more than 40 percent of Polaroid’s R&D
budget was spent on exploring various digital
g p p g g
imaging technologies!

The technological results were
promising: in 1980 only 6
percent of the firm’s patents
were related to electronics. In
1990, the same figure had
grown to 28 percent.

However, being a technology-
driven company, Polaroid
always regarded the shift to
digital imaging as a
technological challenge, not
as a market challenge. It was
assumed that once the
technology is ready, it will
become profitable, somehow.

Therefore, Polaroid never
developed any marketing
capabilities for digital
imaging, nor a new business
model. It was assumed that the
firm should stick to its fantastic
razor blade business model,
since it was so profitable.

So technologically speaking,
Polaroid was well prepared for
the shift to digital imaging. It
even had a sensor of 1,9
megapixel in 1989.

So technologically speaking,
Polaroid was well prepared for
the shift to digital imaging. It
even had a sensor of 1,9
megapixel in 1989.
But in terms of marketing and
business models, it was never
b i d l
prepared.

So technologically speaking,
Polaroid was well prepared for
the shift to digital imaging. It
even had a sensor of 1,9
megapixel in 1989.
But in terms of marketing and
business models, it was never
b i d l
prepared.
And as we know, disruptive
innovation is mainly a
y
business model challenge.

For the first time ever, Polaroid experienced stagnating
profits in the mid 1980’s. As a consequence, the firm
became increasingly market-oriented in the 1990’s…

Being market oriented in this case implied that the
Microelectronics Laboratory was sold to MIT in 1993!

In th 90’ th
I the 90’s the engineers were
i
in permanent fights with
senior management over what
i t h t
business model to adopt for
digital i
di it l imaging. Si
i Since th
there
was no film – management
thought that there are no
th ht th t th
profits, and therefore digital
imaging was not attracti e
as attractive.

The conflicts and tensions
paralyzed the company
company.
Therefore, the digital
prototype originally developed
in 1992 was not launched until
1996.
1996 Once it was launched
launched,
the sales organization did not
really know how to sell the
product.

In the 1990’s Polaroid became
1990 s
increasingly market oriented.
The new CEO Gary DiCamillo
who joined in 1996 had a
background in consumer
marketing and cut down even
more on technology
technology.

This meant more money to
marketing, and less money to
a et g, a d ess o ey
R&D in 1996-2000.

So, the more crucial digital
imaging becomes for the long-
term survival of Polaroid, the
less is spent on it!

Listening to customers and
becoming more market-
oriented is usually good in the
short term….
Shareholders are happy and
top management is praised as
profits go up…

The Barbie camera from 1998
is one example of how Polaroid
combined old technology with
new marketing and made great
money, in the short term…

Polaroid also teamed up with the Spice
Girls and launched the Spicecam in 1998.

The joycam was launched in 1999 and
also appealed to younger customers.

The same holds for the SportCam.

Or this version…? Good marketing, good
p
profits, in the short term…
,

… After all more film was sold and
all, sold,
that’s where the profits were made.

Polaroid took the razor blade
business model for granted, that
was after all what had generated
f
such fantastic profits in the past!

Polaroid took the razor blade
business model for granted, that
was after all what had generated
f
such fantastic profits in the past!
But once digital cameras were good
enough and enabled a kind of instant
photography, very few were
interested in buying expensive
Polaroid film anymore.

The firm went from huge profits to collapsing
revenues within only a few years…

In late 2001 Polaroid was declared bankrupt and
the remaining parts of the firm were sold.

Polaroid shares were traded
at $60 in 1997.
1997

Polaroid shares were traded
at $60 in 1997.
1997
In 2001 they were frozen on
2001,
the New York Stock
Exchange at 28 cents
cents.

Polaroid shares were traded
at $60 in 1997.
1997
In 2001 they were frozen on
2001,
the New York Stock
Exchange at 28 cents
cents.
The stock lost 99,5 percent
of its value!

The bankruptcy was a disaster for
employees,
employees retirees and
shareholders.
In the months before this, Polaroid
paid in total 6,3 million USD to
senior executives.

The former CEO DiCamillo got 1,4
million USD.
USD
Given that top management must
be held responsible for this
bankruptcy, this must be regarded
as a ”very competitive” salary…

Well, it’s easy to blame management.
However:
“I wish I could say that things would be
I
different today if Dr. Land were still
running Polaroid, but my guess is that
Polaroid
the days of instant photography have
simply run out”
out
// Stephen A. Benton, who worked with
Edwin Land for more than 20 years

So, we see that the more important
digital imaging became the less
became,
was spent on it!

So, we see that the more important
digital imaging became the less
became,
was spent on it!
It’s amazing to see that Polaroid was
better prepared for this
technological revolution in the
1980’s than in 2000.

So, we see that the more important
digital imaging became the less
became,
was spent on it!
It’s amazing to see that Polaroid was
better prepared for this
technological revolution in the
1980’s than in 2000.
WHY?

The greatest mistake was probably
to view digital imaging as a
technological challenge, not as a
business model challenge.
challenge
Digital imaging was not compatible
with the razor blade business model.
Developing technology without a
business model is not so difficult,
Polaroid succeeded with that….

… But changing the business model is
far more difficult it implied:
difficult,

… But changing the business model is
far more difficult it implied:
difficult,
•Re-educating the sales organization

… But changing the business model is
far more difficult it implied:
difficult,
•Re-educating the sales organization
•Lower profits

… But changing the business model is
far more difficult it implied:
difficult,
•Re-educating the sales organization
•Lower profits
•Cannibalization

… But changing the business model is
far more difficult it implied:
difficult,
•Re-educating the sales organization
•Lower profits
•Cannibalization
•Conflicts
Conflicts

… But changing the business model is
far more difficult it implied:
difficult,
•Re-educating the sales organization
•Lower profits
•Cannibalization
•Conflicts
Conflicts
•Huge organizational changes…

… Doing all this is painful, shareholders don’t like it,
managers don’t like it, and customers won’t like it…

… Th i ’ more convenient to b
Then it’s i become
increasingly market oriented…

… And draw upon existing competence.

Ironically, Polaroid went ba
o ca y, o a o d e t bankrupt by
upt
listening to their customers, by
making shareholders happy and by
g ppy y
focusing on the core competence.

So the main lesson from the sad story
about Polaroid’s bankruptcy:
Polaroid s

So the main lesson from the sad story
about Polaroid s bankruptcy:
Polaroid’s
Disruptive innovation is not primarily
a technological challenge, it is a
business model challenge.

Image attributions
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Christian Sandström is a
PhD student at Chalmers
University of Technology
in Gothenburg, Sweden.
He writes and speaks
about disruptive
innovation and
technological change.
Most of his work can be found at:
www.christiansandstrom.org
www christiansandstrom org