Disruptive Innovation
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 few years.

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

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

How could this happen?
Did they recognize the threat from
digital technology?
How did Polaroid react?
Let’s take a look at this amazing 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 business model with fantastic
profits.

Just like Gilette makes great money by selling
razor blades, Polaroid made great money by
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.

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

The firm made improvements to 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.
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
goal is manifestly important and its
achievement nearly impossible. Do not
do anything that anyone else can do
readily.’
// Edwin Land, annual report 1980

The firm was so successful and profitable
that Kodak just couldn’t keep away
from the instant photography 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
happened to photography…

It is digital nowadays.

Sony launched the first digital camera, 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
its infancy. The different ’Mavicas’ that
were launched by other firms did not turn
into any commercial successes.

Bill McCune took over as CEO
after Land in 1975.
Being firmly committed to
technology, McCune decided
that Polaroid should move into
digital imaging in the early
1980’s.

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 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.
But in terms of marketing and
business models, it was never
prepared.
And as we know, disruptive
innovation is mainly a
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 the 90’s the engineers were
in permanent fights with
senior management over what
business model to adopt for
digital imaging. Since there
was no film – management
thought that there are no
profits, and therefore digital
imaging was not attractive.

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

In the 1990’s Polaroid became
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.

This meant more money to
marketing, and less money to
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
profits, in the short term…

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

Polaroid took the razor blade
business model for granted, that
was after all what had generated
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.
In 2001, they were frozen on
the New York Stock
Exchange at 28 cents.
The stock lost 99,5 percent
of its value!

The bankruptcy was a disaster for
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.
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
different today if Dr. Land were still
running Polaroid, but my guess is that
the days of instant photography have
simply run 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
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.
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:
•Re-educating the sales organization
•Lower profits
•Cannibalization
•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…

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

… And draw upon existing competence.

Ironically, Polaroid went bankrupt
by listening to their customers, by
making shareholders happy and by
focusing on the core competence.

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

Image attributions
http://www.flickr.com/photos/speechlessson/505881002/
http://www.flickr.com/photos/speechlessson/505881002/
http://www.flickr.com/photos/encandilada/2337607067/
http://www.flickr.com/photos/angel_caido/2384181612/
http://www.flickr.com/photos/cordlesscorey/2289557182/
http://www.flickr.com/photos/sherlock77/107760090/
http://www.flickr.com/photos/captkodak/272734999/
http://www.flickr.com/photos/captkodak/272730114/
http://www.flickr.com/photos/jpcandelier/143401195/
http://www.flickr.com/photos/mocvdleung/252966183/
http://www.flickr.com/photos/captkodak/289068033/
http://www.flickr.com/photos/derricksphotos/105354018/
http://www.flickr.com/photos/timmythesuk/447729571/
http://www.flickr.com/photos/squeakymarmot/429058486/
http://www.flickr.com/photos/timmythesuk/2107418291/
http://www.flickr.com/photos/b-love/2827842133/
http://www.flickr.com/photos/tenderisthebridge/182043321/
http://www.flickr.com/photos/bucher/2406737059/
http://www.flickr.com/photos/jpcandelier/105792762/
http://www.flickr.com/photos/doyoubleedlikeme/2269008006/
http://www.flickr.com/photos/squeakymarmot/429058469/
http://www.flickr.com/photos/isoduran/2474836452/
http://www.flickr.com/photos/_boris/200373547/
http://www.flickr.com/photos/sealegssnapshots/2699386436/
http://www.flickr.com/photos/doyoubleedlikeme/2808524654/
http://www.flickr.com/photos/gestalteando/665672295/
http://www.flickr.com/photos/jsleeper/2187568339/
http://www.flickr.com/photos/missha/310167823/
http://www.flickr.com/photos/twatson/2367856370/
http://www.flickr.com/photos/lynchaos/2957949590/
http://www.flickr.com/photos/captkodak/272730113/
http://www.flickr.com/photos/gwen/457392990/
http://www.flickr.com/photos/tgray/90473388/

Christian Sandström
www.christiansandstrom.org