Disruptive Innovation, Kodak and digital imaging

Kodak Destruction
and Survival

Christian Sandström holds a PhD from Chalmers
University of Technology, Sweden. He writes and speaks
about disruptive innovation and technological change.

Since paper and film had been
manufactured and developed in
these buildings the shift to digital
imaging rendered many of them
obsolete.

In the end, demolition turned
out to be the right thing to do.

Some of these implosions
were made into PR events for
the launch of Kodak’s new
All-in-one printers.

Needless to say,
these demolitions
evoked many
emotions…

Thomas Hoehn, Director of
Brand Communications
and New Media at Kodak
wrote about this here.

In the comments below the
blog entry, many different
views were expressed about
Kodak and this PR event:

“Kodak was great for Rochester.
And for many it still has a place
in their heart for all the good
times and great friends that it
brought together. However,
those days are long gone now -
as symbolized by this implosion.
The Old Kodak is long gone.”

“I was embarassed for the TV
media and for the people who
were watching the implosion as
a way to remember all the great
years that B9 served Kodak. His
presentation was loud,
classless, and direspectful!”

“If you want good publicity.. take care of
your current workers, not just the
digitial employees. Remember were
you got all the money to invest in
digital (FILM)....”

“More thoughts should have
been on the employees that
were negatively impacted by
the closings of these
buildings. The celebration
was a total disrepect for the
individuals that worked for
Kodak for many years and
were let go.”

“It is wonderful for those still
with the company that
someone has finally accepted
the changes in the industry
and Kodak is trying to catch
up with those changes... but
for those of us who were
sacrificed along the way it
can at times feel like salt
thrown on a wound.”

“There's still a lot of great
people at Kodak, just too few
of them at the top. That to me
is the greatest disrespect,
when our CEO and upper
management get great raises
and we are offered fractions of
a percent if anything - not
even a cost of living increase.”

“No matter how they spin this,
it's just way too symbolic of
Kodak's implosion after the
decline of film. The whole Ink
promo was utterly distasteful.”

“I think the company missed the mark in
not realizing the emotional impact the
implosions would have on employees
(current and former).“

“After 28 years with this company i have seen it all
until this, people making a mockery out of
revolution, they did it to save a buck. i work for the
new digital imaging group, with a 32% paycut and
a 17% cut in work hours, just to save a buck, i find
this hole implosion thing a joke, there was a lot of
history with in these buildings to say it’s a
revolution into digital, next time hire bevis and
buthead they’ll show a little more compassion.”

“13 years ago Kodak in Peru had 300 workers,
today we are 10. Put that in a picture and
you will know we understand how you guys
up there feel about so many people having
left the company when they thought they
had a life time job. We are a family and we
feel the same down here.“

“Not many industries have had to face these
challenges simultaneously and Kodak is
doing it head on. This is the fourth year of a
tectonic four-year digital transformation.
Amazing progress has been made but not
without ups and downs, tears and smiles,
and myriad of other emotions. I am happy
that Kodak embraces acceptance of
comments on this blog. Many corporate
blogs do not. This speaks to the brand and
the values that underlay this great
institution.”

“Some would say this
implosion symbolizes
Kodak's actual future ...”

Life at Kodak has
not been easy.

How and why could this happen?

Let’s go back in history and take a
look at the rise of Kodak…

Back in the late
19th century,
the Eastman
Dry Plate
Company
produced the
first cameras
that were not
aimed for
professionals.

The first simple
roll film cameras
that this company
produced were
called Kodak. The
cameras were so
successful that the
Kodak word was
incorporated into
the name.

The Eastman
Kodak
Company was
founded in
1892.

By targeting
non-
photographers,
Kodak created
a huge market.

George
Eastman,
Kodak's
founder, coined
the famous
advertising
slogan: "You
press the
button, we do
the rest."

The slogan
came to
define
Kodak and
was used
during most
of the 20th
century.

The simple ’point
and shoot’
Brownie camera
allowed
consumers to
take their own
pictures. They
could then mail
the roll of film to
Kodak, which
would develop it
and return the
photos by mail.

Before Kodak, people could not
afford or manage to take photos
regularly and document their lives.

Kodak brought photography
to the people, just like Ford
brought cars to the people.

Kodak became a household name. Kodak
moments, Kodak days, ’to Kodak’, the
company defined consumer
photography and the brand became
very strong.

People loved to take photos, and as
they became richer, they took more
photos…

And thus,
Kodak made
more money
and kept
growing, and
growing.

The company was so
dominant that it became a
verb, ’to Kodak’, just like
Google has become a
verb today.

Simple, cheap photography
turned out to be a
business idea that worked
globally and thus, Kodak
took on new markets and
kept growing.

In the early days of
globalization, Kodak
established its first
wholly owned subsidiary
in 1897, in France.

An image of the Kodak Park in
Rochester, 1938.

Needless to say, George Eastman
made a great personal fortune from
the success of Kodak.

Som photos from his house
in Rochester (NY)…

The company helped set the standard of
35 mm film, and introduced the 16 mm
format format for amateurs.

In 1935, the KODACHROME Film was
introduced and became the first
amateur color film success.

Color film
was the
next big
thing.

Along with this, the
consumer cameras were
further developed.

In 1962, sales
exceeded 1
billion USD and
John Glenn
became the first
astronaut to
orbit the earth.
Of course this
Kodak moment
was memorized
with Kodak film.

In 1957, the Kodak Brownie Starmatic was
launched. Over the coming five years more
than 10 million of them were sold!

But even
greater
revenues
were made
by selling
film.

Just like Gilette made great money by selling
razor blades, Kodak made great money by
selling film. The main source of profit was not
the razor or the camera, it was the
continuous consumption of blades and film.

Film could be bought
and finished everywhere.

With signs,
Kodak also
sought to
encourage
people to
take a lot of
photos…

In the 1980s and 1990s Kodak
launched even simpler cameras…

Targeting those people who
only needed a few photos
and not a camera.

The number of employees
increased steadily over time:

1927 20 000
1946 60 000
1955 73 000
1973 120 000

In 1981, the company had a
turnover of more than 10
billion USD.

In the 19th and 20th century Kodak
became a true American classic.

It was founded
by an
energetic and
visionary
entrepreneur,
and created
joy and
memories for
millions of
people.

Kodak was a true American dream.

George Eastman and the
Kodakers did to photography
what Henry Ford did to cars.
They made it available, usable
and affordable for everyone.

So, this is the background, now let’s
take a look at the dawn of digital
imaging and how Kodak handled this
disruptive threat.

During the
20th century,
Kodak grew
up into large,
profitable
company.

People got
richer and
consumed
more and
more film.

Kodak built up a competence
base in precise mechanics…

A global
infrastructure for
photography
had emerged. A
roll of Kodak
film could be
bought
anywhere in the
world and be put
into the camera.

For every
Kodak
moment,
the
company
made a
profit.

… However, in the late 1970s, the
rise of the Japanese camera industry
threatened Kodak…

The cameras and the film were
cheaper and had high quality.

When Fuji sponsored the 1984
olympics in Los Angeles it became
clear that the threat was real.

Winning a price war against these
guys was hard.

At the same time, Polaroid and instant
photography was improved, thus
undermining Kodak’s amateur market.

Kodak responded by diversifying
throughout the 1980s.

The company went into medical imaging,
pharma, batteries for video cassettes…

The development can be traced back to
Bell Labs in the 1960s and then to NASA
and the transmission of photos from
unmanned space vehicles in the 1970s.

Through digital imaging, photos
could be sent back to earth.

Kodak, Canon and RCA tried to convert
light into digital images.

In 1979, Emory Kristof was the
first to use an electronic camera
while photographing life at the
bottom of the ocean.

Electronic cameras were also
used when Kristof took photos of
Titanic at the bottom of the sea.

"What does this development
mean? That the working newspaper
photographer in the not-too-
distance future could be using an
electronic camera."
// Edward Dooks photographer, 1979

"It sounds like it (the digital camera) could
give us more speed, more time to do the
selection and cropping of photographs and
less time just doing the technical production
of it.“
// Ralph Langer, Dallas Morning News 1984

"Electronic photography is going to replace
the silver image. We are going to have to have
an understanding of how to edit pictures, how
pictures are stored electronically and how to
edit them electronically."
// Charles Scott, Photojournalism educator

In 1981, the industry was shaken
when SONY launched their Mavica, a
camera that used floppy discs
instead of film.

Many companies feared that this
technology would eventually
substitute analogue photography.

In Japan it was referred to
as ’the Mavica shock’. They
feared that something like
this would happen.

"When the electronic camera, and all that
goes with it, is finally in our hands --
and it will be -- it will not be because we
have sought it out, but because we are
no longer left with a choice.“
Ed Breen, News Photographer in 1982

Kodak recognized the threat and
invested extensively in digital
imaging during the 1970s and 1980s.

In 1986, Kodak scientists released
the first megapixel sensor, with 1,4
Mpixel.

The JPEG standard for compression emerged
in 1989 and further advancements were made
in digital imaging.

Later on Kodak developed
the sensor into a digital
back, which was built in to a
Nikon camera in 1991.

A sensor with 1,3
Megapixel, an internal
harddrive of 200 megabytes
at a cost of 13 000 USD
(about 21 000 USD today!)

It was marketed to photo
journalists, hoping they’d
be willing to pay for being
able to view images
instantly , take a lot of
photos and removing the
long process of turning
film into a digital format.

In 1994, Apple launched
the QuickTake camera.

The QuickTake had been
developed by Kodak.

It looked like a pair of
binoculars, could store
32 photos and was the
first camera that could be
connected to a PC.

After a collaboration with Philips, Kodak
announced its Photo CD system in
1990. Pictures could be digitized, stored on a
compact disk, and then be viewed and
manipulated on a PC.

In the 1990s Kodak focused more on its core
business. The new CEO George Fisher
divested many business units.

Fisher now had formulate and
implement a digital strategy.

He thought that Kodak should
be an imaging company: “We
are not in the photographic
film business or in the
electronics business, we are in
the picture business.”

A couple of different ideas
came to define Kodak’s
strategy for how to handle the
digital threat.

Greater coherence.
Focus the digital efforts and
coordinate them in a better way.

Incrementality.
The shift will be the
consequence of many
small efforts.

Fisher said: “The future is not some
harebrained scheme of the digital
Information Highway or
something. It is a step-by-step
progression of enhancing
photography using digital
technology”

During the 1990s, digital imaging
emerged in those segments
where transmission and
manipulation of photos was
important. At the same time, film
was doing well.

Kodak thus developed a hybrid
approach, developing digital
imaging while making money on its
established business.

In 1994, Kodak launched a
digital news camera,
it cost 15 000 USD and was
co-developed with The
Associated Press.

Kodak also
developed
digital backs
which could
be attached
to
professional
cameras.

But the business utility
was great. Many film
photos were digitized
sooner or later anyway.
With a digital back, one
step in the production of
photos could be removed.

The first digital backs were
expensive and had a moderate
performance. Kodak launched one
with 6 Mpixels.

Press and Studio photographers
loved it and NASA was very
interested in the Kodak sensor.

6 million pixel resolution is
good enough for most
applications. The
perception of colour is
more important than the
perception of sharpness.
Kodak, 1996

In these years, Kodak also launched
software which could be used for editing
and cropping digitized photos.

Kodak also developed a digital
infrastructure that could be used by
photofinishers throughout their network.

In a press release from 1997, the following
quote can be found:

Four years ago, when we talked about the
possibilities of digital photography, people
laughed. Today, the high-tech world is
stampeding to get a piece of the action,
calling digital imaging perhaps the greatest
growth opportunity in the computer world.
And it may be. We surely see it as the greatest
future enabler for people to truly “Take
Pictures. Further.”

Kodak did everything to enter digital
imaging – consumer cameras,
professional cameras, storage
systems, software, printing
paper, you name it…

However, in the digital world,
everything would be different.

Kodak used to be exceptionally
integrated vertically, owning the entire
value chain, from basic research to
photo finishing.

The digital value chain could not be
dominated in the same way – Compaq, HP
and others were leaders in the PC market,
Adobe dominated image software, in printers
Canon and HP were leaders.

Kodak therefore launched many joint ventures
with these firms, since the company did not
possess these resources on their own.

With the launch of the digital DC40 in
1995, Kodak teamed up with Microsoft,
HP, IBM and tried to create an
infrastructure for digital imaging.

Kodak, Olympus and Sanyo all had thousands
of patents in digital imaging, they cross-
licensed much of this in order to speed up the
shift to digital imaging.

Thus, Kodak developed the digital
business both in-house and through
collaborations and partnerships.

Kodak had a strong brand and a global
presence, these resources were crucial
in the shift to digital imaging. The
company offered digital services such as
digitizing film all over the world.

The company had a strong technology
presence in digital imaging. The company had
more than 5000 engineers and scientists,
more than 600 PhDs and had invested in
digital research since the 1980s.

Kodak had a leading position in
image sensors for a long time and
sold those to many other camera
companies such as Olympus.

At the same time, the price war with
Fuji put Kodak into trouble. In 1997-
98, Fisher had to fire 20 000 people,
mainly because Fuji lowered their
prices and expanded.

Kodak also responded by entering
emerging markets such as China.

During the late 1990s,
Kodak kept launching
smaller, cheaper and
better digital cameras.

At the same time, the company
created various digital consumer
products and services.

Thus, Kodak did not only recognize the
threat at an early point…

… The company pioneered digital
imaging and pushed it further…

… Despite the fact that digital imaging
would render film obsolete…

… Kodak embraced, developed and
commercialized digital imaging…

Daniel Carp, Kodak’s
new CEO said in 2000:
"Kodak is convinced that there has
never been a better time to be in the
picture business…. Digital can
change the way people take and use
pictures. Suddenly there are no
boundaries to how often you can
take pictures because cost and
availability are no longer issues."

With all these preparations, all R&D
and successful digital business
development in the 1980s and 90s,
what could possibly go wrong?

In 2000, Daniel Carp became
the new CEO of Kodak…

In a speech in
2000 he said:
"Kodak is convinced
that there has never
been a better time to
be in the picture
business…. Digital
can change the way
people take and use
pictures. Suddenly
there are no
boundaries to how
often you can take
pictures because cost
and availability are no
longer issues."

A bit of
optimism has
never hurt
anyone, but
reality turned
out to be
somewhat
different for
Kodak.

Carp also said:
”… It will take more than
one company to change a
century of consumer habits
and perception. With the
participation of the entire
industry, I am confident
that we can lead the way
toward a more picture-rich
era, and that, together, we
can break through the
technical and marketing
challenges facing our
industry.”

Once the price and
performance of digital
cameras was good enough…

… An avalanche of growth in
digital imaging now occurred.
30

25

20

15

10

5

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Number of film and digital cameras sold in the
United States (guess which one is digital!)

Once the shift occurred, it was faster
than anyone could have imagined…

In 2007, several Kodak
buildings were demolished.

The global distribution network for
selling film was no longer a great asset.

Having pushed the frontiers of digital
photography for decades, Kodakers must
look at these pictures with mixed feelings.

For every year, less film was consumed,
and thus revenues diminished rapidly.

A paper factory is destroyed, neighbours and
former Kodakers record the event with their
digital cameras and camcorders, and upload
the images to flickr…

… Can the shift to digital imaging be
illustrated in a better way?

In January 2004 Carp announced that Kodak
would cut between 20 and 25 percent of its
worldwide employees.

Carp now said: ''We now know that digital
adoption accounts for the great majority of
our sales decline in the United States''

Up until 2005, Kodak had closed 7 film
processing labs in the United States.

In January 2009, another layoff of
3500-4500 workers was announced.

Another huge loss had been posted.

At its height Kodak employed more
than 100 000 people. This figure has
shrunk to around 25 000.

The stock has reached new record
low levels almost every year.

Shareholders were angry,
employees were angry, and
management asked for
more money…

Standard & Poor’s Equity Research Analyst
Erik Kolb commented on the results:

“They were late to the game in
their shift to digital and they have
been playing catch-up since.”

Kodak
embraced
digitial
imaging!

Kodak stopped marketing
film cameras in 2004.

If Kodak wasn’t late, why did the company
encounter such great trouble…?

One reason is of course the
current recession.

“During the last three months of the
year, we experienced dramatic declines
in several of our key businesses due to
the slowdown in consumer spending
and significantly reduced demand for
capital equipment” // CEO Antonio Perez

But the problems came long
before the economic downturn…

If Kodak wasn’t late, why did the company
encounter such huge problems…?

First of all, people stopped buying film.

It sounds like a simple explanation, and
it is. But the implications for a company
like Kodak are tremendous.

Many of Kodak’s key resources and
capabilities became virtually useless
with this change:

The global distribution
network lost its value.

People used PCs instead of
photo finishing labs.

Kodak used
to make
money on
every photo
you took
using their
film.

The value of being positioned as a vertically
integrated company diminished.

With the death of film, the value of
these signs disappeared quickly.

Kodak’s business model
(making money on film like
Gillette makes money on
razors) was not compatible
with digital photography.

The supplier network for producing film
was also rendered obsolete.

Knowledge in chemistry and film
manufacturing became an obsolete asset.

The value of film and paper manufacturing
sites was literally demolished.

Thus, the shift to digital imaging implied that
Kodak’s capital in terms of skills, processes,
market position etc was destroyed…

… And no strategy or management idea could
have changed this fact.

The same kind of capital destruction occurred
in the camera market.

The rules of the game had changed.

Though Kodak launched many digital cameras, this
could not make up for the decline in film.

Moreover, once products become digital, prices
decline rapidly while the performance increases.

Margins are lost at a furious pace.

And the competition got tougher every year.

New models were launched all the time - with
more Megapixels, better zoom, lower battery
consumption and lower prices.

Consumer Electronics companies like Sony
had a resource base that was suddenly better
for photography than Kodak’s resources.

Kodak could not really keep up with this
competition in the long run.

To make things even worse, mobile
cameras started to disrupt the
compact cameras.

Sales of compact cameras actually
started to decline in 2005 and has
continued to do so ever since.

Making money in such a rapid
industry is very difficult.

With the rise of digital imaging, the
competence base shifted from
precise mechanics to electronics.

Though Kodak had developed
knowledge in electronics, much of the
old competence base became useless.

The attempts at various digital
printing businesses had a
moderate success.

People were simply not
printing that many photos,
nor were they using film.

The company launched Kodak Gallery,
but competition from Google Pictures,
Flickr and others was fierce.

Great new printers were not enough to
compensate for the losses in film sales.

Needless to say, the change of logo did
not prevent the losses either.

So, how can a company like Kodak get
into so much trouble despite recognizing
and pushing the shift to digital imaging?

The value of Kodak’s resources, its
position and its capabilities was
destroyed in the shift to digital imaging.

Over time, a fish develops skills and
finds a good position in the ecosystem.

It may live and prosper in
the ocean for millions of years.

But that does not matter
once you put it on land.

That’s why Kodak encountered such
problems despite their huge digital effort.

Kodak was a fish that had to learn how to
breath on land. And so far, it has survived.

With all these layoffs, losses and
demolitions, can anyone claim that
Kodak’s transition to digital
imaging is a success story?

Based upon other slideshows
about the Kodak Destruction and a look
at other companies and industries I
would say it is a success story.

The reason why those stories are
regarded as failures is that people
underestimate the difficulties
related to a digital shift.

First of all, digital technology has a fantastic
track record of slaughtering established firms.

The following slides will illustrate how digital
technology has destroyed established firms…

The typewriter companies
were extinguished…

The tube radio manufacturers were put out of
business by the transistor radio.

The mechanical calculator companies became
history with the rise of electronics.

More than two thirds of the Swiss watch
industry went out of business in 1970-85.

The music industry is collapsing right now…

These stories tell us that SURVIVAL
must be regarded as a SUCCESS, since so
many companies have died in those shifts.

Let’s take a look at Kodak’s competitors
in the film and camera industry…

Konica left the industry after
trying to survive through a
merger with Minolta.

Polaroid is also resting in peace.

Fuji has survived, but
encountered massive problems.

Thus, when looking at other industries, as
well as Kodak’s competitors, it becomes
clear that survival is rare and should
therefore be regarded as success.

If this is a success story, which were the
differentiating factors that
made Kodak survive?

1. Kodak recognized the threat at an early
point and developed knowledge
in-house about digital technology.

Doing it in-house is important for several
reasons. One is to make the new
technology accepted inside the company.
Another one is of course
to understand the nature of it.

2. Kodak has shown a willingness to
cannibalize on its film business.

If Kodak hadn’t done it, someone
else would have destroyed the film
business for them.

3. Kodak collaborated with other companies,
and other firms were acquired.

This is also important, because
the resource base has to be
renewed, and this is easier to do
by drawing upon the competence
others have developed.

4. From the early 1990s and on, Kodak
showed a willingness to change and to
embrace digital imaging.

If this hadn’t been the case,
particularly in top management,
Kodak would gone down the tube
in record time like Polaroid.

5. From an early point, Kodak not only
explored the new technology, but also tried to
commercialize it through various applications.

By doing so, the new technology would not to
the same extent be regarded as a cost for the
company, but rather an investment.

Summing it up, these images come from what
should be regarded as a successful
transition to digital technology…

If these images come from a success story…

… We can then understand how difficult it is
to survive digital revolutions…

Sources

The Digital Journalist
Grant, R.M., Eastman
Kodak: Meeting the Digital
Challenge, 2006
Investmoneyinindia.com

Find out more:

www.christiansandstrom.org

Disruptive Innovation, Kodak and digital imaging

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