Columbia innovation fall 2014 v 0.06
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A presentation highlighting competitive differentation in the imaging sector using Kodak in 1890, 1990 and GoPro in 2014
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Columbia innovation fall 2014 v 0.06
- 1. Unique capabilities plots help explain evolution’s outcomes Nick Gogerty Fall 2014 Columbia University Background pre-reading materials: The Nature of Value innovation excerpt www.thenatureofvalue.com GoPro presentation materials *all $ figures are normalized to 2014 USD
- 2. Goal: understand Innovation Capability Plots & competitive life cycles • 3 case studies: imaging innovation companies 1. A co. “early stage 80’s” technology start-up success 2. B co. 90’s large global dominant imaging giant 3. GoPro 2014 hot IPO Camera/media firm • Evaluation methods: 1. Plot Ten Types of Innovation capability (Doblin model & book) w/The Nature of Value vector analysis http://www.doblin.com/tentypes#the-book 2. Analyze The Nature of Value creation as capabilities evolve with innovation’s negative & positive optionality
- 3. Ten Types of Innovation* Capability Plot Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Multiple unique capabilities provide strong competitive advantage *Ten Types of Innovation is a Doblin Group model Cycle duration
- 4. A Co. Early stage imaging company • Raised $5m in late 80’s w/cutting edge consumer imaging technology • Radical consumer image capture technology at $659 price point • >10 x technical improvement • Introduced social media images via a tech business • Built huge brand by targeting “amateurs” & people wanting “memories” • Tagline: “You push the button. We do the rest.”
- 6. Unique Brand & Marketing emancipated woman Kodak Ad 1895Kodak as a verb 1900
- 7. Social media & LOL cats (dogs) circa 1900 I Can Haz Cheezburger! Unique product performance Kodak Brownie
- 8. Unique distribution & service Kodak Shop 1900
- 9. Unique core process Kodak factory 1900
- 10. Kodak Innovation Capability Plot late 1890’s Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Multiple unique capabilities provide strong competitive advantage Cycle duration
- 11. Kodak 1900-1920: success! • Wildly successful. Major growing/profitable domestic firm that expands internationally • Added to Dow Jones Index • Owns 95% of American market • Founder had enough cash/shares to settle patent dispute personally for $109m • Founder hired many employees from MIT. Later gave $488m donation to MIT
- 12. Kodak 1990’s dominant imaging player • 100k employees globally • Market cap $45 billion in late 90’s • 3rd largest patent filer in US focused on imaging photography, related digital technology, highest patent : R&D ratio in US • Portfolio of businesses: digital photo, image printing, internet plays etc. • 20 year technology head start on competition in digital imagery • Dominates 95% of market in the US w/ strong global position & distribution • Partner with Apple on cutting edge digital consumer products • CEO cheerleading:” We are in a great business, with great people, great products and technology and an unbeatable brand name.”
- 13. Kodak Innovation Capability Plot 1990’s Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Cycle duration • Inkjet printing • Digital picture frames • Digital cameras • Online services • Photo kiosks • Etc.
- 14. 1997 $45 B mkt. cap. 2012 Kodak 15 yr. outcome
- 15. 1890’s 1920’s 1950’s 1970’s 1990’s* 1907 1935 1961 1970 2006 2000-2012 1900’s
- 16. • Camcorder market? • How deep is the moat? • Where to next?
- 17. Ten Types of Innovation* Capability Plot Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience *Ten Types of Innovation is a Doblin consulting concept, for more info see Ten Types of Innovation book. Cycle duration
- 18. • Fast growing leading edge hardware? – Current penetration b-model US / abroad = 40% – Innovation Capability cycle length? – Next generation tech 3-d? • Media company? – Content creators? – Channel distribution? – Network effects? – 1 billion views on Youtube= X $’s • Short seller risk 1. applemazongooglebook... 2. Market insanity/instability in 15 years?
- 19. Ten Types of Innovation* Capability Plot Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience *Ten Types of Innovation is a Doblin consulting concept, for more info see Ten Types of Innovation book. Cycle duration in 15 years?
- 20. Summary 1. Innovation > Product! 2. More unique Innovation types is better. Duration of extra-normal profits is what counts. 3. Customer perspective of “unique” is what adds value 4. Negative & positive optionality presents risks & opportunities long term 5-10 years 5. Fast growth innovation businesses counter-intuitively require higher yields / lower multiples due to risk of short lived advantages 6. History holds great free lessons on survival as evolution’s economic process wears on all firms over time
- 21. Epilog 1 GoPro $0 $20 $40 $60 $80 $100 $120 $140 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 GoPro SPY normalized $0 $20 $40 $60 $80 $100 $120 $140 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 GoPro SPY normalized -37.5% in 3 weeks time $0 $20 $40 $60 $80 $100 $120 $140 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 GoPro SPY normalized +24.7% (annualized 37.8%)
- 22. Epilog 2 The Ghost of Kodak
Editor's Notes
- The goal is to make an estimate of the duration and depth of “extra” normal returns using a capbility plot and estimating the duration of cycle advantages.
- A and B co. they are the same company at different stages of their lifecycle. They are kodak in the 1880’s-1990’s. Positive optionality is a companies internal ability to create Value and grow ROCs. Negative Optionality is the threat of other firms (positive options) destroying excess ROCs diminishing ROE’s for shareholders. All firms and innovations die!
- A refresher from the assigned reading: Business model of sending in a camera and film because all you really want is pictures! Powerful Brand as a technical leader with ease of use Channel is a moderate mix of direct to consumer, retail and own store distribution Service involves a unique high touch, high quality service Product system that is a unique mix of service and hardware Core process unique manufacturing technology highly patented We can go over this in more detail. The length of the vector is assigned a time duration based on the “typical” time cycle for the sector in months or years. Example cell-phone product may be 9-18 months. Automobile product may be 3-7 years. A unique channel such as tupperware/avon may be 5-10 years (competitive replication/threat) period.
- Early stage imaging company Founder gave $2 billion to charity
- A unique service vs. glass plate photography which required a “professional” to develop large glass plates with volatile chemicals in the dark. Kodak was for amateurs and dramatically reduced the cost to get an image using new “film” technology developed by Kodak.
- Kodak also tried to become a verb (a supposed modern example of branding. Kodak targeted women among other “new” camera groups. women only got the vote in the US in 1920.
- Product went from expensive professional toy for “staid portraits” to cheap enough for children to take flippant images.
- Kodak shops provided unique service and were accessible to the average person. Kind of like how apple made technology approachable with shops. Prior to this a “photographer” had to be a mix of chemist, artist and professional to justify the costs etc. Note the consumer friendly Kodak store here with a service bar and chairs for amateurs to learn. Before this photographers went to chemists to buy chemicals to mix.
- A kodak factory using “cheap” labor in upstate Rochester New York and then London. Foxconn circa (1900)
- Kodak’s primary offering had a very strong position with multiple vectors in very long cycle capability types. Business model of sending in a camera and film because all you really want is pictures! Powerful Brand as a technical leader with ease of use Channel is a moderate mix of direct to consumer, retail and own store distribution Service involves a unique high touch, high quality service Product system that is a unique mix of service and hardware Core process unique manufacturing technology highly patented
- Kodak even Diversified eventually into hand grenades. Kodak gave away over $2 billion in 2014 dollars to charity. Killed himself in 1930’s saying, “my work here is done.”
- A giant without a unique capability set will get taken out by evolution’s innovations. Bankrupt 15 years later. 2005, Kodak ranked No. 1 in the U.S. in digital camera sales that surged 40% to $5.7 billion Focusing on reducing defects six sigma 3.4 per million. We are in a great business, with great people, great products and technology and an unbeatable brand name. Also recognized for excellence in 1997 was Kodak’s compelling Web site, www.kodak.com. It received the "Best World Wide Web Ad" citation in the 6th Annual Mar.com Awards, the WebMaster "50/50 Award" for excellence and innovation on the Internet and the Web Marketing Association’s "Best of Industry" Award in the photography/imaging category. Quality. Quality is critical to Kodak’s future. Our focus is two-fold reducing defects and improving cycle time. Our goal is to achieve Six-Sigma quality (approximately 3.4 defects per million opportunities). We are determined to get there at a rate which requires a greater than 50% improvement per year. In 1997, our rate of progress both for quality and cycle time accelerated, approaching a 50% improvement over the company’s 1996 performance. These improvements with ultimately lead not only to improved customer satisfaction, but also to much lower costs. Bankrupt in 2012 1976 - Kodak had a 90pc market share for photographic film and an 85pc share of camera sales in the US.
- Even though Kodak invented digital imagery in 1975, the core business had little unique capabilities in the space by 2000’s. Management talked about brand etc. and the “synergy” of stretching Kodak into the digital imaging space. They tried to win on volume, had 40% of digital camera space in 2004 with me too commodity camera’s. Digital phones “ate” the product. Other “brand” extensions were me too offerings that lost money. Adjacent spaces were money losers. Interestingly Kodak was structurally doomed and it is unlikely a CEO could have allocated capital to non-core or related businesses. Very smart people were trapped into systematically destroying $45 billion in value and 100k jobs over 15 years.
- Resigned from the better business bureau in 2006 due to inability to respond to consumer complaints on digital camera’s! quality feel with price and margins as they sank money into the business. Deemed one the 7th worst polluter in America in 2002. Enter into a series of “me too” businesses related to imaging- inkjet printers, digital photo frames, digital cameras etc. The only unique aspect these offerings had was brand and marginal quality. “strategically” they were the future of imaging, but provided few to no unique competitive capabilities.
- Actually developed digital camera in 1975 but dropped it due to fears about impact for film business (internal negative optionality) stifled innovation. 1900’s saw product shrink in volume 90% get advanced. 1920’s hired a designer to make art deco camera’s 1950’s incorporated flash technology. 1970’s instamatic put the camera in your pocket. Sold over 100 million. 1990’s co-launch with Apple Computer digital “quick-take” camera. 2000’s me-too product commodity mega pixels being sold. 2001 ofoto purchased. Sold in 2012 for Shutterfly for $23.8 million Difficult to make technical transition (most companies are good for on “technical architecture” and can’t shift. Kodak made prodcut from 1890’s 10x smaller 1900, designer art deco 1920’s, incorporated flash in 1950’s, consumer disposable “pocket sized” in 1970s selling over 100m instamatics. Tried collaboration with Apple Computer in 1994 w/ quicktake digital camera. By 2004 owned 40% of digital camera market with “me-too” products losing out on price/features.
- So here is today’s “hot” ipo GoPro. Are they closer to Kodak 1890’s or Kodak 1990’s in terms of unique capabilities? How long will they deliver extra-normal profits.
- Strong Brand (one of the biggest assets, however other brands may be able to get into to the business with aggressive product positioning or sub-branding) A somewhat unique channel in action sports shops and big box as well international (again other big brands can go there fast) The bundling of various mounts, video processing and remote is unique. But a few pieces of plastic etc. bundlng can be replicated GoPro is high performance and well know, but the image cycle space has very short development cycles 12-18 months. Core process (gopro partnership with a specialty image chip firm provides a slight advantage for now)
- Youtube revenue is likely worth $8-15 million/ billion views. Not much for a multi-billion market cap firm. Go Pro is maybe an $800m firm with a life expectancy of 7-10 years which could easily never pay a dividend and destroy shareholder value competing to stay “product” innovative.
- Lets fill in the blanks. What are you buying with GoPro? What is a feasible unique capability set, they could create, evolve into? What is it worth?
- Innovation is much bigger and more important than product.
- Went out and sold short on Sep 22 after class you sold at $68.27. You immediately lost 37.5% in 3 weeks time. You are now up 24.7%. Annualized basis you are up 37.8% and a top 1% hedge funder. The reality is that the jury is still out. S&P500 is up 8.0% same period
- Launched Nov 8th 2014.