Stock Research – Eastman Kodak And The Power Of Disruptive Technologies

It's simply amazing that ten years into the digital revolution, Eastman Kodak is trying to figure out what business they are in. For decades Kodak dominated the chemically based photographic process. You shoot a roll of film, and then you physically took the roll to a developer, and made a second trip to pick up the finished prints. Their only competition in the industry was the Japanese company, Fuji. The upstart would just eat away each year at Kodak's market, but never becoming a real threat to Kodak's dominance.

Meanwhile from outside the industry, Polaroid back in the late 1950's invented a camera where the chemical based development of the pictures took place inside the camera. The picture was ready in about 60 seconds. Polaroid developed a wonderful business and made a fortune for both its shareholders and its genius creator, Dr. Edwin Land.

What happened next was a business disaster, and Kodak should have learned from Polaroid's mistakes. Dr. Land came up with a moving picture development system. They poured hundreds of millions of dollars into a chemically based system. It would allow users to take moving pictures. The movies would be developed chemically inside the camera system, the same as the still picture system then utilized.

What Polaroid not only didn't plan for, but couldn't even imagine was that a disruptive technology would be created from another industry that would basically destroy Polaroid's business model. Japan would create digital photography. The first Japanese VHS and Betamax camera systems became available. The electronic based technology made so much more sense than Polaroid chemically based system. It forced Polaroid to shut down its movie system products. It also resulted in the immediate write off of hundreds of millions of dollars (equivalent to billions today) that it would never recoup.

Now I ask you, Kodak was in the business, we know that. They saw what this new technology did to Polaroid OVERNIGHT. Couldn't they imagine that it could happen to them? The answer is apparently not. The management team at Eastman Kodak has been brain dead for at least 20 years. The management team and the Board of Directors should have been dismissed more than a decade ago for gross incompetence. They took a magnificent cash generating machine, and allowed it to turn into a boring, mundane second class company.

They simply chose to ignore what was coming, and what was coming was a TIDAL WAVE, that would sweep away Kodak's traditional business. Kodak could have chosen to lead the digital revolution. They could have chosen to take the billions of dollars of cash generated by their traditional chemically based systems, and redeploy in other high end technology driven businesses like digital imaging in the medical industry. No, neither choice happened. The company chose instead, to DO NOTHING. Try to maintain the status quo was the order of the day.

Now Kodak is faced with a "what do we do now" decision? It is just a question of how many years it takes before the Kodak way of doing business (chemical processing) completely evaporates. There are a number of lessons to be taken from this example of a formerly world class company going belly up because of an inappropriate business model. Among them are:

• Every company must absorb the central thesis of Clayton Christensen's two books, "The Innovator's Dilemma", and "The Innovator's Solution". Harvard professor Christensen was the individual who coined the term, disruptive technologies, or what happens when a new innovation comes in and completely blows away a company's formerly dominant technology.

• No company has the luxury of sitting on its rear end, and counting on its cash hoard to keep it in business forever.

• Theodore Levitt of Harvard always talked about "What business are you in?" You'd better make sure that you are constantly thinking about how to obsolete your own business, because your competitors are thinking about it all the time.

• Every company should have an internal team that is separate and apart from the company. The sole function of this team would be to come up with ways to destroy the company by developing better products, or better yet technologies that would obsolete the company's current technology. Xerox decades ago created Xerox PARC (the PARC stands for Palo Alto Research Center) in 1970. They intentionally put it in Palo Alto, California because they didn't want to have their thinking contaminated by the atmosphere in Rochester, NY, a dead town. The same town as Kodak's corporate headquarters by the way.

You want to talk about accomplishments; Xerox PARC came up with the mouse that we use on personal computers. They also created the graphical user interface that you use on your PC, and the basic design of the personal computer was taken from Xerox PARC by Steve Jobs. Xerox completely failed to cash in on any of these creations. The guys in Rochester were just as asleep at the switch as the guys at Kodak. There must be something about the air they breathe in Rochester that lulls them into a sense of complacency.

• Companies need to buy smaller companies who are creating the innovating technologies that will put them out of business. If they wait until the technology enters an actionable phase, it is too expensive to purchase. Examples are Yahoo and Microsoft, both of whom had an opportunity to buy Google for millions of bucks. Google now has a market cap of $150 billion, and is virtually untouchable.

Is it too late for Kodak to save itself? The answer is probably yes. Very rarely can a company in such a downward spiral find the managerial talent, and more importantly COURAGE to transform itself internally. The current management team is too interested in continuing its own benefit package and retirement benefits, to make the hard, tough, and necessary decisions to be transformative. Hopefully, other American companies, and investors can learn from the bitter story that Kodak has to teach us. Good luck.