Business

Saturday February 11, 2012

No more ‘Kodak moments’

What Are We To Do
By Tan Sri Lin See-Yan


EN route to Harvard for the second time in mid-1976, I well recall the family's visit to Disneyland.

At strategic places, the catchphrase for a precious “Kodak moment” is identified for photo-shoots promising an unforgettable moment captured in time, as in: the delight in posing against Cinderella's castle is such a “Kodak moment.”

My grandchildren will not experience this. Eastman Kodak Co (Kodak) filed for Chapter 11 bankruptcy protection in New York on Jan 19. Under US law, this provision allows for an orderly process of restructuring under bankruptcy, while being kept afloat in business to protect the company from being ripped apart by creditors. The struggling icon ran short of cash needed to fund a long sputtering turnaround.

The 131-year old enterprise had struggled for decades to cope with heightened competition, disruptive technology and crippling legacy cost obligations. As one commentator observed, Kodak ceded the photography market to “competitors such as Nikon, Sony and Canon. It hung onto its identity - film, and watched it fade away before its eyes.”

A Kodak screen at Times Square in New York. Eastman Kodak Co, the inventor of the digital camera, plans to get out of that business in the first half of this year as the bankrupt company looks to cut costs. The decision to stop selling digital cameras along with pocket video cameras and digital picture frames marks the end of an era for Kodak, which also invented the handheld camera. — Reuters

Kodak still hopes to continue in business with the aim of emerging in 2013 after using the bankruptcy court to restructure and sell off some patents. Basically, it intends to bolster liquidity, monetise non-strategic intellectual property and resolve unsustainable pension and health costs to enable the enterprise to focus on its most valuable business lines. Can it succeed? To answer this, we need to get to where it has been and understand why it failed in the first place. Kodak's experience carries valuable lessons.

Once ranked among America's corporate titans, Kodak launched its first “Eastman” camera in 1888 with the slogan: “You press the button we do the rest.” Kodak was founded in 1881 by George Eastman who developed a method for dry-plate photography from kitchen experiments in his mother's Rochester home. In 1900, it introduced the Brownie camera, selling it for US$1. Since then, Kodak offered many firsts: first film designed for making motion pictures with sound (1929); introduced Kodachrome film (1935) and offered the first commercially successful amateur colour film; the first instamatic camera (1963); created the first digital camera (1975); first to record sales exceeding US$10bil (1981); launched a website to upload and share photos (1997); stopped selling reloadable film-based cameras (2004) and ended production of Kodachrome (2009) after a 74-year run. It invented the hand-held camera and helped bring to the world the first pictures from the moon in 1969.

Kodak once dominated the industry and its film was even the subject of a popular Paul Simon song but failed to quickly embrace modern technology. By 1976, Kodak accounted for 90% of film and 85% of camera sales in the United States. Until the 1990s, it was regularly rated one of world's top five most valuable brands. Kodak's revenues peaked at US$16bil in 1996, with profits of US$2.5bil in 1999. Analysts' consensus forecast was for revenues of US$6.2bil in 2011; it reported 2011 third quarter loss of US$222mil, the ninth quarterly loss and headed for its sixth annual loss in the past seven years. Since 2008, Kodak's losses exceeded US$1.76bil. In 1988, Kodak employed more than 145,000 people worldwide; it now has barely one-tenth as many and falling further. Moody's downgraded Kodak to a very low junk Caa3. Its share price has since fallen more than 90% to a low of less than US$40 (it was a component of the Dow Jones Industrial Average from 1930-2004).

What went wrong?

Kodak's latest move represents a final reversal of fortune for a company that once had almost complete domination of its industry. Its troubles date back to the 1980s when the enterprise struggled with competitors that highjacked its market share. It later had to cope with the rapid rise of digital photography and smartphones that double as cameras.

Ironically, Kodak invented the digital camera (in as early as 1975) but never managed to capitalise on the new technology, adopting a bad strategy of not cannibalising itself (to be successful, digital photography will take market share from its own film business). It's perceived as though the “company is stuck in time.” It forgot it allowed others to come in and eat its lunch.

Then, there were the restructurings, one after another that found Kodak selling unrelated products and finally pitching head on into the highly competitive printer business. It got savaged. By the time Kodak realised this, it was five years too late to accelerate its shift back to the digital age, said Antonio Perez, its CEO in August 2011. The company's problems came to a head in 2011 when its strategy of using patent lawsuits and milking its family silver (patents for licensing deals) to raise cash ran dry. Hoping to plug the hole, Kodak put 1,100 digital patents up for sale in August 2011. By early 2012, the sale hit snags and faltered. When it starts hacking off an arm here and a leg there, the end can't be far.

Kodak vs Fujifilm

It is now clear whereas Kodak suffered, its long-time rival Fujifilm did rather well. Both had a lot in common:

*both enjoyed near monopolies at home

*both witnessed their common traditional business being made obsolete while Kodak failed to adapt, Fujifilm transformed itself (its market capitalisation in 2011 was US$12.6bil against Kodak's US$220mil

*both saw different parts of the film market turn digital, yet Fujifilm adapted faster with new strategies involving a painful change of mindsets, including bagging the 1984 Olympics, while Kodak dithered in complacency; and

*both diversified Kodak toyed with chemicals, cleaners, medical-test devices and went big on drugs which fizzled out (and sold in the 1990s). Fujifilm was more successful in cosmetics (its Asialift line is sold in Asia and now, Europe) and in making optical films for LCD flat-panel screens which paid off in one which expanded the viewing angle, it enjoys 100% market share.

Kodak was more nimble and creative with digital cameras, adopting Gillette's “razor-blade” business model (sold cameras cheap but made money from films). Kodak's success lasted only a few years before camera phones scuppered it. Furthermore, Kodak misread emerging markets, including the Chinese leap-frogging from no camera straight to digital. At Fujifilm, technological change sparked an internal power struggle. By 2000, the leadership with vision won and adopted a new business model to propel Fujifilm to high profitability.

“Surprisingly, Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one,” observed a US case study. Today, Fujifilm is up and Kodak, down. Even so, one thing is clear. Without a doubt, Nikon, Sony and Canon are still far better placed to fight the digital battle given their superior intellectual property and massive R&D spending.

Creative destruction

It is said western capitalism quite often invents the technology that destroys its own business. Kodak's bankruptcy provides the perfect example. After all, it did build the first digital camera. That technology, followed by the onslaught of smartphones, battered Kodak's old film and camera-making business nearly to its death. Today, we see yet another tale of how easily a corporate icon can be felled by a single disruptive technology.

Caught in a classic dilemma, Kodak stayed complacent and made bad business decisions, including its abortive move into pharmaceuticals. Its story remains that nothing lasts forever. In a free market, Schumpeter's creative destruction (a process where new technologies destroy the company but creates more vibrant new enterprises) benefits consumers, who no longer need to lug around clumsy digital cameras now that smartphones take such clear photos.

Indeed, the destruction of companies and jobs also means the emergence of more competitive companies, offering higher value added jobs and better products and services at much lower prices. Dominant market positions can prove fleeting in the era of Moore's law (where prices of products using sophisticated computing technology fall by one-half in the face of a doubling in digital capacity every 18 months).

We see this throughout the 20th century. Digital Equipment, the iconic dominant American computer maker, failed to spot the rise of personal computers because its managers were caught sleeping. Predominant firms in other industries have been killed by smaller shocks. Of the 316 departmental-stores chains of a few decades ago, only Dayton Hudson adapted well and started an entirely new modern business to survive: “Target.”

That's what creative destruction does to businesses that change only gradually, if at all. Kodak's complacency follows a long list: Polaroid in 2008, Blockbuster in 2010, Nortel Networks (which also fell behind the technology curve) in 2010, Borders (the largest bricks and mortar bookseller) in 2011. Unlike Kodak, Barnes & Nobel is now seriously restructuring to separate its costly Nook electronic-book business in highly competitive digital reading. It's still unclear if it has a future. Neither is Kodak's eventual survival. Creditors will have to decide whether its consumer and commercial inkjet printing are worth supporting in a highly competitive and saturated marketplace where it is still a bit player (2.6% market share), dominated by giants like HP; or whether the bulk of its value really rests in its patents. We just have to wait & see.

What to do?

After 131 years, Kodak - along with many great companies before it - appears simply to have run its course. Many have died. Perhaps the challenges posed by new technologies are too overwhelming. Harvard's Clay Christensen (“The Innovator's Dilemma”) concluded: “It was such a fundamentally different technology there was no way to use the old technology to meet the challenge.”

Kodak blinked against the headlights. Many saw change coming and got ahead of it, often changing significantly. IBM bolted personal computers and Milliken, much of its traditional textile production. In the process of creative destruction, IBM and Milliken lived the creative part; Kodak met with destruction. There is also the legacy issue - pensions and health benefits have become too costly to sustain.

In this, Kodak is emblematic of the post-war era - Kodak and the likes of General Motors bought labour by generous benefits, thinking revenues will always grow. Similarly with Greece and Spain. They proved crippling in uncertain times. Today, companies riding high on the technological wave need to heed Kodak's lesson: they aren't immune to business blunder or the impact of better or revolutionary technologies. Kodak had a good run for its money! Can Microsoft, Google, AOL or Facebook stay the course in the 22nd century? Schumpeter observed: “Like the actual engines that loom so large in creative destruction - steam, electric, diesel, gasoline, jet - the capitalist engine can slow down, sputter, overheat, explode or die.”

*Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my

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