Case study: Kodak ’s failure is classic failure in Planning

There are few corporate blunders as staggering as Kodak’s missed opportunities in digital
photography, a technology that it invented. This strategic failure was the direct cause of Kodak’s
decades-long decline as digital photography destroyed its film-based business model.

Kodak management’s inability to see digital photography as a disruptive technology, even as its
researchers extended the boundaries of the technology, would continue for decades.

To understand how Kodak could stay in denial for so long, let me go back to a story that Vince
Barabba recounts from 1981, when he was Kodak’s head of market intelligence. Around the time
that Sony introduced the first electronic camera, one of Kodak’s largest retailer photo finishers
asked him whether they should be concerned about digital photography. With the support of
Kodak’s CEO, Barabba conducted a very extensive research effort that looked at the core
technologies and likely adoption curves around silver halide film versus digital photography.

The results of the study produced both “bad” and “good” news. The “bad” news was that digital
photography had the potential capability to replace Kodak’s established film-based business. The
“good” news was that it would take some time for that to occur and that Kodak had roughly ten
years to prepare for the transition.

The study’s projections were based on numerous factors, including: the cost of digital photography
equipment; the quality of images and prints; and the interoperability of various components, such
as cameras, displays, and printers. All pointed to the conclusion that adoption of digital
photography would be minimal and non-threatening for a time. History proved the study’s
conclusions to be remarkably accurate, both in the short and long term.

The problem is that, during its 10-year window of opportunity, Kodak did little to prepare for the
later disruption. In fact, Kodak made exactly the mistake that George Eastman, its founder, avoided
twice before, when he gave up a profitable dry-plate business to move to film and when he invested
in color film even though it was demonstrably inferior to black and white film (which Kodak
dominated).

Barabba left Kodak in 1985 but remained close to its senior management. Thus, he got a close look
at the fact that, rather than prepare for the time when digital photography would replace film, as
Eastman had with prior disruptive technologies, Kodak choose to use digital to improve the quality
of film.

This strategy continued even though, in 1986, Kodak’s research labs developed the first mega-
pixel camera, one of the milestones that Barabba’s study had forecasted as a tipping point in terms
of the viability of standalone digital photography.

The choice to use digital as a prop for the film business culminated in the 1996 introduction of the
Advantix Preview film and camera system, which Kodak spent more than $500M to develop and
launch. One of the key features of the Advantix system was that it allowed users to preview their
shots and indicate how many prints they wanted. The Advantix Preview could do that because it
was a digital camera. Yet it still used film and emphasized print because Kodak was in the photo
Case study: Kodak ’s failure is classic failure in Planning
film, chemical and paper business. Advantix flopped. Why buy a digital camera and still pay for
film and prints? Kodak wrote off almost the entire cost of development.

As Paul Carroll and I describe in "Billion-Dollar Lessons: What You Can Learn From The Most
Inexcusable Business Failures of the Last 25 Years," Kodak also suffered several other significant,
self-inflicted wounds in those pivotal years:

In 1988, Kodak bought Sterling Drug for $5.1B, deciding that it was really a chemical business,
with a part of that business being a photography company. Kodak soon learned that chemically
treated photo paper isn’t really all that similar to hormonal agents and cardiovascular drugs, and it
sold Sterling in pieces, for about half of the original purchase price.

In 1989, the Kodak board of directors had a chance to take make a course change when Colby
Chandler, the CEO, retired. The choices came down to Phil Samper and Kay R. Whitmore.
Whitmore represented the traditional film business, where he had moved up the rank for three
decades. Samper had a deep appreciation for digital technology. The board chose Whitmore. As
the New York Times reported at the time,

Mr. Whitmore said he would make sure Kodak stayed closer to its core businesses in film and
photographic chemicals.

Samper resigned and would demonstrate his grasp of the digital world in later roles as president
of Sun Microsystems and then CEO of Cray Research. Whitmore lasted a little more than three
years, before the board fired him in 1993.

For more than another decade, a series of new Kodak CEOs would bemoan his predecessor’s
failure to transform the organization to digital, declare his own intention to do so, and proceed to
fail at the transition, as well. George Fisher, who was lured from his position as CEO of Motorola
to succeed Whitmore in 1993, captured the core issue when he told the New York Times that
Kodak regarded digital photography as the enemy, an evil juggernaut that would kill the chemical-
based film and paper business that fueled Kodak’s sales and profits for decades.

Fisher oversaw the flop of Advantix and was gone by 1999. As the 2007 Kodak video
acknowledges, the story did not change for another decade. Kodak now has a market value of
$140m and teeters on bankruptcy. Its prospects seem reduced to suing Apple and others for
infringing on patents that it was never able to turn into winning products.

Addressing strategic decision-making quandaries such as those faced by Kodak is one of the prime
questions addressed in Vince Barabba’s book, “The Decision Loom.” Kodak management not only
presided over the creation technological breakthroughs but was also presented with an accurate
market assessment about the risks and opportunities of such capabilities. Yet Kodak failed in
making the right strategic choices.

This isn’t an academic question for Vince Barabba but rather the culmination of his life’s work.
He has spent much of his career delivering market intelligence to senior management. In addition
to his experiences at Kodak, his career includes being director of the U.S. Census Bureau (twice),
Case study: Kodak ’s failure is classic failure in Planning
head of market research at Xerox , head of strategy at General Motors (during some of its best
recent years), and inclusion in the market research hall of fame.

“The Decision Loom” explores how to ensure that management uses market intelligence properly.
The book encapsulates Barabba’s prescription of how senior management might turn all the data,
information and knowledge that market researchers deliver to them into the wisdom to make the
right decisions. It is a prescription well worth considering.

Barabba argues that four interrelated capabilities are necessary to enable effective enterprise-wide
decision-making—none of which were particularly well-represented during pivotal decisions at
Kodak:

1. Having an enterprise mindset that is open to change. Unless those at the top are sufficiently
open and willing to consider all options, the decision-making process soon gets distorted. Unlike
its founder, George Eastman, who twice adopted disruptive photographic technology, Kodak’s
management in the 80’s and 90’s was unwilling to consider digital as a replacement for film. This
limited them to a fundamentally flawed path.

2. Thinking and acting holistically. Separating out and then optimizing different functions
usually reduces the effectiveness of the whole. In Kodak’s case, management did a reasonable job
of understanding how the parts of the enterprise (including its photo finishing partners) interacted
within the framework of the existing technology. There was, however, little appreciation for the
effort being conducted in the Kodak Research Labs with digital technology.

3. Being able to adapt the business design to changing conditions. Barabba offers three
different business designs along a mechanistic to organismic continuum—make-and-sell, sense-
and-respond and anticipate-and-lead. The right design depends on the predictability of the market.
Kodak’s unwillingness to change its large and highly efficient ability to make-and-sell film in the
face of developing digital technologies lost it the chance to adopt an anticipate-and-lead design
that could have secured the it a leading position in digital image processing.

4. Making decisions interactively using a variety of methods. This refers to the ability to
incorporate a range of sophisticated decision support tools when tackling complex business
problems. Kodak had a very effect decision support process in place but failed to use that
information effectively.