Friday, January 27, 2012
By now everybody knows about Kodak filing for Chapter 11 bankruptcy. The company’s stock is basically worthless, after peaking above $90 in the ‘90s. It now has twice as many retirees to which it’s paying pension benefits than it does employees. And Kodak owes its creditors nearly two billion dollars more than it could fetch in liquidation. There’s clearly a mess to clean up.
But there’s also a lesson to be learned from the company’s lost decade. Kodak has in many ways been caught in a perfect storm of market tectonics, those external forces that wreak havoc on growth and profitability. To wit:
Competition: Kodak invented the digital camera, all the way back in 1975. But the company neglected to see how it would redefine the future. Foreign competitors like Nikon, Fuji and Sony did, and they stole Kodak’s market share with increasing velocity.
Economic Factors: Not only had Kodak not anticipated how quickly the market would go digital, the 9/11 terrorist attacks decimated leisure travel and the picture taking that goes with it. Even as post-9/11 travel returned to normal levels, film purchases declined 10-15 percent annually in subsequent years. And the economic environment during the past four years exacerbated the problem.
Changing Dynamics: Film industry sales were expected to shrink 10% between 2008 and 2010. Kodak figured its own sales would decline by more like 20%. Turns out it was 40%. To make matters worse, the price of precious metals shot up in part because of federal monetary policy trying to combat the recession (silver is a key component in photographic film). Thus Kodak got squeezed on both sales and margins.
Along the way Kodak also grappled with the internal missteps that commonly plague struggling companies, most notably a loss of focus. The company explored the manufacture of chemicals, bathroom cleaners, and medical testing devices (among other things) in the ‘80s and ‘90s. And it even tried—too late as it turns out—to make a belated go of it in the digital camera business. Willy Shih, head of Kodak’s Consumer Digital unit in the 1990s, explained the hill the company had to climb. “With digital there is no film,” Shih said. “You make your money by selling cameras. And you now needed to make components. You needed to make lenses; you needed to make shutters — all kinds of things that the skills for which no longer existed in Rochester.”
Over the past few years Kodak also succumbed to a loss of nerve, pursuing a strategy of IP licensing and lawsuits, then beginning to sell off its patents to generate needed cash. Alas, it was too little, too late.
The lesson? Technologies change. Competitors poach. Economies crater. And growth stalls. It happens to the best of companies (more than half in an average decade, according to our research). But what impacts your company from without is less significant than its impact within. As Fujifilm’s CEO Shigetaka Komori puts it, “As time passes, the fact shows that when a company loses its core business, some companies are able to adapt and overcome the situation, while others are not.”
Kodak made a fateful decision to not pursue digital imaging when it could have had the market to itself, and it failed to evolve quickly enough in a post-photographic-film world. That’s not to point a finger—nobody has perfect information, and all of us stumble. It’s simply to say that while every company faces dramatic obstacles, addressing internal dynamics is as critical as responding to external events.