TWO

Kodak Misses Its Moment

In early 2012 Kodak filed for bankruptcy after a storied 131 years of busi-
ness. Kodak made a great deal of money from its analog, chemical film
business and had one of the top brands in the world. When digital photog-
raphy came along, Kodak tried, but failed, to convert itself into the same
kind of powerhouse in digital that it had been in film. There are many rea-
sons for this failure, which we explore in this chapter. Today it is ques-
tionable whether or not Kodak will be able to survive by selling its
portfolio of patents, growing its printer business, and successfully emerg-
ing from bankruptcy. Many believe that liquidation is a more likely
outcome.
Most of our examples of firms searching for survival involve digital
products like newspapers and music because the Internet and information
technology are all about digital. Kodak presents the case of a firm with a
very uncertain future because of a physical product and its interaction
with the Internet, that product being the digital camera. The digital camera
combined with information and communications technologies (ICT), spe-
cifically the capabilities of the computer to store and display photographs,
and the Internet to transmit them, transformed the major customer
processes associated with photography. The consumer could take many
photos at virtually no cost, and delete unwanted ones by pushing a button.
Rather than waiting to develop a photo and then sending it by mail to

Parts of this chapter have been adapted from H. Lucas and J. M. Goh, “Disruptive Tech-
nology: How Kodak Missed the Digital Photography Revolution,” Journal of Strategic
Information Systems (March 2009): 46–55.
16 The Search for Survival

another person, the customer uploads the picture to a PC and sends it as an

e-mail attachment to multiple recipients or posts it to a shared Web site. If
the customer wants a hard copy, she can print a picture locally on an inex-
pensive color printer on a PC, send it to an Internet photo service, or go to
a store that has a printing kiosk.

THE RISE AND FALL OF KODAK

George Eastman founded the Eastman Kodak Company in 1880 and
developed the first snapshot camera in 1888. It became clear early on that
consumables provided the revenue; cameras did not need to be expensive
because their owners used large amounts of film. Kodak invested heavily
in film and was one of the few companies that had the knowledge and pro-
cesses to succeed in producing color film. The company hit $1 billion in
sales in 1962. By 1976, Kodak had 90% market share of the U.S. film mar-
ket and 85% share for cameras. Kodak’s photofinishing process quickly
became the industry standard for quality. As a result, most of the power
of the corporation centered on its massive filmmaking plant, and histori-
cally CEOs came from manufacturing jobs at the factory (Gavetti,
Henderson, and Giorgi, 2004).
Kodak’s sales hit $10 billion in 1981, but then competitive pressures,
especially from Fuji, hindered future increases (Gavetti, Henderson, and
Giorgi, 2004). In 1986, Kodak invented the first megapixel sensor captur-
ing 1.4 million pixels to produce a high-quality 5x7 print. Kodak intro-
duced more than 50 products that were tied to the capture or conversion
of digital images. In 1990 Kodak began to sell its Photo CD system in
which a consumer took a roll of film to a photofinisher who placed images
on a CD-ROM rather than paper. The consumer needed a Photo CD player
to see the images on a TV screen. However, costs were too high and the
product never achieved the success Kodak had forecasted.
Kodak went through a total of seven restructurings during the period
between 1983 and 1993. In 1993 Kay Whitmore, a Kodak insider, stepped
down as chairman and was replaced by George Fisher, the CEO who had
turned around Motorola. The board saw Fisher as a “digital man.” One of
Fisher’s first strategic moves was to refocus Kodak on photography; he
sold the companies in its health segment, collecting $7.9 billion he used
to repay debt (Gavetti, Henderson, and Giorgi, 2004). He also went after
Fuji and the Japanese government for restraining the sales of Kodak prod-
ucts. Fisher did not give up on film; he believed that China was an emerg-
ing market with great potential for photography and invested heavily there
in a joint venture with the Chinese government.
 Kodak Misses Its Moment 17

By 1996, Kodak had cut $50 million from the cost of film and paper pro-
duction and had reduced cycle times; what used to take months could be
done in less than a day (Swasy, 1997). By 1997, digital camera sales were
increasing by 75% a year while film camera sales increased by only 3%.
By this time there were many new entrants in digital photography, mostly
Japanese electronics firms. In 2000, the value of digital cameras sold passed
the value of film cameras. That year Fisher left as CEO and was replaced by
Daniel Carp. In 2001 sales of analog cameras dropped for the first time.
In 2002, Kodak bought Ofoto, an online picture service, signaling a greater
commitment to digital photography. Kodak’s 2003 annual report’s chair-
man’s letter stated that Kodak “implemented a digitally oriented strategy to
support revenue and sustainable earnings.” Why had Kodak taken so long
to announce a digital strategy? In the same year, Kodak closed its film camera
factory in the United States. The 2004 chairman’s letter reported on progress:
“In the first full year of its digital transformation strategy, Kodak came out of
the gate at a full gallop—and we continue to build momentum.” Why did
Kodak wait until 2004 to develop a digital transformation strategy? In 2005,
Carp stepped down early as chairman and was replaced by Antonio Perez.
Since 1993, Kodak has reduced its labor force by close to 80% through
retirements and layoffs, over 100,000 employees, a strong indication of
the difficulties the company has encountered (see Figure 2.1). Kodak net
sales reached $20 billion in 1992, and dropped to below $15 billion in
the ensuing five years, though some of the decline was due to divestitures.
Fuji and other brands began to compete heavily with Kodak, offering
high-quality film at 20% below Kodak’s price. By 1993 Fuji had a 21%
market share of worldwide film sales (Gavetti, Henderson, and Giorgi,
2004). In addition to pressure from competitors, investors have been
highly critical of the company and its management. Share prices in
Figure 2.2 rose during Fisher’s first four years of leadership (1993–
1997), and then began a precipitous decline during Carp’s chairmanship
starting in 2000.

THE MOVEMENT TO DIGITAL PHOTOGRAPHY

The great irony at Kodak is that one of its engineers, Steve Sasson,
invented the first digital camera in 1975; he and his supervisor, Gareth
Lloyd, received a patent for the camera in 1978. Since then Sasson has
been working to protect Kodak’s intellectual property and patents on the
camera. But Kodak failed to take advantage of Sasson’s invention for
many years, sticking to its film business instead.
Figure 2.1 Kodak’s Net Sales and Number of Employees
 Kodak Misses Its Moment 19

Figure 2.2 Kodak Share Prices

The transformation from conventional photography to digital photogra-

phy took about two decades. Information and communications technolo-
gies play as important a role in digital photography as the camera itself.
The computer is a vehicle for editing, saving, storing, and ultimately shar-
ing photographs with others. The Internet is the vehicle for the distribution
of multiple copies of an image to different recipients.
Steve Sasson remarks on the history of digital research at the company:

Well, you’d be surprised at some of the breakthroughs and innova-

tions that Kodak was doing. We were sort of in an odd position
where we were certainly supporting Silver Hallide photography for
all our customers, but we were also doing advanced research into
digital imaging. You know, Kodak made the first megapixel imager
in the mid-1980s. We were doing image compression research and
even making products using, what we call, DCT compression back
in the mid 80s. And we made some of the first cameras. You might
be surprised that a Kodak digital camera went aboard the 1991 space
shuttle mission.
20 The Search for Survival

Paul Porter, Kodak’s Director of Design and Usability, commented:

We were way ahead of the curve in digital even though we were

pretty much a film and chemical company. We did a lot of research
in digital because we knew at some point in time the world would
change. We invented the digital camera. So, being the first ones there
we continuously worked in the labs so to make sure when that
change was made we were prepared for it. So we have the expertise
in the research labs to generate these innovations that make our experi-
ence either, more gratifying, more intuitive or better connected than
what other people do.

As prices fell and performance of digital cameras improved in the 1998

time frame, there was a dramatic increase in the sales of digital products
(see Figure 2.3). The movement toward digital photography has a huge
adverse impact in firms that had historically been in the photography busi-
ness such as Kodak, Fuji, and Konica Minolta. When photography moved
from film to digital, it invited a whole new group of competitors into the

Figure 2.3 Sales of Film and Digital Cameras

 Kodak Misses Its Moment 21

marketplace. Companies like HP, Lexmark, Epson, and Canon suddenly

became photofinishers with their color printers, some of which were
designed to work easily with digital cameras to produce prints. A number
of online services like Ofoto sprang up.

WHAT WENT WRONG?

For Kodak, the invention and growth of digital photography was clearly
a disruptive technology that had a dramatic impact on film sales. It was a
once-in-a-hundred-years change for the company. One of the key failures
at Kodak was the inability of the organization to bring about change: the
company had great resources and talent, but its employees, especially in
middle management, had a rigid mind-set constructed around film. The
board of directors at Kodak hired George Fisher to bring about change,
to help convert Kodak into a digital company and create a digital mind-
set. Fisher separated the company’s imaging efforts into a new division
of Digital and Applied Imaging. Eventually Fisher arrived at a “networks
and consumables” model for Kodak. The company would be in the middle
of the imaging business with customers, sending photos, using Kodak
print kiosks, and printing photos using Kodak printers and paper (Gavetti,
Henderson, and Giorgi, 2004).
Middle managers at Kodak did not serve the function of filtering ideas
that bubble up from lower levels of the organization to determine what
to pass on to senior management. Instead, middle managers resisted digi-
tal photography for a variety of reasons, a resistance that in the end jeop-
ardized their own jobs. Fisher and the rest of senior management were
unable to overcome these rigidities.
Kodak had a number of capabilities, but its capabilities in film over-
shadowed those in digital processes. Kodak managers were very success-
ful in developing processes for manufacturing high-quality film and
printing paper. Kodak also had a number of technological assets that posi-
tioned it for success in the film business, including knowledge of chemis-
try, film production, and patents on its processes. There were also many
complementary assets in place, including one of the best-known brands
in the world and advertising programs. Kodak’s historical path was
through film. It was digital technology that represented a completely
new path for many employees. In Kodak’s case almost a century’s experi-
ence in film inhibited rather than facilitated a shift to new technology.
It appears that core competencies responsible for Kodak’s success in the
past turned into rigidities that inhibited its response to digital photogra-
phy, particularly in the ranks of middle managers. Kodak employees had
22 The Search for Survival

a wealth of knowledge about making film. Some employees were knowl-

edgeable about digital photography, but they tended to be new employees
hired to create change. The traditional film managers were highly rigid in
their adherence to this medium:

“Kodak wanted to get into the digital business, but they wanted to do
it in their own way, from Rochester and largely with their own peo-
ple. That meant it wasn’t going to work. The difference between their
traditional business and digital is so great. The tempo is different. The
kind of skills you need are different. Kay and Colby would tell you
they wanted change, but they didn’t want to force the pain on the
organization.” John White (Swasy, 1997)

“We’re moving into an information-based company,” Leo J. Thomas,

SVP and director of Kodak research . . . “[but] it is very hard to find
anything [with profit margins] like color photography that is legal.”
(The Wall Street Journal, 5/22/85)

At Kodak, senior managers failed at bringing about a massive change in

the organization. Fisher converted those at the top of the organization to
believers in the future of digital photography. In an interview Fisher said
that he realized later the belief in digital did not extend throughout the
organization:

The old-line manufacturing culture continues to impede Fisher’s

efforts to turn Kodak into a high-tech growth company. Fisher has
been able to change the culture at the very top. But he hasn’t been
able to change the huge mass of middle managers, and they just don’t
understand this [digital] world. (Businessweek, 10/20/97)

I think that the fear drove paralysis that manifested itself as time went
on, to rigidity with respect to changing our strategy and I didn’t see that
at the start . . . we really had to work very aggressively to get middle
management first of all understanding what we were trying to do and
believe that this was a story of opportunity, that we were in the picture
business, that digital was just a technology just like film was, and that
picture business opportunity was gigantic, and there was a future for
them . . . Their arguments would be all over the map . . . Kodak can’t
succeed in this market. We’ve tried some consumer products before
and failed miserably. There is no money in this business; it’s all low
 Kodak Misses Its Moment 23

margin . . . There is a new set of competitors . . . we don’t know any-

thing about them.

I also believe firmly . . . (that) digital imaging was everything in the

future. Therefore we were either going to be in the picture space . . .
or we weren’t. If we were going to be in it, we’d have to make an
all out assault on digital imaging which meant a step function change.
(George Fisher interview, Gavetti, 2005)

Some of Kodak’s failure is due to the culture of the company and employ-
ees’ strong belief that Kodak meant film.

“No matter what they said they were a film company,” says Frank
Zaffino (a Kodak executive) . . . “Equipment was okay as long as it
drove consumables. . . . Executives abhorred anything that looked
risky or too innovative, because a mistake in such a massive manu-
facturing process would cost thousands of dollars. So the company
built itself up around procedures and policies intended to maintain
the status quo.” (Swasy, 1997)

Kodak’s strong market share produced a monopoly, rigid mind-set

according to John White, who was hired from the Pentagon to work on
software. “As in many large old successful companies, people running it
never created a business. They presided over the franchise . . . That’s not
a good place to train people to be tough” (Swasy, 1997).
Managers at all levels in Kodak also consistently underestimated the
growth of the market for digital cameras. Kodak was convinced that the
professional photographer would be the first adopter and that amateurs
would move more slowly. From the sales statistics in Figure 2.3, this pre-
diction was seriously in error. Today it is estimated that 75% of Kodak’s
sales come from digital products (BusinessWeek, 7/4–10/2011), but it took
a twisted and traumatic path to reach this point.
Kodak’s culture and hierarchical structure also got in the way of an
effective response to digital photography. Kodak was a company that val-
ued harmony, so a manager might think that there was support for a new
innovation because people failed to speak out against it, even though they
opposed the idea. Employees valued hierarchy and authority:

It was so hierarchically oriented that everybody looked to the guy

above him for what needed to be done. (Business Week, 1/30/95)
24 The Search for Survival

At Kodak this arrogance fueled the growth of a nightmarish

bureaucracy so entrenched it could have passed for a government
agency. . . . There was an emphasis on doing everything according to
company rulebooks . . . Meetings were held prior to meetings to dis-
cuss issues and establish agreement in order to avoid confrontations,
which were considered un-Kodak-like. (Swasy, 1997)

What of the future? Carly Fiorina observes:

Conventional photography . . . was a physical, chemical process . . .

Less than five years later (post 1999) that physical process had
become virtually completely digital. It has also become mobile. . . .
along the way Kodak protected its franchise for as long as it could.
And when Kodak finally declared that it would enter the realm of dig-
ital photography in a big way when it was completely obvious to
everyone that the old model simply would not survive. The resulting
strategic about-face was applauded as necessary but was accompa-
nied by massive write-offs and losses because the obvious move
was overdue. It is still not yet clear what Kodak’s role or success will
be in the new digital age. The brand survives, but will the company?
(Commencement Address, Smith School of Business, University of
Maryland, May 22, 2006.)

And in a 2007 interview:

Well, it’s . . . difficult when businesses are very successful to take a

risk and try something new. . . . Kodak sat on a mountain of cash
and profitability in their traditional photography business and
I believe their thinking was digital photography will eat into my tra-
ditional most profitable business. I don’t want that to happen. What
I think Kodak miscalculated about was they weren’t in charge of
whether that would happen. Consumers were in charge. Individuals
were in charge. And an individual will always choose . . . what
gives them greater control, flexibility, freedom, choice . . . So sud-
denly consumers had a new way of taking pictures that gave them
more control, more freedom, more flexibility and more choice.
The consumer became in charge of how fast Kodak’s traditional
business would be eaten away. And Kodak unfortunately didn’t
see that in time. And so now they’re attempting a transformation
in a very weakened state and they may have missed their season
of change.
 Kodak Misses Its Moment 25

These comments say a lot about Kodak. It was hindered in responding to dig-
ital photography by its past history of success and profits. “A mountain of
cash” is a powerful reason to continue with the status quo and raking in the
profits that build the mountain. When you are selling a product like film to
a consumer or offering a service through a Web site, it is the customer who
determines the outcome. Yes, you have to design a product well and have a
usable Web site, but even with success in these endeavors, the ultimate suc-
cess depends on the consumer. And as Carly Fiorina says, the customer is in
charge, not the vendor. Today, customers have even more power thanks to
the reviews one finds of products and merchants at a site like Amazon.
What is next? Antonino Perez came from HP’s printer division and has
been moving Kodak into printers that use less-expensive ink cartridges
than competitors, but the printer market is highly competitive and HP
and others are well-established vendors
Sometimes we can find one or two reasons for a failure, but the story at
Kodak is more complex. Some of the reasons that the company’s survival
is in question include:

1. Belief that Kodak was in the film business when it was in the imag-
ing business.
2. Kodak’s bureaucratic organization structure made change difficult;
there was too much formality and there were too many layers of
management.
3. A culture at Kodak that tried to minimize conflict; you need con-
structive conflict to make tough management decisions.
4. A long history of success with film, an analog product.
5. Very high profit margins and a lot of cash in the bank.
6. A strong brand that meant film to consumers.
7. A focus on digital from the top that was not strong enough to
change the company.
8. Denial that digital photography would take off as quickly as it did.
9. Difficulty figuring out what to do next.
10. The loss of more than 100,000 employees with their knowledge and
experience.
11. A failure to understand the Internet and to envision how it could
change the photography process and business.
12. A belief that Kodak could determine what customers would buy
and how they would take pictures.
26 The Search for Survival

The Kodak story is summarized by a short video. For years Kodak has had
one of the largest industrial parks in the East in Rochester. It has been
selling off parts of the park and clearing land. If you search for “Kodak
Building Implosion” on YouTube, you can watch a video of Kodak
demolishing one of its film production buildings on this campus, a sad
commentary on a storied history at http://www.youtube.com/watch?
v=Fv89KZI5TWY.
What might Kodak have done differently? The company needed massive
organizational change, not just the introduction of digital photography. The
first task was to create a sense of apprehension among employees and a cul-
ture of urgency. Reducing the number of layers of management would have
helped. It was probably a good idea to make digital a separate division, but
there should have been a consistent structure for digital and linking roles to
keep digital and film from becoming too competitive with each other. As
the inventor of the digital camera and the holder of many patents, Kodak
was in a good position to move aggressively in defining the future of pho-
tography. Instead, it let others do so and became a follower, a difficult posi-
tion in an industry undergoing a major disruption. Just as Kodak missed its
moment in digital photography, it did not “get” the Internet or understand
how it would combine with the digital camera to change the entire process
of capturing and sharing images. Employees and shareholders have paid a
steep price for this lack of understanding.
Today, three-quarters of Kodak’s business is from digital products, but
it arrived at this point at great cost. Perez’s strategy was to use Kodak’s
technology to develop a line of inkjet printers using nanotechnology from
filmmaking to produce an ink that would not clog printer heads. On con-
ventional inkjet printers the heads have to be replaced for each refill, add-
ing to its costs. Kodak reversed the HP economic model of an inexpensive
printer with expensive ink refills. Kodak could price its printers higher
than the competition because it offered less expensive refills. By 2010
the company had a 3% worldwide market share for inkjet printers (Wall
Street Journal, 8/11/2011). Kodak is losing money on its sales of inkjet
printers because of fierce competition from Hewlett Packard, and its com-
mercial inkjet printing business is not yet automated so the company
builds its products by hand, greatly limiting its capacity (Wall Street
Journal, 7/19/2011).
In mid-summer 2011, Kodak’s bond prices were dropping and reached
a yield of 16%; its share price fell to $2.52. By the end of September the
price was down to $1.74 a share and one of its bonds that matures in
2017 was trading at 47.4 cents on the dollar. Before filing for bankruptcy
the company had been trying to sell its inventory of over 1000 patents,
 Kodak Misses Its Moment 27

which one analyst described as cutting off your arm. The strategy of
financing the printer business from patent royalties and infringement suits
was not working. Potential bidders for the patents feared that Kodak
would go bankrupt which could invalidate their purchase. Given the rate
at which the company was burning through cash, it was left with little
choice but to file for bankruptcy. According to reports, its pension funds
are not in jeopardy, but a bankruptcy may allow Kodak to reduce its
expenditures for retiree health care. While the CEO holds out hope for
successfully emerging from bankruptcy a more likely outcome is the sale
of the patent portfolio and the sale of its printing business to a competitor
followed by a complete liquidation of this iconic company.

APPLYING THE GENERAL LESSONS

The box score for Kodak shows that they are almost perfect victims of the
incumbent’s dilemma. They only score less than the highest “10” for sunk
costs and lack of imagination because Kodak did try to enter the digital market-
place without much success. Eventually they tried to morph their business
model, but have to be classified as closer to failure than success. See Table 2.1.

• Be aware that technology may help create a product that is far superior
for customers than your traditional product. The digital camera changed
the whole photography process, making it far more consumer friendly.
We no longer had to have hundreds of photographs developed to find
the one we want. Instead we can take hundreds and delete the ones not

Table 2.1 Box Score for Kodak

Score (1 low to 10 high)

Incumbent’s dilemma Outcomes

Denial 10 Morph business model 2

History 10 Abandon business model;
adopt new one
Resistance to change 10 Failure; merger, buyout, 9
liquidation
Mind-set 10
Brand 10
Sunk costs 9
Profitability 10
Lack of imagination 8
28 The Search for Survival

worth saving. Then we can make the photos available to others through
e-mail or on a photo-sharing site.
• Be sure you understand what your product is; Kodak was in the imaging
business and film was just one way of displaying an image. Others have
made this mistake, too. We are not in the business of operating a univer-
sity, but we are in the business of educating people. Railroads do not
exist to operate trains; they provide a service moving freight between
a sender and a recipient. The Internet and the digital camera eliminated
much of the need for film.
• A strong past and present market position is no guarantee for the future.
This is a hard lesson to learn; a successful company sees little reason to
take on the risk of change. Kodak had 100 years of success that had to
produce a lot of complacency among its employees.
• An existing “cash cow” business is a deterrent to innovation. As Carly
Fiorina observed, Kodak had a mountain of cash, that and high margins
do not make a company lean and hungry. Instead they make it easy to
deny that a new technology could disrupt the business.
• Having one of the world’s most recognized brands will not save a com-
pany. Consumers will buy from a store they have never heard of on the
Internet. Well-known brands have gone out of existence, brands like
Oldsmobile, Pontiac, and Mercury. It is great to have a strong brand,
but it will not save a company from new products that consumers find
more attractive than the incumbent’s products.
• Senior management has to provide leadership for a massive change, and
middle management may sabotage these efforts. The layers of manage-
ment at Kodak undoubtedly made it more difficult for senior manage-
ment to get its message across. It may also be that senior managers
were too optimistic about how well their message about the coming
dominance of digital traveled through the company. It did not help that
managers kept restructuring the company, moving digital into a sepa-
rate division and back.

Kodak is a complex case, and the story is by no means over yet. Finding
a single tough management decision that is most responsible for what we
have observed is not easy. But it has to be that the one overarching failure
was the inability for the organization to marshal its resources to adapt to
the disruption caused by digital technology.
METD: Senior management made the tough decision that Kodak
needed to go digital, but it failed to execute and instead let middle
management determine the fate of the company.
 Kodak Misses Its Moment 29

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