Disruptive innovation

Twice in the last week, I found myself telling clients from successful, profitable companies the story of Kodak’s decline.   In both cases, they went a bit pale, and asked if I’d ever written up the story so they could give it to their bosses.

As those of us of a certain age remember, in the 70s, 80s and 90s Kodak’s colour film was what one aspired to use. The colour balance was fantastic, the light sensitivity, grain size and stability everything one’s heart could desire. Some claimed that Fuji film was better in certain situations, but my preference was always for Kodak. The only problem was the price, and that frustrating wait for the photographs to come back from the developers.

In the world of photography, the main innovation in the 90s seemed to be the rise of the preloaded disposable camera. They were small and easy to use, even if the picture quality wasn’t great and you still had to wait for the pictures to be developed. It wasn’t apparent to the ordinary user, but the manufacturing investment behind these cameras was stunning. In 2000 I was shown round Fuji’s innovative remanufacturing facility in Toyko, where a few years before they’d invested around $50M on a fully automated factory to dissemble and remanufacture the cameras, check and even repair the components, and then reassemble the cameras with new film for reuse.   82% by weight of each camera was reused.

There was of course also Polaroid’s instant photography system, with its clunky camera and film, but that was really only something to use occasionally, so it didn’t feel particularly important. Equally, digital photography was a bit of a gimmick, and the resolution was so poor it seemed more useful as child’s toy than as a serious camera.

Kodak obviously felt the same. I remember seeing a presentation in 1999 in which they said that they expected digital photography to grow slowly from the current 5% market share to around 15% by 2015. In fact it reached 15% within 18 months and 50% by 2003. By 2005 Kodak were pulling out of analogue film. They had a worthy struggle to find their new direction, including setting up a lab on Cambridge Science Park, but to no avail. In January 2012 they filed for bankruptcy protection.

It’s a sad story, but there are a couple of wrinkles that make it particularly poignant.

Kodak actually invented digital photography in 1975. The inventor, Steve Sasson, and his team tried hard to persuade Kodak management that digital photography was going to be important, but failed to convince them, and ultimately gave up. Interestingly Steve Sasson is still at Kodak, and I gather that now when he says something is a good idea, he really gets listened to!

Kodak’s fundamental problem was one that all successful businesses are vulnerable to: the steady growth of a “disruptive innovation” that is ignored until too late.

As one of my favourite management thinkers, Clayton Christensen, points out, this is because successful companies, quite reasonably, design their processes to maximise their profit.   All Kodak’s attention and investment was focussed on making, selling and processing great film. This made it very hard for them to notice that many amateur photographers would happily sacrifice some picture quality for the ability to take as many pictures as they liked, see the results immediately and dump or edit the ones that didn’t work.

The profit on a roll of film was awesome so, as digital photography seemed clearly less profitable, it’s easy to see how Kodak remained trapped in an ever declining puddle of profitability, while the world went digital around them.

The blindness of successful organisations towards disruptive innovations is always a challenge for those who try to open their eyes.

Universities are faced with the disruptive innovation of on-line learning, because the last thing a mature student with a job and family wants is an extended period of full time study. They want to be able to study when they have time, take what they need and ignore the rest. This is a tough message for an institution like Cambridge University to take on board, even if some at the Judge Business School are trying to persuade them.

In a very different sector, I have an innovative client in a minerals company. He is aware that their business of resource extraction (ie digging very profitable holes in the ground) risks being disrupted by a gently growing trend towards materials recovery. But how to persuade his Board when extraction is still so profitable?

Although Kodak was brought to its knees by digital photography, I find it ironic that today its main asset is its $2.6B portfolio of digital imaging patents, which it is trying to sell to Google, Apple and others.

Not a bad sum for something that just a few years ago was considered too unprofitable to be worth bothering with.