Eastman Kodak is often mischaracterized as a company whose managers didn’t recognize soon enough that digital technology would decimate its traditional business. However, what really happened at Kodak is much more complicated — and instructive.

Eastman Kodak Co. is often cited as an iconic example of a company that failed to grasp the significance of a technological transition that threatened its business. After decades of being an undisputed world leader in film photography, Kodak built the first digital camera back in 1975. But then, the story goes, the company couldn’t see the fundamental shift (in its particular case, from analog to digital technology) that was happening right under its nose.

The big problem with this version of events is that it’s wrong. Moreover, it obscures some important lessons that other companies can learn from. To begin with, senior leaders at Kodak were acutely aware of the approaching storm. I know because I arrived at Kodak from Silicon Valley in mid-1997, just as digital photography was taking off. Management was constantly tracking the rate at which digital media was replacing film. But several factors made it exceedingly difficult for Kodak to shift gears and emerge with a consumer franchise that would be sustainable over the long term. Not only was a major technological change upending our competitive landscape; challenges were also affecting the ecosystem we operated in and our organizational model. Ultimately, refocusing the business with so many forces in motion proved to be impossible.

A Difficult Technology Transition

Kodak’s first challenge had to do with technology. Over the course of more than a century, Kodak and a small number of its competitors had developed and refined manufacturing processes that enabled consumers to capture and preserve images for a lifetime. Color film was an extremely complex product to manufacture. The 60-inch “wide rolls” of plastic base material had to be coated with as many as 24 layers of sophisticated chemicals: photosensitizers, dyes, couplers, and other materials deposited at precise thicknesses while traveling at 300 feet per minute. Wide rolls had to be changed over and spliced continuously in real time; the coated film had to be cut to size and packaged — all in the dark. With film, the entry barriers were high. Only two competitors — Fujifilm and Agfa-Gevaert — had enough expertise and production scale to challenge Kodak seriously.

The transition from analog to digital imaging brought several challenges. First, digital imaging was based on a general-purpose semiconductor technology platform that had nothing to do with film manufacturing — it had its own scale and learning curves. The broad applicability of the technology platform meant that it could be scaled up in numerous high-volume markets (such as microprocessors, logic circuits, and communications chips) apart from digital imaging. Suppliers selling components offered the technology to anyone who would pay, and there were few entry barriers. What’s more, digital technology is modular. A good engineer could buy all the building blocks and put together a camera. These building blocks abstracted almost all the technology required, so you no longer needed a lot of experience and specialized skills.

Semiconductor technology was well outside of Kodak’s core know-how and organizational capabilities. Even though the company invested lots of money in the basic research and manufacturing of solid-state semiconductor image sensors and developed some notable inventions (including the color filter array that is used on virtually every color image sensor), it had little hope of being a competitive volume supplier of image sensor components, and it was difficult for Kodak to offer something distinctive. Contrast this with Sony Corp., which entered the sensor business to support its electronic video recording business. As an electronics company, its organizational capabilities were far more aligned with what was needed to succeed. What’s more, it jumped in early.

But Sony and other Japanese consumer electronic companies also had to adjust to the changes brought on by digital technology. Sony’s Trinitron color television, once a category leader, was overrun by “plug-and-play” modular digital components — in this case, liquid crystal displays, flat panel displays, and TV chips that made designing a television set easier. As Yukio Shohtoku, retired executive vice president of Panasonic Corp. explained to me, modularization “makes consumer products, our consumer products, a commodity.”

Once consumer electronic products transitioned to digital, Shohtoku noted, leading brands such as Panasonic and Sony lost their competitive edge in those markets. This explains how hundreds of companies, many of them startups, could move into imaging and how a company such as GoPro Inc., based in San Mateo, California, could appear out of nowhere and take the consumer video recorder market by storm. It’s a situation that many makers of technology products are now facing or may soon face.

Scaling Down Is Hard

While the technology presented one set of problems, figuring out how to manage declining film sales while trying to extract maximum profits presented another. Growing companies learn how to invest in manufacturing efficiency and in achieving scale economies. As volumes increase, unit costs go down and capital efficiency improves. But scaling down is hard to do. It helps if your capital base is fully depreciated, but what if you have to reduce the size of your production runs? At a certain point, you just don’t have enough volume anymore to absorb your fixed costs.

In Kodak’s case, film had a finite shelf life, so as sales declined, the company had to figure out how to shrink the size of production batches without driving unit costs up too far or forcing the selling price up, which would have led to a death spiral. I remember when the yearly sales of a particular type of Kodak film went below a single wide, roll production batch. Shrinking the run length would drive up the proportion of time and materials expended in setup, and shifting to smaller production lines would incur additional capital expense, something that would have been impossible to justify. Having a product line made up of many film types worked well when sales were going up but worked against the company as volumes shrank. Discontinuing products pushed film photographers (especially professionals) to digital, and it further drove down cost absorption. For a while, Kodak was fortunate that motion picture print film manufacturing was able to absorb a huge proportion of factory overhead. But when theaters finally moved to digital projection, the company couldn’t slash costs fast enough to keep up with declining volumes.

Declining scale was also a big problem for Kodak in its retail distribution network. Once the volume of film sales at retail stores started to drop, holding onto shelf space became harder. This is not a unique problem — it happens in other markets that are being affected by low-cost imports, market fragmentation, or the cyclical decline of products as newer, more sophisticated products are introduced. But in Kodak’s case, the category was disappearing. For many years, Kodak management was careful not to talk about the problem publicly to prevent it from becoming a self-fulfilling prophecy (something critics misconstrued as management not grasping the gravity of the situation). One could argue that exiting the business and forcing consumers to transition to new solutions was the right way to go. But that would have required Kodak to give up billions of dollars in profits and abandon products like motion picture print distribution too soon, without having other products to capture the demand.

Ecosystem Troubles

The third part of Kodak’s problem had to do with its ecosystem. Much has been written about the importance of building an ecosystem when a new product or service has to leverage complementary assets. Kodak built a unique and powerful ecosystem to support film-based photography. While the majority of its profits came from manufacturing and selling film, retail partners made large profits from photo finishing. For retailers, it was a wonderful business because it brought customers into their stores multiple times: first to purchase film, then to drop off exposed film for developing and printing, and finally to pick up the prints. Each visit brought ancillary purchases, and photofinishing was one of the top two or three profit generators for many retailers and chain stores. But the end of analog imaging was bringing this golden era to an end.

In hindsight, there were two ecosystem design problems. First, as analog photography declined, there was no reason for retailers to be loyal to Kodak products; many were just as happy to use chemicals and paper from Fuji. Second, Kodak management didn’t fully recognize that the rise of digital imaging would have dire consequences for the future of photo printing.

Organizational Inertia?

Kodak management has been criticized for compromising its digital efforts because it wanted to protect film. But the criticism is overblown. Responding to recommendations from management experts, from the mid-1990s to 2003 the company set up a separate division (which I ran) charged with tackling the digital opportunity. Not constrained by any legacy assets or practices, the new division was able to build a leading market share position in digital cameras — a position that was essentially decimated soon thereafter when smartphones with built-in cameras overtook the market.

A complicated and emotional issue was how to deal with the thousands of people in the legacy businesses that were destined to shrink. Most of the individuals in question knew they didn’t have the right skills for the new businesses; their jobs were to maximize profits from the declining businesses for as long as possible. A few people could make the transition, but the truth is that commoditized digital businesses tend to have lower profit margins and can’t afford to carry a lot of costs — particularly legacy costs.

The organizational challenge was even more pronounced at a senior level. For many managers of legacy businesses, the survival instinct kicked in. Some who had worked at Kodak for decades felt they were entitled to be reassigned to the new businesses, or wished to control sales channels for digital products. But that just fueled internal strife. Kodak ended up merging the consumer digital, professional, and legacy consumer film divisions in 2003. Kodak then tried to make inroads in the inkjet printing business, spending heavily to compete with fortified incumbents such as HP, Canon, and Epson. But the effort failed, and Kodak exited the printer business after it filed for Chapter 11 bankruptcy reorganization in 2012.

What Might Kodak Have Done?

With the benefit of hindsight, it’s interesting to ask how Kodak might have been able to achieve a different outcome. One argument is that the company could have tried to compete on capabilities rather than on the markets it was in. This would have meant directing its skills in complex organic chemistry and high-speed coating toward other products involving complex materials — a path followed successfully by Fuji. However, this would have meant walking away from a great consumer franchise. That’s not the logic that managers learn at business schools, and it would have been a hard pill for Kodak leaders to swallow.

For Kodak, it might also have meant holding on to Eastman Chemical Co., a unit it spun off in 1994. After emerging from Chapter 11 bankruptcy protection in 2013, Kodak chose to stand its ground in the imaging business. Today, it is a much smaller company that sells products such as commercial printing solutions, while Eastman Chemical, based in Kingsport, Tennessee, has become a major player in industrial chemicals, fibers, and plastics. (Ironically, Eastman Chemical might end up being George Eastman’s most lasting legacy.)

Yet another potential path for Kodak might have been proactively exiting its legacy businesses in a timely way, as IBM Corp. did. From the early 1990s through the 2000s, IBM managed to do this very efficiently, exiting markets that included printer manufacturing, flat panel displays, personal computers, and disk drives. For the company that’s doing the exiting, exiting legacy businesses is an opportunity to restructure and shed a lot of costs. Kodak eventually did this with its consumer film business, which is now owned by Kodak’s U.K. pension plan. But for an organization exiting its traditional business, the real challenge is keeping an innovation pipeline full of new products and services that can replace the old ones. As Kodak has shown, that can be a formidable challenge.

Lessons for Managers

Every situation is different, but the experiences of Kodak suggest some sobering questions for managers in industries undergoing substantial technology-driven change. Among them are:

Is our core technology converging to the point of being replaced by a general-purpose technology platform? If so, the company could lose manufacturing scale and early-mover advantages — such as being far down the legacy manufacturing learning curve.

Is the technology that underpins our business likely to shift to a digital/modular platform that will lower barriers to entry? If so, commoditization pressure will be inevitable, and the company must prepare to live on much lower margins.

Do we have a capital-intensive legacy business? If so, can we develop a strategy for scaling down production volumes that is both capital efficient and keeps production costs from rising excessively? This is key to maximizing cash flow while trying to execute a transition. It will involve using older equipment or repurposing production assets to make alternate products.

How does the balance of power in our ecosystem change as technology shifts impact different parts of the value chain differently? Will the interests of partners cause our company to do things that are contrary to its long-term interests? This requires thinking about how ecosystem partners will manage the transition and adjusting strategy accordingly.

18 Comments On: The Real Lessons From Kodak’s Decline

  • Charles H. Green | May 22, 2016

    I am not fully persuaded.

    I remember speaking in the late 90s at a Kellogg exec ed program with a newly hired Kodak manager brought in to handle some part of digital. I expressed relief that they were finally doing something proactive about digital, and he agreed.

    He then launched into a description of the problem. What I recall of it was that he blamed Snapfish for “destructive pricing practices.” It was clear he still saw digital as a minor vehicle for selling photo processing and paper. He did not ‘get’ the disruption to photography that digital represented, and it was clear to me then that neither did Kodak. Sometime in the next few weeks I decided to long-term short Kodak stock (as I recall, at around 30 or so, down from 50 in the mid-90s, itself down from its original high of 100; clearly I wasn’t the only one who could read the writing).

    My second thought is that the lack of a Kodak Moment described here sounds remarkably opposite from the mid-1985 moment at Intel so vividly described by Andy Grove and Gordon Moore. They too saw the existential threat posed by Japanese producers of memory (Intel was the market leader, and it was for a long time their dominant source of revenue).

    As Grove tells it, he and Moore decided that if they failed and the board were to bring in a new leader, the first thing the new CEO would do would be to sell off the memory business. “Well, then, why don’t we walk out the door, walk back in, and do it ourselves?”

    Author Shih describes Kodak’s response to their existential decision as:
    “However, this would have meant walking away from a great consumer franchise. That’s not the logic that managers learn at business schools, and it would have been a hard pill for Kodak leaders to swallow.”

    Since Kodak’s potential moment came 15 years later, and Grove described the Intel story in “Only the paranoid survive” in HBR about 1996, I submit that this was PRECISELY the logic that managers, at least some of them, were being taught. By the early 00s, “creative destruction” had caught on, and even I, a mere digital consumer, knew enough to short Kodak stock.

    Can you really say that the end result was pre-ordained, that nothing could have been done? Wasn’t this the worst ending of all? I agree there are lots of lessons to be learned – but I suspect there is still one to go, and it’s the story of the last two decades. You can’t outrun disruption – don’t fight the wave, surf it.

  • Butch Cunnings | May 25, 2016

    How could it possibly matter if the capital equipment were fully depreciated? You are making the classic error of confusing accounting with economics. Even worst, you are calculating unit costs by incorporating fixed costs. (Once again, an amortization is NOT a REAL cost so that should not ever be included in unit costs.) To top it off, if the equipment is not fully depreciated (on a tax basis), you get a tax break (assuming you are not in an NOL position), so this would actually be an ADVANTAGE for ongoing cash flows!

    I stopped reading the article after seeing this blunder.

  • Jeffrey Hardy | May 27, 2016

    My comment will be briefer than those above. In the early 1990’s I was a consultant to the Motion Picture side of Kodak. Two key things, their market share was reported from field reps in each field around the world, and the market share never budged from year to year. Self-reporting? Two, I did a specific study for them that said the digital tidal wave was coming, and quite fast, and those around the VP I worked directly for rejected it, out of hand. They did not want to hear it. There is more, but that was enough to tell me they would be more subject to the whims of history, rather than making that history actively. I was on the phone with that VP 20 minutes after their returning from the company-wide bloodbath meeting. Sad, and true, but it takes personal and corporate gumption and will to overcome history, rather than be eaten by it…

  • John Krienke | June 2, 2016

    The key point about Kodak missing its opportunity to focus on its chemical/layering capability is a strong one, as evidenced by Eastman Chemical’s continued success. Thanks for the example. To this point, this is precisely what MBA grads, including me, learned from C.K. Prahalad who wrote widely about the importance of a firm’s strategic distillation of its Core Competencies. But knowledge also needs courage to set counter-cultural action into motion. A good lesson in the need for both strategic clarity and courageous leadership while market forces overpower the managers in the profit trenches.

  • aibaru | June 10, 2016

    In the end, it seems that there are many reasons why Kodak fell. I will add what might be a possible way forward as regards MBA grads and their influence on business decisions; Every MBA program needs a compulsory course that teaches students how/when to go against all other courses taught previously.

  • victor yodaiken | June 11, 2016

    That part about the UK Pension plan is kind of cold blooded, no?

  • Willy Shih | July 25, 2016

    In response to Mr. Green:

    The traditional film side also tried to engage in digital printing, and they purchased an operation called PictureVision, giving that start-up the exclusive rights to online photo printing. This didn’t turn out very well, as it ran to cross purposes with what the digital unit was trying to do. Snapfish was a competitor in this area, and for a while was owned by District Photo, who was a traditional film photofinisher who was also trying to make the transition. For quite some time, this was the presumed answer to the digital transition, print on silver halide-based photo paper, but as we can see, that turned out not to be the major use model for digital photos.

  • Willy Shih | July 25, 2016

    Response to Mr. Cunnings:

    Actually the point was that the scaled up capacity was not suited to make material in smaller batches. That would have required entirely new equipment. Kodak went from pilot lines to 60″ wide 300 fpm coaters, and synthetic chemistry operations also operated on large scale. If you wanted to gracefully step down the scale, it would not have been practical to run lines slower, or to use a narrower width on existing equipment. And since the product was “dated,” you couldn’t just make a lot and store it. That’s why the motion picture film production was so important.

  • Willy Shih | July 25, 2016

    Reply to Mr. Krienke:

    Yes indeed, Eastman Chemical is George Eastman’s lasting legacy. The difficult thing is walking away from a “great consumer franchise.” That turned out to be really hard.

  • Willy Shih | July 25, 2016

    Reply to Mr. Yodiaken:

    That was part of the bankruptcy restructuring. If you get something at the right cost and can operate it as a niche business, you might be able to create some value. Whether it will ever cover the value lost to pensioners is very doubtful of course.

  • Willy Shih | July 25, 2016

    Response to M. Aibaru:

    Indeed, that means one has to think and not just follow conventional wisdom or the herd. As Herbert Simon taught us, it’s important what you put on the menu of choices.

  • Willy Shih | July 25, 2016

    Reply to Mr. Hardy:

    Indeed, there were many people like that. But I would say at the senior levels during the time I was there (a limited slice of history), top management understood. That however was different from what they might say in public, or what many mid-level managers might say. Interestingly, the workforce at large had a pretty good idea what was happening.

  • Julian Koor | August 16, 2016

    I think the two key facts to bear in mind as a manager is that nothing lasts forever and to constantly challenge your own business. Otherwise someone will create a better product / service and you won’t see it coming.

  • Arthur Weiss | February 18, 2017

    I think the key reason for Kodak’s failure – as alluded to but discounted in the article is that Kodak “could have tried to compete on capabilities rather than on the markets it was in”

    You can change this to a question – do you ask “What do we do?” or “What do we do well?”
    The first addresses markets – who are we? Who do we sell to? Kodak’s answer was “We are in photography” – and that is our market. The question about capabilities allows you to change when the market changes as you keep to what you do well. It was the path followed by IBM. Doing what you do well can help you survive if you can switch and use your skills in another market or area.

    Supporting that Kodak missed this aspect can be seen in areas Kodak did move into. They started to produce printers and pushing high photo-quality paper for these printers. They must have thought their existing franchise or market would still want to print the photos taken using the new digital technologies. So they would continue to serve these markets with dedicated products.

    They failed to appreciate that when technology changes markets it can also change consumer behaviour – and in this case it did. People do not print more photos taken with digital cameras. They print a lot fewer – if any at all.

    They answered the question “What do we do?” NOT “What do we do well?” That was left to Fuji who now produce a range of skin care products using the expertise gained from stabilising thin photographic film. As skin shares many similar characteristics to camera film: it becomes brittle as it ages, it’s thin, it’s covered in collagen / organic materials…. Fuji recognised that they had skills in stabilising and protecting such thin films – and could transfer these skills to produce anti-ageing products for human skin.
    (Also blogged at https://www.facebook.com/AWAREmarketing/posts/10154783747824473)

  • Karl Schubert | April 30, 2017

    The former IBM senior executive (not the author) who was recruited by Kodak to try to lead Kodak to “digital” was leaving an Corporate IBM position where he led the Interactive, Broadcast and Online Video efforts — unsuccessfully. He was an old-style IBM exec but in the middle wave following the mainframe crowd. Seeing him move there suggested Kodak would not succeed.

    Of course, analog photography is now seeing an artistic resurgence but neither soon enough nor volume enough to help Kodak.

    I believe that they were caught in “The Innovator’s Dilemma” and such a shame since they earned the credit for inventing the digital camera.

  • Giovanbattista Testolin | May 5, 2017

    Kodak before digital was quite a profitable and liquid company, if I remember well.
    Additionally it was already well known that semiconductor design and manufacturing was an industry with a very strong cumulative volume learning effect, or learning curve.
    So I wonder: why invest in developing an internal semiconductor capability instead of buying a company already in that business? or developing a strategic partnership or JV?
    And why not buy a good optics/camera manufacturer together?
    Using profits and liquidity to buy companies in the new digital technology and in the key optics systems would have been likely faster and more effective than trying to build semiconductor sensors internally from scratch.
    And maybe Kodak would now still be a significant player in digital photography.
    It remains true that most of the competencies and assets related to chemical photography were going to be lost, maybe they could have been converted to other chemical application.
    The same holds true for the ecosystem of shops, due to the fact that at the same time the internet was starting to change distribution models too,
    But maybe a “Kodak photo” platform with added value in pictures quality could have been the first one.

  • Stephen Waybright | June 10, 2017

    I was at Kodak from ’83 – ’97, most of that time in electronic/digital imaging R&D and product development. With due respect to Dr Shih’s perspective having joined in ’97, it was the years leading up to that, when Kodak squandered what could have been a dominant position in digital imaging and possibly online social media, due to lack of vision of what was clear to the engineers. In 1990, I was Chief Engineer for what we called Image Magic, a digital imaging system making “fantasy” photographs, initially installed at Epcot center. This system included a remote print hub located at Airborne Express in Wilmington Ohio, where we could deliver the prints the next day anywhere in the continental US. By ’93 it was pretty easy to project the relatively short timeline when the cost and quality of digital imaging along with ever increasing data transmission rates would allow such a service to thrive. It seemed an obvious and easy extension to have a couple of my SW guys develop a program to open up access to that print hub to the early adopters on Apple PCs, and to later build a digital image sharing and photo effects service around that, but the strategy was on growing digital only where it was not potentially parasitic to film. Kodak was the original social media company bringing photography and memory sharing to the masses. It could have lead the way into the new frontier of online social media.

  • Craig McGowan | June 13, 2017

    I was a product manager in Willy Shih’s business unit during this time period. I agree with his assessment of the situation and would add the following.

    I did not see a lack of commitment to digital during my time there. Kodak achieved a top three position in several of the digital categories it competed in, including online services and digital cameras. These markets were far more competitive and lower in margin than film but Kodak was holding its own there, although the cost structure was clearly a problem looming on the horizon.

    However, it was the second wave of disruption that came after Willy left that really caused the biggest problems. We went from photography as a category to photography as a piece of other categories (i.e. cameras became a component of mobile devices, photo sharing became a part of social networks).

    Given the current state of the market today, there is a real question in my mind if Kodak could have invented the iPhone and beat Apple at that game, or invented Social Networks and beaten Facebook. While photography was in Kodak’s DNA, these other more general offerings certainly were not.

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