Discover a new article in this Hub about Digital Transformation !

Let us focus some time on the classic example that represents how digital transformation can challenge an existing model and how it can harm and threaten the existence of a well-established leader. Kodak® is this excellent example. Most people believe they missed a technology shift when instead, there were deeper foundational cracks that led to the slow disintegration of their business model.

The root causes of this industrial and social disaster are outlined below:

  • R & D: Did they simply not invest enough into it? No. Kodak invented the technology and aggressively invested up to $2 Billion in R&D for digital imaging. Semiconductor technologies without a doubt already formed Kodak’s core knowledge and potential niche market; but they did realize as management was tracking the rate of which digital cameras replaced traditional film cameras.
  • Leadership: Was it a lack of leadership that became blindsided? No. In 1996, CEO George Fisher knew that digital photography could highly disturb, or even replace Kodak’s core business. The leadership was in fact, aware of the threat that digitization was bringing.
  • Acquisitions: Was Kodak focused on internally developing all relevant technologies without looking at acquiring external startups to help with the digital shift? No. Kodak acquired Ofoto in 2001 and renamed it “Kodak EasyShare Gallery” in 2005. The site was Kodak’s consumer online digital photography web site. Ofoto was started in 1999. This acquisition proves that Kodak not only had identified the threat and the associated opportunities but had also executed a plan to leverage the digital transformation of their market.

Digital Transformation : Kodak’s bad strategic and investment timing

Chunka Mui , in his “How Kodak Failed” article published on January 18th, 2012 on Forbes highlights the following: Barabba (head of market intelligence in 1981) had done a deep dive on the future adoption curves from the analog silver halide films versus the digital photography. He highlighted the fact that digital photography could possibly replace Kodak’s analog base business but also and importantly, that this would not happen overnight and consequently the company had around 10 years to strategize and execute a digital transformation. Barabba sheds light on the fact that executive management was so worried about the digital photography threat, that they executed a strategy based on digital kiosks (10,000). Unfortunately, the team did not realize that the digital photography market would evolve towards home storage and home printing capabilities, and not remain dependent on photography services in these areas.

This example shows that the first ones to enter carry an important portion of the risks implied by testing unproven business models and carrying the R&D costs resulting from multiple available technologies that have not yet proven their relevancy. It also shows the importance of strategic timing that we will deep dive into in the following “false belief” paragraph.

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Digital Transformation : Kodak remained complacent in their analog success and acted like a stereotypical change-resistant organization

Kodak applied their well-established analog business references (product, margin split, product performance and specification, price points, channels: Kodak digital kiosks) and this later proved difficult to change. Kodak tried to simplify and adapt to technologies, but as illustrated in the example of digital kiosks, doing something and doing the right thing are different things.

Important contrast to Kodak’s failure is Fujifilm’s successful shift.

In his blog entry “How Fujifilm survived”, KNC, the economist explains that Fujifilm realized in the 80s that digital photography was going to be the next big transformation they would face. The executive management, mainly from the very profitable film division, took the decision to milk the analog cow. The slow analog film business fall took 15 to 20 years and went from 60% of Fujifilm’s profits to basically nothing. Kodak and Fujifilm both had quickly identified the trends and possible impact to their profitability. So why was the result so different between the two leaders? Kodak nearly disappeared and Fujifilm leveraged this transformation to leap in front of its competitors?

KNC highlights the main difference between these two competing companies when dealing with digital transformation:

  • Strategy and Execution: Fujifilm management decided to diversify and adopt a long-term vision that enabled them to sacrifice some short-term profitability to harvest long term gains. Fujifilm also understood the importance of expertise and key digital skills as part of its workforce.
  • Self-cannibalization: Fujifilm understood that the analog film and digital film market were serving a similar application and usage. The market transforms according to the evolutions of technologies. Fujifilm that had a strong market position did not hesitate to cannibalize its own space to enable long term success.

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Digital Transformation : Kodak’s leadership failed to manage simultaneously competitive frames / business models

The main mistakes and root causes have been very well explained by Clark Gilbert and  Joseph L. Bower  in their article “Disruptive Change: When Trying Harder Is Part of the Problem“ published in the Harvard Business Review from the original Kodak case study done in May 2002, concluded that Kodak had fallen into the trap of trying to make the new digital business model fit their old, but very successful, analog model instead on figuring out the best model in order to serve new needs and applications.

In the same article, there is very good assessment of digital transformation and innovation as a threat or as an opportunity:

  • Threat: When the disruptive innovations begin to be identified, the most efficient option is to frame them as a threat, to properly allocate the right resources and funding. It will also drive the proper behavior from the organization and will push the managers to focus their efforts to deal with the needed transformations.
  • Opportunity: On the opposite end, when creating a new business model and assessing the market on new services, usages and applications, it is more efficient to frame those disruptive innovations as an opportunity. This will in turn trigger the proper behavior from the organization to find unique applications associated with the identified disruptions.

The authors also highlight that managing competing threat/opportunity frames at the same time often equates to adjustments to organizational structure and the processes governing new business funding and that this is the key to an effective response.

Fujifilm’s strategic approach was so dramatically different than Kodak’s:  Fujifilm’s executive management understood that the long-term success of the company was tightly linked to the capability of the organization to manage the two competing frames.

What about mature and early stage companies: do they value digital transformation as a threat or an opportunity? The MITSloan Management review shows that maturing company respondents overwhelmingly view digital technologies as an opportunity (around 95%) more than a threat (around 28%). On the other side, early stage companies have tendencies to reduce the gap between opportunity and threat; they view digital technologies as much as an opportunity (around 40%) as a threat (around 30%).

IoT therefore needs to be treated as both a threat and an opportunity but not for the same reasons. The difference is how your company, your leaders and middle management address it and implement the right business model with the proper commitment of resources and allocation. The rules of the game are changing for numerous markets once considered as “stable” with well-established analog leaders. Thus, you need to asses if this is applicable to your market, and if your answer is “maybe” then you need to frame it in the most efficient way to gain long term success.

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