Lessons learned from Kodak's collapse

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Was Eastman Kodak Co.'s management ham-handed and blind, missing the societal shift to digital photography?

The prevailing sentiment is yes, and certainly media and industry commentators have feasted on the fall of Kodak into bankruptcy. But it's always good to be somewhat leery of the conventional wisdom, and in tech.fortune.cnn.com consultant Larry Keeley demurs, saying Kodak managers actually followed the strategy of the moment, and common sense.

The Kodak non-moment

The argument is that Kodak was so addicted to film that it ignored the digital revolution. But Mr. Keeley points out that Kodak knew all about the impending rise of digital technology and how it threatened the company's stronghold. For example, a report circulated among senior executives in 1979 detailing how the market would shift permanently from film to digital by 2010.

Instead, he says the Kodak story is an example of how easy it is to get things wrong in strategy, even when trying with the best of intentions to do everything right.

The strengths strategy

Kodak wasn't stodgy, refusing to change. But it fell under the sway of a prevailing strategic approach back then, deciding it should take advantage of its signature strengths to meet future technological disruption. So given its strengths in chemistry, optics and chemistry, at the end of the 1970s Kodak targeted xerography, or copying.

"I was consulting with Xerox at the time, and we took Kodak's threat to enter the world of copying very seriously. We were right too; Kodak's strengths in organic chemistry and optics helped them to create some excellent, high-end products," Mr. Keeley observes. The strategic mistake, he argues, was not ignoring change but trying new things with familiar capabilities at the exact moment Kodak needed to be hungrier to do truly new, unfamiliar things.

Tiny businesses

Kodak remained healthy with this focus on its strengths until the mid-1990s. But he says that what the company missed – what most of us miss in such circumstances – is that the new businesses were paltry in comparison to the base business.

In particular, digital photography was very slow growing initially and actively undermined Kodak's largest source of profits in photo and motion picture film. He notes that PepsiCo faced the same problem: It may want to sell healthy snacks, but the unhealthy snacks are what drives the bulk of profits.

"This exact phenomenon plagues innovation in nearly every large firm. At least once a week, top executives tell me that new growth businesses in their firms are intriguing and potentially important, but they simply 'don't move the needle.' Said in plain English: 'The hot new thing simply cannot produce enough revenues this quarter to improve my bonus as a senior executive.' So those projects are starved of resources instead of nurtured," Mr. Keeley notes.

What's the answer?

Companies must solve a cultural and accounting dilemma that serves as a barrier to innovation.

Senior executives have to be given incentives to create hot new platforms, he says, "not just get paid for driving growth in the familiar ways that drove value yesterday."

Special to The Globe and Mail