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Disruptive technology: How Kodak missed the digital photography revolution
Journal of Strategic Information Systems 18 (2009) 46–55
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Journal of Strategic Information Systems journal homepage: www.elsevier.com/locate/jsis
Disruptive technology: How Kodak missed the digital photography revolution Henry C. Lucas Jr. *, Jie Mein Goh Decisions, Operations and Information Technologies, Robert H. Smith School of Business, University of Maryland, College Park, MD 20740, United States
a r t i c l e
i n f o
Article history: Available online 25 February 2009
Keywords: Innovation Information and communications technologies Disruptive technology Core rigidities Case study Qualitative research
a b s t r a c t The purpose of this paper is to analyze how a firm responds to a challenge from a transformational technology that poses a threat to its historical business model. We extend Christensen’s theory of disruptive technologies to undertake this analysis. The paper makes two contributions: the first is to extend theory and the second is to learn from the example of Kodak’s response to digital photography. Our extensions to existing theory include considerations of organizational change, and the culture of the organization. Information technology has the potential to transform industries through the creation of new digital products and services. Kodak’s middle managers, culture and rigid, bureaucratic structure hindered a fast response to new technology which dramatically changed the process of capturing and sharing images. Film is a physical, chemical product, and despite a succession of new CEOs, Kodak’s middle managers were unable to make a transition to think digitally. Kodak has experienced a nearly 80% decline in its workforce, loss of market share, a tumbling stock price, and significant internal turmoil as a result of its failure to take advantage of this new technology. Ó 2009 Elsevier B.V. All rights reserved.
1. Introduction The purpose of this paper is to explore how firms respond to challenges from rare transformational technology that threatens a traditional, successful business model. We propose an extension of Christensen’s theory of disruptive technologies and illustrate the extensions with a longitudinal case study of Kodak. Kodak is unique in that it developed and patented many of the components of digital photography, yet this new form of photography has had a serious, negative impact on the firm. The two main contributions of the paper are the extension to Christensen’s theory and the lessons from Kodak’s unsuccessful response to a major technological discontinuity. The digital camera combined with information and communications technologies (ICT), specifically 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 another person, the customer uploads the picture to a PC and sends it as an email attachment to multiple recipients. If the customer wants a hard copy, she can print a picture locally on an inexpensive color printer on a PC, send it to an Internet photo service, or go to a store that had a developing kiosk.
* Corresponding author. Tel.: +1 301 314 1968. E-mail addresses: [email protected] (H.C. Lucas Jr.), [email protected] (J.M. Goh). 0963-8687/$ - see front matter Ó 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.jsis.2009.01.002
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1.1. Past research: Christensen’s theory of disruptive technologies Christensen’s theory of disruptive technologies is one of the most popular for explaining the plight of the incumbent firm facing a significant new technology. He proposes a theory of response to disruptive technologies in two books about innovation (Christensen, 1997; Christensen and Raynor, 2003). He argues that investing in disruptive technologies is not a rational financial decision for senior managers to make because, for the most part, disruptive technologies are initially of interest to the least profitable customers in a market (Christensen, 1997). The highest-performing companies have systems for eliminating ideas that customers do not ask for, making it difficult for them to invest resources in disruptive technologies. By the time lead customers request innovative products, it is too late to compete in the new market. The root cause of the failure to adapt to disruptive technologies is that the company practiced good management. The decision-making and resource-allocation processes that make established companies successful cause them to reject disruptive technologies. Christensen and Overdorf (2000) present a framework for dealing with disruptive change that focuses on resources, processes and values. Resources include people, equipment, technologies, cash, product designs and relationships. Processes are the procedures and operational patterns of the firm, and values are the standards employees use to set priorities for making decisions. Managers design processes so that employees perform tasks in a consistent way every time; they are not meant to change. The most important processes when coping with a disruptive technology are those in the background such as how the company does market research and translate it into financial projections, and how the company negotiates plans and budgets. Employees exhibit their values every day as they decide which orders are more important, what customers have priority and whether an idea for a new product is attractive. The exercise of these values constitutes the culture of the organization. Culture defines what the organization does, but it also defines what it cannot do, and in this respect can be a disability when confronting a new innovation. 1.2. Extending Christensen’s theory When a firm is confronted with a discontinuous, highly disruptive technology, senior management has to bring about significant changes in the organization at all levels. Our first extension to Christensen is to emphasize the change process required to adopt a disruptive technology. Senior management has to convince others of the need to move in a new direction. Specifically we are interested in how middle managers change themselves and also bring about change in the organization (see Rouleau, 2005; Balogun, 2006). Christensen argues that the firm is not ready to adapt a disruptive technology because it does not see a demand from its customers for the new innovation. He maintains that high-performing companies have systems in place that tend to kill ideas that customers are not asking for. We propose to extend this part of his theory to encompass the culture of the organization, by which we mean the beliefs of employees, the way the firm organizes itself and the nature of the interactions among employees (Schein, 1983). 1.3. A first extension: the struggle for change In confronting a technological disruption, a firm faces a struggle between employees who seek to use dynamic capabilities to bring about change, and employees for whom core capabilities have become core rigidities. Management propensities for change drive the process (see Fig. 1). We describe this ongoing struggle using concepts from dynamic capabilities, core rigidities and management propensities.
Response to Disruptive Technology Reduce capacity to change
Increase capacity to change
Core Rigidities
Dynamic Capabilities
Organize and marshal capabilities for change
Attack Rigidities Management Propensities
Fig. 1. A framework for responding to disruptive change.
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1.3.1. Dynamic capabilities The theory of dynamic capabilities is an extension of the resource-based view of the firm (Barney, 1991; Peteraf, 1993; Mata et al., 1995; Eisenhardt and Martin, 2000; Barney and Arikan, 2001). Dynamic capabilities is defined as ‘‘the firm’s ability to integrate, build external competences to address rapidly changing environments” (Teece et al., 1997). They ‘‘consist of specific strategic and organizational processes like product development, alliancing and strategic decision-making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies” (Eisenhardt and Martin, 2000; Helfat et al., 2007; Teece, 2007). The theory suggests that a firm has three classes of assets to use in seeking new forms of competitive advantage when confronted with a novel situation including: Processes: assemblies of firm-specific assets that span individuals and groups. These processes have three roles including coordination, learning and reconfiguration. Positions: specific assets including plant and equipment, knowledge and reputational assets, that determine competitive advantage at a given point in time. Paths: the sequence of events that have led to a firm’s current position i.e. ‘‘. . .a firm’s previous investments and its repertoire of routines constrain its future behavior” (Teece et al., 1997). 1.3.2. Core rigidities Dynamic capabilities may not, however, always enable a firm to reconfigure its business in response to an external threat. Leonard-Barton (1992) introduces the idea that the core activities of the firm can become so rigid that it cannot respond to new innovations. Her four dimensions of a core capability include: (a) employee knowledge and skills; (b) technical systems which embed knowledge and support innovation; (c) managerial systems which guide knowledge creation and control and (d) values and norms associated with various types of knowledge. Leonard-Barton suggests that core capabilities that are appropriate in one situation may turn out to be inappropriate in another, for example, the challenges for an incumbent firm from a new entrant. These core capabilities, rather than being dynamic and helpful in coping with change, become core rigidities that inhibit a response. There are a number of paths to rigidity. Because corporate resources are limited, firms often emphasize one discipline, which makes the company less attractive to people from non-dominant disciplines. It is easy for technical systems to become outdated, especially when they involve expensive plant and equipment or complex software. Management systems also become rigid over time as people respond to incentive and reward systems; there is little interest in performing tasks that appear to be undervalued by senior management. It is easy for the organization to fall into the competency trap; employees convince themselves that their current processes and technology are superior to a new, disruptive technology, and they fail to respond appropriately. Rigidities in these core capabilities inhibit individual and organizational learning when confronted with a rare, technological disruption. Employees may be comfortable with their existing knowledge and skills and resist learning the new technology. There may be little incentive to build new technical and managerial systems, or to learn new knowledge to create the systems. 1.3.3. Management propensities Management propensities determine the outcome of the battle between dynamic capabilities and core rigidities in responding to a transformational technology. This implication is an extension to research demonstrating the importance of managers in determining firm performance outcomes (Holcomb et al., 2008; Castanias and Helfat, 2001; Bantel and Jackson, 1989; Hambrick and Mason, 1984). Managers have to develop a strategy that emphasizes the response to a disruptive technology, and they must communicate this strategy throughout the firm (O’Reilly, 1989). Senior managers have to learn a new technology and develop cognitions that change is necessary; they must lead the change effort (Sherif and Menon, 2004). Managers must also help subordinates develop cognitions that respond to a new direction for the firm. They must teach others in the organization about their vision for the firm and see that employees learn this new business model and all that it entails. We refer to these managerial activities as propensities or managers’ inclinations to act in a certain way. During the course of responding to the disruptive technological change, complications result and cause different management levels to have different managerial cognitions (Gavetti, 2005a). If it is desirable to change the overall direction of a firm, senior managers are likely to be faced with one group of long-term employees who exhibit core rigidities, and newer employees who are trying to innovate and take advantage of the firm’s dynamic capabilities. It is interesting to note that the discussion above has a parallel in the IS strategy literature. For example, Galliers (2004, 2006) has proposed a framework for information systems strategizing which focuses on exploitation, exploration and change management. A firm confronted with a technological discontinuity needs to explore, utilize its dynamic capabilities and learn a new, agile response to a threat. It needs to create knowledge, which is a key component of Gallier’s IS strategy framework as well. 1.4. A second extension: organization culture Organizational culture shapes organizational cognition and has a very important role in its response to technology-enabled transformations. We have adopted Schein’s (1983) definition of culture for the purposes of this paper. Culture is ‘‘a
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pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration – a pattern of assumptions that has worked well enough to be considered valid, and therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to these problems” (Schein, 1983, p. 14). Founders teach organizational members through their actions and through this process, culture is developed, learned and embedded (Schein, 1985). Culture operates at both the macro and micro levels within an organization. As defined by Schein, culture is a multilevel concept that is fragmented across domains such as different types of management. Literature (Burke, 2002) often focuses on the role of senior management in creating a firm’s culture; we see a need to consider the role of middle management which has been less emphasized in prior research (Balogun and Johnson, 2004; Danneels, 2004). Middle managers are typically the largest managerial group and they play a key role in implementing firm strategy. Given their position in the organizational hierarchy, middle managements’ propensities may be different from those of senior management. Previous literature on organizational change acknowledges the role of culture in facilitating, managing, or impeding change (e.g., Burke, 2002; Tripsas and Gavetti, 2000). A bureaucracy is associated with slow response and employees who value security over risk-taking. Bureaucratic structure leads to organizational inertia (Merton, 1957). Thus, an organization culture that promotes hierarchy and maintaining the status quo will be resistant to disruptive technologies. 2. The case of Kodak 2.1. Data collection The research reported here comes from primary and secondary sources. We obtained annual reports from Kodak and searched the literature to build an historical time line of the key events in digital photography and Kodak’s response to this new technology. We looked at past Kodak web sites on www.archive.org to get a sense of changes in marketing and strategy. As a part of a larger project on IT-enabled transformations, members of a research team visited Kodak and interviewed two employees the company was willing to make available to us. Also as a part of the larger study we asked Carly Fiorina, ex-CEO of HP, to expand on her early analysis and comments on Kodak’s history with digital photography. We consulted a teaching case study, books and a videotaped interview with one of the Kodak CEOs during this time period. 2.2. 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 when color photography was introduced, it was one of the few companies that had the knowledge and processes to succeed. The company achieved $1 billion in sales in 1962. By 1976, Kodak captured the majority of the US film and camera market (90% and 85%, respectively). 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 film-making plant, and historically CEOs came from manufacturing jobs at the factory (Gavetti et al., 2004). Kodak’s sales hit $10 billion in 1981, but then competitive pressures, especially from Fuji, hindered future increases (Gavetti et al., 2004). In 1986, Kodak invented the fist megapixel sensor capturing 1.4 million pixels to produce a high-quality 5 7 print. Kodak had introduced 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 CDROM 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 to be 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 et al., 2004). He also went after Fuji and the Japanese government for restraining the sales of Kodak products. Fisher did not give up on film; he believed that China was an emerging market with great potential for photography and invested heavily there in a joint venture with the Chinese government. By 1996, Kodak had cut $50 million from the cost of film and paper production 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 chairman’s letter stated that Kodak ‘‘implemented a digitally oriented strategy to support revenue and sustainable earnings”. In the same year, Kodak closed its film camera factory in the US. 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”. In 2005, Carp stepped down early as chairman and was replaced by Antonio Perez.
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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 Fig. 2). Kodak net sales reached $20 billion in 1992, and dropped to below $15 billion in the ensuing 5 years, though some of the decline was due to divestitures. This change is particularly dramatic when compared with Fuji’s net sales, which have been growing since 2001. 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 et al., 2004). In addition to pressure from competitors, investors have been highly critical of the company and its management. Share prices in Fig. 3 rose during Fisher’s first 4 years of leadership (1993–1997), and then began a precipitous decline during Carp’s chairmanship starting in 2000. 2.3. The movement to digital photography The transformation from conventional photography to digital photography took about two decades. Information and communications technologies play as important a role in digital photography as the camera, itself. The computer is a vehicle for editing, saving, storing and ultimately sharing photographs with others. The Internet is the vehicle for the distribution of multiple copies of an image to different recipients. Steven Sasson, The inventor of the digital camera at Kodak, remarks on the history of digital research at the company. Well, you’d be surprised at some of the breakthroughs and innovations 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
Fig. 2. Kodak’s net sales and number of employees.
Fig. 3. Kodak’s monthly share price.
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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 1980s. And we made some of the first cameras. You might be surprised that a Kodak digital camera went aboard the 1991 space shuttle mission. 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 experience 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 Fig. 4). The movement toward digital photography has a huge adverse impact in firms that had historically been in the photography business such as Kodak, Fuji and Konica Minolta. When photography moved from film to digital, it invited a whole new group of competitors into the 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 sprung up. Fig. 5 shows a timeline of the key events in Kodak’s history related to digital photography.
Fig. 4. Sales of digital camera.
Time Line
14 Stopped selling film based camera 15 First full year in digital transformation
7
Sold Sterling 8 Divested Clinical Diagnostics Division
5 Produced Photo CD 6 George Fisher became system 3 Acquired CEO Sterling Drug 4 Acquired IBM copiers
1 Lost Polaroid patent infringement suit 2 Invented first megapixel sensor
1,2
1985
3,4
9
Kodak charged Fuji & Japan 10 WTO rules against Kodak
16 Antonio Perez became Implemented digital strategy CEO 17 Outsourced 12 Acquired digital camera Ofoto production 13
18 Produced low cost cartridge printers
11
Daniel Carp became CEO
5
1990
6
7,8
9
10
1995 Fig. 5. Kodak’s time line.
11 12
2000
13 14,15 16
17 18
2005
2007
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3. An analysis of Kodak’s response to digital photography 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. Unlike the disk drive industry that is prominent in Christensen’s work, the move to ICT and digital changed the process by which the consumer captured, displayed and shared images. Table 1 describes how Christensen’s theory applies to Kodak, and how Kodak’s history deviates from this theory. Christensen comments that disruptive technologies produce products that are typically cheaper, smaller and often more convenient to use than traditional products. Digital cameras were an expensive curiosity at first, but soon producers improved their performance and they constantly reduced prices. Digital photography, as noted earlier, was not just a product, but a change in the entire process of capturing, displaying and transmitting images. Kodak seriously underestimated how quickly the demand for this new technology would grow. Christensen’s theory predicts that firm resource-allocation processes discourage investment in potentially disruptive technologies. However, contrary to his disk drive industry examples, Kodak did invest massive amounts in digital photography. It just never had much to show for it. Fisher arrived after Kodak had spent $5 billion on digital imaging R&D with little coming from the labs. Product development and sales were scattered over more than a dozen divisions, at one point the company had 23 different digital scanner projects under development (Gavetti et al., 2004).
Table 1 Christensen’s theory of disruptive technology and Kodak. Christensen’s theory
How it applies at Kodak
Differences with Kodak
Products based on disruptive technologies are typically cheaper, simpler, smaller and, frequently, more convenient to use ID p. xv
At first digital cameras were more expensive and large; gradually they became cheaper, simpler and smaller
Digital cameras changed more than the physical artifact; they changed the process of photography – one now captured an image and a photo was only one way of displaying the image. Digital photography also changed the distribution, sharing and copying of images via the Internet It appeared that digital cameras created their own market demand Kodak thought at first that the main market for digital photography would be the professional photographer, not the amateur consumer. It did invest heavily in digital products, but did not manage that investment well ($5 billion by the time Fisher arrived). Kodak seemed to be ignoring customers; it focused on film because it was comfortable and so profitable. The company had an analog, chemistry mindset and could not think digitally
Technologies can progress faster than market demand. ID p. xvi ‘‘. . .investing aggressively in disruptive technologies is not a rational financial decision for them to make. . .By and large, a disruptive technology is initially embraced by the least profitable customers in a market. ID p. xvii The highest-performing companies. . .have welldeveloped systems for killing ideas their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies-lower-margin opportunities that their customers don’t want-until their customers want them. And by then it is too late. ID xix The reason is that good management itself was the root cause. Managers played the game the way it was supposed to be played. The very decision-making and resource-allocation processes that are the key to the success of established companies are the very processes that reject disruptive technologies. ID p. 98 Give responsibility for disruptive technologies to organizations whose customers need them. Chap. 5 title, p. 100 ID It is the middle managers who must decide which of the ideas that come bubbling in or up to them they will support and carry to upper management for approval, and which ideas they will simply allow to languish. Their job is to sift the good ideas from the bad and to make good ideas so much better that they regularly secure funding from senior management. IS p. 10
As digital cameras became smaller and easier to use, consumers adopted them. Not clear if they spent less on photography or not, but the suppliers of imaging services changed
Kodak underestimated the speed with which the consumer segment would adopt digital photography
Kodak appears to be more in a state of denial. Possibly at first this reason could have kept them from investing, but Kodak began to develop a digital strategy long after it was obvious to everyone else that it needed one
Senior management allocated resources to digital products, but middle managers rejected the disruptive technology
Kodak did try a separate organizational unit
Kodak kept organizing and re-organizing. Data suggest that when a separate organization was created, the digital subunit and traditional photography had serious conflict over resources Senior management was trying to change middle management, and had little success. In this case it was not middle management bringing ideas to senior management; the direction was the opposite
Kodak’s middle managers impeded the conversion to digital
ID is from The Innovator’s Dilemma, IS is from The Innovator’s Solution.
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Christensen suggests giving responsibility to disruptive technologies to a separate organization that will work with customers who are most likely to buy the new technology. Kodak went through a number of restructurings and at times had a separate digital organizational unit. In 1994 Fisher separated digital imaging from silver-halide photographic division to create digital and applied imaging division (Gavetti et al., 2004). However, it appears that it was not separate enough as there was infighting between the traditional film business and the digital photography unit. Kodak tried a number of different organizational structures for the digital business, as an example: In the Fall of 2000 Kodak reorganized to bring digital and applied imaging and consumer imaging under one organization, in order to end the internal war between the film and digital segments (Rochester Business Journal, 12/8/2000). 3.1. Extensions to Christensen’s theory of disruptive technologies Our analysis of Kodak led to the proposed extensions to Christensen’s theory of an organization’s response to a technological discontinuity. In the spirit of qualitative research, we are not trying to generalize the Kodak case to other companies, but rather are interested in generalizing from Kodak to a theory. Below we discuss how Kodak’s experiences support our two extensions to Christensen’s theory. 3.1.1. Change The framework in Fig. 1 suggests that management propensities influence the ability of the organization to marshal dynamic capabilities for change and to attack core rigidities. What was the result of this ongoing struggle at Kodak? One of the key failures at Kodak was the inability of the organization to bring about change: it was not able to marshal dynamic capabilities for change or successfully counter core rigidities. 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 mindset. 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 et al., 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 as Christensen suggests. Instead, middle managers resisted digital photography for a variety of reasons, a resistance that in the end jeopardized their own jobs. Fisher and the rest of senior management were unable to overcome these rigidities. Kodak had a number of dynamic capabilities, but its capabilities in film overshadowed those in digital processes. Kodak managers were very successful in developing processes for manufacturing high-quality film and printing paper. Kodak also had a number of technological assets that positioned it for success in the film business, including knowledge of chemistry, 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 experience in film inhibited rather than facilitated a shift to new technology. It appears that core competencies that were responsible for Kodak’s success in the past turned into core rigidities that inhibited its response to digital photography, particularly in the ranks of middle managers. Kodak employees had a wealth of knowledge about making film. Some employees were knowledgeable 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 people. 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.” by 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 that 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. (Business Week, 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 margin. . .There is a new set of competitors. . .we don’t know anything about them.
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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, 2005b) 3.1.2. Organization culture Kodak also suggested our second extension to Christensen. Some of Kodak’s failure is due to the culture of the company and employees’ 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 manufacturing 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 mindset 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 Fig. 4, this prediction was seriously in error. Kodak’s culture and hierarchical structure also got in the way of an effective response to digital photography. Kodak was a company that valued 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) 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 discuss issues and establish agreement in order to avoid confrontations, which were considered un-Kodaklike. (Swasy, 1997)
4. Discussion and lessons learned One of the goals of this paper is to propose extensions to Christensen’s theory of disruptive technology that improve its ability to explain major, IT-enabled transformations. We believe that the history of Kodak supports Christensen’s theory of disruptive technology and the dilemmas of the innovator, and at the same time suggests some extensions to this theory. Generalizing our study of Kodak to Christensen’s theory of disruptive technology, we added considerations of organization change and culture. Fig. 1 helps to understand the change processes and the struggle management faces as it tries to marshal the firm’s dynamic capabilities for change while overcoming core rigidities in the organization. A second goal of the paper is to learn from Kodak’s unsuccessful response to the challenges and threats of ICT and digital cameras that changed the process of photography. Kodak invested heavily in digital photography, but middle managers and the culture of the organization made it impossible for the company to capitalize on that investment. When confronted with a rare, discontinuous change from technology, senior management in a firm faces the daunting task of changing the organization to embrace the new technology. Change depends on convincing management ranks that the threat is serious; after a long period of success, core competencies become core rigidities, making change that much more difficult. Kodak also demonstrates how difficult it is to change an organization’s culture; a polite, bureaucratic organization staffed by risk-averse managers is unlikely to respond successfully to a disruptive technology. In Christensen’s study of disk drives, it was not clear that customers were ready for new innovations, and the incumbent manufacturers received little feedback suggesting the need for them. In Kodak’s case, the customer was embracing new technology at a rapid rate. As Carly Fiorina observed: 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 traditional 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 suddenly 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. (Carly Fiorina interview, Batavick and Lucas, 2008) What are the lessons learned from viewing Kodak from the lens of Christensen and our extensions to his theory? The most important observation is that management has to recognize the threats and opportunities of new information and communications technologies and marshal capabilities for change. This change effort involves attacking core rigidities and the culture of the organization, and bringing all levels of employees on board, or the change effort will fail. This analysis of Kodak’s
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history supports the proposed extensions of Christensen’s theory, specifically the need to change the organization and its culture when responding to a disruptive technology. The unanswered question is when confronted with a major technological discontinuity, can managers and organizations change a business model that has been successful for more than a century? References Balogun, J., 2006. Managing change: steering a course between intended strategies and unanticipated outcomes. Long Range Planning 39, 29–49. Balogun, J., Johnson, G., 2004. Organizational restructuring and middle manager sensemaking. Academy of Management Journal 47 (4), 523–549. Bantel, K.A., Jackson, S.E., 1989. Top management and innovations in banking – does the composition of the top team make a difference? Strategic Management Journal 10, 107–124. Barney, J., 1991. Firm resources and sustained competitive advantage. Journal of Management 17 (1), 99–120. Barney, J., Arikan, A., 2001. The Resource-Based View: Origins and Implications. In: Hitt, M.A., Freeman, R.E., Harrison, J.S. (Eds.), The Blackwell Handbook of Strategic Management. Blackwell Publishers Inc., Malden, MA, pp. 124–188. Batavick, F., Lucas, H.C., 2008. The Transformation Age: Surviving A Technology Revolution with Robert X. Cringely (DVD). Maryland Public Television and University of Maryland’s Robert H Smith School of Business. Burke, W.W., 2002. Organization Change: Theory and Practice. Sage, Thousand Oaks, CA. Castanias, R.P., Helfat, C.E., 2001. The managerial rents model: theory and empirical analysis. Journal of Management 27 (6), 661–678. Christensen, C., 1997. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press. Christensen, C.M., Overdorf, M., 2000. Meeting the challenge of disruptive change. Harvard Business Review 78 (2), 66–76. Christensen, C., Raynor, M., 2003. The Innovator’s Solution. Harvard Business School Press. Danneels, E., 2004. Disruptive technology reconsidered: a critique and research agenda. Journal of Product Innovation Management 21 (4), 246–258. Eisenhardt, K., Martin, J., 2000. Dynamic capabilities: what are they. Strategic Management Journal 21 (10–11), 1105–1121. Galliers, R.D., 2004. Reflections on information systems strategizing. In: Avergou, C., Ciborra, C., Land, F. (Eds.), The Social Study of Information and Communication Technology: Innovation, Actors and Contexts. Oxford University Press, Oxford, pp. 231–262. Galliers, R.D., 2006. Strategizing for agility: confronting information systems inflexibility in dynamic environments. In: De Souza, K. (Ed.), Agile Information Systems: Conceptualization, Construction, and Management. Butterworth-Heinemann, Oxford, pp. 1–15. Gavetti, G., 2005a. Cognition and hierarchy: rethinking the microfoundations of capabilities’ development. Organization Science 16 (6), 599–617. Gavetti, G., 2005b. Kodak: Interview with Dr. George Fisher (DVD). HBS Publishing. Gavetti, G., Henderson, R., Giorgi, S., 2004. Kodak (A). HBS Publishing. Hambrick, D.C., Mason, P.A., 1984. Upper Echelons: the organization as a reflection of its top managers. The Academy of Management Review 9 (2), 193– 206. Helfat, C., Finkelstein, S., Mitchell, W., Peteraf, M.A., Singh, H., Teece, D.J., Winter, S.G., 2007. Dynamic Capabilities: Understanding Strategic Change in Organizations. Blackwell, Oxford, UK. Holcomb, Tim R., Michael Holmes Jr., R., Connelly, Brian L., 2008. Making the most of what you have: managerial ability as a source of resource value creation. Strategic Management Journal. Leonard-Barton, D., 1992. Core capabilities and core rigidities: a paradox in managing new product development. Strategic Management Journal 13 (S1), 111–125. Mata, F., Fuerst, W., Barney, J., 1995. Information technology and sustained competitive advantage: a resource-based analysis. MIS Quarterly 19 (4), 487– 505. Merton, R.K., 1957. Social Theory and Social Structure, rev. ed. Free Press, New York, NY. O’Reilly, C., 1989. Corporations, culture, and commitment: motivation and social control in organizations. California Management Review 31 (4), 9–25. Peteraf, M., 1993. The cornerstone of competitive advantage: a resource-based view. Strategic Management Journal 14, 179–191. Rouleau, L., 2005. Micro-practices of strategic sensemaking and sensegiving: how middle managers interpret and sell change every day. Journal of Management Studies 42 (7), 1413–1441. Schein, E.H., 1983. The Role of the founder in creating organizational culture. Organizational Dynamics Summer, 13–28. Schein, E.H., 1985. Organizational Culture and Leadership. Jossey-Bass, San Francisco, CA. Sherif, K., Menon, N.M., 2004. Managing technology and administration innovations: four case studies on software reuse. Journal of the Association for Information Systems 5 (7), 247–281 (July). Swasy, A., 1997. Changing Focus: Kodak and the Battle to Save a Great American Company. Times Business. Teece, D.J., 2007. Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal 28 (13), 1319–1350. Teece, D., Pisano, G., Shuen, A., 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18 (7), 509–533. Tripsas, M., Gavetti, G., 2000. Capabilities, cognition, and inertia: evidence from digital imaging. Strategic Management Journal 21 (10–11), 1147–1161.
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Journal of Strategic Information Systems journal homepage: www.elsevier.com/locate/jsis
Disruptive technology: How Kodak missed the digital photography revolution Henry C. Lucas Jr. *, Jie Mein Goh Decisions, Operations and Information Technologies, Robert H. Smith School of Business, University of Maryland, College Park, MD 20740, United States
a r t i c l e
i n f o
Article history: Available online 25 February 2009
Keywords: Innovation Information and communications technologies Disruptive technology Core rigidities Case study Qualitative research
a b s t r a c t The purpose of this paper is to analyze how a firm responds to a challenge from a transformational technology that poses a threat to its historical business model. We extend Christensen’s theory of disruptive technologies to undertake this analysis. The paper makes two contributions: the first is to extend theory and the second is to learn from the example of Kodak’s response to digital photography. Our extensions to existing theory include considerations of organizational change, and the culture of the organization. Information technology has the potential to transform industries through the creation of new digital products and services. Kodak’s middle managers, culture and rigid, bureaucratic structure hindered a fast response to new technology which dramatically changed the process of capturing and sharing images. Film is a physical, chemical product, and despite a succession of new CEOs, Kodak’s middle managers were unable to make a transition to think digitally. Kodak has experienced a nearly 80% decline in its workforce, loss of market share, a tumbling stock price, and significant internal turmoil as a result of its failure to take advantage of this new technology. Ó 2009 Elsevier B.V. All rights reserved.
1. Introduction The purpose of this paper is to explore how firms respond to challenges from rare transformational technology that threatens a traditional, successful business model. We propose an extension of Christensen’s theory of disruptive technologies and illustrate the extensions with a longitudinal case study of Kodak. Kodak is unique in that it developed and patented many of the components of digital photography, yet this new form of photography has had a serious, negative impact on the firm. The two main contributions of the paper are the extension to Christensen’s theory and the lessons from Kodak’s unsuccessful response to a major technological discontinuity. The digital camera combined with information and communications technologies (ICT), specifically 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 another person, the customer uploads the picture to a PC and sends it as an email attachment to multiple recipients. If the customer wants a hard copy, she can print a picture locally on an inexpensive color printer on a PC, send it to an Internet photo service, or go to a store that had a developing kiosk.
* Corresponding author. Tel.: +1 301 314 1968. E-mail addresses: [email protected] (H.C. Lucas Jr.), [email protected] (J.M. Goh). 0963-8687/$ - see front matter Ó 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.jsis.2009.01.002
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1.1. Past research: Christensen’s theory of disruptive technologies Christensen’s theory of disruptive technologies is one of the most popular for explaining the plight of the incumbent firm facing a significant new technology. He proposes a theory of response to disruptive technologies in two books about innovation (Christensen, 1997; Christensen and Raynor, 2003). He argues that investing in disruptive technologies is not a rational financial decision for senior managers to make because, for the most part, disruptive technologies are initially of interest to the least profitable customers in a market (Christensen, 1997). The highest-performing companies have systems for eliminating ideas that customers do not ask for, making it difficult for them to invest resources in disruptive technologies. By the time lead customers request innovative products, it is too late to compete in the new market. The root cause of the failure to adapt to disruptive technologies is that the company practiced good management. The decision-making and resource-allocation processes that make established companies successful cause them to reject disruptive technologies. Christensen and Overdorf (2000) present a framework for dealing with disruptive change that focuses on resources, processes and values. Resources include people, equipment, technologies, cash, product designs and relationships. Processes are the procedures and operational patterns of the firm, and values are the standards employees use to set priorities for making decisions. Managers design processes so that employees perform tasks in a consistent way every time; they are not meant to change. The most important processes when coping with a disruptive technology are those in the background such as how the company does market research and translate it into financial projections, and how the company negotiates plans and budgets. Employees exhibit their values every day as they decide which orders are more important, what customers have priority and whether an idea for a new product is attractive. The exercise of these values constitutes the culture of the organization. Culture defines what the organization does, but it also defines what it cannot do, and in this respect can be a disability when confronting a new innovation. 1.2. Extending Christensen’s theory When a firm is confronted with a discontinuous, highly disruptive technology, senior management has to bring about significant changes in the organization at all levels. Our first extension to Christensen is to emphasize the change process required to adopt a disruptive technology. Senior management has to convince others of the need to move in a new direction. Specifically we are interested in how middle managers change themselves and also bring about change in the organization (see Rouleau, 2005; Balogun, 2006). Christensen argues that the firm is not ready to adapt a disruptive technology because it does not see a demand from its customers for the new innovation. He maintains that high-performing companies have systems in place that tend to kill ideas that customers are not asking for. We propose to extend this part of his theory to encompass the culture of the organization, by which we mean the beliefs of employees, the way the firm organizes itself and the nature of the interactions among employees (Schein, 1983). 1.3. A first extension: the struggle for change In confronting a technological disruption, a firm faces a struggle between employees who seek to use dynamic capabilities to bring about change, and employees for whom core capabilities have become core rigidities. Management propensities for change drive the process (see Fig. 1). We describe this ongoing struggle using concepts from dynamic capabilities, core rigidities and management propensities.
Response to Disruptive Technology Reduce capacity to change
Increase capacity to change
Core Rigidities
Dynamic Capabilities
Organize and marshal capabilities for change
Attack Rigidities Management Propensities
Fig. 1. A framework for responding to disruptive change.
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1.3.1. Dynamic capabilities The theory of dynamic capabilities is an extension of the resource-based view of the firm (Barney, 1991; Peteraf, 1993; Mata et al., 1995; Eisenhardt and Martin, 2000; Barney and Arikan, 2001). Dynamic capabilities is defined as ‘‘the firm’s ability to integrate, build external competences to address rapidly changing environments” (Teece et al., 1997). They ‘‘consist of specific strategic and organizational processes like product development, alliancing and strategic decision-making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies” (Eisenhardt and Martin, 2000; Helfat et al., 2007; Teece, 2007). The theory suggests that a firm has three classes of assets to use in seeking new forms of competitive advantage when confronted with a novel situation including: Processes: assemblies of firm-specific assets that span individuals and groups. These processes have three roles including coordination, learning and reconfiguration. Positions: specific assets including plant and equipment, knowledge and reputational assets, that determine competitive advantage at a given point in time. Paths: the sequence of events that have led to a firm’s current position i.e. ‘‘. . .a firm’s previous investments and its repertoire of routines constrain its future behavior” (Teece et al., 1997). 1.3.2. Core rigidities Dynamic capabilities may not, however, always enable a firm to reconfigure its business in response to an external threat. Leonard-Barton (1992) introduces the idea that the core activities of the firm can become so rigid that it cannot respond to new innovations. Her four dimensions of a core capability include: (a) employee knowledge and skills; (b) technical systems which embed knowledge and support innovation; (c) managerial systems which guide knowledge creation and control and (d) values and norms associated with various types of knowledge. Leonard-Barton suggests that core capabilities that are appropriate in one situation may turn out to be inappropriate in another, for example, the challenges for an incumbent firm from a new entrant. These core capabilities, rather than being dynamic and helpful in coping with change, become core rigidities that inhibit a response. There are a number of paths to rigidity. Because corporate resources are limited, firms often emphasize one discipline, which makes the company less attractive to people from non-dominant disciplines. It is easy for technical systems to become outdated, especially when they involve expensive plant and equipment or complex software. Management systems also become rigid over time as people respond to incentive and reward systems; there is little interest in performing tasks that appear to be undervalued by senior management. It is easy for the organization to fall into the competency trap; employees convince themselves that their current processes and technology are superior to a new, disruptive technology, and they fail to respond appropriately. Rigidities in these core capabilities inhibit individual and organizational learning when confronted with a rare, technological disruption. Employees may be comfortable with their existing knowledge and skills and resist learning the new technology. There may be little incentive to build new technical and managerial systems, or to learn new knowledge to create the systems. 1.3.3. Management propensities Management propensities determine the outcome of the battle between dynamic capabilities and core rigidities in responding to a transformational technology. This implication is an extension to research demonstrating the importance of managers in determining firm performance outcomes (Holcomb et al., 2008; Castanias and Helfat, 2001; Bantel and Jackson, 1989; Hambrick and Mason, 1984). Managers have to develop a strategy that emphasizes the response to a disruptive technology, and they must communicate this strategy throughout the firm (O’Reilly, 1989). Senior managers have to learn a new technology and develop cognitions that change is necessary; they must lead the change effort (Sherif and Menon, 2004). Managers must also help subordinates develop cognitions that respond to a new direction for the firm. They must teach others in the organization about their vision for the firm and see that employees learn this new business model and all that it entails. We refer to these managerial activities as propensities or managers’ inclinations to act in a certain way. During the course of responding to the disruptive technological change, complications result and cause different management levels to have different managerial cognitions (Gavetti, 2005a). If it is desirable to change the overall direction of a firm, senior managers are likely to be faced with one group of long-term employees who exhibit core rigidities, and newer employees who are trying to innovate and take advantage of the firm’s dynamic capabilities. It is interesting to note that the discussion above has a parallel in the IS strategy literature. For example, Galliers (2004, 2006) has proposed a framework for information systems strategizing which focuses on exploitation, exploration and change management. A firm confronted with a technological discontinuity needs to explore, utilize its dynamic capabilities and learn a new, agile response to a threat. It needs to create knowledge, which is a key component of Gallier’s IS strategy framework as well. 1.4. A second extension: organization culture Organizational culture shapes organizational cognition and has a very important role in its response to technology-enabled transformations. We have adopted Schein’s (1983) definition of culture for the purposes of this paper. Culture is ‘‘a
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pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration – a pattern of assumptions that has worked well enough to be considered valid, and therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to these problems” (Schein, 1983, p. 14). Founders teach organizational members through their actions and through this process, culture is developed, learned and embedded (Schein, 1985). Culture operates at both the macro and micro levels within an organization. As defined by Schein, culture is a multilevel concept that is fragmented across domains such as different types of management. Literature (Burke, 2002) often focuses on the role of senior management in creating a firm’s culture; we see a need to consider the role of middle management which has been less emphasized in prior research (Balogun and Johnson, 2004; Danneels, 2004). Middle managers are typically the largest managerial group and they play a key role in implementing firm strategy. Given their position in the organizational hierarchy, middle managements’ propensities may be different from those of senior management. Previous literature on organizational change acknowledges the role of culture in facilitating, managing, or impeding change (e.g., Burke, 2002; Tripsas and Gavetti, 2000). A bureaucracy is associated with slow response and employees who value security over risk-taking. Bureaucratic structure leads to organizational inertia (Merton, 1957). Thus, an organization culture that promotes hierarchy and maintaining the status quo will be resistant to disruptive technologies. 2. The case of Kodak 2.1. Data collection The research reported here comes from primary and secondary sources. We obtained annual reports from Kodak and searched the literature to build an historical time line of the key events in digital photography and Kodak’s response to this new technology. We looked at past Kodak web sites on www.archive.org to get a sense of changes in marketing and strategy. As a part of a larger project on IT-enabled transformations, members of a research team visited Kodak and interviewed two employees the company was willing to make available to us. Also as a part of the larger study we asked Carly Fiorina, ex-CEO of HP, to expand on her early analysis and comments on Kodak’s history with digital photography. We consulted a teaching case study, books and a videotaped interview with one of the Kodak CEOs during this time period. 2.2. 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 when color photography was introduced, it was one of the few companies that had the knowledge and processes to succeed. The company achieved $1 billion in sales in 1962. By 1976, Kodak captured the majority of the US film and camera market (90% and 85%, respectively). 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 film-making plant, and historically CEOs came from manufacturing jobs at the factory (Gavetti et al., 2004). Kodak’s sales hit $10 billion in 1981, but then competitive pressures, especially from Fuji, hindered future increases (Gavetti et al., 2004). In 1986, Kodak invented the fist megapixel sensor capturing 1.4 million pixels to produce a high-quality 5 7 print. Kodak had introduced 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 CDROM 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 to be 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 et al., 2004). He also went after Fuji and the Japanese government for restraining the sales of Kodak products. Fisher did not give up on film; he believed that China was an emerging market with great potential for photography and invested heavily there in a joint venture with the Chinese government. By 1996, Kodak had cut $50 million from the cost of film and paper production 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 chairman’s letter stated that Kodak ‘‘implemented a digitally oriented strategy to support revenue and sustainable earnings”. In the same year, Kodak closed its film camera factory in the US. 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”. In 2005, Carp stepped down early as chairman and was replaced by Antonio Perez.
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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 Fig. 2). Kodak net sales reached $20 billion in 1992, and dropped to below $15 billion in the ensuing 5 years, though some of the decline was due to divestitures. This change is particularly dramatic when compared with Fuji’s net sales, which have been growing since 2001. 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 et al., 2004). In addition to pressure from competitors, investors have been highly critical of the company and its management. Share prices in Fig. 3 rose during Fisher’s first 4 years of leadership (1993–1997), and then began a precipitous decline during Carp’s chairmanship starting in 2000. 2.3. The movement to digital photography The transformation from conventional photography to digital photography took about two decades. Information and communications technologies play as important a role in digital photography as the camera, itself. The computer is a vehicle for editing, saving, storing and ultimately sharing photographs with others. The Internet is the vehicle for the distribution of multiple copies of an image to different recipients. Steven Sasson, The inventor of the digital camera at Kodak, remarks on the history of digital research at the company. Well, you’d be surprised at some of the breakthroughs and innovations 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
Fig. 2. Kodak’s net sales and number of employees.
Fig. 3. Kodak’s monthly share price.
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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 1980s. And we made some of the first cameras. You might be surprised that a Kodak digital camera went aboard the 1991 space shuttle mission. 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 experience 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 Fig. 4). The movement toward digital photography has a huge adverse impact in firms that had historically been in the photography business such as Kodak, Fuji and Konica Minolta. When photography moved from film to digital, it invited a whole new group of competitors into the 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 sprung up. Fig. 5 shows a timeline of the key events in Kodak’s history related to digital photography.
Fig. 4. Sales of digital camera.
Time Line
14 Stopped selling film based camera 15 First full year in digital transformation
7
Sold Sterling 8 Divested Clinical Diagnostics Division
5 Produced Photo CD 6 George Fisher became system 3 Acquired CEO Sterling Drug 4 Acquired IBM copiers
1 Lost Polaroid patent infringement suit 2 Invented first megapixel sensor
1,2
1985
3,4
9
Kodak charged Fuji & Japan 10 WTO rules against Kodak
16 Antonio Perez became Implemented digital strategy CEO 17 Outsourced 12 Acquired digital camera Ofoto production 13
18 Produced low cost cartridge printers
11
Daniel Carp became CEO
5
1990
6
7,8
9
10
1995 Fig. 5. Kodak’s time line.
11 12
2000
13 14,15 16
17 18
2005
2007
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3. An analysis of Kodak’s response to digital photography 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. Unlike the disk drive industry that is prominent in Christensen’s work, the move to ICT and digital changed the process by which the consumer captured, displayed and shared images. Table 1 describes how Christensen’s theory applies to Kodak, and how Kodak’s history deviates from this theory. Christensen comments that disruptive technologies produce products that are typically cheaper, smaller and often more convenient to use than traditional products. Digital cameras were an expensive curiosity at first, but soon producers improved their performance and they constantly reduced prices. Digital photography, as noted earlier, was not just a product, but a change in the entire process of capturing, displaying and transmitting images. Kodak seriously underestimated how quickly the demand for this new technology would grow. Christensen’s theory predicts that firm resource-allocation processes discourage investment in potentially disruptive technologies. However, contrary to his disk drive industry examples, Kodak did invest massive amounts in digital photography. It just never had much to show for it. Fisher arrived after Kodak had spent $5 billion on digital imaging R&D with little coming from the labs. Product development and sales were scattered over more than a dozen divisions, at one point the company had 23 different digital scanner projects under development (Gavetti et al., 2004).
Table 1 Christensen’s theory of disruptive technology and Kodak. Christensen’s theory
How it applies at Kodak
Differences with Kodak
Products based on disruptive technologies are typically cheaper, simpler, smaller and, frequently, more convenient to use ID p. xv
At first digital cameras were more expensive and large; gradually they became cheaper, simpler and smaller
Digital cameras changed more than the physical artifact; they changed the process of photography – one now captured an image and a photo was only one way of displaying the image. Digital photography also changed the distribution, sharing and copying of images via the Internet It appeared that digital cameras created their own market demand Kodak thought at first that the main market for digital photography would be the professional photographer, not the amateur consumer. It did invest heavily in digital products, but did not manage that investment well ($5 billion by the time Fisher arrived). Kodak seemed to be ignoring customers; it focused on film because it was comfortable and so profitable. The company had an analog, chemistry mindset and could not think digitally
Technologies can progress faster than market demand. ID p. xvi ‘‘. . .investing aggressively in disruptive technologies is not a rational financial decision for them to make. . .By and large, a disruptive technology is initially embraced by the least profitable customers in a market. ID p. xvii The highest-performing companies. . .have welldeveloped systems for killing ideas their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies-lower-margin opportunities that their customers don’t want-until their customers want them. And by then it is too late. ID xix The reason is that good management itself was the root cause. Managers played the game the way it was supposed to be played. The very decision-making and resource-allocation processes that are the key to the success of established companies are the very processes that reject disruptive technologies. ID p. 98 Give responsibility for disruptive technologies to organizations whose customers need them. Chap. 5 title, p. 100 ID It is the middle managers who must decide which of the ideas that come bubbling in or up to them they will support and carry to upper management for approval, and which ideas they will simply allow to languish. Their job is to sift the good ideas from the bad and to make good ideas so much better that they regularly secure funding from senior management. IS p. 10
As digital cameras became smaller and easier to use, consumers adopted them. Not clear if they spent less on photography or not, but the suppliers of imaging services changed
Kodak underestimated the speed with which the consumer segment would adopt digital photography
Kodak appears to be more in a state of denial. Possibly at first this reason could have kept them from investing, but Kodak began to develop a digital strategy long after it was obvious to everyone else that it needed one
Senior management allocated resources to digital products, but middle managers rejected the disruptive technology
Kodak did try a separate organizational unit
Kodak kept organizing and re-organizing. Data suggest that when a separate organization was created, the digital subunit and traditional photography had serious conflict over resources Senior management was trying to change middle management, and had little success. In this case it was not middle management bringing ideas to senior management; the direction was the opposite
Kodak’s middle managers impeded the conversion to digital
ID is from The Innovator’s Dilemma, IS is from The Innovator’s Solution.
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Christensen suggests giving responsibility to disruptive technologies to a separate organization that will work with customers who are most likely to buy the new technology. Kodak went through a number of restructurings and at times had a separate digital organizational unit. In 1994 Fisher separated digital imaging from silver-halide photographic division to create digital and applied imaging division (Gavetti et al., 2004). However, it appears that it was not separate enough as there was infighting between the traditional film business and the digital photography unit. Kodak tried a number of different organizational structures for the digital business, as an example: In the Fall of 2000 Kodak reorganized to bring digital and applied imaging and consumer imaging under one organization, in order to end the internal war between the film and digital segments (Rochester Business Journal, 12/8/2000). 3.1. Extensions to Christensen’s theory of disruptive technologies Our analysis of Kodak led to the proposed extensions to Christensen’s theory of an organization’s response to a technological discontinuity. In the spirit of qualitative research, we are not trying to generalize the Kodak case to other companies, but rather are interested in generalizing from Kodak to a theory. Below we discuss how Kodak’s experiences support our two extensions to Christensen’s theory. 3.1.1. Change The framework in Fig. 1 suggests that management propensities influence the ability of the organization to marshal dynamic capabilities for change and to attack core rigidities. What was the result of this ongoing struggle at Kodak? One of the key failures at Kodak was the inability of the organization to bring about change: it was not able to marshal dynamic capabilities for change or successfully counter core rigidities. 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 mindset. 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 et al., 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 as Christensen suggests. Instead, middle managers resisted digital photography for a variety of reasons, a resistance that in the end jeopardized their own jobs. Fisher and the rest of senior management were unable to overcome these rigidities. Kodak had a number of dynamic capabilities, but its capabilities in film overshadowed those in digital processes. Kodak managers were very successful in developing processes for manufacturing high-quality film and printing paper. Kodak also had a number of technological assets that positioned it for success in the film business, including knowledge of chemistry, 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 experience in film inhibited rather than facilitated a shift to new technology. It appears that core competencies that were responsible for Kodak’s success in the past turned into core rigidities that inhibited its response to digital photography, particularly in the ranks of middle managers. Kodak employees had a wealth of knowledge about making film. Some employees were knowledgeable 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 people. 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.” by 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 that 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. (Business Week, 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 margin. . .There is a new set of competitors. . .we don’t know anything about them.
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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, 2005b) 3.1.2. Organization culture Kodak also suggested our second extension to Christensen. Some of Kodak’s failure is due to the culture of the company and employees’ 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 manufacturing 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 mindset 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 Fig. 4, this prediction was seriously in error. Kodak’s culture and hierarchical structure also got in the way of an effective response to digital photography. Kodak was a company that valued 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) 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 discuss issues and establish agreement in order to avoid confrontations, which were considered un-Kodaklike. (Swasy, 1997)
4. Discussion and lessons learned One of the goals of this paper is to propose extensions to Christensen’s theory of disruptive technology that improve its ability to explain major, IT-enabled transformations. We believe that the history of Kodak supports Christensen’s theory of disruptive technology and the dilemmas of the innovator, and at the same time suggests some extensions to this theory. Generalizing our study of Kodak to Christensen’s theory of disruptive technology, we added considerations of organization change and culture. Fig. 1 helps to understand the change processes and the struggle management faces as it tries to marshal the firm’s dynamic capabilities for change while overcoming core rigidities in the organization. A second goal of the paper is to learn from Kodak’s unsuccessful response to the challenges and threats of ICT and digital cameras that changed the process of photography. Kodak invested heavily in digital photography, but middle managers and the culture of the organization made it impossible for the company to capitalize on that investment. When confronted with a rare, discontinuous change from technology, senior management in a firm faces the daunting task of changing the organization to embrace the new technology. Change depends on convincing management ranks that the threat is serious; after a long period of success, core competencies become core rigidities, making change that much more difficult. Kodak also demonstrates how difficult it is to change an organization’s culture; a polite, bureaucratic organization staffed by risk-averse managers is unlikely to respond successfully to a disruptive technology. In Christensen’s study of disk drives, it was not clear that customers were ready for new innovations, and the incumbent manufacturers received little feedback suggesting the need for them. In Kodak’s case, the customer was embracing new technology at a rapid rate. As Carly Fiorina observed: 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 traditional 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 suddenly 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. (Carly Fiorina interview, Batavick and Lucas, 2008) What are the lessons learned from viewing Kodak from the lens of Christensen and our extensions to his theory? The most important observation is that management has to recognize the threats and opportunities of new information and communications technologies and marshal capabilities for change. This change effort involves attacking core rigidities and the culture of the organization, and bringing all levels of employees on board, or the change effort will fail. This analysis of Kodak’s
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