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4 Lessons From Kodak's Comedown

Rick Newman

Another one bites the dust.

Companies fail all the time, but the last few years have seen an unusual parade of marquee names that once transformed or dominated their industries headed for bankruptcy court: General Motors, Chrysler, Blockbuster, Borders, Circuit City, and of course Lehman Brothers.

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Now Eastman Kodak has declared bankruptcy, yet another victim of a technology revolution that moved too fast for a big, lumbering firm to keep up with. Kodak, of course, dominated consumer photography for more than a century, first with its inexpensive cameras and then with its ubiquitous film and photographic paper. For years, Kodak was one of the most recognizable brands in the world.

As with many fading giants, Kodak's demise took place over decades and was imperceptible at first. Kodak invented the digital camera in the 1970s, yet sat on the technology, fearful that filmless cameras would cannibalize its core business. Competitors such as Fuji, meanwhile, nibbled away at its market share, often undercutting it on price. By the early 2000s, digital cameras finally became affordable and commonplace, and film was out.

All the while, Kodak tried to diversify, while its workforce shrank from 70,000 to fewer than 20,000. But most of those efforts failed to catch on, and the company could never replace its gargantuan film business. A Chapter 11 reorganization may now allow Kodak to restructure its business around printers, certain types of software, and commercial packaging, while selling hundreds of valuable patents to raise money and position itself for the future.

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The whole sorry tale sounds familiar, since many big firms these days struggle to keep up with smaller, nimbler competition. But Kodak's story isn't as simple as it might seem. Some of its decisions may seem foolish in retrospect, for instance, yet it's far from obvious what the company should have done differently. And in some ways Kodak followed established guidelines for strategic planning--yet still failed. Here are four takeaways from Kodak's comedown, relevant to companies and individuals both:

Leadership can be a curse. Kodak is far from the first company to become so captive to its core business that it can scarcely imagine another way of doing things. Vijay Govindarajan of Dartmouth's Tuck School of Business calls this phenomenon the "incumbent's curse." "When a company becomes successful, it develops a dominant logic," Govindarajan says. "When the world went digital, Kodak's strengths became weaknesses. It could not overcome its dominant logic and build a new logic." The company certainly had the money and brand cachet to become a leading provider of digital cameras. Instead, Sony, Nikon, Canon, and others became the dominant names in that business, while Kodak became an also-ran. "Kodak knew how to make digital cameras," says Govindarajan. "The traditional organization and mind-set got in the way."

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The incumbent's curse is evident in many other companies today, such as Blackberry-maker Research in Motion, Hewlett-Packard, Microsoft, Best Buy, and perhaps even Wal-Mart. It's also a cautionary tale for powerhouses like Apple and Google, which are riding high for now thanks to products that are runaway hits, but also because they just happen to be in the right business at the right time. The risk for such firms is that success will breed the kind of complacency that makes innovation seem less necessary--until somebody else comes up with a better product. By then, it might be too late.

Beware the obvious answer. In retrospect, it seems clear that Kodak should have plunged into digital photography far earlier. At best, however, that may only have delayed the company's demise. While digital cameras now dominate consumer photography, they're also low-margin products that are themselves being displaced by smartphones, tablets, and other devices with built-in cameras. "How would you like to have a business centered around electronic cameras in 2015?" says Larry Matteson, a professor at Rochester University's Simon School of Business and a former Kodak executive. "If that were your strategy, you'd be right back in the soup. That was never going to be Kodak's grand salvation in the long term."

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Kodak wasn't run by fools, and the company had detailed projections about the rate at which digital photography would displace its core film business. It may even have been a smart move to protect its film sales by staying out of digital photography until that technology matured, since Kodak was so dominant at the time that its own entry into digital could have accelerated its adoption by consumers. When Kodak did start selling digital cameras, it lost money on them, as prices rapidly dropped. Kodak may have protected its cash flow from film at the expense of future market share in a different business, but that may have been the best decision at the time.

Diversification isn't always the answer, either. Since it foresaw the end of its film profits, Kodak tried to leverage its imaging and chemical technology by getting into other businesses such as pharmaceuticals, medical diagnostics, copiers, and computer hardware. For the most part, those efforts never gelled, and Kodak sold off most of the ancillary businesses it acquired. Kodak also hired two CEOs from different industries--George Fisher of Motorola and Antonio Perez of H-P. That's often considered a shrewd way to remove the corporate blinders and bring in fresh ideas. Ford CEO Alan Mulally, for example, knew little about cars when he came to Detroit in 2006, but insights gleaned from a long career at Boeing helped him revive the ailing automaker. At Kodak, however, outsiders weren't able to work the same sort of magic.

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Matteson argues that Kodak's real mistake may have been chasing new business lines and markets--companies buying copiers, for instance, or hospitals buying diagnostic machines--rather than simply finding new applications for its core technology. As a contrast to Kodak he cites Corning, which has been making glass in one form or another for 160 years--evolving from lightbulbs in the 1800s to cookware, cathode-ray tubes for TVs, fiber optics, and now screens for smartphones and high-definition TVs. It might seem like a fine distinction, but such strategic nuances can have make-or-break implications down the road. At any rate, Kodak certainly tried to diversify, just like the textbooks say. It just didn't work out.

Sometimes, your time is simply over. Like many other established companies, Kodak ended up pinched between a cost and organizational structure derived from an outdated legacy business, and new business imperatives that simply couldn't support the old structure. So it's debatable whether Kodak's management could have made any decisions that would have preserved the company in its old form. "All companies die, just like people do," writes Tuck professor Syd Finkelstein, author of Why Smart Executives Fail."Like people, for most companies it's very hard to accept this inevitability." Chapter 11 may now give Kodak a fresh start, but if it's not nimble in the future, no amount of forgiveness will make it successful. Reinvention, these days, needs to be a regular occurrence.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success , to be published in May. Follow him on Twitter: @rickjnewman

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