complete financial know how

Innovation is the key

In the mid 1970s an employee of Kodak demonstrated a prototype of a device that weighed 8 pounds and needed a suitcase to transport it.

It was the world’s first digital camera. The photos were stored on a cassette tape, they took 21 seconds to scan and boasted quality of 0.01 megapixels – wow!

At the time the market capitalisation of Kodak was $32 billion and the management team could not, for the life of them, understand why anyone would ever want to display a photo on a television screen.

When they asked the employee how long he thought it would take for the device to be commercially viable he estimated 15-20 years, citing Moore’s Law (Intel co-founder who noticed in 1965 that the number of transistors per square inch on integrated circuit boards had doubled every year since their invention), way too long for Kodak management.

Fast forward to January 2012. Kodak filed for $6.75 billion bankruptcy. What went wrong?

These were clever people – you didn’t run a Fortune 100 company if you weren’t and surely they did not wake up one day in 1995 and say to themselves “what decisions can we take today that will ultimately destroy this company?”

A huge challenge all entrenched businesses have is dealing with innovations at the margin that are not an immediate threat to their existing business model or product franchise but which could potentially displace their existing franchise.

For example, if management had seen the potential of the emergence of digital photography it would have been hard for them to mentally get around the fact that their existing chemical processing business would be at risk if they used their resources to move into that emerging technology.

Would their shareholders have been pleased to see them invest in a technology that had the potential to destroy their current business? We know that risk aversion is a stronger human emotion than the potential for gain which is something we see at a personal level and we see it played out every day in so many businesses. The long run cost to business development is enormous.

All too often, when management has a strong product franchise it seems to make more sense to build a strategy around strengthening your competitive position by focusing on improving your current operations i.e. pursuing operational excellence. (Operational excellence per say will never allow a business to flourish with sustainable growth and I will come back to this in another article). It doesn’t make much sense therefore to embrace a long term view or an innovation and place a bet on a product that may never get traction or more particularly, one that might cannibalise your existing business.

With the benefit of hindsight it is reasonable to conclude that Kodak’s demise was inevitable and that there was absolutely nothing management could do other than accept it and harvest their product franchise as strongly as possible for as long as possible then file for bankruptcy then re-build a new business built around the Kodak brand and the new (but now refined and market tested) digital imaging technology with a focus on a different customer group. In other words do exactly what has played out.

On the other hand Kodak management could have seen what was coming and made a decision to invest heavily in developing the lead it had in digital technology and then figure out a way to integrate their product development with their existing customer base and most importantly, bring new customers into the photography space. Given the strength of their brand and their research leadership at the time it would have arguably been easier for them to do that than most of the other companies that did embrace digital.

Instead, believing they were invincible and that the market would never buy into the concept of digital photography they unwittingly licensed the patents they owned from their research in digital imaging to their competitors and, the rest as we like to say with the benefit of hindsight, is history.

The moral of this story is to never rest on your laurels. Your business is most at risk when it’s looking to be in great shape. Creative destruction is the inevitable consequence of a capitalist system so given that prediction, why not anticipate it and constantly look for ways to re-invent your business? In that way you can absolutely develop sustainable growth.

Peter Cox
August 2014
(with acknowledgement to my good friend Ric Payne)

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Posted in: Blog, Innovation