How many people remember their first Kodak camera? That cute little box that cost just a little, but kept eating up that more expensive film. It was Kodak that invented the now commonly-held idea that it is software that makes hardware necessary. The PC took off because of companies like Lotus, WordPerfect, and Microsoft. The iPhone has gotten to the top on the backs of app developers. Kodak made a fortune from its film, and didn’t worry too much about the camera.
Now, Kodak is on the verge of a bankruptcy filing, a milestone in American business. What can we takeaway from what went wrong?
You have to develop new technologies and products, and not stick with what got you to the winner’s circle. This is true whether you are Research in Motion grappling with the rise of the iPhone and Android, or any of the old mini-computer makers centered around Boston’s Route 128 that couldn’t adapt to that crazy new idea, the PC. For Kodak, their dominance in film just wasn’t enough. Like Motorola, like Polaroid, the world shifted from analog to digital and Kodak had to shift with it.
But wait a minute. Wasn’t Kodak always one step ahead of the competition in film technology? Didn’t they invent the digital camera? In fact, like Motorola in digital cell phones, Kodak was an early player, but they could never get it to stick. It is reminiscent of what happened to another Rochester, NY company, Xerox, and their brilliant stream of inventions at the Palo Alto Research Center (PARC) years ago. Xerox invented the first computer mouse, the first Ethernet, the first graphical interface operating systems for PCs, the first laser printer. But it turns out that invention without execution is not enough. With the exception of the laser printer, Xerox was never a big enough player in any of the businesses that emerged from these inventions. And Kodak was never able to beat the Japanese digital camera manufacturers, despite their early leading position. A sad story, because Kodak had the raw materials to become a player in the new digital world, but they couldn’t execute on it.
It is even more difficult to expand into «adjacent» businesses where you have some expertise, but where many of the customers and products might be different. Or the rules of the game are different. Could Kodak have become Flickr? Could Kodak have moved into social media and created an online presence where people could share experiences and photos? Could Kodak have even become Facebook? The answer is no. The entire mindset of business is different, the business models are different, the history and culture of the companies is different.
Diversifying into unrelated businesses when you have traditionally been focused on your core is always a bad idea. This is what happens when companies run out of good ideas. They get the crazy notion of investing free cash flow into unrelated industries where they have no expertise to compete, and they lose their shirt. Just like the tire industry in the 1980s, Kodak’s expansion into chemicals, bathroom cleaners and medical-testing devices only burned money they wished they had now.
Over time, successful companies make decisions that are logical at the time, but create long-run barriers to change when the company’s natural growth ends. This is most apparent in the generous health and pension benefits provided to Kodak workers over the years. It makes sense to share the success of your business with the people who helped you make that happen — employees — but when things turn bad those benefits become obligations that you can no longer afford. But, like the GM before it, you still have to pay.
There comes a time in a company’s history when it makes much more sense to sell the business while it’s still worth something than to try to turn it around. Very few companies ever do so. Why? Selling the company means the CEO and other top managers are out of business as well, and why do that when you have all the perks and pleasures of being at the top? I’m sure the folks at Blockbuster wish they sold out when they could.