Kodak and the digital revolution – A business model failure

I had my penultimate MBA elective at the weekend on Corporate Strategy so my next few posts will concentrate on value creation, value capture and business model architecture. I make so secret that business models fascinate me and it was reiterated throughout the lectures that the CEO agenda should be very much focused on the firm’s business model.

This point was highlighted with the case of Kodak’s demise from  Quasi-Monopolist (1888-1976) to bankruptcy protection in 2012.  How did a company that had pioneered the photographic market in 1880 collapse in just a few short years?

Contrary to popular opinion Kodak was ahead of the digital technology curve and they saw well ahead of time that digital photography was a game changer.  The problem was that for over a century Kodak had the classic razor and blade business model i.e. sell cheap cameras and make big profits on photography printing.  This model does not work in the digital market where photos are more for instant sharing rather than for capturing memories.

The CEO agenda

Subsequent Kodak CEOs were trapped in cognitive inertia: they kept developing new digital technologies without envisioning a new business model for the digital market.  I have described in previous posts what a business model at a simple level it has three parts:

1. How do we create value?
2. How do we capture value?
3. Who are our customers?

There is no doubt that Kodak created value for their customers (e.g. high quality cameras) but they did not capture that value (i.e. make money).  Also Kodak did not understand their customer; for many years their customer had been families and in particular women. But in the digital market it is a much younger audience who want to share their photos quickly with their friends.

What could Kodak have done?

Although retrospectively everything is easy, what could Kodak have done?

The most important priority for a turnaround business is to focus on one thing!  None of the Kodak CEOs could reconcile the digital and photo print businesses.

Option 1: Break up the business and sell of the parts

One option could have been to break up the business. Kodak could have been split in a manufacturing division, chemical division and a very profitable research division.  These could have been sold off or floated in their own right.

Option 2: Sell the whole print business like a fixed term bond

In the year 2000 Kodak could have sold the photo print business.  Even though most people could see photography printing had a 10-12 year life, the business had very stable, predictable cashflows.  This could have been valued in the same way as a 10-year bond and would appeal to institutional investors.  This would have left Kodak free to focus purely on digital without any distractions.

Option 3: Licence the brand or the technology

Kodak could have licensed their brand to P&G or licenced their technology to other companies, or a combination of both.  Kodak had spent over a hundred years and huge resources building a household brand that would have been very attractive to a portfolio brand company such as P&G or Unilever.  Kodak’s R&D labs had some of the most advanced technology in the industry and this could have been licensed to other technology companies to use in their devices.

Option 4: Leverage their distribution network and ignore digital

Kodak had a huge asset in their extensive distribution network with reach into many countries and retailers.  They could have continued to focus on print based products with a horizontal move into other print based products (e.g. printers or print technology) and sold these new products into their retail channels.

I am sure there are many other potential options but the point is that Kodak needed a fundamental change in their business model.  Business models are at the heart of corporate strategy and that is why they interest me so much.