Strategic Logic and Kodak Part 2

Happy Thanksgiving to all

Part 2: Kodak Case Study

The book that discusses this case:

Most new technologies do not create a new business, but rather a substitute for the old way of doing things. Thus, the strategic impact of a new technology will depend on how it affects the market imperfections that protected the older way of doing things. And this impact can be important. Take the case of photography, which turned to digital. You do not have to be a genius (written in 2003) to realize that the traditional business of Kodak is in danger, since every time someone buys a digital photographic camera, he or she is renouncing the future purchase of photographic paper and the products necessary for development, products on which Kodak has a high margin supported by its patents and economies of scale. There are only two important competitors in the world, Kodak and Fuji, along with a few secondary actors.

Facing this ‘announced death’ of its main business by the invasion of a new technology, Kodak seems to have a straightforward strategic solution: enter into digital photography. Kodak has been investing the important cash flow produced by its traditional operations in the new digital technologies. However, profits are not arriving and never will. The reason is that the competitive structure of traditional (chemical) photography and that of digital photography (electronic) are very different, the second being much less attractive than the first.

Traditional photography is based on a fairly specific chemical technology, on which Kodak has an important number of patents and specialized knowledge, accumulated over more than 100 years. Moreover, not only research but also most production processes are subject to important economies of scale. In addition, Kodak’s brand, advertised for a century, and its worldwide distribution reach are two more barriers that protect the company’s profits. A further positive for the manufacturers is that the price of the cameras is relatively unimportant compared with that of the consumables, such as photographic paper and developing products. Each person who buys a camera, no matter how inexpensive, ends up leaving a lot of money in Kodak’s till. For all these reasons, the business has traditionally been very profitable, with very little competition. Kodak has been able to push the rest (Agfa, Ilford) that did not have its competitive advantages from the market.  The only exception has been Fuji, which shares the market with Kodak.

This competitive structure, however, has nothing to do with the business of digital photography. To start with, there are no significant consumables: digital photos are taken with a digital camera, which does not use rolls of film, and are seen on the computer screen, without consuming film. Some, perhaps, are printed on the printer, on paper that is more normal than photographic paper and is not protected by entry barriers.

The technology of the cameras is also different, based on electronic light sensors, produced by several companies: all those that have significant capability in photo-electronics can manufacture them, and there are many. Finally, because we are dealing with a digital product, company brands such as Sony, Panasonic, HP and so on come into play, as they have credibility with consumers in this area. In short, we find a business that will be structurally less profitable than that of traditional photography, since its entry barriers are lower and the degree of competition, logically, is higher.

That is why Kodak’s effort to transform itself into a digital photography company is headed for failure. Even if it succeeds, it will find that the business is not as profitable as the traditional one. And there is not much that it can do about it: The shift from chemistry to electronics is a technological change that destroys the profitability of the traditional photography business, just as the microcomputer destroyed the profitability of large computers. If IBM has become profitable today, it is not by selling PCs, but by doing other different activities. It is a question of accepting strategic logic: the profitability of a company depends in the first place on the possibilities of singularization[1] that exist in its business, and if these change to become higher or lower, then profitability will change to become better or worse.

[1] Singularization means that the company can charge a higher price or produce at a lower cost or some combination thereof than its competitors or potential entrants.

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