The article What’s Wrong with This Picture: Kodak’s 30-year Slide into Bankruptcy in Knowledge@Wharton makes some interesting points.  Here is my summary.  Kodak, once an industry leader and an innovator could not succeed because of the fear of cannibalizing existing film business.

The technology is one of countless innovations that Kodak developed over the years but failed to successfully commercialize, the most famous being the digital camera, invented by Kodak engineer Steven Sasson in 1975. Digital technology has all but done in the iconic filmmaker. Since 2003, Kodak has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce by 47,000. It now employs 17,000 worldwide, down from 63,900 less than a decade ago.

The challenge in innovation is getting it into a product. Most companies either focus on incremental improvement of current products or long-term research.

Innovations that reach a middle ground — such as envisioning new product lines in the next two to five years — are much more elusive and often don’t have a champion pushing for them in the organization.

One of the root causes is that innovation disrupts the business model. Kodak made money on film and gave cameras away. They could not do the same with Digital imaging.

The company didn’t envision making money off cameras themselves, but rather the images it assumed people would store and print. “If you look at R&D, they were superfast. In terms of the business model, they were quite the opposite.

The problem is the the existing business model is the one generating all the profits.  It is very difficult to divert those into new competing business models (because most companies I know allocate R&D resources to each product line based on the revenues they generate). Furthermore, many times Wall Street expectations drive businesses away from innovation.

Over the years he watched digital projects lose battles for research dollars. Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet.

Furthermore, a successful business model leads companies to try to change the customer needs to fit existing business model instead of trying to change the business model to fit the market needs.

“It succumbed to inside-out thinking,” says Day — that is, trying to push forward with the existing business model instead of focusing on changing consumer needs. Accustomed to the very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted.

So, one lesson is to periodically ask the question about what is our core competency? What is our businessbeyond our business model – the way in which we are making money right now? Is our competency in customer understanding (e.g. Nordstrom), technological superiority (e.g. Intel) or execution efficiency (e.g. Walmart).  Then focus the investment around the competency:

Innovation is “the match between a solution and a need, connected in a novel way,” Terwiesch says. Kodak had a choice in how it pursued innovation: If it focused on the need, it would have to find new ways to take and store photos. If it focused on the solution, it would have to find new markets for its chemical coating technologies. Kodak’s competitor, Tokyo-based Fujifilm, focused on the solution, applying its film-making expertise to LCD flat-panel screens, drugs and cosmetics. “You have to make a decision: What are you as a company? Is it understanding the need or understanding the solution?” Terwiesch asks. “These are simply two very different strategies that require very different capabilities.

Another approach is to spin out companies that focus on new innovation and business model. It is hard to focus on disruptive innovation within an existing business.  

He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work.” Venture companies in Silicon Valley are “pretty wild,” Larish adds. “In Rochester, people come to work at 8 and go home at 5.”

On the other hand, the same problem makes spinning out businesses also hard.  Who is going to decide how much investment should go into which spin off?  Does one set up completely separate infrastructure for the spin off or bring it back once it succeeds?  How does one measure success of the spin off? Hence, once the spiral of business model driving the business starts, it is difficult to get out of it.

The digital era pushed Kodak into “a position of reacting,” and the company seemed to lose focus. “They had reorganization efforts … [and] brought in CEO after CEO. When you have that much disruption and change,” it becomes difficult to implement a long-term strategy

The final quote is one we should all remember:

“Don’t assume that just because you’re not willing to do it, somebody else won’t.”