We’re writing a book at L&C on the topic of disruption and culture. To do that we’ve been researching different industries to see which companies have succeeded and which have not in the face of disruption. We came across two companies in different industries where disruptive technologies affected a core part of their business. It was fascinating to read about how they dealt with disruption, with the inevitable demise of one and success of the other. Both companies invested significant time and money into their disruptive technology, but the outcomes were vastly different. The two companies are Kodak and Phillips; Kodak declared bankruptcy in 2012 while Phillips stock is doing extremely well as of the time of this writing.
These two companies were each at the forefront of their disruptive technology. Steve Sasson, an engineer at Kodak, developed the digital camera back in 1975. It was a big clunky object, described as being about “as big as a toaster, took 20 seconds to take an image, had low quality, and required complicated connections to a television to view….” [source]
The first LED light was invented by Nick Holonyak, an engineer at General Electric in 1962. However, Phillips kept up with the developments and assembled a research team to explore the technology potential almost from the beginning of the discovery.
Like Philips, Kodak was not exactly blindsided by disruptive technology. The senior team and board had been presented with the reality of digital progress by its head of market research in 1981, Vince Barabba. But at the time it didn’t believe that it was much of a threat. It did, however, try to fit a digital product into its family of film and print development. Kodak had the opportunity to regroup as the CEO, Colby Chandler, retired in 1989. The company had two options – Kay R. Whitmore who had worked within Kodak for over thirty years in the film business, and Phil Samper who represented the new digital technology. They went with the tried and true, and the series of missteps continued.
The problem has been analyzed by many people before us and the “blame” for Kodak’s collapse is attributed to a number of factors:
- they’re a chemical company and know nothing about semi-conductors;
- their infrastructure was set up to work with exclusive dealers of their product (photo shops) so the pivot to digital was too costly; and
- they only used digital to try to get more people to print photos.
It is this last suggestion that seems to make the most sense to us – the question is, why was the board so intent on sticking with printing?
Thinking Inside the Box
If you are deeply immersed in the world of film photography, (or your own industry), it’s incredibly difficult to step outside your world to assess what else is happening that might affect your business. Imagine you work at Kodak or are on its board and you’ve just been introduced to the latest gadget – the digital camera. Stuck within your own paradigm, you understand that a person can take as many photos as their SD card will handle and they can see them instantly, knowing which ones to keep (and print) and which ones to delete. It makes the process more efficient, but it also means that the consumer is going to want to print more pictures, not less! The Kodak employee sees increased demand for photo shops or, eventually, (while thinking progressively) online printing. In their paradigm, they couldn’t imagine people not wanting to print photos at all.
What they failed to comprehend was one of the essential reasons for printing photos in the first place. We don’t print photos just to relive memories, we print them to share our memories or experiences with friends and family. Once the consumer discovered the sharing potential of online platforms from Tumblr to Facebook, they realized they now had the capacity to share not just with their close family and friends, but former classmates, work colleagues and anyone who had access to the internet. Presented with this new option, Kodak’s core customers abandoned printing photos in droves while younger generations have never printed a set of vacation photos in their lives. Yes, Kodak missed the boat, but they didn’t even know it was there.
Philips and LED Technology
In contrast, Philips nursed LED lighting along for over 40 years of research and development before it became commercially viable in a big way. By 2000, a scientist named Roland Haitz had developed a law to measure the progress of LED lighting development. He determined that the cost per unit of light falls every decade by a factor of 10 while lighting output increases by 20. That meant that the incandescent lighting industry was doomed.
Also happening around the same time, the marks of climate change were becoming increasingly evident. Philips recognized that its incandescent products were highly energy inefficient, and therefore were one of the causes of climate change. Following its mission, it made the decision to lead the way in the phase-out of incandescent bulbs. It worked with NGOs and governments around the world moving them forward and in 2006 sold off its incandescent business. It was an interesting strategic decision, because the incandescent bulb business was worth about 30% of Philips’ entire business, at €7B/year in revenue. But, with Haitz’ law ever present in their minds, the company decided that it was a good time to sell. In contrast to Kodak, Philips saw the writing on the wall and consumers’ complete abandonment of incandescents once LED lighting became affordable and as effective as the standard 60W bulb. (Today, for instance, a Philips 12.5W A19 60W replacement bulb costs $5, uses 20% of the electricity and lasts 50,000 hours or more.)
What strikes us as telling, is that Phillips stared the beast in the eyes and walked towards it. The company knew that incandescents were going to be phased out and they accepted that reality, and in fact, ended up leading the way and speeding up the process. Meanwhile, they were working on the replacement technology, far ahead of their competitors, with a technology that had nothing to do with incandescents.
Philips Lighting has had to completely reinvent itself, but by staying ahead of the curve it has been able to do so. Its knowledge of LED lighting is leading it into new lighting territory. Not only have its engineers developed ways to manipulate LED hues to promote well-being, better plant growth, and consumer behaviour, Philips has also developed a “lighting as a service” business where they provide the design, equipment, and maintenance to businesses and municipalities in exchange for a leasing contract. Given that LEDs last so long, manufacturing alone is no longer a long-term growth opportunity. It is a company that has anticipated the future and run with it.
In Kodak’s case, we can all wonder “What if?” What if Kodak had accepted that digital tech was the wave of the future in ways that were barely on the radar back in the 80s? What if they had chosen the digital CEO instead of the “steady as she goes” CEO? Perhaps it would have taken off as it did for Philips – or perhaps not. Another aspect is, the culture of the corporation that was not only resistant to change, but also unable to see what was beyond its own print and chemical paradigm. In today’s terms, it was unable to “pivot” or be “agile” to the impending change, and it provides an excellent example of why companies always need to look beyond their own industry to see what lies ahead.
Scott Anthony, Kodak’s Downfall Wasn’t About Technology, HBR, July 15, 2016.
Willy Shih, The Real Lessons From Kodak’s Decline, MIT Sloane Management Review, Summer, 2016 Issue
Chunka Mui, How Kodak Failed, Forbes.com, January 18th, 2012
David Sax, Kodak’s Old School Response to Disruption, The New Yorker, January 27th, 2016
Jon Gertner, How Philips Altered the Future of Light, Fast Company, February 10th, 2014
Paul Nunes and Larry Downes, How Philips Thrived in Lighting’s “Big Crunch“, Forbes.com, March 31st, 2015