Over the past several years, industry boundaries have rapidly disappeared and diverse business models have collided. In an era when companies create new business opportunities by crossing industry boundaries and collaborating with any field in the world, they face the question, ‘What should we choose, and how should we change?’ In the first installment of ‘Innovation Story,’ we consider the direction we should take and the challenges ahead through the stories of Kodak and Fujifilm, two companies that once divided the global camera market between them.
Written by Brad Cho (CEO of The Innovation Lab Co., Ltd.)
The Market Shifted from Film Cameras to Digital Cameras
Before discussing the two companies, we need to understand the camera market. In 1981, when Sony introduced the Mavica, the first commercial digital camera, the amateur photography market was worth around USD 14.2 billion. Because film manufacturing required highly advanced technology at the time, only a very small number of companies—Kodak, Fuji, and Agfa—could produce competitive film. In short, high barriers to entry meant few competitors and allowed industry leaders to enjoy an economic moat.
In a market centered on digital cameras, however, this moat no longer worked. Numerous competitors entered the camera manufacturing market by purchasing image sensors, semiconductors, and other components externally, and price competition intensified. People even stopped having their photos printed, instead storing them on computers, printing them at home, or sharing them on social media. The chemical technologies and franchise networks built over many years for film and photo printing had effectively become useless.
Did Kodak Simply Ignore the Shift to Digital Cameras?
To give the conclusion first, Kodak anticipated the arrival of the digital camera market and prepared for change. In 1976, when it held 90% of the U.S. film market and 85% of the camera market, Kodak unveiled the world’s first digital camera. It subsequently spent more than KRW 2 trillion a year at its peak on digital-camera-related research and development, and at times invested more than 60% of its annual R&D budget in digital transformation. From 2003, it went all in on digital image processing rather than the film business, and in 2005 it even briefly achieved the number-one share of the U.S. digital camera market.
The problem was that Kodak’s selective change took place only within the ‘camera industry.’ Digital technology erased points of differentiation across the industry, creating a low-price, low-margin product structure and cutthroat competition in the market. Kodak reportedly lost USD 60 on every digital camera it sold. Moreover, after Nokia introduced the world’s first mobile phone with a built-in camera in 2001, camera-phone sales surpassed digital-camera sales within just two years.
Kodak merely expected the digital photo printing business on which it had focused to remain a meaningful market; it failed to foresee that, with Facebook’s emergence in 2002, online storage and sharing rather than printing would become the norm. Although it aspired to become a digital company, it also outsourced a substantial share of its digital-camera operations to OEMs, missing even the opportunity to bring core technologies in-house.
The Same Situation, a Different Response from Fujifilm
Around 2000, Fuji shared dominance of the film industry with Kodak and entered the digital-camera era from a relatively similar starting point. Unlike Kodak, however, which declared that it would transform into a digital company, Shigetaka Komori—who became CEO in 2003 and now also serves as chairman—held firmly to the principle of allocating management resources to areas connected to the organization’s core capabilities where they could create synergy, and transformed the company rapidly.
Even before taking office as CEO, he initiated a comprehensive inventory of every technology the company possessed and a search for existing and new markets in which those technologies could be used. Fuji later developed anti-aging cosmetics based on the insight that the chemical technologies used to manufacture film were related to antioxidants and collagen, and applied its extensive data and know-how on chemical compounds to pharmaceutical research. These initiatives served effectively as a bridge between current technologies and future markets.
Another point worth noting is that, instead of pursuing everything within the organization, the company made bold use of M&A (mergers and acquisitions) and JVCs (joint ventures). After quickly completing the restructuring of its traditional film business, Fujifilm invested KRW 7 trillion over ten years to acquire around 40 companies. In pharmaceuticals, it acquired Toyama Chemical and Merck’s biopharmaceutical business in 2008; in cosmetics, it acquired Astalift in 2007; and in optical lenses, it acquired a stake in Olympus, which held a 70% share of the endoscope market. It also established Fujitac, which primarily produces film for LCD panels and now holds a 70% share of the global market.
Similarities Between Kodak and Fujifilm
- Anticipated the trend toward the digital camera market
- Shared a sense of crisis and reallocated management resources in response to change
- Invested in R&D to overcome the crisis (at least 3–4% of revenue)
Differences Between Kodak and Fujifilm
Kodak
- Transition to a digital company
- Sought a way forward only within the camera industry (specialized focus)
- Failed to predict the long-term direction of the trend (digital transformation = digitizing the existing structure)
- Made strategic mistakes such as focusing on digital image processing while outsourcing camera manufacturing to OEMs
Fujifilm
- Adhered to the principle of ‘staying true to the core business’
- Sought a way forward beyond the camera industry (related diversification)
- Successfully predicted the long-term direction of the trend (long-term impact of digitization = commoditization + lower margins)
- Leveraged core capabilities (technology)
- Pursued aggressive M&A and synergies
- Preferred intense but brief pain during organizational change
The Critical Difference That Changed Kodak’s and Fujifilm’s Futures
As 90% of the traditional camera and film market disappeared over the ten years after its 2001 peak, Fujifilm’s overriding task was to remain a prosperous and enduring company in the 21st century. The path Fuji chose was a new one connected to its core capabilities: ‘diversification.’ Unlike Kodak, Fuji did not insist on remaining within the camera industry, and this ultimately became the decisive reason for the enormous difference between them.
Ultimately, while Kodak’s revenue fell by around 48%, from KRW 16.8 trillion in 2000 to KRW 8.6 trillion in 2010, before it declared bankruptcy in 2012, Fuji’s revenue increased by 57% over the same period, from KRW 14 trillion to around KRW 22 trillion. It also built experience and a track record across diverse industries connected to its core capabilities, leaving it more resilient than before. Since the financial crisis, it has moved away from a domestically focused business mix, with overseas operations now accounting for more than 60% of total revenue.
The cases of these two companies should prompt us to think about selective change. When a digital wave sweeps through an industry, it is crucial to explore what it implies and to form a reasonably accurate view of the future, even if the prediction is imperfect. Kodak did not abandon its existing industry and even acted in areas within it that were unrelated to its capabilities. Fuji, by contrast, never gave up on synergy with its capabilities, yet did not limit itself to a particular industry; it imagined freely and executed concretely and boldly.
The wave of digital transformation sweeping through the financial industry today is formidable. At the crossroads of change and innovation, what will we change, and what will we leave unchanged? I will close with this one question that remains ours to answer.
Written by Brad Cho, CEO of The Innovation Lab Co., Ltd.
While running The Innovation Lab, he has led corporate innovation workshops and coaching for more than ten years as a management consultant and innovation coach. He first introduced the concept of the Big Blur in a 2013 book and now helps organizations innovate business models, transition to platform businesses, and develop new growth businesses through a range of programs. His books include <Platform Wars>, <All the Boundaries You Knew Are Disappearing>, and <Business Model Zen>.
Read the original article published in Hana Financial Group Magazine