Innovation & Change at Eastman Kodak Company - Case Study Example

Innovation & Change at Eastman Kodak Company Table of Contents 1. Introduction 1 2. Company Background 1 3. Key Concepts in Change Management 2 4. External Causes of Change 2 4.1 Porter’s Five Forces Analysis 3 4.2 PEST Analysis 4 5. Internal Causes of Change 5 6. Kodak’s Change Management Strategy 6 7. Conclusion: Lessons from the Kodak Experience 8 8. References 8 1. Introduction This report provides a critical evaluation of the management of innovation and change at the Eastman Kodak Company (hereafter, Kodak), based on the discussion in the Harvard Business School case study, “Kodak and the Digital Revolution” (Gavetti, Henderson & Giorgi, 2005). The analysis begins with a brief description of the company’s history, followed by a brief review of key relevant concepts in innovation and change management. External and internal factors guiding change at Kodak are then described, and a descriptive analysis of Kodak’s change management strategy is presented. To conclude the evaluation, general lessons that can be learned from the Kodak experience are discussed. 2. Company Background The internationally-recognised Kodak name has its roots in the work of an American inventor, George Eastman, who perfected dry photographic film technology in 1878. By 1881 Eastman established a partnership with a family friend, Henry A. Strong, in Rochester, New York (the present-day location of Kodak’s worldwide headquarters), and by 1888, the “Kodak” name appeared in public with the introduction of the company’s first portable camera. The company grew steadily and diversified into a wide variety of film and imaging technologies over the years, producing some of the world’s technological “firsts” along the way: flexible film for movie cameras, instant photographic film, lithium batteries for consumer use, and improvements in digital photo technology (introduced by Sony in 1981) that made it more useful for consumers (Gavetti, et al., 2005; Kodak, 2012). 3. Key Concepts in Change Management Before approaching the subject of change management, it is perhaps necessary to consider an even more basic concept relevant to the Kodak experience: Innovation. Innovation can be defined as the creation of new value from existing assets, or the creation of completely new assets that provide value (Joshi, Joshi & Joshi, 2007). This is relevant to Kodak’s case, because a great deal of change for the company throughout its history came as a result of innovation, creating new products and diversifying into different areas, such as pharmaceuticals and copiers (Gavetti, et al., 2005). Innovation is often thought of as change or evolution in products and services, but Joshi, et al. (2007) point out that innovation always involves change or evolution in processes and organisational structures as well. Managing innovation, therefore, is change management. Change management always follows a process, but the nature of the change determines whether the process is imposed on the firm, that is to say, whether it simply reacts to emergent change, or whether the change is planned change, a proactive path towards some future objectives (King & Anderson, 1995; Lewis, 2011). The Kodak experience as described in the case study by Gavetti, et al. (2005) shows that both types of change, and consequently, different approaches to change management at different times, occurred throughout Kodak’s history. 4. External Causes of Change The definitions of emergent and planned change suggest that change can come from different sources, and the implication is that emergent change might be more likely to be caused by external factors, while planned change is more the result of an assessment of the firm’s internal circumstances (Lewis, 2011). Two of the common frameworks for assessing a firm’s external environment and discovering the external triggers for change are Porter’s Five Forces Analysis, which is somewhat general in nature, and the PEST analysis, which is preferred by some scholars because of its somewhat greater detail, and better description of changing environments (Porter, 2006; Kozlinskis, 2008). 4.1 Porter’s Five Forces Analysis Porter’s Five Forces are Competitive Rivalry, Threat of New Entrants, Threat of Substitutes, Bargaining Power of Suppliers and Bargaining Power of Customers (Porter, 2006). The usual way of visualising the Five Forces is as shown in Figure 1, which describes them in terms of their impact on Kodak between 1975 and 2003: Fig. 1: Porter’s Five Forces Beginning in the mid-1970s, Kodak began to see challenges from other competitors such as Japan’s Fuji in the film market which until that time Kodak had completely dominated (Gavetti, et. al, 2005). So the threat of new entrants in Kodak’s case would be considered extremely high; as the case study describes, the company was not really prepared for strong competition from a new player in the market which it considered its own. Bargaining power of suppliers is fairly low in Kodak’s case; much of the company’s expansion and diversifying activities, such as the acquisition of Sterling Drug (Gavetti, et al., 2005, p. 2), was done with the objective of bringing as much of its supply chain as possible under its control. With the rise of various forms of digital imaging technology, the threat of substitutions to Kodak’s traditional strengths, film and photo paper, can be described as very high. As a consequence, the bargaining power of buyers can be described as moderate; consumers have a few alternatives to Kodak (such as Fuji, Konica, or Agfa), and a choice of either digital or film imaging, but on the other hand, there is no substitute for photography. Taken altogether, the four forces contribute to making the fifth, competitive rivalry, very high; this was illustrated in the Kodak case, wherein the company saw its market share steadily decline due to competitive pressures. 4.2 PEST Analysis A PEST Analysis separates the various external environment factors affecting change into Political/Legal, Economic, Social, and Technological categories. The case study does not address political or legal issues, but in further research, a well-known case in the US antitrust courts involving Kodak is discovered. In the early 1980s, a number of independent service providers began servicing Kodak copiers, often directly competing with the company’s own service; in response, Kodak refused to sell replacement parts to independent service providers, prompting a lawsuit under US antitrust laws. The courts ruled that Kodak was unfairly exercising a monopoly, in a decision commonly called the “Aspen/Kodak Rule” (Aspen was a similar case involving a number of ski resorts) (Muris, 2000, pp. 704-706). The consequence of this ruling is that Kodak must exercise caution in competing with other companies, so as not to appear to be competing unfairly. Economic factors over the years 1975 through 2003 can be described very simply, and are combined with the technological factors. Film, photo printing, and other imaging technology developed very quickly, much of the innovation being driven by Kodak itself up until the point that digital imaging technology began to grow rapidly. The general trend, as described by the case study, has been for new technologies to be expensive for consumers at the outset, and then quickly decrease in price as they become more widespread and easier to produce. The economic and technological factors are also closely related to social factors. Kodak’s focus on its film, photo paper, and image processing technology complemented with low-cost cameras helped to make photography widespread among the public (Gavetti, et al., 2005, p. 1). In a sense, this may have helped to make later technologies more accessible to consumers as well. Every new technology seems to accelerate how quickly new ones are available to and adopted by consumers; for example, digital photo technology was introduced right about the time personal computers were beginning to be affordable for ordinary households, and in just a few years, the abilities to take pictures, process them, display and store them, and even print them were entirely in the consumers’ own hands. 5. Internal Causes of Change Changes in the market, in technology, or in the activities of competitors are external causes of change, but change can be caused by internal forces as well – ways in which the firm reacts to external change triggers, or by circumstances in the organisation and amongst its people (Lewis, 2011). Changes in the skill and experience of the workforce, conflicts between different parts of the organisation, and different perspectives on new situations can determine the path of innovation, which is why Frost and Egri (2007) describe change and innovation as being as much politically-motivated as it is inspired by new market conditions or new ideas. In Kodak’s case, the most obvious internal causes of change were its growth through mergers and acquisitions between 1983 and 1993; changes in top management which brought executives with very different perspectives from the ‘traditional’ Kodak mindset into the picture; new performance management ideas implemented – not altogether successfully – after 1994; and several rounds of company restructuring and downsizing, particularly in 1999 and 2003 when part of the workforce was eliminated (Gavetti, et al., 2005, pp. 4-7). 6. Kodak’s Change Management Strategy As described in the case study, Kodak’s peak was between 1976 and 1981, when it controlled 85% of the camera market and 90% of the film sales in the US, eliminating any serious competition through its sheer size, its incredible brand strength, and the speed with which the company could bring incremental technical improvements such as the small 110 and 126 cameras to market (Gavetti, et al., 2005, p. 2). Up to this point, most of the change that affected the photography and imaging world was initiated by Kodak itself, meaning that the company could fully practise planned change, introducing innovations in a controlled way that did not disrupt, or at least required only small, gradual changes its overall business and organizational model. When Sony introduced the digital Mavica camera in 1981, however, the nature of change for Kodak became emergent rather than planned, meaning that the company had to react to change rather than create change. The first move the company made was to increase the complexity of its organisation; a new digital-imaging division was created, and Kodak began a 10-year period of expansion into other areas such as medical imaging, copier technology, pharmaceuticals, and chemicals. The problem with increasing complexity is that change managed in this way always reaches a point of diminishing returns, what Harvard’s Mark Gottfredson and Keith Aspinall call the “innovation fulcrum”; the point beyond which providing customer value and managing the organisation results in higher costs and decreasing returns (Gottfredson & Aspinall, 2005). They explain that, “The fact is, companies have strong incentives to be overly-innovative in new product development. Introducing distinctive offerings is often the easiest way to compete for shelf space, protect market share, or repel a rival’s attack.” (Ibid., p. 1) Protecting market share and defending itself against the competitive threat posed by rivals such as Fuji was evidently exactly what Kodak had in mind by expanding its range of activities. The process is called vertical integration, and is a bottom-up process to take all the new parts of the value chain, or as the case may be, existing parts that need to be modified to function in new circumstances, and place them together in a single organisation. Thus, when Kodak’s market strength was significantly threatened, Kodak reacted by vertically integrating the larger part of its supply chain – the lab and production facilities needed to create its products – and by branching out into related businesses like copiers in order to reduce costs and create new sources of income. When it became clear that digital technology would be an area that would only expand, Kodak reacted by creating a specialised division to work on the technology. And, as the “Aspen/Kodak Rule” court actions showed, Kodak was not above employing aggressively unethical tactics to hold some of its market captive (Muris, 2000; Gavetti, et al., 2005). Kodak’s experience illustrates what is called a “dual-core approach” to change management; the “dual” nature is a result of product innovation – usually a change with basically external causes, because of market demand – coming from the bottom, while organisational innovation – change with internal causes, because the organisation must adapt to provide the innovative product – comes from the top (Frost & Egri, 2007, p. 19). Digital imaging and disposable cameras are obvious product innovations, but in a sense, so was the competition presented by Fuji and others to Kodak’s mainstay products; the product changed, because Kodak could no longer solely rely on its enormous market strength and strength of its brand to give it a competitive advantage, it had to provide consumers other reasons to choose its product over one that was an equal in quality and competitively-priced. Kodak’s organisational innovation – restructuring the company, bringing in management talent with more experience in the new technologies – was not planned, but a reaction to what had been imposed on it by external causes. 7. Conclusion: Lessons from the Kodak Experience The most obvious lesson from the Kodak experience should probably be, “nothing is sacred.” The case study recounts how Kodak was beaten in the market by innovations such as digital photography and disposable cameras, and suggests that it did not have to be, if only the company had been willing to question and critically assess its long-existing structure and assumptions about technology (Gavetti, et al., pp. 3-4). And the basic mistake of Kodak’s strategy is still evident; after losing market share for years, Kodak announced early this year it was finally abandoning the camera business altogether to focus on photo printing, bringing a more than 100-year story to an end (Mattioli, 2012). In effect, Kodak refused to believe that the film technology they had mastered could ever be rendered obsolete – a perspective Frost and Egri refer to as “naturalisation,” where forms, privileges, structures, and relationships are assumed to be beyond debate and reassessment (Frost & Egri, 2007, p. 18) – and by the time the company realised that belief may not be secure, Kodak was forced to play catch-up, and ultimately failed. Another related lesson that might be taken from Kodak’s experience is that emergent change need not be chaotic or something that a business must simply find ways to accommodate. Gottfredson and Aspinall (2005, pp. 5-6) suggest that any change can be managed if a business identifies its “Model T”: the single product that is the backbone of the entire company. Once this is found, it is much easier to plot what changes might occur as time passes, and plan for them – in effect, enjoying a planned change while imposing an emergent change on all one’s competitors. What Kodak would have decided its “Model T” was had it done that analysis with open minds is a matter of speculation; as the case study describes, their decision was that silver-halide film technology would be everlasting, and that turned out to be wrong. But had they been willing to at least suspend that assumption and consider the problem, perhaps now the world would not be one in which Kodak no longer produces the things that made it a global household name. References Bessant, J, and Tidd, J (2007). Innovation and Entrepreneurship. Chichester, UK: John Wiley & Sons. Frost, PJ, and Egri, CP (2007) Influence of Political Action on Innovation: Part I. Leadership and Organization Development Journal, 11(1), pp. 17-25. Gavetti, G, Henderson, R, and Giorgi, S (2005). Kodak and the Digital Revolution. Harvard Business School Case Study, No. 9-705-448, 2 November 2005. Gottfredson, M, and Aspinall, K (2005) Innovation Versus Complexity: What is too much of a Good Thing? 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