KODAK VS FUJIFILM: Capability-Centric Digital Transformation

In numerous conferences, I have seen the case of KODAK used to capture attention and generate a sense of urgency for Digital Transformation.

Rarely have I heard about how FUJIFILM leveraged its capabilities to reinvent itself and succeed in the same crisis.

The message regarding KODAK is usually simple and effective:

“Companies that do not adapt (innovate and digitally transform) die. What are you going to do?”

Multiple speakers on Innovation and Digital Transformation

But the reality is not that simple.

In 2018, I attended a different conference. Jonathan MacDonald did not focus on the KODAK case as a failure to adapt to the digital transformation of photography, but rather explained FUJIFILM’s success in its approach to the same crisis.

In his presentation, MacDonald spoke about how FUJIFILM had been able to rely on its existing capabilities and generate the necessary ones to succeed in various markets while KODAK had focused on maintaining its position in a specific market.

In case you are interested in knowing him, here is a video of his presentation from 2017.

Jonathan MacDonald’s Conference in 2017

Again, a few weeks ago, I attended the exaggerated and supposedly inspiring example of KODAK. I remembered the 2018 conference and decided to write this post.

In “Kodak vs Fujifilm,” I aim not to dwell on the clichéd message and show the impact of adopting a market-centered strategy (KODAK) versus a capability-centered one (FUJIFILM).

Thus, if in “What is Digital Transformation?” I discussed the concepts of Digital Transformation and Reinvention, I hope this post will help illustrate it with these examples.

CONTEXT OF KODAK VS FUJIFILM

KODAK and FUJIFILM are etched in my memory.

I remember the excitement with the camera and the feel of the film, the thrill of picking up the developed photos when you were surprised by several that you didn’t even remember, and, surprisingly, some of them were good. I also remember the darkness and chemicals when using my neighbor’s developing equipment. In the early ’90s, we all had (or were) a neighbor who was an amateur developer.

The case of KODAK is paradigmatic

KODAK had been present since the birth of the imaging industry (1880), had manufactured the first roll film cameras, and was the inventor of the first 1.4-megapixel sensor in 1972 (the origin of the digital camera).

Moreover, KODAK and FUJIFILM had achieved the democratization of photography by conceiving products for mass and everyday consumption.

They managed to create the culture of “Kodak moments,” those happy moments worth “freezing and sharing” with family and friends. Stored in thick paper albums, reviewing them was a different way to spend the afternoon.

KODAK’s philosophy was encapsulated in the following phrase from its founder, George Eastman:

“You press the button we do the rest”

George Eastman, founder of Eastman Kodak Company

In the ’90s and early 2000s, FUJIFILM and KODAK shared the oligopoly of the photographic market. Their only competition, far behind, was AGFA and KONIKA. A few years later, while FUJIFILM was executing a successful diversification strategy, KODAK entered bankruptcy.

Fujifilm vs Kodak

FUJIFILM, from photography to “light”

According to MacDonald, FUJIFILM had transitioned from being a photography company to being the company of light or, more precisely, the effect that light exerts on materials. I’m not sure if this is accurate (I haven’t found official references), but the idea, besides being emotive, reflects what happened.

FUJIFILM elevated its vision and, consequently, expanded its scope. It moved from a limited scope (photography) to a much broader one (light), diversifying its business into other sectors where its chemical knowledge could be leveraged using light. These sectors included medical imaging diagnostics, chemicals, pharmaceuticals, and even cosmetics.

Today, my children do not know KODAK and know FUJIFILM through their INSTAX cameras that allow them – oh magic – to “freeze” a moment. In the digital world, printing has become something exotic highlighting certain products.

Maintaining MacDonald’s analogy, FUJIFILM shone while KODAK dimmed.

KODAK VS FUJIFILM, THE DIGITAL CHALLENGE

Neither FUJIFILM nor KODAK lived off the sale of cameras.

Both companies shared the “silver halide” strategy, named after a compound in the films. In this strategy, the camera was the necessary medium to incentivize the recurring sale of consumables (films).

Kodak and Fujifilm film-centered strategy Source: hazmeunafoto

Similar to the printer sector (whose revenues came from consumables), it was not uncommon for them to subsidize or even give away cameras in exchange for increasing their recurring revenues from films.

In 2001, film sales reached their peak worldwide and began to decline. First slowly and then suddenly, reaching a decline rate of 30% annually. Sales in 2010 had decreased to less than 10% of the sales in 2001.

Producing films was a complex process that only a few could do, but assembling electronic components was not.

Many more could do that. In the digital context, traditional barriers to entry were reduced to the point of disappearing.

This situation facilitated the rise of Asian giants in digital imaging such as Canon and Nikon initially, and later Sony, LG, and Samsung.

Despite this, KODAK held nearly 10,000 patents, of which more than 1,000 were related to digital imaging, allowing it to have an interesting business through their sale and licensing. KODAK bet on outsourcing its digital cameras to various OEMs while focusing on generating new patents to feed the business.

In 2010, the leading company in digital cameras was CANON, which, along with KODAK, NIKON, and SONY, shared 75% of the market in the USA.

On the other hand, FUJIFILM, despite also having digital capabilities, understood its strength in the chemistry of light and not in semiconductors. It did not aim to digitally transform its analog film business but chose to reinvent itself by exploring other territories where it could leverage its capabilities.

FUJIFILM adopted a diversification strategy in all sectors where its capabilities could offer a competitive advantage.

KODAK continued to focus on digital imaging while FUJIFILM broadened its field of action.

FUJIFILM IN THE 2000s: A SUCCESSFUL STRATEGY

Turning FUJIFILM into a digital camera manufacturing or assembly company did not seem like an interesting option. FUJIFILM chose to leverage its knowledge in complex chemical processes and the impact of light to open up to other sectors.

To do this, in 2004, it decided to reduce its production lines and strengthen its R&D. Its goal was to find markets where it could employ its capabilities, and it did so by exploiting them in sectors such as chemicals, pharmaceuticals, medical imaging diagnostics, or even cosmetics.

Fujifilm skincare Source: fujifilm.com

In this way, it gradually shifted its focus from high-consumption photography to other sectors where, thanks to its capabilities, it achieved higher margins and stability.

When needed, it partnered with other companies to create joint products, as was the case with its partnership with XEROX to strengthen its position in the photocopier market through FUJI-XEROX.

By 2010, revenues generated from analog film sales accounted for only 16% of its sales. The company had reinvented itself by elevating its vision to consequently diversify by leveraging its foundations.

FUJIFILM had understood that it should value its capabilities by leveraging them in different markets and growing them both internally and through partnerships. FUJIFILM, without being one, was beginning to apply three characteristics that identify digital businesses:

• Scalability: being able to produce more products or services for more people/companies
• Reach: producing different products or services or acting in different sectors
• Speed: being able to scale or broaden reach faster than the market

KODAK IN THE 2000s: A STRATEGY OF FAILURE

It is often said that KODAK was focused on its analog business and did nothing to transform itself. This is a simplification. The truth is that despite its initial dominant position and the effort it made to transform, its reactions were slow in the face of new competition.

Kodak Offices Source: finanzas.com

Unlike FUJIFILM, KODAK did not elevate its vision, but concentrated its energies on a digital transformation process by cutting production lines and focusing on meeting the new needs of its digital users.

It tried to transfer its leadership from analog film to digital photography. It made significant investments in digital R&D focusing on its users. Its goal was to launch digital products in the mass photography world.

As I mentioned earlier, as a result of that effort in R&D, it generated numerous patents that brought it significant benefits. It launched new camera models trying to differentiate itself from its competition and achieve a position less sensitive to price, but it did not succeed.

That focus on R&D led KODAK to outsource the development of its technology to OEM manufacturers. It also launched various products that digitalized the foundations of its philosophy: “You press the button we do the rest.”

With that approach, in 2001, it purchased a digital photography platform to launch KODAK EASY SHARE GALLERY. In KODAK GALLERY, it provided its users with storage, sharing in private user circles, and image printing. It represented the digitalization of the successful analog “Kodak moments.”

At a time when users were shifting from sharing their photographs in private circles (the “Kodak moments”) to doing so publicly through social networks like MySpace, Facebook, or Flickr; the proposal of KODAK GALLERY quickly lost value.

Another digitization initiative led it to create a line of photo printing kiosks that it installed in 10,000 physical retail locations in the USA.

What KODAK failed to see is that digital photography users perhaps did not need to print photographs or, at the very least, not in a volume that justified the existence of those kiosks. Especially when we had the possibility to share them digitally.

Again, KODAK was digitizing an analog process while maintaining its “You press the button we do the rest” but was not reinventing itself.

Additionally, the growth of mobile phones and their increasing photographic capabilities created the perfect storm in the imaging world. Let’s remember that in 2007, Apple launched the iPhone, and in 2009, it launched the iPhone 4.

KODAK tried to react by seeking partnerships that would facilitate its access to mobile phones, the internet, and social networks. In that context, it signed an agreement with MOTOROLA, launching the MOTOZINE ZN5 in 2008.

KODAK, unlike FUJIFILM, did not know how to rely on its capabilities to reinvent itself but focused on the digital transformation of its processes to remain a leader while keeping its vision intact. Thus, it clung to a race in which, despite its better starting position, it was always late or generated unsustainable advantages.

KODAK IN 2020

The widespread idea that KODAK disappeared in 2012 is false. In fact, 2020 was a good year for KODAK.

After declaring bankruptcy in 2012, KODAK underwent a significant restructuring that allowed it to survive, grow again, and start a new future.

In the midst of the pandemic, in July 2020, the U.S. Federal Government granted KODAK a loan of $765 million to begin manufacturing pharmaceutical ingredients through its new subsidiary: Kodak Pharmaceuticals.

Kodak Pharmaceuticals Source: Kodak.com

The government’s goal was to limit its dependence on India and China for certain assets necessary for the manufacture of generics. To achieve this, it relied on KODAK’s chemical capabilities and employed a law passed during the Cold War.

This announcement caused KODAK’s stock to rise from $2 to $33, stabilizing above $6. Let’s remember that while in 1997 KODAK’s shares reached $93, in January 2012 they were trading at less than $1.

CONCLUSIONS

Faced with the same challenge, the emergence of digital imaging and the initially gradual and later rapid disappearance of analog photography, KODAK and FUJIFILM adopted very different strategies.

The success of FUJIFILM’s strategy was due to relying on its capabilities to vary its scope, grow, and do so quickly.

The key was its reinvention through diversification by elevating its vision, moving from being a leader in analog photography to a leader in the impact of light on materials.

In KODAK’s case, its strategy consisted of maintaining its vision while digitally transforming its internal and external processes.

KODAK’s bankruptcy was not due to its inability to adapt or its lack of focus on the customer. The reality is that it digitally transformed with a strong focus on the customer but did not know how to reinvent itself by leveraging the capabilities it had.

While FUJIFILM clung to its capabilities, KODAK clung to its vision.

While FUJIFILM reinvented itself, KODAK digitally transformed its processes.

Willy Shih, former Vice President of KODAK until 2003, summarized it this way:

“I could have tried to compete on capabilities instead of in the markets I was in, but that would have meant distancing myself from consumers. That’s not the logic that managers learn in business schools, and it would have been a hard pill to swallow for KODAK’s leaders.”

Willy Shih, former Vice President of Eastman Kodak Company

Increasingly, the capabilities of companies are their greatest asset. The market can vary as long as the capabilities allow it. Creating and growing them should be the primary objective of companies.

The only way to achieve scalability, reach, and speed of digital businesses is by having the necessary capabilities.

REFERENCES:

Below is a list of the references used in this post.

• What is Digital Transformation?
• FUJIFILM.COM
• KODAK.COM
• Digital Transformation
• Disruptive Innovations
• Fujifilm outlasting the Kodak moment
• Kodak – Fujifilm: a tale of two film companies
• YAHOO FINANCE
• FINANZAS.COM
• HAZME UNA FOTO
• RAZÓN Y PALABRA

BLIND MELON

In 1992, Blind Melon surprised us with one of the great indie rock albums of the ’90s. In it, besides the award-winning “No Rain,” there are other small gems like this “Change.” Soon, its singer, Shannon Hoon, would pass away, and the group would dissolve.

“They’ll all look at me and say, and they’ll say,

Hey, look at him I’ll never live that way

But that’s ok,

They’re just afraid to change”

Shannon Hoon, Blind Melon

Very fitting for the post and the times.

Enjoy!