In January 2012, Kodak, a 133 year old company, filed for bankruptcy protection. Kodak with net liabilities of more than $7Bn and net assets worth only $5Bn was seeking protection from lender while it restructures in capital. Creditors and shareholders were sceptical about the future prospects of the pioneer camera-film maker that owned more than 1100 technological patents.

However, much the criticism regarding the bankruptcy protection targeted the Kodak’s resistance to changing market needs and misjudging market potential of innovative technologies. Investors believe that Kodak that mastered the digital camera/ photography technology in the 1975,but the management decided to shelve the project as they feared cannibalization of its then-profitable camera film business.

Kodak’s Background

By 1888, Kodak became a household name with its commercially manufactured photo-film camera. Kodak enjoyed virtual monopoly in US were it had 90% market share for camera film and 85% market share for cameras. By 1996, it reported $2.5Bn in profits and employed nearly 145,000 employee worldwide. Much of the profits were realized in the camera film business which provided Kodak with sustainable, continuous revenue. In 1975, Steve Sasson, a Kodak engineer developed the first digital camera. Management acknowledged the innovation but feared it would directly threat their highly profitable film business. The invention was shelved by Kodak, even though it made economic sense to pursue the technology. Kodak’s management’s inability to evaluate the future prospects of the disruptive digital technology had disastrous effects on its competitiveness. With an influx of smarter technology and introduction of smartphones, digital photography peaked in the recent years, gradually replacing the camera film industry.

Management’s Decision Issues:

Kodak’s management enjoyed steady profits growth in its early years and had become reactive rather than proactive to market trends. Much of the strategic changes made by the management, such as introduction of digital camera, diversification of photo sharing and printing business etc. had been management’s reaction to plummeting photo-film’s market share. Considering digital technology expertise as an asset (tangible asset: patents, intangible asset: knowledge) and decision to manufacture digital cameras as a real option, Kodak failed to determine the appropriate stage to launch the product, hence exercise its options of introducing new technology.

Moreover, another flaw in the management’s decision making process was its lack of perceiving the bigger picture. In early 1990’s, Kodak conducted an extensive research on understand the consumer perception about digital photography. The results of the research give insight that digital photography had the potential to replace the existing camera film industry in the next 10-years. However, Kodak’s management decided to concentrate on improving the quality of its camera films rather than explore the opportunities in the digital photography.

Any decision or strategy change confronting the management should be evaluated as a call option. The value of call option is highly dependent on the exercise time of the option. Consider the technology industry which encourages disruptive innovation, entered the digital photography industry earlier could have established Kodak with a blue ocean opportunity. Embracing the changing technology and allocating capital effectively could have helped Kodak retain its market dominance.

Follow