Kodak moment: Getting the one life-and-death strategic question right

People are drawing all sorts of lessons from Kodak’s Chapter 11 filing.  How does a dominant, “iconic” business slide downhill with such rapidity and finality – even though it invented the technology (digital photography) that remade its industry and caused the company’s ills?

One online commenter opined a week or so back: “They forgot they weren’t in the photography business, they were in the memory business.”  This was a riff, of course, on Theodore Levitt’s famous Harvard Business Review thesis that railroads declined because they forgot they were in the transportation business.  With all due respect to Prof. Levitt, this kind of thinking at a strategic level is likely to put a business on the wrong track, if you will – with a derailment due down the road.  In fact, perhaps the Kodak disaster resulted from taking this kind of theoretical marketing exercise too seriously.

Yes, the key marketing question is always: “What are we selling here?”  A clear vision of how products connect with customers’ desires, meet their needs, and differentiate from competition provides the esssential foundation for product strategy, promotion, pricing, etc.  But I don’t recall Kodak ever having much doubt about that.  Pace the above-cited online Levitt-channeler, Kodak knew very well that their photography business was really selling memories (or at least, the means to preserve them).  The famous “Kodak moment” line is just one of many ways, over the years, that Kodak’s consumer advertising focused on the events their products recorded, not the products themselves.  Kodak pretty much created the mass market for photography, so I’d have to say they answered the “what are we selling?” question well.

But marketing is not strategy – not all of it.  The key strategic question, dangerously similar to “What are we selling?” but fundamentally different, is “What business are we in?”  And especially in times of change, the wrong answer will kill you.  The right one – or one of the right ones, because there’s often more than one good answer – can save you even when your core business disappears.

To illustrate the difference, take the famous railroads/transportation example.  Imagine what would have happened if the railroad CEOs had said to each other: “Gentlemen, we are in the transportation business.  We’re facing competition from air transportation companies.  So we need to start airlines.”  That’s Ted Levitt’s thesis of what they should have done – a judgment framed, to be fair, back when railroads were financial trainwrecks and airlines soaring (sorry – this topic seems to lend itself to puns).

Railroad-spawned airlines almost certainly would have been colossal failures, and possibly damaged their core businesses even further through diversion of investment and attention.  Because railroads weren’t in any generic “transportation” business – they were in the railroad business.  All their expertise, infrastructure, history, and business relationships were designed for a very specialized kind of transportation: moving large quantities of (usually) low-value commodities along regular routes dependably and cheaply.  They knew nothing about air transport, which is almost the diametrical opposite: moving relatively small, discrete quantities of high-value commodities (airmail, people) along flexible routes very quickly from point A to point B, without any infrastructure to speak of in between.  The people who succeeded in the new-fangled airline business were specialists in that technology – many of them aviators and/or airplane builders like William Boeing (who started two of today’s major airlines before anti-trust made him spin them off).

The only market where rail and air overlapped was in inter-urban passenger transportation, which railroads never made money on even in their heyday.  Once they were able to get out of the passenger business (courtesy of Amtrak, which saddled a federal pseudo-business with that losing proposition), railroads got steadily more efficient focusing on the freight business they handle well.  New technologies such as bar-code reading to keep track of freight cars in transit, and intermodal services like trailer-train to interface more efficiently with trucks, made their business even better.  Today, railroads are hot investments for people like Warren Buffett – and not one of them owns an airline.

From that standpoint, what business was Kodak in?  The answer: they were in the film business.  That’s what they knew, that’s what they did superbly well.  George Eastman’s original patent – issued eight years before he sold his first camera – covered an emulsion-coating machine.  Kodak in the 1930s even acquired a gelatin company – a factory that boils beef bones down to their slimy essence – to insure supply of the critical ingredient for bonding layers of chemicals to a film substrate.   Kodak made all kinds of films, and they did it extremely well.

Certainly, part of Eastman’s genius was in realizing that the way to sell photographic film was to get lots more people taking pictures.  So Kodak made it easy to record “memories” with simple cameras like the Brownie and the Instamatic, which were so cheap they were sometimes given away with film.  Kodak’s cameras were never very good, but they didn’t need to be – they just needed to be simple enough for everyone to use, and generate resales of Kodak film – which was very good.

Kodak wasn’t in the “memory” business.  They weren’t even in the photography business (that was Rolleiflex, Leica, and Hasselblad, and later Canon, Pentax, and Olympus).  Kodak was in the film business.  Not necessarily restricted to “film” in the photographic sense.  They were in the thin precision coatings business.  Ironically, as the film photography market crumbled in the past few years, one of the valuable assets Kodak sold off to keep the lights burning was the old gelatin factory – which has continued to thrive and find new markets.

So what should Kodak have done when they invented digital photography and realized they’d just created the end of their legacy consumer business?  They should have said “OK, we’re in the high-quality film (coatings) business, so let’s start expanding all the different ways we can increase and sell that expertise.”  Maybe they should also have said “Let’s introduce this new digital thing too, and make money on it while the market lasts.”  But that would have been an entirely different, and relatively short-term, decision.

I’d been thinking along these lines for a couple months as the Kodak end-game sadly unrolled – then an article in the Wall Street Journal confirmed my hunch.  It details how Fujifilm avoided Kodak’s fate by doing essentially what I’ve just outlined.  In the ’60s and ’70s, Fuji was best known for lower-cost photographic film that chased the consumer photo business Kodak had built.  But they read the digital handwriting on the wall and acted on it.  They asked, “What business are we in?” and they answered “We’re in the film – that is, chemical coatings – business.”  Today, photographic film is 1% of Fujifilm’s revenues.  Mostly, they sell films for coating TVs and computer displays, cosmetics (another type of thin chemical films), and pharmaceuticals (branching off their chemical expertise).  It wasn’t easy – over the years they had to cut $3-4 billion in costs, including a lot of jobs – but they survived and they are growing and profitable.

What business are you in?  What business, really?  Sooner or later this is a question we all have to answer.  The marketing positioning answer can be misleading.  But there is no more important question to get right.

Mike Baum
Sophia Consulting LLC

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About mhbaumk12

Mike Baum has 40 years of experience with all types of direct marketing, has run several companies, spent 25 years as a consultant in franchising and in K-12 education, and currently helps companies find solutions to growth challenges.
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