Missing the ‘Kodak moment’

Before we start looking at ICSOs, let us start with an example from business which illustrates very well how disruption occurs and what mistakes one can make when trying to come to grips with changes which defy decades of positive experience and conflict with a tested and highly successful business model. We will briefly examine one of the most prominent examples of disruptive change in the corporate sector: Kodak. For decades Eastman Kodak, to call the firm by its complete name, had been a market leader in cameras and film. Kodak followed a so called razorblade business model which means selling razors cheaply and making most of the profits from selling razor blades, or, in Kodak’s case, selling cameras cheaply and securing growth and profits from selling film. “By 1976 Kodak accounted for 90% of film and 85% of camera sales in America. Until the 1990s it was regularly rated one of the world’s five most valuable brands.”9 Kodak looked very much like a ‘great’ company. Following Jim Collin’s thinking this should not surprise us: Kodak had developed a perfect hedgehog strategy: it focused on the one business it was the ‘best in the world’ at and it had chosen the best suited business model for its specific line of business. So, why did Kodak arrive ‘at death’s door’, as The Economist writes? The answer is simple: Kodak experienced disruptive change very similar to the one our hedgehog was facing when the car appeared. With a new enemy – digital photography and mobile phones with inbuilt cameras – the old extremely successful strategy no longer worked and with dramatic consequences. In 2012 Kodak filed for bankruptcy protection and while it emerged from bankruptcy in 2013 it had sold most of its units, including its film business, and is now a much smaller company making equipment for printing and packaging. Kodak’s rapid decline is even more surprising when we find that in 1975 Kodak built one of the first digital cameras, and during the early years of digital photography Kodak held more patents in this field than any     of its competitors. So, Kodak had the digital technology, a dominant position in the traditional market, a world class brand and plenty of funds to invest – yet they were unable to put all of this together and turn it into a success model under new and very different conditions.

Obviously there are many different reasons for such a monu-mental failure and we cannot go into any detail here but there are three which we briefly want to look at. Firstly, there is the razorblade business model which secured profits predominantly from selling film. Such a model cannot work with digital photography where a memory card has replaced film. And while film could only be used once and had to be replaced every time you had taken 24 or 36 photos, the memory card can hold hundreds or even thousands of photos and can be used over and over again. After over 100 years of success secured through the razorblade business model Kodak was unable to quickly come up with a new model.

Secondly, like most large and old companies, Kodak was risk averse. Under many circumstances this is the right approach: if you are large, well-established and have sufficient money in the bank, you can leave it to others to take the risks of innovation. You can wait and see which innovation fails and which one succeeds and apply innovation once it has been tested and proven. As long as you can accommodate innovation within your existing business model and as long as innovation does not require significant change in the company’s culture, the wait and see approach may work. But with disruptive innovations, those that require a total rethink of your business model and/or a change in your company’s culture you cannot afford to wait and see. You need to be prepared to step up to the challenge and take the significant risks involved in moving away from your proven success model into new and uncharted territory. Kodak was not prepared to accept these risks.

Thirdly, management was neither visionary nor bold enough to lead the company through the required changes. There were two critical points in the development of digital photography which the Kodak management missed. The first one was in 1975 when Kodak built one of the first digital cameras – or at the latest in 1981 when Sony produced a digital camera – when the company’s leaders should have understood that this was a technology which would eventually threaten their core business. If the management would have understood the emerging developments then they would have had about 25 years time to shift to a new business model, possibly by starting a new separate digital photography company with its own business model and the freedom to experiment, test, fail, learn and develop. The second critical point arrived in the early 2000s when it became evident that the time of chemical film was running out and digital photography would take over. At that point a dramatic, crisis driven change might still have been possible. But the Kodak management hoped to buy some time by continuing to sell its traditional cameras and films for some more years in China and other emerging economies – a hope that proved completely wrong. In one sentence: throughout the 30 years the disruptive change process took, Kodak management was unable or un-willing to see the depth and speed of the change or unprepared to react to that change with the courage and boldness required for the company to survive.

Obviously, Kodak had to face a dramatic change which would have required it to completely reinvent its business model and corporate culture and the odds against the company were high. But then there is Fujifilm, the only significant competitor Kodak had in its high time: The leadership of Fujifilm was prepared to go through the pain of reinventing the company and managed to successfully navigate disruption. Today Fujifilm hardly sells any film anymore but it remains an impressive and profitable global company.

What does disruptive change in the commercial sector have to do with our topic, the world of civil society organisations? The answer is, “so far not very much”: to date disruptive change has not happened in our sector. However, concluding from the fact that serious disruption hasn’t happened in the civil society sector yet, that it will never happen is a high risk approach. Recently I came across a very simple but straight forward way of illustrating this risk. Repeating the statement “It won’t happen to us” again and again The Motley Fool adds a different sector to each repetition: the newspaper publishers assume: “It won’t happen to us”, so do the telephone utilities, the stockbrokers, the record companies, the bookstores, the travel agencies and the retailers. And the final “It won’t happen to us” comes from “the next industry to fall.”10 Rejecting the possibility that disruptive change may affect one’s own sector seems to be a typical feature in the demise of many industries.

ICSOs should make sure they are not falling into the same trap. There are a number of potentially disruptive developments occurring at present which may have similar effects on some of today’s leading ICSOs as digital photography had on Kodak. However, accepting the probability that disruptive change may happen does not provide an answer to the question where it will come from. As we will see, there are a number of quite different potential sources out there – and the real challenge may come from a disruption we do not even have on our list. Since ICSOs are lacking experience of how to detect and manage disruption they will have to be especially vigilant and prepared to go through one or two false alarms on their way to developing relevant experience.