Why Kodak died, and Fujifilm flourished: the story of two film makers
Kodak time has passed, and today's version of Fujifilm is thriving, having survived a cardinal reorganization. Before you - a detailed analysis based on first-hand information, obtained from top managers and from real financial data, allowing you to understand how and why the fates of two similar companies diverged in opposite directions.
The situation before the film crisis: a safe and profitable market
Although Kodak and Fujifilm produced cameras, their main business was photographic film and the sale of post-processing services. According to Forbes , Kodak “was happy to hand out cameras in exchange for getting people to pay for photo development — as a result, Kodak’s share of the chemicals and paper used for developing and printing photos was 80%.”
This strategy in the company itself was known as “silver halide ”, and was named after the chemical compounds used in the production of the film. It was a fantastic success story. This strategy was similar to what Gillette or printer manufacturers were doing: hand out razors or printers to earn on blades and cartridges. Fujifilm, by the way, introduced a disposable 35mm camera in 1986, two years before Kodak did. The film was for them all.
In 2000 , shortly before the transition to the figure, film sales accounted for 72% of Kodak's revenues and 66% of its operating income; Fujifilm had 60% and 66% respectively.
World film consumption and income composition change
The film is made according to a carefully verified combination of various technologies that require a neatly built production process. If you look at the cut of the color film, you can see that the base of the film consists of 20 evenly coated layers, each of which is sensitive to three primary colors, red, blue and green. And the thickness of each layer is only 1 micrometer .
Fujifilm Director, Sigatak Komori, explains in his book that “in addition to the formation of the film and its coating with high accuracy, the formation of grain, functional polymer, nanodispersion, functional molecules and the control of redox processes are also required. All these processes are under strict quality control. ”
Willy Shih, former vice-president of Kodak (1997-2003), confirms that "color film was a very difficult product to manufacture." The film “had to be covered with 24 layers of complex chemicals: photosensitizers, paint, binding compounds and other materials placed on the film with great accuracy while it was being pulled at a speed of 90 m per minute. The wide film needed to be changed and cut in real time; the film-covered film had to be cut to size and pack, and do it all in the dark. ”
Komori recalls that once there were 30-40 producers of black and white film around the world, but many of these companies faced insurmountable technical problems in the face of the spread of color film. “In the film business there were high entry barriers. Only two manufacturers, Fujifilm and Agfa-Gevaert , had enough technology and production scale to compete with Kodak, ”said Shih.
This business was relatively safe and profitable. For decades, the Fuji-Kodak duel supported the movement in the market, while Agfa and Konica played in the second and third leagues. Each company had a large local market share, creating a steady and safe cash flow, despite temporary price wars , like the one Fuji launched against Kodak in the 80s and 90s.
Consequences of the digital revolution: “fucking” and endangered business
In 2001, film sales around the world reached their peak, but, as President Fujifilm recalls, “the peak always hides the treacherous valley”. At first, the market began to shrink very slowly, then the speed began to grow, and as a result, it collapsed by 20-30% per year. In 2010, the global need for photographic film fell more than 10 times compared with what it was 10 years ago.
But first, the market has not disappeared, it has changed. After the democratization of personal computers and the Internet in the 90s, consumers began to buy digital cameras. Unfortunately for film manufacturers, the transition from analogue to digital presents extremely serious difficulties. Semiconductor technology platform does not intersect with the production of the film.
Most importantly, as explainedformer vice president of Kodak: “The broad applicability of the platform means that a good engineer can buy all the building blocks and assemble a camera. These blocks are abstracted from almost all the necessary technologies, and you no longer need a lot of experience and special skills. Component vendors offered technology to anyone who paid, and there were few entry barriers. ”
In other words, the digital era has become the exact opposite of the comfortable silver halogen business model, where several players have shared a safe market with good profits. The key business of film and post-processing has disappeared, but the commercialization of digital cameras did not make up for this loss. In 2006, Kodak director Antonio Perez called the digital cameras a “crap business.”
Why? Because suddenly Kodak and Fujifilm had to leave their quasi-duopoly and compete with dozens of companies in the low-margin digital camera business. Unlike color films, anyone could combine a sensor and a processor, and bring the product to market. That is exactly what happened. As Panasonic President Yukio Sotoku told Kodak, his twin company, “Modularization makes a consumer product, our consumer product, a commodity.”
This explains how a surfer from California, from scratch, could take the consumer video market by storm, and become the director of GoPro before it was squeezed out by Chinese manufacturers of cheaper electronics.
One look at Kodak finance is enough to clarify the situation. In the early 2000s, Kodak managed to maintain sales, but the group's profit fell to negative values. In the 90s, Kodak sales ranged from 13 to 15 billion, and profits from 5 to 10%. In 2000, the company received $ 1.4 billion in profits, and in 2002 - $ 800 million. After that, the company's Rochester finances entered a phase of long agony, followed by 2012 bankruptcy. A particularly sharp drop is observed after 2006.
And the problem was not with the sales of cameras. Kodak sold a large number of digital cameras. In 2005, Kodak occupied 21.3% of the US market and overtaken its Japanese competitors in the digital camera segment. That year, sales of the American group grew by 15%.
Unfortunately, sales were not so rosy all over the world. By 1999, Kodak held 27% of the market. But this figure dropped to 15% by 2003 , and by 7% by 2010, and the company lost the position of Canon, Nikon and others.
The main problem was that Kodak did not earn money from digital cameras. She was throwing money. According to a Harvard study , with each digital camera sold in 2001, she lost $ 60.
This problem is clearly visible in the financial statements. Kodak in 2000 reached $ 1.4 billion in operating profit, selling 10.2 billion units of goods related to photography, but profitability evaporated very quickly thereafter.
In 2006, in the official annual report, the company began to separate sales of the digital and film sectors. The table shows that Kodak initially maintained a good income level in the photo sector. She even managed to replace falling film sales with income from digital products, but this activity suffered losses. As a result, the company had to file for bankruptcy in 2012. In the previous year, film sales brought in $ 34 million in operating income, and the digital camera sector lost ten times more money ($ 349 million).
In general, the picture for Fujifilm was not much better, and she experienced the same troubles as her American competitor. Fujifilm President recalls that “in our forecasts we could not take into account the speed at which the market captures digital goods. The film market shrank much faster than expected. ” WITHFrom 2005 to 2010 , color film sales fell from 156 billion yen to 33 billion, while the photo processing segment shrank from 89 billion to 33 billion yen. But the Japanese company was able not only to overcome the crisis, but also to succeed in this difficult situation. How?
How was Fujifilm able to overcome the crisis and succeed?
A critical element in Fujifilm’s success has been diversification. In 2010, the film market fell to 10% of its 2000 volume. But Fujifilm, whose film accounted for 60% of its sales, successfully diversified and managed to grow profit by 57% in ten years, while Kodak sales fell by 48%.
Faced with a sharp drop in core product sales, Fujifilm quickly began to operate, and changed its business through innovation and external growth. Ruled by the iron hand of Sigetaki Komori, appointed by the president in 2000, Fujifilm quickly implemented massive reforms. In 2004, Komori developed a six-year plan called VISION 75, in honor of the 75th anniversary of the group. The goal was simple, and was to "save Fujifilm from a catastrophe and guarantee its viability as a leading company with sales of 2-3 trillion yen a year."
At first, management restructured the film business, cutting back production and closing unnecessary factories. At the same time, research and development departments moved to a new place to combine research efforts and promote an improved communication and innovation culture among engineers. Realizing that the digital camera business will not be able to replace the silver halogen strategy due to the low profitability of the sector, the company conducted massive diversification based on opportunity and innovation.
Even before the launch of the VISION 75 plan, the president ordered the head of the research and development department to take an inventory of Fujifilm technologies and compared them with the demands of international markets. After a year and a half of technological audit, the R & D team issued a table with all the technologies existing in the company that can meet the demands of future markets.
The president saw that “Fujifilm technologies can be adapted for emerging markets such as pharmacology, cosmetics, and functional materials.” For example, the company was able to predict a boom in the field of LCD screens and seriously invested in this market. Using their film technology, the company's engineers created FUJITAC, a series of high-quality films necessary for the production of LCD panels on televisions, computers and smartphones. Today, FUJITAC takes70% of the market of protective polarizing films for LCD screens.
The company also entered such unexpected markets as cosmetics. In support of this step, 70 years of experience with gelatin, a key ingredient for photographic film derived from collagen, spoke . Human skin is 70% collagen, because of which it has such brilliance and elasticity. Fujifilm also had a great deal of experience in oxidative processes associated with both the aging of photographs and the fading of human skin. Therefore, Fujifilm launched a cosmetics line in 2007 called Astalift.
If the company did not have its own promising technologies that could compete in emerging markets, it was engaged in mergers and acquisitions. By purchasing companies that have already entered the market, and combining their assets with their experience, the Japanese company was able to quickly and easily release new products to the market.
Using the synergy of technology, in 2008 she acquired Toyoma Chemical, and entered the drug market. Plunging into this market, she also bought a radiopharmaceutical company, now called Fujifilm RI Pharma. She also strengthened her position in already existing joint ventures, for example, in Fuji-Xerox, which became a joint venture in 2001, after Fujifilm acquired another 25% stake in the partnership.
In 2010, nine years after the peak of film sales, Fujifilm turned into a new company. If in 2000, 60% of sales and two thirds of profits came at the expense of the photographic ecosystem, then in 2010 the photographic division was responsible for less than 16% of total profits. Fujifilm was able to get out of the storm thanks to massive restructuring and diversification.
Why did Kodak fail?
Much has already been said about why Kodak could not carry out reforms. A mummified company that is stuck in the analog era and unable to adapt to the digital world is usually described. Some explain that Kodak suffered from myopia and could not see the onset of digital cameras, while others say that the problem was complacency when management refused to accept the inevitable, despite being aware of the digital tsunami approaching.
There is a certain truth in this description, but it is incomplete and simplified. As already mentioned, Kodak created a good assortment of digital cameras and was able to win first place in sales in the US in the early 2000s. Historically, Kodak invented digital photography by developing this technology in 1975. The Rochester company poured billions of dollars into the digital research and development department, and, like Fujifilm, greatly reduced production, which also cost billions of dollars .
According to the Harvard Business Review: “Director George Fisher (1993-1999) knew that the invasion of digital photography could occur, and even replace the core business of Kodak. No doubt, he and other members of the company's management were tempted to ignore this. But to their credit, they were able to resist temptation. Fisher built troops and aggressively invested more than $ 2 billion in the development and research of digital images. ” The next director, Dan Karp, also adhered to the same goal, vowing to invest two-thirds of the company's research and development budget in digital projects.
Former president of Kodak's consumer digital business addsthat "Kodak management was criticized for undermining the digital sector, made in an effort to save the film. But this criticism is exaggerated. In response to expert recommendations, from the mid-90s to 2003, the company created a separate division (which I managed), whose task was the digital market. The new division, not limited to heritage or practitioners, has been able to create a market position in terms of digital cameras. ”
In fact, Kodak failed for the same reasons that Fujifilm flourished: diversification. But in the case of Kodak, the firm was hampered by a lack of diversification. Unlike Fujifilm, which recognized the photo business doom and studied new markets with a completely different portfolio, Kodak made a mistake with the analysis and remained in the shrinking photo industry.
In fact, the point is not that Kodak did not try to change - she tried, but did it wrong. In the face of a radical shake-up of the market, she reacted vigorously — but simply doing something and doing something right is different things. As the former vice-president of Kodak explained, "The Kodak management has not fully realized that the appearance of digital photos will have terrible consequences for the future of photo printing." In the late 90s, Kodak in a hurry installed 10,000 digital kiosks in partner stores. Simply put, Kodak tried to reproduce the silver halogen business model in the digital world. At least its part associated with the seal.
Unfortunately, “the business created by them failed in the traditional market and could not find a new one. Industry outsiders — Hewlett-Packard, Canon, and Sony — worked better. They launched products based on home storage and home printing, and in the process uncovered new requests for convenience, storage and selectivity, ” explained Harvard Business Review in 2002. Two years later, Facebook appeared and soon after that printing photos was a thing of the past. . Most consumers are not going to print photos. They shared photos on the Internet.
Kodak understood the transition to digital numbers, invested in technology and foresaw that the photos would be shared on the Internet. For example, in 2001, the company acquired the Ofoto photo sharing site. Unfortunately, the company decided to use Ofoto to get people to print digital photos. They could not understand that the process of sharing photos on the Internet was a new business, and not one of the ways to increase print sales.
The fall of the print went along with the market difficulties of digital cameras. According to Shihu, the head of the consumer digital photographs division, the position of his newly created division “practically disappeared after the market was captured by smartphones with built-in cameras.” Already in 2003, sales of camera phones exceededsales of digital cameras, and the growth in sales of smartphones went much faster than the growth in demand for cameras. As the head of Kodak said in 2006, it was a “damn business”. The average cost of a digital camera in 2000 was $ 393, and by 2012 this figure had collapsed to $ 78.
No matter how hard Kodak tried, photo printing shrank to a very small market, and entry-level cameras were a game with a small profit, in which other players prevailed. In such a situation, semiconductor manufacturers survived, who developed and sold technology modules for cameras or smartphones (Sony) or digital SLR manufacturers like Canon and Nikon, specializing in the niche of expensive devices with interchangeable lenses. Kodak did not fall into any group with its simple cameras.
Worse, “Kodak early abandoned the development and production of its own digital cameras and began to rely on OEMs. Not having its own technology for sensor production and image processing, the company was at a disadvantage at the start of the digital race, ”explains Furiiffilm's director, Comori.
Surprisingly, Kodak continued to chase this lousy business. While Fujifilm actively invested in the pharmaceutical and health sectors to reduce its dependence on the complex photo industry, Kodak sold a very lucrative department of health-related photographs in 2007 to infuse more resources into the losing digital camera division. The sale brought in $ 2.35 billion, but analysts said it was unwise to sell such a business whenbaby boomers were supposed to retire massively, and the demand for X-ray images would only grow. From the point of view of the director of Fujifilm, getting rid of the revenue unit from the field of health became a “fatal mistake”.
Why did the Kodak leaders make such a mistake? Why did they insist on trying to grab the vanishing low-profit business when other companies had a technological advantage?
“In jurisprudence, we call this position a bird that likes to fly backwards. It is more pleasant for her to look where she was, than where she flies, ” said Dan Aleph, author of the biography of Kodak founder George Eastman.
Looking back, Shih, former vice president of Kodak, believesthat “a company could try to compete with opportunities, not with the markets in which it was represented,” as Fujifilm did, but “this would mean giving up a great franchise. Business schools are taught no such logic, and it would be difficult for the leaders of the company to come to terms with it. ”
The head of Fujifilm agrees with this, and puts in the first place the causes of the fall of Kodak inertia. “This company was the first for so long,” he said, adding that “and this led to the fact that it slowly adapted to change. From the outside, it seemed that in the depths of their hearts Kodak simply did not want to change. ”
Fujifilm, on the contrary, has always been a candidate in the shadow of Kodak, has learned to be bold and innovative, in order to narrow the gap with the historical leader. Her corporate culture had to be more courageous and willing to take risks. For example, in the 1980s, Fujifilm opened factories in the United States and dared to challenge Kodak's marketing empire in its backyard, winning the title to sponsor the 1984 Los Angeles Olympics.
Winston Churchill once said that "Winners always write history." Analysis based on the crisis is an enjoyable exercise, and many consultants and business educators love to mention Kodak as an example of poor leadership. But the story is also based on unforeseen circumstances. As part of its bankruptcy plan, Kodak sold the Ofoto photo sharing website for less than $ 25 million in April 2012. In the same month, Facebook bought Instagram for $ 1 billion. In the alternative universe, Ofoto could be the leading online photo-sharing platform.
For Apple, exactly the opposite is true. Who today remembers how this elite company was recently on the verge of bankruptcy? In 1997, after 12 years of financial losses, Microsoft and Steve Jobs came to the rescue. Microsoft, worrying about not becoming a monopoly without a competition with Apple, invested $ 150 million in it. Today, a company worth a trillion dollars was about to disappear.
But, despite all the attempts, the leaders of Kodak, Fisher, Karp and Perez were not Steve Jobs, and the story was not on their side. Being in the center of events when the company was losing billions of dollars, its directors did everything they could. In his book, the head of Fujifilm talks about leadership and says that the second leader "uses a bamboo sword, and the first one uses a steel sword."
Komori meant that when directors fight “with steel swords, losing means dying,” since their decisions have strategic implications that affect future companies. They can not afford to make mistakes. He recalls how he decided to organize a serious investment in the FUJITAC business, which produces a film for LCD screens, when no one was sure that the plasma technology , which did not require a film, would not win the LCD race. Not being sure of the outcome, he decided to launch four LCD film production lines, while his managers wanted to start with one.
Komori remembers many of his “sleepless nights”, but diversification required courage and decisive action. History was on his side, and this bold step, typical of Fujifilm philosophy, justified itself. Today, FUJITAC controls 70% of the world market.
Some saythat Kodak made a mistake that George Eastman, its founder, avoided twice when he left a profitable business of producing photoplates, switching to films, and when he invested in color film, when she was clearly losing in black and white (Kodak dominated the market) . However, with the advancement of the digital era, the question was not to evolve in the same industry, but to make a revolution: to give up the shitty production of digital photographs and use their achievements to diversify in other markets.
Unlike Fujifilm, Kodak was unable to accomplish this vital revolution. When George Eastman committed suicide in 1932 at the age of 77, he left a note saying "My work is finished." But this time, the work at Kodak was not finished.