Wednesday, November 7, 2012

Lessons from the Demise of Kodak: Understanding the Components of Risk

As one of the former bluechip American companies, it may have seemed almost inconceivable that a global brand such as Kodak could take such a fall from grace that it would ultimately have to declare public bankruptcy after a period of massive layoffs and increasing debt in 2011.  In the prior to the 1980s, Kodak seemed like an immovable force, as it had what some might consider to be a monopoly in the photography business.  Kodak's founder, George Eastman is credited with the invention of the modern, widely-available camera, as his first "brownie" was sold throughout the country and moved photography from a specialty practice to a an everyday commodity.  Profits were further advanced by Kodak's vastly lucrative film and development services, which sold photographic printing paper, development chemicals, and the camera film that were all essential products to the film-making process.

However, Kodak's meteoric rise crumbled as a result of many poor strategic decisions, which were often compounded by a failure to understand risk and competition.  As discussed in Eric Lamarre and Martin Pergler's article "Risk: Seeing Around The Corners", published in the October 2009 McKinsey Quaterly, risk is a multifaceted component of every strategy and must be something accounted for in both short-term and long-term planning.  Expanding upon Porter's iconic "Five Forces" model, Lamarre and Pergler illustraite the many outside components of risk, stressing that seemingly small, indiret competitive forces can often spur a groundswell that ultimately can catch an organization off guard.

In Kodak's instance, there were many failures and underestimations of competition that forced the company to retain an outdated strategy, leading to the drastic loss of marketshare.  Kodak failed to capitalize on the rise of digital photography (which was ironic, as it was an early developer of the technology), which quickly wooed away its supposedly secure customer base.  Not only did the digital camera help to take down the old-fashion photography model, but Kodak also underestimated and failed to reply to the introduction of cellphone cameras.  Seeing them as a minor complement, instead of a potential product substitute caused Kodak to be caught off guard, and unprepared.  In the early 1980's, Kodak was also overtaken by Japanese competitors, who were able to leverage supply chain, production, labor and currency advantages to inflict severe inroads to the American marketplace.  Coupled with other seemingly random events that Kodak should have been better prepared for, such as the financial market crash and several poor investments, resulted in a company that found itself overturned and out-played by its own archaic, single-minded strategy.  It has become a textbook example of how poor evaluation of risk factors and a narrow focus can ultimately undo even the most ardent of American icons.

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