Hi There,
Welcome to another issue of Tap to Unlock, a newsletter where I write about economics, products, & strategy. In this issue, I talk about Kodak’s P2P strategy, Photography → Pharmaceuticals
Kodak
The U.S. government is loaning legendary camera maker Eastman Kodak $765 million to start manufacturing pharmaceutical products in a bid to increase U.S. self-sufficiency in response to the coronavirus pandemic, the company announced Tuesday.
Kodak is branching out into pharmaceuticals and the US government plans to support its efforts. Kodak will create a new business arm, Kodak Pharmaceuticals, to produce ingredients needed for drug manufacturing.
Kodak Pharmaceuticals will make ingredients that have “lapsed into chronic national shortage”. It will be able to make “up to 25 percent of active pharmaceutical ingredients used in non-biologic, non-antibacterial, generic pharmaceuticals,” Kodak estimates. Kodak CEO Jim Continenza expects pharmaceuticals to eventually comprise 30 to 40 percent of Kodak’s business, reports The Wall Street Journal.
Shares in Kodak more than tripled after the government loan announcement, pushing the firm’s market value from $115 million to $347 million by close on Tuesday, the stock’s best performance day ever.
Backstory
Kodak was the Google of its day. Founded in 1880, it was known for its pioneering technology and innovative marketing.
“You press the button, we do the rest,” was its slogan in 1888.
In 1976, Kodak accounted for 90% of film and 85% of camera sales in America.
The similarity between google and Kodak can also be seen in the business model.
Even though Kodak produced cameras, its core business was centered on film and post-processing sales. Kodak gladly gave away cameras in exchange for getting people hooked on paying to have their photos developed.
This strategy made Kodak a leader in the market (80% market share) of chemicals and paper used to develop and print photos.
This approach is similar to Google or Gillette. Google gives its products away for free and earns revenue from advertising and Gillette gave away razors for free to make money on blades.
In 2000 sales related to film accounted for 72% of Kodak revenue and 66% of its operating income.
In 2001, the film sales peaked worldwide. The market began shrinking very slowly, then picked up speed and finally plunged at the rate of 20 or 30% a year. Mainly with the advent of digital photography to replace film.
Within a few years of film sales peaking in 2001, the core business of film and post-processing disappeared.
In 2010, worldwide demand for the photographic film had fallen to less than a tenth of what it had been only 10 years before. Now both Kodak and Fujifilm were forced to compete against dozens of companies in the low margin business of digital cameras.
And Kodak faced the second blow: Advent of smartphones to replace digital cameras.
Kodak sold plenty of digital cameras. In 2005, Kodak captured more than 20% of the US market share and emerged no. 1 in the digital camera segment.
But, the problem was that Kodak was not making any money with digital cameras.
It was bleeding cash. According to a Harvard case study, it lost $60 for every digital camera is sold by 2001.
Eventually, Kodak had to file for bankruptcy in 2012. In 2011, film sales only generated an operating income of $34 million while the digital camera division lost ten times that ($349 million loss).
What went wrong?
A Kodak engineer, Steven J. Sasson, invented the first digital camera in 1975. But Kodak’s management reacted to negatively his camera because it was filmless photography, instructing him to tell no one about it. ( Link )
Vince Barabba, Kodak’s head of market intelligence, conducted extensive research that looked at the core technologies and adoption curves around silver halide film versus digital photography.
He concluded that digital photography had the potential to replace Kodak’s established film business.
And Kodak had around 10 yrs to prepare for the transition. But during that 10-year window, Kodak did little to prepare for the later disruption.
In 2006, the CEO of Kodak, Antonio Perez was quoted calling digital cameras a “crappy business.”
Kodak misunderstood the effect of digitization, consumers were no longer interested in printing photos. For instance, Kodak acquired a photo-sharing website called Ofoto in 2001.
But, the company used Ofoto to make people print digital pictures. They failed to understand that online sharing was a new business. They also installed 10,000 digital kiosks in various stores for consumers just to print their photos.
What happened to Fujifilm?
Internal Approach
Unlike Kodak, Fujifilm acted swiftly and changed its business through innovation and external growth.
Under the leadership of Shigetaka Komori, in 2000, Fujifilm quickly carried out massive reforms. In 2004, Komori came up with a six-year plan called VISION 75 in reference to the 75th anniversary of the group. The goal was simple “saving Fujifilm from disaster and ensuring its viability as a leading company with sales of 2 or 3 trillion yen a year.”
One of the most creative examples is how they moved from the photographic film into cosmetics.
From film to cosmetics? 🤯 How do you do that? 🤔
It turns out that Fujifilm had almost 80 years of experience in the key ingredient in skincare and skin: gelatin, the chief ingredient of photo film which is derived from collagen. Human skin is seventy percent collagen.
They also had existing strengths in the science of aging –which is identical to the science of how photos fade (the process of oxidation). Thus, Fujifilm launched a makeup line in 2007 called Astalift.
The company was also able to predict the boom of LCD screens and invested heavily in this market and leveraged the photo film technology.
External Approach
To develop more new business ventures, FujiFilm used the M&A strategy. The company acquired companies that have already penetrated a market and combined their assets with its expertise.
In 2010, nine years after the peak of film sales (2001), Fujifilm was a new company inside out. In 2000, 60% of its sales came from the Imaging division
In 2010, 16% of the revenue came from the Imaging division. Fujifilm was only managed to ride out of the storm because of its massive restructuring and diversification strategy.
Now
Kodak has pivoted from film to pharmaceuticals. As the experience of manufacturing film and other photography, products lends itself to drug making.
China is currently the world’s largest supplier of pharmaceutical ingredients, the active compounds used to make drugs, and U.S. imports from China have increased in recent years.
But Fujifilm is several steps ahead of Kodak in the pharmaceutical realm. Fujifilm has acquired several more pharmaceutical and biotech co’s and has established itself as a major supplier of medical equipment and drugs.
Health care and material solutions made up 43% of Fujifilm’s total revenue in 2019, and the company aims to double its health care sector sales over the next few years.
Lessons
In short, Kodak failed for the same reason that Fujifilm succeeded: diversification.
In his book, The Decision Loom, Vince Barabba explores 4 interrelated capabilities that are necessary for interactive and effective decision making.
1. Having an enterprise mindset that is open to change.
2. Thinking and acting holistically.
3. Being able to adapt the business design to changing conditions.
4. Making decisions interactively using a variety of methods.