Kodak and Fujifilm were the two dominant film companies in the 90s. In 2000, before the digital photography transition, film sales accounted for 72% of Kodak's revenue and 58% of sales for Fujifilm. Since then, what happened to these companies?
The tale of these two film companies couldn't have been more different.
A Profitable & Secure Film Market
Even though both Kodak and Fujifilm produced analog cameras, their core business was film sales and post-processing services. According to Forbes, Kodak even gladly gave away cameras in exchange for getting people hooked on paying to have their photos developed. As a result, Kodak gained an 80% market share for chemicals and paper used to develop and print photos.
The "Silver Halide" strategy, coined by Kodak was a great success story. This business strategy was similar to that of razor and printer manufacturers; giving away free razors and printers while making money on razor blades and ink cartridges. Film was indeed everything to both Kodak and Fujifilm.
How did Kodak and Fujifilm gain their competitive advantage? Photo film manufacturing is a complex process made of a fine-tuned combination of various technologies. A color film roll had to be coated with as many as 24 layers of sophisticated chemicals with each layer only one micron thick.
Before color film, there were 30 to 40 manufacturers producing monochrome film (black & white). But when confronted with an insurmountable technical challenge to produce color film, only Fujifilm and Kodak had the technology, expertise and production scale to dominate the film market. As a result, the film business proved to be very profitable and secure.
The Digital Revolution
What happened next caught both companies by surprise. In 2001, as film sales peaked worldwide, the market began to shrink slowly, then plunged by 20% to 30% per year. By 2010, the global demand for photo films had declined to less than 10% of what it had been 10 years ago.
With the internet boom and democratization of the personal computer, consumers started to purchase digital cameras instead of film cameras. Unfortunately, the transition from analog to digital photography was bad news for film manufacturers like Kodak and Fujifilm. These company could no longer rely on their cash cows; film sales.
The playing field drastically changed with digital cameras. Firstly, semiconductor technology had nothing to do with film manufacturing. Secondly, modularization made consumer products a commodity. Manufacturers could buy the building blocks (e.g. a senor and processor) and assemble a digital camera.
New entrants like GoPro, which was founded by a California surfer, now flooded the digital imaging market. Kodak and Fujifilm's technological advantage, expertise and production scale were no longer relevant in the low margin digital camera business.
From 2005 to 2010, Kodak's film and photofinishing sales declined by 38% from $2,841 to $1,767 million while Fujifilm business declined 73% from 245 to 66 billion yen. What did these film companies do during the digital revolution?
How Did Fujifilm Overcome The Crisis?
Fujifilm adopted a new business strategy, diversification. When the film market declined, the film company that derived 60% of its sales from film successfully diversified its business and even grow its revenue by 57% from 2000 to 2010.
What did Fujifilm do in the face of a sharp decline of its cash cow product? Fujifilm, under the leadership of Shigetaka Komori, transformed its business through innovative and external growth. In 2004, Komori introduced a six-year plan called VISION 75. The goal was simple, to save Fujifilm from disaster and securing it as a leading company with annual sales of 2 to 3 trillion yen.
Firstly, the management restructured its existing business by downsizing production lines and closing redundant facilities. In the meantime, the research and development teams moved to a new facility to promote better communication and collaboration. The head of R&D was tasked to take stock of Fujifilm's technologies, matching them with future demands and new markets.
Such efforts eventually paid off. Fujifilm diversified into emerging markets such as pharmaceuticals, cosmetics and highly functional materials. Fujifilm leveraged on existing film technologies and invested heavily in new technology. For example, the company launched FUJITAC, high-performance films essential for making LCD screens and Astalift, a collagen makeup line.
When technologies did not exist internally, Fujifilm used merger and acquisition (M&A) to quickly develop new capabilities. For example, it acquired Toyoma Chemical to enter the pharmaceutical business and partnered with Xerox to form Fuji-Xerox to reinforce its position in digital imaging.
By 2010, Fujifilm had successfully transformed itself into a new company. In 2000, 60% of its sales and two-thirds of its profits came from film sales, in 2010, only 16% of revenues came from imaging products. Fujifilm is a leading exemplar of how a company can restructure and adopt a diversification strategy.
Why Did Kodak Fail?
What about Kodak? The failure to reform itself meant that it was incapable of adapting to the digital world. Some experts believe that the senior management were complacent, they refused to accept the inevitable even though they were aware of the changes in the industry.
Kodak did produce a decent range of digital cameras and had the largest market share in the United States in the early 2000s. Historically, Kodak was also the inventor of the digital camera back in 1975. The company also invested billions in digital R&D, and like Fujifilm, downsized its film business.
But was it too little, too late? Kodak failed for the same reason that Fujifilm succeeded; diversification. The lack of diversification was the final nail in the coffin. Unlike Fujifilm which recognized early that the film business would decline and developed new products for new markets, Kodak persisted in the declining photo industry.
Kodak did try hard to change, but did not fully recognize the rise of digital imaging would have dire consequences for the future of photo printing. Instead of scaling back on photo printing, Kodak installed 10,000 digital kiosks in partner stores. They tried to replicate the "Silver Halide" business model in the digital world.
Unfortunately, their analog business strategies did not work in a digital world. Competitors like Hewlett-Packard, Canon and Sony launched digital storage and home printing solutions to meet changing consumer demand for convenience, storage and selectivity.
Social media played a huge part in Kodak's declining business. In 2004, Facebook was founded and became the defacto way for people to share photos. Soon photo prints became the thing of the past. In 2001, Kodak invested in a photo sharing website called Ofoto. Instead of realizing that online photo sharing was a new business, Kodak used Ofoto to make people print digital pictures.
By 2003, camera phones came into the picture and quickly outsold digital cameras worldwide. With consumers buying camera phones, the average price of digital cameras fell from $393 in 2000 to $78 in 2012. Kodak's digital camera sales plunged. In the new environment, the survivors were semiconductor manufacturers or specialized DSLR companies like Canon and Nikon. Kodak was neither.
To make matters worse, Kodak did not develop and manufacture its own digital cameras, but relied on OEM manufacturers. Not developing its own technology in sensor and image processing put Kodak at a disadvantage when it came to digital imaging. Despite this, Kodak persisted in this industry and eventually sold its highly profitable Healthcare imaging business to cover losses in its consumer camera department.
Why did Kodak's senior management make such a mistake? Why did they persist on competing in a low margin business when competitors had a technological advantage?
"The company could have tried to compete on capabilities rather than on markets it was in", Mr Shih, former Kodak VP
And added, "This would have meant walking away from a great consumer franchise. That's not the logic that managers learn at business schools, and it would have been a hard pill for Kodak leaders to swallow."
Kodak had been the dominant player in the market for so long. As a result, the film giant was slow to adapt and its management was reluctant to adapt to external changes. By contrast, Fujifilm, which was always the challenger took risks and embraced innovation. As a necessity, its corporate culture was more risk taking for it to challenge Kodak.
Some said that Kodak made the mistake that its founder, George Eastman avoided twice before, when he gave up a profitable dry-plate business to move to film and when he invested in color film despite being inferior to black and white film. However, in the digital era, it was not about evolving in the same industry but diversifying to other markets; what Fujifilm successfully did.
Will other market leaders like GoPro and DJI succumb to the same fate as Kodak or will they reinvent themselves, innovate and diversify into other markets?
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