Five years ago Kodak filed for Chapter 11 bankruptcy protection. This was not only an economic tragedy for one of the great companies of the last century, it was devastating for the city of Rochester, New York, where the company was based. Kodak was once a household brand whose dominance in the photographic film business was unparalleled. The phrase “Kodak moment” came to epitomize the cultural relevance of the brand. At its height, Kodak’s market share of the photographic film market was more than 80% in the U.S. and about 50% globally. It employed over 60,000 citizens of Rochester, the majority of whom became unemployed when the company collapsed.
Kodak was a juggernaut of a company; but the tragedy of its collapse runs deeper. It is not that the company could not have saved itself by responding to change. The tragedy is that Kodak invented the change that eventually killed it. A Kodak engineer, Steven J. Sasson, invented the first digital camera in 1975. In an interview with the New York Times, Sasson describes how Kodak’s management reacted to negatively his camera because it was filmless photography, instructing him to tell no one about it.
At that time, Kodak was focused on maintaining the large profits it was making from its sales of photographic film. However, as digital cameras grew in popularity, Kodachrome, the photographic film that was Kodak’s cash cow, was discontinued in 2006 after 74 years of production. It is not that Kodak had failed to imagine a new future. It had failed to capitalize on the imagination and inventiveness of its scientists.
The Comeback Kid
Kodak has emerged from bankruptcy a much smaller but profitable company. It has been mining its treasure trove of about 7,000 patents and developing technologies in digital imaging and touch screens. It still produces some of its classic film products but for smaller niche markets. In Q3 of 2016 it posted modest profits of $12 million.
Kodak is not the only company that has gone through this cycle of near death and then a slow revival. Other examples include Nokia and Blackberry. The important question for corporate leaders is why large companies struggle with doing innovation during the good times when they were still profit making. Do companies need a crisis before they start to respond to change? Is it necessary for companies to experience a near collapse before they start innovating?
One of the questions I often get asked is why I care so much about innovation in large companies. Is it not inevitable that creative destruction will result in large incumbents being replaced by new startups? The economic impact of large company failure is often felt more widely than the failure of a startup. But even more important to me is the fact that the failure of many of these companies is mostly unnecessary. Most large companies have the necessary resources and smart people to succeed at innovation.
In every large company I have worked with, they are smart people there with great ideas. I have learned that management in such companies just needs to stop getting in their own way. And since today is the fifth anniversary of Kodak’s bankruptcy filing, it seemed appropriate to remind ourselves how corporate leaders can support sustainable innovation within their companies.
In traditional MBA programs, strategy was often taught as a company’s coordinated efforts to use its core competencies to gain a competitive advantage. A company was considered to have succeeded when it had implemented a strategy that its competitors found too hard or too costly to imitate. Managers were then expected to invest enormous resources to protect this competitive advantage. Such a view of strategy partly explains Kodak’s decision to shelve the digital camera. At the time, its core competitive advantage was its cash cow photographic film business.
Viewing strategy as gaining and protecting a competitive advantage works in business environments that have long term stability. However, such environments no longer exist. The rapid pace of technological advancement has changed the dynamics in most industries. Most companies now need to develop the ability to respond to change quickly. This is difficult because the management practices that are needed to protect competitive advantages run counter to those that are need for innovation.
Leaders in every large company need to change their approach to strategy. Strategy can no longer be defined as the singular exploitation of core competencies to maximize gains. We now need ambidextrous organizations and leaders. Strategic innovation management is the ability of a company to compete in mature markets with mature technologies; while simultaneously exploring new markets with new technologies.
In order to become ambidextrous, large companies need to stop thinking and acting as if they are a single monolithic institution with one business model. Instead, they need to start viewing themselves as portfolios of products and services. The aspiration is to have a balanced portfolio of products so that when shifts happens, the company is already engaged in a systematic process of searching for new advantages.
Nagji and Tuff distinguish three main types of innovation: core, adjacent and transformational. With core innovation the company focuses on making incremental changes to existing products for existing customers. Adjacent innovation involves taking something the company currently does well and applying it to new markets or to the development of new products and services for current markets. With transformational innovation the company focuses on creating new offerings for new markets.
A balanced portfolio is one in which a company has products and services that cover all three types of innovation. This is the only way to guarantee that the company is being run with a short-term, medium-term and long-term view. Nagji and Tuff propose a “magic formula” of 70–20–10 that most companies can use to balance their portfolios. This means that companies should be investing 70% of their resources into core innovation, 20% into adjacent innovation and 10% into transformational innovation. This formula is not uniform across industries. It can change on the basis of industry norms. However, every leadership team must manage its portfolio to ensure that it is balanced.
With a balanced portfolio in place, corporate leaders then need to recognize that the processes for managing innovation are different from those that are used to manage core products. In most companies, anyone with an innovative idea has to make a financial case for investment using a business plan. However, transformational innovation is about imagining the future. The proposed products and business models are often different from the company’s current products and business models. As such, management will not have seen the projected financials play out in reality before. This can lead them to reject potentially successful ideas.
The advent of agile, lean startup and design thinking methods has provided us with a set of tools we can use to manage innovation. At the outset, we capture the innovator’s idea as a set of assumptions to be tested. We then test our assumptions with customers using experiments. As we iterate towards success, the role of management is to track how well their teams are doing at aligning the innovator’s ideas with a profitable business model. A key principle for innovation management is that only tested and validated business models are taken to scale. So for new transformational ideas, business model validation is what corporate leaders should be investing in.
Don’t Fumble The Future
While I have used Kodak as an example of disruption in this article, most large companies are currently struggling with similar challenges. The best way to survive in a future that is ever changing is for corporate leaders to transform the way they view strategy, business models and innovation management. Only then do they have a chance of avoiding the fate that Kodak suffered on this day five years ago.
Our book The Corporate Startup covers these topics. Please order here.
This article was first published at Forbes where I am regular contributor.