Chapter 5. Innovating Out of a Crisis
“A peak always conceals a treacherous valley” — Shigetaka Komori. Former chairman and CEO, Fujifilm[1]
The business world loves case studies and their ability to convey a complete story succinctly — from unexpected disruption to successful resolution — with compelling insights and clear lessons. However, case studies are also criticised for pushing managers to adopt ‘solutions’ simply because they worked somewhere else in the past.[1] Their selective focus on successes — whilst omitting instances of failure and the lessons to be learned from that — can create the false impression there is ‘one right way’ of doing things. Therefore, case studies should be approached with caution. Despite this, the business world remains captivated by cases and one of the most widely cited — by business schools and consultants alike — is the Kodak case: the compelling story of the US giant disrupted by a new technology. Except this story isn’t true.
Kodak, founded in 1880, dominated the camera film industry for over a century until, as the story goes, it missed the switch from analogue to digital photography and went bankrupt. Yet, this is a narrative as wrong as it is simplistic. Kodak was an innovator — inventing the first digital camera in 1975[3] — and fully aware of the potential the digital revolution had to transform their market. Their eventual downfall wasn’t due to a lack of innovation or foresight, as is often suggested, but was a consequence of their own past success. Kodak was understandably reluctant to forgo the certainty of profits ($1.4 billion in 2001 alone) in their current market an focus on uncertain gains in a still-emerging new market. Their mistake was not failing to exploit future potential — it was trying to conserve existing profits at the same time.
Fig.10: Kodak’s ‘Conservation Trap’
Kodak executives thought they had time to adapt. So they focused on trying to conserve (K) the current profits their dominant position generated for as long as possible. But, by the time Kodak fully committed to digital (becoming the market leader by digital camera sales in 2005), the world had re-organised (ɑ) in ways they had failed to anticipate. The mobile phone revolution at that time saw digital cameras embedded into every device, drastically reducing the demand for stand-alone digital cameras; a trend accelerated by the rise of ‘selfies’ — requiring both front and rear-facing cameras — that helped transform digital cameras into a largely invisible, low margin, commodity. The market Kodak eventually pivoted to was now insufficient to sustain this giant. Kodak fell into a conservation trap — clinging to past successes in a dying ecosystem, which prevented them from reorganising and adapting to the new world unfolding around them.
The Case of Fujifilm
Yet, despite this fascination with case studies, Fujifilm — Kodak’s smaller Japanese rival — receives far less attention from business schools, consultants, and conference speakers in the West.[4] Like Kodak, Fujifilm had been heavily-dependent on camera film sales, accounting for two-thirds of their profits at the market’s peak in 2000. Fujifilm therefore faced the same precipitous collapse of their market, which happened slowly at first, but then rapidly. By 2006, the market for colour photo film was in a death spiral, plunging 20–30% per year and, by 2010, was worth less than a tenth of its value a decade earlier. In the words of Fujifilm’s CEO at the time — Shigetaka Komori — the implosion of their core market in the “blink of an eye” was “an earth-shattering event”. Yet, unlike Kodak, Fujifilm not only survived but thrived. This was a ‘live player’ — able to do things others had not done before.
Fig.11: Total global demand for colour photo film
Fujifilm remained committed to their mission ‘to protect the culture of photography’. Despite knowing a huge storm was coming they didn’t abandon their customers. They continued making colour camera film, albeit with the “decisive cuts” necessary to survive a shrinking market. But these cuts were less about preserving their profitability and dividends and more about buying them time to act. And act they did. Fujifilm started “investing heavily in new businesses [they] thought had a promising future”, focusing on industries where they could leverage their expertise, like pharmaceuticals and highly-functional materials. Cosmetics became a key focus area — perhaps a surprising choice for a photography company until one realises the chief ingredient in film, gelatine, is derived from collagen, which makes up 70% of human skin, giving it its sheen and elasticity. The same oxidation process that ages skin also fades colour photos and Fujifilm had eight decades of research into this process, which they successfully leveraged into anti-aging cosmetics — a booming industry in the large, wealthy market of Japan, a country with one of the world’s longest life expectancies.
Fujifilm invested in other promising areas, such as “polarising plate protective film … an essential ingredient in the manufacture of liquid crystal panels”. This had been a niche industry providing a crucial component in TV, computer and mobile phone screens. But, as the mobile revolution erupted in the 2000s, “what was only ¥2 billion in sales at the beginning of 1990” was transformed into a business worth “¥200 billion twenty years later, easily making up for the losses incurred” in Fujifilm’s core market.
Fujifilm demonstrated Pal’chinskii’s first principle in action — they increased their chance of success by experimenting with a variety of ideas — investing $1.8 billion annually in R&D and making “active use” of mergers and acquisitions (M&A) to acquire “companies that [had] already left the starting gate”. By “combining their assets with Fujifilm’s expertise” they got “new products to market quickly and easily”.
Fujifilm also demonstrated Pal’chinskii’s second principle in action — they accepted that some failure was inevitable, so kept projects on a small enough scale that failure was survivable. They hedged their bets, spending over $6 billion across 40 companies to quickly “build a presence” in new markets like software technology, medical devices and inkjet printing. If any venture failed, losses could be off-set by success in other areas — giving Fujifilm options: the requisite variety of responses needed to survive in uncertain times.
Fig.12: High-AQ (Fujifilm) vs. Low-AQ (Kodak) Companies
Fujifilm also demonstrated Pal’chinskii’s third principle in action — they developed effective feedback loops between decision-makers and those closest to the action to quickly identify and select what worked in their local context. Like Pal’chinskii, Komori was open to learning from others and encouraged his people to seek advice from “outside experts”, especially in areas where they lacked “internal competence”. But he made one thing clear to his people: “Think for yourselves!” Relying on outside consultants to tell you how to run your own company was “out of the question” as “strangers” couldn’t possibly know, or care about, Fujifilm’s situation more than its own people. Instead, Komori urged decision-makers to get closer to the action, learn what was working and focus on whatever showed signs of success.
Fujifilm navigated the storm successfully. By January 2012, as Kodak was filing for bankruptcy, Fujifilm posted record annual net sales of $21.4 billion. Komori credited his company’s sense of urgency as being essential to their success: “Had we delayed by just another year or two” he noted, “we would have been right in the middle of the devastating financial downturn in the fall of 2008 and the company might not have been able to survive this double punch”.
Fujifilm’s ability to act quickly had been honed by years of operating in Kodak’s “colossal shadow”, forced to thrive in less profitable niches. In this way, the Japanese firm resembled prehistoric mammals — smaller and more adept at finding and exploiting new sources of value. Kodak, on the other hand — the “premier company in photographic film for so long” — resembled the previously dominant dinosaurs: too “slow to adapt ” in a world around them changing faster than they could respond to.
This book will explore a key question: Why did this Japanese firm seek out a variety of new responses, hedge its bets, and focus on learning, while the US firm did not? Neither company likely knew of Pal’chinskii or his principles, yet Fujifilm appeared to follow them closely and thrived, while Kodak collapsed. My hypothesis is there’s a fundamental difference in how strategy is approached in the East and the West — and the former approach is better suited to thriving in uncertain times. Therefore, in the next two chapters, we’ll explore the eastern approach to strategy and examine how it helps organisations survive and thrive in times of extreme uncertainty.
1/ All quotes in this chapter are taken from ‘Innovating Out of Crisis: How Fujifilm Survived (and Thrived) As Its Core Business Was Vanishing’ by Shigetaka Komori (2015)
2/ For an explanation of why copying what worked somewhere else provides no guarantee it’ll work the same way again see the introduction.
3/ https://petapixel.com/2018/10/19/why-kodak-died-and-fujifilm-thrived-a-tale-of-two-film-companies/
4/ Perhaps because the story is more complex, without a simple takeaway like “disrupt yourself before others disrupt you,” which fuelled countless consultant-led transformations.
