This is a draft from a forthcoming book ‘Out-Think, Out-Move: Real-Time Strategy & Execution in an Uncertain World’. It focuses on business in Russia but the insights should be applicable to a much wider audience. Feedback and comments are welcome (email@example.com). Earlier sections are here:
“A peak always conceals a treacherous valley” — Shigetaka Komori, Chairman and CEO, Fujifilm
Pal’chinskii’s second principle was:
Accept that failure is sometimes inevitable, so do things on a small enough scale that it’s also survivable.
The case study of failure that western business schools, business consultants and conference speakers seem to love is the Kodak case: the compelling story of the US giant disrupted by digital technology. Kodak, founded in 1880, dominated photography for more than a century but in 2012 filed for bankruptcy. The commonly repeated diagnosis is that Kodak missed the switch from analogue photography to digital. But this is wrong.
Kodak were the pioneers of digital photography, having invented the first digital camera in 1975. They were also aware, as was the entire industry, of the changes digital would bring to their market. The problem was that Kodak (quite understandably) were unwilling to forgo the certainty of large profits today in their current market ($1.4 billion in 2001) for profits in an uncertain future market. Kodak had fallen into the ‘conservation trap’. They tried to conserve their premier role in this highly-profitable market and mistakenly thought they would still have time to adapt later. But, when Kodak finally made the switch to digital — going big and becoming the market leader for digital cameras — the world had changed fundamentally. Digital cameras were no longer a highly-sought after product but a commodity, embedded in millions of smartphones. Kodak adapted too late and, like other slow-moving dinosaurs, died out.
For some reason western business schools, consultants and conference speakers seem far less interested in the case of Fujifilm — Kodak’s Japanese rival. Like Kodak, Fujifilm’s profits were also dependent on camera film sales — accounting for two-thirds by the time the market peaked in 2001. After this time the market started shrinking slowly, at first, then the decline became more rapid. By 2006 the market for camera film entered a death spiral, plunging 20–30% per year (see chart). By 2010 the market was worth less than a tenth of what it had been at the start of the decade. Fujifilm’s CEO, Shigetaka Komori[ Quotes in this chapter are taken from “Innovating Out of Crisis” by Shigetaka Komori. Chairman and CEO of Fujifilm at the time], described the disappearance of a market in the “blink of an eye … [as] an earth-shattering event”. Yet Fujifilm would not only survive the loss of its core market but would eventually thrive.
Fujifilm’s stated mission had been ‘to protect the culture of photography’, which meant they couldn’t abandon its customs by not making camera film, even though profitability started to suffer. They had to make “decisive cuts” but did so to buy themselves time, rather than trying to maintain profitability. A sense of urgency to adapt came from the very top: “Had we delayed by just another year or two” the CEO Komori explained, “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 managed managed to avoid the ‘conservation’ trap that ensnared Kodak. They would not waste time fighting against evolution but instead seek to adapt, before it was too late.
Knowing that the future would look very different Fujifilm started, “investing heavily in new businesses [they] thought had a promising future”. They focused on industries where they could leverage their specialist knowledge, such as inpharmaceuticals, highly-functional materials and cosmetics. Cosmetics may have seemed an odd choice for a camera film manufacturer but the chief ingredient in film is gelatine, derived from collagen, which makes up 70% of human skin (and gives it its sheen and elasticity). The same oxidation process that causes skin to age also causes colour photos to fade over time, so Fujifilm’s eight decades of research into this process could be leveraged into anti-aging cosmetics. They did the same with investments into ““polarising plate protective film, an essential ingredient in the manufacture of liquid crystal panels”. This had been a niche industry providing a crucial ingredient for TV, computer and mobile screens — a market that would soon explode with the popularity. Fujifilm’s sales in this area grew from $15 million in 1990 to $1,8 billion by 2007, “easily making up for the losses incurred” by the decline of the camera film industry.
Here we can see Pal’chinskii’s ‘First Principle’ in action — increasing your chances of success by seeking out and experimenting with a variety of new ideas. Fujifilm created the ‘requisite variety’ of options needed to respond successfully to a changing world. They made “active use of mergers and acquisitions (M&A)” where they lacked expertise to “build a presence in the [new] marketplace” fast. “By acquiring companies that have already left the starting gate and combining their assets with Fujifilm’s expertise, [they got] new products to market quickly and easily”. This helped Fujifilm move into profitable markets, such as software technology, medical devices and inkjet printing quicker and more effectively. They spent big in M&A (over $6 billion) but they also invested $1.8 billion a year in R&D. Fujifilm wasn’t making one or two big bets on the future but multiple smaller bets and here we can also see Pal’chinskii’s ‘Second Principle’ in action. In the uncertain world failure is to be expected, so design for survivability.
Fujifilm’s M&A activity was spread across 40 companies, meaning the failure of one acquisition or merger — or even a dozen or more — could easily be off-set by the others. They didn’t rely on their core market (camera film) nor, like Kodak, on one big move (into digital cameras). Instead, they increased their variety of options and ensured any failure was survivable. Fujifilm’s CEO Shigetaka Komori also refused to allow his people to “rely on outside consultants” who couldn’t possibly know their local situation better than Fujifilm itself. Komori was not averse to learning from others — ask “outside experts for advice” he urged, especially in “those areas where maybe [we] don’t have the internal competence” — but he demanded that his people “think for yourselves!” Asking “strangers what you should do about your own company” was “out of the question”. Like Pal’chinskii before him, Komori knew the key to success was not the latest technology alone but how people locally interacted with technology to develop new ideas and create new sources of value.
In January 2012 Fujifilm posted record annual net sales of $21.4 billion, jus as Kodak was filing for bankruptcy. Komori believed that Kodak’s dominant position as the “premier company in photographic film for so long … [made] it slow to adapt and diversify”. He explained that Fujifilm, having spent so long in “Kodak’s colossal shadow”, had had to learn how to find niches left it by the industry’s apex predator. This ability to explore and adapt was their advantage when the world changed enabling them to not only survive, but thrive. This should be the case business schools love.
All quotes are taken from “Innovating Out of Crisis” by Shigetaka Komori. Chairman and CEO of Fujifilm at the time