“A peak always conceals a treacherous valley” — Shigetaka Komori. Former chairman and CEO, Fujifilm
Businesses love case studies. Case studies have the power to convey a complete story succinctly — from incident to result — with critical takeaways clearly marked. Yet case studies also come in for some justified criticism: They’re often used to influence how managers should act today based on what happened yesterday (in a different time and context) and they’re often used by their authors to push a favoured ‘solution’ by being selective about what they focus on (and what they leave out). Therefore, one should use case studies with care. But businesses love case studies and one of the most beloved — by business schools and consultants alike — is the Kodak case: The compelling story of the US giant disrupted by a new technology. Except, that story is not the real case.
Kodak was founded in 1880 and dominated the camera film industry for more than a century until, as the story goes, it missed the switch from analogue to digital photography and was eventually forced to file for bankruptcy in 2012. Yet this narrative is as wrong as it is simplistic. As many have pointed out  Kodak was, in fact, the pioneer of digital photography, having invented the first digital camera in 1975. They were also aware of the changes a digital revolution would unleash on their market. Kodak’s decline didn’t come from a lack of innovation or foresight — it was their (perhaps understandable?) unwillingness to forgo certain profits in their current market ($1.4 billion in 2001) for the chance of uncertain profits in a future market. The mistake they made was trying to have both.
Fig. 10: Kodak’s ‘conservation trap’
Kodak tried to conserve (K) its leading role in a currently profitable market, whilst believing it had time to adapt to a new market reality tomorrow. But, by the time Kodak finally went in big on digital — actually becoming the market leader by digital camera sales in 2005 — the world had already re-organised (ɑ). Digital cameras were no longer a high-value product — they’d evolved into a lower margin, commodity-like offering embedded into millions of mobile phones (many with multiple digital cameras to satisfy new user needs for things like ‘selfies’). Kodak’s reluctance to leave the old world they dominated meant they got stuck in the conservation trap — trying to conserve past success in a dying ecosystem that prevented them from adapting to a new world in time.
Despite their love of case studies few businesses, or business schools, consultants or conference speakers in the West seem in the case of Fujifilm, Kodak’s smaller Japanese rival. This player had also been heavily-dependent on camera film sales, which accounted for two-thirds of Fujifilm’s profits at the market’s peak in 2000. And they also suffered dramatically when this market started shrinking slowly at first but, as the world embraced the new digital revolution, suddenly quickly. By 2006 the market for colour photo film entered a death spiral, plunging 20–30% per year and by 2010 it was worth less than a tenth of what it had been a decade earlier. This disappearance of their main market, in the “blink of an eye” was, according to Fujifilm’s CEO at the time “an earth-shattering event”. Yet, unlike Kodak, Fujifilm not only survived this shock but thrived because of it.
Fujifilm was a ‘live player’ — able to do things they had not done before.
Fig. 11: Total global demand for colour photo film
Fujifilm took their mission (‘to protect the culture of photography’) seriously. Even though they knew there was a huge storm coming they wouldn’t abandon their customers. Fujifilm continued to make colour camera film but made “decisive cuts” in order to be able to afford to in a declining market. Yet these cuts were less about maintaining profitability and dividend payments and more about buying the company time to act. And act they did. 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 into pharmaceuticals and highly-functional materials. One of the other industries Fujifilm focus on was cosmetics, which may have seemed an odd choice for a photography company, but the chief ingredient in film — gelatine — is derived from collagen, which makes up 70% of human skin, (giving it its sheen and elasticity). Yet the same oxidation process that causes skin to age also causes colour photos to fade over time and Fujifilm had eight decades of research into this process. They considered anti-aging cosmetics a promising industry, especially as Japan was a large, wealthy market where people enjoyed one of the longest life expectancies anywhere in the world.Fujifilm’s approach showed Pal’chinskii’s first principle in action: The Japanese firm was able to increase their chances of success by seeking out and experimenting with a variety of new ideas. They invested $1.8 billion a year in their own R&D and made “active use” of mergers and acquisitions (M&A) — spending over $6 billion across 40 companies to help them quickly “build a presence” in new markets like software technology, medical devices and inkjet printing: “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”. They cast their net wide as they knew, in line with Pal’chinskii’s second principle, that when trying something new the chances of failure were high, due to an lack of knowledge or experience (which even the M&A activity couldn’t alleviate entirely). So Fujifilm hedged their bets, making multiple investments on a small enough scale that any failure was survivable. Should any project, merger or acquisition fail (such as digital cameras did for Kodak) — or should even a dozen such activities fail — they had a chance of off-setting those with success withany number of other ventures (such as the market for polarising plate protective film). Fujifilm acted to give themselves good options — they created the requisite variety of responses needed for surviving and thriving in uncertain times.
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 ingredient for TV, computer and mobile screens. But the mobile revolution that erupted in the 2000s turned “what was only ¥2 billion in sales at the beginning of 1990 [into] ¥200 billion twenty years later, easily making up for the losses incurred” in Fujifilm’s core market. Komori credited the company’s sense of urgency as essential to their success: “Had we delayed by just another year or two 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 showed Pal’chinskii’s first principle in action — they were able to increase their chances of success by seeking out and experimenting with a variety of new ideas — investing $1.8 billion a year in their own R&D and making “active use” of mergers and acquisitions (M&A) to acquire “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”. But Fujifilm also showed Pal’chinskii’s second principle in action — they accepted that some failure was inevitable so did things on a small enough scale so that failure was survivable. Fujifilm hedged their bets, spending over $6 billion across 40 companies to help them quickly “build a presence” in new markets like software technology, medical devices and inkjet printing. Should any project, merger or acquisition fail they could off-set losses with success from any number of other ventures. Fujifilm had given themselves options — they created the requisite variety of responses needed for surviving and thriving in uncertain times.
Fig. 12: Fujifilm’s High-AQ versus Kodak’s Low-AQ
Fujifilm also implemented Pal’chinskii’s third principle by quickly selecting what was working in their local context by developing effective feedback loops between decision-makers and those closest to the action. Komori himself (like Pal’chinskii before him) was not averse to learning from others — he urged his people to ask “outside experts for advice” especially in “those areas where maybe [we] don’t have the internal competence”. But Komori warned Fujifilm’s people not to “rely on outside consultants”. Asking “strangers what you should do about your own company [was] out of the question” as they couldn’t possibly know the local situation better (or care as much) as Fujifilm’s people. Therefore, he insisted his people “think for yourselves!”. Fujifilm decision-makers were urged to get closer to the action, learn what was working and focus on whatever showed signs of success. This is how Fujifilm inched their way through the storm and out the other side. By January 2012, as Kodak was filing for bankruptcy, Fujifilm posted record annual net sales of $21.4 billion. Komori put their success down to their ability to find new niches — a capability they had to develop whilst being in Kodak’s “colossal shadow”. They had acted like modern day mammals, seeking out new sources of value whilst Kodak — the “premier company in photographic film for so long” — acted like the dinosaurs, being “slow to adapt and diversify” as the situation changed.
The key question for this book is why did the Japanese firm seek out a variety of new responses, hedge their bets and focus on learning but the US firm did not? It’s unlikely either had ever heard of Petr Pal’chinksii or his principles yet Fujifilm followed them closely and succeeded, while Kodak did not — they made big bets on a couple of markets and collapsed. The hypothesis of this book is that there’s a fundamentally different approach to strategy between the East and the West and the former is better suited to thriving in uncertain times. Over the next two chapters we’ll explore what this Eastern approach to strategy is, before diving deeper to understand where it came from and why it can be useful to your organisation as you try to survive and thrive in a more uncertain world.
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)
3 Arguably as it’s a more complex story that doesn’t have a neat conclusion such as ‘disrupt yourself before others disrupt you’, which has launched thousands of profitable, consultant-led ‘transformations’.