Chapter 5. FujiFilm: Variety
“A peak always conceals a treacherous valley” — Shigetaka Komori. Former chairman and CEO, Fujifilm
Business schools in the West love case studies. That’s because case studies have the power to present a complete story succinctly — from incident to reaction to result — and convey critical points the author wishes to get across. Yet case studies also come in for some justified criticism: They’re often used to influence managers how they should act today based purely on what happened yesterday, in a different time and in a different context; case studies also tend to push one favoured ‘solution’, by being selective about what they focus on and what they leave out. Therefore, one should use case studies with care. But, as already noted, business schools love a case study and one of the most popular —beloved alike by conference speakers and business writers— is the Kodak case: The compelling story of the US giant disrupted by a new technology. Indeed, so popular is this case that Kodak has become short-hand coda for warning managers that they must embrace new technological trends early.
Kodak, the story goes, was founded in 1880 and dominated the camera film industry for more than a century, until it missed the switch from analogue to digital photography and was 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 the digital revolution would unleash on their market. Kodak’s weakness therefore was not a lack of innovation or foresight, it was their (understandable?) unwillingness to walk away from large, certain profits in their current market ($1.4 billion in 2001) for uncertain profits in a future market. The mistake they made was trying to have both. Kodak tried to conserve (K) its leading role in a profitable market today while believing it had time to adapt tomorrow. But this was a trap. By the time Kodak finally went in big on digital — becoming the market leader for digital camera sales in 2005 — the world had re-organised (ɑ). Digital cameras were no longer a high-value product — they had evolved into a lower margin, commodity-like offering embedded into millions of mobile phones (and soon into hundreds of millions of smartphones, many with more than one digital camera to satisfy new user needs for selfies). Kodak’s reluctance to leave the old world they had dominated meant they were too late to adapt to the new world. They had been caught in the ‘conservation trap’ and, like the dinosaurs before them, their past success had prevented them from adapting to a new reality.
Fig 8. Kodak’s ‘conservation trap’
Despite their love of case studies, Western business schools, consultants and conference speakers seem less interested in the case of Fujifilm, Kodak’s Japanese rival. This smaller firm had also been heavily-dependent on camera film sales, which accounted for two-thirds of their profits at that market’s peak. They also suffered when this market started shrinking, which happened slowly at first but, as the world embraced the new digital revolution, the decline accelerated sharply. By 2006 the market for colour photo film had entered a death spiral, plunging 20–30% per year and, by 2010, the market was worth less than a tenth of what it had been just a decade earlier. This disappearance of their main market in the “blink of an eye” was, according to Fujifilm’s CEO at the time, Shigetaka Komori, “an earth-shattering event”. Yet, unlike Kodak, not only did Fujifilm survive this shock, they actually thrived because of it because Fujifilm was a ‘live player’ — they’re able to do things they have not done before.
Fig 9. Total global demand for colour photo film
Fujifilm took their mission — ‘to protect the culture of photography’ — seriously. This meant that, despite the coming storm, they would not simply abandon current customers. They decided to continue making colour camera film but to continue doing this meant making “decisive cuts”. However, these cuts were less about maintaining profitability and dividends 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 they believed they could leverage their specialist knowledge into, such as pharmaceuticals, highly-functional materials and cosmetics. (Cosmetics may have seemed an odd choice but the chief ingredient in film — gelatine — is derived from collagen, which makes up 70% of human skin and gives skin its sheen and elasticity. 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, which they leveraged into anti-aging cosmetics). They also invested in “polarising plate protective film … an essential ingredient in the manufacture of liquid crystal panels”. At that time this was a niche industry providing a crucial ingredient for TV, computer and mobile screens, but it was about to explode with the digital and mobile revolutions. In 1990 Fujifilm’s sales in this area had been just $15 million but grew to $1,8 billion by 2007, “easily making up for the losses incurred” by the decline of the camera film industry. The sense of urgency Komori instilled into Fujifilm at this time was also essential to their success: “Had we delayed by just another year or two” he reflected later “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 approach reveals 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 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”. But Fujifilm didn’t rely on M&A activity alone — they also invested $1.8 billion a year in their own R&D. In line with Pal’chinskii’s ‘Second Principle’ they also knew that when trying something new the chances of failure are higher, due to an initial lack of knowledge or experience (which even the M&A activity couldn’t alleviate entirely). Therefore, Fujifilm hedged its bets, making multiple small bets 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 them with greater success in any number of other ventures (such as the market for polarising plate protective film). Fujifilm acted to give themselves good options — they had created the ‘requisite variety’ of responses needed for surviving and thriving in uncertain times.
Fig 10. Fujifilm’s High-AQ versus Kodak’s Low-AQ: Same variety of situations faced, but different variety of responses with which to respond.
Instinctively, Fujifilm’s CEO also adopted Pal’chinskii’s ‘Third Principle’: Develop feedback loops between decision-makers and those closest to the action in order to quickly select what’s working locally and adapt in real-time. 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 Komori admonished Fujifilm’s people not to “rely on outside consultants”. Asking “strangers what you should do about your own company [was] out of the question”. They couldn’t possibly know the local situation better (or care as much) as Fujifilm; so he demanded his people, “think for yourselves!”. This forced Fujifilm decision-makers to get closer to the action, learn what was working (and what wasn’t) and focus on what 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, when asked later to explain the smaller firm’s success over its more illustrious rival put it down to Fujifilm’s ability to learn how to find new niches — a capability they had had to develop whilst being in Kodak’s “colossal shadow”. On the other hand, he argued, Kodak’s dominant position as the “premier company in photographic film for so long” had made it, rather like the dinosaurs, “slow to adapt and diversify”.
So, why did the Japanese firm seek out a variety of new responses, hedge their bets and focus on learning — in line with Pal’chinksii’s principles — but their US rival didn’t? The hypothesis this book will explore is that there’s a fundamentally different approach to strategy between the East and the West and that it’s the former which is better suited to the more uncertain times we are now in. Therefore, taking a page out of the Western business school approach let’s now look at two more case studies that will try to succinctly explain this point (but without trying to convince you to adopt a different approach yet — at least not until we have fully explored that in the rest of this book). Therefore, see the next two chapters as a high-level introduction into the Eastern approach to strategy.