The Kodak lie

January 18, 2012: 7:07 AM ET

The demise of Kodak isn't merely the classic disruption story that everyone loves to tut tut over. It's much more complicated than that.

By Larry Keeley, contributor

FORTUNE -- People never seem to notice, but strategies have fashions. Just as cars had fins for a while, or business folks try to dress like they just stepped off the set of Mad Men, or phones get big touch screens and icons to chase after Jony Ive's iPhone design choices, there are also conventions in how we think about what firms should do to create value. These ways of thinking even have names so we can refer to them in shorthand: focus, cost leadership, differentiation, core competence leverage, supply chain integration, and the like.

This came to mind over the last few days in the midst of the Kodak (EK) death vigil. Most of the Kodak conversation has been standard issue Chicken Little: the sky is falling; the American dream is dead; another classic company has bitten the dust. We're all off to hell in a handcart and there's not a thing we can do about it. After all, Kodak was a symbol of better times, an era when American innovation and invention was seemingly ubiquitous. But while George Eastman's goal -- to make photography "as convenient as the pencil" has been realized and even exceeded -- Kodak was not the company that capitalized on this new ubiquity.

And so, with a mixture of schadenfreude and fear, we hear the Monday morning quarterbacks explain what went wrong and explain how a company with so much promise managed to snatch defeat out of the jaws of victory. The basic buzz is that Kodak missed the moment. Addicted to film photography, they never really could (to borrow a phrase from another brief strategic fashion) "cross the chasm" and drive the growing new digital photography field.

What if this convenient analysis is just too superficial? The demise of Kodak isn't merely the classic disruption story that everyone loves to tut tut over. Nor is the company's downfall merely a result of recent bad decisions or the mismanagement of senior executives. It is the more nuanced story of how easy it can be to get things wrong, even when trying with the best of intentions to do everything right. It's a cautionary tale of the need for deeper understanding of what innovation really means, and how it is infinitely more vital than most people think it is, even as it isn't about any single product or widget or technology.

Kodak knew all about the impending disruption of digital technology. As many have noted, they own the primary patents on digital photography and built one of the world's first digital cameras in 1975. As The Economist reported recently, a report circulated among senior executives in 1979 detailed how the market would shift permanently from film to digital by 2010. This disruption was no surprise. But following the fashions of the moment back then, Kodak's leaders looked at the whole shift through the lens of their signature strengths in chemistry, optics, and films. They tried to do new things with familiar capabilities at the exact moment they needed to be hungrier to do truly new, unfamiliar things.

One of Kodak's significant attempts to diversify away from the world of film came at the end of the 1970s. They targeted xerography, specifically aiming at the other hometown hero in Rochester, New York. I was consulting with Xerox (XRX) at the time, and we took Kodak's threat to enter the world of copying very seriously. We were right to; Kodak's strengths in organic chemistry and optics helped them to create some excellent, high-end products.

This way of thinking was fashionable at that moment. In 1979, Sony (SNE) used its skills in miniaturization to create the craze du jour, the Walkman. Toyota (TM) used its strengths in paints and seals to make better quality cars than Detroit was making. A decade later, one of my heroes, CK Prahalad, published his seminal paper on The Core Competence of the Corporation in Harvard Business Review to explain the fashion. In effect, the strategic question was: given what we are already good at, what new things can we do that will drive growth?

For Kodak a continued focus on chemistry, optics and depositions on film made perfect sense. And it made it a healthy company through the mid-1990s. But what it missed, what most of us chronically miss, was that the new businesses, however soundly reasoned and engineered, were dinky, especially viewed in comparison to their base business. This is why Pfizer (PFE) loves Lipitor (and the blockbuster drug model); why Cisco (CSCO) loves routers; and why it was hard for IBM (IBM) to sell off the ThinkPad (though it did so, in sharp contrast with HP (HPQ), which should have). And it's why PepsiCo (PEP) has found it so hard to sell healthy snacks, when soda and potato chips are so very popular. So often we want innovation to be easy -- allowing us only to have to tweak the familiar instead of trying to do something more deeply connected to how customers live their lives now.

In Kodak's case, the digital photography field not only was slow growing but it actively undermined their largest source of profits: photo and motion picture films. The tiny sideline businesses simply could not scale at a rate that might make up for the loss of film revenues, so those inside the core business were unable or unwilling to do what it took to foster drastic transformation.

This exact phenomenon plagues innovation in nearly every large firm. At least once a week, top executives tell me that new growth businesses in their firms are intriguing and potentially important, but they simply "don't move the needle." Said in plain American: "The hot new thing simply cannot produce enough revenues this quarter to improve my bonus as a senior executive." So those projects are starved of resources instead of nurtured.

So what should Kodak have done? More to the point, what should you do to avoid this trap? Well, there is a new form of strategic thinking coming into fashion right now, called Convergences. Used well, it gives leaders a deeper sense of the interdependencies that connect firms, products, systems, and services in new ecosystems. It challenges the older notions of supply chains and vertical integration to get at newer ideas such as platforms, which move the cost and risk of innovating off your balance sheet and onto others'. It uses visualization techniques to reveal where new opportunity hotspots are emerging -- typically the confluence of new technological capabilities and new customer behaviors.

This new way of shaping strategy can show you the next big thing, long before it has a name and a whole host of competitors. But that insight still doesn't solve the vexing cultural and accounting problems that plague most firms innovation choices: senior executives have to be incentivized to create hot new platforms that are newsworthy, not just get paid for driving growth in the familiar ways that drove value yesterday.

Will this latest strategic fashion make a difference? It already does. Will it be a fashionable way to think for long? Who knows? Surely, I don't. That's the trouble with fashion. Something new is usually just moments away. But for now this is a solid way of thinking for those looking for the future to show up a little ahead of its regularly scheduled arrival. That, at least, will never go out of style.

Larry Keeley is co-founder of Doblin Inc, a part of Monitor Group, where he is a partner and thought leader in the Innovation practice. He has focused on pioneering innovation effectiveness methods for three decades.

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