Kodak managers learn gobbledygook theory of strategy, firm folds
Posted: January 16, 2012 Filed under: competitive advantage, Corporate strategy, education 14 CommentsMany of you will have heard by now that Kodak is likely to file for Chapter 11 bankruptcy sometime soon. Their present strategy appears to be to wind down the business by selling off many of their patents. I guess my main surprise upon seeing them back in the news was that they were still in business. Apparently, it takes an extended period for these behemoths to fold for good.
The source of my surprise was the fact that I used to teach Kodak managers in both the executive and part-time MBA programs at the Simon School in Rochester, the home of Kodak’s headquarters. Just to be clear, these men and women were great students … bright, curious, open-minded, and typically well-trained. My purpose here is not to jump on the current bandwagon and blame Kodak’s present troubles on the stupid, selfish, rapacious tendencies of its 1%-er senior managers. Quite the opposite. Rather, I’d like to question what role, if any, the things they learned in b-school strategy classes played in the formation of, ultimately, misguided business plans.
Harking back to the late 90s, when I was teaching EMBA classes that were populated with about 1/3 senior managers from Kodak, I vividly remember initiating class discussions about the disruption digital technology was going to have on Kodak’s legacy business. Unlike the automobile manufacturers of the 70s, who really missed the significance of Japanese competition, Kodak managers fully understood that the new digital technologies were going to change their industry forever. Sure, there was a lot of uncertainty about the speed and path by which transformation would occur. But, it wasn’t the case that these smart people didn’t see it coming. They got it. And they were optimistic and dedicated, in my experience to a person, to implementing strategies that would permit Kodak to successfully ride the new technological wave.
Why were they so optimistic? When challenged to discuss it in class, they proudly explained that Kodak’s “core competency” was “color”. The reasoning went something like, “We understand color and its application to photography better than any other firm. This knowledge will be as important for success in digital applications as it was in analog film. Therefore, we are wonderfully positioned for whatever challenges the market presents.” The problem, from my perspective was two-fold: a) the thinking did not seem to go much deeper than this; and, b) the strategy literature did not have much to offer to help them think deeper than this.
Many have complained that the RBV, which is the source of this core-competency thinking, is a tautology: core competencies are unique resources that cause a firm to persistently outperform its peers; all firms that persistently outperform their peers have core competencies. I don’t agree with this complaint. Indeed, my sense that the pioneers of the RBV were on to something substantially influenced my desire to study strategy. That said, the “theory” underlying the RBV doesn’t go much more than one step beyond the tautology. And, much of where it goes is wrong (e.g., having resources that are inimitable is neither necessary nor sufficient for persistent performance advantage).
So, my energetic, smart, dedicated EMBA students, when presented with a strategy theory that was frustratingly close to a tautology, developed a strategic conceptualization of their firm that was – not surprisingly – frustratingly close to one as well. At the end of the day, it seemed to be an article of faith among my students that “knowledge resources about color” were going to save the day. (As we are all only too aware, smart people are masters at locking onto a favored idea and finding all kinds of arguments to support it.) As a teacher, it was incredibly difficult to push them deeper into a critical analysis of how, specifically, this “color know-how” was going to be their lifeline. New competitors, new product distribution channels, radical changes to how photographs are shared and consumed? No problem — we know color!
Part of my teaching frustration, which became part of my research motivation, was that the extant literature did not offer much in the way of tools to help these folks think about such issues in a complete, consistent, and efficacious way. Worse, in my judgement, teaching those folks a shallow set of ideas actually facilitated their transition into a dangerous state of groupthink. Holding up a piece of tautological thinking as the pinnacle of scholarly theory doesn’t exactly encourage students to think beyond tautology.
Our field has more than its share of interesting conjectures (i.e., informally generated speculations). What we need now are more scholars who are willing to roll up their sleeves and dig into the details. And patience. Lots of patience.
StrategyProfs.net 
I had a similar experience teaching Blockbuster employees in Dallas. Surely the innovators dilemma work has some relevance? I would argue that higher ed is facing a similar disruptive scenario but few colleges seem to be addressing the threat even after Christensen’s work. Sense making and sense giving are very important (but overlooked) processes in strategy. Kodak created a false sense of security by promulgating the color myth – which reminds me of Mintzberg’s discussion of chicken little.
Another great example. And I couldn’t agree with you more about higher ed. One difference is that I don’t get the same sense of self-confidence talking to university administrators as I did from my exec students. In the case of the former, in my judgment, they were fairly clueless as they rode the demand wave to astronomical tuition rates and are still so today as they soldier on nervously watching as the indications of massive shifts in the industry continue to pile up.
Mike,
See the similarities to the Polaroid case:
What was Polaroid thinking?
http://qn.som.yale.edu/content/what-was-polaroid-thinking
Arie.
Yes. Here’s the money quote,
MacAllister Booth reasoned, “As electronic imaging becomes more prevalent,there remains a basic human need for a permanent visual record. Whether that record fulfills an emotional requisite in the visual diaries of amateur photography or provides practical data in an industrial or scientific setting, the universal insatiable appetite for visual communication and portable information will be constant, reflecting a continuing need for instantly available, high-quality print media.”
At least MacAllister had a solid rationale … wrong, as it turned out, but not circular.
I’m not sure you should classify Kodak’s downfall as B-school iatrogenic, but it does raise the question of whether the problem facing companies in their situation are analytical or political/institutional.
It’s not clear what could have been done to save Kodak’s franchise, but a naive assessment of what they had to work with would have identified two distinct strengths: Their knowhow in film and printing (which subsumes their expertise in “color”) and their strong consumer brand. Digital technology obviously threatened the first, but not necessarily the second. It’s easy to forget now how nearly synonymous Kodak was with mass photography in the U.S. Instamatics seemed to be in every household, often multiple times, during their heyday. There was no analytical reason, certainly not from an RBV perspective, not to build a strategy based on the brand asset.
A naive approach would have been to try to create a “digital Instamatic” early on–a cheap point-and-shoot whose convenience and fun factor would outweigh its (at the time) inferior picture quality. That would have built directly off of Kodak’s existing brand and distribution. But it also would have threatened the legacy facilities and human capital of the firm, the bulk of which were tied up in R&D and manufacturing for chemical film (rather than in marketing). Those executives who thought they would be saved by their color knowhow were also perpetuating a view that made their expertise still valuable to the firm. We can call it self-interest or identity preservation or whatever, but the decision to make Kodak’s chemical/printing/color assets the core of the digital strategy (which the current company has continued right up to bankruptcy)–rather than being the trusted purveyor of snapshot photography of the new digital era–was probably not a random error (if error it indeed was).
All,
See also Scott Anthony’s npte on The Persistence of the Innovator’s Dilemma”
“Yet, the innovator’s dilemma persists. Just ask executives at Blockbuster Video, Sony, Nokia, Microsoft, Hertz, Kodak, Delta, and nearly all newspaper companies. That’s not to say that there haven’t been success stories. But they’re notable because they are exceptions.”
http://blogs.hbr.org/anthony/2011/11/why_does_the_innovators_dilemm.html
Arie.
Mike, did you teach your students about strategic drift?
Mike, I’m curious roughly when this was, just to compare with my own experiences with Kodak.
One of the interesting parts for me is that I spent quite a bit of time working on digital colour management, which can be seen as technology encoding colour knowhow and making it a commodity. I’m sure people at Kodak knew about these things, but it didn’t seem to dent their leap to “colour!” as the basis for their RBV analysis. One can apply all the usual cognitive bias explanations to this, but I think you’re right that there’s a hole in the tools around RBV as well.
The Economist piece comparing Kodak with Fuji was also pretty valuable I think. The scale of the challenge was a key problem – being a digital company was likely not enough. Which says that even if the Kodak EMBAs had been right about the value of their colour expertise, they would have had to face up to a shrinking company – or instead rethink the basis of the RBV view…
Fuji bounced from collagen in film to cosmetics, alongside some digital imaging. They did in effect use RBV thinking, but they also created a firm that is by RBV actually two firms…
This was around 2000 give or take. And I agree on all points. Of course, the piece is intended to be provocative, – obviously, there was a lot more to it. Trying to react to massively changing technology and market conditions is the tallest of tall strategic orders. Still, reading the recent headlines really did bring back these circular discussions we’d have in class and the dawning realization I had at that time that the fault may not have been bad thinking on their part so much as scholarly “theory” that seemed only to push them further into the weeds.
I agree with you – maybe I was too oblique, but in my experience, most discussions based on RBV would view the current Fujifilm corporation as an unnatural situation, something to be avoided… and I think that’s a pointer to another way the theory biased the discussion.
The best futures one could invent for Kodak in 1995 (to pick the time when I was working with digital colour) would involve parlaying the brand into something like a cross between Flickr and Facebook, taking the chemicals/substrate expertise and finding a use for it and building a digital camera firm with a view to leaping into mobile internet devices over time. That’s 3 firms with seriously different core competence in RBV-speak and I don’t think it’s overstating it to say that the culture of the theory would have made it hard to consider that kind of divergence.
Of course, another frame on it is RBV derived, but more cultural. In the US, a FujiFilm would have been encouraged to spinoff various parts, rather than become even more of a conglomerate. That has pros and cons, but for this piece I think the big difficulty is that it’s hard to spin off something before it’s ready to stand on it’s own two feet. So, then you have to invest to get it to that point, but the RBV steps back in to say “why are you investing in something that isn’t your core competence?” So, again, it gets in the way of getting the option on the table for discussion…
Part of the problem is how most people teach it and part of it is that the RBV has taken on a life of its own.
By definition, few firms have a sustained competitive advantage. Therefore, by definition, very few firms have a core competence.
Unfortunately, managers often ask the question: “What is our firm’s core competence?” This presumes that they have such a competence — a proposition that runs quite counter to the expectations of the theory itself.
Similarly, managers often say, “We need to stick to our core competence.” That ignores that one of the most strategic decisions they can make is to acquire a new competence. Clearly, one should not dismiss this without careful analysis (the most common result of this statement).
So, is it really surprising that Kodak’s managers did not carefully analyze whether their knowledge of color could be a source of sustained advantage?
Have you looked at Dynamic Capabilities? Paul Tiffany taught a strategy course at Haas last semester focusing on Teece’s Dynamic Capabilities approach, and we looked at Kodak (and referred to it many times in our discussions). One of the arguments made was that the upper management’s awareness of the demise of chemical and rise of digital wasn’t enough to ensure change occurred…It was argued that the engineering culture at Kodak simply wasn’t capable (or sufficiently motivated/convinced) of making the change to digital. Chemical was in their blood, as a result of the company doing so well for so long with this as (another one of?) their core competencies.
I don’t know if Dynamic Capabilities is the ‘rolling up their sleeves’ you are looking for, but it suggests that the capability to internalize, learn, and CHANGE is a ‘resource’ in itself if you will, and tied to success more than static resources such as technology, IP, relative competitive advantage, etc.
Mike,
Interestingly, there is no mention of “color” in this obscure aspect of Kodak’s strategy — see link below:
http://www.democratandchronicle.com/apps/pbcs.dll/article?AID=2012305120021&nclick_check=1
Cheers,
Rich
“Californium neutron flux multiplier,” really?