Corporate re-invention: a cautionary tale
Ziggy Switkowski
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Ziggy Switkowski
Ziggy Switkowski

Editor’s Introduction:  This month CEO Forum is doing something we have not done before: featuring a commentary piece as one of our lead articles.  We are doing this because we believe the piece has an important message for many CEOs, as they confront what will arguably be the most challenging business environment for decades in 2009.

Business models, and key assumptions about what works and what does not, will be sorely tested in the coming months, and, under that kind of pressure, many CEOs will be tempted to make (or try to make) fundamental changes to their business.  Unfortunately, many of these changes will not stave off the inevitable decline some businesses will face. The need for strategic change is easier to recognise, and even articulate, than it is to execute successfully.

It is this paradox (the simultaneous need for, and the very real limits on, organisational change) that former Telstra CEO Ziggy Switkowski addresses below, in his examination of the fate of the Kodak company over recent decades.  Switkowski’s analysis is all the more authoritative, given both his intimate knowledge of Kodak gained over 18 years service at the company, and his vast experience as a CEO (leading Kodak Australasia, Optus and Telstra).  We commend the article to all CEOs interested in the possibilities and limits of strategic re-invention under pressure.

Note:  This commentary piece first appeared on the Business Spectator web site .  It has been reproduced in full below.

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Kodak negatives

Last week the Eastman Kodak Company scrapped its annual profit forecast, citing rapidly slowing consumer spending. No surprise there, nor that its share price slipped to $US6, down by a half in three months.

At its peak in February 1997, Kodak shares reached $94 but it’s been a steady decline since.

The rise and fall of this proud 120-year-old international imaging company has been much studied and a common theme has emerged in the many diagnoses of its seemingly ineffective strategies. Kodak either did not see the digital revolution coming, underestimated the speed and magnitude of the impact of new technology, or managed the transition from chemical to digital imaging poorly.

While some of these observations have validity, they miss the main strategic insight which explains this much diminished company. And overlooking this aspect can lead to wildly inaccurate forecasts for other Australian companies confronting changes of a similar nature.

At the peak of its value, Kodak had worldwide market shares in key photographic segments above 70 per cent; manufacturing margins on film, paper and chemicals were often 80 per cent; and the business was a series of annuity streams involving regular purchases of film, processing, print paper and chemicals, with periodic format changes by an industry leader with serious market power.

Few understood the possibilities of digital technologies better than Kodak. And strategic scenarios were developed in the 70s and 80s to anticipate the impact and exploit it.

But a successful company transformation implied a transition from a high market share, high margin, annuity business based upon technologies protected by generations of patents and trade secrets to a business populated by new competitors, where global leadership was a 30 per cent share, and manufacturing margins of digital cameras and accessories were less than 30 per cent. And the imaging process was now simple, with open standards, fewer steps and much less frequent purchases.

‘Success’ implied morphing from a high revenue, high return business model to one with much lower revenues and absolute returns, on a terrain covered by new ambitious competitors having few legacy issues, lower cost structures and non-monopoly return expectations.

And it required evolving from core competencies such as chemical engineering and high volume manufacturing processes in total darkness to software development and mastering consumer electronics cycles. This could never be seamless, and with the possible exception of Nokia, few multinational companies have made such a transition effectively.

Furthermore, it’s one thing to anticipate and correctly describe the commercial future, another to make the transition, and yet another to like the new environment once you get there. This is the main message – that seemingly powerful corporate dinosaurs can’t survive for long when the climate quickly changes on them. And in this case, the climate is not greenhouse gases (that’s another story) but the forces of digitisation and the internet.

Kodak is currently a world leader in digital cameras. But so what? Sure there have been many missteps along the way (such as frustrated diversification moves into copiers, pathology services, pharmaceuticals etc) but even a relatively flawless transition into the digital world would have left it a much diminished, even irrelevant company unless it redeployed any excess cash flows into unrelated areas and serendipitously hit some jackpot.

The lessons contained in the history of Kodak have clear applications today and two Australian industries come to mind where similar challenges loom large – print media and commercial free-to-air television (FTA).

Few disagree that the future for daily news is online. Newspapers are in long-term decline. Few disagree that advertising will shift to the internet. The proprietors of print media understand this, employ good people to delay the inevitable, and experiment with online services that depend upon excellence in newsgathering, editing, packaging and presentation.

Some may discover the formula, a means for getting people to pay for online content, but the value of such businesses may not approach that of the traditional structures they replace.

The near-term threat to commercial FTA is PayTV but beyond that, both services will be confronted by internet protocol TV (IPTV). Myriad content will be available 24/7 randomly accessed by a vast assortment of appliances. Even if a network had the smarts to make the transition, they may not enjoy the destination which will never provide the monopoly returns of the early television era.

For the time being, government endowed licence monopolies, onerous anti-siphoning rules and lack of bandwidth provide some protection to commercial stations, but these will inevitably make way for the new order that IPTV will demand, although perhaps not for a decade or more.

As in the case of Eastman Kodak, the leaders of firms such as Fairfax and the Seven, Nine and Ten networks all understand this change, and are implementing various strategies to manage through the technology changes. But my sense is that with careful management and a bit of luck, these worthy people will end up running successful small businesses having started with great big ones.

Ziggy Switkowski worked at Eastman Kodak from 1978 to 1996 and was the chairman and chief executive of Kodak (Australasia) from 1992-96. He is a member of the Business Spectator Advisory Board.


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