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BSc Hons: Brilliant Mzizi ST10125117

Social Informatics Learning Unit 4: Technology, social

structure and behaviour

SOIN8411

Managing the Disruptive and Sustaining the Disrupted: The Case of Kodak
and Fujifilm in the Face of Digital Disruption. Article 1 Personal Summary

Abstract

Valuable lessons can be learned from the comparison between Kodak and
Fujifilm in terms of how the two companies confronted the digital disruption,
with one failing and the other thriving. Through a series of theoretical
propositions rooted in literature and tested with case studies on Kodak and
Fujifilm, this article suggests a systematic way for incumbent firms to navigate
technological disruptions. A disruptive technological change does not
necessarily render all technological competences embedded in the firm’s
products obsolete. Further, a competence disrupted in the home market does
not have to be abandoned. By analyzing a firm’s technological system and
closely studying its innovation capability, an incumbent can nurture certain
technological competences and diversify into new fields where such
competences are valued and can distinguish the firm from its competitors. The
challenge lies in a timely redefining of the firm’s core business and
restructuring the organization to ensure consistent execution of the strategies.

KEY WORDS: disruptive innovation, product technology system, sustaining

technology, organizational
continuity, photographic industry.
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Introduction

Eastman Kodak and Fujifilm dominated the photographic industry for decades
until the early 2000s when digitalization revolutionized the industry. The two companies
started by selling film and then extended to focusing on photographic film
and equipment. They had highly similar business models, product development
histories, product portfolios, and market foci. In the year 2001, they both had comparable
levels of total revenue, number of employees, and market share in the
world film market. However, in January 2012, Kodak, the legendary American
photographic film and equipment firm, filed for bankruptcy protection. Kodak, an
industry pioneer and technology innovator, rapidly lost its century-long dominance
of the film, camera, and photo-finishing industries in the face of the digital disruption
to photographic technologies. Faced by the same disruption, the Japanese firm
Fujifilm, Kodak’s long-term rival, successfully re-created itself and diversified into
new profitable areas. Since Fujifilm was established almost 50 years later than
Kodak, before the year 2001, the decade-long competition between the two companies
had been characterized as a chase by Fujifilm trying to catch Kodak. The distinctive
strategies followed by the two companies at the watershed event of digital
disruption around the same year led the two companies to different paths and
eventually different fates. By the end of 2016, Fujifilm’s total revenue was almost
13 times higher than Kodak’s ($20.769 billion vs. $1.543 billion as of December
2016) and the firm employed 13 times more workers than Kodak (78,150 vs.
6,100).

The retreat and repositioning idea discussed by Adner and Snow (2010) is similar
to a main strategy we identified from our case analysis. However, in this article,
we develop a systematic way for incumbent firms to strategize during a technological
paradigm shift. In the following sections, theoretical propositions are developed
and empirically examined using the case research method. Through this newly
developed theoretical framework, we suggest an alternative way for incumbent
firms to respond in the face of disruptive innovations and present a course of action
to follow.
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Theoretical Propositions

To meet the challenges posed by a disruptive innovation, incumbent firms

must
consider and respond to some critical managerial questions. These questions
serve
as central themes to guide the literature review. Deductive explanations for
managerial
questions are stated as theoretical propositions to be used in this case-based
research. Abernathy and Clark (1985) defined a firm’s technological
competences as the competitive advantages its product have achieved in one
or more dimensions that are valued by the customers. Depending on the
degree to which an innovation sustains or destroys a firm’s technological
capability and/or market linkage, such innovation can be classified as an
architectural, regular, revolutionary, or niche creation innovation (Abernathy &
Clark, 1985). In a similar work, Henderson and Clark (1990) noted that an
innovation could happen at the component and/or architectural level
depending on the degree and format of changes to the technology. Nowadays,
when an innovation is referred as being disruptive, the impression is usually
that the overall industry is disrupted and all technological competences
rendered obsolete. From the aforementioned work, it is clear that an
innovation can disrupt different competences and to different degrees.

The theory of disruptive innovation states that a disruptive innovation is

simpler,
cheaper, and/or more convenient than existing products but initially
underperforms
in the attribute valued by mainstream customers (Christensen, 2000). Since a
product attribute is most often achieved by several underlying technologies
that
collectively deliver the function, when disruption happens, these embedded
technologies
and the firm’s competences should be assessed to answer the question:
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“What has been disrupted and to what degree?” Then strategies should be
crafted
accordingly. As a result, the first theoretical proposition is:
Proposition 1. Disruptive innovations do not necessarily destroy all
technological competences embedded in a product. Firms that correctly
distinguish disrupted from sustaining technological competences and react
strategically are more likely to manage the transition successfully.

Built on early literatures,

O’Reilly and Tushman (2008) argued that “ambidexterity,” a dynamic capability
to explore and exploit simultaneously, is very important for firms to adapt
during technological changes and possibly solve the “innovator’s dilemma.”
They further suggested that, in fast-changing regimes, the need for
ambidexterity might be more urgent and exploration and exploitation happen
more simultaneously, though there is no empirical evidence supporting this
proposition.

The exploitation suggested in literature happens in the home market to

maintain profitability; however, it may not serve the purpose well if the core
business and home market are fast shrinking. Since a disruptive innovation
may open up new opportunities that were not available before (Adner & Snow,
2010), firms may also exploit their sustaining technologies in the new regime
by exploring technology integration. As a result, the second proposition states:

Proposition 2. Firms that adopt disruptive innovations early, and at the same time explore
opportunities to further exploit their sustaining competences, not only in the
current market but also in the emerging regime of the disruptive innovation,
have a better chance to succeed.
To compete effectively, large firms must not only diversify to new business
areas, but also diversify and develop their technological competencies (Rheem,
1995). Therefore, Proposition 3. Firms that take serious efforts to explore new
business opportunities for the competencies disrupted in the current market
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and then cultivate and diversify such competencies to new business areas can
maintain organizational continuity and have a better chance to succeed.

Cross Case Pattern-Matching Analysis

This case research seeks to examine how our theoretical propositions apply to
the strategic behaviours of the two companies. We present data from the case
companies by analyzing and relating them to the four theoretical propositions
in this subsection.

Proposition 1. Disruptive innovations do not necessarily destroy all

technological competences embedded in a product. Firms that correctly
distinguish disrupted from sustaining technological competences and react
strategically are more likely to manage the transition successfully.

The technological system used in photography can be broken down into

exposure optics, image capture, image storage, photo finishing, and image
processing technologies. Figure 2 shows the break-down of the system into its
component parts today (Ho & Lee, 2014). Prior to the disruption, the two
major technological branches were exposure optics and film-related chemistry.
Following the digital revolution, the industry still relied on the optical
technology embedded in the camera lens for exposure, but the chemical
technologies that used to be essential from film production to photo finishing
were replaced by electronics.
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During the digital disruption, Fujifilm believed in its manufacturing engineering

skills and quality control technology as core competences to be utilized
(Komori, 2015), but Kodak regarded brand and marketing as its core strength
(How Fujifilm survived, 2012). Such difference led to distinctive strategies and
explained why Fujifilm developed the technologies in-house but oftentimes
Kodak simply licensed its brand to outside developers. In the year 2006, Kodak
gave up the manufacturing of digital cameras to Flextronics. Fujifilm continued
its development and manufacturing of digital cameras until today.
Proposition 2. Firms that adopt disruptive innovations early, and at the same
time explore opportunities to further exploit their sustaining competences, not
only in the current market but also in the emerging regime of the disruptive
innovation, have a better chance to succeed.
Summary
During the years of digital disruption that led to a fast-shrinking film business,
both companies were under severe financial pressure, but they took different
paths in managing the transitions. Kodak was late to the digital camera market
and ceased its earlier diversification efforts to exclusively focus on its core
business in picture. It sold the less related business units (health group) and
licensed its Kodak brand to a few companies in some highly related areas
(digital memory cards and lenses). Fujifilm not only adopted the disruptive
innovation (digital cameras) early and continued its development and
manufacturing, but also integrated its sustaining technologies (optical) with
disruptive ones (digital image sensor) to enhance the performance of the
disruptive innovation (digital cameras) as well as crafted new business growth
opportunities in other related fields (digital medical equipment and health care
systems).
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Conclusion
Our case studies on Kodak and Fujifilm show that disruptive innovations are
not necessarily devastating to incumbent firms. Neither is spinning off an
autonomous organization to adopt the disruptive innovation and abandoning
the disrupted core competence the only way for incumbents to survive a
technological disruption. An incumbent firm needs to analyse its product
technology system at the individual technology level or their underlying
knowledge bases to differentiate the technological competences that are
sustainable in the new technological paradigm from the ones disrupted in the
core market. An improved understanding of which competencies, assets,
revenue businesses, partners, or paradigms will be destroyed and which can be
sustained will lead to effective strategies to maintain organizational continuity
during the transition. As a result, firms can better manage their sustaining and
disrupted technologies and diversify into new profitable areas.
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