Disruptive technology: How Kodak missed the digital photography revolution

Abstract

The purpose of this paper is to analyze how a firm responds to a challenge from a transformational technology that poses a threat to its historical business model. We extend Christensen’s theory of disruptive technologies to undertake this analysis. The paper makes two contributions: the first is to extend theory and the second is to learn from the example of Kodak’s response to digital photography. Our extensions to existing theory include considerations of organizational change, and the culture of the organization. Information technology has the potential to transform industries through the creation of new digital products and services. Kodak’s middle managers, culture and rigid, bureaucratic structure hindered a fast response to new technology which dramatically changed the process of capturing and sharing images. Film is a physical, chemical product, and despite a succession of new CEOs, Kodak’s middle managers were unable to make a transition to think digitally. Kodak has experienced a nearly 80% decline in its workforce, loss of market share, a tumbling stock price, and significant internal turmoil as a result of its failure to take advantage of this new technology.

Introduction

The purpose of this paper is to explore how firms respond to challenges from rare transformational technology that threatens a traditional, successful business model. We propose an extension of Christensen’s theory of disruptive technologies and illustrate the extensions with a longitudinal case study of Kodak. Kodak is unique in that it developed and patented many of the components of digital photography, yet this new form of photography has had a serious, negative impact on the firm. The two main contributions of the paper are the extension to Christensen’s theory and the lessons from Kodak’s unsuccessful response to a major technological discontinuity.

The digital camera combined with information and communications technologies (ICT), specifically the capabilities of the computer to store and display photographs, and the Internet to transmit them, transformed the major customer processes associated with photography. The consumer could take many photos at virtually no cost, and delete unwanted ones by pushing a button. Rather than waiting to develop a photo and then sending it by mail to another person, the customer uploads the picture to a PC and sends it as an email attachment to multiple recipients. If the customer wants a hard copy, she can print a picture locally on an inexpensive color printer on a PC, send it to an Internet photo service, or go to a store that had a developing kiosk.

Christensen’s theory of disruptive technologies is one of the most popular for explaining the plight of the incumbent firm facing a significant new technology. He proposes a theory of response to disruptive technologies in two books about innovation (Christensen, 1997, Christensen and Raynor, 2003). He argues that investing in disruptive technologies is not a rational financial decision for senior managers to make because, for the most part, disruptive technologies are initially of interest to the least profitable customers in a market (Christensen, 1997). The highest-performing companies have systems for eliminating ideas that customers do not ask for, making it difficult for them to invest resources in disruptive technologies. By the time lead customers request innovative products, it is too late to compete in the new market. The root cause of the failure to adapt to disruptive technologies is that the company practiced good management. The decision-making and resource-allocation processes that make established companies successful cause them to reject disruptive technologies.

Christensen and Overdorf (2000) present a framework for dealing with disruptive change that focuses on resources, processes and values. Resources include people, equipment, technologies, cash, product designs and relationships. Processes are the procedures and operational patterns of the firm, and values are the standards employees use to set priorities for making decisions. Managers design processes so that employees perform tasks in a consistent way every time; they are not meant to change. The most important processes when coping with a disruptive technology are those in the background such as how the company does market research and translate it into financial projections, and how the company negotiates plans and budgets. Employees exhibit their values every day as they decide which orders are more important, what customers have priority and whether an idea for a new product is attractive. The exercise of these values constitutes the culture of the organization. Culture defines what the organization does, but it also defines what it cannot do, and in this respect can be a disability when confronting a new innovation.

When a firm is confronted with a discontinuous, highly disruptive technology, senior management has to bring about significant changes in the organization at all levels. Our first extension to Christensen is to emphasize the change process required to adopt a disruptive technology. Senior management has to convince others of the need to move in a new direction. Specifically we are interested in how middle managers change themselves and also bring about change in the organization (see Rouleau, 2005, Balogun, 2006).

Christensen argues that the firm is not ready to adapt a disruptive technology because it does not see a demand from its customers for the new innovation. He maintains that high-performing companies have systems in place that tend to kill ideas that customers are not asking for. We propose to extend this part of his theory to encompass the culture of the organization, by which we mean the beliefs of employees, the way the firm organizes itself and the nature of the interactions among employees (Schein, 1983).

In confronting a technological disruption, a firm faces a struggle between employees who seek to use dynamic capabilities to bring about change, and employees for whom core capabilities have become core rigidities. Management propensities for change drive the process (see Fig. 1). We describe this ongoing struggle using concepts from dynamic capabilities, core rigidities and management propensities.

The theory of dynamic capabilities is an extension of the resource-based view of the firm (Barney, 1991, Peteraf, 1993, Mata et al., 1995, Eisenhardt and Martin, 2000, Barney and Arikan, 2001). Dynamic capabilities is defined as “the firm’s ability to integrate, build external competences to address rapidly changing environments” (Teece et al., 1997). They “consist of specific strategic and organizational processes like product development, alliancing and strategic decision-making that create value for firms within dynamic markets by manipulating resources into new value-creating strategies” (Eisenhardt and Martin, 2000, Helfat et al., 2007, Teece, 2007).

The theory suggests that a firm has three classes of assets to use in seeking new forms of competitive advantage when confronted with a novel situation including:

Processes: assemblies of firm-specific assets that span individuals and groups. These processes have three roles including coordination, learning and reconfiguration.

Positions: specific assets including plant and equipment, knowledge and reputational assets, that determine competitive advantage at a given point in time.

Paths: the sequence of events that have led to a firm’s current position i.e. “…a firm’s previous investments and its repertoire of routines constrain its future behavior” (Teece et al., 1997).

Dynamic capabilities may not, however, always enable a firm to reconfigure its business in response to an external threat. Leonard-Barton (1992) introduces the idea that the core activities of the firm can become so rigid that it cannot respond to new innovations. Her four dimensions of a core capability include: (a) employee knowledge and skills; (b) technical systems which embed knowledge and support innovation; (c) managerial systems which guide knowledge creation and control and (d) values and norms associated with various types of knowledge.

Leonard-Barton suggests that core capabilities that are appropriate in one situation may turn out to be inappropriate in another, for example, the challenges for an incumbent firm from a new entrant. These core capabilities, rather than being dynamic and helpful in coping with change, become core rigidities that inhibit a response. There are a number of paths to rigidity. Because corporate resources are limited, firms often emphasize one discipline, which makes the company less attractive to people from non-dominant disciplines. It is easy for technical systems to become outdated, especially when they involve expensive plant and equipment or complex software. Management systems also become rigid over time as people respond to incentive and reward systems; there is little interest in performing tasks that appear to be undervalued by senior management. It is easy for the organization to fall into the competency trap; employees convince themselves that their current processes and technology are superior to a new, disruptive technology, and they fail to respond appropriately.

Rigidities in these core capabilities inhibit individual and organizational learning when confronted with a rare, technological disruption. Employees may be comfortable with their existing knowledge and skills and resist learning the new technology. There may be little incentive to build new technical and managerial systems, or to learn new knowledge to create the systems.

Management propensities determine the outcome of the battle between dynamic capabilities and core rigidities in responding to a transformational technology. This implication is an extension to research demonstrating the importance of managers in determining firm performance outcomes (Holcomb et al., 2008, Castanias and Helfat, 2001, Bantel and Jackson, 1989, Hambrick and Mason, 1984). Managers have to develop a strategy that emphasizes the response to a disruptive technology, and they must communicate this strategy throughout the firm (O’Reilly, 1989). Senior managers have to learn a new technology and develop cognitions that change is necessary; they must lead the change effort (Sherif and Menon, 2004). Managers must also help subordinates develop cognitions that respond to a new direction for the firm. They must teach others in the organization about their vision for the firm and see that employees learn this new business model and all that it entails. We refer to these managerial activities as propensities or managers’ inclinations to act in a certain way.

During the course of responding to the disruptive technological change, complications result and cause different management levels to have different managerial cognitions (Gavetti, 2005a). If it is desirable to change the overall direction of a firm, senior managers are likely to be faced with one group of long-term employees who exhibit core rigidities, and newer employees who are trying to innovate and take advantage of the firm’s dynamic capabilities.

It is interesting to note that the discussion above has a parallel in the IS strategy literature. For example, Galliers, 2004, Galliers, 2006 has proposed a framework for information systems strategizing which focuses on exploitation, exploration and change management. A firm confronted with a technological discontinuity needs to explore, utilize its dynamic capabilities and learn a new, agile response to a threat. It needs to create knowledge, which is a key component of Gallier’s IS strategy framework as well.

Organizational culture shapes organizational cognition and has a very important role in its response to technology-enabled transformations. We have adopted Schein’s (1983) definition of culture for the purposes of this paper. Culture is “a pattern of basic assumptions that a given group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration – a pattern of assumptions that has worked well enough to be considered valid, and therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to these problems” (Schein, 1983, p. 14). Founders teach organizational members through their actions and through this process, culture is developed, learned and embedded (Schein, 1985).

Culture operates at both the macro and micro levels within an organization. As defined by Schein, culture is a multilevel concept that is fragmented across domains such as different types of management. Literature (Burke, 2002) often focuses on the role of senior management in creating a firm’s culture; we see a need to consider the role of middle management which has been less emphasized in prior research (Balogun and Johnson, 2004, Danneels, 2004). Middle managers are typically the largest managerial group and they play a key role in implementing firm strategy. Given their position in the organizational hierarchy, middle managements’ propensities may be different from those of senior management.

Previous literature on organizational change acknowledges the role of culture in facilitating, managing, or impeding change (e.g., Burke, 2002, Tripsas and Gavetti, 2000). A bureaucracy is associated with slow response and employees who value security over risk-taking. Bureaucratic structure leads to organizational inertia (Merton, 1957). Thus, an organization culture that promotes hierarchy and maintaining the status quo will be resistant to disruptive technologies.