Kodak: Mistakes Made on the Road to Innovation

Led by CEO Antonio M. Perez, Kodak is struggling to reinvent its business model. It's not alone

By Steve Hamm and William C. Symonds

When Eastman Kodak (EK) vowed in 2000 to become a leader in digital cameras, the idea seemed ludicrous. The old-line Rochester (N.Y.) company had film and print all through its DNA. Yet by 2005, Kodak ranked No. 1 in the U.S. in digital camera sales. Its digital sales surged 40%, to $5.7 billion, even as its film-based businesses fell 18%. The key: product innovation, something Kodak knew how to do oh-so-well. The company designed one award-winning breakthrough after another to make digital photography nearly as simple as pointing and clicking.

So why does Kodak Chief Executive Antonio M. Perez now dump on digital cameras, calling them a "crappy business"? Simple: While blazing growth of camera sales has helped blunt the effects of Kodak's fast-fading film revenues, it hasn't replaced the rich profits of the film business. Even the best mass-market cameras yield slim profit margins. So, although Kodak's digital camera business was a roaring sales success, it turned out to be a crushing profit disappointment. Perez, who arrived at Kodak in 2003 and became chief executive last year, had championed a dramatic change only to find it wasn't the right model for turning the company around.

Now he's crafting yet another strategy for Kodak, its third in less than a decade. Building on the mistakes made and lessons learned in recent years, Perez is attempting innovation of another sort -- reinventing the company's core business model. He aims to make Kodak do for photos what Apple does for music: help people to organize and manage their personal libraries of images. He's developing a slew of new digital photo services for consumers that he expects to yield higher returns. They include everything from online photo sharing to a rapid-fire scanning system, called Scan the World, that takes shoe boxes full of yellowed snapshots and converts them into crisp digital images organized by the date originally printed. But the shift from hard product to digital services is a huge challenge. It's "a very hard transformation," says Perez. "History says very few companies have made it."

In an era when innovation is all the rage, many CEOS, like Perez, are discovering that product innovation alone isn't enough to save sick companies or turbocharge healthy ones. For many, their core businesses are being disrupted by globalization, technology shifts, and new competitors. They must reinvent the company. Even at healthy companies, business model innovations are essential to retaining their competitive positions. Microsoft (MSFT)Chief Executive Steve Ballmer says he no longer thinks of his competition as individual companies. Instead, "it's alternative business models that we'll have to compete with or embrace," he says. His two biggest threats are the open-source phenomenon and advertising-supported software.

There's no better example than Kodak of the importance of coming up with new ways of doing business -- and the difficulties of succeeding. At its peak, Kodak was an icon of American technology innovation. Now it's fighting to recover from a tech revolution that is strangling its core business. Kodak was late to recognize the problem, slow to react, and then went down the wrong innovation path. It faces many of the problems and is making many of the mistakes that any company can make when so threatened. Because of these delays and missteps, it's still far from clear how Kodak's story will play out. Yet it provides a vivid case study for businesses facing similar challenges. A March survey commissioned by IBM (IBM) showed that 65% of the world's top CEOs plan on radically changing their companies in the next two years.