Chapter 5. Innovating Out of a Crisis

The business world loves a case study. It conveys a complete story — from unexpected disruption to successful resolution — succinctly, with compelling insights and clear take-aways. Yet, case studies also come in for some criticism, much of it justified. They’re often used to push managers to adopt ‘solutions’ that worked somewhere else in the past^⁠2. But case studies are selected for successes, with instances of failure ignored, creating the false impression that this is ‘one right way’ of doing things. Case studies should be approached with caution. But the business world remains captivated by them. One of the most widely cited is the Kodak case: the compelling story of the US giant disrupted by a new technology. Except this story isn’t true.

Kodak was founded in 1880 and dominated the camera film industry for over a century, until, as the story goes, it missed the switch from analogue to digital photography and went bankrupt. Yet this is a narrative as wrong as it is simplistic. Kodak invented the first digital camera in1975^⁠3. They were aware of the potential the digital revolution had to transform their market. Their downfall wasn’t down to a lack of innovation or foresight, but a consequence of their own past success. Kodak were (understandably) reluctant to forgo the certainty of profits ($1.4 billion in 2000) in their current market for the uncertain gains of a still emerging market. Their mistake was not failing to exploit future potential, but trying to conserve existing profits at the same time.

Kodak executives thought they had time to adapt, so tried to conserve (K) their current profits for as long as possible. But, by the time they fully committed to digital — becoming the market leader by digital camera sales in 2005 — the world had re-organised (ɑ). The mobile phone revolution saw digital cameras embedded into every device, while new trends, such as ‘selfies’ — requiring high quality front and rear-facing cameras — transformed digital cameras into a mass-produced, low-margin commodity. These reduced the demand for stand-alone digital cameras, and revenues were insufficient to sustain the giant. Kodak had fallen into a conservation trap — clinging to past success in a dying ecosystem, preventing them from reorganising and adapting in time to the new world unfolding around them.

Despite the business world’s fascination with case studies, the case of Fujifilm — Kodak’s smaller Japanese rival — receives far less attention. Like Kodak, Fujifilm had been heavily dependent on camera film sales, which accounted for two-thirds of their profits at the market’s peak in 2000. They faced the same precipitous collapse of a market that came slowly at first, then rapidly. By 2006, the market for colour photo film was in a death spiral, plunging 20-30% per year. In 2010 it was worth less than a tenth of what it was a decade before. In the words of Fujifilm’s CEO at the time, Shigetaka Komori, this implosion of their core market in the “blink of an eye” was “an earth-shattering event". But, unlike Kodak, Fujifilm not only survived but thrived.

Fujifilm’s first step was to commit to their mission ‘to protect the culture of photography’. They knew a devastating storm was coming but didn’t abandon their customers. They continued making colour camera film, albeit with the “decisive cuts” necessary to survive a shrinking market. Yet these cuts were less about preserving profitability and dividends and more about buying them time to act. And act they did.

Fujifilm started “investing heavily in new businesses [they] thought had a promising future”, focusing on industries where they could leverage their expertise, like in pharmaceuticals and highly functional materials. Cosmetics became a key focus. This may seem a surprising industry for a photography company to focus on, unless one knows that the chief ingredient in film, gelatine, is derived from collagen, which makes up 70% of the dry weight of human skin, giving it its sheen and elasticity. The oxidation process that ages skin also fades colour photos. And Fujifilm had eight decades of research into this process, which they could leverage into anti-aging cosmetics — a booming industry in the large, wealthy market of Japan with long life expectancies.

Fujifilm also invested in other promising areas such as “polarising plate protective film … an essential ingredient in the manufacture of liquid crystal panels”. This had been a niche industry providing a crucial component for TV, computer and mobile phone screens. Then, as the mobile revolution erupted in the 2000s, “what was only ¥2 billion in sales at the beginning of 1990” was transformed into a business worth “¥200 billion twenty years later, easily making up for the losses incurred” in Fujifilm’s core market.

This is Pal’chinskii’s first principle in action:^⁠4 Fujifilm increased their chance of success by experimenting with a variety of ideas — investing $1.8 billion annually in R&D and making“active use” of mergers and acquisitions (M&A) to acquire “companies that [had] already left the starting gate”. By “combining their assets with Fujifilm’s expertise,” they got “new products to market quickly and easily”.

Pal’chinskii’s second principle was also in play: Fujifilm accepted that some failure was inevitable, so kept projects on a small enough scale that failure was survivable. They hedged their bets, spending over $6 billion across 40 companies to quickly “build a presence” in new markets, like software technology, medical devices and inkjet printing. If any venture failed, losses could be off-set by success in other areas. This gave Fujifilm the requisite variety of responses needed to survive in uncertain times.

Like Pal’chinskii before him, Fujifilm’s CEO, Komori, was also open to learning from others and actively encouraged his people to seek advice from “outside experts”, especially where they lacked “internal competence”. But he made one thing clear to his people — “think for yourselves!” Relying on outside consultants to tell them how to run their own company, he warned, was “out of the question”, as “strangers” couldn’t possibly know, or care about, Fujifilm’s situation more than its own people. Komori urged decision-makers to get closer to the action, learn what was working and focus on whatever showed signs of success — Pal’chinskii’s third principle in action.

Fujifilm navigated the storm. In January 2012, as Kodak was filing for bankruptcy, the Japanese company posted record annual net sales of $21.4 billion. Komori credited his company’s success to their sense of urgency. “Had we delayed by just another year or two,” he observed, “we would have been right in the middle of the devastating financial downturn in the fall of 2008 and the company might not have been able to survive this double punch”. This ability to act quickly, cultivated by years of having to operate in Kodak’s “colossal shadow”, made Fujifilm resemble the smaller prehistoric mammals^⁠6 who survived a planetary shock, whilst Kodak — the “premier company in photographic film for so long” — resembled the previously dominant dinosaurs — “slow to adapt” to a world changing faster than they could respond to.

¹ All quotes in this chapter are taken from ‘Innovating Out of Crisis: How Fujifilm Survived (and Thrived) As Its Core Business Was Vanishing’ by Shigetaka Komori (2015)

² For an explanation of why copying what worked somewhere else provides no guarantee it’ll work the same way again, see — Introduction: Why ‘Best Practices’ Are Holding You Back

⁴ See chapter three — Pal’chinskii’s Principles

⁵ See chapter two — Adapt or Die