Why this is Indian IT industry’s Kodak Moment

Why this is Indian IT industry’s Kodak Moment

In 1996, Kodak reached the peak of its success. Revenues touched $16 billion and market capitalisation crossed $31 billion. With a 65% global share of film sales, Kodak became the fifth most valuable brand in the world employing 145,000 people. It was also the year when Kodak introduced the world's first digital camera — the DC20 with all of 0.2 megapixels. Despite helping invent digital photography, Kodak never found a cash cow to replace film. Between 2003 and 2011, Kodak gradually cost-cut its way to oblivion shedding 47,000 jobs, 13 manufacturing plants and 130 processing labs. It never made a profit after 2004; by 2012, having run out of cash, Kodak declared bankruptcy and was delisted from the New York Stock Exchange.

Once-great companies like Kodak, Digital and Nokia with capable CEOs and vast resources come to an ignominious end not because they don't see the tsunami coming — they die or fade into irrelevance because they are unable to respond forcefully. Kodak invented the digital camera as early as 1975. It had all the technology, resources, brand, and distribution to prevail. Yet it failed.

A major reason why once-dominant firms like Kodak fade away like old photos is culture. Culture trumps strategy. A combination of complacence and overconfidence ("this cannot happen to us") prevented Kodak from adapting quickly. Its leadership was indecisive and changed strategy many times. Despite having a venture capital arm, it took years to make its first acquisition and never made any bets big enough to create breakthroughs. Kodak offered the first service that allowed customers to post and share pictures online but failed to follow through forcefully to create what might have become Instagram or Snapchat. It diversified into chemicals and pharmaceuticals but without much conviction; these businesses fizzled and were sold off. Unlike Fuji, Kodak obsessed about its core developed markets and did not seize the opportunity in emerging markets, especially a rising China. Having failed to become a printing powerhouse, Kodak is now trying to license its rich portfolio of patents.

In contrast, Kodak's arch rival and perennial number 2, Fuji Film managed to successfully diversify into cosmetics, optical films and chemicals, and survives with a market cap of $19 billion. Shigetaka Komori, the CEO of Fuji, saw the writing on the wall and did not dither. Over just 18 months, he restructured Fuji, slashing costs and jobs, shedding factories, development labs, distributors and employees to improve cash flow. Fuji then spent nearly $10 billion acquiring 40 companies to diversify quickly into new areas. Acting fast and making big cuts to fund an acquisition spree was unprecedented in tradition-bound Japan. It was a particularly courageous act for Komori because it meant unwinding the work of his predecessor who had handpicked him for the job.

There are a set of reasons that make it difficult for even well-managed companies to navigate industry disruptions the way Fuji did or Microsoft has. High on the list is complacence, even arrogance. When a company is sitting on lots of cash, fat margins and a good market share, it's hard to create a sense of urgency in the organisation and among its shareholders.

Another factor is the gravitational pull of the current or legacy business. The need to somehow deliver quarterly earnings, serve existing customers, maintain profit margins, manage the many daily operational challenges, all consume the majority of resources and senior management attention. Too little focus goes towards embracing the brewing disruption and resources are trapped in feeding the legacy business until it is too late. Essentially, companies drive off the cliff, one quarter at a time. The key here is to recalibrate expectations of investors, employees, customers and then execute predictably.

A third reason is the fear of cannibalisation. The future businesses are, at least initially, often less profitable than the current business or the profit comes in smaller, bite-size chunks and is, therefore, less attractive.

Fourth, the future business model usually requires a very different mindset and new capabilities. Building these capabilities is non-trivial and time-consuming. It requires hiring new talent with new mindsets and cultural values, setting off a clash of cultures that is difficult to manage. Acquiring capabilities by buying companies has a decidedly mixed success rate, and sometimes goes disastrously wrong.

Finally, there is governance. Though the boards of good companies are populated by accomplished leaders, few boards have independent directors with a visceral grasp of the magnitude of impending changes. It is all too easy then to remain focused on traditional financial metrics like revenue growth and earnings per share until it's too late.

These factors collectively create an "innovators' dilemma" where, like Kodak, management sees the impending tsunami but the responses are anaemic and create a delusion of progress until it is too late. The reality is that companies caught in an industry transition must realise that there are two kinds of risk: the risk of omission, or doing nothing versus the risk of commission, or trying something different. The risk of commission has slightly better odds and the urgency and consequences of failure are such that there should be no half-measures. To succeed, companies have to be 'all-in' or utterly committed to the shift. This may mean making significant acquisitions, bringing in very different talent, and radically shifting resources towards the future even though these moves are risky and can blow up too.

Today, India's IT companies are struggling to navigate a tectonic industry shift. Its leaders have seen the technological and regulatory shifts coming for the last decade. They have recognised the limits of wage arbitrage and understood the need to shift from renting IQ to creating IP, and becoming more global. They see the giant new opportunities afforded by the digital revolution. But as the story of Kodak shows, seeing is not enough. Acting decisively and forcefully is crucial. More than ever, India's IT companies need the same calibre of courageous and entrepreneurial leadership that created them in the first place.

'The snake that cannot shed its skin must die' — Friedrich Nietzsche.

Source | Times of India | 2 July 2017       

Regards!

Librarian

Rizvi Institute of Management