Day 1

1
Strategic Management and Implementation TMU

• Johannes M. Pennings
• June 2004
• www-management.wharton.upenn.edu/pennings

2
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Interia
• Photography Industry

3
The (Institutionalized) Strategic Management
Shopping Mall
Value Disciplines
Competing for the Future
Activity Systems
Dual Strategies
Capabilities-Based Competition
Vision
Time-Based Competition
Resource-Based View
Multimarket Competition
Strategic Innovation
Value Chain
Time/Event Pacing
Core-Competence
5-Forces model
Co-opetition
Eco-Systems
Virtual Integration
Strategy as Revolution
Collective Strategy
Profit Pools
Strategic Groups
7-S Framework
Value Migration
4

• Strategic Management Confusion Reigns.
• Waves of new approaches have been proposed.
  Each approach made its contribution in turn,
  yet how any of them built on or refuted the
  previously accepted wisdom was unclear. The
  result Each compounded the confusion about
  strategy that now besets managers.
• Source Collis Montgomery (1995) Competing
  on Resources Strategy in the 1990s, Harvard
  Business Review.

5

• People seem to disagree about almost every
  aspect of strategy making they disagree about
  which issues to address in developing strategy,
  they disagree about the process of developing
  strategy, and they even disagree as to whether
  one can think about strategy at all.
• C. Markides (2000) All the Right Moves A Guide
  to Crafting Breakthrough Strategy

6

• Strategic Management
• ... deals with the formulation and
  implementation of a set of decisions, the purpose
  of which is the realization of a sustainable
  competitive advantage (manifested in long-term
  above average profitability).

7
Many Frameworks of Strategy

• Porter and Five Forces
• Competitive advantage due to cost leadership or
  market differentiation
• Mintzberg and Stream of Decisions
• Not rational but emergent
• BCG and low to high growth markets
• New School and competencies that produces a
  platform fro strategizing

8
PorterStrategy, the Link between the Firm And
its Environment
THE FIRM Goals and Values Resources andCapabil
ities Structure and Systems
THE INDUSTRY ENVIRONMENT Competitors Customers S
uppliers
STRATEGY
STRATEGY
9
Sources of Competitive Advantage
COST ADVANTAGE
Similar product
at lower cost
COMPETITIVE ADVANTAGE
Price premium
from unique product
DIFFERENTIATION ADVANTAGE
10
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Interia
• Photography Industry

11
Porters FrameworkForces Driving Industry
Competition
Potential Entrants
Threats of New Entrants
Bargaining Power over Suppliers
Industry Competitors
Buyers
Suppliers
Bargaining Power of Buyers
Threat of Substitutes
Substitutes
12
Mintzberg on Strategy

1. Plan (Intended)Also a Ploy (a Tricka Way to ? a
   Competitor)
2. Pattern (Realized)
3. Position
4. Perspective

?
?
13
THE CONCEPT OF STRATEGY
14
BCG
Hi Growth
Lo Growth
Market Share
15
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Inertia
• Photography Industry

16
Shifting From an Industry Focus(Porter) to a
Resource Focus
THE FIRM Goals and Values Resources and
Capabilities Structure and Systems
THE INDUSTRY ENVIRONMENT Competitors Customers S
uppliers
THE INDUSTRY ENVIRONMENT Competitors Customers S
uppliers
STRATEGY
STRATEGY
The Firm-Strategy interface
The Strategy-Environment Interface
17
Shifting From an Industry Focus(Porter) to a
Resource Focus
THE FIRM Goals and Values Resources and
Capabilities Structure and Systems
THE INDUSTRY ENVIRONMENT Competitors Customers S
uppliers
STRATEGY
STRATEGY
The Firm-Strategy interface
The Strategy-Environment Interface
18
New School Resources Capabilities

• The role of resources and capabilities in
  strategy formulation.
• The resources of the firm
• Organizational capabilities
• Appraising the profit potential of resources and
  capabilities (sustainability and appropiability).
• Developing the firms resources and capabilities.

19
Value Migration

• We have to be willing to cannibalize what were
  doing today in order to ensure our leadership in
  the future. Its counter to human nature but you
  have to kill your business while it is still
  working.
• Lewis Platt, Hewlett-Packard

20
Value Migration

• Financial accounting, balance sheets,
  profit-and-loss statements, allocating of costs,
  etc. are an x-ray of the enterprises skeleton.
  But much as the diseases we most die from - heart
  disease, cancer, Parkinsons - do not show up in
  a skeletal x-ray, a loss of market standing or a
  failure to innovate do not register in the
  accountants figures until the damage is done.
• P. Drucker (1993)

Developing (strategic) leading indicators
21
Rationale for the Resource-based Approach to
Strategy

• When the external environment is subject to rapid
  change, internal resources and capabilities offer
  a more secure basis for strategy than market
  focus.
• Resources and capabilities are the primary
  sources of profitability
• But note that platform of capabilities can become
  a TRAP

22
Evolution of Honda A Strategy Based Upon
Resources and Capabilities
50cc 2-cycle engine
Related products ground tillers, marine engines,
generators, pumps, chainsaws
Founding of Honda motor company
405cc motor cycle
4 cycle engines
1948 1950 1955 1960 1965 1970
1975 1980 1985 1990 1995
First product clip-on engine for bicycles
The 50cc super -cub
N360 mini car
1000cc Goldwing touring motor cycle
Acura Car division
23
Resources as the Basis for Superior Profitability
Patents Brands Retaliatory capability
Barriers to Entry
Industry Attractiveness
Monopoly
Market share
Rate of Profit in Excess of the Competitive Level
Firm size Financial resources
Vertical Power
Process technology Plant size Low-cost inputs
Cost Advantage
Competitive Advantage
Brands Product technology Marketing
capabilities
Differentation Advantage
24
The Relationships Between Resources,
Capabilities and Competitive Advantage
INDUSTRY KEY SUCCESS FACTORS
COMPETITIVE ADVANTAGE
STRATEGY
ORGANIZATIONAL CAPABILITIES

• RESOURCES
• TANGIBLE INTANGIBLE HUMAN
• Financial
• Physical

• Specialized skills
• and knowledge
• Communication
• interactive abilities
• Motivation

• Technology
• Reputation
• Culture
• Structure

25
The Rent-Earning Potential of Resources and
Capabilities
Scarcity
THE EXTENT OF THE COMPETITIVE ADVANTAGE
ESTABLISHED
Relevance
Durability
THE PROFIT EARNING POTENTIAL OF A RESOURCE
OR CAPABILITY
SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE
Mobility
Replicability
Property rights
Relative bargaining power
APPROPRIABILITY
Embeddedness of resources
26
Growth of service sector partly explains increase
in Strategy as Firm Knowledge
Source World Bank, 1998
27
Growth of service sector in Sweden, similar to
other EU countries
Employment Percent
Agriculture
Service
Industry
Source IUI
28
The new forces
Deregulation
Globalization
Traditional sources of competitive leverage
Digitization
Source Unleashing the Killer App
29
Revolutionary changes

• Digitization - Computing power and communications
  bandwidth becoming cheap enough to treat as
  disposable (Moores law)
• Compare doubling grains of dirt on a chess board
• Globalization China, World is a large network,
  global network of suppliers and buyers, 24 hour
  operations, shop on a global basis
• Deregulation - Free market better regulator than
  government, e.g., airlines, communications,
  banking

30
Business Week 1998
31
Business week and US Companies.Where is Haider,
Bank of China, etc. ?
Source Business Week
32
Valuation Ratios

• Coca-cola 19 Beverages
• Oracle 15 Computer software/services
• Cisco Systems 14 Computer software/services
• Computer Associated International 14 Computer
  software/services
• Schering Plough 12 Health care
• Amgen 10 Health care
• Gillette 10 Consumer Products
• Metronic 9 Health care
• Kellog 9 Food
• Microsoft 9 Computer software/services
• Pharmacia UpJohn 9 Health care
• First Date 9 Computer software/services
• Pfizer 8 Health care
• Abbot Laboratories 8 Health care
• Mereck 7 Health care
• Johnson Johnson 7 Health care
• Bristol-Myers-Squibb 7 Health care
• Pepsico 7 Beverages
• Phillip Morris 6 Tobacco

33
Competitive advantage is becoming increasingly
dependent on firms ability to create and
leverage knowledge
Key idea Firms are good at transferring tacit
knowledge (Kogut Zander, 1992)
External leakage and imitation
Firm knowledge Internal codification Disseminatio
n Transfer
Competitive advantage (if resources
capabilities are hard to replicate or imitate)
34
Identifying Organizational capabilities
Functional Approach
FUNCTION CAPABILITY EXEMPLARS Corporate Finan
cial management Exxon, Coca Cola Management
General Electric, Strategic Control Emerson
Electric, GE Coordinating decentralized ABB,
Shell business units Managing
Acquisitions ING, ConAgra MIS Speed and
responsiveness through American Airlines rapid
information transfer Benneton RD Research
capability Mereck, ATT Development of
innovative new products Sony, 3M Manufacturing E
fficient volume manufacturing Electrolux Conti
nuous Improvement Nucor, Motorola Flexibility
Benetton Design Marketing Design
Capability Apple, Swatch, Brand
Management Proctor Gamble, PepsiCo Sal
es Distribution Promoting reputation American
Express Responsiveness to market trends The
Gap Sales Responsiveness Microsoft,
Glaxo Efficiency and speed of
distribution DHL Customer Service KLM
35
The Framework for Analyzing Knowledge,
Capabilities and other Resources
STRATEGY
4. Select a strategy
POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE
3. Appraise the rent-earning potential of
resources/ capabilities
5. Identify resource gaps that need to be
filled.
2. Identify capabilities
CAPABILITIES
1. Identify the firms resources. Appraise
strengths and weaknesses
RESOURCES
36
Summary

• We are moving into a knowledge-based economy as
  new forces are changing the face of business
• A companys market value is increasingly
  dependent upon the value of its intellectual
  capital or intangible assets
• A companys competitive advantage is based on a
  firms ability to create and leverage its
  knowledge
• Thus, knowledge sharing across divisions,
  countries, functions is emerging as a major
  business priority

37
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Inertia
• Photography Industry

38
Internal and External Design Strategy and
Innovation

• Brief Review of Organizational Design and and
  External Relationships
• Structure, Culture, Networking of Internal
  Organization Design
• Brief Review of External Design

39
Internal and External Design Strategy and
Innovation

• Brief Review of Organizational Design and and
  External Relationships
• Structure, Culture, Networking of Internal
  Organization Design
• Brief Review of External Design

40
Internal Design Aspects

• Specialization ( grouping by skills, process,
  customers, products, etc.)
• Coordination
• Hierarchy
• Functional and Divisional Structure

41
The Basic Tasks of Organization
Achieving high levels of productivity requires
SPECIALIZATION
Specialization by individuals necessitates
COORDINATION
For coordination to be effective requires
COOPERATION
But goals of employees goals of owners THE
AGENCY PROBLEM

• ORGANIZATIONAL CHALLENGE design structure
  systems that
• Permit specialization of knowledge
• Facilitate coordination by grouping individuals
  link groups with systems of communication,
  decision making, control
• Deploy incentives to align individual firm
  goals and share knowledge among them

42
General Motors Organization Structure, 1997
Board of Directors
Corporate Functions
Presidents Council
North American Operations
Delphi Automotive Systems
International Operations
GM Acceptance Corporation
Hughes Electronics
GM Europe
Midsize Luxury Car Group
Small Car Group
GM Power Train Group
Vehicle Sales, Marketing Group
Development Technical Cooperation Group
Asian Pacific Operations
Latin American, African, Middle East Operation
43
General Electrics Organization Structure, 1995
Board of Directors
Corporate Staff Functions Tax, Treasury, Audit.
MA, Legal, Business Public Relations, Government
Development Relations, Leadership Development
Corporate Executive Office
Lighting
NBC
Motors
Aircraft Engines
Capital Services
Electrical Distribution Control
Appliances
Transportation Systems
Industrial Power Systems
Medical Systems
Information Services
Plastics
Service Divisions Aerospace Environmental
GE Licensing/ Marketing
Technology Programs Supply
Trading Sales
44
Organization design

• By FUNCTION(sales, production, customer service,
  etc.)

• By PURPOSE (market, product, segment, region,
  etc.)

Sales
Finance
Service And Parts
Service And Parts
New Cars
Used Cars
45
Functional Structure
46
Multidivisional Structure (By Region, Product,
or Customer)
CEO
Division 1
Division 2
Division 3
Division 4
RD
RD
RD
RD
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Marketing
Marketing
Marketing
Marketing
Finance
Finance
Finance
Finance
Accounting
Accounting
Accounting
Accounting
HR
HR
HR
HR
47
Multidivisional Structure at Proctor Gamble
Laundry and Cleaning Products Laundry and Cleaning Products Laundry and Cleaning Products Laundry and Cleaning Products
Cleaners and Cleansers Detergents/Soaps Dishwashing Detergents Dishwashing Detergents
Comet (1956) Lestoil (1936) Mr. Clean (1958) Spic and Span (1926) Bold (1965) Cheer (1950) Dash (1950) Dreft (1933) Era (1972) Ivory Snow (1930) Oxydol (1914) Tide (1946) Cascade (1955) Dawn (1972) Ivory Liquid (1957) Joy (1949) Cascade (1955) Dawn (1972) Ivory Liquid (1957) Joy (1949)
Personal Care Products Personal Care Products Personal Care Products Personal Care Products
Bar Soaps Fragrances Fragrances Respiratory Care Products
Camay (1926) Coast (1974) Ivory (1879) Kirks (1885) Lava (1893) Oil of Olay (1993) Safeguard (1963) Zest (1952) California (1989) Giorgio (1994) Hugo Boss (1985) Incognito (1992) Laura Biagiotti-Roma (1988) le Jardin (1983) NaVy (1990) Old Spice (1938) Red (1994) Toujours Moi (1921) Venezia (1993) Wings (1994) California (1989) Giorgio (1994) Hugo Boss (1985) Incognito (1992) Laura Biagiotti-Roma (1988) le Jardin (1983) NaVy (1990) Old Spice (1938) Red (1994) Toujours Moi (1921) Venezia (1993) Wings (1994) Chloraseptic (1957) Cough Drops (1931) DayQuil (1992) Formula 44 (1959) Inhaler (1939) NyQuil (1968) Sinex (1959) VapoRub (1905) VapoSteam (1959) Vitamin C Drops (1986)

Other Prod. Groups Food Beverage Products Food Beverage Products Food Beverage Products
Amines Fatty Acids Fatty Alcohols Methyl Esters Glycerine Crisco Shortening (1911) Crisco Oil (1960) Folgers Coffee (1850) Duncan Hines Baking Mix (1956) Jif Peanut Butter (1956) Fisher Nuts (1920) Hawaiian Punch (1937) Pringles Potato Chips (1968) Sunny Delight Citrus Punch (1964) Tender Leaf Tea (1982) Crisco Shortening (1911) Crisco Oil (1960) Folgers Coffee (1850) Duncan Hines Baking Mix (1956) Jif Peanut Butter (1956) Fisher Nuts (1920) Hawaiian Punch (1937) Pringles Potato Chips (1968) Sunny Delight Citrus Punch (1964) Tender Leaf Tea (1982) Crisco Shortening (1911) Crisco Oil (1960) Folgers Coffee (1850) Duncan Hines Baking Mix (1956) Jif Peanut Butter (1956) Fisher Nuts (1920) Hawaiian Punch (1937) Pringles Potato Chips (1968) Sunny Delight Citrus Punch (1964) Tender Leaf Tea (1982)
48
Pros Cons of Basic Organizational Designs

• Functional Structure
• Pros fosters group identity, permits greater
  specialization and so increases skill levels,
  facilitates supervision.
• Cons creates strong contrasts and thus conflict
  between functional units, makes it harder to
  trace responsibility for performance (no unit is
  a profit centre), fails to develop well-rounded
  general managers.

• Multidivisional Structure
• Pros simplifies co-ordination across functions
  within units, can be very large and still
  maintain control, facilitates idiosyncratic
  treatment of customers when they differ greatly.
• Cons reduces collegiality, duplicates staff
  functions and foregoes opportunities to share
  them, reduces chances for skill specialization.

49
Dilbert on cross-functional conflict
50
The Fundamental Law of Organizational Design

• To the extent that youdifferentiate,
• you must integrate.

51
Task Interdependence

• Pooled interdependence
• Units share a common resource.
• Sequential interdependence
• One units output is another units input.
• Reciprocal interdependence
• Units must work with each other to produce common
  output.

high Cost of Managing low
low Priority for Linking high
52
Forms of Task Interdependence
Needs Assessment
53
An Information-Processing Model of
Organizational Design (Wheel vs Circle)
54
Linking Mechanisms

• Hierarchy (i.e., a boss)
• Rules and procedures (formal or informal)
• Liaison roles
• Task forces, cross-unit teams
• Integrator roles/departments
• Matrix structures

Information Processing Capacity high

low
Costs of Managing the Linkage low

high
55
Liaison Roles Cross-Unit Groups
Liaison
56
Integrators (Project, Brand, Program, Account
Managers)
57
Matrix Structures
58
New Organizational Forms
Process-based organizations Organizing around
business processes Recognizing
corporate processes -
entrepreneurial process - competence
building process - renewal process
Project-based organization, engineering cos.,
consulting also Firms Formulas cos., also
manufacturing cos. e.g. Oticon
Parallel structures separate structures of
separate management processes e.g. 3M,
TQM, change management process
Network and Virtual Organization the
boundaryless corporation e.g. Sun
Microsystems, Cisco Systems, Italian
clothing manufacturers
59
Firm as a bunch of silos or interconnected
departments
60
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Interia
• Photography Industry

61
External Design

• Contracting
• Licensing
• Consortia
• Partnerships
• Alliances
• Joint Ventures
• Acquisitions

Relationship with Us?
62
Firms Sharing Assets

• Governance or Control (Who is in Charge?)
• Ownership

63
Firm A
Firm B
Internal or External Hybrid
64
Strategy and Structure

• Internal and external Strategic Perspective
• Porter, BCG and Knowledge Based View
• Internal Functional to Divisional and Network
  Design
• External Licensing to Equity Joint Ventures and
  Acquisitions
• Strategic management of Innovation
• Knowledge as Platform for Strategizing
• Design inside and outside the firm for
  Strategizing

65
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Inertia
• Photography Industry

66
Strategy and Innovation

• Resources and capabilities provide a basis for
  firms to stay in the market, but also to exit
  early (too early)
• Stay Nokia, IBM,
• Exit Mannesmann, Polaroid, Swissair, Marconi
• Sink or swim depends on???

67
Innovation and Strategy

• 1. Death of Dominant Design
• Firm versus its environment
• Some examples
• What watch do you wear?
• 2. Unlocking the Firm from Old
• 3. Locking into the NewDesign

68
Dominant Design

• A product or service with a clear identity, a
  standard that we take for granted and has become
  widely diffused
• Car
• Windows
• Pizza
• Endoscopy
• Mobile Phone

69
Patterns of Technological/Market Evolution
70
Strategic Focus Evolves with the S-curve

• Compare product life cycle
• Emergence of dominant design
• From product to process innovation
• From functionality to volume and standardization

71
Technological Substitution
72
E.g., Cash Machine
E.g. ICT
73
Innovationa matter of life and death

• Think of a product that got pushed out of
  existence?
• Why did substitution occur?
• What happened to the Owners of that dominant
  design?
• Examples in your Industry, Sector

74
Sail-ship built around 1910, capsized on maiden
voyage, off Southampton
75
Wooden Tennis Rackets
76
A 1998 racket that is now the dominant design
77
Ergonomic Designs (which never made it!)
78
Evolution of Tennis Racket as Dominant Designs
Graphite (plastic)
wooden
79
Tennis Racket Manufacturers

• Outside Firms often Major Innovators
• Prince with Metal and Titanium Racket
• Star Players Play Big Role in Acceptance of New
  Paradigms
• Best Ideas Need not be Winners!

80
Substitution

• Old products languish, but hang on, long after
  new technology emerges
• New products often launched by firms outside
  traditional industry
• New technology creates new markets
• Penetration of new technology typically begins
  with tiny sub-markets

81
Example of Mechanical Watches dying paradigm

• Mechanical engineering
• Swiss
• Guild-like handicraft
• Jewelry-like

82
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83
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84
Watch as a Closed Assembly System
85
Watch as a Closed Assembly System

• Note that a watch is more than time keeping
  device
• Marketing - expensive to cheap push to pull
• Distribution -jewelry stores to drugstores
• Production - craft, mass to automated
• State - cartel protection to global openness
• so changes in dominant design not only in product
  but also institutions, practices, competencies,
  distribution and regulation-protectionism

86
Watchs Dominant Design take-aways

• S-curve for both product process innovation.
• Global watch industry went to three significant
  technology-market discontinuities
• Dominant design switches with three outcomes
• bankruptcy
• entrepreneurship
• weathering the storm

87
Other Examples New paradigm often results in
displacement of incumbents by new entrants

• Mechanical to electronic to auto-kinetic watches
• Wired to wireless telecom
• Bank branches to ATMs
• Vacuum tubes to transistors
• Propulsion to jet engines
• Typewriters to word processors
• 35MM Camera to Digital Photos
• Disk drives for desktop to laptop PCs
• Brickmortar bookstores to e-book retail

88
Strategy and Innovation

• Part I, Day 1
• What is strategy? Frameworks
• External vs Internal Focus Customer Knowledge
• Strategy and Design
• Part II, Day 1
• Strategic Management of Innovation
• Market and Firm Inertia
• Photography Industry

89
Technological Substitution
Digital
35MM
90
From 35MM to Digital Cameras
Digital with FLASH CARD
35MM with FILM
91
Paradigm

• 35MM

• Digital

92
Key Players, Value Chain

• Players
• Kodak, Canon, Minolta, Fuji, Agfa-Gevaert, Sony,
  Zeiss Ikon, Polaroid (bankrupt in 2002), Casio
• Value Chain
• (1) Housing, (2)Shutter mechanism, (3) Optics,
  (4) Flash and Power source, (5) Development, (6)
  Printing, (7) Wholesale and (8) Retail

93
Evolution in this ecology

• ! 80-85.2 86-90.3 91-95.. 4 96-03
• Photography Group
• Adjacent Groups (Computer HW and SW)
• Development Infrastructure

94
Evolution of Photography
86-90
91-95
96-2003
80-85
PC Revolution Internet and Email limited
to Universities Photo CD with CD Player 1.
Complementary technologies And 2. Firms with NE
Strategies, hugging Aging Paradigms
Polaroid Bankrupt Price-adjusted Quality
full Match Digital sales Exceeds
Conventional Sales
35MM Cameras And Early DI (Sony MAVICA No
Substitution Paradigm and its Trajectory Very
Obvious
Counter Innovations APS Convergence In
Full Swing
95
Paradigm

• 35MM
• Complements are development, paper
• 50Mn plus pixels
• Limited duplication, transmission
• Analog
• Hard, Real
• Key Players Kodak, Agfa, Fuji, also Canon
• Companion Paradigms Film and film reels, Movie
  Production, Projection

• Digital
• Complements are PC, WWW, Email
• Number of pixels growing
• Duplication
• Digital
• Soft, Virtual
• Key Players Canon, Sony, Minolta, and perhaps
  Kodak
• Companion Paradigms Editing, Visual arts, Movie
  Production

96
Key photography elements of product/service/delive
ry
Relative Value
Digital
Immediate Viewing
Image Sharing
Price
Resolution
Features
97
Photographic Process Digital vs. Film Paradigm
Traditional Film Image Lifecycle
Slide
Album
Camera
Slides
Consumer
Image
Re
-
purchase
Developing
Prints
Taken
Cycle
Film
Negatives
Photo
Album
Frequent re
-
purchases

98
Imaging / Photography Value Chain
Imaging Equipment
Imaging Media
Imaging Transfer
Imaging Storage
Imaging Display
Traditional Industry Players

• Canon
• Nikon
• Kodak
• Olympus
• Minolta
• Polaroid

• Kodak film
• Fuji film
• Agfa film

• Kodak Paper
• Fuji Paper

• Various Album Manufacturers

• Kodak Chemicals

Imaging Equipment
Imaging Media
Imaging Transfer
Imaging Storage
Imaging Display
Digital Industry New Players

• Microsoft Software
• Adobe Software
• Kodak Software
• Dell Software
• H-P Printers / Ink
• Epson Printers / Ink
• Lexmark Printers / Ink

• Ofoto online
• H-P paper
• CVS.com
• AH.com
• CD-ROMs

• SanDisk
• Sony
• Intel
• Toshiba

• PC Manufacturers
• Mobile Phones
• Palm Pilots / PDAs

• Sony
• H-P

99
..smile.
100
Photography Industry - Milestones
Year Event
1827 First photographic picture (Daguerre Type)
1880 Kodak founded by George Eastman
1882 Kodak roll film introduced
1900 Kodak introduces Brownie camera
1981 Sonys MAVICA digital video camera introduced
1986 Canons first all-digital camera introduced
1992 Kodaks Photo CD introduced
1994 Compact Flash (from SanDisk) introduced
1996 Advanced Photo System (APS) introduced
1999 Kodaks Ofoto Online service founded
2003 Digital Sales Exceeds 35 mm Sales
2004 Kodak Stops making 35 mm camera
101
Cameras

• Old versus New Paradigm
• Razor Blade
• Polaroid Dead and Kodak out of the Dow (DJIA)
• Movie Theaters and Hollywood next?
• Film, Paper and Album replaced by Digital
• ..and WWW and Email
• What is Next ?

102
Kodak Options

• Majority of Kodaks revenues come from sales of
  films not cameras, and digital cameras do not use
  any film. How difficult for Kodak to give up its
  cash cow product.
• The economics of traditional photography are much
  more attractive for producers than those of
  digital. A constraint on Kodak?
• Finally, given that Kodak supports a vast
  organization on the basis of film sales, and that
  digital wont yield profits for some time to
  come, how will this organization be supported in
  lieu of film sales.

103
Patents, Strategic Alliances, Joint Ventures..
104
Kodaks Response to Digital Disruption

• Approached digital photography as a threat to its
  core business
• Saw cannibalization of existing film-based
  business
• Focused on current consumer behavior vs. emergent
  technologies (Paradigm Hugging)
• Focused on traditional film competitors (e.g.
  Fuji)

105
Kodaks Response to Digital Disruption

• Before December 2001
• Kodaks organization was organized by end-user
  market
• The work of digital champions had to be divided
  among the various segments rather than as a
  unified strategy
• Besides having the difficulty of charging one
  group with the responsibility to develop Kodaks
  digital strategy, simple funding for RD efforts
  would be divided among the existing segments
• Given this structure, digital imaging was a
  threat to the established paradigm and its
  owners

106
Kodak Refocuses

• Kodak restructured in 2002 to better integrate
  digital technology into its product line
• Photography
• Health Imaging
• Commercial Imaging
• Refocused on the business of Photography
• Recognized the need to meet multiple market
  segments
• Consumers with differing needs, shopping habits,
  Internet usage, technical sophistication
• Partnering with other firms

107
Kodaks Prospects

• Kodak is not the leader it once was its core
  competencies in paper and film have become core
  rigidities
• The photography market is likely to be much more
  fragmented
• As we will see on June 13, we need a dedicated
  integrated business unit for new paradigm to
  overcome core rigidities

108
So far lessons

• 1. Death of Dominant Design
• Firm versus its environment
• Innovations
• Inertia and Paradigm Huggers
• 2. Unlocking the Firm or Industry from Old
  Paradigm
• Photography Industry

109
First Day

• Concept of Strategy
• External (Customer, market) and Internal
  (Knowledge) View
• Tools for Strategizing (Internal Structure and
  External Structures)
• The Strategic Challenge for Players in their
  Industry in overcoming Inertia