With Kodak in big trouble this week, a lot of people have been reflecting on what went wrong. While many are using this an opportunity to talk about bad management, or missing the digital photography trend, I think there’s more to the Kodak story than this. Kodak’s problems illustrate two very important innovation problems.

The first is that new innovative new ideas diffuse much more slowly than we expect them too. This causes problems when you have to respond to a new competitive innovation.

Larry Keeley has written an excellent post about Kodak, and he says:

The demise of Kodak isn’t merely the classic disruption story that everyone loves to tut tut over. Nor is the company’s downfall merely a result of recent bad decisions or the mismanagement of senior executives. It is the more nuanced story of how easy it can be to get things wrong, even when trying with the best of intentions to do everything right. It’s a cautionary tale of the need for deeper understanding of what innovation really means, and how it is infinitely more vital than most people think it is, even as it isn’t about any single product or widget or technology.

Kodak knew all about the impending disruption of digital technology. As many have noted, they own the primary patents on digital photography and built one of the world’s first digital cameras in 1975. As The Economist reported recently, a report circulated among senior executives in 1979 detailed how the market would shift permanently from film to digital by 2010. This disruption was no surprise.

Here is an illustration of the problem:

Innovations diffuse following an S-Curve, and this causes problems. When a new innovation is really hyped, people expect it to follow diffusion Curve A – where at the end of time X it has taken over the market. The problem here is that the value for X is usually much higher than we expect, but more importantly, once you get through that time, you have only gotten to the point where the innovation is starting to take off.

If the expectation is that the innovation should have taken over the world at after time X, but it has actually grown slowly, then there are three possible future paths. The innovation could die, and people often assume that this it what will happen if it hasn’t taken over the world yet – that is Curve B. Many people are talking as though this is the mistake that Kodak made – that they discounted the potential of digital.

However, the real problem is trickier. As Keeley points out, they were fully aware of the potential of digital photography. It wasn’t that they ignored it. The problem was that they thought it would grow in a slow, straight line, like Curve C. This mistake is incredibly common.

The first lessons from Kodak’s demise are:

1. New innovations take longer than we expect to become dominant, but when they finally take off, they move fast. Never assume that an idea will diffuse along Curves A or C – that never happens. Curve B is possible, and so is the S-Curve. Figuring out which is most likely is hard, but that’s what you need to focus on.
2. There are no straight lines in business. If you ever find yourself making a projection like Curve C, you are almost certainly wrong. Be cautious of this, especially if this projection suggests that you have a long time to respond to changes.

Heres the second issue: performance also improves following an S-Curve. Disruptive products (P2) replace existing ones (p1) in a pattern like this:

This is the Innovator’s Dilemma. New innovations start out with lousy performance. They are crappy. If you’re a dominant firm on the P1 Curve, and you correctly predict the shape of the new curve, the question then is: when do you jump to P2?

Consider this from Adrian Wooldridge in The Economist:

Like Kodak, Fujifilm realised in the 1980s that photography would be going digital. Like Kodak, it continued to milk profits from film sales, invested in digital technologies, and tried to diversify into new areas. Like Kodak, the folks in the wildly profitable film division were in control and late to admit that the film business was a lost cause. As late as 2000 Fujifilm counted on a gentle 15 or 20-year decline of film—not the sudden free-fall that took place. Within a decade, film went from 60% of Fujifilm’s profits to basically nothing.

If the market forecast, strategy and internal politics were the same, why the divergent outcomes? The big difference was execution.

Fujifilm realised it needed to develop in-house expertise in the new businesses. In contrast, Kodak seemed to believe that its core strength lay in brand and marketing, and that it could simply partner or buy its way into new industries, such as drugs or chemicals.

In other words, Fuji jumped onto the P2 curve early, while Kodak figured that its core competencies would allow it to jump to the P2 curve right around time TC – right when digital started to outperform film. Mike Ryall taught a lot of Kodak execs in his MBA classes, and this is how he describes their thinking:

Why were they so optimistic? When challenged to discuss it in class, they proudly explained that Kodak’s “core competency” was “color”. The reasoning went something like, “We understand color and its application to photography better than any other firm. This knowledge will be as important for success in digital applications as it was in analog film. Therefore, we are wonderfully positioned for whatever challenges the market presents.”

Simon Waldman’s book Creative Disruption: What you need to do to shake up your business in a digital worldis one my favourites on the topic of Kodak. In a recent blog post, he says:

Newspapers, music retailers, book publishers etc are all used to operating in a market with a lot of businesses that are essentially clones of each other [in terms of overall cost and revenue structure]. This is what ‘competition’ means to them. It is a world away from the sort of asymmetric warfare involved in dealing with a new, disruptive force – which will initially seem too small to even bother with compared to your traditional rivals. [eg: Craigslist vs Big Newspaper Co/ Play.com vs HMV/ Netflix vs Blockbuster]

He contends that Kodak was so busy fighting Fuji in the 80s and 90s that they seriously underinvested in digital. They just figured that they could jump onto the P2 curve when the time was right, using that core competency in color.

Scott Anthony comes up with two more lessons in this:

Start before you need to. … The challenge — what I call “The Innovator’s Paradox” — is when you have the freedom to change, you don’t feel the urgency. For example, in the early days of Kodak’s disruption, its core film business actually was growing. A lack of urgency allows a company to treat new growth efforts as science experiments that are academically interesting but not vital activities. However, once the urgency grows, freedom narrows rapidly, as attention goes to staunching the bleeding in the core business.

Place multiple bets. It’s always hard to know which idea is going to be “The One,” especially in fast-changing industries. An ideal response involves a portfolio and pipeline of growth strategies — again, started early enough that they have time to iterate, incubate, and grow.

The bottom line in all of this is that responding to innovations that disrupt your core business model is incredibly hard. You need to invest early, you need to have a clear idea of how you will compete in the new environment, and you have to have a reasonably accurate map of how the new innovation will disrupt your current products and services.

Having a good understanding of the innovation diffusion S-Curve will help with all of these steps.