Risk lessons you should learn from Kodak

Back in the mid-1970s, a research engineer at photo giant Kodak walked into the company’s head office with a remarkable invention. Steve Sasson sat down with key executives and enthusiastically outlined his plans for the first-ever digital camera, an idea that would revolutionise photography forever, and cement Kodak’s position as an innovator for years to come.

Boardroom executives were lukewarm on the idea. The company was making so much cash from traditional photo development it saw no need to embrace change. The marketing push behind the new digital camera was an afterthought at best, as Kodak kept its emphasis on traditional photos and its dominant market position.

“It was filmless photography, so management’s reaction was, ‘that’s cute—but don’t tell anyone about it.” Sasson on his experience.

The ‘Kodak moment’ the company’s famous slogan for capturing a priceless moment, once felt like it would be around forever. But Kodak failed to spot what would happen next. Kodak’s nearsighted view and lack of support for its new technology would eventually prove its undoing. 

By 2012, Kodak had plunged into Chapter 11 bankruptcy after losing ground on rivals in the digital camera revolution. These days, a ‘Kodak moment’ is more likely to refer to a company’s failure to innovate.

Kodak’s story is a sad demonstration of business failure and the failure to innovate. As of August 1, Kodak had a market value of just $110 million, despite its decades-long dominance of the photography sector. Usurped by affordable digital cameras and then the smartphone, the company is largely a relic of the past.

Historic business failures underline some interesting lessons for companies of today. For risk managers, a lack of innovation, lack of foresight, a lack of influence, or inability to spot disruption can spell disaster.

But how much can risk managers influence their companies and protect against business failure? Is it the role of a risk manager to prevent companies from falling behind? How should risk managers approach innovation?

 

Jeff Bezos, the CEO and founder of Amazon, recently told employees that “Amazon is not too big to fail.” Bezos added: “In fact, I predict one day Amazon will fail. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years”. With one of the world’s richest men predicting the downfall of his multinational giant, how can risk managers prevent business failure?

The corporate world is littered with examples of companies that have failed to adapt and ended up on the scrapheap, or have lost their dominant market position to upstart rivals.

Nokia is another prime example. In the late 1990s, the Finnish company was a global leader in cellular and mobile phone technology. Its phones may have seemed cutting edge at the time, but the business was quickly disrupted as smartphone technology came to the fore.

Nokia was slow to adapt as rival companies pounced on the smartphone market, and as data became more important to consumers than voice calls. Blackberry also began to chip away at its customer base, before the emergence of the iPhone in 2007, which blew away the competition with its slick touch screen interface and app-enabled platform.

By the time Nokia embraced Android technology in 2008, it was too late. Nokia sold its phone business to Microsoft in 2014, and the computing giant sold it in two parts to Finland’s HMD Global 18 months later.

Blockbuster video is another cautionary tale for risk managers. Just 15 years ago, the company was at its peak, excelling as the movie industry shifted from videos to DVDs. The bricks-and-mortar store network spread to nearly every corner of the globe, and seemed a sure-fire bet for long term success.

In 2000, as the DVD-boom was in full swing, Blockbuster received an approach from Reed Hastings, the founder of a little-known tech startup called Netflix. Hastings proposed a partnership to run Blockbuster’s online platform. In the days of slow internet connections and unreliable streaming, Blockbuster rejected the approach.

Less than ten years after Reed Hastings’ approach Blockbuster had filed for bankruptcy. The advent of new technology, accessible broadband internet, and convenient home streaming killed the video store dead in its tracks. Netflix now has its eye on disrupting satellite and cable TV, the cinema sector, and even sports. The company is producing its own movies, and entertainment sector analysts predict it will displace many other industries.

While some companies have been guilty of overestimating their market position and brand dominance, others have failed because of corporate governance issues.

Former Wall Street darling Enron Corporation’s shares were once worth more than $90 US Dollars as the trading and commodities business grew profits and branched out into new industries. Enron was once one of the biggest in the United States and one of the most commanding names on Wall Street. However, its story was a lie.

Enron’s leadership misled public markets about the company’s finances, hiding losses and fooling regulators with inflated numbers. Enron went bankrupt in 2002 after reporting a $137 million loss in one of America’s biggest corporate scandals. The collapse is one of the clearest cases of a lack of corporate governance and risk structure.

As history has shown, even the mightiest companies fail. Risk managers say there are lessons to learn from the failure to innovate and spot danger. How can risk managers play their part and help prevent business failure?

Risk consultant Eamonn Cunningham says companies need to have a “well-established” enterprise risk management programme and a “genuine desire to adopt best practice”. “If you’re not using the fundamentals of enterprise risk management to probe your organisation for vulnerabilities or opportunities, you’re not going anywhere. You need a system behind you.”

Cunningham says “failure to innovate” and “failure to recognise disruption” should be recognised as top risks by companies. “It’s about more than R&D; it’s about thinking where you are going. There are other factors in this ever-changing world. Keep your eyes on the horizon, keep your eyes cast wide open inside and outside of your organisation and you will be well-placed to deal with this.”

He believes risk managers can help companies “disappearing into obscurity”. He adds: “Probe the strategic initiatives that come up as part of the strategic decision-making process and subject them to rigour. Are they fit for purpose, and will they meet internal and external challenges?”

Cunningham says risk managers should be involved in “pushing” and “stress-testing” innovation: “People learn through failure, so be brave.”

He believes Kodak failed because management “did not listen”. “The powers that be were slaves to film and processing. It was brought to their attention. Companies should encourage comment and make sure ideas are examined. Don’t operate in vertical or horizontal silos. Listen and examine everything that comes your way. Don’t say no, say, ‘why not?’”

Risk practitioner Chris Corless says large companies often fail to give proper weight to long-term risks and targets.

“Businesses struggle with long-term anything, whether it’s strategic risks or objectives. Companies need to have a view of their strategic risks, risks associated with strategy, and external risks,” Corless adds.

He says risk managers need to add a “longer-term view to their risk management framework”. He also believes companies need to have a “strong risk appetite framework, to uncover when the organisation is taking more risk than had been previously agreed to.”

Corless believes corporates and risk managers need to “have the ability to uncover emerging strategic and external risks”. He adds: “It’s about having time to respond and react. To shift an entire organisation can be very challenging.”

He says sudden operational risks can be “easier” to deal with than long-term risks, as they tend to be “front of mind”: “Long-term external risks take many management time horizons. CEOs are gamblers in a way. In Kodak’s case, management was betting that digital photography would not overtake traditional photography during their tenure. If you have a couple of people that take that bet, all of a sudden you haven’t got time to make the switch you need to make.”

Corless has spent most of his career consulting in the mining sector, and says miners have become more adept in spotting long term risks and moving with the times.

“They have started to divest from controversial things like coal, and everyone is doubling down on copper as a versatile mineral of the future. They are changing their approach, and have so far resisted the temptation for big mergers.”

He adds: “In the oil and gas space, Exxon Mobil, BP and Shell are saying the future will be renewables, and they want to be part of that. They want to be energy companies, not just oil and gas companies. They are changing their approach and making smaller bets,” Corless adds.

Other industries in the midst of significant transformation include big tobacco. Tobacco giants including Philip Morris International have declared they want to move away from cigarettes, amid declining sales and growing awareness of health dangers.

Tobacco companies have instead invested in “heat-not-burn” tobacco products, vaping, and nascent industries like legal marijuana. Philip Morris has even launched an advertising campaign encouraging people to quit smoking.

The motor industry is also undergoing significant change, as old names try to keep up with the shift to electric vehicles, declining car ownership, and the emergence of ride-sharing apps. Motor giant Ford has signalled a shift away from car production to the technology that underpins transport.

Corless says: “Ford is undergoing a large strategic transformation, and it will be interesting to see how they fare. There’s a question of operational risk there: how much are they willing to risk pursuit of those objectives?”

As corporations across the world try to avoid becoming the next big business failure, they will hope their approach to innovation is more successful than Kodak’s all those years ago.