In January 2012, after more than a century of dominating the global market for amateur photography and maintaining a long-standing commitment to innovation, the Eastman Kodak Company (Kodak) filed for bankruptcy. Throughout the twentieth century, Kodak was iconically associated with photographic memories, but today, it has become synonymous with corporate failure in the face of technological change. A commonly espoused explanation for the failure of an established firm in the face of technological change—including Kodak’s—is rooted in inertial processes that impede the firm’s ability to transform itself and respond to the changing business environment.Footnote 1
Somewhat at odds with such inertia-based explanations, however, in the decades leading up to Kodak’s bankruptcy, the company pursued multiple major initiatives intended to diversify beyond its core film photography business and spearhead the development of emerging digital photography technologies. Although Kodak’s initiatives met with some success, they ultimately failed to stem the company’s decline. In fact, Kodak’s actions align with several established recommendations for strategic renewal within the academic literature, such as investing in research and development (R&D) in new technological and market domains, regularly introducing new products, and pursuing innovation through acquisitions.Footnote 2 Understanding why these diversification efforts failed to avert Kodak’s eventual bankruptcy can provide valuable insights into the limitations of these renewal strategies and offer a deeper understanding of the dynamics of a large firm’s decline. Such insights are essential for developing a more comprehensive business history of corporate failure.Footnote 3
Kodak’s long-standing commitment to innovation makes the company a particularly compelling case for illuminating the process of corporate decline. The Eastman Kodak Company bears the name of its founder, George Eastman, and the firm’s first successful product—the Kodak camera. Introduced in 1888 as the first affordable, user-friendly film cameras, “Kodaks” expanded the appeal of amateur photography to the mass market. Eastman advertised the accessibility of photography embodied by his cameras in popular press with the slogan, “You press the button, we do the rest,” and distributed them through pharmacies, grocers, and convenience stores rather than specialty photography retailers. Starting in the 1890s, the firm developed a global distribution network, opening subsidiaries in the UK, Germany, France, and Australia.
From its early days, Kodak invested heavily in both the development of new products and basic research. The firm recognized film’s contribution to Kodak’s profitability and offered cameras at successively lower price points: $25 in 1888, $5 in 1895, and $1 in 1900. To capitalize on the explosive demand for film, Kodak developed expertise in mass manufacturing, introducing process innovations such as continuous wheel production of film. By 1896, the company manufactured 400 miles of photographic film per month.Footnote 4 In the 1930s, Kodak’s research laboratories produced the first commercial color film for amateur photography—a product the firm would sell for the next 80 years—with no competitor matching its quality for 50 of those 80 years.
Beyond amateur photography, Kodak also cultivated applications for photographic film and paper that would emerge as major businesses. For instance, less than a year after Wilhelm Roentgen discovered X-rays in 1895, Kodak introduced the first photographic paper for capturing X-ray images. In addition, in the 1890s, the firm collaborated with Thomas Edison on developing motion picture technology. By 1922, Kodak manufactured 147,000 miles of motion picture film per year, an endeavor that consumed one-twelfth of all silver mined in the US.Footnote 5
Kodak went public in 1905 and joined the Dow Jones Industrial Average in 1930. From the inception of the Fortune 500 list in 1955 until the mid-1990s, Kodak consistently ranked among the top 50 US firms, with its market capitalization exceeding $26 billion in 1996. In the 1980s, the company accounted for 2% of all industrial R&D performed in the US and employed over 145,000 people. Even as sales of photographic film started to decline in 2001, Kodak led the US in the number of patents generated, held top market share in digital cameras in the mid-2000s, and ranked as one of the world’s most trusted brands.Footnote 6
Faced with the prospects of slowing growth in its core film business and the emergence of digital technology, Kodak pursued major strategic renewal initiatives. Between the 1970s and the 1990s, Kodak diversified into new markets, investing billions of dollars to grow three key businesses: plain paper copiers, pharmaceuticals, and digital photography. Kodak’s management viewed these businesses as growth opportunities that would complement its profitable but maturing film franchise. The three businesses represented applications of Kodak’s core competencies in imaging and fine chemistry, aimed at securing future growth. The copier business leveraged and expanded Kodak’s imaging expertise into a new line of business. The pharmaceutical business sought to translate decades of fine chemistry research, including a library of 500,000 proprietary compounds developed in film research, into medications. Finally, Kodak invested heavily in digital imaging to create and shape the evolving technology, which would ultimately replace film in amateur photography. In 1991, the copier and pharmaceutical businesses accounted for more than two-fifths of Kodak’s total sales.
Despite extensive efforts to pursue new business trajectories, including a $5.1 billion acquisition of Sterling Drug in 1988, the firm struggled to generate meaningful financial returns from these investments. The intense competition in the copier market meant that, after decades of investment, the business was barely breaking even. While the pharmaceutical business accounted for a quarter of Kodak’s earnings in 1991, the acquisition of Sterling Drug saddled the company with expensive long-term debt.Footnote 7 Unable to sustain its investments across copiers, pharmaceuticals, and photography, Kodak divested its copier and pharmaceutical businesses between 1994 and 1996 (also spinning off a legacy chemical manufacturing subsidiary founded by George Eastman in 1920) to focus on its core photography business.
Through its early and sustained investment in digital photography, Kodak succeeded in pioneering multiple ground-breaking technologies (e.g., high-resolution sensors, color filters, and image compression algorithms) and producing award-winning products. However, the firm faced external challenges that hindered its ability to translate technological and market leadership into strong financial performance. First, products embodying digital technology had to overcome substantial adoption challenges; decades passed between the early development of technology and the emergence of a mass market for digital cameras. Second, by the time annual worldwide sales of digital cameras reached 1 million units in 1999, numerous competitors had entered the industry. This increased competition drove down prices, making it difficult for any participant to achieve sustained profitability.
Kodak’s difficulties in generating meaningful financial returns illustrate a modern corporation’s challenges in seeking to sustain itself through a range of strategic renewal initiatives. In Kodak’s case, these efforts included investing in R&D, developing capabilities in new technologies, exploring new markets, and using acquisitions to diversify away from a maturing business. Despite adopting these strategies and employing impressive technical and managerial talent, Kodak could not avert its decline. A combination of uncertainty within the business context, competitive pressures, and significant costs contributed to multiple setbacks, ultimately culminating in the firm’s bankruptcy.
In presenting our findings, we first detail the origins of the Eastman Kodak Company, emphasizing the role of innovation in its early success. We then describe the company’s exploration of new growth opportunities in copier, pharmaceutical, and digital photography businesses. Finally, we reflect on the firm’s decline, despite its multi-decade efforts at strategic renewal.
Origins of the Eastman Kodak Company
George Eastman was working as a bank clerk in Rochester, New York, when he became interested in photography in the late 1870s. At the time, the prevalent photographic technology used wet glass plates—rectangular panes of glass covered with light-sensitive chemical solution to capture the images. Amateur photography was a demanding endeavor, requiring chemical expertise (to mix corrosive chemicals for sensitizing glass plates and developing the resultant images), patience (to wait anywhere from 20 seconds to five minutes for a single image to be captured), and physical strength (to hoist 40–70 pounds of equipment, including the camera, tripod, glass plates, dark tent, and chemicals). A mid-range set of photographic equipment in the 1870s cost around $50 (or about $1,500 in 2025 dollars).Footnote 8 The time, effort, expertise, and expense required for amateur photography limited its appeal.Footnote 9
Eastman entered the photography business by manufacturing dry glass plates—an innovation that made photography more accessible to the public. The predecessor wet plate technology required the photographer to use a dark room (or dark tent when working outdoors) to cover the plates with a mixture of light-sensitive chemicals, insert the wet plates into the camera one at a time, capture the images, and then develop the images while the plates were still wet. In contrast, dry glass plates were precoated with light-sensitive chemicals, eliminating the need for the photographer to carry the chemicals or a dark tent for sensitizing and developing the plates in the field. Eastman’s first invention (patented in 1879) was a machine designed to mass-produce dry glass plates. While the introduction of dry glass plates expanded photography’s accessibility to a somewhat larger audience, Eastman continued looking for ways to “make the camera as easy a recorder, as a pencil” with respect to its portability, ease-of-use, and affordability.Footnote 10
This search led Eastman to invent “American film”—rolls of sensitized paper initially and then thin plastic that would be used to capture the images instead of glass plates.Footnote 11 The shift from glass plates to film as a capture medium revolutionized photography, enabling the creation of motion pictures and the introduction of portable photographic cameras.
Prior to the introduction of film, cameras had to be sturdy enough to support the weight of glass plates, which made using a tripod necessary. The introduction of film (which weighed far less than glass plates) enabled the manufacture of smaller, lighter cameras and eliminated the need for a tripod. In addition, the introduction of film meant that the number of pictures amateur photographers could take was no longer limited by the number of glass plates they were willing to carry; the Kodak film cameras that Eastman introduced in 1888 came with enough film for 100 images. Moreover, developing images no longer required chemical expertise. After using up the film, consumers could simply mail their cameras back to Kodak and receive paper prints of their images and a camera freshly loaded with a new roll of film—a convenience Eastman advertised in the popular press with the slogan, “You press the button, we do the rest.”
The changes in size and weight of the photographic equipment transformed amateur photography. Whereas the photographer once accompanied a wagon of equipment on a photographic outing, now cameras could accompany the photographer in day-to-day activities.Footnote 12 Figure 1 offers a contemporary’s view of Eastman’s impact on photography. The Eastman Kodak Company invested heavily in advertising its products as a means to capture snapshots of special occasions (such as family celebrations or vacations) and preserve these “Kodak moments” in photo albums. The company distributed its cameras through drugstores and other mass-market outlets, making its products easily accessible to a wide audience. From the 1890s onward, Kodak expanded the international distribution of its products, forming subsidiaries in the UK, Germany, France, and Australia. Table 1 offers a timeline of the company’s historical milestones.
A view of amateur photography in 1877.
Note: We thank Todd Gustavson and John Elsbree at the George Eastman Museum for pointing us to the cartoon and Marcella Barnhart and Victoria Sun at the Lippincott Library of the University of Pennsylvania for helping us track down Kessler’s cartoon collection. (Source: Camillus Kessler, At the Bottom of the Ladder [Philadelphia, PA, 1926, 80.])
Eastman Kodak Company Milestones
In addition to multiple technological innovations, George Eastman also developed a novel business model in which the sales of a low-margin hardware product (i.e., cameras) built a customer base and drove the sales of a compatible high-margin consumable (i.e., film).
If the cameras were the only thing that produced a profit, it would be no object to sell double the number and make only the same net profit; but before the camera is dead, we ought to make at least as much from the film used in it as from the camera itself, probably more. I believe that every camera is good for at least twenty spools of film.Footnote 13
Driven by this insight, Kodak developed and introduced successively cheaper cameras. While Kodak cameras were priced at $25 in 1888, the company introduced cameras priced at $5 in 1895 and $1 in 1900. This camera/film business model became more popularly known as the “razor/blade” model following the introduction of Gillette razors in the early twentieth century.
From the company’s early days, George Eastman emphasized investment in innovation as critical to the company’s success:
I have come to think that the maintenance of a lead in the apparatus trade [camera sales] will depend greatly upon a rapid succession of changes and improvements… If we can get out improved goods every year nobody will be able to follow us and compete with us.Footnote 14
Eastman hired the first research chemist in 1896, and in 1912, he founded Kodak Research Laboratories, funding the work of 20 people with an annual budget of $53,797 (about $1.75 million in 2025 dollars).Footnote 15 Eastman expressed his expectations for the laboratories as “Your mission is the future of photography.”Footnote 16
The leaders who succeeded Eastman continued the high levels of investment in innovation, directing 5–6% of Kodak’s sales into R&D. Kodak’s 1977 Annual Report characterized Kodak’s R&D investment as follows: “In many ways, this ‘research nickel’ has been the most important investment the company has made, engendering a new or improved product each third working day.”Footnote 17 In addressing securities analysts, Kodak managers argued that, “The return on that ‘nickel’ has been central to a company growth rate about twice that of the real gross national product.”Footnote 18
Between 1966 and 2006, Kodak spent more than 5% of its total revenues on R&D for a total of $28.7 billion in nominal dollars ($80.6 billion in 2025 dollars). In 1968, Kodak employed more than 5,400 people in R&D around the world—a number that grew to approximately 7,000 by 1980. In 1970, Kodak Research Laboratories in Rochester alone (the company’s central research laboratory) employed 1,669 researchers with a range of educational backgrounds: three biologists, 548 chemists, 29 chemical engineers, 28 electrical engineers, 17 mechanical engineers, 22 mathematicians, 115 physicists, 105 general technologists, 564 technicians, and 238 auxiliaries. By 1998, the Kodak Laboratory staff in Rochester numbered approximately 6,500 people.Footnote 19
The investment in research enabled Kodak to pursue a range of related technologies, including new vacuum distillation methods to enter the vitamin manufacturing business in 1938, introducing the Verifax coated-paper copier using a patented dye diffusion process in 1953, and engaging in space research with the US government following World War II.
Exploring New Paths for Growth
Plain paper copiers: 1970s–1990s
By 1958, the sales of Verifax, Kodak’s coated-paper copier, had reached $30 million annually (about 3.6% of Kodak’s total sales).Footnote 20 Priced between $99 and $500, the copiers were small enough to fit on an office desk. However, the copies made by the machines had several shortcomings: they required elaborate manual effort, users had to handle chemical solutions that stained clothing, and in the case of competing technologies (i.e., thermal diffusion copiers marketed by 3M), the resulting copies faded over time. Despite these disadvantages, though, copiers gained popularity as they replaced retyping as a primary method for producing multiple copies of business correspondence. The total copier market in 1957 amounted to $185 million in sales, with “about $60 million for machines and $125 million for supplies.”Footnote 21
Extrapolating from Kodak’s in-house experience of using one Verifax copier machine for every 100 employees or 10 typewriters in use, Paul A. Barbee, manager of Kodak’s Business Photo Methods Sales Division, anticipated that 1 million copier machines would eventually be installed worldwide. Bert S. Cross, head of 3M’s Graphic Products Group, predicted that this million would be installed by 1965, generating annual paper and supply sales of $500 million.Footnote 22
These forecasts overlooked the potential impact of technological innovation on the industry’s growth trajectory. In 1959, Xerox introduced the 914—a revolutionary copier that used plain paper (instead of coated paper) and allowed users to produce copies at the touch of a button.Footnote 23 This new technology removed the need for handling chemical solutions and coated papers, enabled limitless copying, and eliminated concerns about copies fading over time. Unlike the smaller, coated-paper copiers marketed by Kodak and 3M, the 914 was the size of an office desk and cost considerably more than its predecessors. Rather than selling the copier outright for $30,000, Xerox executives opted to lease the machines and charged customers by the copy—a decision that translated into enormous profits for the firm:
In its first year of operation, the average 914 generated enough copies, and hence revenues, to pay for all of the manufacturing, sales, administration, and overhead costs associated with the machine. At the end of the year, of course, Xerox still owned the 914 because of the decision to lease instead of sell it. So the revenues generated by the next year’s usage, typically even greater as the customer’s appetite for copies expanded, were mostly profit. And the same held true for the year following that. And the next. And the next. And the next.Footnote 24
After investing heavily in developing a national sales and service organization, Xerox leased more than 200,000 machines and invested its profits into developing new products. The combination of a breakthrough product, an innovative business model, and a robust national sales and service organization led to 15 years of profitable growth for Xerox. Fortune magazine even called the 914 copier “the single most profitable product ever manufactured in the US.”Footnote 25
By 1977, the US market for plain paper copies exploded to $2.9 billion—$2.4 billion from machine leases and another $500 million from supplies. Including the $1 billion market for offset printers and older copying technologies, the total copier market grew to $5 billion in the US and another $5 billion in Europe, Asia, and the rest of the world. Dataquest, a research firm based in Menlo Park, projected that the copier market would continue growing at 20% per year.Footnote 26
Competing with Xerox
Xerox’s enormous profits and rapid growth attracted competition. In 1970, IBM—whose leasing model had inspired Xerox executives—entered the market with its Copier 1, a machine targeting the low- to medium-speed segment of the market. The Copier 1 produced 10 copies per minute, compared with the 60 copies per minute produced by Xerox’s fastest copier.Footnote 27
In 1975, after 12 years of development, Kodak introduced its Ektaprint plain paper copier, capable of producing 70 copies per minute. Kodak’s entry deliberately targeted the high-speed, high-volume segment of the copier market: “The Kodak copier was designed for the customer with needs from 40,000 to 300,000 and more copies per month.”Footnote 28 William Czamanske, Kodak’s marketing lead for Ektaprint, characterized the high-volume copier customers as “highly cost-conscious in their choice of machines. ‘There’s virtually no brand loyalty—price, service and print quality are what’s important.’”Footnote 29 Kay Whitmore, then general manager of Kodak’s photographic division and later the company’s CEO, explained Kodak’s focus on this segment of the market: “We are in a particular segment of the copier business because that’s where the profits are.”Footnote 30 According to Kodak’s CEO at the time, Walt Fallon, this strategic choice also allowed Kodak to enter a less competitive arena, as it “intentionally stayed away from the lower end of the line where we knew the competition was going to be.”Footnote 31 In particular, Kodak sought to avoid intense price competition with Japanese manufacturers, who had also entered the market. At launch, Fallon justified the choice of the segment by projecting it to grow by 15% annually through 1980.Footnote 32
According to Colby Chandler, the president (who would later become CEO) of Eastman Kodak, the company was drawn to the plain paper copier market not only by the high profits and growth potential but also by the opportunity to prove that “nobody knows more about imaging technology than Kodak does.”Footnote 33 Despite entering the market more than 15 years after Xerox’s launch of the landmark 914 copier, “in just a few years, Kodak’s copier has become the technical standard.”Footnote 34 Fortune magazine described the Ektaprint machine as one that was “thought to provide the ultimate in copy quality.”Footnote 35 The copier featured a recirculating document feeder—a technology later licensed from Kodak by IBM, Xerox, and Canon.Footnote 36 The copier was also the industry’s first to feature a microprocessor.Footnote 37 Industry observers lauded the technological advances in Kodak’s first copier: “it was like having the first plane you built be a four-engine jet.”Footnote 38
The technological advantage of Kodak’s first copier enabled the company to enter an industry dominated by Xerox, which had placed 100,000 copiers in 1974.Footnote 39 In 1975, Xerox held 82% of the worldwide market in plain paper copying, with 42% of its sales and 52% of its earnings coming from outside the US. In June 1975, two months after Kodak entered the market, Xerox employed 13,500 salespeople—about half in the US and half overseas—and 24,000 service technicians out of a total workforce of 100,000 employees worldwide. By comparison, IBM, which entered the market in 1970, employed approximately 4,000 copier salespeople.
Faced with this competitive landscape, Kodak pursued a gradual entry strategy, focusing on complementing the technological strengths of its machines with their high service quality. In 1975, Kodak’s copier unit employed 300–500 salespeople and 1,400 technicians. Kodak’s CEO at the time, Walt Fallon, described the approach: “Kodak will enter this market in an orderly way. Our ability to service customers will be at least as important as sheer physical demand in determining production and marketing schedules now and as we head into 1976.”Footnote 40 Following this strategy, Kodak installed 1,000 machines in the first 15 months, increasing the number of installations to 5,000 by 1979, reaching a total of 14,000 machines. By 1978, Kodak had secured more than 50% market share in the high-volume copier segment.Footnote 41
However, Kodak’s ability to translate its technological advantage into market share was short-lived. Sanford Garett, a securities analyst with Sanford J. Bernstein Co., articulated Kodak’s challenge:
Kodak doesn’t have the depth of marketing or service strength of either Xerox or IBM, so it has used technology as a wedge to get into the marketplace. With time, the size of the lead it has is going to diminish. I would think that Xerox and IBM wouldn’t be far behind with comparable products, especially Xerox.Footnote 42
Despite its gradual pace of expansion, Kodak’s entry into the copier business elicited a vigorous competitive response. In 1982, IBM entered the high-volume segment, nearly halving Kodak’s market share. However, Xerox’s reaction to Kodak’s entry was even more consequential. David Kearns, who later became Xerox’s CEO, described the impression Kodak’s copier made on Xerox senior managers:
It was as if the atomic bomb had been dropped at Xerox. We were dumbstruck. The Kodak machine was simpler and much less costly than Moses [Xerox’s copier under development], and it didn’t break down much. At the time, I was on the marketing side of the company, and when I saw the Kodak machine, I realized for the first time that you could make a more reliable copier than ours. Up until then, I thought our engineers were doing as well as possible with a complex technology.Footnote 43
In the short term, Xerox responded to Kodak’s entry by introducing the 8200 machine equipped with advanced features specifically designed to compete with Kodak’s Ektaprint 150 in 1979.Footnote 44
In the long-term, Kodak’s entry into the market prompted Xerox to revamp its product development process and redesign the company around principles of lean manufacturing and total quality management.Footnote 45 As a result, Kodak went from competing with an incumbent that had been somewhat complacent to competing with an aggressive, lean entity with a much larger sales and service organization and whose copier revenues matched those of Kodak in all of its businesses. The competition was decidedly uneven. In 1982, Kodak introduced the Ektaprint 250, touted as “the first copier ever from any manufacturer to offer automatic, single-pass, two-sided copying at full machine speed.”Footnote 46 However, before the Ektaprint 250 could gain traction, Xerox introduced its Marathon series of copiers the next year, easily surpassing Kodak’s 1982 offering.Footnote 47 By 1984, Kodak’s market share in the high-volume copier segment shrank to less than 20%—a loss from which Kodak would not recover.Footnote 48 Xerox’s transformation exacerbated the industry dynamics, making it difficult for any firm other than Xerox to achieve profitability in copiers. Success in the high-volume segment required massive upfront investments in R&D to continually develop new copiers and a large sales and service organization to secure market success and profitability.
Kodak’s success at developing “third generation” features, such as the automatic feeder and stapling/finishing units in 1976, was not enough to overcome the disadvantages posed by its smaller sales and service organization. Kodak struggled to leverage technology to overcome the scale advantages of Xerox’s and IBM’s sales forces. As a result, Kodak fell behind the competition. Between 1978 and 1983, the high-volume segment of the market grew by 46% annually, but Kodak’s sales only grew by 28%.Footnote 49 Mike Murray, Kodak vice-president in charge of copiers, explained Kodak’s difficulties in keeping up: “You can’t add resources fast enough.”Footnote 50
Kodak’s challenges in building a large sales and service organization to compete with Xerox in the copier business effectively contributed to poor financial performance. Despite investing $100 million in product development, the copier business generated only $10 million in revenue in 1976, with expectations of achieving $200 million by 1979.Footnote 51 Though there were expectations that the copier business would become profitable within a year or two of entry, it lost US $30 million annually in its first five years, only breaking even in 1980.Footnote 52 In 1981, Kodak invested an additional US $50 million in a copier manufacturing facility.Footnote 53 However, again, this investment did not translate into market share gains. In 1995, in the 91+ copies per minute segment, Xerox held 75% market share, while Kodak held 12.5%. In the 70–90 copies per minute segment, Canon led with 20%, followed by Xerox with 18%, and Kodak with 17%.Footnote 54
Kodak’s decision to target the high-volume segment of the copier market put it at another disadvantage to Xerox, which could spread its R&D costs over 60% of the market that Kodak chose to forgo. Accordingly, Xerox’s R&D budget for copiers almost equaled Kodak’s total R&D expenditures across all its businesses. In other words, Kodak’s copier R&D budget was just a fraction of Xerox’s. Figure 2 compares Xerox’s sales and R&D expenses with those of Kodak.
Xerox and Kodak sales and R&D expenditures (in US$ millions).
Note: The jumps in Kodak sales and R&D expenses in the 1980s are attributable to its acquisition of Sterling Drug in 1988 and dissipate following the sale of the Sterling Drug businesses in 1994. (Source: Annual reports for Xerox and Eastman Kodak Company.)
As Figure 2 shows, Xerox’s copier revenues were comparable to Kodak’s total revenues from all its businesses—a scale advantage that made it difficult for Kodak to achieve profitability.Footnote 55
Appreciating the need for scale, Kodak entered a series of alliances, starting with Canon in 1984. In this first alliance, Canon agreed to be the original equipment manufacturer (OEM) for Kodak, with Kodak marketing Canon-made copiers under its own brand in the medium-speed segment in the US.Footnote 56 In a follow-up alliance in 1988, Kodak agreed to be the OEM for Canon’s high-speed copiers, which were marketed under the Canon brand in Japan. Securities analysts saw the 1988 alliance as an attempt by both players to build scale in the industry:
The industry switch-over to digital equipment (in copiers and printers) would require a constant flow of new products, and the consequent costs would have penalized Kodak, with $2 billion in sales, far more than Xerox, with $12 billion in revenues. The agreement will provide both Canon and Kodak with the economies of scale in two key areas—R&D and manufacturing.Footnote 57
In another effort to build scale, in 1988, Kodak acquired IBM’s copier sales and service organization.Footnote 58 The acquisition of IBM’s copier business doubled Kodak’s market share while eliminating an important competitor.Footnote 59
In addition to partnering with other firms, Kodak continued seeking out niches in which it could maintain its technological leadership. For instance, its color copiers, which produced 24 copies per minute, were the fastest in the industry.Footnote 60 Leveraging its work in digital photography, Kodak introduced the 1500 digital copier in 1991, featuring the fastest charge-coupled device in its scanner and offering 400-dots-per-inch resolution.Footnote 61 In addition to industry-leading products, Kodak’s research on copiers also benefitted its film business, leading to the introduction of Ektavolt—a film that relied on organic photoconductors rather than silver for image taking.Footnote 62 Beyond research synergies, the copier division also provided “the critical mass available to manufacture equipment that supports microfiche and diagnostic imaging products.”Footnote 63
Despite these technological accomplishments and growing faster than any other business at Kodak, the copier business continued to struggle financially.Footnote 64 In 1987, copier sales accounted for 16% of Kodak’s revenues but made, at most, a negligible contribution to earnings.Footnote 65 By 1989, the copier division generated a $360 million loss. In 1990, it posted a modest $5 million profit on revenues of $4.1 billion.Footnote 66 Despite Kodak CEO Whitmore’s promise that the division would generate a 10% return by 1995, the Information Systems Division (which housed the copier business) reported losses of $151 million in 1992 and $137 million in 1993.Footnote 67
By the 1990s, Wall Street viewed Kodak’s investment in the copier business as wasteful. First Boston securities analyst Jack Blackstock described the situation: “Kodak has spent a lot of cash flow from businesses it’s really good at [i.e., photographic film] on businesses it’s not good at. If they stopped doing that, they’d be in good shape.”Footnote 68 In 1996, Kodak sold its copier sales and service business to Danka, a copier servicing firm that sought to capitalize on Kodak’s strong sales and service organization. While selling for $688 million, Kodak retained the manufacturing operations, and Danka committed to investing an additional $175 million in Kodak copier R&D.Footnote 69
In summary, Kodak’s experience in the copier business represented an effort to diversify into a high-margin, high-growth business where it had technological expertise. The company sought new business with higher growth potential than its established film franchise. However, Kodak’s efforts in copiers fell short of achieving sustained profitability in part due to the external challenges of an intensely competitive environment. While Kodak initially achieved 50% market share in the high-volume market segment, its entry intensified the competition, pushing Xerox to embrace lean production and total quality management practices. This shift made the competitive environment even more challenging for Kodak.
Competing in the copier market required significant, ongoing investment in both R&D and a national sales and service organization. Moreover, maintaining such high levels of investment in copiers was challenging without a large, established customer base. Kodak attempted to build this base by developing cutting-edge technology. When technological leadership did not translate into market share, it sought partnerships with firms such as Canon and IBM. Despite these efforts, Kodak’s copier business struggled with slim margins over multiple decades, ultimately leading to its sale. The contrast between the ongoing struggles of the copier business and the profitability of Kodak’s established photographic film franchise made it increasingly difficult to justify continued investment in the copier business.
Pharmaceuticals: 1980s–1990s
Kodak’s Life Sciences business unit emerged from the company’s 1984 reorganization into 17 business units. In the 1985 annual report, division president Jack Thomas articulated the division’s mission: “[to] develop and commercialize new products growing from our extensive capabilities in chemistry and biotechnology—a logical extension of our base businesses.”Footnote 70
Securities analysts viewed the move into life sciences as an overdue and necessary step in diversifying away from the firm’s core film photography business, whose growth slowed to 4% per year in the early 1980s, down from 8 to 10% annually in previous decades.Footnote 71 The film business was also facing emerging threats. For instance, Eugene Glazer, analyst with Dean Witter Reynolds, argued that “faced with a strong dollar that hurt foreign sales, a disc camera that did not meet sales expectations and other threats from competitors such as the electronic still camera, Kodak ‘has finally recognized the slowing growth in its basic business.’”Footnote 72 Similarly, Stanley W. Morten, analyst with Wertheim & Co., suggested that “ancillary activities were ignored by Kodak in the past, but with a sluggish demand for photographic products, the pressure’s been on to do something about it.”Footnote 73 Securities analysts also saw the potential of a strong pharmaceutical business, which could stabilize Kodak’s earnings. For instance, Robert K. Hedrick, an analyst with the Dallas investment firm Eppler, Guerin & Turner, posited that, unlike the sales of photographic cameras and film (which are negatively affected by economic downturns), “drugs are something you have to have. Drug sales aren’t affected so much by the economy.”Footnote 74
As with copiers, Kodak senior managers saw healthcare as a business with significant potential for both profitability and growth. Kay Whitmore, Kodak’s president argued: “The life sciences and healthcare industry has traditionally enjoyed rates of profitability well above the all-industry average. Healthcare is expected to grow considerably faster than the gross national product.”Footnote 75 Part of Kodak’s interest in biotechnology was attributed to an Arthur D. Little forecast predicting a $23 billion global biotechnology market by the year 2000.Footnote 76
The Life Sciences business unit entered multiple partnerships to investigate promising biotechnology innovations. These efforts included a $2.5 million grant to support Cornell’s Biotechnology Center for four years, financing clinical trials for acquired immunodeficiency syndrome (AIDS) drugs, and purchasing a license for a drug delivery system.Footnote 77 Kodak also created a $45 million joint venture to research nucleic acids with the goal of developing antiviral and antiaging drugs, entered into a $6 million joint R&D alliance to investigate monoclonal antibodies, and initiated a partnership to screen chemicals from its proprietary library for potential pesticide and herbicide applications.Footnote 78
In selecting potential partners, Kodak focused on companies with prescription drugs nearing clinical trials.Footnote 79 Kodak also contracted with Nova Pharmaceuticals in 1986 to screen the 500,000 chemical compounds in its proprietary library for potential pharmaceutical uses.Footnote 80 Kodak’s managers were particularly interested in identifying drug applications in areas such as cancer, where the toxicity of the chemicals developed in its film research could be offset by the curative properties of the compounds.Footnote 81
To focus its efforts in developing prescription drugs, Kodak founded an Eastman Pharmaceuticals unit within the Life Sciences division, hiring executives from Ciba-Geigy and Merck to lead the unit.Footnote 82 In 1985, Kodak’s managers set the ambitious goal of developing a pharmaceutical business that would generate over $1 billion in sales by 1995.Footnote 83
Industry analysts had varying estimates of the size of the acquisition Kodak would require to achieve meaningful scale in pharmaceuticals. On the lower end, some analysts suggested that the acquisition must be in the “several-hundred million to billion-dollar range.”Footnote 84 On the higher end of the estimates, James M. Meyer, an analyst for Janney Montgomery Scott in Philadelphia argued,
Kodak could easily afford to spend “a billion or two” on an acquisition or go after a bigger deal and finance it by selling off something else. “They did look at Searle, but its main product, aspartame, isn’t a prescription drug. What could be a good match? Something the size of Sterling—Rorer is a bit small—or Syntex. SmithKline might be a little big but is at the upper-end size of a possible acquisition.”Footnote 85
Sterling acquisition
On January 4, 1988, F. Hoffman La-Roche, a major Swiss drug company, launched a hostile takeover bid for Sterling Drug, offering $72 per share—a 27% premium over the price of the stock.Footnote 86 When Sterling’s management rebuffed the offer, Hoffman La-Roche raised its bid to $76 per share on January 15 and later to $81 per share on January 22. Kodak, recognizing Sterling as a good match for its pharmaceutical expansion, entered the bidding as a white knight. On January 22, Kodak offered $89.50 per share, totaling $5.1 billion, which was $500 million higher than Hoffman La-Roche’s bid. This led the latter to withdraw from bidding.
Kodak CEO Colby Chandler articulated the company’s rationale for the acquisition of Sterling as follows:
The merger will accelerate our entry into the $110 billion-plus pharmaceutical business. It also immediately provides the worldwide drug registration and marketing infrastructure that we have sought to bring Kodak’s discovery efforts closer to the marketplace.Footnote 87
At the time of the acquisition, Kodak had 12 investigative new drug applications pending with the US Food and Drug Administration.Footnote 88 Kodak’s managers believed the acquisition would expedite the regulatory approval process, thus allowing Sterling to contribute to the company’s bottom line within five years.Footnote 89 For Kodak, the Sterling acquisition was the culmination of a 3-year search for potential targets, which made the Board of Directors “comfortable” with Kodak taking on billions of dollars in debt to finance the deal and fend off competing bids.Footnote 90
The Sterling acquisition shifted Kodak’s goal from exceeding $1 billion in pharmaceutical sales by 1995 to becoming a top 20 pharmaceutical company by 2000.Footnote 91 Sterling’s CEO, John M. Pietruski, argued that Kodak viewed the acquisition as a strategic fit (i.e., gaining new capabilities) rather than a synergistic fit (i.e., realizing cost savings from eliminating redundant operations).Footnote 92 While acknowledging the hefty premium paid, Kodak executives argued that the cost of the Sterling deal was lower than building the same capabilities internally. Kodak’s CEO, Colby Chandler, saw the premium as the price for sustained profitability: “Health care is the highest-margin business of the future with a high cost of entry.”Footnote 93
Kodak’s acquisition of Sterling elicited strong negative reactions on Wall Street due to its size. Many saw the 62% premium over Sterling’s trading price of $55.125 per share as excessive, and analysts were concerned about the overleveraging of Kodak’s balance sheet and the increased cost of capital. At $5.1 billion, the Sterling acquisition far exceeded Kodak’s previous largest acquisition of $175 million for Verbatim in 1985.Footnote 94 Michael W. Ellmann, a Wertheim Schroder & Co. securities analyst, issued a research report prior to the acquisition, arguing that “we believe a deal price to be limited to a $2 billion maximum.”Footnote 95 Four years before acquisition, Ty Govatos, a securities analyst with Donaldson Lufkin Jenrette, described Wall Street’s concerns about the negative impact of a potential large acquisition:
First, large acquisitions rarely work and, therefore, are not generally viewed favorably by the Street. Second, when combined with Kodak’s move into other areas, many would consider such an acquisition as confirmation that the company’s existing businesses are no longer attractive.Footnote 96
Indeed, some analysts voiced concerns about the opportunity cost of the Sterling acquisition. Specifically, Kodak’s interest in growing its pharmaceutical business through acquisition led it to pass up other potential deals, such as acquiring Duracell to shore up its homegrown battery business.Footnote 97 Critics described Kodak’s decision as “Instead of spending 10 times earnings to buy a premium battery company… paying 23 times earnings to buy a lackluster drug company.”Footnote 98
The analysts argued that Kodak overpaid for Sterling, pointing to the acquired company’s product mix and competencies with respect to prescription medications. From a product mix perspective, nearly two-thirds of Sterling’s sales came from over-the-counter (OTC) drugs, with only 40% from prescription drugs. Moreover, profit margins from OTC drugs (15–25%) were lower than those of prescription drugs (30–35%).Footnote 99 Concerns were also raised about the weakness of Sterling’s R&D organization. However, some analysts viewed this as a feature rather than a flaw in Kodak’s planning. According to Alex Henderson, a securities analyst with Prudential Bache Securities, “Kodak didn’t want a R&D company. It wanted a distribution channel for its own products.”Footnote 100 Kodak planned to strengthen Sterling’s R&D through its own R&D management expertise and hiring external pharmaceutical executives. In drawing attention to the discrepancy between the price Kodak paid and Sterling’s capabilities, Henderson likened the Sterling acquisition to “buying a dog to pin the tail on.”Footnote 101
Further heightening concerns in the capital markets was Kodak’s decision to finance the acquisition with debt instead of sales of assets. This decision changed the firm’s capital structure from being 35% debt-financed to more than 50% debt-financed, prompting downgrades of Kodak’s debt—S&P lowered it from AA to A-, and Moody’s lowered it from double A-2 to single A-2. S&P described it as “the largest industrial downgrade” of the first quarter of 1988.Footnote 102 Concerns about overleveraging the firm were amplified by a pending $5.7 billion patent infringement lawsuit from Polaroid, which Kodak lost in September 1985, though the final payout number was still uncertain.Footnote 103 Together, these factors led to a 20% drop in Kodak’s stock price in the months following the acquisition.Footnote 104
While Kodak’s acquisition of Sterling came as an unwelcome surprise to some analysts, others pointed to the ideal fit between the two firms. For instance, Salomon Brothers’ Mary Meeker, who would go on to become an influential technology analyst, argued “there aren’t a lot of [drug] companies out there that would be as good a fit as Sterling.”Footnote 105 Similarly, Peter Enderlin of Smith Barney, Harris, and Upham, made the case for the combined businesses’ potential for success:
As far as the Sterling acquisition goes, I think there’s a good chance it will turn out to be a resounding success, but it’s going to take a long time, maybe 10 years. The basic thesis of combining Sterling’s downstream capabilities of clinical trials and FDA approvals with greater R&D resources and Kodak’s expertise in organic chemistry is still valid. It’s a business which is very compatible with Kodak’s other businesses and its corporate position as a producer of high-technology, chemically-based products. They have a lot of familiarity with the health care market already and the distribution channels. Assuming they can generate a reasonable flow of significant new drugs—which is very difficult to have any visibility on at this point, but I think that’s a fairly good bet on a long-term basis—Sterling will turn out ultimately to be an excellent avenue of diversification for the company. But it’s going to take longer than the market is willing to give the company at this point.Footnote 106
In integrating Sterling, Kodak established it as a standalone business division, on par with its photography, chemical, and photocopier businesses. The new Sterling division, with 20,750 employees, subsumed the Eastman Pharmaceuticals business unit, which had 250 employees by 1988. Kodak also appointed executives with pharmaceutical backgrounds to run the Sterling R&D organization.Footnote 107 Figure 3 shows the Kodak organizational chart.Footnote 108
Sterling in the Kodak organization.
Note: We are grateful to Brad Paxton and Steve Sasson for supplying us with Kodakery archives. (Source: Tom McCormack, “Where Sterling Fits in the Kodak Family,” Kodakery, 2 June 1988, 6.)
In 1991, Kodak changed the name of Sterling Drug to Sterling Winthrop to reflect the greater prominence of Sterling’s Winthrop unit, which focused on prescription drugs.
Despite the large investment, Kodak’s pharmaceutical business faced setbacks. Sterling’s promising drugs for congestive heart failure struggled to show efficacy in clinical trials, and Schering-Plough beat Sterling in introducing anticancer treatments based on interleukin-4, an anticancer drug from Kodak’s joint venture with Immunex before the Sterling acquisition.Footnote 109 While Kodak and Sterling scientists identified some promising new technologies (such as the use of nanoparticles in drug delivery), the setbacks in clinical trials made it difficult for Kodak to show positive financial results from its acquisition.
Moreover, Kodak’s acquisition of Sterling was followed by a wave of large mergers and acquisitions within the pharmaceutical industry. In April 1989, Beecham acquired SmithKline Beckman for $7.9 billion, and in July of the same year, Bristol-Myers merged with Squibb in a $12 billion stock swap. This merger wave significantly increased the scale of R&D in the industry, dwarfing Kodak’s efforts to double Sterling’s $100 million per year R&D budget. To address these changes, Sterling entered an R&D alliance with the French pharmaceutical company Elf Sanofi in 1991. This partnership put the alliance’s total sales among the top 20 pharmaceutical companies worldwide with some 30 compounds slated for co-development.Footnote 110
In 1991, Kodak’s health division, which included Sterling, accounted for 25% of the firm’s revenue and 26% of its earnings.Footnote 111 The health division’s performance contrasted favorably with that of the copier business, which accounted for 20% of the revenue but contributed almost no earnings. The turnaround of the pharmaceutical business even impressed some of the acquisition’s earlier critics. In 1993, Prudential’s Henderson admitted that Kodak had “finally got the [prescription drug] pipeline almost to the point where it may produce something” and that the pharmaceutical business is “doing a lot better than it has since they bought it.”Footnote 112 However, the cost of servicing the debt incurred from the Sterling acquisition made it difficult for Kodak to sustain investments in the prescription drug business.Footnote 113 According to Kodak CEO George Fisher, by the time he joined the company in 1993, the investments required by Kodak’s different businesses forced its managers to make difficult choices about the company’s direction:
The company had three great businesses: the chemical business, the photography business, and the pharmaceutical business that they acquired a few years earlier. Unfortunately, even though all of those businesses were great businesses, they all had to be fed, especially capital. And the company was generating cash of significance in only one business—the film business—and that was not enough to feed all three.Footnote 114
Faced with this challenge, Kodak senior managers chose to refocus the company on its core photography business and capitalize on the opportunities presented by digital technology. As part of this strategy, Kodak sold off its chemical and pharmaceutical businesses.Footnote 115 In 1994, Kodak divested the businesses acquired through the Sterling acquisition, selling the prescription pharmaceutical business to Elf Sanofi for $1.675 billion, the OTC drug business to SmithKline Beecham for $2.93 billion, and the home products and personal care business to Reckitt & Colman for $1.55 billion.Footnote 116
Kodak’s efforts to develop a pharmaceutical business aligned with the strategies of other chemical companies seeking to diversify. For instance, Bayer in Germany had subsidiaries that participated in chemicals, pharmaceuticals, and photographic cameras and film (Agfa-Gevaert).Footnote 117 Similarly, Fujifilm, Kodak’s smaller competitor in the photographic film business, pursued diversification into both pharmaceuticals and cosmetics. Kodak’s interest in pharmaceuticals was motivated by the desire to leverage its expertise in fine chemicals in an adjacent industry characterized by high profit margins, strong growth potential, and high barriers to entry.
While Kodak was successful in advancing some of the drugs it identified through clinical trials, the competition from other pharmaceutical companies made it difficult for the company to generate substantial earnings. It is possible that, given more time, Sterling could have developed blockbuster drugs in alliance with Sanofi; however, the cost of servicing the debt from the Sterling acquisition made it difficult for Kodak to continue investing in the pharmaceutical business. Moreover, the consolidation wave in the pharmaceutical industry pushed Kodak’s original goal of becoming a top 20 pharmaceutical company by the year 2000 further out of reach.Footnote 118
Digital Photography: 1970s–2000s
Following World War II, Kodak worked on various federal government projects, supplying photographic equipment to surveillance satellites and space missions. As part of its work with surveillance satellites in the 1950s, Kodak developed technology for filmless and wireless image transfers. Rather than sending film to Earth to be processed, the E-1 Camera System (invented for the SAMOS satellite program in 1956) developed the film in space and scanned the images for transmission to Earth using radio signals. Kodak’s work with the space programs provided early exposure to the evolving field of electronics, including the “manufacture of miniaturized electronic circuits that can withstand shock 20,000 times the force of gravity” and “the design of systems that combine the capabilities of photography, optics, mechanics, and electronics.”Footnote 119 Kodak also gained experience in the development and manufacture of integrated circuits, which would later be incorporated into multiple Kodak products, including cameras and copiers.
As part of its new solid-state physics research program, aimed at exploring the applications of electronic technology to photography, Kodak tasked a group of 22 researchers in 1972 with developing sensors for electronic image capture. The group produced its first working device in 1979.Footnote 120 In 1981, Kodak incorporated the sensor into the SP-2000, an electronic movie camera capable of capturing more than 2,000 images per second. Priced at $110,000, the SP-2000 targeted industrial customers needing to perform “motion analysis of fast-moving mechanical components and manufacturing processes.”Footnote 121
In parallel with Kodak’s efforts to develop sensors, an electrical engineer in its Apparatus Division research laboratory, Steve Sasson, completed the prototype of the first portable digital camera in 1975. This camera was based on the charge-coupled device (CCD) technology developed by Bell Labs in 1969. After multiple presentations to senior management, Sasson and his manager, Gareth Lloyd, filed for and received a patent.Footnote 122 However, Kodak did not commercialize the technology at the time, citing concerns about the lack of customer interest in seeing photos on a TV screen, the relatively low resolution of the images, and the high cost of the cameras.Footnote 123
On August 24, 1981, in Tokyo, Sony became the first company to publicly demonstrate a prototype of an electronic still camera.Footnote 124 Industry observers saw this demonstration as heralding the arrival of a digital age in amateur photography.Footnote 125 This move by a major Japanese electronics firm forced Kodak’s senior managers to seriously consider the prospect of a digital future. At 279,300 pixels, Sony’s MAVICA (MAgnetic VIdeo CAmera) prototype’s resolution was slightly worse than that of a conventional television set (240–360 horizontal lines compared with 525-line resolution of a commercial TV program in the US) and vastly lower than the resolution of photographic film, which was comparable to 10 million pixels for a frame of 35 mm film.Footnote 126 The camera stored images on a 2-inch floppy disk, capable of recording a maximum of 50 images. Viewing the images required a viewer device that displayed the images on a TV set or computer monitor. Sony was also in the process of developing a printer for electronic images and a device for transmitting images through phone lines.Footnote 127 In 1981, Sony estimated the price of the camera to be about $660 ($2,320 in 2025 dollars).Footnote 128
The low image quality and high price of the cameras—concerns raised by Kodak’s management when evaluating the prospects of digital technology in amateur photography—coupled with efforts to establish the Still Video Floppy Disc as the industry standard for recording electronic images, led to a 6-year delay in Sony’s ability to introduce and market the camera.Footnote 129 During this period, the focal market for the camera shifted from consumers to newspapers, as the technology offered journalists the ability to transmit images via telephone lines, bypassing the traditional process of developing the film, printing, and delivering the results.
Despite doubts about consumer adoption of electronic photography, Sony’s 1981 demonstration spurred film camera manufacturers into action. In July 1986, Canon marketed the RC701 as the first electronic still video camera. Priced at $2,595—four times higher than Sony’s initial estimate—the camera offered a resolution of 380,000 pixels.Footnote 130 Along with the camera, Canon launched several devices for working with electronic images, including a viewer for displaying images on a computer monitor or TV ($2,695), a color printer ($6,500), and a transceiver (transmitter–receiver) for transmitting the images via telephone lines ($19,900).Footnote 131 A review in Popular Photography, a prominent trade journal, described the quality of electronic images reproduced by Canon’s printer as “roughly equivalent to photographs reproduced on low-quality newsprint—one of the media for which this system is intended.”Footnote 132
In 1987, Kodak’s Electronic Photography business unit introduced its still video system—a set of devices designed to handle images generated by electronic cameras. At the time, it represented the broadest line of still video components offered by any manufacturer, including two electronic image player/recorders, a TV-video transfer stand that converted prints and slides to the electronic format, and a transceiver that transmitted electronic images over telephone lines.Footnote 133 While Kodak’s pricing was competitive with that of Canon and Sony, its transceiver deployed a sophisticated image compression algorithm, similar to the one that would later undergird the JPEG standard for digital images.Footnote 134 Notably, in 1989, Kodak’s transceiver enabled the transmission of images from Tiananmen Square to CBS News in New York, circumventing a video satellite blockade imposed by the Chinese government. In recognition of this technological achievement, Sony and Kodak jointly received an Emmy award for “Still Picture Transmission Technology for News” in 1990.Footnote 135
While Sony and other Japanese manufacturers approached electronic photography as an expansion of their existing video camera business, Kodak viewed electronic photography through the lens of high-resolution photography—its long-standing value proposition to its customers.Footnote 136 Consequently, Kodak not only matched its competitors’ efforts in low-resolution digital photography but also sought to direct the industry’s technology trajectory toward high-resolution photography. To shape this direction, Kodak developed and commercialized high-resolution digital cameras for both new industrial applications and professional use, as well as creating high-resolution hybrid products—such as the Photo Compact Disc (Photo CD)—that combined film and digital technologies for consumers.Footnote 137
In 1986, Kodak built the first megapixel CCD imager, with a resolution of over 1.4 million pixels.Footnote 138 Within a year, the device was incorporated into both a stationary megapixel camera for scientific and industrial applications and the world’s first portable megapixel digital camera. The stationary camera was produced by Kodak’s Videk subsidiary, which was incubated as a start-up within Kodak’s Eastman Technologies Division. The camera featured a 15-pound power supply and was priced between $11,500 and $18,000.Footnote 139 The 1.4-megapixel black-and-white camera became one of the first digital cameras capable of producing images that, when processed, could yield 4” × 6” prints comparable in sharpness to those from film photography.Footnote 140
Starting with the portable camera prototype developed by Kodak’s Government Systems business unit for military use in 1987, over the next 15 years, Kodak designed and introduced dozens of digital cameras for professional photographers. In 1991, it launched the DCS, the first commercially available, single-lens reflex (SLR) digital camera. The six models of DCS series, priced between $20,000 and $25,000, sold 974 units between 1991 and 1994.Footnote 141 These cameras paired the Nikon F3 film camera bodies with Kodak’s electronics, incorporating the first megapixel color CCD, and were advertised as a means for professional photographers to “convert to a new digital system without switching cameras.”Footnote 142 In 2002, Kodak introduced the DCS Pro 14n, which featured a 14-megapixel resolution and $4,995 price tag, well-positioned against Canon’s forthcoming 12-megapixel camera priced at $9,000.
When assessing the potential impact of digital cameras on the amateur film photography market in the 1980s, Kodak managers operated in an environment where 80% of film cameras in use were priced under $50 and offered image quality comparable to digital cameras with resolutions exceeding 2 million pixels.Footnote 143 By comparison, the resolution of the electronic still video cameras—under 400,000 pixels—was much lower than that of images captured on photographic film though it was better than that of individual frames captured by a video camera or displayed from video home system (VHS) tapes. Market researchers identified the high price of electronic cameras, which were well-above the $500 price of video cameras, as a further deterrent to consumer acceptance.Footnote 144
Kodak managers believed that hybrid products, which combined film and digital technologies, could offer consumers a superior value proposition compared with purely electronic cameras.Footnote 145 In keeping with this logic, in 1982, one year after Sony demonstrated the Mavica prototype, Kodak demonstrated a film-to-digital photo viewer prototype at Photokina, the world’s largest photography trade show. The device scanned images from film, displayed them on a TV screen, and allowed users to zoom in on specific features, as well as make color corrections, enlargements, and cropping adjustments. These edited images could then be transmitted to photo processors (firms that developed film for the consumers) for printing.Footnote 146
For Kodak, the film-to-digital photo viewer prototype became the foundation for two hybrid products: the Photo CD, announced in 1990 and introduced in 1992, and the imaging kiosk, launched in the US in 1997.Footnote 147 The Photo CD merged digital and film technology, allowing consumers to receive not only developed film but also a CD containing high-resolution digital image files from their photo processor. These images could be displayed on a TV set using a specialized Photo CD viewer device.Footnote 148 Capable of storing 100 images at approximately 18 megapixels each, the Photo CD preserved the high resolution of film images.
In introducing the Photo CD, Kodak sought to make the lower-resolution offerings from competitors’ digital cameras unacceptable to potential users. The resolution of images on the Photo CD was 16 times higher than that of the prevalent TV sets at the time and four times higher than the resolution of the nascent high-definition television (HDTV) format. A USA TODAY reporter described the quality of Photo CD images as “the Kodak images displayed on the TV are stunningly sharp and crisp—a marked improvement over the electronic photography systems developed by Sony, Polaroid and other firms.”Footnote 149 Likewise, a New York Times technology columnist described how the differences in resolution also translated into superior print quality, with Photo CD prints that “look like a photograph, not like a bad, dot-filled reproduction.”Footnote 150
To capitalize on the improving performance of personal computers, Kodak formed a Computer Camera Products group in June 1992. Rather than commercializing products independently, the group pursued a novel partnership model, where Kodak would act as an OEM, developing and manufacturing cameras for other companies. The group’s inaugural product resulted from a partnership with Apple Computer. First launched in 1994, the Apple Quicktake 100 was a digital camera designed and manufactured by Kodak yet marketed by Apple. The camera’s sensor was based on the one used in the DCS 200, the second-generation SLR camera developed by Kodak’s professional division. Hailed by industry observers as a price/performance breakthrough, 80,000 Quicktake 100 cameras were sold in the first year—an eightfold increase in the number of digital cameras sold up to that point.Footnote 151
Also in 1994, Kodak formed a Digital and Applied Imaging group, a new business unit, to focus Kodak’s digital efforts:
Our traditional businesses will continue to furnish the majority of our earnings for a long time. However, fueled by digital technology, digital imaging is growing faster than conventional photography. To share in this growth, we must be successful in exploiting our own electronic technology in the marketplace. It is time to focus special attention on both traditional and digital growth opportunities.Footnote 152
In keeping with those goals, Kodak continued to develop digital cameras aimed at the mass market. Trade publications such as Popular Science, PC Magazine, CNET, and others recognized Kodak’s consumer digital cameras as the best available. In 1999, the year when worldwide sales of digital cameras first surpassed the 1-million-unit mark, Business Week compared Kodak’s DC240 digital camera with Fujifilm’s MX-1700 and Sony’s Cybershot DCS-F505: “They’re all impressive examples of digital imaging technology, but the standout on pure picture quality is the Kodak.”Footnote 153 In 2004 and 2005, Kodak held the leading market share in digital cameras in the US.Footnote 154
Despite these technological advancements, award-winning products, and market leadership, Kodak’s digital photography business did not break even until 2003.Footnote 155 Initially, the lack of profitability stemmed from delays in consumer adoption of digital cameras. While Kodak developed the first digital camera prototype in 1975, digital camera sales did not surpass those of film cameras until 2002—more than a quarter-century later. The delay in demand realization and the scale of Kodak’s investment made analysts question the wisdom of the company’s commitment to digital photography. For instance, Ty Govatos, a Donaldson Lufkin Jenrette securities analyst, summarized his view of Kodak’s investments in copiers and digital photography as follows:
Most analysts still refuse to believe that Kodak’s 10-year panic in electronic photography, most of which is included in the Information sector, has been costing the company $200 to $400 million annually in operating losses. That amounts to $0.35 to $0.75 per share in losses after taxes.Footnote 156
When demand for digital cameras materialized in the early 2000s, low barriers to entry and stiff price competition characterized the industry’s competitive dynamics, thus further eroding any potential for high profitability.Footnote 157 In response to these challenges, Kodak pivoted to the inkjet printing business, expecting to capitalize on the printing of the growing number of digital images produced. The company aimed to leverage its electronic and chemical expertise as well as strong brand reputation to build a consumer inkjet printing franchise and profit from the high margins available in printer ink. This strategic shift built upon decades of investment in inkjet technology and aligned with the views of financial analysts regarding Kodak’s potential avenues for success.Footnote 158 For instance, in initiating their coverage of the Eastman Kodak Company for Lehman Brothers, analysts Caroline Sabbagha and Sherry Kim wrote:
We think it is extremely important for Kodak to have full ownership of inkjet printer technology. We think that a good portion of the incremental output in digital photography is likely to be done at home. Therefore, we believe that Kodak needs to be able to fully benefit from the profitable consumables stream in the inkjet market, especially since ink cartridges are one of the few products that have margins that rival those of film.Footnote 159
To succeed in this pivot, Kodak named Antonio Perez, a former Hewlett-Packard executive, its CEO in 2005. Under his leadership, Kodak launched a line of consumer inkjet printers in 2007.
However, the introduction of Apple’s iPhone in 2007, followed by the rise of smartphones with high-resolution cameras and large screens, had a twofold effect on the digital photography ecosystem: (1) it dramatically reduced the value proposition of standalone digital cameras, making them unnecessary for most consumers and (2) it also provided an alternative way to share the pictures, reducing the need for printing images and undermining the appeal of inkjet printers.Footnote 160 The challenges of balancing the capital requirements for growing the struggling inkjet business with managing expenses from shutting down the legacy film business resulted in severe cash shortfalls, ultimately leading Kodak to seek bankruptcy protection in January 2012.
In summary, over four decades, Kodak’s investments in digital photography yielded multiple technological breakthroughs and recognition for its technology leadership. In addition to technological innovations, Kodak explored several pathways to commercializing digital technology, introducing digital and hybrid film–digital products for existing and new industrial, professional, and consumer photography markets. Despite these pioneering and substantial efforts at digital transformation, Kodak faced significant challenges with respect to finding a viable business in light of the uncertain timing of market adoption and increasing competition.
Conclusion
The history of Kodak illuminates the process of corporate decline for an iconic, innovative, and customer-focused company, illustrating some of the challenges of sustaining long-term success. Kodak’s decline cannot be solely attributed to fear of cannibalization or the rigidity of its business processes or routines. While these inertial factors were likely present in some decision-making processes, as is typical in many established enterprises, Kodak’s failure followed sustained efforts over multiple decades to identify new, viable growth opportunities. These efforts sought to leverage its technological competencies and capitalize on the opportunities presented by emerging digital technologies.
Kodak’s strategic initiatives included diversifying into plain paper copiers and pharmaceuticals and developing various digital photographic applications. In both the copier and digital photography markets, Kodak achieved technological leadership by introducing products that set the industry standard. For example, in the copier business, Kodak’s Ektaprint copiers were the first to incorporate microprocessors. Despite launching over 15 years after Xerox’s introduction of the 914, these copiers became the standard for copy quality. Operating with a fraction of Xerox’s R&D budget, Kodak maintained technological leadership in niche areas such as color copiers. In pharmaceuticals, Kodak successfully revitalized Sterling’s drug development pipeline. It formed an R&D alliance with Elf Sanofi to compete with larger firms, with the health division contributing a quarter of Kodak’s revenues and earnings. In digital photography, Kodak introduced numerous innovations, including the first integral color sensor, the first-megapixel sensor, and the first digital SLR camera. Such technological leadership enabled Kodak to shape the trajectory of digital photography toward a focus on high-resolution images.
Despite demonstrating technological leadership and making substantial investments over multiple decades to renew itself, Kodak ultimately struggled to secure a viable path forward. Accordingly, the company’s decline presents a significant puzzle in strategic management. How can an established enterprise, which recognizes the changes in its environment and spends several decades under different leaders exploring multiple avenues across diverse markets and technologies to sustain its competitive position, ultimately fail? The answer to this puzzle may lie in understanding the strategic context in which these renewal efforts were undertaken, as well as the complex challenges and constraints that such efforts inevitably face.
First, the potential of any new path explored by an established enterprise is often evaluated in comparison with its past success.Footnote 161 When identifying new profitable growth opportunities, Kodak’s managers weighed these opportunities against the company’s long and outstanding performance in film photography. Kodak’s success in this area made it difficult to justify sustained investment in businesses that did not yield comparable returns. Second, the pursuit of new growth opportunities is inherently fraught with uncertainty, particularly regarding the timing and realization of potential returns. This uncertainty can arise from new and existing competitors vying for the same opportunities and the rate at which new technologies evolve to meet market demands. Kodak’s entry into both copiers and pharmaceuticals was accompanied by substantial shifts in the competitive landscape. In the copier market, Kodak’s entry triggered an intense competitive response, which led Xerox to restructure itself into a lean, aggressive competitor that used its scale advantages to deny new entrants market share and, consequently, profitability. Similarly, in the pharmaceutical industry, Kodak faced substantial challenges, including the rapid pace of industry mergers following the Sterling acquisition and several setbacks in clinical trials for new drugs, which hindered the company’s ability to generate favorable financial returns. In digital technology, the protracted delays in the improvement of the technology and the realization of the mainstream consumer demand made it difficult for Kodak to capitalize on its pioneering innovations.
Third, while an established enterprise may pursue new growth paths, such renewal efforts often impose significant short-term costs that attract intense scrutiny and pressure from the various stakeholders.Footnote 162 In Kodak’s case, the substantial financial commitments—amounting to hundreds of millions of dollars annually—for its ventures into copiers and digital photography resulted in underperformance. In addition, the $5.1 billion acquisition of Sterling Drug, financed through considerable debt, elicited a strong negative reaction from both securities analysts and credit rating agencies, further intensifying the external pressures on the company.
Collectively, these features of the strategic context capture the problem statement for an established incumbent as it navigates shifting market and technology landscapes in an effort to sustain itself. In Kodak’s case, the problem statement required the company to identify new businesses that approached the high profitability of the film business while contending with significant uncertainty regarding the timing of long-term business growth and incurring substantial short-term costs.
The history of Kodak provides valuable insights for today’s established corporations in maturing markets that are seeking new growth opportunities. It highlights that, on the one hand, managerial foresight and commitments, coupled with scale and scope, are necessary for sustained growth. On the other hand, the success of the well-intended strategic initiatives can be constrained by unforeseen industry dynamics and interdependencies across businesses, as Kodak experienced. While Kodak’s leaders recognized the need to build new businesses, leveraging the firm’s scale and innovative capacity, shifts in markets and technologies introduced new uncertainties and interdependencies that were not present in Kodak’s prior success, ultimately leading to underperformance in the face of high expectations.
Acknowledgments
We thank Jaeho Choi, Felipe Csaszar, Farah Kapoor, Anne Marie Knott, Rory McDonald, Dan Levinthal, Jade Lo, Jonathan Palmer, Metin Sengul, Patricia Thornton, Neil Trenk, Andrew Ward, and seminar participants at Boston University, Drexel University, ESADE, HEC Paris, Lehigh University, 2023 and 2024 Business History Conference, 2022 Strategy Science Conference, 2022 Strategic Management Society meetings, and Wharton Work-in-Progress Workshop for their helpful feedback. We are also grateful to Marcella Barnhart, Phebe Dickinson, Leah Glickman, Victoria Sun, Mia Wells and the Lippincott Library staff at the University of Pennsylvania, Erin Fisher, Andrea Reithmayer and staff at University of Rochester Library special collections, Todd Gustavson, John Elsbree, and Ken Fox at the George Eastman Museum, Melissa Murphy and staff at Harvard University’s Baker Library special collections, as well as Scott Brownstein, Terry Faulkner, Alexis Gerard, Brad Hunt, Tone Kelly, Glenn Kennel, Robert LaPerle, Ken Parulski, Brad Paxton, Jim Patton, Robert Shanebrook, and Steve Sasson for their help in locating the documents used in this project and Jax Kirtley for tirelessly connecting us with fellow MIT alumni. We thank Catherine Schrand and Brian Bushee for their help in interpreting Kodak’s financial statements, Luis Rios for his help with patent data, Dmitriy Vinokurov for his programming assistance, Lynn Selhat and Evelyne Mullhern for copyediting, and Thomas Splettstoesser for his assistance with the figures. The authors thank the Mack Institute for Innovation Management at the University of Pennsylvania’s Wharton School for generous financial support for this project.
Author Biographies
Natalya Vinokurova is an Associate Professor at Lehigh University. Her research focuses on problems with idea diffusion, specifically, why ideas that should not diffuse do and why ideas that should diffuse do not. She studies decision-making patterns in financial and technological innovation contexts using a combination of historical analysis and ethnographic methods. Her research has appeared in Business History, Enterprise & Society, Organization Science, and Strategic Management Journal. She is an Associate Editor of Industrial and Corporate Change and serves on editorial boards of Business History, Organization Science, and Strategy Science.
Rahul Kapoor is the David W. Hauck Professor and Chair of the Management Department at the Wharton School of the University of Pennsylvania. In his research, Rahul focuses on the management of innovation and ecosystems related to new technologies and business models. He has published several articles on these topics in leading peer-reviewed and practitioner journals from the perspective of both established enterprises and start-ups. He is the past Chair of the Technology and Innovation Management Division of the Academy of Management. He also serves as an Associate Editor of the Strategic Management Journal and as a Contributing Editor of Strategy Science.
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