by Ben Gilad
Polaroid – Case Study
Polaroid was founded by Edwin Land, a brilliant inventor and technologist and a researcher of polarized light. In 1948 he invented the instant camera, and instant photography became the core business for Polaroid. For many years, Polaroid was the sole player in the field of instant photography, enjoying strong protection through patents. In 1976, Kodak made an attempt to enter the market but was forced out three years later by a court ruling. The only substitute for instant photography was conventional photography that required long processing time. As a result, Polaroid enjoyed monopoly profits on its product and was Wall Street’s darling throughout the 1960s.
The first sign of trouble came in the 1970s. Processing technology of traditional film advanced to the point where “one-hour” development time was possible. That was close enough to offer many customers a reasonable tradeoff. Then in the late 1980s came cheap disposable cameras that appealed to the same consumer desire for alternatives to traditional expensive 35-mm cameras. But the final blow came with digital technology. Starting in the 1990s, instant photography became available, but this time it required no film and none of Polaroid’s products. With digital defining the new instant industry, competitors became both camera manufacturers and consumer electronics manufacturers. Polaroid was now competing for the consumer’s pocket-book with Sony, Canon, Kodak, Fuji, HP, Epson, and many others. As a result, the buyer had more alternatives and a much higher bargaining power.
Polaroid’s industry—instant photography—showcases an evolution led by changes in the force of substitutes. Industries such as steel, horse buggies, and eight-track music players suffered similarly from the emergence of a dominant substitute (aluminum for steel, the automobile for buggies, and tape cassettes for eight-track tapes).
The difference in shading of the five forces between the two figures represents the fact that with the broader definition of instant photography to include digital, entry has become much easier for anyone with digital expertise, from consumer electronics to traditional photographic companies, increasing the pressure on incumbents such as Polaroid. Both methods, however, show a clear rise in the power of at least two structural forces. If a company does not take brilliant, bold, proactive, preemptive moves to forestall the effect of such structural hits, it will, inevitably, pay dearly. On October 12, 2001, Polaroid filed for bankruptcy. Its stock was trading for a few cents, down from a high of $60 in 1997. Its famous art-deco headquarters on the Charles River was empty and up for sale.
The bankruptcy was the culmination of a process that had started fifteen years earlier. Edwin Land left the company in 1985 after the disastrous failure of his instant motion picture system, Polavision, into which the company poured millions. Polavision lost out to the video camera, an alternative to Polaroid’s technology. An executive at Polaroid told the press “everybody but Land knew video was on the way.” This is quite typical of strong, charismatic, and autocratic technologists who become leaders in the industry.
As is true of several other companies built around a once-brilliant technology, Land’s blindspot persisted for fifteen years after his departure from the company. The signs of a changing industry were mounting everywhere. Polaroid’s post-Land leadership just did not want to see them clearly enough.
Consider this:
In 1988, Roy Disney and his Shamrock Holdings Company launched a bid for Polaroid. Shamrock offered $40, which was $6 above market value at the time. That acquisition would have allowed Polaroid to invest in several promising technologies that would have gotten it out of its core business, which faced increasing challenges from conventional and (at that time) an emerging digital substitution. Instead, Polaroid’s management, led by McAllister Booth (a loyal Land follower), borrowed $300 million through its ESOP program (an employee ownership program) and beat back the bid. That was hailed at the time as an innovative use of employees’ stock ownership. Alas, it also started what would later be called Polaroid’s mountain of debt. In 1986 Polaroid’s debt was $171.3 million, by 1989 it was $830 million, and by 2001 it grew to $948.4 million and crushed Polaroid. Fighting such a costly battle to hold off an acquirer as one’s industry was slowly but clearly fading away was not a strategic decision that was in the best interests of shareholders. It was a personal blindness. Industry dissonance with the company’s strategy was not even acknowledged as possible.
In 1995, as the situation worsened, Polaroid brought in a new CEO, an expert turnaround executive from Black and Decker named Gary DiCamillo. He tried various strategies of revival but mostly cut cost and employment across the line. The market was changing rapidly now, and not in Polaroid’s favor, but DiCamillo refused to see it. One of his lieutenants, Carole Uhrich, who headed the commercial division, advised DiCamillo in 1998, with shares still at $40, to sell the company. Her recommendations came on the heels of a long internal debate over the speed of advances in digital technology. The advance of digital technology meant the company’s strategy of relying on high-margin instant cameras and film was quickly becoming incongruent with the changing market. Her conclusion, based on an internal report, was that digital’s progress would leave Polaroid’s in the dust (which it did, very quickly for commercial customers). DiCamillo’s response, which became famous as blinders go: “The board did not hire me to sell the company.” It surely did not bring him in to bankrupt it, either . . . Again, personal blinders prevailed over clear signs that Polaroid’s strategy was failing to address the fundamental changes in the instant industry.
So what was Polaroid’s strategy in those last few years? On the surface it might have looked like a reasonably successful strategy. Under DiCamillo, Polaroid introduced a big hit product, the I-Zone camera, which produced stamp-size “sticker photos” that were very popular with teenagers, even though the camera was of low quality and some employees called it “junk.” Polaroid was also producing digital cameras and selling many of them—1.3 million in 2000 alone. And then Polaroid had two winning technological aces up its sleeve—new digital image printing technology known as Opal and a handheld device called Onyx that printed high-quality instant monochrome prints.
However, upon closer examination—relative to the industry’s changes—the strategy was obsolete. The industry dissonance just grew larger.
The I-Zone was still just an attempt to revive the dying instant camera with film industry, not to address the fundamental reality of a fading technology. Alas, the teenage market does not use much film (it’s a fad, not a functional use), and the I-Zone produced lower margins than previous instant products (much of the profit in instant comes from the film). The I-Zone also required significant outlays on marketing. Overall, it did not change the picture of a sliding instant camera with film market. Instead, it gave the illusion of “success” to the old guard at Polaroid who wanted to stick by the old technology. The strategy of high-margin cameras and film was replaced with a strategy of low-margin cameras and film. By the second quarter of 2001, Polaroid was losing $109 million on revenues that fell 33 percent.
Polaroid’s digital camera was a halfhearted attempt to enter the digital age. It was on the low end, bringing in very little (if any) profit. Manufacturing was outsourced, and Polaroid just added its software. Polaroid did not have the technological savvy, manufacturing economies, or marketing deep pockets to compete with Sony, Kodak, Canon, Fuji, HP, and Epson on the high end. As will be seen later though, the main problem was that Polaroid’s leadership did not have the serious commitment to moving into a new industry. The changing nature of rivalry with the entry of digital instant required much more than a hesitant, halfhearted effort on the part of management if Polaroid was to survive.
The two new printing technologies needed a lot of cash to move forward fast. Even if the cash was available (not spent on marketing low-margin consumer products), rivalry was much stronger than in the instant camera with film industry. Kodak and Fuji locked most channels of distribution for the Opal technology, which aimed at printing high-quality images for consumers who brought in their digital cameras. It required space in kiosks and shopping centers that was already occupied. The Onyx technology required very strong partners, and at that late stage in the game, Polaroid had little to offer them.
It is unfair to lay the blame on Gary DiCamillo’s shoulders for all of Polaroid’s troubles. The decline started under Land himself, and Polaroid’s refusal to look reality straight in the face dates back many years. Instant cameras with film were a stagnant industry back in the 1980s. It just took twenty years to die off. But unlike Land, neither Booth nor DiCamillo had any reason to stick blindly to their old instant technology, the “core business.” When your core business is disappearing under your feet, it should be your core business to change cores. . . . The popular management trend of “going back to one’s core” or “core competency” as an instant remedy to a company’s problems is based on a fundamental fallacy that ignored the environment. Core competencies must fit a changing world to be worth developing or sticking with. But most of DiCamillo’s efforts between 1995 and 2000 were focused on preserving or reviving the old “core business” that had no future. Anything that did not fit this obsolete “core” was jettisoned or got shuffled in endless reorganizations.
For example, Polaroid was an earlier developer of holographic technology, held the number-one position in the market, and had products that were superior to those of other competitors. Holography is heavily figured in security tags as well as backing for displays on cell phones, two examples of markets with a large upside potential. In 1998 it was estimated to be in the range of $2.8 billion, up from $1 billion in 1997. Yet inside Polaroid, the holographic division was limping along. It never received serious investment. Its people were put on notice that the division was not performing. At a security conference, a U.S. government expert testified that in his eight years on the job, he had never seen a forgery of a Polaroid hologram, yet Polaroid shut down its hologram division and spun off its holographic storage portion because it drained resources from the “core business.” If anyone had made a serious analysis of the industry structure for holography, it would have been immediately clear that it was a much better industry to be in than the dying instant camera with film. If anyone did make such an analysis, no one at the top at Polaroid listened.
Could anything have changed Polaroid’s fate? I believe that an effective, culturally supported, early warning system used by DiCamillo and his top aides would have helped significantly, especially in his earlier days at Polaroid. It is clear, though, that Polaroid did not have any such systematic process, and as a result, DiCamillo and his top aides had no chance at all: They were operating on the basis of wrong assumptions, insulated in their intuitions and beliefs and “vision” of a better future until the company collapsed. Evidence of that can be found in the way Polaroid’s competitive intelligence worked (or did not work).
Competitive intelligence analysis of the industry was carried out at Polaroid in the business unit level, not at DiCamillo’s level. As one former manager described it to me, it was obvious to everyone that digital would one day replace Polaroid’s instant technology, and the only question was How fast?
This is a critical question for a company whose livelihood depends on the answer. One would expect that following basic rules of risk management—and Polaroid was facing significant risk—DiCamillo and his top aides would build a serious early warning capability that would track this issue constantly and alert management to significant developments, so that management could follow Yahoo!’s philosophy and ask frequently and honestly: “Are we (still) doing the right thing?” One would also expect emergency meetings at the top to debate and act decisively when the alarms went off. None of it happened at Polaroid. Instead, a siege mentality of “we stick to our core” took effect and pushed all others efforts aside.
By 1998, digital was taking away a significant chunk of Polaroid’s commercial business, from real estate to medical to drivers’ licenses. Instead of concluding that consumer business was going to follow suit, Polaroid’s management of the consumer side made rosy forecasts. It urged corporate management to shift its focus from commercial to consumer, where the pace of adoption of digital would be much slower. A 1997 report on Generation Y’s fast adoption of digital technology was completely ignored. DiCamillo did not even see it. Strategy sessions at the division paid lip service to competition in digital. DiCamillo and his staff ignored recommendations of an internal task force on digital strategy. Competitive intelligence (CI) reports that said over and over “the world is changing, we must act now” did not lead to action. Instead, in one of the cost-cutting rounds, CI was basically eliminated. In one illuminating incident, a presentation made in 1998 to the consumer division on future trends that would affect strategy encountered a chilly reception. The president of the division sitting at this meeting dismissed the suggestions as “fun” futuristic stuff without many actionable implications. Four years later the future was there with plenty of action….
The absence of a rational approach to risk management using an early warning system cost Polaroid’s investors their investment and Polaroid’s employees their pension funds. Executives who listen only to the voices inside their heads make very poor risk managers.
If Polaroid’s saga is mainly the failure to properly manage the rise in the power of substitutes, Lucent’s story is a classic sad example of the failure to understand changing buyers’ needs.