Disruptive Innovation And The Bankruptcy Of Polaroid

Disruptive Innovation and the Bankruptcy of

Polaroid

Christian Sandström holds a PhD from Chalmers University of Technology, Sweden. He writes and

speaks about disruptive innovation and technological change.

www.disruptiveinnovation.se

In 2001, Polaroid declared bankruptcy. The disruptive shift from analog to digital photography put this industrial giant out of business.

One of the most fascinating things about capitalism is how powerful, huge companies can almost instantly become history.

The beauty of Polaroid cameras was that photos could be viewed instantly. When digital imaging enabled this to be done in a much cheaper way the competitive advantage of Polaroid was destroyed within only a few years.

Today there is a movement called ”Save Polaroid”, which tries to persuade film manufacturers to keep making the Polaroid film…

There’s even a website devoted to the task of saving Polaroid.

How could this happen?

How could this happen?

Did they recognize the threat from digital technology?

How could this happen?

Did they recognize the threat from digital technology?

How did Polaroid react?

How could this happen?

Did they recognize the threat from digital technology?

How did Polaroid react?

Let’s take a look at this amazing story…

Polaroid made their money by selling cheap cameras and then charge a lot of money for the Polaroid film. Since film is used continuously this turned out to be a fantastic business model with fantastic profits.

Just like Gilette makes great money by selling razor blades, Polaroid made great money by selling film. The main source of profit is not the razor or the camera, it’s the continuous consumption of blades and film.

Polaroid was founded in 1937 by Edwin Land. The business was initially based upon synthetic

polarizers, which were used for bomb sites during WW2. The company later shifted to

instant photography.

A photo like this would come out from the camera.

A fantastic innovation!

The firm made improvements of this technology over the decades. Polaroid experienced a remarkable growth and soon became a household name.

The firm made improvements of this technology over the decades. Polaroid experienced a remarkable growth and soon became a household name.

Between 1948 and 1978 sales grew 23 percent and profits grew 17 percent, both annually!

This remarkable success was based upon technological innovation. Hence, Polaroid became a technology-driven company which always looked for new challenges.

This remarkable success was based upon technological innovation. Hence, Polaroid became a technology-driven company which always looked for new challenges.

Edwin Land himself held over 500 patents, how many CEOs have that nowadays?

Polaroid believed firmly in innovation: ‘Do not undertake the program unless the

goal is manifestly important and its achievement nearly impossible. Do not do anything that anyone else can do readily.’

// Edwin Land, annual report 1980

The firm was so successful and profitable that Kodak just couldn’t keep away from the instant photography business.

Kodak made its own version, was sued by Polaroid for huge patent infrigements and had to leave the market in 1986.

As we all know, something has happened to photography…

It is digital nowadays.

Sony launched one of the first digital cameras, the Mavica in 1981. The photos were stored on a floppy disk and had a photo quality of 0,3 Megapixel.

During the 1980’s digital imaging was still in its infancy. The different ’Mavicas’ that were launched by other firms did not turn into any commercial successes.

Bill McCune took over as CEO after Land in 1975.

Being firmly committed to technology, McCune decided that Polaroid should move into digital imaging in the early 1980’s.

In 1986 Polaroid invested 30 million USD in a new unit called ”The Microelectronics Laboratory”.

In 1989, more than 40 percent of Polaroid’s R&D budget was spent on exploring various digital

imaging technologies!

The technological results were promising: in 1980 only 6 percent of the firm’s patents were related to electronics. In 1990, the same figure had grown to 28 percent.

However, being a technology-driven company, Polaroid always regarded the shift to digital imaging as a technological challenge, not as a market challenge. It was assumed that once the technology is ready, it will become profitable, somehow.

Therefore, Polaroid never developed any marketing capabilities for digital imaging, nor a new business model. It was assumed that the firm should stick to its fantastic razor blade business model, since it was so profitable.

So technologically speaking, Polaroid was well prepared for the shift to digital imaging. It even had a sensor of 1,9 megapixel in 1989.

So technologically speaking, Polaroid was well prepared for the shift to digital imaging. It even had a sensor of 1,9 megapixel in 1989.

But in terms of marketing and business models, it was never prepared.

So technologically speaking, Polaroid was well prepared for the shift to digital imaging. It even had a sensor of 1,9 megapixel in 1989.

But in terms of marketing and business models, it was never prepared.

And as we know, disruptive innovation is mainly a business model challenge.

For the first time ever, Polaroid experienced stagnating profits in the mid 1980’s. As a consequence, the firm became increasingly market-oriented in the 1990’s…

Being market oriented in this case implied that the Microelectronics Laboratory was sold to MIT in 1993!

In the 90’s the engineers were in permanent fights with senior management over what business model to adopt for digital imaging. Since there was no film – management thought that there are no profits, and therefore digital imaging was not attractive.

The conflicts and tensions paralyzed the company. Therefore, the digital prototype originally developed in 1992 was not launched until 1996. Once it was launched, the sales organization did not really know how to sell the product.

In the 1990’s Polaroid became increasingly market oriented. The new CEO Gary DiCamillo who joined in 1996 had a background in consumer marketing and cut down even more on technology.

This meant more money to marketing, and less money to R&D in 1996-2000.

So, the more crucial digital imaging becomes for the long-term survival of Polaroid, the less is spent on it!

Listening to customers and becoming more market-oriented is usually good in the short term….

Shareholders are happy and top management is praised as profits go up…

The Barbie camera from 1998 is one example of how Polaroid combined old technology with new marketing and made great money, in the short term…

Polaroid also teamed up with the Spice Girls and launched the Spicecam in 1998.

The joycam was launched in 1999 and also appealed to younger customers.

The same holds for the SportCam.

Or this version…? Good marketing, good profits, in the short term…

… After all, more film was sold, and that’s where the profits were made.

Polaroid took the razor blade business model for granted, that was after all what had generated such fantastic profits in the past!

Polaroid took the razor blade business model for granted, that was after all what had generated such fantastic profits in the past!

But once digital cameras were good enough and enabled a kind of instant photography, very few were interested in buying expensive Polaroid film anymore.

The firm went from huge profits to collapsing revenues within only a few years…

In late 2001 Polaroid was declared bankrupt and the remaining parts of the firm were sold.

Polaroid shares were traded at $60 in 1997.

Polaroid shares were traded at $60 in 1997. In 2001, they were frozen on the New York Stock Exchange at 28 cents.

Polaroid shares were traded at $60 in 1997. In 2001, they were frozen on the New York Stock Exchange at 28 cents. The stock lost 99,5 percent of its value!

The bankruptcy was a disaster for employees, retirees and shareholders.

In the months before this, Polaroid paid in total 6,3 million USD to senior executives.

The former CEO DiCamillo got 1,4 million USD.

Given that top management must be held responsible for this bankruptcy, this must be regarded as a ”very competitive” salary…

Well, it’s easy to blame management.

However:

“I wish I could say that things would be different today if Dr. Land were still running Polaroid, but my guess is that the days of instant photography have simply run out”

// Stephen A. Benton, who worked with Edwin Land for more than 20 years

So, we see that the more important digital imaging became, the less was spent on it!

So, we see that the more important digital imaging became, the less was spent on it!

It’s amazing to see that Polaroid was better prepared for this technological revolution in the 1980’s than in 2000.

So, we see that the more important digital imaging became, the less was spent on it!

It’s amazing to see that Polaroid was better prepared for this technological revolution in the 1980’s than in 2000.

WHY?

The greatest mistake was probably to view digital imaging as a technological challenge, not as a business model challenge.

Digital imaging was not compatible with the razor blade business model. Developing technology without a business model is not so difficult, Polaroid succeeded with that….

… But changing the business model is far more difficult, it implied:

… But changing the business model is far more difficult, it implied:

•Re-educating the sales organization

… But changing the business model is far more difficult, it implied:

•Re-educating the sales organization

•Lower profits

… But changing the business model is far more difficult, it implied:

•Re-educating the sales organization

•Lower profits

•Cannibalization

… But changing the business model is far more difficult, it implied:

•Re-educating the sales organization

•Lower profits

•Cannibalization

•Conflicts

… But changing the business model is far more difficult, it implied:

•Re-educating the sales organization

•Lower profits

•Cannibalization

•Conflicts

•Huge organizational changes…

… Doing all this is painful, shareholders don’t like it, managers don’t like it, and customers won’t like it…

… Then it’s more convenient to become increasingly market oriented…

… And draw upon existing competence.

Ironically, Polaroid went bankrupt by listening to their customers, by making shareholders happy and by focusing on the core competence.

So the main lesson from the sad story about Polaroid’s bankruptcy:

So the main lesson from the sad story about Polaroid’s bankruptcy:

Disruptive innovation is not primarily a technological challenge, it is a business model challenge.

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