Disruptive Innovationand the Bankruptcy ofPolaroid

Christian Sandström holds a PhD
from ChalmersUniversity of Technology, Sweden. He writes andspeaks about disruptive innovation andtechnological change.www.disruptiveinnovation.se

In 2001, Polaroid declared bankruptcy.The
disruptive shift from analog todigital photography put this industrialgiant out of business.

One of the most fascinating
thingsabout capitalism is how powerful,huge companies can almostinstantly become history.

The beauty of Polaroid cameras
wasthat photos could be viewed instantly.When digital imaging enabled this tobe done in a much cheaper way thecompetitive advantage of Polaroid wasdestroyed within only a few years.

Today there is a movement
called”Save Polaroid”, which tries topersuade film manufacturers to keepmaking the Polaroid film…

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

How could this happen?

How could this happen?Did they
recognize the threat fromdigital technology?

How could this happen?Did they
recognize the threat fromdigital technology?How did Polaroid react?

How could this happen?Did they
recognize the threat fromdigital technology?How did Polaroid react?Let’s take a look at this amazing story…

Polaroid made their money by
selling cheapcameras and then charge a lot of money forthe Polaroid film. Since film is usedcontinuously this turned out to be a fantasticbusiness model with fantastic profits.

Just like Gilette makes great
money by sellingrazor blades, Polaroid made great money byselling film. The main source of profit is notthe razor or the camera, it’s the continuousconsumption of blades and film.

Polaroid was founded in 1937
by Edwin Land.The business was initially based upon syntheticpolarizers, which were used for bomb sitesduring WW2. The company later shifted toinstant photography.

A photo likethis wouldcome outfrom
thecamera.A fantasticinnovation!

The firm made improvements of
thistechnology over the decades. Polaroidexperienced a remarkable growth andsoon became a household name.

The firm made improvements of
thistechnology over the decades. Polaroidexperienced a remarkable growth andsoon became a household name.Between 1948 and 1978 sales grew 23percent and profits grew 17 percent,both annually!

This remarkable success was basedupon
technological innovation. Hence,Polaroid became a technology-drivencompany which always looked for newchallenges.

This remarkable success was basedupon
technological innovation. Hence,Polaroid became a technology-drivencompany which always looked for newchallenges.Edwin Land himself held over 500patents, how many CEOs have thatnowadays?

Polaroid believed firmly in innovation:‘Do
not undertake the program unless thegoal is manifestly important and itsachievement nearly impossible. Do notdo anything that anyone else can doreadily.’// Edwin Land, annual report 1980

The firm was so successful
and profitablethat Kodak just couldn’t keep awayfrom the instant photography business.Kodak made its own version, was suedby Polaroid for huge patent infrigementsand had to leave the market in 1986.

As we all know, something
hashappened to photography…

It is digital nowadays.

Sony launched one of the
first digitalcameras, the Mavica in 1981. The photoswere stored on a floppy disk and had aphoto quality of 0,3 Megapixel.During the 1980’s digital imaging was still inits infancy. The different ’Mavicas’ thatwere launched by other firms did not turninto any commercial successes.

Bill McCune took over as
CEOafter Land in 1975.Being firmly committed totechnology, McCune decided thatPolaroid should move into digitalimaging in the early 1980’s.

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

In 1989, more than 40
percent of Polaroid’s R&Dbudget was spent on exploring various digitalimaging technologies!

The technological results werepromising: in
1980 only 6percent of the firm’s patentswere related to electronics. In1990, the same figure hadgrown to 28 percent.

However, being a technology-driven company,
Polaroidalways regarded the shift todigital imaging as atechnological challenge, notas a market challenge. It wasassumed that once thetechnology is ready, it willbecome profitable, somehow.

Therefore, Polaroid neverdeveloped any marketingcapabilities
for digitalimaging, nor a new businessmodel. It was assumed that thefirm should stick to its fantasticrazor blade business model,since it was so profitable.

So technologically speaking,Polaroid was well
prepared forthe shift to digital imaging. Iteven had a sensor of 1,9megapixel in 1989.

So technologically speaking,Polaroid was well
prepared forthe shift to digital imaging. Iteven had a sensor of 1,9megapixel in 1989.But in terms of marketing andbusiness models, it was neverprepared.

So technologically speaking,Polaroid was well
prepared forthe shift to digital imaging. Iteven had a sensor of 1,9megapixel in 1989.But in terms of marketing andbusiness models, it was neverprepared.And as we know, disruptiveinnovation is mainly abusiness model challenge.

For the first time ever,
Polaroid experienced stagnatingprofits in the mid 1980’s. As a consequence, the firmbecame increasingly market-oriented in the 1990’s…

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

In the 90’s the engineers
werein permanent fights withsenior management over whatbusiness model to adopt fordigital imaging. Since therewas no film – managementthought that there are noprofits, and therefore digitalimaging was not attractive.

The conflicts and tensionsparalyzed the
company.Therefore, the digitalprototype originally developedin 1992 was not launched until1996. Once it was launched,the sales organization did notreally know how to sell theproduct.

In the 1990’s Polaroid becameincreasingly
market oriented.The new CEO Gary DiCamillowho joined in 1996 had abackground in consumermarketing and cut down evenmore on technology.

This meant more money tomarketing,
and less money toR&D in 1996-2000.

So, the more crucial digitalimaging
becomes for the long-term survival of Polaroid, theless is spent on it!

Listening to customers andbecoming more
market-oriented is usually good in theshort term….Shareholders are happy andtop management is praised asprofits go up…

The Barbie camera from 1998is
one example of how Polaroidcombined old technology withnew marketing and made greatmoney, in the short term…

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

The joycam was launched in
1999 andalso appealed to younger customers.

The same holds for the
SportCam.

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

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

Polaroid took the razor bladebusiness
model for granted, thatwas after all what had generatedsuch fantastic profits in the past!

Polaroid took the razor bladebusiness
model for granted, thatwas after all what had generatedsuch fantastic profits in the past!But once digital cameras were goodenough and enabled a kind of instantphotography, very few wereinterested in buying expensivePolaroid film anymore.

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

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

Polaroid shares were tradedat $60
in 1997.

Polaroid shares were tradedat $60
in 1997.In 2001, they were frozen onthe New York StockExchange at 28 cents.

Polaroid shares were tradedat $60
in 1997.In 2001, they were frozen onthe New York StockExchange at 28 cents.The stock lost 99,5 percentof its value!

The bankruptcy was a disaster
foremployees, retirees andshareholders.In the months before this, Polaroidpaid in total 6,3 million USD tosenior executives.

The former CEO DiCamillo got
1,4million USD.Given that top management mustbe held responsible for thisbankruptcy, this must be regardedas a ”very competitive” salary…

Well, it’s easy to blame
management.However:“I wish I could say that things would bedifferent today if Dr. Land were stillrunning Polaroid, but my guess is thatthe days of instant photography havesimply run out”// Stephen A. Benton, who worked withEdwin Land for more than 20 years

So, we see that the
more importantdigital imaging became, the lesswas spent on it!

So, we see that the
more importantdigital imaging became, the lesswas spent on it!It’s amazing to see that Polaroid wasbetter prepared for thistechnological revolution in the1980’s than in 2000.

So, we see that the
more importantdigital imaging became, the lesswas spent on it!It’s amazing to see that Polaroid wasbetter prepared for thistechnological revolution in the1980’s than in 2000.WHY?

The greatest mistake was probablyto
view digital imaging as atechnological challenge, not as abusiness model challenge.Digital imaging was not compatiblewith the razor blade business model.Developing technology without abusiness model is not so difficult,Polaroid succeeded with that….

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

… But changing the business
model isfar more difficult, it implied:•Re-educating the sales organization

… But changing the business
model isfar more difficult, it implied:•Re-educating the sales organization•Lower profits

… But changing the business
model isfar more difficult, it implied:•Re-educating the sales organization•Lower profits•Cannibalization

… But changing the business
model isfar more difficult, it implied:•Re-educating the sales organization•Lower profits•Cannibalization•Conflicts

… But changing the business
model isfar 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 becomeincreasingly market oriented…

… And draw upon existing
competence.

Ironically, Polaroid went bankrupt bylistening
to their customers, bymaking shareholders happy and byfocusing on the core competence.

So the main lesson from
the sad storyabout Polaroid’s bankruptcy:

So the main lesson from
the sad storyabout Polaroid’s bankruptcy:Disruptive innovation is not primarilya technological challenge, it is abusiness model challenge.

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