Business Failure and Systematic Multi-Level Root Cause Analysis - Case Study Example

Business Failure Case Study

Introduction

The term business failure denotes a situation whereby a company is forced to halt its business activities and operations because it can no longer make any substantial profit or even generate adequate income to cater for its basic business needs and expenses (Artinger & Powell 2015). In the words of Everett and Watson (1993, p. 371), a situation where a business is considered a failure normally occurs when it only generates losses to its creditors, and they use more money in the business than they make. According to Sharma and Mahajan’s (1980) view, business failures are mainly caused by either internal or external factors which bring crisis to business operations. Internal crisis factors that cause businesses to fail may include, but are not limited to, poor management choices, lack of vision, tact, plan and strategy, poor internal communication, insufficient control or accountability measures, excessive managerial bureaucracy, unsatisfactory product or service quality, poor customer service, inadequate marketing and promotion, and lack of planning for the future among others. Governance is considered to be key in controlling internal factors that may lead to business failure. External crisis factors that may cause business failure may include fluctuations in market demands, failure to embrace and develop technologies, economic crises, changes in exchange rates, forces of nature, insolvency of suppliers or clients, and government regulations among others. External factors are considered to be environmental conditions that are usually uncontrollable (Sharma & Mahajan 1980). This paper will research and critically analyze the financial problems and lack of profitability at Eastman Kodak Company, commonly referred to as Kodak, which led to its failure. The root causes of the failure of Kodak will be analysed on multiple levels by examining different approaches, and a turnaround or exit strategy developed and discussed.

Kodak is a technology firm headquartered in America which has its business roots in photography and imaging products. The company began its operations in 1888 with George Eastman as its founder (Black 2010). The company is known to provide graphic communication, printing, and packaging services and business solutions. Its operations and business activities are on a global scale. As opined by Fandel (2007), the name Kodak has always been synonymous with the production of photographic films and imaging products. The business was divided into segments of commercial and entertainment films, graphics and enterprise, and digital printing. The company has for the longest time been dominating the photographic film industry, especially throughout the entire 20th century (Chunka 2012). Many analysts who have reviewed the case of Kodak state that the success of Kodak as a company was the same reason that it failed because it chose to stick to its old ways of doing business.

In 2012, Kodak filed for bankruptcy after struggling with financial challenges since the late 1990s (Chunka 2012). The financial struggles and subsequent bankruptcy can be evidenced by the thorough analysis of the financial data of the company for the past five years before it filed for bankruptcy. The number of analysts that reviewed the financial performance and strategy of Kodak for a number of years before it filed for bankruptcy are evidence that the once dominant company in the photographic film and imaging industry was slowly coming to its knees (Pham-Gia 2009). On the surface, the problems faced by Kodak are blamed on its failure to shift into the digital world soon enough and embrace technology that was pertinent to its operations. However, digging deeper into the problems of Kodak reveals that there was more than meets the eye when it comes to its failure as discussed in the next section of this paper. Failure to embrace digital photography by Kodak is often blamed on the management’s rigidity to change with current times (Black 2010).

Systematic multi-level root cause analysis

It is important to note that, before its failure, Kodak was one of the most successful companies globally. Kodak dominated the photographic film market throughout the 20th century. One reason for Kodak’s market dominance was because it took time to understand the needs of its clients and connect well with them. Most of the products of Kodak were a true reflection of the expectations and needs of consumers. In 1976, Kodak held a 90% stake in the market share (Black 2010). Another reason for its success was the fact that its prices, especially prices for cameras, were quite affordable to their clients. The company ensured that it remained successful by using the Push system of production and sales whereby the market was only there to buy the goods that were produced. This means that it was able to dictate what was to go into production as well as the quantities that were to be produced. For this reason, consumers were forced to buy only what the company had produced because competition was nonexistent. This meant that they did not have a choice since there was no variety of products. Kodak enjoyed this monopoly for quite some time.

Kodak also remained highly successful because of the strategy that it used to market its products. Because competition was practically nonexistent, Kodak used a Freebie type of strategy to market photographic materials and equipment which was also referred to as the razor and blades marketing style (Khanna, Guler & Nerkar 2015). This type of marketing strategy involved giving away of a product at a very low price so that the sale of another product would be promoted or encouraged. Kodak would give away a product at a very low price so as to encourage the sale of another product at a relatively low price. This meant that Kodak would sell a certain product at a very low price so as to create market for another product (Laamanen, Lamberg & Vaara 2016). The company ensured its products were of top notch quality so that it could attract and retain its client base. Kodak’s market share remained favorable because its marketing strategy ensured that its finances were not affected. Since Kodak commanded a great market share in the photographic film and imaging industry, it was able to offer its products at a very low price and still make huge profits without hurting its financial performance. This is what enabled Kodak to be successful globally. The success of Kodak clearly shows that its leadership was visionary and committed to the success of the company.

The success of Kodak began to diminish after it had enjoyed the largest market share for many years. In conducting a multi-level root cause analysis of the failure of Kodak, it is prudent to use Everett and Watson (1998) view of examining the macro, meso, and micro business environments in order to understand the factors that contributed to the problems that the company faced. In regard to the macro business environment, the failure of Kodak could be largely associated with lagged retail sales that resulted from failure to make a go for it when other businesses in the same sector were keeping up with current business trends. In regard to the meso (sector/industry) business environment, Kodak was hit by an excess entry of other companies into the photographic film and imaging industry. Companies such as Fujifilm and Sony came and took the photographic film industry by storm, dethroning Kodak from its dominant market position. Technological development can also be used to explain Kodak’s failure in terms of its meso business environment. In fact, this is largely thought to be Kodak’s greatest contributor to its failure. Digital photography came as a disruptive technology to Kodak. Many analysts are of the opinion that Kodak remained in denial for a long time by shunning technology and failing to embrace digital photography. Kodak failed to notice the changing nature of the photographic film and imaging industry. Even when it noticed, Kodak still fought so hard to uphold conventional photography and shun digital photography. The micro (firm) business environment can be said to have contributed to Kodak’s failure as a result of the management’s inefficiencies and mistakes.

Competition is a major factor that led to the failure of Kodak. According to Shepherd et al. (2000), it is evident that Kodak’s failure to anticipate and diagnose its failure by not paying keen attention to sales and marketing greatly contributed to its failure. In reference to Shepherd’s et al. (2000) thinking, Kodak’s competitor took the opportunity to venture into the US film industry and ran with it by focusing on proper market research, low/value pricing, and better promotion and sales channels. Fujifilm introduced high quality films and photography supplies at a much lower price than Kodak in the US market through Fuji Photo Film USA. Before the entry of Fujifilm into the photographic film and imaging market, Kodak knew it dominated the market and it did not believe that consumers, especially in America, could ever desert its well-known brand for a new comer in the market. This overconfidence that it was the king of the market, according to Artinger and Powell (2015), greatly contributed to its subsequent failure. When given the opportunity to officially film the 1984 Olympics in Los Angeles, Kodak passed on it and failed to secure the sponsorship rights. Fuji ran with the opportunity by securing the sponsorship rights. This is what gave Fuji a stable niche in the photographic film and imaging market, leading to the firm’s official opening of a film plant in America. Fuji also came up with relatively lower priced products that attracted Kodak’s loyal clients.

In conducting a root cause analysis towards the failure of Kodak, it is important to ask this critical question: why did Kodak fail? To answer this question, it is important to analyze the reasons why Kodak failed from a multiple view point. On the surface, many analyses done on the failure of Kodak seem to indicate that it failed because of its preparedness to embrace the digital world fast and well enough. However, recent analyses seem to reveal that there were several people who saw the problem coming in the organization but failed to inform it early enough about the problems (Black 2010). Technological discontinuities were the main problem the faced the company when it began to receive competition from worthy rivals. Kodak felt that new digital technologies had aggressive opponent who had much better products to offer than itself. These competitors seemed to offer low price margins that threatened to cannibalize the high margin central business of Kodak. These were unavoidable challenges that Kodak failed to take commensurate action to deal with (Rhaiem 2012).

Kodak’s failure to adapt to digital technology in the photographic film and imaging industry can be blamed for its gradual failure (Black 2010). Kodak simply failed to change with current times and embrace digital technology. Its leaders are to blame for failing to see that sticking with analog photographic film and imaging processes and products would set the company on a catastrophic path of failure. The external business environment in the photographic film industry was undergoing major technological changes with the invention of digital photography. Other companies such as Fuji and Sony ran with these new digital technologies in photography and came up with better products and new innovations that enhanced customer experience. Kodak’s leadership saw all these things happening but failed to take up necessary steps and actions to address the situation and ensure that the company retains its market share (Rhaiem 2012).

It has been noted that the company’s failure to adapt to digital technology is to blame for its failure. However, a root cause analysis of this problem can reveal that its leadership is to blame for realizing this problem and failing to take appropriate corrective measures. Being the oldest company in the photographic film industry, Kodak’s leadership knew exactly what to do to retain the largest market share as before. The company was the first to innovate the digital camera in 1975 but Sony introduced the first digital camera to the market six years later. This means that at that point in time, it saw the need to embrace technology and venture into digital photography so as to boost its competitiveness. However, its failure to keep up with technology is what is not understandable. Kodak acted in a manner likely to suggest that it was not ready for digital photography. Poor strategic decisions by Kodak’s leadership and management are to blame for its failure (Pham-Gia 2009). When George Fisher was brought on board in 1993 to take up Kodak’s leadership mantle, the fact that he was a technology expert made people believe that Kodak would recover from the slump it had fallen into. However, complacency was to blame for its failure to pick up. Even the top management failed to make it its priority to ensure that the failure to effectively embrace digital technology was adequately addressed. The management failed to take up the matter as urgent and treat it with the seriousness it deserved. People with good ideas were constantly ignored and those who saw oncoming problems were not given the opportunity to address them because of hierarchy (Kotter International 2012).

Kodak’s leadership failed the company by not coming up with strategic plans that would enable its smooth transition into digital photography without having negative effects on the market share of its original products. The company appeared to have lost touch with the market by failing to keep up with current times and coming up with products that suited the current market. The management failed to take note of the changes occurring in the photographic film and imaging industry (Kotter International 2012). Digital photography changed the needs and demands of the market, but Kodak failed to act promptly and keep up with these needs and demands. Even though Kodak had pioneered digital photography, it failed to embrace it fast and early enough. Its competitors took full advantage of Kodak’s complacency and came up with effective strategies to adapt to digital photography before Kodak had the opportunity to react. Kodak’s competitors did not give it the opportunity to bridge the gap between digital technology and its past because it would have retained its highest market share as before (Pham-Gia 2009).

Kodak was also faced with numerous internal conflicts that saw the leaders fail to unite and drive the company to success. The leadership was divided because there were some who saw the need to fully embrace digital technology while others were stuck in the past and wanted Kodak to retain its pride of offering its core original products (Byrne & Shepherd 2013). Overreliance on its loyal customer base led to its downfall because customers chose to buy products that kept up with digital technologies.

Turnaround/exit strategy

A good turnaround/exit strategy out of the mess that Kodak had got itself into would be staying in touch with the needs and demands of the market. Kodak had been successful and had dominated the market for quite a long time that it felt that the only way to continue being successful was to retain its old products. This was a major mistake as the needs and demands of the market had changed. Kodak should have stayed in touch with the expectations of the market as this was the only way to satisfy the needs of the customers. It is important to understand what the market expects because Kodak would realize what competitors were doing and thus have the ability to counter those strategies and remain competitive (Laamanen, Lamberg & Vaara 2016).

Overreliance on the loyal customer base should also be discouraged because customers will always go for what favors them the most in terms of meeting their unique needs at the lowest possible cost. This overreliance leads to overconfidence which leads to complacency. Kodak should use the loyal customer base as its basis for launching new products that are in touch with the expectations of the same customers (Ucbasaran, Shepherd, Lockett & Lyon 2013). The customers already trust the company to come up with high quality and innovative products, so Kodak should take advantage of that loyalty and use it to ensure that the needs of the customers are satisfied.

According to Gelder, de Vries, Frese and Goutbeek (2007), the leadership should ensure that its people do not fear embracing new technologies because they fear affecting their business by losing their original products. It should understand that the needs and demands of customers can vary from time to time. It should also understand that customers may want to keep up with technology and embrace new things in the market. Instead of remaining rigid, the company should try to understand the exact needs of the customers and come up with products that satisfy those needs.

Market audits are also important for Kodak because it will be able to find out how its products and business activities are perceived by the outside world. By doing this, it can be able to know what it is doing right and where it is failing. This will give it the opportunity to know what to change and what not to change, or what to improve on. By doing this, its focus will always be on the needs and expectations of the market, which is crucial for any business (Deichmann & van den Ende 2014).

The management should be able to see that digital photography is a disruptive technology that can either make or break the business. Staying in denial is a big mistake that can cause the company to fail. Viewing digital photography as a disruptive technology would allow Kodak to see the need to embrace digital technology in its core business. This calls for identifying what competitors are doing and coming up with ways to counter their strategies. Allowing competitors to come up with better ways of doing business and doing nothing about it is a great business mistake that should be avoided (Singh, Doyle & Pavlovich 2015).

Conclusion

Success or otherwise of any business is usually determined by a number of factors that have been discussed in this paper. However, in the case of Kodak and many other failing companies, one of the most crucial factors is leadership. Kodak’s leadership failed to come up with proper strategies that would ensure it continued to enjoy the lion’s share of the market. Leadership decisions and strategies are what the rest of the team will follow and implement. So, in Kodak’s case, the poor leadership decisions and strategies are what the rest of the workforce had to implement. Initially, the leadership was quite focused because the company was very successful. However, the loss of focus along the way is what saw the company grapple with the issues it is currently facing. Even though the lack of competitors initially gave the company a good advantage in the market, it failed to realize that its competitors were using better strategies than them when they embraced digital technologies. The success of Kodak is said to have also contributed to its failure because it brought about overconfidence. Conservative leadership is also to blame for failing to embrace digital technology. Good takeaways would be working towards understanding why the leadership was conservative. It would also be prudent to understand why Kodak made poor strategic decisions and it continued to do so even after it realized it was failing.