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Sustaining vs Disruptive Innovation through the Lens of Kodak

25 February 2025

Geof read Clayton Christensen’s The Innovator’s Dilemma. The book details the difficulty managing an incumbent business while also thinking about market disruptions.

Tags: geof read, learning

Below is a photograph of me and my cousins taken in the summer of 1975, posing on one of the lifeguard stands along the beach in Ocean City, Maryland. It’s a 35mm Kodak Kodachrome print taken by my dad with his Canon camera. We could reprint and enlarge this image, keeping the detail, resolution, and color of the original. This was taken the same year Kodak worldwide sales passed $3 Billion and they commanded 90% of the film market and 85% of camera sales worldwide. It was also taken the same year Kodak engineer Steven Sasson invented the first digital camera.

Kodak’s now famous story is an example of The Innovator’s Dilemma, outlined in Clayton Christensen’s book by the same name. Christensen outlined a series of five principles to help managers understand the dynamics of disruptive technologies. The most interesting concepts for me were:

• The role of customers and consumers in defining a company’s value network. This is Christensen’s first Principle. Companies depend on customers and investors for resources. 
• Shifts in consumers’ perception of value among established markets. This is Christen’s fifth Principle. Technology supply may not equal market demand.  

Principle One: Companies Depend on Customers and Investors for Resources
It is easy, with hindsight, to criticize Kodak’s management for being short sited by not investing in digital technology earlier. Managers at established companies often focus on sustaining innovations, improving existing products for current customers, and commanding a higher margin to reinvest and return to shareholders. This is not unreasonable, and Kodak managers did a good job at listening to film processing retail customers and consumer photographers and investing in innovations to make it easier to take and develop print pictures. 

Kodak’s innovation investments were made to sustain value for its existing film, paper, and chemical customers - the drive up Fotomat stores, ubiquitous “one hour photo” departments in drugstores, and photography shops.

“Sales in the quarter advanced to $1.29 billion from $1.18 billion. The solid third quarter earnings by Kodak, however, was not enough to overcome the performances in the earlier six months as the camera and film maker reported profits of $409.55 million for the first nine months of 1975 compared with $409.63 million in the first nine months of 1974. Gerald B. Zornow, Chairman, said that improved operating results for the third quarter reflected the general upturn in economic activity accompanied by a strengthening in the company's business worldwide.” (source New York Times, October 16, 1975, page 55)

Imagine you are Kodak’s Zornow, and responsible for delivering a modest 10% income return to your shareholders (they returned 14.3 percent in 1975). Are you going to invest your scarce R&D dollars in a technology that will all but render your key customers (film sales and print developers) obsolete? Or are you going to sustain your current value network and invest in sustaining innovations around film, print, and chemicals? This is the Innovator’s Dilemma.

Christensen’s definition of a firm’s technology is “the processes by which an organization transforms labor, capital, materials, and information into products and services of greater value.”  Kodak’s technology, its sales force, film, chemical, and paper manufacturing were focused on sustaining and growing its products and services. This included new convenient film formats like instamatic film cartridges and disposable cameras. These innovations offered greater film loading convenience over the traditional 35mm film cartridges for consumers. These innovations also guaranteed continued sales of Kodak film, paper, and chemical to its retail customers. 

Principle Two: Small Markets Don’t Solve the Growth Needs of Large Companies

The first US commercially sold digital camera was the Dycam Model 1 released in 1990. The camera could capture up to 32 0.09-megapixel images that had to be downloaded before the battery died. (source www.vintagedigitalcameras.com) With the lower resolution, less than one percent the resolution of traditional 35mm film, early digital cameras offered new consumer value such as immediacy, convenience, and portability. However, that market demand for low quality digital pictures was significantly lower than the film market for incumbent companies like Kodak to justify investment.

Dycam eventually licensed the technology to Logitech. Managers at companies like Logitech, for whom a smaller return was still significant compared to Kodak’s required sustaining returns, could afford to invest in newer digital technology. As digital technology improved, and cameras offered the value of immediacy and better image resolution, more mainstream consumers made the shift from film to digital. Companies like Nikon and Sony, not as beholden to film, paper, and chemical customers like Kodak, were able to invest their innovative dollars to improving camera quality. (Interestingly, these same companies were not as successful in adapting to the disruption in digital phone photography.)

Briefly, the other Principles are:

Principle Three: Markets that Don’t Exist Can’t be Analyzed

This reinforces the necessity for a “test and learn” mindset and minimizing risk in driving upward (sales and profit) mobility in emerging markets. The best quote here is “Guessing the right strategy at the outset isn’t nearly as important to success as conserving enough resources so that new business initiatives get the second or third stab at getting it right.”

Principle Four: An Organization’s Capabilities Define its Disabilities

I think this is closely related to Principle One - Companies depend on customers and investors for resources. Kodak’s core capabilities, since its inception, were focused on film, print, and chemicals. Kodak invented entire value networks based on developing film, commanding market share dominance.

Principle Five: Technology Supply May Not Equal Market Demand

The performance of early digital photography was woefully inferior to traditional print in terms of image quality. However, as the market for digital convenience grew (and the opportunity to capture more profit and margin), the technology caught up.

Even though it is almost 30 years old, The Innovator’s Dilemma, and managing the paradox of sustaining innovation versus disruptive innovation still holds up. How can leaders balance demands of profit and margin operating incumbent businesses while still being flexible enough to lead (or at least effectively react to) the disruptors? If you’d like to learn more about this, the second half of the book offers some useful strategies. 

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