Shell’s looming Kodak moment
Photo: The Economist.
“It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change”
This quote, often wrongly attributed to Charles Darwin, eloquently summarizes his evolution theory.
The other day I read an article about how a Kodak employee invented the digital camera in 1975. An odd historical fact, of course, knowing that Kodak today is an irrelevant player in the world of digital photography. It was not so long ago that the brand, founded in 1888 by George Eastman, was still affectionately and iconically used to describe the perfect picture opportunity – a ‘Kodak moment’. Sadly, today that same ‘Kodak moment’ has transformed in a brand inevitably becoming obsolete.
The first digital camera
The article explains how Steven Sasson in 1973 was employed by Eastman Kodak after getting his Masters in electrical engineering. He started working at the research lab and was appointed the ‘very small’ project of researching the imaging performance of a ‘charged-coupled device’, also known as CCD. The CCD, invented by Bell Labs a few years earlier, could translate electrical signals into digital values and triggered 24-year old Sasson to come up with an all-electronic camera, without mechanical parts. This first digital camera, recording the electrical signals on a cassette tape and requiring 30 seconds to depict a 100 by 100 pixel, black and white image on an external monitor, roughly had the size and weight of a toaster.
Steven Sasson – in the picture not 24 anymore – proudly shows the first digital camera, which he built at Kodak in 1975 (source: Megapixel.co.il).
They couldn’t imagine consumers watching their photos on a TV set. But the bright Sasson, not inhibited by company and industry conventions yet, was confident about his invention
Sasson demonstrated this entirely new product to executives from the marketing, technical and business departments and subsequently to higher levels in the organization. But the executives at Kodak were not impressed and told him: “that’s cute — but don’t tell anyone about it”. They couldn’t imagine consumers watching their photos on a TV set. But the bright Sasson, not inhibited by company and industry conventions yet, was confident about his invention. By using Moore’s Law he quite accurately predicted that within between 15 to 20 years his camera could compete with traditional film. He even suggested they should imagine the future digital camera as “an HP calculator with a lens”.
I can imagine why in 1975 Kodak was not eager to fully pursue this entirely new and disruptive digital technology; it would directly cannibalize on Kodak’s extremely successful business. Kodak was the market leader in analog film and virtually owned the entire chain of photography; people also used Kodak cameras, developed their photos with Kodak chemicals and printed them on Kodak paper. In 1976 Kodak accounted for 90% of film and 85% of camera sales in America.
You have to burn your boats
In hindsight it was Kodak’s near monopoly that became the nail in its coffin. While in its early years Kodak was constantly innovating and, as it were, the Google of its time, it became complacent when its market share grew comfortably big and unlearned how to innovate. Still, there was ample time for the executives to be woken up from their slumber and change their strategic course, before digital photography started to irreversibly eat up Kodak’s analog business. Already in 1979 Larry Matteson, a Kodak executive, wrote a report detailing how different parts of the market would switch from film to digital by 2010 – just like Sasson’s prediction this one was also quite accurate.
Kodak answered: “We didn’t hire you to tell us it’s over, we hired you to tell us the future of film
And much later in 1988 ‘futurist marketer’ Faith Popcorn was hired by Kodak to predict the future of film. In her report she predicted: “The future of film is digital” – which was at the time not even a radical prediction anymore. But Kodak answered: “We didn’t hire you to tell us it’s over, we hired you to tell us the future of film”. Instead of listening to Popcorn, in that same year Kodak bought a pharmaceutical for its chemicals (useful for the production of film) for over 5 billion dollars, which shows it kept seeing film as its core business. As late as the turn of the millennium, Kodak kept seeing digital as the enemy.
Only in 2003, when roughly half of the market was digital, Asia started to dominate the market for cheap digital cameras and just before consumers slowly but surely started to use their mobile phone as the camera of choice, Kodak finally flipped its corporate strategy. The analog giant hired Antonio Perez away from Hewlett-Packard, who then invested heavily in digital, shut down film factories and fired thousands of employees. In 2005 Perez told his top seven executives “You have to burn the boats” – quoting the Spanish conquistador Hernán Cortés. By then, however, it was too late.
US analog versus digital camera sales; when Kodak finally radically changed its strategy in 2003, it was too late, the digital competition was everywhere (source: Thirdway.org)
The tipping point
Already for a few years I see a striking parallel between Kodak and Royal Dutch Shell, the Anglo-Dutch multinational oil and gas company. This parallel might be invoked by the somewhat matching colors of the logos, but mostly has to do with strategic navel gazing and blindness for the outside world.
In Shell’s case the disruptive technology that is threatening its core business and existence doesn’t come from digital cameras, but from renewable energy, such as wind and solar power. If you read a newspaper every now and then, the trend is undeniable. Companies like Tesla, Nissan and Chevrolet are building (or preparing for) an all-electrical car market, in which by 2040 50% of the cars will be electric – according to a (nicely animated) prediction by Bloomberg. At the same time, many countries in Europe are clearly and seriously betting on renewables; Portugal two weeks ago ran for four days straight on renewable energy. Even Dubai, literally built on oil, now produces the cheapest solar energy in the world; less than 6 US cents per kilowatt-hour, which makes it cheaper than gas (9 cents per kilowatt-hour) and creates a competitive tipping point towards renewable energy. Many other counties around the world, such as China, India, Germany, Morocco and Mexico, are also quickly reaching their tipping point. An estimate, by the Economist, predicts that by 2030 20% of the world’s energy will be renewable.
And though Shell proudly claims that its future scenarios “challenge conventional wisdom” it still defines itself firmly as an oil and gas company
You would guess Shell knows all this. After all, according to its website the company has been “developing possible visions of the future since the 1970s”. And though Shell proudly claims that its future scenarios “challenge conventional wisdom” it still defines itself firmly as an oil and gas company – while it should redefine itself as a (sustainable) energy supplier. What’s even more surprising are Shell’s actual scenarios for the coming 50+ years. In the most sustainable scenario “cleaner-burning gas becomes the backbone of the energy system” and in the second scenario “oil remains widely used in power generation until mid-century”. As if the company lives on a different planet.
The Innovator’s Dilemma
To understand why companies such as Kodak and Shell seem strategically blind for disrupting technologies that seriously endanger their businesses, I read The Innovator’s Dilemma, a classic by Clayton Christensen, first published in 1997. The book thoroughly explains why it’s so difficult for established companies to embrace change.
The most important reason is risk aversion – which is, in fact, an evolutionary personality trait that most people have. Established companies prefer to invest in safe, proven technologies. Only when a disruptive innovation has gained a substantial, profitable market share, they will switch their investments. The problem with this strategy is that once a disruptive technology has gained momentum, successfully entering its market is nearly impossible. Only the players that enter the emerging market early have the ‘first-mover advantage’. So, what seems a safe strategy from the outset, turns lethal when the disruptive industry is growing mature – hence the title of Christensen’s book.
Shells strengths – its know how, skills and culture that transform oil and gas into value – are now turning into its weaknesses
Christensen furthermore explains that the biggest enemy of a company that needs to adopt a disruptive technology are the ‘processes’ and ‘values’ that are solidly embedded in the company. The processes can transform resources (things like people, technology, information and money) into products and services, thus adding value to a company. With the values a company prioritizes whether an order, client or idea for a new product is attractive enough. Simply put, at Shell all processes and values are structurally aimed at transforming oil and gas into value. Wind and solar energy are simply not attractive because at this point they can’t add as much value to the company as fossil fuels. Which means that Shells strengths – its know how, skills and culture that transform oil and gas into value – are now turning into its weaknesses.
Investing in wind farms
Christensen offers three solutions to overcome these weaknesses; you acquire a different organization built around the disruptive technology (e.g. a company that produces wind turbines or builds wind farms), you change the processes and values of your current organization (e.g. you hire a CEO with the vision and determination of Elon Musk) or you found an independent organization that develops its own processes and values required to successfully enter a new market. The third option has the biggest chance of survival, since changing a corporate culture is extremely difficult. Especially when you’ve become a complacent dinosaur – just like Kodak at the time.
Shell is in a bid to build a wind park off the Dutch coast. A change of strategy or simply strategic window dressing? (source: Wikimedia).
Shell might argue it is working on all three solutions. Last week, I read in a Dutch newspaper that Shell made a bid for building an offshore wind energy farm in front of the Dutch coast – together with Dutch companies Eneco and Van Oord. In the same week I read in the Guardian that Shell just founded a new company called New Energies, which invests in renewable and low-carbon power.
The problem with these sustainable projects, however, is that Shell is not convincingly allocating its resources towards these projects
The problem with these sustainable projects, however, is that Shell is not convincingly allocating its resources towards these projects. According to the Guardian, New Energies’ annual spending is less than 1% of what Shell invests in oil and gas. What’s more, New Energies will be run alongside the ‘Integrated Gas’ division, which operates with Shell’s typical core processes and values and thus has different priorities. Therefore, New Energies most likely won’t be getting the resources that it requires to seriously make a dent in the renewable energy market. New Energies might be the first step in a sustainable strategic course, but for now it sounds more like strategic window dressing.
A tsunami building up
Especially when you look at Kodak’s efforts to turn into a digital company just before the digital market started to break even with the analog market, Shell still has a long way to go in redefining itself. In 2005 Kodak was even the #1 digital camera seller in the US. However, Kodak was losing a lot of money on every camera sold. At the same time Asian competitors undercut Kodak’s cameras by producing their cameras more cheaply. And, on top of that, Kodak was quickly losing market share in the much more profitable analog business. Kodak was thus stuck in the middle of two losing businesses.
If you keep betting for too long on the old, more profitable technology, you don’t stand a chance against your future competition that is nimble and solely focused on the disruptive technology
Clay Christensen admits that for Kodak it was virtually impossible to survive the digital “tsunami” that hit the company, because the digital technology was so fundamentally different from film. The lesson is that if you keep betting for too long on the old, more profitable technology, you don’t stand a chance against your future competition that is nimble and solely focused on the disruptive technology. So, while the tsunami is building up around the world, in all sorts of industries Shell is firmly holding onto its doomed technology.
The adoption of renewable energy is accelerated by a cultural aversion towards C02 polluters (photo taken in 2015 by Wouter Boon).
The brightest engineers, managers and investors in the energy industry will quickly shift their brains and bucks towards more visionary and sustainable organizations
Even if Shell thinks its market is completely different from Kodak’s and convinced it can write better future scenarios, there’s another important issue forcing Shell to dump these scenarios as soon as possible (an issue, for that matter, that Kodak didn’t even have to deal with). There’s a strong cultural aversion in society towards companies that drill, frack, exploit and rely on fossil fuels and thus increase CO2 emissions, cause temperatures and water levels to rise, islands and deltas to drown, species to go extinct, etc. In the next decade these kinds of companies will incur an increasing amount of bad publicity and thwarting government politics. What’s more, the brightest engineers, managers and investors in the energy industry will quickly shift their brains and bucks towards more visionary and sustainable organizations – in fact, Shell shareholders are already asking for a change of course. This cultural mindset will only reinforce the acceleration towards renewable energy – and possibly flip the market even more quickly than now predicted.
So, the bottom line is that Shell needs to rapidly reinvent itself, because at some point in the near future its oil and gas reserves will become as worthless as Kodak’s analog film. If Shell keeps allocating most of its resources towards increasing these reserves its Kodak moment is inevitable. And I don’t mean the one that refers to a pretty picture, of course. I mean the one that announces a brand’s inevitable death.