Laguna Niguel, CA

Thursday, January 26, 2012

In recent days, Eastman Kodak, once one of the most respected companies in the world, has filed for bankruptcy protection as it attempts to sell its treasure chest of patents in order to raise needed funds. The company that gave us our Kodak moments has become a victim of the digital age. What is most ironic is the fact that the company that was once celebrated for its numerous technological innovations and despite having invented the first digital camera in 1975 has been a victim of its own invention. Certainly management should have known that improvements in digital photography would obsolete Kodak's business model of selling easy to use cameras in order to sell highly profitable film products and processing services.

In part Kodak's demise can be traced to the need to protect current business models while positioning itself for the future.  Unfortunately for Kodak this was not done. Cannibalize its lucrative businesses for some new fangled way of taking pictures would probably have not set well with its investors who feasted on its dividends and price appreciation. However, as events unfolded, it should have been obvious to management that at some time it should have ridden the wave of innovation in digital cameras. Instead it finds itself trying to reinvest itself as among all things a printer company. Given the dominance of companies such as Hewlett-Packard, Brother, Epson, et al. this is a dubious strategy. Much of the market for affordable digital cameras is now being threatened by the ubiquitous cell phones that are used by hundreds of millions of consumers throughout the world who share their prized pictures digitally rather than by exchanging photographs. A trend that calls into question the advisability of management's current emphasis on printers.

The intent of this article is not to discredit Kodak and its management but to draw lessons from their experience. Some companies have, in fact, been willing cannibalize their existing businesses in order to take advantage of more lucrative opportunities. Intel, a company that has been driven by paranoia, voluntarily changed itself from a producer of memory chips to one that produced microprocessors.  Its current dominant position in that market space has allowed it to enjoy high profits by constantly investing billions of dollars in research and development and in leading edge manufacturing facilities. IBM, a company that as is the case with Kodak is a centagenerian, realized that it had lost its competitive advantage in the PC market and sold the business. It also repositioned itself from a hardware centric company to one that emphasizes services and software.

Of the fifty companies that were pronounced the "nifty fifty" in 1972, less than 40 percent exist as independent companies today. At that time investments in these companies were considered to be the epitome of buy and hold investments.  Unfortunately, events since then have invalidated that perception.  Some such as Polaroid, the pioneer of instant photography, Digital Equipment, one of the dominant producers of minicomputers, and Burroughs, a mainframe computer company were victims of changes in technology that they failed to recognize in time to save them.  Others such as Kresge aka Kmart and J.C. Penney while still in existence today have lost market share to Wal-Mart.  Pharmaceutical companies such as Upjohn, American Home Products, and Squibb have merged with other companies within their industry in the quest for promising drug pipelines and cost efficiencies. Xerox, a company whose PARC R&D laboratories produced many technological innovations such as the graphical user interface, the computer mouse, and Ethernet computer networks, never capitalized on them and today finds itself still basically a copier company that finds demand for its products cannibalized by the Internet and Email.  While Xerox did not benefit from PARC's innovation, Apple certainly has. Much of Apple's success can be traced to its ability to incorporate PARC's graphical user interface into its products.

Time and innovation stops for no man or no company. Change is inevitable and it is incumbent on investors to be cognizant of emerging trends and their potential impact on their investments. The impact of some trends is relatively easy to discern whereas others are beyond comprehension for most of us.  It does not take the most astute investor to realize that $100 a gallon gasoline will limit sales of gas guzzling vehicles such as the Hummer with its 10 mpg and that higher down payments will hurt home sales. Understanding the implications of nanotechnology and the decoding of the human genome is much harder to discern. Fortunately for investors, there is a methodology for determining the implications of change on their investments.  It is Stratamentical Analysis an analytical methodology presented in "A Common Sense Approach to Successful Investing".

About the Author

Experienced as a registered representative, an individual investor and a management consultant to Fortune 500 companies, Doniger has developed his perspectives on the economy from a lifetime of smart investments. His books include A Common Sense Road Map to Uncommon Wealth, A Common Sense Approach to Successful Investing and Common Sense Prescriptions for Financial Health. He is also a regular guest on the Business Talk Radio Network, CNBC, CDTV.net and other shows. His articles have been published in media outlets such as Investor's Digest of Canada and Morningstar.

Marvin H. Doniger

Doniger Associates

Laguna Niguel, CA

949-661-5456