Holding On to Old Business Models

IT’S NO SECRET that innovative competitors, new technologies, and regulatory conditions force industry leaders to adapt to new market realities. Why, then, when the writing is on the wall that paradigmatic shifts are occurring in an industry, do most market share leaders try to perpetuate obsolescing business models?

Consider Microsoft. The company announced last year that it would offer a free, Web-based service that works with Word, Excel, and PowerPoint to allow people to store and access files online, according to an article in the Seattle Post Intelligencer. (http://seattlepi.nwsource.com/business/333748_software01.html)

Clearly, Microsoft is embracing the shift from desktop-based software applications to web-based ones, right? It is responding to the launch in 2006 of Google Docs, a free application that allows users to create and edit word-processing and spreadsheet files online, inside a web browser. It no doubt knows that future growth prospects for its Office software lies in workplace use of Web 2.0 – the use of wikis, Internet delivery of applications, and Web-enabled collaboration – where hosted services, instead of desktop-based applications, are the wave of the future.

Not so fast. Microsoft’s online service, named Office Live Workspace, will require that editing and creating documents still take place on the PC desktop, requiring a regular version of Microsoft Office that users will have to purchase and install on their computers. Why? According to David Smith, an analyst with Gartner, a technology research firm, “They (Microsoft) certainly are not looking to push the envelope and be the leader in providing Web-based Office tools. They need to do it in a way that preserves their business.” Office is Microsoft’s second-biggest product behind Windows.

To be sure, abandoning a market or business model that has served a company well for years is challenging. No company wants to embrace a new business too soon and risk forgoing revenue from a legacy product that still has some life left. Still, holding on to an old business model for too long can cause a market leader to lose its dominant position, perhaps forever. The trick is to maintain market vigilance of indicators of significant change in a way that allows for maximum strategic flexibility.

Take photographic film processing. When was the last time you took a role of film to a local drug store or supermarket to have pictures developed? “Now you can bring your media card in and go to a kiosk and have it printed in a second. Or you can have it printed at a one-hour photo lab. Or you can upload the image to a wholesale facility on the Internet and have it delivered to a retail store,” says Bing Liem, senior vice president of sales for the imaging division of Fujifilm USA, as quoted in The New York Times. (http://www.nytimes.com/2007/10/09/business/09film.html?_r=1&oref=slogin)

So, how have photography companies responded? As its film business has tanked, Kodak has spent the last few years making a transition to digital technology. This transition balances embracing a new business model with a reasonable extension of an old one.

In the heyday of film, some 25 billion photographic images were not just captured but printed as well, according to the Times article. By 2009, as the use of digital cameras continues to grow, some 135 billion images will be captured, but far fewer printed. The challenge is getting people to print those images out.

According to the Photo Marketing Association, when digital camera owners in the United States do print out their digital images, they usually do so in stores rather than on home printers. So, Kodak is helping retail stores replace their old silver halide photo processing equipment with kiosks that consumers can use to print digital pictures.

Meanwhile, Kodak’s strategy for its film business now calls for targeting third world economies where home computers are less common. It is selling low-cost film cameras throughout Asia, according to a Kodak spokesperson. In August 2007, Kodak posted record sales in India.

By monitoring key indicators – in this case, the propensity of consumers to print digital images in stores rather than at home – Kodak has been able to reposition a key product, photo finishing equipment, to correspond to the obsolescence of film and the rapid growth in digital imaging. Meanwhile, instead of perpetuating its film business in mature markets that have moved beyond film, Kodak now is replicating a business model in markets not yet impacted by digital photography technical advances.

The best of both worlds, to be sure.