Situational Psychology - 9) Desperate Situations
A More Severe Look at Do-or-Die
Desperate situations are also known as “do-or-die” environments. And they are all too common. Much of practical strategy is devised in order to keep us out of these situations because they so often do not end well. Our positions die and, if we survive their death, we are left poorer for the experience. In the U.S. about half of all marriages end in divorce. The positions of all businesses are even more prone to disaster. Over twenty percent of new businesses fail in their first year. After five years, about half of all businesses fail. Sixty five percent of businesses fail within their first ten years.
Old, well-established companies fall to desperate situations regularly. In the last ten years alone, we have seen the disappearance of A&P Supermarkets, started in 1859, Ringling Bros. and Barnum & Bailey Circus, established in 1884. Modell’s Sporting Goods, started in 1889, and Henri Bendel Department Stores, started in 1895. I list these venerable businesses because they all survived and grew for over a hundred years, under many generations of managers. Surviving the twentieth century was itself an amazing feat, given all the wars, deadly epidemics, economic crashes, and, especially, the technological revolutions. All these companies started when the primary form of transportation in a city was the horse and buggy.
The example we use here is Kodak, an extremely successful competitor started in 1890. They have survived, but in doing so, they demonstrated both how hard it is to sacrifice parts of our positions, but how desperate situations diminish us.
How Kodak Became Desperate
Sometimes our own mistakes lead us into desperate situations, but we can also end up in them because ultimately most conditions are beyond our control. The question today is what type of psology does it take to deal with them strategically?
It requires a very different mindset, and, for those who are focused on building positions, a difficult one. It is a psychology that recognizes the need for sacrifice, not small sacrifices, but t willingness to sacrifice the most valued aspects of our positions. From a distance, it often looks like companies that fall into desperate situations are too optimistic. However, the real problem is the nature of change. All major changes happen gradually at first, but then, they culminate suddenly, and gradual adjustments no longer work.
For most of its history, Kodak was focused on competition with other similar companies selling film, cameras, and chemicals. As late as 1997, it was focused on a battle with low priced Asian competitors, chiefly, Fujifilm, who Kodak sued for predatory practices.
It was not as though Kodak didn’t recognize the coming digitizing of picture taking. Twenty years prior, Kodak employee Steven Sasson developed Kodak’s first digital camera. Following Moore’s law, Larry Matteson, another employee, reported in 1979 a complete shift to digital photography by 2010. This would prove almost miraculously prophetic.
However, Kodak’s CEO saw that era as remote. They choose not to promote their digital technology because they didn’t want to hasten the day of Armageddon. Instead, they focused on diversifying, a fad in the eighties. They bought a drug company. They expanded their chemical operations. And, like many companies of the era, they restructured.
The Digital Age
George M. C. Fisher, a former Motorola CEO, was brought in to head the company in 1993. The next year, they brought out their first digital camera in partnership with Apple computer, the Apple QuickTake . The product survived for only three years. However, chemical film sales fell all through the nineties. In In 2001, Kodak found a new CEO, Daniel Carp, who moved even more aggressively into digital technology, introducing their own line of digital cameras, EasyShare. By 2005, Kodak ranked No. 1 in the U.S. in digital camera sales, which surged 40% to $5.7 billion. At this point in history, Kodak is a brilliant success story of technological transition.
But the past is prologue. Asian competitors came into the digital camera market, and to maintain any position, Kodak had to sell many digital cameras at a loss. By 2010, it was in seventh place in digital cameras sales behind Canon, Sony, Nikon, but that wasn’t the worst news. The new generation of phones were replacing digital cameras entirely.
The psychology of desperate situations requires leadership that can sacrifice everything to survive. In 2005, Kodak brought in Antonio Pérez to do the unthinkable. He swung an axe that cut deep. He shut down factories and outsourced or eliminated manufacturing divisions, divesting his digital camera manufacturing operations in 2006, including assembly, production and testing. Kodak also left the film camera market altogether, and began to end the production of film products. In 2009, it ceased selling Kodachrome color film, ending 74 years of production. In total, 13 film plants and 130 photo finishing facilities were closed. They laid off 50,000 employees between 2004 and 2007.
If this seems drastic, it is only because we don’t understand desperate situations. The company was still hemorrhaging money, much of it repaying the debts it had accumulated. A number of divisions were sold off to repay debts, most notably the Kodak Health Group, one of the company's few profitable units. Kodak used the $2.35 billion from that sale to fully repay its approximately $1.15 billion of secured term debt. Kodak also turned to patent litigation to generate $838 million. Much of it came from a patent licensing settlement with Korean company, LG.
Unfortunately, however, by 2011, Kodak was rapidly using up its cash reserves because its remaining operations were still losing money.
Bankruptcy
On Januar,y 2012, the company filed for Chapter 11 protection. At this point, Kodak had no assets left except its many patents. They sold those for approximately $525 million to a group of companies. To stop their continuing losses, they announced that they would end the selling of several products, including digital cameras, pocket video cameras, digital picture frames, and inkjet printers. This stopped the bleeding.
In looking over my past work on desperate situations, I now realize that I didn’t analyze them deeply enough. The responses I suggested were too simple and too focused on opponents. In learning about Kodak, I am sent back to Sun Tzu’s central suggestion for desperate situations: we must use all of our resources to survive. We cannot hold anything back in hopes the situation will turn around. We must cut to the bone and beyond, throwing off all we once considered essential.
Kodak emerged from bankruptcy as a technology company focused on imaging for business. Its main business segments are Digital Printing & Enterprise and Graphics, Entertainment & Commercial Films. It still sells film to the movie industry, but given the transition of the movies to digital, who can say how long that will last. Kodak made a profit for he first time in 2016, so the businesses they kept could support themselves. By definition, this ended their desperate situation.
Unfortunately, in 2018, they tried to get into cryptocurrency. A pied piper that too many tried to follow. Their story goes on. On the brighter side, Kodak was awarded the $765 million loan under the Defense Production Act for Kodak Pharmaceuticals to make ingredients for generic drugs for distribution inside the U.S. Among them will be the antimalarial drug hydroxychloroquine.