Kodak Moment for Uncle Sam

Dinosaurs must die.  It’s a fact of life.  Just ask Kodak. Last week, after 123-years in business, it was reported the dinosaur company is preparing to file for bankruptcy protection.  By market close on Friday, the former blue chip’s stock traded at $0.37 a share.

No doubt, Kodak’s demise resulted from many failings.  The most obvious being its failure to adapt to digital photography.  From what we gather, Kodak’s near monopoly on film, and exceptional profit margins, blinded the company to its pending death as digital photography came to dominate the market.

By the time Kodak realized their strategic error the world had changed.  Although they made hefty investments in digital camera products, it was much too late.  They could not catch their competitors.  Kodak was stuck in analog…their business model and products were obsolete.  The world had become digital.

In short, when film fell out of favor Kodak’s revenue stream disappeared.  Yet their legacy costs and benefit liabilities continued to increase until, ultimately, they could no longer turn a profit.  Over the last 10 years, Kodak has lost money nearly every year.  Their bankruptcy was just a matter of time.

Creative Destruction

The experience of Kodak is not unique.  Moreover, it offers an example of how the world works.  Dinosaurs like Pan American Airways, Bethlehem Steel, and Montgomery Wards, always die out as new, more nimble and creative enterprises are born.

This process, where new and innovative companies destroy the value of established companies, is what Austrian-American economist, Joseph Schumpeter, called creative destruction.  Although this process is disruptive to the existing order of industry and employment, and can result in mass layoffs of workers with obsolete skills, it is necessary for sustaining long-term economic growth.

New innovation is what provides new opportunities for workers in more creative and productive businesses.  It also delivers better and lower priced products to market.

It’s through creative destruction, for instance, that you can now take a picture with your smart phone and instantly send it to whoever you want for practically free.  Without creative destruction, you’d still have to lug a clunky camera around and wait for film to be developed to see and share photos.

Many factors contributed to the Kodak moment of bankruptcy.  However, we suspect this won’t be their end.  Once they’ve shed their debt and liabilities we’re confident a new lively, though modest, company will find a niche they can exploit for the consumer’s benefit.

In the meantime, for entertainment and instruction, we’ll take a moment and contemplate the unfavorable place Kodak currently finds itself along with Uncle Sam…

Kodak Moment for Uncle Sam

“Nothing fails like success,” once noted 20th century economist and systems scientist, Kenneth Ewart Boulding.  This insight was not so much a discovery but, rather, the recognition of an axiom.

In Kodak’s experience, it was the success of their film business, and its blinding profit margins, that led to their failure.  When the world changed, and their cash cow could no longer produce milk, inefficiencies in other parts of their business, like their retail outlet model, were no longer hidden by an abundance of profits.  They could not adapt before the money ran out.

Other companies, like Barnes & Nobel, are struggling to adjust their business to meet shifting consumer demands.  But it’s not just companies that are at risk of extinction, governments are at risk too.

For example, the U.S. government’s incompetence has been hidden by the success of the U.S. economy.  For over a century, economic growth concealed that idiots in Congress were making idiotic decisions.  So, too, economic growth overcame the hindrance of government agencies and their overzealous paper pushers.

But when the economy slipped in 2008 it quickly revealed a Kodak moment for Uncle Sam’s failings.  Money had corrupted the government.

The picture of Uncle Sam, as it came into focus, showed Washington no longer represents the people…it represents a legion of investment banks, lobbyists and special interest groups.  On top of that its legacy costs now encumber the economy as the government’s books slip further and further into arrears.

Perhaps what we are observing is creative destruction cutting off the source of the government’s corruption.  One can only hope that a disruptive transformation will produce Uncle Sam’s smaller, freer offspring.

Sincerely,

MN Gordon
for Economic Prism

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