6210 – Polaroid

Team 2

Polaroid Corporation: Digital Imaging Technology in 1997

 What do we know about Polaroid’s business in 1997?

In 1997 Polaroid Corporation was the leader in the imaging marketplace. Its sales at the end of 1996 were $2.3 billion. The CEO of Polaroid in 1997, Gary DiCamillo, cited three core beliefs, which were guiding his management of the company. First, he believed that instant photography was very much alive and well. Second, he saw international expansion as a real opportunity for growth. And third, he saw the digital future as a reality that would be relevant to Polaroid’s future success. DiCamillo was then presented with making a decision on how to best structure the corporation – market-driven or technology-driven.

Polaroid’s core product line consisted of three core areas were consumer imaging, commercial imaging, and new business units. A position of vice president for new ventures, who directly reported to DiCamillo, was created in April 1997. This position’s role was to generate visions for innovative product designs and have one of the core areas invest in them. Approximately $2 billion of Polaroid’s annual revenues were provided by the core instant photography business. The digital imaging aspect of this accounted for 6% of the company’s revenues at the end of 1996 but was expected to grow significantly. Below are some of the key features of the three core areas:

Commercial Imaging: This consisted of 13 different business segments, which were organized into five units, namely Identification Systems, Photo Retailing, Professional/Technical, Business Imaging, and Electronic Imaging Products. These products were primarily intended for the worldwide market in the arenas of business, medical, graphic arts and desktop publishing applications. The commercial imaging area of Polaroid was the most successful with the greatest contribution to the bottom line due to their lower requirements for marketing expenses. The most profitable unit in this section was Identification Systems with Polaroid being the market leader internationally. Although the Electronic Imaging Products unit produced revenues of over $100 million in 1996 with an expected increase of 20% in 1997, it did not significantly contribute to the company’s bottom line due to heavy investment in product development. In 1997 Polaroid also introduced a new Image Quality Assured (IQA) software utility along with its first series of software products based on proprietary technology called Before and After.

Consumer Imaging: One basic product, instant photography systems was manufactured and marketed by this section. They dealt with an undifferentiated mass market, with digital technology expected to supplement traditional technology in the consumer imaging product section. 1997 was the best year for Polaroid camera sales in a decade partly attributed to efforts made by a newly hired group of seasoned product marketing executives.

New Businesses: This area included the older lines of sunglasses, holographic products and polarizers, as well as the development, manufacture and marketing of medical and graphics imaging products. Due to the sale of Helios, an unprofitable medical imaging business in 1996, Polaroid was able to eliminate $30 million of its losses in digital imaging in 1997.

 What do we know about Polaroid’s position in the digital imaging market in 1997?

Analysts predicted the market for digital photography to grow enormously from 1997 to 2002, with estimates of 36% to 100% in sales growth annually. Polaroid believed that this growth would take place in the digital camera market in the small office and home office sectors as the demand for integrating image with text increased.

Polaroid felt it possessed “three pillars to [its] competitive position in digital imaging. First, was the company’s entire photographic knowledge…Second, was Polaroid’s specific knowledge in the area of sensor design. And third, was its knowledge in the area of image science and image processing.”[1] Further, Polaroid felt its technological competitive advantage was its ability to provide customers with the greater value – highest quality and convenience at the lowest price.

DiCamillo, Polaroid’s CEO in 1997, also felt that a key strategy in developing a new digital imaging business was to be more externally focused and form key alliances, ventures and partnerships with other companies. These strategies helped decrease losses in the digital imaging business from $190 million in 1995 to $460 million in 1996 and were expected to break even by 1998.

For products geared towards the business and professional users in the above $1000 range, Polaroid’s competitors within the digital imaging market were: Kodak, Nikon, AGFA, Canon, Minolta, Sony, and Dicomed. Within this group Polaroid was positioned as the worldwide leader. Below the $1000 range all manufacturers were having difficulty in obtaining quality that was comparable to traditional 35mm cameras. Because the digital camera offered features and options that were attractive to the under $1000 consumer, such as instant image production, easier manipulation and electronic transmission of images Polaroid felt that this was also a market that it should invest in through volume production/cost reductions.

  • Is the digital camera business an attractive opportunity for Polaroid in 1997? What are the arguments pro and con?

The digital camera business is an attractive opportunity for Polaroid due to the company’s internal capabilities, its core competencies, and the potential of the market. However, just how Polaroid can best exploit the opportunities in this market is the key issue.

The advantages of this market for Polaroid is that it is able to leverage its internal R&D capability and the technology innovation that it has spent its entire corporate history developing. Polaroid and its CEO also recognize these capabilities as core competencies and competitive advantages in the marketplace. In addition, the market potential for the digital camera business is explosive; while its traditional product markets are in more mature markets that are only growing at more modest rates and reducing margins.

There are several disadvantages for Polaroid entering this market. First, the camera hardware cannot be manufactured as efficiently and profitably as its competitors, largely due to a lack of skill and scale. In addition, competition is fierce with well-capitalized and committed competitors. These competitors also have an incentive to sell the camera hardware at a loss in order to sell their primary product lines such as computers or printers. Thirdly, Polaroid would be required to completely overhaul its brand identity in the consumer market, as it is currently perceived as an instant camera company.

However, there is a way for Polaroid to leverage its strengths and minimize its weaknesses, without being a disrupting force for Polaroid.

  • Is digital imaging a disruptive technology for Polaroid’s market?

Digital imaging has the potential to be a disruptive technology to some of Polaroid’s markets, for example the instant photography market; but itis the next generation technology for their consumer and commercial imaging markets. It is a new technology, but is compatible with the existing technology that is the backbone of Polaroid’s strategy.

The best way for Polaroid to exploit this market and its corresponding opportunity is to utilize its core technological capability and provide products and services to existing camera companies. That way it could focus on selling what it knows and makes money on, and avoid being the loss leader of the camera hardware. Polaroid can avoid losses by looking at the entire manufacturing process and identify where it can add value with chips, software, imaging, and other technological capabilities and advances. This maximizes their return on investment capital, reduces the number of competitors, leverages their core competencies, and increases revenue with the least amount of risk.

Otherwise it simply provides a loss leader product in order to sell components and technologies that it aimed to sell all along. This will end up eroding earnings and distracting the company from its core capabilities.

 What kinds of uncertainty does Polaroid face in addressing this market?

Numbers of Competitors: At this stage of the market competition, competitors could come from a variety of industries: photography, consumer electronics, personal computers and computer peripherals, computer software, and maybe others. These competitors would likely compete in the $1,000 or less category, while traditional photography competitors would also compete in the $1,000 and above category.

Consumer Acceptance: Although the digital photography market is in the early stage of development and the new features are attractive, the quality of output is inferior unless the consumer spends over $1,400 and has a PC. The cost and quality trade-off of digital versus 35mm may not offer Polaroid a large enough market. Kodak held the second highest market-share (25%-30%) in the $1000 and under price range and had lost over $100 million dollars by midyear after spending $500 million to develop the product. Because the quality of the product output was poor compared to 35mm, returns were exceedingly high.

Profitability: Based on the latest market forecasts, profitability would be achieved only through selling related consumables. Juenger, a veteran Polaroid engineer, believed that the industry leaders would achieve the volume economies and cost reductions that would allow them to reduce the price of the current $1,400 to $300. Over the long-term, it was predicted that hardware sales would eventually be a break-even business proposition.

Market size of consumables: Industry analysts predicted that the market for digital cameras would be between 2 and 3 million. However, no estimates were given about the market size for consumables and the average profitability for each customer. This is critical to see if the overall business will be profitable for Polaroid.

Market Channels: Polaroid needs to develop channels for their digital cameras. As of 1996, approximately 30% of digital cameras were sold through electronics and video stores and 15% in camera stores and one-hour photo-labs. Digital cameras were also being sold as peripherals in computer stores, office equipment stores and mail order. From these channels, Polaroid currently only utilizes camera stores.

 Does Polaroid have any current or potential competitive advantages in this market?

De Haan (Director, Advanced Development in R&D) believed that Polaroid had three pillars of competitive advantage for digital imaging. First, Polaroid had a significant competitive advantage in all the technology in creating a photograph such as optical lenses, shutters, etc. Second, they had the competencies in constructing the individual components. Third, Polaroid had specific knowledge in sensor design. They also had proprietary algorithms contained in their image science and processing technology.

Polizzotto believed Polaroid’s greatest competitive advantage was in their ability to create the greatest customer value by combining the highest quality images with the lowest cost. Juenger (R&D Engineer) held a similar belief about Polaroid’s competitive advantage as Polizzotto. He stated, “the customer looked for quality divided by cost”. In addition, Polaroid had the advantage of “ease of use” technology.

Spitzer (Director, Image Sensor Technology Division) believed that Polaroid’s advantage over other electronic companies was by understanding the way in which the eye and brain see images. They also had an advantage in processing digital signals to produce a quality output through “proper lensing, shuttering, and aperturing”.

DiCamillo (Polaroid CEO) probably summed it up best when he said, “we are pretty good creating images instantly. Not very many companies can do that, most have to go through an intermediary step”. De Haan added, “Digital technology is not new at Polaroid”.

Although not mentioned directly in the case, Polaroid had a strong brand image for instant photography, which could be easily leveraged into the digital photography market. Polaroid also had a very strong opportunity in creating the imaging software standard in the industry with their IQA platform.

 What strategic options are available to Polaroid in this market? Have Polaroid’s early

moves (PD-2000, PD-300) limited its options?

 What should Polaroid’s goals and expectations be about this market? How should

Polaroid develop and maintain competitive advantage? What are the major risks?

Polaroid built a $2.3B business by building and maintaining a privileged position in instant photography technology. Polaroid’s “veritable fortress of patents” protected this position well into the 1990s. Polaroid leveraged this core technology into multiple markets, with instant photography accounting for nearly $2B of all their sales.

  1. Core instant photography $2B of $2.3B
  2. 50 types of film, 100 types of equipment
  3. 60% commercial, 13 vertically integrated markets
  4. Photo retailing -> consumers
  5. Professional / Technical
  6. Identification cards -> most profitable commercial.
  7. Business imaging -> mostly real estate and insurance
  8. 40% consumer, basically one product based on 15 year old technology

There are three critical aspects that make this technology susceptible to technology disruption:

  1. Performance trajectory of instant photography is flat – no significant product improvement in 15 years.
  2. Performance trajectory of digital is positive, so it will surpass instant at some point.
  3. One can imagine ways to combine available digital technologies, internal and external, in new ways, such as digital imaging, printing technology, and ID card technology.
  4. Signals Polaroid has received that technological disruption is likely:
  5. Hybrid products - bundling digital scanners with Spectra camera.
  6. Conflict between R&D and marketing

The PD-2000 and PD-300 have not limited Polaroid’s options at this point. In fact, they are very good opportunities for learning experience and customer preference discovery.

Corporate Strategy

Polaroid will seek to maintain leadership in instant photography – “simple workflow solutions by the push of one button”. This will include Polaroid’s traditional film-based instant photography business as well as exploration and exploitation of digital imaging opportunities.

Polaroid has strength in market position, brand recognition, R&D in psychometrics, digital image technology, and optical systems. These competitive advantages will be developed and maintained through continued focus on R&D and new product development.

Polaroid’s core technology (film-based instant photography) can’t continue to be leveraged across all of the markets it serves today. Its business model, built on its privileged position, is threatened to be destroyed by many newcomers and technologies.

Because the future is somewhat uncertain, Polaroid will continue its thrusts to shape industry standards through its potent R&D capabilities, and adapt to the rapidly changing environment by discovering and exploring new markets for digital technology.

New technologies that could disrupt existing business lines should be explored through the creation of independent businesses. It is the responsibility of senior executives to identify and develop new technology opportunities. The senior executives must find new sources of information about the markets outside of their current businesses. This means meeting with academicians, R&D, technologists, venture capitalists, etc, on a regular basis to monitor and appraise the external environment.

Business Strategy

Organization

Film (traditional instant photography) businesses: The organization structure of the traditional film business (commercial and consumer) operations should be maintained and focused on execution, not R&D. Digital technology can be incorporated into the product lines to the extent that it serves customers.

R&D Core: Responsible for development of image technologies, exploration of improvement in image science, and new technologies such as digital technologies. Image quality and one button convenience are key aspects of R&D responsibility.

Corporate development: Develop and create new relationships with industry partners, monitor and identify trends outside of existing markets, identify potentially disruptive technologies and develop opportunities. This group is responsible for coordinating, analyzing, and synthesizing developments between groups, identifying and pursuing potentially important technology standards, and managing IP.

Disruptive Business Units: New business units funded appropriately to market opportunities chartered to explore and develop disruptive technologies. These groups are free to leverage Polaroid core competencies, technologies, brands, etc, but are not limited to using only Polaroid resources. They may use whatever technology they can find in the market. These businesses may be wholly owned, joint ventures, or partnerships.

New technologies

The new businesses unit is a good idea, but should be used to establish small businesses to explore and probe potential markets in digital imaging. These probes may, in fact, compete with Polaroid’s existing businesses in consumer and commercial markets.

The new businesses units will need totally different measures, decision management, and incentive programs than the established business. One key question to be answered is how to make money in the digital imaging markets – there is not yet identified the equivalent of “film” which is an important part of revenue and profitability.

To discover opportunities for digital technology, Polaroid should:

  • Create a system for identifying disruptive technologies
  • Set up separate organizations out of the mainstream to explore those technologies
  • Explore opportunities to combine digital technologies in new ways
  • Leverage access to Polaroid core competencies and R&D (including psychometrics and digital image processing)
  • Partner with digital technology suppliers, not limited to Polaroid
  • Find initial markets
  • Use market probes to understand needs of customers
  • Ramp up to capture opportunities when they occur
  • Leverage Polaroid brand and channels

Polaroid should not have the same expectations or measures for their digital businesses as for their traditional film businesses. The markets are at different stages of maturity: digital markets are developing and uncertain, whereas film markets are mature, predictable and profitable.

PD-2000 and PD-300 have not specifically limited their options and allowed the company to develop expertise in digital camera technology.