Discussion Paper No. 83
Managing Exploration Processes for New Business-The Successes and Failures of Fujifilm and KodakTomoatsu Shibata
Yasunori Baba
Jun Suzuki
May, 2018

Data Science and Service Research
Discussion Paper

Center for Data Science and Service Research

Graduate School of Economic and Management
Tohoku University27-1 Kawauchi, Aobaku

Sendai 980-8576, JAPANManaging Exploration Processes for New Business-The Successes and Failures of Fujifilm and Kodak-

Tomoatsu SHIBATATOHOKU University, Japan
27-1, Kawauchi, Aoba-ku, Sendai, Miyagi-Pref., 980-8576, Japane-mail : shibatatomoatsu@gmail.com

Yasunori BABA
University of Tokyo, JapanJun SUZUKI
National graduate institute for policy studies, Japan
Abstract: Sustainable growth of a company requires exploration of new areas beyond its
current businesses and technological fields. Previous studies have found that companies
are prone to explore areas close to their core businesses and that they engage in several
types of exploration activities. This study was designed to foster understanding of thecorporate exploration process, a subject that has not been fully investigated to date. We
devised a theoretical framework to analyze the exploration process and discussed its
effectiveness in analyzing the corporate exploration process.

The activities of Fujifilm

and Kodak, in exploration of new technologies and markets, were compared revealingthat the fundamental cause of success or failure may be attributed to the differences inthe exploration process.

Keywords: Fujifilm, Kodak, exploration process, exploration hierarchy, digital camera,
exploration strategy

1Managing Exploration Processes for New Business-The Successes and Failures of Fujifilm and Kodak-

Abstract: Sustainable growth of a company requires exploration of new areas
beyond its current businesses and technological fields. Previous studies have found thatcompanies are prone to explore areas close to their core businesses and that they engage
in several types of exploration activities. This study was designed to foster
understanding of the corporate exploration process, a subject that has not been fully
investigated to date. We devised a theoretical framework to analyze the exploration
process and discussed its effectiveness in analyzing the corporate exploration process.
The activities of Fujifilm and Kodak, in exploration of new technologies and markets,were compared revealing that the fundamental cause of success or failure may be
attributed to the differences in the exploration process.

Keywords: Fujifilm, Kodak, exploration process, exploration hierarchy, digital
camera, exploration strategy

1. Introduction

Fujifilm and Kodak competed intensely in the photographic film business for many
years. However, the advent of digital cameras in the 2000s markedly reduced the global
demand for photographic film. The fates of these two companies were very different.
After a series of twists and turns, Kodak went bankrupt in 2012. In contrast, Fujifilm
proactively developed new businesses and is now becoming a “total healthcare company”

1centered on medical care.
This raises the question of what differentiated Fujifilm and Kodak. Many factors
were involved, including their exploration strategies for new technology and new
businesses. Having competed in the same business for many years, Fujifilm and Kodak
had similar core technologies. For example, the two companies’ top five technical fields
of cumulative patent applications between 1983 and 2012 were the same: optics,
audio-visual, textile machines, basic materials, and computers. Moreover, the changes
in ratios of applications in these five fields followed almost identical patterns, as
described later. Thus, these two companies adopted similar patent application
behaviors in these fields and retained similar core technologies.
Nonetheless, the two companies followed separate growth trajectories, which
eventually led to different business outcomes. Thus, even if companies have the same
capacity at one point and compete in the same market environment, their subsequent
exploration strategies will influence their success or failure.
Both companies understood that digital technology would soon be the predominant
type of photography business, having begun investing in exploration on digital cameras
from as early as the 1980’s. This indicates that the factor that determined the success or
failure of Fujifilm and Kodak was not their responses to the emerging digital camera
market itself, but whether they had a consistent, long-term exploration strategy inresponse to the declining trends of their core film business. Thus, the fundamental
question is the factors that ultimately resulted in one company having a consistent
exploration strategy and the other having an inconsistent strategy. This study foundthat this difference arose from the different methods by which the two companies
proceeded with exploration.

2

Put simply, Fujifilm adopted a middle-up-down process of exploration, in which
top management sets the vision of the organization, and middle managers grasp andsolve the gap between the vision set by top management and current conditions byfacilitating team-level dialectic interactions among employees (Nonaka,1988; Nonaka
and Takeuchi, 1995). In this organizational process, exploration activity proceeds down
the exploration hierarchy and narrows the area of exploration organizationally. By
contrast, Kodak tended to determine its area of exploration through a top–down
approach, with a CEO often recruited from the outside, thereby omitting theorganizational process. The CEO’s business background and past achievements may
have influenced the selection of areas of exploration (Helfat and Peteraf, 2015). We
show differences in these exploration processes through an in-depth case study of
Fujifilm and Kodak.

The rest of this paper is structured as follows. Section two describes the frameworkof examining exploration processes while reviewing related studies. Section three
explains our methods and data. Section four presents a comparative analysis of the
exploration processes adopted by Fujifilm and Kodak. Using patent data, wedemonstrate that, while Fujifilm’s exploration process was consistent, Kodak’s was not.
Section five discusses the causes of these differences from the perspective of corporate
exploration and examines the validity and effectiveness of the framework. Finally,
section six concludes the paper.

2. Theoretical considerations on corporate exploration for new technologies and3markets

2.1. Uncertain nature of exploration

Studies have demonstrated that a company’s search activity shows a path dependency
that makes their exploration activities lean toward areas close to those of their coretechnology (Cohen and Levinthal, 1990). Studies of the relationship between
organizational competency and exploration of closely related areas have shown thatcompanies form structured internal organizational routines to increase efficiency (Cyert
and March, 1963; Nelson and Winter, 1982) and end up focusing on activities associatedwith closely related areas, limiting their exploration to certain areas. Absorptive
capacity depends on an organization’s degree of preliminary knowledge; that is, it isclosely related to the knowledge accumulated through past research and development
activities (Cohen and Levinthal, ibid.). Thus, a company that has succeeded withexisting technologies lacks the capacity to absorb new technologies. Therefore, theexploration and learning activities of successful companies have a path dependency, inthat they are naturally biased toward closely related technologies and knowledge they
have already accumulated (Helfat, 1994; Stuart and Podolny, 1996). As a result, theproducts released by companies that build on past achievements tend to be more similar
to their existing products than products released by start-up companies (Martin and
Mitchell, 1998).
Companies foster innovation by technically exploring new areas different from thoseof their core technologies (Bergelman, 1991, 1994). Exploration activities in closely
related areas are considered positive, as they can strengthen and refine a company’s

4accumulated core technologies and competencies. However, companies may become
more attached to their accumulated competencies, despite changes in the external
environment that have given rise to the requirement for new technologies. Core
technologies may inhibit a flexible response to changes in the external environment andultimately bring about rigidities. Companies in this situation are said to have fallen
into “competency rigidity” or a “competency trap” (Leonard-Barton, 1992; Levitt andMarch, 1988). Therefore, companies must broaden their exploration activity and avoid
sticking to closely related technologies. However, wide exploration that expands beyond
closely related areas involve costs and uncertainties. Uncertainties in activities
involving technological innovations are driven by the exploration activity itself (Fleming,2001).
Studies have proposed frameworks to effectively consider uncertainties caused by
exploration activities. One such framework involves exploration depth and exploration
scope (Katila and Ahuja, 2002). Exploration depth refers to the frequency at which an
accumulated knowledge is used, and exploration scope reflects the degree to which newknowledge is searched. Excessively wide or deep explorations are counterproductive to
product development, whereas explorations with a certain degree of both scope anddepth are the most effective for product development (Katila and Ahuja, 2002).
Previous studies have attempted to classify exploration scope, depending onwhether an exploration crosses certain technological and organizational boundaries(Rosenkopf and Nerkar, 2001). Crossing a technological boundary to integratetechnologies in different technical areas and crossing an organizational boundary tocooperate with different organizations require different skills, know-how, andknowledge. Therefore, analyses of exploration activity should distinguish between

5technology and organization. Using a two-dimensional matrix, exploration activity can
be classified into four types (Rosenkopf and Nerkar, 2001). For example, exploration
beyond both technological and organizational boundaries and explorations oftechnologies within an organization but in a technical area different from its coretechnologies constitute different types of exploration and require different skills andknow-how.
Research on technological progress has analyzed exploration activities to enhance
understanding of the nature of technical advances (Nelson and Winter,1982;
Rosenberg,1969). In some cases, marginal improvements in existing technologies
involve exploring in several different directions, whereas, in other cases, a few
directions may seem much more worthy of attention than others. Particularly inindustries characterized by very rapid technological advances, the succession ofadvances may appear almost inevitable. These promising trajectories and directions for
exploring technological progress have been termed “natural trajectories” (Nelson andWinter, 1982). The concept of “technological imperatives” has similar meanings in
guiding the evolution of certain technologies (Rosenberg, 1969). These concepts indicate
that, in some cases, search activities for technical advances may follow particular
trajectories that appear almost inevitable.
Thus previous research has studied exploration activity from different perspectives
and determined the effect of each type of exploration. However, because these studies
did not consider the exploration process itself, this study proposes an analyticalframework for exploration processes to understand how the exploration processproceeds in different business contexts.

6

2.2. Framework of the exploration process

Since this paper addresses the process of by which corporate exploration proceeds, wewill consider how this process proceeds within a company. An exploration is anexperimental and trial-and-error process that leads to the acquisition of new knowledge
and learning (March, 1991). To acquire knowledge from exploration, it is necessary toclearly delineate the explored area, or boundaries of exploration, regardless of thetechnology or market. Therefore, it is first necessary to determine the scope of the area,
because it defines the basic direction of the exploration activity (Katila and Ahuja,2002).
Several steps are involved in the exploration process. First, it is necessary to
broadly examine candidates for exploration and define the scope of the area of
exploration. Second, from among these multiple alternatives, it is necessary to
determine the direction to explore further. We call the former “wide exploration” and thelatter “local exploration.”

These are connected by a focusing process, which uses

focusing devices to determine the direction of local exploration (Rosenberg, 1976). For
example, during wide exploration, Fujifilm assessed multiple business areas and thenchose healthcare within certain scope. Of the possible choices within healthcare,including pharmaceutical products and medical care equipment, Fujifilm focused on
cosmetics and performed a local exploration of that area. Narrowing from multiple
choices within healthcare to cosmetics is an example of the focusing process, resulting
in a direction of local exploration. At this stage, the company can perform a local
exploration of cosmetics-related areas to generate useful knowledge.
Thus, the process of exploration can be conceptualized as going from upper to7lower levels within a hierarchy (Clark, 1985; Simon, 1981). It consists of repeating the
focusing process that defines the direction (Rosenberg, 1976) and the exploration
activity.

The hierarchy of exploration incorporates the two dimensions of depth andscope of exploration, both of which have proven in analyzing exploration (Katila andAhuja, 2002). In this sense, the concept of hierarchy of exploration is consistent withexisting findings. Figure 1 shows the hierarchical nature of exploration activity, using
the example of Fujifilm.

Fig. 1. Exploration Hierarchy
Width

Exploration
Strategy

Wide exploration layer
High-performance
Materials

Healthcare

Optical Devices
Focusing process

Liquid Crystal
Film

Pharmaceutical
Products

Cosmetics

Medical Care
Equipment

Local exploration layer

Based on understanding of its hierarchical nature (Clark, 1985; Simon, 1981), theexploration process can be analyzed from two different perspectives; that is, a method ofmoving within a hierarchy and a method of focusing (Figure 2). There are two types of
movement within a hierarchy: from upper to lower levels, thereby narrowing the area of
exploration; and determining the area of local exploration directly, without going
through the wide exploration and focusing processes. There are also two types offocusing, organizational focusing, which encourages front line managers to engage in8the focusing process for areas of local exploration; and non-organizational focusing,which does not involve organization-wide discussions of areas of local exploration. Thus,
the exploration process can be regarded as a matrix of four quadrants.
In the case of an exploration process located in the upper right quadrant, theexploration area will be narrowed within a hierarchy through an organizational
focusing process. A typical example is a middle-up-down model of knowledge creation(Nonaka,1988; Nonaka and Takeuchi,1995), whereby senior management determine thedestination of an organization, and middle managers choose the route and steer the shipby facilitating team-level interactions among employees (Nonaka,1988; Nonaka and
Takeuchi,1995). According to this model, both top managers and front line managers
are engaged in discussions to set the direction of exploration. Focusing and exploration
activities within the organization are repeated while proceeding from upper to lower
levels within the exploration hierarchy. Once the area of wide exploration is determinedby interactions within the organization, subsequent local explorations proceed withinthat range. In this sense, this type of exploration process has the advantage of stabilityof the direction of exploration.
In contrast, when the exploration process is located in the lower left quadrant, thearea of local exploration is determined directly, without organizational processing fromthe outset. There are two typical cases. First, when a company faces a natural trajectoryof technical change emerging in a neighboring industry, the company can easily identify
areas of exploration and does not require a focusing process. In tandem with the rise ofdigital technology, the necessity of exploring digital cameras became self-evident andinevitable for traditional camera manufacturers. The second case is when top
management plays a pivotal role in managerial cognitive capabilities (Helfat and9Peteraf, 2015, Helfat, 2007) and decides the area of exploration in a top down manner(O'Reilly and Tushman,2016). Top management often begins new projects to which they
are personally attached through top down decision making. Both of these cases have themerit of speedy decision making because they omit the focusing process within theorganization. However, in the latter case, there is a risk that the area of exploration
may change every time top management is replaced, because the areas of exploration
were determined in the absence of an organizational focusing mechanism. This is very
close to the loss of exploration direction.

Fig. 2. Framework of Analyzing the Exploration Process
Method of moving within
the exploration hierarchy

Fujifilm (second phase)

From wide
to local area

Kodak
(second phase)
Direct to local
area

Non organizational

Organizational

Method of focusing

Based on this framework, we found that Fujifilm and Kodak followed completely
different exploration processes. This difference affected their fates, as described below.

3. Method and Data

This study has exploratory aspects, including the extraction of details about thepersonnel and organizations involved in corporate innovation activities, the gathering of

10

data regarding the processes associated with these activities, and the analysis of these
data. The methodology of this study included a qualitative survey and case study
analysis. This research methodology gathers and analyzes abundant data, while
introducing a new theoretical framework not previously described (e.g., Eisenhardt,
1989; Pettgrew, 1990; Yin, 1994).
The analysis of Fujifilm was based on semi-structured interviews with executives ofFujifilm, internal information provided by the company, data prepared by the company
for the general public, and publicly available materials, including books and businessmagazines. The analysis of Kodak is based on publicly available materials, including
books, business magazines, and academic papers. Data on patents filed by bothcompanies were also analyzed.
Semi-structured interviews with seven individuals, two company executive
directors and five directors of related departments, were conducted on July 17, 2015,
January 29, 2016, and July 14, 2016. Before the interviews, we developed a profile ofthe company based on public sources. The goal of the interviews was to understandFujifilm’s exploration strategy. To obtain a more complete picture of the company, we
also spoke with staff in related functional areas. Each interview lasted over one hour,and some individuals were interviewed multiple times. The interviews were recorded
and transcribed by a professional service. When clarification was necessary, interviews
were followed up by email. A report was prepared based on the information from theinterviews and written sources, with the completed report reviewed by Fujifilm to ensure thevalidity of the facts cited. We also communicated by email with Fujifilm to clarify several
questions, resulting in a complete version of the corporate transformation process.
We also analyzed the nature of exploration using patent data (Dutta and Weiss,111997; Henderson and Cockburn, 1994; Rosenkopf and Nerkar, 2001). Patents containextensive information about the inventor, the company to which the patent is assigned,
and the technological antecedents of the invention, which can be accessed incomputerized form. Every patent is assigned to a technical class, which we used to
identify the technical areas being developed by the company.

Table 1. Cumulative Numbers of Fujifilm Patent Applicationsin Technical Areas Ranked 1 to 13 (1982 to 2012)
Technical
area
OpticsAudio-visual

Cumulative
Accumulated
Rank
Share
numbershare
109326
1
30.4%
30.4%
47790

2

13.3%

43.7%

36806

3

10.2%

53.9%

19099

4

5.3%

59.2%

17007
15800

5
6

4.7%
4.4%

63.9%
68.3%

14465

7

4.0%

72.3%

13453

8

3.7%

76.1%

Surface tech

12356

9

3.4%

79.5%

Medical tech

10837

10

3.0%

82.5%

Measurement

9826

11

2.7%

85.3%

Organic chem

8973

12

2.5%

87.8%

Elec_mach

8678

13

2.4%

90.2%

TextilemachinesBasicmaterials
Computer
SemiconMacromolecularOthermachines

Technical areas ranked
1 to 5 represent thecore areas of Fujifilm.
About 2/3 of patentapplications during
this period were intechnical areas 1 to 5.

Technical areas ranked 6 to
13 represent peripheraltechnical areas of Fujifilm.

12Table 2. Cumulative numbers of Kodak Patent Applications inTechnical Areas Ranked 1 to 13 (1982 to 2012)
Technical
area
OpticsTextilemachines

Cumulative
rank
number36203

1

Accumulated
Share
31.2%
31.2%

14226

2

12.3%

43.4%

Audio-visual

13419

3

11.6%

55.0%

ComputerBasicmaterials
Macromolecul
ar

7883

4

6.8%

61.8%

4727

5

4.1%

65.9%

4264

6

3.7%

69.5%

Organic chem

4123

7

3.6%

73.1%

Semicon

3910

8

3.4%

76.4%

Measurement

3837

9

3.3%

79.7%

Handling

3110

10

2.7%

82.4%

Elec_mach

2984

11

2.6%

85.0%

Surface tech

2935

12

2.5%

87.5%

Chemical eng

2405

13

2.1%

89.6%

share

Technical areas ranked
1 to 5 represent thecore areas of Kodak.
About 2/3 of patentapplications during
this period were intechnical areas 1 to 5.

Technical areas ranked 6 to
13 represent peripheraltechnical areas of Kodak.

The cumulative number of patent applications by Fujifilm between 1982 and 2012in technical areas ranked 1 to 13 accounted for more than 90% of all patent applications
by Fujifilm during this period (see Table 1). About two-thirds of these applications werein technical areas 1 to 5, which we regarded as the core technical areas of Fujifilm.
Accordingly, technical areas 6 to 13 can be regarded as peripheral technical areas.
Similarly, we counted the patent applications by Kodak and identified their core andperipheral technical areas in the same manner (see Table 2). Because the cumulative
number does not represent the ranking of applications at any specific time, we
determined the changes over time in ratios of patent applications in the top five fields ofKodak and Fujifilm (Figures 3 and 4). Both companies applied for patents in the same
top five technical fields: optics, audio-visual, textile machines, basic materials, andcomputers. Also their ratios followed almost the same patterns.

13Fig. 3. Kodak’s Patent Application Ratio Trends in Its Top Five Fields
KODAK
100%
90%
80%
70%
60%

Textile machines
Basic materials
OpticsComputer
Audio-visual

50%
40%

30%
20%
10%
0%

Fig. 4. Fujifilm’s Patent Application Ratio Trends in Its Top Five Fields

FUJIFILM
100%
90%
80%
70%
60%
50%
40%

Textile machines
Basic materials
OpticsComputer
Audio-visual

30%
20%
10%
0%

4. Comparative Study of the Exploration Strategies of Fujifilm and Kodak 1

Analysis of the competition between Fujifilm and Kodak in the photographic film

14

market from the 1980s to 2010s can separate their exploration strategies into twophases. The first phase, which ended around 2000, was the period during which coretechnologies incorporated into digital cameras were explored and commercialized.
During this period, the main areas of exploration were evident and inevitable, as thetechnology driven natural trajectory clearly set the direction and pace of technicalchange (Nelson and Winter, 1982). During the second phase, when it became clear thatthe digital camera business could not make up for the extinction of the photographic
film business, the survival of the two companies required exploration. Because new
business areas were unclear, their choice of areas of exploration became strategicallyvery important.

4.1. The first phase: Exploration and commercialization of digital cameras

In the late 1970s and 1980s, signs of the advent of digital technology began to appear.
Because both Fujifilm and Kodak understood that digital technology could threaten
their photographic film business, they began exploring related technologies at an earlystage. First, Fujifilm started a digital camera project at its Central Research Institutein 1977 and established a microelectronics laboratory in 1981 to develop the company’s
in-house charged coupled device (CCD), a type of semiconductor. Kodak showed similar
trends. In 1975, Steve Sasson of Kodak invented the world’s first digital camera (Lucasand Goh, 2009). Because the number of pixels was as small as 10,000, the image quality
was poor, and these cameras could not be used as a substitute for film cameras. By 1993,
Kodak had invested 5 billion dollars in research and development for digital technology(Lucas and Goh, 2009).

15

The progress of technological exploration can also be traced by reviewing thesecompanies’ related patent applications. The trends of applications for semiconductor
patents by Fujifilm and Kodak (Figure 5) show that both companies engaged in
exploration of this field beginning around 1985. Between 1989 and 1993, Kodak applied
for more patents than Fujifilm, a sign that Kodak proactively engaged in exploration ofdigital technology. After a relatively stable period, the number of patent applications by
Fujifilm rapidly increased, beginning around 1997.

Fig. 5. Semiconductor-related Patent Application Trends for Fujifilm and Kodak

Data from the EPO Worldwide Patent Statistical Database. The number of annual patent applications
related to semiconductors (IPC:H01L) was aggregated based on WIPO’s IPC and Technology
Concordance Table.

Historically, the first sign that the digital camera market would start to growemerged in 1995, when Casio released its QV-10 model, with an image quality standardof one million pixels. This image quality standard could replace film cameras, resulting
in market expansion. In 2000, Fujifilm’s digital camera (Fine Pix4700Z), equipped with
its own Super CCD Honeycomb, accounted for 23% of the global market share and 28%of the domestic market share. Its success was largely due to the Super CCD Honeycomb,
which enabled the camera to capture 60% more light per square inch. In April 2001,

16

Kodak introduced its digital camera EasyShare to the market. It featured theconvenience of easy download of pictures to a computer, as well as a longer battery life
than that of competing products. Less than two years later, Kodak owned the top shareof the American digital camera market (Christensen, 2006), with the two companies
accounting for a large share of the worldwide digital camera market in 2000 (Figure 6).
Fig. 6. Global Market Share Trends for Digital Cameras

Global Market Share for Digital Cameras
100%
90%

Fujifilm

80%

Canon

70%

Olympus60%

Matsushita Electric

Casio

50%

Nikon
40%

Kodak

30%

Sony

20%
10%

Others

0%

2000

2001

2002

2003

2004

2005

Source: Gavetti, Tripsas, Aoshima 2010)

Overall, both companies were aware of the necessity of digital camera development
at an early stage, both engaged in technology exploration not long after. However, theirsubsequent exploration trajectory differed markedly. While Fujifilm engaged inconsistent exploration of digital camera technology for about 20 years, the new CEO of
Kodak, George Fisher, who had been recruited from Motorola, decided to return to thecompany’s core business of photographic film with investments in emerging markets. In
2000, however, George Fisher was replaced by Daniel Carp, who once again accelerated
the development of digital cameras. After a period of twists and turns, Kodak ultimately
returned to digital camera development. It turned out that both company had a large

17market share by around 2000.

4.2. The second phase; Exploration in the post-digital camera era
Many companies from other industries entered the digital camera market, making it
highly competitive. For example, Canon entered the market in 1999, followed by
Matsushita Electric Under such severe market conditions, Fujifilm’s market sharegradually decreased, reaching 10% in 2004. Kodak’s share followed the same trajectory.
After the commoditization and falling profitability of the digital camera, Antonio Perez,
who had been appointed Kodak CEO in 2005, called it a “crappy business”. To make up
for the extinction of film market, the exploration of new businesses was deemed urgent
by both two companies. Decisions about which technological and business areas would
be explored eventually resulted in different outcome for Fujifilm and Kodak.

Fig. 7. Kodak Patent Application Trends, Positions 6–13
KODAK 6-13
600
500
400
Semicon300

Measurement
Medical tech

200

Organic chem
100

MacromolecularSurface tech
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

0

Handling
Other machines

From the EPO Worldwide Patent Statistical Database.
The number of annual patent applications in top fields 6 to 13 containing many Kodak applications fromamong 35 technical classes, aggregated based on WIPO’s IPC and Technology Concordance Table.

18

Fig. 8. Fujifilm Patent Application Trends, Positions 6–13
FUJIFILM 6-13
1600
1400
1200
1000
Semicon800

Measurement
600

Medical tech
Organic chem

400

Macromolecular

200

Surface tech

0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Handling
Other machines

From the EPO Worldwide Patent Statistical Database.
The number of annual patent applications in top fields 6 to 13 containing many Fujifilm applications from among
35 technical classes, aggregated based on WIPO’s IPC and Technology Concordance Table.

Corporate exploration beyond core technologies can be assessed by examining
patent applications for peripheral technologies. The companies showed basically thesame patent application patterns in their five top-ranked five fields. However,(cumulative) patent applications from 1983 to 2012 in technical fields ranked between 6
and 13 showed different trends for Kodak (Figure 7) and Fujifilm (Figure 8). Fields
ranked 6–13 were chosen because these applications appeared to represent exploration
beyond the boundaries of core technologies.
The number of patent applications by Kodak showed two peaks. The first andhigher peak, occurring around 1989 and 1990, consisted of applications in organic
chemistry, macromolecules, and methods of measurement, whereas the second peak,
between 2002 and 2004, consisted of applications in semiconductors and surface
technology. The technical fields of these two peaks differed, indicating a lack ofconsistency in Kodak's technical exploration.
In contrast, patent applications by Fujifilm showed an upward trend in almost all19technical fields, beginning in 1998. Since that time, Fujifilm has been involved inconsistent technological exploration in the fields that include both its core technologies
and peripheral technologies. Whereas Kodak’s exploration lost direction, Fujifilm’s
technology exploration beyond core technologies showed long-term consistency.
Corporate exploration can also be analyzed by determining how much it crosses
organizational boundaries (Rosenkopf and Nerkar, 2001), for example by examining
these firms’ joint R&D activities with external organizations. Cooperative patentapplications filed together with external organizations increased for both companies,
beginning around 2002 (Figure 9). The growth in the number of such applications filed
by Fujifilm was especially remarkable, indicating the company’s attempts to cross its
organizational boundaries and proactively explore external technologies.

Fig. 9. Trends in the Number of Cooperative
Patents for Fujifilm and Kodak
copat
2000
1800

1600
1400
1200
1000
800

600
400
200
0

kodak

fujifilm

From the EPO Worldwide Patent Statistical Database. Aggregated based on WIPO’s IPC andTechnology Concordance Table.

The trends in diversification and concentration for explorations by both companies
can also be assessed using the Herfindahl–Hirschman Index HHI), which measures the
distribution of patent applications. A higher HHI indicates a higher concentration level,20whereas a lower HHI indicates greater diversity. Figure 10 shows the trends in HHIs
for the top 13 technical fields of Fujifilm and Kodak. The technological endeavors of
Fujifilm remained concentrated throughout the 1980s, peaking in 1991 and 1992, but
showing consistently greater diversification of technological development from 1990
onward. The progress of diversification slowed around 2009, becoming steady in recent
years. In comparison, Kodak started diversifying its technological endeavors in theearly 1980s but showed increased concentration in the early 1990’. During the first halfof the 2000s, Kodak showed greater diversification of technology development but again
began increased concentration in 2005.

Fig. 10. Trends in HHI Indices for Fujifilm and Kodak
HHI: Herfindahl-Hirschman Index
HHI of 13 Fields
0.4

0.3

0.2

0.1

0

Kodak

Fuji

Thus, from the 1980s to the 1990s, Fujifilm showed concentrated technologicaldevelopment in the optical field, eventually catching up with Kodak. Beginning in the
1990s, however, Fujifilm showed consistent technological exploration and promoted thediversification of its businesses. In contrast, beginning in the 1980s, Kodak prepared forthe advent of digital technology by investing in technological exploration of21

pharmaceutical products and medical care equipment. In the early 1990s, however,
Kodak started to rapidly concentrate its technological development. During the second
half of the 1990s, when digital cameras became a threat to the company’s main businessof photographic film, it once again started technological exploration in a variety of fields.
In 2005, however, Kodak started concentrating its technological resources on the inkjet
and printer businesses. These transformations once again demonstrate the contrast
between the strategies employed by Fujifilm and Kodak.

4.3. Exploration of medical care productsThis section will describe the technical exploration of both companies in the medicalcare field, focusing on two sub-fields: medical care equipment and pharmaceuticalproducts. We will consider when Fujifilm began its exploration in the field, and how
Kodak explored this area.
Figure 11 shows the trends in the number of patent applications for medical careequipment by both companies. These patents ranked tenth and thirteenth among the
cumulative number of patent applications by Fujifilm and Kodak, respectively. Figure
10 shows that Fujifilm has explored technology in this field for a long time.2 Beginningin 2002, Fujifilm showed a marked increase in the number of patent applications andincreased exploration of this technology. Kodak started exploring this field a few years
after Fujifilm. Between 1990 and 1995, Kodak and Fujifilm filed similar numbers ofpatent applications in this field, but the number filed by Kodak markedly decreased
thereafter.
2

Fujifilm started to develop FCR (Fuji Computed Radiography), its digital X-ray image

diagnostic system, in 1974 and released it in 1983. This was an alternative to the traditional
analog method using X-ray film.

22Fig. 11. Trends in Patent Applications Related to Medical-Care Equipment

1800
1600
1400

From this period, Fujifilm increased
its number of patent applications

1200
1000
800
600
400
200

1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

0

Fuji Medical techkodak Medical tech

From the EPO Worldwide Patent Statistical Database. Aggregated based on WIPO’s IPC andTechnology Concordance Table.

The same trends can be observed in the number of patents filed for pharmaceuticalproducts. As shown in Figure 12, Kodak began to explore pharmaceutical technology
earlier than Fujifilm and started filing patent applications in 1986. Beginning in 1996,
however, Kodak withdrew from its exploration of pharmaceutical technology, anddecreased the number of patent applications filed. In contrast, Fujifilm started to fileincreased numbers of patent applications a little later than Kodak, around 1990.
Beginning in 2002, the number of applications surged, after a stable application periodof over 10 years.
These findings indicate that both Kodak and Fujifilm started to explore similar
technological areas at roughly the same time, but that subsequent development wascompletely different. While Fujifilm increased medical care exploration in the 2000s andbegan to shift the focus of its business to this field, Kodak withdrew from it.
Not surprisingly, the merger and acquisition strategy is consistent with the above
technical exploration. In 1988, Kodak purchased the pharmaceutical company Sterling

23

Drug for 5.1 billion dollars but sold it in 1994. In 2007, it finally sold its medical careequipment business and completely withdrew from the medical care field. Meanwhile,
Fujifilm purchased Toyama Chemical in 2008 and made it a consolidated subsidiary.
This was followed by its purchase in 2012 of SonoSite, a large American manufacturerof portable ultrasound devices. Through these acquisitions, Fujifilm injected moremanagement resources into its medical care business.
Fig. 12. Trends in Patent Applications Related to Pharmaceutical Products

300

250

Fujifilm increased its number ofpatent applications

200

150

Kodak was faster and moreproactive than Fujifilm.

100

50

0

Fuji Pharmaceuticals

Kodak Pharmaceuticals

From the EPO Worldwide Patent Statistical Database. Aggregated based on WIPO’s IPC andTechnology Concordance Table.

5. Differences between the Exploration Processes of Fujifilm and Kodak

The core technologies of Fujifilm and Kodak were almost identical, and both faced thesame market environment, especially regarding the advent of digital technology. Thus,
had both companies assessed their own core technologies and looked for new areas towhich they could be applied, they would have explored the same technological andbusiness areas. In fact, between the 1980s and 1990s, the two companies were exploring
the same areas, such as medical care equipment and pharmaceutical products.

24

A statement by Fujifilm CEO Shigetaka Komori confirms this: “Naturally, Kodak
had also foreseen the arrival of the digital era and was cautious about it. With regards
to diversification, they took steps similar to Fujifilm when they set out to develop
pharmaceuticals.” 3 Although Fujifilm and Kodak initially followed the same
exploration strategy, these strategies ultimately took entirely different trajectories,
resulting in completely different business performances.

5.1. Fujifilm’s exploration process

Before its top management officially decided on which new business areas to explore,
Fujifilm had been exploring new technological fields independently at the operational
level. For example, in 1987 when the digital camera was being developed by its
electronic image department, a group of middle managers who were interested in thecompany’s future spontaneously started a series of “technology strategy meetings”(Kuwashima, 2009). These meetings were attended by 10 members selected fromvarious departments, such as R&D, manufacturing, and human resources departments.
This group, which met regularly once every month, took the lead in discussing possible
future technological and business directions of the company and submitted a final report tothe senior management (Shibata, Kodama, and Suzuki, 2017). Thus, in the late 1980s,
managers at the operational level were already engaged in discussions on the futurebusiness directions of the company.

Later, in 2000, Fujifilm officially started a company level "wide exploration", under3

Shigetaka Komori, “Spirit of Management.”25

the leadership of CEO Komori and involving the technology development department.
As part of this initiative, the company conducted a 2-year “technology inventory” project,which examined which new businesses to explore, based on technology and market. For
this purpose, Fujifilm constructed a four-quadrant map, with current and newtechnologies on the horizontal axis and current and future markets on the vertical axis.
Then, the top management determined the future direction of the organization: Komori
was quoted as saying that “without identifying which fields we can take advantage ofwith our own technological and management resources, we will not be able to put ourbusiness on track. For that, first, we need to organize and verify what kinds of strengths
Fujifilm has.”4
As a result, it was decided that the company would invest in six strategically
articulated fields: healthcare, high-performance materials, graphics, optical devices,
digital imaging, and documents (Fujifilm Holdings Corporation, 2016). In terms ofhierarchy of exploration, this process can be identified as deciding the areas of "wideexploration". Healthcare and high-performance materials are widely defined categories
that do not refer to specific products. Because healthcare has a very broad range,
making it difficult to engage in the experimental or trial-and-error processes that could
lead to knowledge acquisition and learning. Fujifilm needed to be more specific about
this new area. After examining many options, Fujifilm decided to explore the field offunctional cosmetics as local exploration area.5
In selecting functional cosmetics, the technological synergy and business timelinesof the company worked as organizational focusing devices to define the direction of
4

Shigetaka Komori, “Spirit of Management.”

5

The exploration and entry process for the cosmetics business is similar to that cited by Shibata,

Kodama, and Suzuki (2017).

26

exploration (Rosenberg, 1976). The term technological synergy indicates the application
to cosmetics of basic technologies accumulated in the film business, such as antioxidant
and collagen control technologies (Shibata, Kodama, and Suzuki, 2017; Kodama andShibata, 2016). Despite not having a sales channel to the cosmetics market, Fujifilm
emphasized the merits stemming from technological synergy. The other perspective was
the timeline for product commercialization. Cosmetics can be commercialized more
quickly than pharmaceutical products, and can also be evaluated in the market
relatively quickly. Because the company was already in the very time-consuming
business of pharmaceutical products, that balance of the timeline was also considered.
Yuzo Toda (vice-president and CTO as of 2016), who spearheaded this initiative atthat time, said the following:
Balance is important in business. If we invest solely in businesses withlong-term goals, we run the risk of interrupting them as soon as the managers
are replaced. Therefore, to get to know the market better, we decided to invest incosmetics, a field that not only requires less development time thanpharmaceutical products, but is also where we could achieve our goals relatively
quickly.6
Similarly, the following statement by Naoto Yanagihara (General Manager of R&D
Headquarters, Executive Officer as of 2016) also indicates that Fujifilm uses a businesstimeline as one of its evaluation criteria: “[Regarding photographic film-related
technology], we have been keeping the areas and core technologies we believe will growin the mid-to-long term, even if they are not commercially profitable in the short-term.”7

6

Toda (2015) Forbes Japan, March 26, 2015.

7“Nikkei no Monozukuri,” March 2016.

27

Hence, the use by Fujifilm of technological synergy and business timeline asorganizational focusing devices to define its direction of exploration led the company tofocus on the functional cosmetics business as a new business area (Rosenberg, 1976).

5.2. Kodak’s exploration process
Conversely, Kodak’s exploration process was conducted in a top–down manner by
the initiative of CEO, generally omitting the organizational focusing process. Figure 13
provides a chronological representation of the appointment of Kodak’s CEOs and its
exploration strategy. Basically, Kodak was aiming to shift from photographic film todigital cameras by promoting slogans such as “We are a digital company” and “We want
to be a digital company.”8 In 1993, Kodak’s board of directors invited George Fisher
from Motorola to become CEO, an unprecedented step for Kodak, as no previous CEO
had come from outside the company. Fisher’s goal was to strengthen the company’s
main business of photography through digital technology. Therefore, in 1994, Kodak
sold the pharmaceutical company Sterling Drug, which it had purchased in 1988, toBayer and invested those resources in film photography in China and other emerging
markets (Lucas and Goh, 2009). Although Kodak had conducted research anddevelopment on digital cameras from an early stage and tried to diversify its businessby investing in pharmaceutical products, it ended up re-investing in the photographic
film business. Its patent applications in the digital camera field began to increase
markedly around 2001, 3–4 four years later than Fujifilm. This delay appears to havebeen caused by George Fisher, who decided to return to the company’s main business ofphotographic film.

8

Shigetaka Komori “Spirit of Management”

28

In 2000, George Fisher was replaced by Daniel Carp, who once again accelerated
the development of digital cameras. This change is reflected in the rapid increase,beginning in 2001, in the number of patent applications for semiconductors. In April
2001, Kodak introduced its first digital camera, EasyShare, to the market and secured
the largest share in the American market (Christensen, 2006). Its CEO announced thecompany’s commitment to digital technology, not only to photographic cameras but tomedical care. The 2003 annual report stated that the company had “implemented adigital oriented strategy to support revenue and sustainable earnings”, and its 2004
report stated that, “in the first full year of its digital transformation strategy, Kodak
came out of the gate at a full gallop and we continue to build momentum” (Lucas andGoh, 2009).
In 2005, however, the Kodak board of directors invited Antonio Perez from
Hewlett-Packard (HP) to become CEO. Perez, who called the digital camera business“crappy,” sold the medical care equipment business in 2007 and sought to enter the
inkjet printer business. Once again, the area of exploration had changed. Sales of Kodak
inkjet printers began in 2007, but, by 2011, HP, Canon, and Seiko Epson accounted foraround 90% of the global printer market, making it impossible for Kodak to increase its
share. In 2012, Kodak declared bankruptcy.

29

Fig. 13. Relationship Between Appointment of Kodak CEOs andAreas of Exploration
1993 – Recruits George Fisher from Motorola as CEO.
Returns to photography film business; in 1994, Kodak sells
medication company purchased in 1988.

2000 – Appoints Daniel Carp as CEO. Introduces a
digital camera in 2001 and commits to digitalizationof medical equipment.

1993

2000

Bankrupcty

2005 – Recruits Antonio Peres from HP as CEO.
Sells medical equipment business and enters inkjet
printer business in 2007.

2005

13

These findings indicate that Kodak’s exploration strategy was executed in a top–
down manner. The CEO, sometimes recruited from outside the company, defined thearea of exploration without an organizational focusing process. This type of exploration
process is prone to changing direction because it is dependent on the judgment of theCEO. Two factors influence the judgment of a CEO: those attributable to corporate
governance, such as demands from investors; and the CEO’s professional experience,such as background and past achievements.
For example, Fisher’s return to the photographic film business was due in part to
the influence of investors seeking short-term results. Fujifilm CEO Komori shares his
point of view: “In the United States, investors always demand short-term results fromthe managers. As I said before, even though Kodak tried to diversify its business for awhile, maybe that kind of influence led them to return to photography, a field where it iseasier to secure some kind of profit.”99“Editor-in-chief ’s interview,” Nikkei Business, July 23, 2012.

30

However, the reason Antonio Perez shifted Kodak to the inkjet printer business was
likely due to his previous professional experience. As vice-president of HP, Perez was
responsible for managing its inkjet printer business. During that time, he increased thenumber of printers sold worldwide from 17 million to 100 million and increased sales toover 10 billion dollars, an achievement that paved the way to his becoming Kodak CEO.
Thus, Kodak’s shift to the inkjet printer business may have been due to its new CEO’s
successful experiences, resulting in a strong motivation to try unique strategies. Thus,
both investors seeking short-term results and previous experiences, such as thebusiness background of a CEO, may affect the selection of areas of exploration.
These findings are supported by studies showing that the judgment of CEOs is
influenced by their cognitive capabilities, such as how they think about the business. A
CEO’s cognitive capabilities may, in turn, influence the success or failure of a business.
For example, the difficulty faced by NCR while entering the field of mainframe
computers was attributed to the cognitive capabilities of the managers and how they
perceived NCR’s business (Rosenbloom, 2000). Moreover, CEOs’ cognitive capabilities
have been found to be unconsciously affected by their past business experiences andaccumulated knowledge (Helfat and Peteraf, 2015). Because CEOs’ past businessexperiences implicitly influence their judgment, areas of exploration are likely tochange whenever a CEO with different business experiences is recruited from outside
the company.

6. Conclusions

31

This study focused on the exploration process, a subject insufficiently covered inprevious studies. To better understand this process, we presented a two-dimensionalframework to understand the exploration process. Our analysis of the exploration
strategies of Fujifilm and Kodak during their corporate transformation processes
showed the validity of this framework. In this section, we will summarize our findings
and present our conclusions.
It is widely believed that Kodak’s bankruptcy was caused by its failure to properly
deal with the emergence of the digital camera market. However, as Section 4 indicates,
Fujifilm and Kodak were not very dissimilar in their business commitments to thismarket. Although their market shares gradually decreased, both initially had large
market shares. Kodak introduced its first digital camera EasyShare before the market
started to grow and had the largest share of the American market in the early 2000s.
Therefore, Kodak did not fail due to its inability to transition from film to digital
cameras. Rather, it failed because of its subsequent exploration strategy, which changed
direction repeatedly.
This does not mean, however, that Kodak was late in starting to explore for new
businesses. The timing of Kodak’s explorations in medical care equipment andpharmaceutical products was comparable to that of Fujifilm. However, Kodak’s changes
in the direction of exploration ultimately pushed the company to bankruptcy. The
comparative study in this paper explains why Kodak’s exploration lost direction, with
our findings indicating that the company’s manner of managing the exploration process
basically caused the company to fail.
During the first phase of exploration into digital cameras, the necessity of this
exploration was obvious and inevitable, because the direction and pace of technical32

change were predominantly directed by their natural trajectory (Nelson and Winter,
1982). Guided by constraints, Fujifilm and Kodak were similar in introducing related
technology into their products, making a focusing process generally unnecessary. Kodak
was able to return to digital camera development even after having gone back once to its
traditional film photography business. These facts indicate that natural trajectory andits effect on the direction of exploration cannot be ignored.
During the second phase of exploration, after the introduction of digital cameras,
the need to diversify required many alternative directions of exploration. This second
phase required more difficult decisions than the first phase. Due to differences in their
exploration processes, the fate of the two companies diverged during the second phase.
Fujifilm started with a wide exploration process, narrowing to a local exploration
process within an exploration hierarchy, enabling Fujifilm to organizationally define thearea of exploration through an organizational focusing process. Thus, Fujifilm’s
exploration process can be located in the upper right quadrant of Figure 2. Once thearea of wide exploration is determined through the organizational focusing process,subsequent areas of local exploration will remain primarily within this range. Therefore,
areas of exploration are unlikely to change much even when the CEO is replaced. The
direction of exploration will remain generally stable, and the exploration activities
generally consistent.
In contrast, Kodak paid little attention to the organizational focusing process.
Rather, Kodak’s CEOs recruited from outside the company often decided on a specificarea of exploration in a top–down manner without an organizational focusing process.
Thus, Kodak’s exploration process can be located in the lower left quadrant of Figure 2.
In such a company, areas of exploration tend to be influenced by investor demands

33and/or the CEO's past business experiences. Traditionally, the different businessexperiences and achievements of CEOs invited from different business fields are
considered strengths. However, Kodak’s case indicates that, when areas of exploration
are decided in a top–down manner, a CEO’s varied experience may increase the riskthat the exploration strategy will lose its focus (Miller and Ireland, 2005).
These findings indicate that the framework of exploration processes caneffectively explain the differences in exploration processes between Fujifilm and Kodak.
This comparison may contribute to greater understanding of corporate exploration
processes. However, analyses of additional cases will be necessary to establish theeffectiveness of the framework presented in this study.

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