Learning from Fujifilm’s road to safety

Last October we looked at what the wealth industry could learn from the Kodak experience in responding to a disrupted industry. You can see it here.

Some of the most interesting lessons relate to why incumbents so often fail in the face of disruptive change – because they benefit from the status quo, threats appears small or unclear, there is a desire to protect the existing business, and an inability to move quickly enough.

So what about Fujifilm, Kodak’s competitor of the day? Where Kodak went bankrupt, Fujifilm survived. Fujifilm came to the acceptance that their core business was probably dead, which was just as well, as its film business has shrunk at a rate of 10% pa for the past 10 years.

Once you’ve got past the terrifying part, accepting that your core business is dead in the long term can be a liberating thing. Previously unthinkable courses of action become possible. But that still leaves you with the problem of replacing the core business. Big new opportunities do not come along often, and hardly ever when you really need one.

So how has Fujifilm fared from this perspective?

A decade on, there has been one really big success – Fuji Xerox, the digital copier venture between Fujifilm and Xerox. This now produces around half of Fujifilm’s sales and profits. This was a reasonably logical move in that it was still an imaging business, and therefore connected to the core business – but it still required a new partnering business model to make it work.

There have been a range of niche successes. Some of these are also connected to the old core business, such as specialist optical films for flat screen panels.

Others are less obvious, as today’s image hints at. Astalift is a premium anti-aging skincare brand, and yes it’s owned by Fujifilm. How does a film company end up in skincare? By transferring research into oxidation and collagen from its existing industry (film), to a new one (life sciences).

Fujifilm is an inspiring story, but it points to the scale of the challenge. They found a good replacement core business and some decent new niche businesses. But to get there, they needed new business models in related businesses, and existing business models in new industries – a massive transformation.

The financial outcomes in return for 10 years of transformation effort? Sales and profits essentially unchanged and a share price down ~20%. You can take a glass half empty or half full view of that. The glass half empty view is they ran hard for a decade with not much to show for it. The glass half full view is that the starting point was in reality -100% (ie Kodak’s fate), and that they managed to replace 80% of it in a decade, which is pretty amazing.

Whichever view you prefer, when a high margin core business dies off, replacing it is a truly herculean task. Potential replacements have a tendency to be lower margin (often much lower margin), smaller in size, or both.

A similar challenge faces the wealth management industry. The traditional industry value chain with 200+ bps to share around is running off, being replaced by MySuper, off-platform and SMSF segments with lower margins. Incumbents who benefited from that world face a huge change program. But it’s not the first such transformation of this scale – the wealth industry of today transformed from a world of whole-of-life policies and unit trusts with 8% entry fees. Notwithstanding that some did not successfully make the jump then, and others will not do so now, that is still an encouraging thought.

Sources: as with the previous Trialogue looking at the Kodak case study, we’ve drawn on themes from Clayton Christensen’s work on disruptive innovation, Markides & Geroskis’s “Fast Second”, 2005, and Lex, Financial Times September 4 2013.