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POLAROID: ENTERING THE DIGITAL IMAGING

Polaroid Corporation, historically the best-known brand in instant photography, faced a host of challenges in 1997. Although Polaroid had enjoyed spectacular growth from the late 1940s through the late 1970s, its history since then had been more troubled. When its sales declined in the 1980s, Polaroid had attempted to expand into electronic- and digital-imaging technologies. During that decade, Polaroid’s R&D expenses averaged 8.8% of total revenues, and by 1989, 42% of the firm’s R&D dollars were devoted to electronicimaging technologies. This research had led to several major technological breakthroughs, but few of the products that resulted from this effort had been successful. Its new-product failures had been extremely costly and had led to substantial losses and layoffs; Polaroid’s workforce had shrunk from 21,000 in the late 1970s to about 10,000 in 1997. Most leading stock analysts and business publications were skeptical that Polaroid could turn things around. Internally, there was no consensus on how Polaroid could increase its sales and profits. Although Polaroid currently offered a wide range of traditional and digital-imaging products, in 1996 its established product lines in instant-camera and film accounted for 90% of its overall sales of almost $2.2 billion, and its digital imaging products had lost $120–$130 million. Gary DiCamillo, Polaroid’s CEO, was a Harvard Business School graduate who had a background in consumer marketing at Black & Decker. He had been the first outsider named CEO at Polaroid in 1995. In just over a year, he had restructured the firm’s business to cut losses in digital imaging and maintain strength in traditional photography. His next goal was to make Polaroid a more marketing-focused organization, capable of launching 40 to 50 products over the next two years. Polaroid under Edwin Land, 1937-1980 Edwin Land founded Polaroid in 1937. A brilliant scientist who was considered autocratic, Land led his firm to tremendous success. His first invention, light-polarizing filters, was used in automobile headlights, sunglasses, and lamps. His invention of the one-step, or instant, camera in 1947 made Polaroid a household name. Between 1948 and 1978, Polaroid had an average annual compounded sales growth of 23%, profit growth of 17%, and share price growth of 17%. Polaroid was well known for its technological capabilities. Its commitment to innovation led it to improve its instant camera significantly, and it had considerable expertise in instant-imaging technologies such as silverhalide chemistry, optics, and electronics. It had also developed a formidable patent position. To secure its technological lead, Polaroid stopped outsourcing the manufacture of its cameras and film in the early 1970s. As it built new plants to make these items, it developed additional capabilities in precision camera assembly and thin-film coating. During those years, a strong belief in the primacy of technology became a key element of Polaroid’s culture. Land believed long-term, large-scale research projects would enable Polaroid to develop great products, and great products would in turn create their own market. Polaroid employees thus felt their firm had little need for traditional market research. Polaroid complemented its technological strength with its power in distribution. By selling its products through mass-market retailers such as Kmart, Polaroid avoided competing directly with traditional camera firms, which sold primarily through specialized camera stores. In addition, the Polaroid name had become recognized worldwide. In the 1960s, Polaroid began selling cameras at cost. The large installed base of cameras then fueled an ongoing demand for film, which generated gross margins of 70%. Many Polaroid employees believed deeply in this business model. In an interview, a former CEO noted: “. . . one of the things that is terribly important, and I think most people understand it but maybe not as fully as they should, is that in the photographic business all the money is in the software [film], none of it is in the hardware. . . .” Polaroid held a virtual

monopoly in the U.S. instant photography market until 1976, when Kodak introduced its own instant camera. Polaroid immediately sued Kodak for patent infringement, forced Kodak out of the market in 1985, and made it pay $925 million in damages in 1991. Exploration of Digital Imaging, 1980-1989 When Land stepped down in 1980, Bill McCune, who had been at Polaroid since 1939, became CEO. Land’s departure occurred at a time when Polaroid’s sales, and the instant-camera market in general, were declining. Point-and-shoot cameras, which were easier to use than their predecessors, had become competition for Polaroid. Further, with Kodak’s entry into the instant-photography business, Polaroid no longer had this market to itself. In 1981, Polaroid formed an electronic-imaging group to explore technologies in microelectronics, advanced optical design, image processing, and fiber optics. It spent $30 million to open a microelectronics laboratory in 1986 and gave the lab an operating budget of $10 million per year. Over the next decade, this lab increased the share of Polaroid’s patents related to electronics from 6% to 28% of Polaroid’s total patents. A member of the electronic-imaging group stated, “We compared ourselves to Bell Labs. Our orientation was ‘technical challenge—we can do it.’” Although there was little consumer demand for most digital-imaging applications during this decade, electronic-imaging managers, who were long-term employees, began holding brainstorming sessions during which they questioned the strategic implications of digital imaging. Over time, they became highly skeptical that the “software” model that had proved so successful in instant photography would work for digital imaging. Their memos and reports (one dating from 1982) identified “the current business model” as a key constraint for Polaroid in the digital world. They believed the appropriate model for digital imaging would make hardware (e.g., digital cameras, printers, or a combination thereof) the main source of profitability. A leader of this group commented, “. . . already in the eighties within our group we were not at all committed to the razor blade business model . . . there was no question that if we had the right instrument we could make money with the hardware only.” Two projects emerged from the laboratory’s work. The first, Helios, was a revolutionary chemical-free, dryimaging system for radiology that was intended to replace traditional X-ray technology. The tabletop-size imager used a high-resolution laser to produce black-and-white images at 300 dots per inch and had many potential applications, including nuclear medicine, ultrasound, magnetic resonance imaging, and digital radiography. Helios’ development leveraged Polaroid’s chemical knowledge and thin-film coating capabilities. Polaroid would accrue a revenue stream from selling film once it sold a machine. The second project was called Printer in the Field, or PIF. It was targeted at the traditional instant camera consumer. PIF was envisioned as a hybrid system that combined digital-image capture with instant film for image output. PIF generated much excitement within the electronic-imaging group, and work on the project culminated in a patent in 1990. Technical difficulties, however, eventually led to it being abandoned in 1991. Digital Imaging at Polaroid in the 1990s Although Polaroid enjoyed improved worldwide camera sales in the early 1990s as it entered emerging markets such as Russia, its sales of instant film declined as traditional imaging companies such as Kodak and Fuji offered an increasing array of film speeds and quality levels. Polaroid’s management believed significant growth would not come from the firm’s core instant-imaging business and planned to concentrate on Polaroid’s digital business instead. Polaroid reorganized in 1990. It created three market-focused divisions: scientific/technical, consumer, and business, as well as a fourth division, electronic imaging, which was to feed products to the other three divisions. Helios, the medical-imaging system, remained a separate group. Polaroid hired many new

employees with high-tech backgrounds to staff the electronic-imaging division, and in 1994, it recruited a long-time Digital Equipment Corporation (DEC) employee to head this division. The Electronic Imaging Division Polaroid devoted considerable resources to its digital-imaging efforts. In 1994, for instance, it spent 66% of its R&D dollars on digital imaging. This division developed a range of digital imaging products. At the same time, Polaroid cut funding for ancillary projects; in 1993, it sold its microelectronics lab to MIT. Digital camera products. After it abandoned the PIF project, the electronic-imaging division concentrated on a stand-alone camera. A newly formed electronic-imaging marketing group developed this product concept, which was targeted at professionals in real estate, law enforcement, military intelligence, and insurance. The group had developed sophisticated sensor technology while developing PIF. Polaroid’s sensors could generate a resolution of 1.9 million pixels. Most competitors’ sensors generated fewer than 480,000 pixels. Polaroid also held a patent on using rectangular pixels, which improved color recovery and had developed proprietary compression algorithms that prevented loss of information or decrease in image quality. A working prototype of the camera was ready in 1992, with a target price of $2,000–$2,500, which was far below Kodak’s list price of $9,995 for a digital camera with a similar resolution that was targeted at the professional market in 1993. Digital-imaging managers were ready to sell the camera, given its price/performance relative to competitors’ offerings, but executives hesitated to fully endorse the project. One senior manager noted, “We’re not just going to be up against Kodak, Fuji, etc. We’re going to be up against 30 consumer electronic companies—the Sonys, Toshibas, Hitachis, the Intels, etc.” Another senior manager wondered, “Can we be a down and dirty manufacturer at the same time we’re an innovator over here?” Senior executives wanted to bundle the digital camera with a printing device. Digital-imaging managers, who had been more exposed to early evidence about digital imaging, strongly disagreed with this option. During this period, digital-imaging managers and corporate executives met frequently to review strong evidence for the rise of digital photography and the decline of instant imaging. One digital-imaging manager described the dialogue with senior management: “The catch [to our product concept] was that you had to be in the hardware business to make money. ‘How could you say that? Where’s the film? There’s no film?’. . . What was fascinating to me was that these guys used to turn their noses up at 38 percent margins. But that was their big argument. ‘Why 38 percent? I can get 70 percent on film. Why do I want to do this?’” The electronic-imaging group was excited by a deal it had made with IBM to develop digital cameras that could be used with mobile computers. IBM was to manufacture the cameras, and Polaroid was to provide the know-how. Senior executives ended these discussions. Other disagreements arose over how to sell the camera. When the electronic-imaging group requested a separate sales group, it was told it had to use the instant photography sales force, which sold mainly to mass merchandisers. Nonetheless, Polaroid continued spending $7–$8 million a year on the electronic-camera program. Polaroid’s Foray into the Digital Camera Market The conflicts between Polaroid’s senior management and the electronic-imaging division resulted in long delays for the firm’s development of the digital camera and the creation of technological alliances with important partners; these delays ultimately pushed back the commercialization of the product. When the PDC-2000 was finally introduced in March 1996, the market was crowded. Nonetheless, the PDC-2000 received rave reviews for offering performance well beyond that of similarly priced cameras, as well as numerous awards for technical achievement, including the Netguide Magazine State-of-the-Art award, Publish magazine’s Impact award, and the European Technical Image Press Association’s Best Digital Product of 1996.

When the PDC-2000 came to market, electronic-imaging managers wanted their division to have its own sales force. Polaroid’s senior executives told them they would have to use the instant photography sales force. One employee commented, “We had products in the $1,000 range and these people were used to going to Kmart or Wal-Mart.” Printer products The electronic-imaging group developed capabilities in ink-jet and dye sublimation printers. In 1992, a small format dye sublimation printer was introduced, but it was taken off the market a year later because Polaroid’s executives didn’t think these printers would ever match photographic quality. Helios After PIF was abandoned, Polaroid’s upper-level executives allocated the funds that had been dedicated to PIF into Helios. During the early 1990s, Helios received annual funding of $120 million, compared with $30– $40 million for the entire electronic-imaging division. The 8 x 10 inch version of Helios came to market in 1993, after almost 10 years of development. Helios competed with silver halide-based film systems called “cathode ray tube film recorders” made by Kodak, 3M, Fuji, DuPont, Agfa, and Konica Silver that produced halide-based images and film. Helios provided resolutions that were comparable to these film recorders. Relative to silver-halide systems, Helios offered several advantages. Silver-halide systems required more time during preparation and processing, including film cassette loading, chemical preparation, and toxicwaste disposal. Helios, a carbon-based system, did not need these steps and did not produce waste, so it also eliminated the time and costs spent meeting environmental and safety requirements. In addition, Helios could consistently reproduce the exact same image, while chemical-based systems showed imperfections. Although Helios was almost four times more expensive than regular 8 x 10 CRT film recorders, it enabled up to four different scanners to be hooked up to one imager, whereas CRT recorders could handle only one input at a time. Yet Polaroid sold fewer than 300 of these systems by June 1995. Analysts blamed Polaroid’s marketing of Helios for the product’s lack of success. Further, the 8 x 10-inch format could compete for just 20% of the digital-radiology market; the other 80% required 14 x 17-inch images. Polaroid began shipping the 14 x 17-inch models at the end of 1995. The manufacture of Helios film was similar to that of graphic arts film, and Polaroid opened a $200 million coating facility in 1994 to produce these films. In 1995, Polaroid introduced its first graphic arts products. A Dry Jet Color Proofing System created high-quality proofs from digital data, and Dry Tech Image-setting film, a carbon-based binary film, created the plate that went onto presses. Polaroid faced competition from Konica, Kodak, and Imation, but this market’s potential was seen as limited. The graphic-arts industry was expected to move toward computer-to-plate technology, bypassing the need for film. A New CEO Soon after Gary DiCamillo took over as CEO in October 1995, Polaroid laid off 1,600 employees, consolidated its film-coating facilities, and restructured its operations to concentrate on higher growth markets. In 1996, DiCamillo restructured Polaroid into three market-focused divisions: consumer imaging, commercial imaging, and new business. He also cut R&D expenses by 30%, commenting, “We’re not in the business to get the most patents. We’re not in the business to write the most research papers. And we’re not in the business to see how many inventions we can come up with.” Polaroid’s problems continued in 1996. Initial sales of the PDC-2000 were twice what Polaroid had predicted, but sales began to slide in late 1996. Graphic-arts products accounted for only $3 million in sales in 1996 and had incurred significant operating losses. In 1996, Polaroid sold most of the Helios operation to Sterling Diagnostic, a large distributor of medical-imaging products. It continued to produce the film and lasers. In contrast, Polaroid’s ID systems were doing well. The combination of instant and electronic ID systems held 65% of the U.S. market and constituted Polaroid’s fastest growing commercial business.

For the first quarter of 1997, Polaroid’s sales and profits were $457 million and $15.8 million, respectively, versus $461 million in sales and a loss of $60.1 million during the same period in 1996. Polaroid had also begun a new marketing campaign that targeted consumers while they shopped at Wal-Mart and Kmart, and it was about to release digital-imaging software for home computer users. It remained to be seen whether these measures represented the first steps toward Polaroid’s long-awaited recovery. Epilogue Polaroid continued its slide in 1997 and 1998 with sales dipping to $2.15 billion and $1.85 billion, respectively, with losses for these periods of $127 million and $51 million. Polaroid restructured again and had additional layoffs. Its strength in digital imaging diminished considerably. It had only about 50 internal employees devoted to digital-imaging research, as opposed to about 300 in 1992. DiCamillo began reorienting Polaroid away from its belief in large-scale invention and towards fast product development. Polaroid also totally outsourced the development of its next-generation digital camera, the PDC-300....