WEB EXCLUSIVE: Lighting industry at the edge of the unknown
Everyone involved with the LED world is involved in a massive industry transformation, which has parallels with the changes that were seen in another industry, explains Ankush Chopra in this WEB EXCLUSIVE article.
Once upon a time, there was a small innovative company with big ambitions. It created a game-changing widget that made it easy for consumers to use such widgets. Consumers loved it and began consuming these widgets in large quantities. As a result, this small company became a very large company. Slowly, it began to drive out every other competitor and began guarding the industry like a fortress. Its market share increased to 80%; it generated enormous cash year after year and lived happily thereafter.
Some 60 years later, when another very large company from another industry tried to enter this fortress, our company drove out this very large rival easily. The fortress remained intact. In yet another 25 years, another company came up with a game-changing widget to rival our company’s widget. Our company spent billions of dollars in learning this new technology and aggressively created several new widgets around the new technology.
However, there was a problem. The new widgets eliminated the need to replace widgets. Our company saw two difficult options: run with the new technology and shrink its own business significantly or avoid the new widget and risk being driven out of the industry. It could not decide whether to be or not to be and this indecision turned fatal. Soon, it saw the fortress of its industry breached and then taken over by many other companies. In the end, our great company became a minor player, a jaundiced shadow of its glorious past.
This company was Kodak, and the widget it created was the film roll. Kodak drove out DuPont when the latter tried to enter the film-roll market. Later, Sony’s digital camera was truly game-changing for the industry. Kodak spent billions in creating industry-leading digital technologies but failed to maintain its position in the market. It faced a technology that promised to eliminate film-roll demand and destroy its profits. In the face of such a choice, Kodak blinked. As a result, its market share fell from over 80% in the 1980s to less than 18% in 2008. Its hefty profits plunged to chronic losses.
The history of the camera industry has strong parallels with the lighting industry today. The key point of similarity is the impact of new technology on replacement demand, the key profit driver in the industry. Digital cameras eliminated the replacement demand for film roll in a similar way that LED technology will largely eliminate the replacement demand for light bulbs. The lighting industry will see a dramatic reduction in demand because each LED bulb will eliminate the demand for over 25 incandescent bulbs, and the prices of each LED will drop much lower than 25 times the price of incandescent bulbs.
As a result, even if the dominant lighting players succeed in LED technology, they will still see a decline in their revenues and profits. At the same time, several new players such as Cree and Samsung are entering the lighting arena to stake their claim with their LED technologies. These players pose the same challenge to the majors that consumer electronics majors such as Sony posed to Kodak and Polaroid. Although Kodak survived, albeit with a significantly diminished position, and Polaroid went out of business, not every new entrant thrived. Thus it is important for firms eyeing the LED market to understand this history and to avoid repeating the mistakes that others made in a similar situation.
When firms face the situation that Kodak and Polaroid faced, they are stuck with awful options. If they embrace the technology, they lose profits by eliminating their own replacement demand. If they avoid the new technology, they may even go out of business. Significant research has shown that when decision makers face two choices that leave them worse off than status quo, they tend to avoid making the choice. Kodak and Polaroid also dragged their feet in the face of technologies that kill replacement demand. They found immense resistance within their organizations that stymied their commercialization efforts.
Furthermore, camera majors made some critical mistakes. They predicted a future based on their current capabilities. Kodak thought the future of camera industry was a convergence between chemistry and microelectronics, and pursued such convergence products. Polaroid believed that the future of camera was mini printers on top of digital cameras. Both were deluding themselves. As a result, Polaroid went out of business whereas Kodak lost its dominance. Both also missed some key trends such as PC penetration and the rise of the Internet. These trends provided key value-creating opportunities that others capitalized upon.
|Lighting Majors in 2010 vs. Kodak in 1980s|
Table 1 (right) shows a comparison between the camera industry and the LED industry from the perspective of incumbent firms. These parallels have some important implications for lighting majors and new entrants arriving on the scene. The lighting majors will face a challenging future on many fronts. As they see their replacement demand steadily dwindle, they may find it hard to recreate value.
Although Kodak and Polaroid spent enormous resources on new products, they couldn’t recreate lost value. Moreover, lighting companies may also face internal resistance to changeover to LED. Finally, as current capacity becomes obsolete, constant restructuring of remaining assets will take its toll on the employees as well.
The lighting majors will not only face intense competition from new players such as Samsung, Sharp, Toyoda, Nichia and Cree, but will also find these new entrants bring new capabilities to the market. Cree and Samsung have some deep capabilities in LED technology, and Samsung has a vast array of capabilities including access to other distribution channels. These players will attempt to change the rules of the game to suit their strongest capabilities. While Kodak had strong relations with traditional channels, consumer electronics majors shifted the distribution game to the Best Buys and Walmarts of the world. Similar shifts cannot be ruled out in the lighting industry.
Another key challenge for lighting majors will be the fact that the drivers of success will change rapidly. Currently, distribution, brand and pricing largely determine the performance of firms in the lighting industry and new entry is almost impossible. In the LED segment, technology (and price) will become the key performance driver until a shakeout takes place in the industry. After the shakeout, technology will become less important as often seen after shakeouts in such situations. This shakeout may lead to the exit of one or more current lighting majors, as has happened in many other industries in the past.
The lighting majors need to watch out for the key cognitive challenges similar to those that camera majors faced. These cognitive challenges arise from a set of heuristics that managers in any industry share. [Wikipedia describes heuristics as experience-based techniques that help in problem solving, learning and discovery. A heuristic is a "rule of thumb", an educated guess, an intuitive judgment or simply common sense.] These deeply-ingrained heuristics allow managers to take rapid actions in the face of major complexities of business. Although these heuristics, also known as dominant logics, make managers efficient and effective in their domains, they also become a liability when the industry changes significantly.
Kodak’s dominant logic was to make money through consumables such as film rather than cameras. When consumables disappeared, it struggled to find ways of making money. Kodak hired George Fisher, the ex-CEO of Motorola, to overcome this barrier of dominant logic, without success. Lighting majors need to manage the risk of their dominant logic becoming a barrier to success in the LED market.
Finally, lighting majors will see a blurring of industry boundaries before these boundaries become clear again. As firms try to go beyond the socket, they may aim at opportunities both close to, and far from, the traditional industry boundaries. Home automation, fixtures, data networking, and services will all be up for grabs, and the collective effort of firms will determine the new industry boundaries. The path from here to there will also lead firms down some dead ends. Kodak’s efforts on Kodak CD and CD players, and Polaroid’s efforts on printer on top of digital cameras, were such dead ends. The way to avoid dead ends is to “bust your blinders” or remove the blinkers that will force a company to see the future from the rosy lens of its past success.
Although the odds may appear somewhat stacked against the lighting majors, there is no guarantee that the Samsungs and Crees will have a clear way ahead for themselves. In the camera industry, while major players such as Kodak, Polaroid and Fuji all lost out, many high profile new entrants couldn't win either. A little known fact of the camera industry’s history is that even Apple, the legendary creator of iPod, iPhone and iPad, entered this industry but failed to win. Although changing technology does open doors for new entrants, the road to victory is not an easy one.
The new entrants should note that none of the three lighting majors (GE, Philips and Osram) are as dependent on the lighting industry as Kodak and Polaroid were dependent on the camera industry. This gives lighting majors leeway that camera majors didn’t have. The distribution channels will be an important aspect of this game for the first round; newcomers may find it challenging to fight majors head on in the distribution game. They should not forget how promising innovators in the camera industry, such as Apple and SMaL, could not succeed against the consumer electronics firms.
So what does all this imply for the firms eyeing the emerging LED market? The take-away depends on who you are. If you are a lighting major, you ought to be very careful lest you repeat the mistakes that camera majors made. If you are a startup, you need to keep an eye on how the industry evolves and capture emerging niches the same way that firms like Flickr and Shutterfly did in the photography industry. LED will nicely play into niches such as wellness and aesthetics that will need capabilities that lighting majors and newcomers do not possess today.
If you are an LED technology firm entering from other domains into lighting, you need to know that although head-on collision with the majors will be possible now, you have to cover your vulnerabilities, especially in non-technical capabilities that you still do not own. It may be best to influence the LED game to your advantage in the first round while trying to build missing capabilities. However, all players will have to think out of the box to create a compelling future ahead.
No matter how you are involved with the LED world, one fact is indisputable: you are involved in a massive transformation of an industry that will touch every life on this planet. It is rare to be a part of something so monumental.