THE PHOTOCHEMICAL INDUSTRY : HISTORICAL ESSAYS IN BUSINESS STRATEGY AND INTERNATIONALIZATION by LUTZ ALT B.A., City College of New York (1952) M.B.A., University of Chicago (1966) SUBMITTED TO THE ALFRED P. SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 1986 ® Lutz Alt 1986 The author hereby grants to M.I.T. permission to reproduce and to distribute copies of this thesis document in whole or in part. Signature of Author_ _ _ __ _ _ Alf ed P. Sloan School of Management February 6, 1986 Certified by Professor Richard D. Robinson Thesis Supervisor Accepted by Professor Lotte L. Bailyn Chair, Alfred P. Sloan School of Management Ph.D. Committee Archives TABLE OF CONTENTS Chapter Page ABSTRACT..................................................... 3 Acknowledgmenta.............................................. 5 Part I I INTRODUCTION................................................. 6 Part II II AGFA................ 33 ... ... ... ... ... ... ..a III GEVAERT............. 71 .. a ... ....... .. IV AGFA - GEVAERT...... 113 V ILFORD.............. 135 VI KONISHIROKU......... ........................... A A A 153 VII FUJI................ 183 VIII EASTMAN KODAK....... 214 Part III IX CONCLUSION................ 287 BIBLIOGRAPHY................................................. 318 THE PHOTOCHEMICAL INDUSTRY : HISTORICAL ESSAYS IN BUSINESS STRATEGY AND INTERNATIONALIZATION by Lutz Alt Submitted to the Alfred P. Sloan School of Management in partial fulfillament of the requirements for the degree of Doctor of Philosophy ABSTRACT The photochemical industry produces materials sensitive to light, thereby making possible satisfaction of the world's craving for photographic images. It was among the first industries to extend its markets and operations abroad, irrespective of individual countries in which its member firms had their origins. This extension began at the dawn of the twentieth century, during an epoch well before most member firms had diversified their product lines. The experience of this industry thus provides a relatively pure field for inquiry into some issues that are central to understanding of business internationalization. This thesis reconstructs the internationalizatioon of six surviving photochemical producers from a strategic perspective. This perspective suggests that the carrying out of strategic intents leads to certainty in the incurrence of volume independent costs. The asymmetry between certainty of cost incurrence and uncertainty of revenue generation is reduced by the restraint or elimination of intra-industry competition and by the search for markets wherever they can be found or developed. Internationalization of this industry is thus seen to have been largely a market seeking phenomenon. The nature of markets, of knowledge, of strategy and their interrelationships are analyzed to establish linkages between the experience of this industry and certain ideas that have been advanced by international business scholars. These include the notions of cultural distance, demand similarities in international trade, cost advantages of managerial hierarchies over markets, oligopolistic reaction, internalization, and the role of differentiation in goods markets imperfections. The choice between retention and externalization of rights inhering in prior ownership is introduced in exploring the advantages enjoyed by managerial hierarchies over alternative institutions for executing transactions across national frontiers. Strategic considerations, which is to say concern with outcomes over the long run, are seen to militate in favor of retention. On the cost side, it is suggested that international application of the markets vs. hierarchies model subsumes choices between perfect and highly imperfect market mechanisms on the one hand and on the other, between externalization of product resale rights and their retention by the manufacturer. Retention is a necessary condition for appropriating the benefit of large scale economies that. can arise in performance of the marketing function. Successful differentiation efforts are seen to have a psychological basis that transcends cultural barriers although it is not completely universal. This contributes to the development of an oligopolistic industry structure that operates globally except where national markets have already been preempted. Technical knowledge is retained by its original owner when externalization of the rights to its exploitation is seen to diminish the owner's long-term revenue potential. It is argued that strategic interest prompts internationalizing firms to retain resale and knowledge exploitation rights because of the disparity in time and resources required between the shrinking of cultural distance and the acquisition of technical knowledge. Thesis Supervisor : Richard D. Robinson Title : Professor of International Management Other Thesis Committee Members : Professor Mel Horwitch Professor D. Eleanor Westney Acknowledgments While writing this thesis, I have enjoyed the benefits of splendid guidance and heartening encouragement from Professors Mel Horwitch, Richard Robinson and Eleanor Westney. The spirit of collegiality in which their advice was offered is particularly appreciated. Several substantive chapters have benefitted from the incisive comments of Richard Furth, a former colleague and now President of the Cambridge Decision Support Group. Many executives and archivists generously gave of their time to make this work possible. There are too many to list individually here, but this does not signify that there contribution goes unappreciated. 1 must, however, express special thanks to the senior management of the Agfa-Gevaert Group of Bayer AG for their cordial hospitality in permitting me to have unrestricted access to their company archives, managers and photographic literature collections. Finally, I should like here to pay homage to Richard Robinson who has acted as my academic adviser during my years at the Sloan School. The depth of his scholarly insights, the breadth of his vision and his worldly wisdom are sources of lasting inspiration. Translation Note. Dutch, French, German and Spanish source materials were translated by me. For the translation of Japanese materials, the work of Toshiko Yonemura is gratefully acknowledged. Chapter I Introduction The contemporary world is hardly conceivable without photography. Pictures, images and information conveyed by photochemical means are pervasive if not ubiquitous in daily life. The industry catering to the world's insatiable appetite for such images exploits the physical phenomenon that certain salts containing silver turn dark when exposed to light. Although this phenomenon had been known since early in the seventeenth century, the technologies required to exploit it commercially were not developed until the nineteenth century. That century and its successor spawned a host of enterprises dedicated to the production of photosensitive materials. Few of these survived, and the photochemical industry eventually became highly concentrated. It is now dominated by some half dozen companies which sell their output on a more or less global scale. The objective of the following historical essays is to describe the circumstances under which the surviving companies came to internationalize their business or, in one instance, failed to do so. The enterprise histories covered are those of Agfa from its beginnings in 1867 to 1964. Gevaert from its beginnings in 1890 to 1964. Agfa-Gevaert from its de facto merger in 1964 to the present. Ilford from its beginnings in 1879 to the present. Konishiroku from its beginnings in 1873 to the present. Fuji from its antecedents in 1919 to the present. Eastman Kodak from its beginnings in 1880 to 1932. These companies, which today generate the preponderant majority of the industry's output, had their origins respectively in Germany, Belgium, England, Japan and the U.S. As the above dates suggest, the extension of their markets and operations to foreign countries can be traced back to the dawn of the twentieth century in a majority of cases. This occurred well before most of them had diversified their product lines beyond those serving chemically based photography. The industry was thus one of the first to become involved internationally and thereby provides a relatively uncluttered field for inquiry into the internationalization of business, irrespective of country of origin. The above dates also indicate a long time span rich in changes in the business environments in which these companies operated and in events, decisions and developments within the individual firms. The reaching of the stated objective is thus a formidable task. Even if it were possible to chronicle all the events bearing on the subject at hand, to do so would contribute little to understanding of the subject. Some organizing framework is needed if sense is to be made of a maze of undifferentiated facts. The main purpose of this introduction is to develop that framework. This will be done by defining historical relevance, business strategy, internationalization and the relationship between these last two concepts. The chapter also describes the principal strategic commitments that characterize the photochemical industry and are believed to have led to its internationalization. It further alerts the reader to some limitations arising from the nature of the research conducted upon the conclusions