COGNITION: THE LIMIT TO ORGANIZATION CHANGE; A CASE STUDY OF EASTMAN KODAK A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Noah Simon April 2011 COGNITION: THE LIMIT TO ORGANIZATION CHANGE; A CASE STUDY OF EASTMAN KODAK Noah Simon April 2011 LAS: Leadership Abstract The following thesis examines an incumbent firm affected by change. It seeks to deepen the understanding of the dynamic capabilities model by proposing cognition and not previous resource deployment is the limit of change. Two similar companies, Eastman Kodak and Polaroid will be compared during the shift from film to digital photography to determine what separated the two companies. KEYWORDS: (Organizational cognition, dynamic capabilities, path dependency, cognition, perception) TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENTS 1 INTRODUCTION 1 2 LITERATURE REVIEW 6 2.1 Dynamic Capabilities...................................................................................... 7 2.1.1 How does a company survive?.............................................................. 7 2.1.2 What are the effects of core competencies?.......................................... 8 2.1.3 How are established companies affected by change?........................... 9 2.2 The Cognitive Perspective.............................................................................. 10 2.2.1 What does a path dependency mean for the individual?....................... 10 2.2.2 What are the effects of routines?........................................................... 13 2.2.3 What begins the process of change?..................................................... 14 2.2.4 What affects perception of change?...................................................... 16 2.2.5 What is needed to address and affect change effectively?.................... 20 2.3 Summary…………………………………………………………………... 21 3 METHODOLOGY 23 3.1 Data Selection……………………………………………………………... 24 3.2 Data organization………………………………………………………….. 27 3.3 Limitations………………………………………………………………… 27 4 RESULTS 29 4.1 History of the Digital Photography Market………………………………... 29 4.2 Coding System…………………………………………………………….. 31 4.3 Results……………………………………………………………………... 32 4.3.1 Research……………………………………………………………… 32 4.3.2 External/ internal factors……………………………………………... 37 4.3.3 Sales…………………………………………………………………... 40 4.4 Summary of Results………………………………………………………. 42 4.4.1 Kodak vs. Polaroid……………………………………………………. 45 50 5 CONCLUSION 5.1 Connections between the Findings and the Literature Base……………… 50 5.2 Implications……………………………………………………………….. 51 5.3 Limitations………………………………………………………………... 51 5.4 Future Directions………………………………………………………….. 52 6 APPENDIX A 53 7 APPENDIX B 56 8 APPENDIX C 59 9 WORKS CONSULTED 62 LIST OF FIGURES 4.1 Research and Development…………….…………………………………….... 25 4.2 External and Internal Factors………………………………………………….. 26 4.3 Sales and Consumer Confidence………………………………………………. 26 5.1 Adoption of Digital Cameras by US Consumers……………………………… 30 5.2 US Camera Sales………………………………………………………………. 30 5.3 Coding Explained……………………………………………………………… 32 5.4 Research Data………………………………………………………………….. 33 5.5 External/ Internal Factors……………………………………………………… 37 5.6 Sales…………………………………………………………………………… 40 CHAPTER I INTRODUCTION The one driving force behind all of time is change. Because of change nothing can stay permanent. During the age of humanity, the effects of change have ranged from miraculous to catastrophic. For those who possess better technologies, the advantage gained is enormous. In the Bronze Age the Assyrians forged an empire because they wielded bronze better than anyone else.1 The new technology was extremely beneficial for the Assyrians, but it was a major threat to the competing nations. An advantage in technology can create a disparity between those who possess it and those who don't. The nature of change dictates that what once was is no longer. As humanity has continued to imagine and invent, the previous way of doing things continues to become obsolete. Obsolescence, however, is only detrimental for the incumbent. The new technology which creates the obsolescence typically advances humanity and is beneficial because of that. For the incumbent, however, it is a threat. Change is accelerating. Innovations which disrupt in the short term, but are seen as advances in the long term are becoming more common. The pace of change started quite slowly, the domestication of animals occurred in roughly 3000B.C.2 which was almost 150,000 years after the human which resembles modern humans is known to 1 James Harvey Robinson and James Henry Breasted, History of Civilizations: Earlier Ages, (New York City: Ginn and Company, 1960), 791. 2 ibid. 1 2 have existed.3 Now, however, we are advancing at a tremendous rate. Moore's law contends that computing power will double every two years.4 And more recently, Ray Kurzweil, a leading futurist, built off Moore's law by suggesting all technology is growing at an exponential rate.5 In many ways, this change is good and it has benefited humanity. For some, however, change has been destructive. When new mindsets are created and spread, the previous way of doing things is seen as wrong. Slavery in the United States of America is largely accepted as wrong and is a prime example of old mindsets being cast away. And the effects of this paradigm shift still persist today. When new technologies are introduced, incumbent organizations are at risk. All change can be both beneficial and damaging; it depends on which perspective is looked at. This thesis will examine change from the incumbent‟s perspective. For an incumbent, change can be dangerous. For thousands of years, aside from walking, horses were the main source of alternative transportation. When the car was invented and made popular, an entire history based on the horse was made obsolete. When a disruptive technology is introduced incumbents are forced to adapt or perish.6 Firms have been able to adapt to disruptive change, but many have not. What prevents some from succeeding? This thesis will examine why some organizations are unable to adapt to change. It will be argued that the past is not the determining factor. Instead, it will be argued that the present is what determines success. An interdisciplinary approach is needed to understand the nature of the past and present. 3 "New Clues Add 40,000 Years to Age of Human Species" in National Science Foundation [database online]. [cited 2011]. Available from http://www.nsf.gov/news/news_summ.jsp?cntn_id=102968. 4 Gordan Moore, "Cramming more componentsonto integrated circuits," Electronics 38, no. 8 (1965) 5 Ray Kurzwiel, The Singularity Is Near, (USA: Viking, 2005), 652. 6 Dorothy Leonard-Barton, "Core Capabilities and Core Rigidities: a Paradox in Managing New Product Development," Strategic Management Journal 13 (1992): 111-125. 3 Taking the dynamic capabilities model from business theory explains how the past influences and creates the present. Dynamic capabilities was introduced by Teece (1997) and argued a firm must respond to change by reallocating their resources to better match the environment. A failure to do so meant the eventual destruction of the firm.7 The dynamic capabilities model offers a solution to path dependency theory which seeks to understand what the influence resource deployment has on the future. Path dependency theory argues a company's resource deployment forces a company to commit to a path which decides the direction of the firm.8 These fields focus on the role of resources and how they determine the future of the company. This body of research uses the past to determine future direction. Cognition from psychology is used to introduce a new factor to the dynamic capabilities model. The field of cognition seeks to discover what affects perception. This relates to the following research in that an individual's perception of their environment will dictate what decisions they make in the present.9 As firms are operated by individuals, the role they play cannot be ignored. Cognition deals with how information is processed in the present moment to determine future direction.10 This thesis will combine these two disciplines and argue the limit to a firm's dynamic capabilities is rooted in cognition. It will be argued that dynamic capabilities offers the solution to the problem of path dependence, but does not offer a complete 7 David J. Teece, Gary Pisano, and Amy Shuen, "Dynamic Capabilities and Strategic Management," in Technological Know-How, Organizational Capabilities, and Strategic Management: Business Strategy and Enterprise Development in Competitive Environments Hackensack, N.J. and Singapore: World Scientific, 1997), 27-51. 8 JORG SYDOW, GEORG SCHREYOGG, and JOCHEN KOCH, "Organizational Path Dependence: Opening the Black Box," Academy of Management Review 34, no. 4 (2009): 689-709. 9 Clark G. Gilbert, "Change in the Presence of Residual Fit: Can Competing Frames Coexist?" Organization Science 17, no. 1 (2006): 150-167. 10 ibid. 4 explanation of what affects a firm's ability to change. This thesis will demonstrate how the past exerts influence only up until the present moment. Path dependency is used to explain the influence the past has on the present. Then, cognition will explain what happens in the present moment and how the limit to change is rooted in cognition or imagination, and not the past. A case study of Kodak from 1974 to 2005 is used to explain how a company can transform