What Kodak's collapse from $31B to $1B reveals about identity threat, cognitive rigidity, and why organizations can't evolve past their success
In 1975, a Kodak engineer named Steve Sasson built something revolutionary in a lab in Rochester, New York. It was the world's first digital camera. It worked. It was crude (weighing eight pounds and capturing a grainy 0.01 megapixel image), but it worked. Sasson demonstrated it to Kodak's leadership, explaining how this technology would eventually replace film.
Their response was unequivocal: "Don't tell anyone about it. It will destroy our film business."
For the next thirty years, Kodak pretended they hadn't invented the technology that would reshape photography. They filed patents. They built digital products. They even launched digital cameras. But they did it all while protecting their film business (the business that defined who they were).
By 2012, Kodak filed for bankruptcy. A company that was once worth $31 billion and employed 145,000 people emerged from restructuring as a $1 billion chemical company. The photography giant that had defined an industry for over a century had been reduced to a shadow of itself.
Here's what makes Kodak's story so instructive: This wasn't a failure of innovation. Kodak didn't lack the technology, the talent, or the capital to succeed in digital photography. They invented it first. They held over 1,000 patents in digital imaging. They had some of the world's best engineers.
What they couldn't change was who they believed they were.
The Identity Trap
Every organization has an identity, a core belief about what it fundamentally "is." For Kodak, that identity was clear: "We are a film company." This identity wasn't just marketing language. It was embedded in their systems, their incentives, their expertise, their culture, and most importantly, their decision-making.
Organizational identity serves a critical function. It guides strategy, attracts talent, creates coherence, and provides stability. A strong identity is a competitive advantage. Until it becomes a cage.
The trap emerges when the environment shifts in ways that threaten the core identity. At that moment, adaptation stops being a strategic choice and starts feeling like an existential threat. The organization faces a psychological crisis: To survive, we would have to stop being who we are.
Research by Mary Tripsas and Giovanni Gavetti on Polaroid's collapse revealed a striking pattern: Organizations with strong, established identities are six times more likely to miss disruptive innovations, even when they see them coming. Not because they don't recognize the threat, but because responding to it would require abandoning the identity that made them successful.
Kodak spent three decades protecting a declining film business while the photography industry transformed around them. The cost of preserving who they were instead of becoming who they needed to be was $30 billion in shareholder value.
The Psychology: Two Forces That Trapped Kodak
Understanding why Kodak couldn't adapt requires understanding two psychological mechanisms that kept them locked in place.
Identity Threat: When Adaptation Feels Like Annihilation
When an organization's core identity is threatened, it doesn't respond with rational strategic analysis. It responds the way any threatened organism responds: with defense.
For Kodak, digital photography wasn't just a new technology. It was an existential threat to their identity as a film company. The psychological response was predictable and powerful.
Research by Davide Ravasi and Mary Jo Hatch on organizational identity threats reveals three common defense mechanisms:
Denial. Organizations dismiss the threat as illegitimate or temporary. Kodak's response to early digital cameras was telling: "That's not real photography." They framed digital as inferior, amateur, not worthy of the Kodak brand. This wasn't just marketing. It was psychological defense.
Compartmentalization. Organizations acknowledge the threat but isolate it, preventing it from contaminating the core business. Kodak created a digital division in the 1990s, then systematically starved it of resources. The digital team operated separately, couldn't cannibalize film sales, and was measured by different metrics. The result? Digital remained marginal while film remained central, even as the market shifted.
Idealization. Organizations double down on what made them great, emphasizing their traditional strengths. Kodak positioned itself as the "gold standard" of photography, emphasizing quality and heritage. While competitors embraced the convenience and accessibility of digital, Kodak clung to the superiority of film.
These aren't irrational responses. They're deeply human. Identity provides cognitive stability. Changing it creates cognitive dissonance at an organizational scale. The brain (and by extension, the organization) resists.
Active Inertia: Applying Old Formulas to New Games
The second force was what Donald Sull termed "active inertia," the tendency to respond to dramatic environmental shifts by accelerating activities that worked in the past.
Kodak didn't stand still. They invested $5 billion in digital technology development. They launched digital cameras. They built online photo-sharing platforms. They were active. But they were applying film-business thinking to a digital-business reality.
Consider their strategy:
Premium pricing. In film, Kodak could charge premium prices because quality mattered and switching costs were high. They tried the same approach in digital cameras, even as competitors offered comparable quality at lower prices. Film economics don't work in hardware markets.
Retail distribution. Kodak's strength was their retail relationships. Every pharmacy and supermarket carried Kodak film. They optimized for shelf space. But digital cameras required different distribution, and digital photos eliminated the need for prints entirely. Their distribution advantage became irrelevant.
Quality-focused messaging. "Kodak quality" meant something in film photography. In digital, quality quickly commoditized. What mattered was convenience, connectivity, and sharing. Kodak kept emphasizing quality while consumers moved on to other priorities.
This pattern isn't unique to Kodak. Research by Barry Staw and Jerry Ross on escalation of commitment shows that organizations routinely double down on failing strategies. Not because of future value, but because of past investment. The more Kodak had invested in film infrastructure, expertise, and brand identity, the harder it became to walk away from it.
The sunk cost fallacy operates at an organizational level. Kodak had spent a century building film capability. They had $14 billion in annual film revenue at their peak. Walking away from that felt impossible, even as they watched it decline. So they protected film profits while investing in digital, trying to have both, but unable to fully commit to either.
Why Standard Responses Fail
If the problem is clear, why don't organizations solve it? Because the standard solutions don't address the psychological and structural roots of identity rigidity.
"Just innovate separately"
The conventional wisdom is to create a separate division for disruptive innovation. Let it operate independently, free from the constraints of the core business.
Kodak tried this. They had a digital division. It failed.
Why? Because organizational ambidexterity (the ability to exploit existing business while exploring new opportunities) is extraordinarily difficult. Michael Tushman and Charles O'Reilly's research shows that separate divisions rarely get the resources, attention, or legitimacy they need. The core business has powerful advocates, established metrics, and immediate revenue. The new venture has potential and promises.
In resource allocation decisions, the present wins over the future almost every time.
Kodak's digital division couldn't cannibalize film sales. They were measured separately. When film was declining, the instinct was to protect it, not accelerate its demise. The digital team was told to find "digital opportunities" that didn't threaten film. That constraint made it nearly impossible to build a winning digital strategy.
"Leadership vision"
Another common response: Get a visionary CEO who can see the future and drive transformation.
Kodak tried this too. Antonio Perez, who became CEO in 2005, understood that digital was the future. He pushed the company toward digital printing, consumer inkjet printers, and digital services. He knew what needed to happen.
It didn't matter.
Identity isn't just in the minds of leaders. It's embedded in systems, structures, incentives, and culture. When Kodak's compensation system rewarded film profitability, when their expertise was concentrated in film chemistry, when their best people had built careers in film, and when their board evaluated performance based on film metrics, no amount of CEO vision could turn the ship quickly enough.
"Culture change programs"
The third standard response: Launch a culture change initiative. Run workshops. Create new values. Get everyone aligned around the new direction.
This fails because culture doesn't drive behavior. Systems do. Culture is the emergent property of how organizations actually work, not what they say they believe.
Kodak's actual incentive system rewarded people for maximizing film profitability. Individual managers were making locally rational decisions (protecting their business unit's performance, their team's bonuses, their own careers). The collective result? Organizational irrationality.
You can't workshop your way out of that. You have to change the underlying systems.
What Actually Works: The Ambidextrous Identity
Some organizations do navigate identity evolution successfully. They don't abandon their core identity. They reframe it in ways that allow for adaptation. Here's how.
Dual Identity Architectures
The key isn't choosing between old and new identity. It's holding both simultaneously.
Microsoft didn't stop being a Windows company to become a cloud company. They're both. Amazon didn't stop being an e-commerce company to become an infrastructure provider through AWS. They're both. Apple didn't abandon hardware to embrace services. They're both.
Research by Charles O'Reilly and Michael Tushman shows that ambidextrous organizations (those that can exploit existing businesses while exploring new ones) outperform their peers by a factor of three. But ambidexterity isn't about separation. It's about integration at the leadership level.
These organizations succeed because senior leadership holds the tension between competing identities. They don't resolve it prematurely by choosing one over the other. They resource both, protect both, and manage the inevitable conflicts.
The critical difference from Kodak: The leadership doesn't just tolerate the new business. They legitimize it as equally central to organizational identity. Microsoft's leadership made it clear that cloud was as important as Windows. Amazon's leadership positioned AWS as a core expression of their mission, not a side project.
Identity Narrative Flexibility
Organizations that navigate disruption reframe their identity at a higher level of abstraction, one that accommodates both current and future businesses.
Kodak's fatal mistake was defining their identity too specifically: "We are a film company." That framing made digital photography an existential threat. Every investment in digital felt like betraying who they were.
But they could have framed it differently: "We help people capture and preserve memories." Or "We're in the business of visual storytelling." At that level of abstraction, film and digital are both legitimate expressions of the core identity. Digital becomes an evolution, not a betrayal.
Netflix demonstrates this principle. They didn't define themselves as "a DVD rental company" (though that's what they were). They positioned themselves as "entertainment delivery." That framing allowed them to evolve from DVDs to streaming to content creation, all while maintaining identity coherence.
Research by Lynda Gratton shows that organizations defining identity by purpose rather than product adapt twice as fast to market shifts. Purpose-level identity is flexible enough to accommodate multiple business models while providing enough coherence to guide strategy.
Controlled Cannibalization Systems
Perhaps the hardest capability: Building systems that allow new businesses to cannibalize old ones in a managed way.
This requires accepting that the new business will eat the old business, and building mechanisms to manage that transition rather than prevent it.
Adobe provides a powerful example. They killed their highly profitable boxed software business to move to subscription. It was painful. Revenue dropped significantly in the short term. But they did it deliberately, with clear timelines, transparent communication, and incentives aligned with the transition. Today, Adobe is larger and more valuable than ever.
Apple cannibalized the iPod with the iPhone. They knew the iPhone would destroy iPod sales. They did it anyway because they understood that if they didn't cannibalize themselves, someone else would.
Research by Clayton Christensen and Michael Raynor shows that organizations that self-disrupt survive disruption five times more often than those that wait for external forces to compel change. But self-disruption requires systems that reward cannibalization rather than punish it.
The key is ring-fencing the old business with a clear sunset timeline while fully resourcing the new one. Not trying to protect the old indefinitely, but managing its decline in a way that funds the transition.
Diagnostic: Is Your Identity a Cage?
How do you know if your organization is trapped? Here are four tests.
The Language Test
Listen carefully to how people talk about the organization. If you hear "We've always been a [X] company" and that statement is used to block new directions, you have identity rigidity.
The phrase itself isn't the problem. It's how it functions. If it's descriptive (explaining heritage), that's fine. If it's prescriptive (limiting what's possible), that's a warning sign.
Kodak's pattern: Severe rigidity. The "film company" identity became prescriptive, blocking digital opportunities at every turn. When engineers proposed digital initiatives, the response was consistently "that's not who we are."
The Investment Test
Compare investment in legacy business versus future business. Not just financial investment. Also attention, talent, and legitimacy.
Kodak invested $5 billion in digital development, but they were simultaneously protecting $14 billion in film revenue. The protection budget exceeded the innovation budget. When preservation costs more than exploration, you're trapped.
Kodak's pattern: Significant imbalance. Protection spending vastly exceeded exploration spending. Nearly 3x more resources went to defending film than building digital, even as the market shifted decisively toward pixels.
The Talent Test
Where do your best people want to work? If top talent avoids the "future" division, preferring the established business, your identity is channeling human capital to the past.
This happens because status, resources, and career advancement stay concentrated in the core business. The new venture is seen as risky, marginal, or less prestigious. When your A-players won't touch the future, your identity is actively working against adaptation.
The Competitor Test
Who's hiring from your company, and what are they building? If competitors are recruiting your people to build the businesses you won't pursue, you're experiencing identity-driven brain drain.
Kodak's engineers left to join digital photography startups. They knew the technology. They saw the opportunity. But they couldn't pursue it at Kodak because it threatened the core business. So they built it elsewhere.
The Question Every Organization Faces
Kodak's story isn't ultimately about technology. It's about identity. They had the technology, the talent, and the capital. What they couldn't change was who they believed they were.
The central question for every organization facing disruption isn't "Can we build the new thing?" It's almost always "Can we become the kind of organization that builds the new thing?"
That's a harder question because it requires confronting identity. Not abandoning it, but evolving it. Reframing it at a level that allows for growth rather than demanding stasis.
The organizations that survive major disruptions don't abandon their core identity. They reframe it in ways that make the future feel continuous with the past, not contradictory to it. They build systems that allow for dual identities. They create mechanisms for controlled cannibalization. And they distribute leadership across people who can hold the tension between competing imperatives without resolving it prematurely.
Your strongest competitive advantage today might be your biggest liability tomorrow. Unless you build the capability to evolve your identity before the market forces you to.
The cage isn't made of technology or market forces. It's made of the stories we tell ourselves about who we are. And unlike Kodak, you still have time to change the story.
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At Yalin Consulting, we help organizations diagnose identity traps before they become existential crises. Our assessments, grounded in organizational psychology research, reveal where identity is enabling adaptation and where it's creating rigidity. Learn more at yalin.consulting or reach out at anil@yalin.consulting
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