Tuesday, March 13, 2007

GE: Is 3 less than 2?

[Digicam vs. cameraphone]As a mass market item, the digital camera enjoyed double digit growth from 1997-2005. But last year, US sales were up only 5% and IDC projects they will be flat at 30 million in 2007. In undergraduate strategic management, this is the classic definition of a looming shakeout, and in fact that’s what analysts are expecting. Also, camera phones have become an even more popular substitute, since nearly half of last year’s billion cell phones were camera phones.

In Michael Porter’s five forces model, an industry facing flattening growth, strengthening substitutes and high rivalry quickly watches profits disappear, and so it’s just about the worst possible time to enter. (Only a period of absolute decline would be worse). So I was really surprised to discover over the weekend that General Electric decided to announce its first digital cameras at last week’s annual PMA Show.

The announcement made so little sense that I spent several hours trying to find out more, not only surfing the web but asking my some of my colleagues in our strategy group. Like most strategy professors, we teach GE as an unusual case of unrelated diversification, and often quote Jack Welch’s famous dictum, paraphrased as “every business unit should be number one or number two in its market, or get out.”

The digicam market is already crowded with firms leveraging other competencies. Of the eight companies last year with market share over 5 percent, all have some form of related diversification:

  • camera companies Canon (#1), Nikon (#4) and Olympus (#6) obviously know something about making and selling cameras;
  • consumer electronic companies Sony (#2) and Samsung (#7) make high-volume consumer electronics products;
  • scanner/printer company HP (#5) has experience in color management, imaging and software; and
  • film companies Kodak (#3) and Fuji (#8) have top color scientists, a strong motivation to stay in photography, and at least some exposure to the camera industry with low-end cameras and disposables.
Shipping a digicam has historically been easy because of the opportunities for open innovation, by sourcing components or even whole cameras. Kodak partnered with Chinon to develop both the first consumer digital camera (for Apple in 1994) and its subsequent products, while HP entered by relabeling Pentax cameras. On the other hand, many early entrants have already given up or fallen out of the running.

[GE logo]Other than a love for diversification, what does GE bring to the table? After all, enforcing Welch’s dictum they dumped their consumer electronics division on Thomson in 1987. Sure, the generic GE brand was ranked #4 last year. But when I consulted the most frequent photographer in our household, my better half’s initial reaction was “neutral-to-negative” on a GE digital camera. Why? “I’ve never heard of GE doing anything with cameras.”

It turns out there’s less there than meets the eye. A GE camera has barely more to do with GE than a Polaroid camera has to do with Polaroid. GE wants to make a quick buck licensing its name, and has a smidgen of technology from its medical imaging group. The cameras are designed and sold by a new company called “General Imaging,” reflecting the ego and determination of its CEO Hiroshi Komiya. Komiya’s claim to fame is that was at the helm when Olympus led the ranks of digicam makers in 1996, before the market took off. Olympus remained #1 with 20+% share through 1998, but then was passed by Canon, Sony and Kodak. For the past five years, Olympus has had trouble making a profit and its digicam market share is now 6% and falling.

After retiring from Olympus in 2005, last summer Komiya decided to re-enter the maturing market. The company’s press release details the hubris:
Komiya said his goal is to be among the top three camera brands in the world within five years. “We believe digital cameras are still in a growth market,” he said. “With the replacement cycle now down to three years, many consumers are buying their second or third digital camera, while others have been waiting for just the right camera to come along to make their first purchase. With our excellent quality, advanced features, strong value proposition and the great GE name, we are in a position to lift the entire category.”
Even making #3 would not meet the Welch standard. And with minimal trepidation, I predict that General Imaging will never hit double digits, let alone the 15% it would take to be #3. Meanwhile, as
Business Week warns:
The licensing deal itself is raising questions as to whether GE might, in the long term, actually jeopardize its brand—one of top four most trusted brands in America—by expanding its consumer-electronics licensing program.

Today, GE has six consumer-electronics licensees, which make everything from phones to Web cameras to Christmas lights. The $163 billion company earns an estimated $250 million from those deals, according to Nick Heymann, an analyst with Prudential Equity Group. Sure, the company has few costs associated with its licensee sales, and licensing is commonly viewed as money that falls right to the bottom line. But if the General Imaging business—or another new licensee—were to run into problems, that could hurt the GE brand.

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