Escalating Commitment as the Reason for Polaroid's Failure

Business Studies What Caused Polaroid's Bankruptcy in 2001? In 2001 Polaroid filed for bankruptcy. The circumstances surrounding the bankruptcy indicate several potential reasons, including poor management decision making and escalating commitment. The financial management of the firm appears to have been questionable in the year before the filing; a special bonus of $1.4 million was paid to the CEO Gary DiCamillo, and other board members received payments f between $63,000 and $272,000 (TParadiso, 2003).

The payments were not illegal, but it is notable that the $1.4 million bonus for DiCamillo would not have been received if 6 months prior the auditor KPMG LLP had not been persuaded to refrain from issuing a going concern warning on the annual accounts (TParadiso, 2003). These actions may all appear questionable, especially the action of DiCamillio calling KMPG's CEO in order to ensure the going concern warring was not issued, but whatever the view, these do not appear to be responsible for the bankruptcy.

The firm filed for bankruptcy as it did not have enough cash to survive; the firm could not pay its debts, and had a total of $1 billion of long-term debt (Rifkin, 2002). The debt was unaffordable due to the fall in sales and profit. This leaves one to question what happened that resulted in the firm's financial difficulties. Polaroid was well-known for cameras, film and photographic paper. The firm was also undertaking research and development, and had developed digital camera technology in the 1980's.

However, despite the firm development of the technology, making it a potential front runner, the firm did not bring the digital photographic technology to the market. The firm was heavily invested in the film market, and the digital cameras did not need film. The move to digital cameras may have appeared one that would undermine one of the firm most important markets, costing them film sales. Digital cameras can be seen as a type of disruptive innovation; a new product that would disrupt the existing market.

Although the firm appears to show some commitment to the research and development, there are delays and the firm holds back from launching the product even when it was ready in 1992 (Sandstrom, Magnusson, & Jornmark, 2009). There appears to be a belief on the part of Polaroid that there will continue to be a demand for the traditional photographic products (Sandstrom et al., 2009).

The firm did not undertake an accurate assessment of the market, especially the consumer market where the issue was not only the reduction in the use of the film, but also the knock on effect of pictures being available in digital format, with more images being viewed via a computer, which also meant that there would be less need for photographic paper. Polaroid finally released their own digital camera in 1996.

By this time the marketplace had already been developed and many other major electronic firms, such as Sony, Fuji, Olympus and HP, had already established themselves in the market; Polaroid had lost their chance for an early entrance and become a late comer. The firm was playing catch up, and although there were some changes, such as the marketing of photographic paper to consumer for the home printing of photographs, the firm was suffering as a result of the disruptive innovation and the move to the digital format.

During the early 1990's Polaroid remained committed to film photography. It may be argued that they failed to recognize the threat of the disruptive innovation, even though they were aware of the developments, even undertaking some of that innovation themselves (Sandstrom et al., 2009). By failing to act on it, and continuing to support the film products, there was an escalating commitment. The greater the commitment, the harder it is for management to change the strategy. The challenges relate not only due to the costs which may be lost as.