KODAK CASE

INTRODUCTION

Kodak, created in 1880 is a multinational corporation and a diversified photographic, imaging, equipment manufacturer and supplies, which include: chemical and health-care products, and information systems.
Widely recognized as a tightly managed company with superior international marketing, this company has been overwhelmed by disruptive innovation on its market and had to deal with the intensive competitiveness. Despite Kodak’s attempts to overcome this situation launching new projects, researches and investment, the company announced its bankruptcy in 2012.
Now Kodak has reborn with a new company name and has learnt how to deal with the mistakes that they committed in the past.
The purpose of this case study is to understand the company’s previous mistakes regarding the market tendency, the competitiveness and customer’s needs in order to find the best solution.

 

I/ BACKGROUND

 

1. Creation:

In 1880, a gentleman called George Eastman, of the Eastman Dry Plate Company, was busy inventing single-shot pieces of paper that were covered in a photographic emulsion. A fellow photographic expert, William Walker, joined Eastman’s company in 1883, and in 1885 they invented a holder for a roll of Eastman’s photo plates.

1. Foundation :

In 1888, Eastman trademarked the word “Kodak”, which was originally just the brand name of Eastman’s cameras, but the brand became so popular that the company name was eventually changed to Eastman Kodak.

1. First Camera:

– Accompanying the new trademark, Eastman released The Kodak Camera(1) in 1888. The camera came pre-loaded with a roll of paper film that could take 100 photos, and you had to send the camera back to Eastman to get it developed and re-loaded with more film.

– By 1897, a folding, pocketable camera had been invented.

– Then, in 1900, Eastman released the Brownie(2), an incredibly cheap, cardboard-box camera that was cheap enough to buy for $1 and operate, that it instantly became a mass market success; the first camera to do so. In essence, the Brownie was so cheap and easy to use that it invented the concept of a snapshot(3).

1. Eastman Death and Kodachrome(4):

– In 1932, because of a long illness Eastman committed suicide after leaving most of his wealth to the University of Rochester. The note he left read “My work is done. Why wait?”
– After Eastman’s death, Kodak continued pioneering consumer products, with color film in 1935 and developed Kodachrome, the first successful mass-market color film. Kodachrome came in just about every format and enabled the creation of color movies and rich color photos in print publications.
Kodachrome was actively produced for 74 years until it finally fell victim to the digital supremacy in 2009.
– Through the years, Kodak had led the way with an abundance of new products and processes that have made photography simpler, more useful and more enjoyable.

1. Film and basic camera:

– By the end of the ’60s, Kodak had the entire photography industry sewn up; it had sales exceeding $4 billion (close to $50 billion after inflation) and 100,000 employees. So the company decided to be faithful to their basic and most profitable products: film and basic cameras. Kodak also produced a camera used by the astronauts of Apollo 11 on the surface of the Moon.

1. Kodak’s diversification:

– By the late 1980s, Fuji Photo Film Co. of Japan had come out of seemingly nowhere to take over huge portions of Kodak’s market share in film. Kodak management began thinking about photography as a fading business – and decided to diversify by buying a big pharmaceutical company. Only a few years later, Kodak abandoned the drug company and, finally, began to invest in digital imaging products. Those were displacing filmed X-rays(5) in medical practice. And it started to push development of its 1976 invention, the digital camera.

1. Permanent innovation :

– In 1976, Eastman Kodak researcher Bryce Bayer created the Bayer color filter array(6). This filter transferred over to digital photography, however, and now almost every digital sensor uses an RGGB Bayer filter to capture images.

–  In 1979 Kodak was the first company to research and create an efficient organic light emitting diodes(7) (OLED), and in 1999, after 20 years of continued research, Kodak teamed up with Sanyo to produce the first OLED display.

1. George Fisher and his action:

-The second man to mark Kodak in a significant way was George Fisher, who took up the position of chief executive in 1993. The main fear was that digital technology would make its conventional film business obsolete. Its growth became slower, and it was burdened with huge debt.

– But by late 1997, when Mr. Fisher’s contract was running out, Kodak was again in a financial mess. The company was suffering from a strengthening dollar and growing softness in overseas markets; there was a manufacturing high-cost, and its growing portfolio of digital products was losing hundreds of millions of dollars annually.
However, Mr. Fisher made numerous mistakes:

– A software business he bought has never made money.

– In November 1997 he unveiled the restructuring plan to save $ 1 billion, in part by cutting 19,900 jobs.

– And they say that Mr. Fisher pumped money into far too many digital products.

1. Digital Camera:

– In late September 2003, the 122-year-old company announced that it was going to concentrate its efforts on digital cameras for consumers, on digital imaging products for medical care and commercial industry. There was irony on the announcement, because Kodak holds patents for inventing the digital camera in 1976. The company just never got around to develop the technology, because they though the money to be made from its traditional business based on old-fashioned photographic film was so much bigger.

1. First strategies and problems:

– Mayor investors met to discuss completely different “strategies to maximize shareholder’s value”:

-One would be to forget about the digital investment, restore the dividend to its high level and continue enjoying the cash

flow out of the fading film business.

-Other Shareholders have raised the idea of splitting Kodak into separate companies, for consumer, medical and commercial products.

– Mr. Carp argued that trying to capitalize on the film business would only accelerate Kodak’s decline as many of the retailers, photo shops, and radiologists Kodak supplies would abandon it for suppliers better able to help manage the transition to digital.
But he waited until the last minute to embrace the digital change: Kodak’s rival Fuji Photo Film Co. started sooner, had better camera technology, and focused more on minilabs, which were expected to dominate the processing market.

1. Carp and his action:

-Mr Carp ran the company for the long ride down. Confident about the company’s growth strategies he insisted that the company was on the right track: the stock bounced up after he revealed his plan: he expected by 2006, revenues from the digital business would account for 60% of Kodak’s revenues, overcoming traditional 40%. However, the revenues did not do that well.

1. Financial strategy:

– Focused on generating cash to support the underlying value of the company, pay down the debt, and enable prudent investments for growth.
– In the process, they bought back 7.4 million shares of Kodak stock. During 2002 there was a worldwide workforce reduction, with the final phase to be completed in 2003.

1. Kodak’s attempt to succeed :

– Digital camera: Early 2004, Kodak announced the cameras sales termination from the advanced photo system(8) (APS introduced in 1996)
– Termination of photo paper: The end of 2005 Kodak quit the production of black and white photo paper.
– By 2008 Kodak reduce 12.000 to 15.000 of the 60.000 jobs at this time.
– Agreement with Sakar: In March 2009, Kodak entered into a license agreement with Sakar International, which will commercialize camera, photo and computer equipment under the Kodak brand.
– In 2009 ceased the world’s production of the Kodak Kodachrome after 74 years and decades of success.
– Changes and notice: Until 2010 Kodak launched during the digitization of photography, several restructuring, sales of business sector and strategic redirection behind. On that process the number of employees fell dramatically and Kodak focused on the professional photo-finish and printer range.
– In December 2011, the Kodak’s stock was under a dollar, and the company got threatened with exclusion from the NYSE and so the loss of subsequent investors. Bankruptcy rumors pointed Kodak back as speculation.

1. Bankruptcy :

– The 19th of January 2012, Kodak filed bankruptcy protection in the United States District Court according to Chapter 11 for the Southern District of New York.

– In February 2012, Kodak announced that it would cease making digital cameras, pocket video cameras and digital picture frames and focus on the corporate digital imaging market.

– In August 2012, Kodak announced the intention to sell its photographic film (excluding motion picture film), commercial scanners and kiosk operations as a measure to emerge from bankruptcy.

1. Action and changes:

– In January 2013, the Court approved a financing plan to help the company to emerge from the bankruptcy by mid-2013.
– Kodak sold many of its patents for approximately $525,000,000 to a group of companies (including Apple, Google, Facebook, Amazon, Microsoft, Samsung, Adobe Systems and HTC) under the name Intellectual Ventures and RPX Corporation.
– On September 3rd, 2013, Kodak emerged from bankruptcy having shed its large legacy liabilities and exited several businesses.
Foundation Kodak Alaris:

– Kodak Alaris( established in London) arise from the acquisition of the personalized imaging and document imaging of the Kodak’s bankruptcy for 650 million US-dollar. As a part of this acquisiton 4,700 people from 30 countries should switch to Kodak Alaris. They expected annual sales of 1.3 billion US-dollars.

– Only the photo-paper is directly produced from Kodak Alaris, the photo films are prepared by the former parent company Kodak in the US and only distributed by Kodak Alaris. Kodak Alaris has received a perpetual license to use the brand name Kodak. On the same day left the former parent company Kodak the bankruptcy proceedings and will focus now only on professional printer business.
2014 Kodak        
-The Board of Directors of Eastman Kodak Company has elected Jeffrey J. Clarke as Chief Executive Officer and a member of its Board of Directors.

II/ Case Analysis

 

A/ Kodak’s market

It is essential to compare Kodak’s evolution to its market, so a company can decrease its market share or profits, as long as the market decreases more than it. Even though the company is able to testify an average growth its economy can be in trouble, as the average market growth increase more or faster. Before analyzing Kodak’s market share evolution, it’s important to introduce the market structure.
1° The market’s structure

Let’s remind that at the beginning, before the bankruptcy, Kodak was focused on the consumer film, printing and cinema activity: the « photography » market (un-professional customers).The average growth rate of the US photo market is 2% annual unit since 1970.

But it is appropriate to analyze this market structure deeply, and the several submarkets that it involves such as digital and film cameras.

This graph determines three main points in camera’s market:
– Film cameras (and film itself) peaked in roughly 1998-1999.
– Digital cameras were slowly adopted between 1995 and 1999, but 1999 represented a sharp growth inflection for the technology (this is likely due to the rise of the broadband internet from 1999 and forward).
– Stand-alone digital cameras peaked in 2007 – the year the iPhone was announced.
è Globally, we can conclude that there was a tendency towards digital cameras which replaced traditional films.

2°The consumer tendency:
In order to determinate the market, it is essential to analyze the consumer tendency:

– From the late 90s until 2008 (which is also the year when the phone’s camera became mainstream), the digital camera market in the U.S. grew from 4.5 million units shipped in 2000 to 28.3 million units in 2007.
– Specifically, digital grew and the revenues drop as photo printing went to digital: while the cost production is higher for digital, consumers have shown a clear preference for it.
èTendency to digital

3° The market share

– During the 1980’s, Kodak faced intensification of Japanese competition in photography and a continuing decline in product demand as Fuji, Konica, Polaroid, 3M company  and others challenged Kodak’s dominance on the market: these lower priced brands such as Konica and Fuji were gaining market share faster than Kodak.
– Although Kodak tried to focus on digital image instead of film, printing photos and movies, the advance of its competitors and the arrival of Canon and Nikon, in 2006 on the digital market, have not allowed Kodak to recover its 76% share of the market, in 1986 fell under 70% and in 1995 to end at 8% in 2010.
èKodak loss of market share

B/ Kodak’s financial report

Kodak, which is strongly linked to its buyers’ bargaining power, who have different product options according to the lowest price, had to deal with more than 100 years with potential new entrants in the market and with substitutive product. As the following financial statement reveals: “Kodak was unable to defeat the intense market competition”.
Exhibit 1: Evolution of the Income statement

 

-The gross profit reflects the volume of business generated by the current activity of the company and allows the reader to appreciate the dimension:

àThis exhibit highlights the culminating power of Kodak in 1999 and its unavoidable bankruptcy in 2012.

-Net income reflects the profit and loss of the company:

àKodak financial result
Exhibit 2: Evolution of the balance sheet

-Net current asset is one of the most important indicators from the balance sheet: Current asset – current liabilities, it determines whether the company’s balanced resources are sufficient to finance the investment cycle. When a surplus is generated it is possible to finance a portion of current assets, that is to say, the working capital needs to be generated by the activity. Therefore, the more score, the more the company demonstrates a better financial situation:

àThis reinforces the Kodak’s financial lift and seems to exclude the potential business closure.
It is true that market developments didn’t make the task easy to Kodak, and to advise it in the best objective to recover from its fall, it is essential to find out why it fell to learn from the past:

1. C) Failure theories:

1° Kodak’s location:

The analysis of Rich Karlgaard argues that the failure of Kodak can be related to its Rochester location:  When you study the history of great American companies that stumbled and failed, or only partially recovered, you see how difficult it is to overcome the mindset of your immediate surroundings. Businesses located in places where success is the norm, and innovation is built into the ecology, have a better improvement chances. According to Karlgaard, that was, and is, easier to do in Silicon Valley, where laid-off can more readily find new jobs, than in a small city like Rochester, whose population is now at 210,000 plus. Indeed the impact on a small city and the multiplier effect of lost jobs, axed all at once, could turn into a civic disaster.
2° Disruptive Innovation:

Clayton Christensen in his book “The Innovator’s Dilemma”, which is subtitled “when new technologies cause great firms to fail”, show that once-successful companies went under not because their managers made bad decisions, but because they kept making the same kind of decisions that had kept their customers happy for decades.  In doing so, they overlooked products that other kinds of customers might one day want, thereby missing untapped opportunities that eventually turned into industry-transforming ones. Christensen estimates that Kodak was “a global company that completely dominated its industry and was destroyed by a disruptive technology: digital imagery”.
3° The Marketing Myopia:  Poor market listening

Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies:
During 80-90’s years, we entered the digital age. Film and photo prints on specific paper were much rarer: the consumables sales drop is staggering. Kodak then develops its first digital camera, but prefers to stay focused on its core products. The company does not really know how to approach the digital switchover: is it a fad or a real transformation of the market? The group’s leaders think it’s a fad that will not last. They prefer then play the “security card” rather than analyzing their market to understand this “digital revolution” in depth. Kodak does not take the digital revolution, “They had gold in their hands, but do not know how to use it,” declared the former director of Kodak France. Thus begins a long and perilous descent into hell for the Kodak group.
4° Kodak’s failed business strategy:

“When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera innovation was held back because of management’s concerns about the negative impact on film sales. When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.” Source obtained from businesstheory.com the article “Lessons learned from Kodak’s fall”.

 

1. D) Leadership evolution and impact

 

Relevant CEO in Kodak’s history achievements and characteristics:

1. The very first one: Henry A. Strong (1884-1919), was a photography businessman.
2. Father and promoter: George Eastman (1919-1925), was an innovator and entrepreneur who founded and popularized the Eastman Kodak company. He was also a philanthropist contributing in many different ways to help the American community.
3. Best market share, almost monopoly: Walter A. Fallon (1972-1983)
4. Richest time ever in the company: George M. C. Fisher (1993-1999)
5. Path to an imminent bankruptcy: Daniel A. Garp (2000-2005)
6. The dodged bankruptcy finally steps on Kodak: Antonio M. Peréz (2005-2014). Now a days, Special Advisor to the Board of Directors. Mr. Perez was Chief Executive Officer of Kodak from 2003 to 2014. Mr. Perez worked for 25 years with HP, where he held a variety of global leadership positions. After HP, Mr. Perez was President and Chief Executive Officer of Gemplus International. Mr. Perez has been special advisor to the Board since March 2014. He is an optimistic person, passionate and based on innovation.
7. New name, new time, new opportunity: Jeff Clarke (March 2014- Present). His combination of strengths and experience in technology, transformation, finance, operations, and international business is precisely what Kodak set out to find in the next leader of Kodak. Because those personal characteristics can lead the company to success. His past leadership positions have included businesses selling hardware, software and services, and printing – with B2B customers as well as consumers. “We feel extremely confident about Kodak’s prospects with Jeff at the helm,” said James V. Continenza, chairman of the board. “I thank Antonio Perez for his excellent leadership of Kodak through its complex and successful restructuring, and for solidifying our relationships with our valued customers since that time”.
8. E) Kodak situation after bankruptcy

The New Kodak
-Kodak has based his commercial markets in a two-year restructurating. The plan is to keep reducing costs and erase non-core business, such as spin offs like the new Image of Kodak that operates as Kodak Alaris controlled by a new owner.
-Today, Kodak is leaner, financially stronger and ready to grow. The company is prepared to take advantage from the digital transition. Kodak is working in the growing demand for graphic communications around the world, especially in emerging markets; and dynamic growth in the market for printed electronics, sensors, fuel cells and other printed products with functions beyond visual communications.
Imaging Innovation for Business
-Kodak has transformed itself into a technology company focused on imaging for business. Today’s Kodak provides:

-World-class R&D, based on Kodak’s unique strengths in the materials, imaging and deposition sciences.

-Breakthrough products enabling customers to achieve transformational improvements in quality, productivity and sustainability.

-A broad solution set across graphic communications, product goods packaging, functional printing enabling.

-Software and professional services businesses use to redefine information flow and security.

Building on a Technology Heritage
–Kodak’s current portfolio is based on deep technological expertise developed over the years in science materials and digital imaging science.
-Using this expertise, the company that delivered the first film roll is now delivering leading solutions for today’s business customers. These include: Digital Offset Plates that reduce or eliminate the consumption of energy, water and chemistry Flexographic systems that make packaging more vibrant and eye-catching for shoppers. Continuous manufacturing processes to mass-produce touch screen sensors / Printing plates that reduce environmental impact by eliminating use of chemistry and processing.

Kodak Alaris:
-Kodak Alaris consumers products and services: Kiosk, consumer films, single use cameras, Mobile Apps, and Tips and projects Center
-Kodak Alaris business products and services:
-Document Imaging: enable customers to capture and consolidate data from digital and paper sources, understand and extract
valuable insight from the contents, and deliver the right information to the right people at the right time (scanners, services…)
-Event Imaging solutions (expertise, technology).
-Professional photographers & Labs (Professional film & products)
-Retailers and photofinishers (thermal printing, innovative papers…).
–Kodak Alaris with Insight:
Kodak Alaris made a partnership with Insight Health care, which is a company based in providing solutions and services to the old population :
Document Scanners: capture and convert vital patient Health information with speed, efficiency and reliability.
Info Insight: reduce information management costs with exceptional classification and handling it is a flexible and capable artificial intelligence.
Info Activate: obtain and organize information to streamline you healthcare team’s share point information and workflow.

 

Early results        
It is too early to know if Kodak’s new business plan will succeed. The company ended 2013 still in the red zone. Kodak’s overall sales for 2013 came in at $2.35 billion. Revenue for the most recent quarter came in at $607 million, down from $739 million a year earlier. Sales, which fell 12% at the company’s graphics, entertainment, and commercial films business, were not enough to prevent a net loss of $63 million.

On the good side, net loss is $402 million less than a year ago. 2014 is a key year for the company, and investors should monitor both revenue and profitability figures in detail. The company is not forecasting a major turnaround, and it forecasts sales volume for 2014 are in the $2.1 billion-$2.3 billion range.

 

 

 

 

 

 

 

 

 

 

III/ Kodak’s Problem

How Kodak can learn from its mistakes and wrong decisions to make a strong come back to the market?

In other words: How can the company ensure its existence in the current business with the changing industry trends? What should Kodak do to maintain its competitiveness in order to effectively compete with existing and potential competitors?

 

IV/ Kodak’s Option

-Hire expert in managing conglomerate company.
-Create control mechanism to motivate executives to improve their divisions’ performance.
-Introduce nutritional supplement product in order to capture the growing opportunity in healthcare industry.
-Partnership
-Implement cost cutting strategy among all divisions in order to enhance company efficiency.
-Develop training program in order to become more market oriented.

-Close the business.

V/ Criteria

To purchase the best option, Kodak has to consider:

– The market competitiveness and competitors.
– The economical purpose: keep making profits.
– The actual « Photo market », the disruptive technological innovation.
– Involving customer’s needs.
– The image of the company.

 

VI/ Conclusion and Action plan

-Discontinue unprofitable product.
-Change middle to high-level management.
-Launch new and innovative product

-Innovation: focused in imaging innovations and business, the result is an extensive portfolio and differentiated.

-Stewardship:  responsibly managing all company’s assets, including Kodak’s people, facilities and the products and services it sells. Contributing to a culture of sustainability with movements like Kodak Cares, Corporate citizenship, and Global diversity.

-Engagement: looking beyond company’s direct sphere of influence, reaching out to a variety of stakeholders and participating in the larger arena to explore long term opportunities for Kodak and the world community.

-Move to another business segment such as movie and entertainment
-Focus on high potential products (Kiosks and mini-lab; online services such as photo printing and sharing): Kodak could have become a social media powerhouse if it had successfully convinced consumers to use its online service to store, share and edit their pictures. Instead, Kodak focused too much on devices, and lost the online battle to social networks like Facebook.

-Emphasize on niche market: medical market and professional.

-Transform executive and management teams: slowly eliminate poorly performed executives and who don’t fit with company’s divisions acquired; replace with people who have expertise and industry knowledge.
-Decentralized decision making authority to each division: conduct preliminary analysis to get the most efficient flow of information between divisions; shift decision making task from centralized manager to each division manager then evaluate its effectiveness in responding to the competitive threats and changing trends.

 Sources and links:

http://businesstheory.com/

http://www.kodak.com/ek/US/en/Home.htm

 

 S S, C G, M P