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

The downfall of Blockbuster.

Blockbuster LLC

Prepared for: Case Study

EF Education First Business case study

Prepared by: Jonathan, Manou & Lillian

Monday 8 December 2014

EXECUTIVE SUMMARY

Introduction

The rise of the Internet created a whole new generation of business, information gathering and advertisements. Companies who were able to adapt themselves like Apple and Netflix had driven a large number of others like record stores and video rental stores to go out of business. This case study will focus on Blockbuster, a video rental store whose main business was based on physical rental stores and had to compete with streaming and mailing platforms.

Blockbuster history

The first Blockbuster opened in 1985 in Dallas, Texas. Founded by David Cook, a computer programmer who had programmed Blockbuster`s information collecting software to track inventory and consumers preferences, enabled Blockbuster to provide the movies that costumers wanted in its

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individual stores. Wayne Huizenga purchased a controlling interest in Blockbuster with two colleagues in 1987, for $18 million and drove Blockbuster expansion period by either opening franchisers or buying the competition. At the end of 1987 the company owned eight stores and franchised eleven, in the next year it already become the biggest video chain in the world and by 1991, Blockbuster owned 1654 stores in the United States alone.

In 1994 Viacom purchased Blockbuster for $ 8.4 billion. However, under Viacom`s guidance the company lost almost half of its value by 1996, a big part of this downswing was due to Viacom prioritising more than just renting movies. Viacom tried to use Blockbuster stores to sell Paramount and MTV merchandise, books, toys, and clothing.

In 1997, Blockbuster changed its CEO to John F. Antioco, who refocused on its video rental business, resulting in a brief upswing in profits. But the company made a series of bad investments regarding new media and new competitors which drove Blockbuster to be in a loss of $984 million despite its $5.9 billion in revenue.

Another of Blockbuster problems was the emerging of the Internet and of subscription services. Its biggest competitor, Netflix, started as a DVD by-mail subscription service in 1997. Netflix charged a flat monthly fee without late fees. In 2004 Blockbuster started a by-mail subscription service called Blockbuster.com, and removed its late fee program, but by that time Netflix had already acquired part of Blockbusters customer base.

Blockbuster spent the turn of the century expanding its video-game rental market, by purchasing competitors like Game Station. By 2002, Blockbuster had video-game sections representing all the major gaming platforms in 90% of its stores and it continued this venture even after splitting from Viacom in 2004.

After a failed bid to take over a failing rival, Hollywood videos. Financier Carl Icahn had gambled on this deal by owning a substantial number of shares from both Blockbuster and Hollywood Video and launched a proxy fight (a stakeholder opposing against the management) to displace John Antioco after the takeover failure. Carl

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Icahn had suffered great losses and disagreed with John Antioco on how to revive profit at Blockbuster. The financier believed in reinstating the late fees and removing investment from Blockbuster.com,. John Antioco resisted these measures and lost the proxy fight which led to him being replaced by Jim Keyes. Blockbuster approved the cuts de-emphasizing the online service in favour of an in-store, retail-oriented model, which temporarily boosted the value of the shares. But blockbuster wasn’t able to keep up with its competitors and on March 2010 Blockbuster`s accounting firm issued its audit opinion with substantial doubt about Blockbusters ability to keep its business after a few years Blockbuster had to declare for bankruptcy.

Business Model

Blockbuster established its retail channels through physical stores in the United States and abroad. On August 29, 2010, Blockbuster had 3,306 operating stores. The company believed that its competitive advantage relied on its ability to access newly released movies while other competitors would not have access for the initial 28 days of release.

In 2009, Blockbuster started a vending kiosk to increase its distribution channels and it had approximately 6630 kiosks operating under Blockbuster Express Brand in the United States. Additionally, Blockbuster made its products available through mail and digital distribution channels. Blockbuster promoted its by-mail channel by launching a marketing partnership with Comcast Cable Corporation (Comcast) while Comcast would offer its customers Blockbuster By-mail service as an additional service within Comcast packages. Blockbuster would offer to its customers the opportunity to learn and sign up for Comcast services in Blockbuster kiosks.

To establish its digital channel, Blockbuster purchased Movielink from a consortium of movie studios in 2007, which allowed customers to download and watch movies on their personal computers.

Blockbusters distribution used an outsourced party for distributing merchandise from its main distribution center in McKinney, Texas to its domestic stores; along with it Blockbuster had 39 additional distribution centers across the EUA to support its by-mail subscription program. Also Blockbuster had 2333 stores in 16 other countries. Blockbuster was aware of the fact that physical stores weren’t able to compete in the twenty-first century, but despite of its efforts to expand into new retail channels, Blockbuster wasn’t able to compete with its competitors, and had to file for bankruptcy.

Events that lead to the downfall

An inability to adapt to a changing market paved the way into bankruptcy for Blockbuster. Jeffery Stegenga, Chief Restructuring Officer attributed Blockbuster decline to five main events:

• Increased competition in the media entertainment industry;
• Technological advances changing the landscape of the industry;
• Rapid grow of the new competitors;
• Changing customer preferences;
• General economic environment.

Along with these changes Blockbuster had a high level of financial leverage (debt) that the business incurred during periods of lower competition and higher performance.

Particularly, the rise of new competitors using alternative distribution methods were a huge obstacle. They cut into Blockbuster’s Customer base, and consequently diminished its recourses. Even with Blockbuster trying to invest in other channels of distribution the revenue and profits from these channels weren’t enough to tap the hole created by the reduced traffic to its store-based channel.

For Blockbuster the timing couldn’t have been worse, as the economy was struggling to recover itself from the 2008 recession. In response to these challenges Blockbuster took a number of steps:

• Reduce of administrative expenses resulting in a $333 million decrease;
• Close unprofitable domestic stores;
• Reduced investments internationally;
• Refinancing transaction (act of paying a debt by doing another loan) extending debt maturities and amortisation schedule;
• Secured cash through letters of credit relating it to a historical lease guarantees (a bank acts as guarantee to a third party for a specific fee, in exchange of a set amount of money and a set period of time).

In 2009, Blockbuster reached out to Rothschild, Inc. who would serve as investment banker and financial advisor to help evaluate its capital structure and financing alternatives. Worried about not being able to secure more credit, Blockbuster reached out for an amortising term loan (a loan with scheduled periodic payments of both principal and interest), but the amortisation schedule reduced significantly the available liquidity and consequently constrained operations.

In October 2009, Blockbuster successfully completed the issuance of the Senior Secured Notes (a type of loan that is backed by the borrower`s assets) to refinance itself ahead of the scheduled amortisation payments, that were to take place in 2010 and 2011. This action would provide an extension of maturities (time until a company should pay its loan) and additional liquidity.

With the secured credit, Blockbuster invested heavily in its inventory levels to prepare for the 2009 holiday season. Even with the issuance of the Senior Secured Notes, the fourth quarter of 2009 was extremely difficult for Blockbuster. During this quarter, Blockbuster faced the rapid expansion from key competitors like Netflix, suffered from discount sales of new-release titles by Big-box retailers, and failed to secure the anticipated 28-day window advantage on key titles ahead of the holidays. Consequently the operating results and period-ending liquidity for the final quarter of 2009 fell significantly short of the projections. This year, Blockbuster reported a loss of $558.2 million and a decline of 15.6% decline in its USA sales.

In the beginning of 2010, Blockbuster sought help from legal and financial advisors in order to try a new infusion of capital by the Senior Secured Note holders, (creditors from the first Secured Note) and organize the company finances according to the bankruptcy code through a recapitalization of Blockbuster`s assets.

Later in July 2010, the New York Stock Exchange sent Blockbuster a notice, suspending the company from its stock market. On September 2010, Blockbuster missed a $13.5 million payment on the Senior Secured Notes and Filed its official Bankruptcy.

References:

http://www.businessweek.com/chapter/chap0009.htm

http://content.time.com/time/magazine/article/0,9171,2022624,00.html  

http://www.businessinsider.com/blockbuster-admits-bankruptcy-is-a-possibility-2010-3

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/nytimescompanynews.pdf

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/wwwgamesindustrybiz.pdf

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Hopkinscharasmaticfounder.pdf

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Altanerwearemovingtodallas.pdf

http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1010&context=utk_studlawbankruptcy

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Lippmanblockbusterbuys236retail.pdf

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/Connblockbusteragreestobuy.pdf

http://trace.lib.utk.edu/assets/Kuney/BlockbusterBankruptcy/HyattHeBeganBlockbusterSoWhat.pdf

http://research.gigaom.com/2012/11/following-the-money-what-carl-icahn-sees-in-netflix/

http://www.ign.com/articles/2004/06/22/viacom-blockbuster-split-up

http://www.entrepreneur.com/article/197648

 

 

 

 

 

Important articles:

http://www.bloomberg.com/news/2013-11-06/blockbuster-video-rental-chain-will-shut-remaining-u-s-stores.html

Blockbuster Video-Rental Chain Will Shut All U.S. Stores

By Alex Barinka Nov 6, 2013

Blockbuster LLC, the video-rental company owned by Dish Network Corp. (DISH), will close its remaining 300 U.S. stores, ending an era for a chain that was once a ubiquitous part of American shopping centers.

Blockbuster will shut the outlets by early January and discontinue its DVD-by-mail service by mid-December, Englewood, Colorado-based Dish said today in a statement. Each Blockbuster store has eight to 10 employees, so the move is expected to cost about 2,800 jobs. Dish will keep the licensing rights to the Blockbuster brand and use it to sell other services.

“People were waiting for the death knell for that business for many years,” said Matthew Harrigan, an analyst at Wunderlich Securities Inc. “With everything happening on the digital distribution side, it has been long overdue.”

Dish, which acquired the chain out of bankruptcy in April 2011, had already divested Blockbuster’s international assets, including operations in the U.K. and Scandinavia. The company has been gradually shutting down the 1,700 stores it acquired.

“This is not an easy decision, yet consumer demand is clearly moving to digital distribution of video entertainment,” Dish Chief Executive Officer Joseph Clayton said in today’s statement. “We continue to see value in the Blockbuster brand, and we expect to leverage that brand as we continue to expand our digital offerings.”

Blockbuster was once so dominant in the home-video market that it was sued by independent video retailers, which claimed in 2001 that the company’s revenue-sharing agreements with movie studios hurt competition. The lawsuit was later dismissed.

Netflix Streaming

When the company was spun off by Viacom Inc. (VIAB) in 2004, it operated about 9,000 locations — before streaming video services such as Netflix Inc. (NFLX) devastated the industry. Blockbuster filed for bankruptcy protection in September 2010.

Dish took over Blockbuster the following year, aiming to use the stores to sell mobile devices that could stream Blockbuster movies. The plans broke down when U.S. regulators didn’t immediately approve a waiver allowing Dish to use its satellite spectrum for terrestrial data and voice transmission.

The Blockbuster brand will continue at Dish through the Blockbuster @Home and Blockbuster on Demand options, which stream movies and videos to televisions, computers and other devices, Dish said.

Dish shares were little changed today in New York, closing at $48.84. The stock has risen 34 percent this year.

While the demise of the Blockbuster chain is symbolic for the industry, it won’t have a big impact on Dish’s prospects, Harrigan said.

“It’s certainly an end-of-an-era type thing, but in terms of that affecting Dish’s stock, it doesn’t have any particular importance,” he said.

http://www.businessinsider.com/blockbuster-admits-bankruptcy-is-a-possibility-2010-3

Blockbuster Admits Bankruptcy Is A Possibility

Blockbuster filed its annual report to the SEC today. In it: Language admitting that Blockbuster could go bankrupt in some situations, including as part of a stock exchange it’s planning, “or any of the other strategies we are pursuing.”

Here’s some of the relevant sections from Blockbuster’s 10-K:

We are in the process of developing and initiating certain operational and business strategies to attempt to maximize our cash and cash equivalents over the near term. One initiative we are pursuing involves an exchange of all or part of our senior subordinated notes for Class A common stock. We also may seek certain modifications to the senior secured notes from the holders thereof. Consistent with this approach, the holders of the senior secured notes and the senior subordinated notes have been contacted and have formed respective note holder committees, have retained advisors and are conducting due diligence. Assuming that we can reach agreement with such holders on the terms of an exchange, we will seek to implement an exchange during the latter part of the second quarter or early part of the third quarter of this year, depending on the timing of SEC clearance of the exchange documentation and when we receive, if necessary, shareholder approval. In connection with pursuing an exchange, we will also be involved in discussions with holders of our Series A convertible preferred stock regarding the possible conversion of such Series A convertible preferred stock into our Class A common stock. We can give no assurance that we can successfully execute an exchange and preferred stock conversion strategy or any of the other strategies we are pursuing and our ability to do so could be significantly impacted by numerous factors including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of our various debt agreements and indentures as well as the certificate of designations governing our Series A convertible preferred stock. It is possible that a successful and efficient implementation of an exchange or any of the other strategies we are pursuing will require us to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code.

If we are unable to successfully implement our operational and business strategies, if we are unable to reach agreements with our debt holders to restructure a sufficient portion of our debt, or if the major studios tighten or eliminate credit terms, we may voluntarily seek relief under the U.S. Bankruptcy Code.

We are currently experiencing significant liquidity constraints and have sizable amortization and other debt service requirements. Should we not be able to generate sufficient cash flow from operations and should the studios tighten or eliminate credit terms, we may determine that it is in the Company’s best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code, including prior to the time we would otherwise be required to do so in an acceleration event. Seeking relief under the U.S. Bankruptcy Code, if such relief does not lead to a quick emergence from Chapter 11, could materially adversely affect the relationships between us and our existing and potential customers, employees, suppliers, partners and others. Further, if we were unable to implement a plan of reorganization or if sufficient debtor-in-possession financing were not available, we could be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code.

For the full year 2010, we will continue to take actions to improve liquidity. We expect to further reduce general and administrative expenses by over $200 million, continue to rationalize the domestic store portfolio and work to divest international assets. In addition, our 2010 global capital expenditures will remain at maintenance levels of approximately $30 million and we will aggressively manage working capital. We will also continue to explore a variety of strategic alternatives to strengthen our capital structure to position us for success in our transformational efforts. We are in the process of developing and initiating certain operational and business strategies to attempt to maximize our cash and cash equivalents over the near term. One initiative we are pursuing involves an exchange of all or part of our senior subordinated notes for Class A common stock. We also may seek certain modifications to the senior secured notes from the holders thereof. Consistent with this approach, the holders of the senior secured notes and the senior subordinated notes have been contacted and have formed respective note holder committees, have retained advisors and are conducting due diligence. Assuming that we can reach agreement with such holders on the terms of an exchange, we will seek to implement an exchange during the latter part of the second quarter or early part of the third quarter of this year, depending on the timing of SEC clearance of the exchange documentation and when we receive, if necessary, shareholder approval. In connection with pursuing an exchange, we will also be involved in discussions with holders of our Series A convertible preferred stock regarding the possible conversion of such Series A convertible preferred stock into our Class A common stock. We can give no assurance that we can successfully execute an exchange and preferred stock conversion strategy or any of the other strategies we are pursuing and our ability to do so could be significantly impacted by numerous factors including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of our various debt agreements and indentures as well as the certificate of designations governing our Series A convertible preferred stock. It is possible that a successful and efficient implementation of an exchange or any of the other strategies we are pursuing will require us to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code. See “Liquidity and Capital Resources” below for further discussion of our operational plan to preserve liquidity.

Case Study: McDonald’s

Who has never heard McDonald’s? This company is well-known for fast food and the first company that established the standardization of fast customer services, manual as well as multi-store network, all of which impacted on the business field, especially, fast food industry. It is amazing contribution that recently the reference rate of exchange, which is called “Big Mac Index”, has been started to use to see the economy all over the world. McDonald’s Corp (MCD.N) Chief Executive Officer Don Thompson said the company that now serves some 70 million customers a day worldwide has at various times during its history faced questions about whether it is still relevant to consumers, who are now craving more fresh and unprocessed food. These days, however, the sales of McDonald’s are decreasing gradually. On 21^st, October in 2014, McDonald’s Corp. (MCD), the world’s largest restaurant chain, has announced that the third-quarter net profit fell 30 percent, which is $1.7 billion, as U.S. sales slumped for the fourth straight quarter. And also 30 percent of net profit which is $1 billion comparing with that of last year fell in this third-quarter.

What has led them to suffer from the management? There are some internal issues. One of them is the increase of competition. In addition to existing fast food rivals like Burger King and Starbucks, there are new rivals which is called fast casual food like Chipotle. The customer rotation of Chipotle is faster than McDonald due to the lower number of options. Chipotle, known for using pricier antibiotic-free meats and organic produce, are taking a bite out of McDonald’s market share. A several days ago, Chipotle reported an eye-popping 19.8 percent gain in third-quarter, same-restaurant sales. Other fast food companies launched new products. Burger King Worldwide Inc. (BKW) recently started selling a 10-pack of chicken nuggets for $1.49, while Wendy’s Co. is touting pulled-pork sandwiches. These components cause McDonald’s not only to get, but also to keep fewer customers. On the other hand, McDonald’s needs to respond to the rise in price of ingredients and labor costs. They have had no choice but to raise the price of hamburgers because they don’t have any good solution so far. Finally, the sales in existing branches decreased 3.3%.  Labor costs seem to be the more difficult issue to solve. On 4^th November, workers for fast food demonstrated to make the company pay more than $15 per an hour for them 150 places in America. McDonald’s is the biggest target because it has most branches in America.

These are also external issues, one of which is the use of rotten chicken imported from China to Japan. Also, Japanese branches sell new products with more expensive prices than that the company decided in advance. These facts let customers embrace disbelief of security and trust, which has resulted in decreasing the sales which accounts for 25% in Japan. The most net profit in Asia is generated in Australia and Japan, so this problem gave the company serious damage. The sales in August is one-quarter than same month last year. Totally, McDonald’s Asian sales fell about 10%. In Russia, McDonald has gotten difficulty in selling their food due to the political issue in Ukraine. Four branches have been closed as the response to the American economic sanctions to Russia. In addition, recent economic crisis in Europe caused McDonald’s Europe sales to fall 1.4%.

Chief Executive Officer Don Thompson said in a statement.

“The internal factors and external headwinds have proven more formidable than expected and will continue into the fourth quarter,” Thompson said in the statement. “These significant challenges call for equally significant changes in the way we do business.”

To win more diners, McDonald’s said today it’s trying a new global strategy that includes investing in store remodeling and technology as well as mobile ordering and payments. Sales were hurt in China and Japan after a probe into meat supplier OSI Group LLC caused food shortages. The affected markets make up about 10 percent of consolidated revenue, McDonald’s said in August. The supplier issue reduced profit in the quarter by 15 cents a share. The company also is facing pressure in Russia, where hundreds of its stores are being inspected by consumer-safety regulators. Russian courts have temporarily closed nine restaurants, McDonald’s said in a statement on its Russian corporate website. Closings there and in Ukraine reduced profit by 1 cent a share.

In conclusion, it is true that there are some tough issues including politics, but McDonald’s still has great chance to overcome current conditions. It is time to radically reconsider the company itself if they really want to get back into the competitiveness. Otherwise, it is just going to go bankrupt and many people are going to lose jobs, which makes the society disorder. That’s why they should approach those issues not only for McDonald’s.

 

http://www.bloomberg.com/news/2014-10-21/mcdonald-s-profit-drops-30-as-u-s-sales-slump.html

http://www.usatoday.com/story/money/business/2014/10/21/mcdonalds-fast-food-restaurants-earnings/17652697/

http://www.chicagotribune.com/business/breaking/chi-mcdonalds-earnings-20141021-story.html

http://www.ibtimes.com/mcdonalds-reports-30-drop-third-quarter-profit-after-chinese-meat-scandal-1708829

McDonald’s Third-Quarter Profits Drop 30%

http://beforeitsnews.com/financial-markets/2014/10/mcdonalds-reports-30-q3-profit-drop-on-weak-u-s-china-markets-2782336.html

 

Toyota’s Recall Crisis Case Study

Toyota brand

• INTRODUCTION

In 2009, Toyota has recalled nearly eight million vehicles in the United States for two mechanical safety defects that can cause unintended acceleration: ‘sticking’ accelerator pedals and a design flaw that can cause accelerator pedals to become trapped by floor mats. These recalls were triggered by a car collision in August 2009 that took the lives of four people. When NHTSA(National Highway Traffic and Safety Administration) first identified the two defects more than a year ago, the agency pushed Toyota to conduct recalls quickly. Toyota later paid nearly $33 million in civil penalties as the result of investigations into whether the company notified NHTSA in a timely manner about these defects. During Congressional hearings on the Toyota recalls in February 2010. Members of Congress asked NHTSA to study whether electronic or software problems in Toyota vehicles could be to blame for unintended acceleration. In March 2010, NHTSA enlisted top NASA engineers and experts in areas such as electromagnetic compatibility to study whether electronic flaws can cause unintended acceleration. In its final report, NASA engineers found no evidence of an electronic defect in Toyota vehicles capable of producing dangerous, high-speed unintended acceleration incidents. The two mechanical safety defects originally identified by NHTSA remain the only known causes of dangerous unintended acceleration incidents.

Consumer attitudes toward Toyota began to change. Prior to Toyota’s historic recall in November 2009, over three-quarters (83%) of U.S. adults surveyed were positive about the brand while fewer than 1 in 5 (17%) were negative.

• CASE ANALYSIS

 

• Toyota Brand

Toyota Motor Corporation is a Japanese automotive manufacturer headquartered in Japan. In 2013 the multinational corporation consisted of 333,498 employees worldwide and, as of November 2014, is the twelfth-largest company in the world by revenue. The company was founded by Kiichiro Toyoda in 1937. Toyota is the world’s first automobile manufacturer to produce more than 10 million vehicles per year.

 

Consumer Reports’ Car Reliability Survey finds that Toyota dominates the industry when it comes to the most reliable cars. The findings come from Consumer Reports’ 2012 Annual Auto Survey, which is based on subscribers’ experiences with 1.2 million vehicles. Toyota is one of the top-selling brands in America and Toyota is committed to safety and dependability and to creating the most reliable cars. It strives for continuous improvement in everything it does, along with creating breakthrough products for the future.

 

• Products Quality

Some say that Toyota grew too fast, and its quality decreased. On the other hand, quality experts say that in spite of Toyota’s rapid growth, quality has remained at better than industry average levels. In fact, Lexus, a Toyota luxury brand, often leads the industry in quality.

2011 Initial Quality Study

( http://www.qualitydigest.com/inside/quality-insider-article/so-does-toyota-really-have-quality-issue.html )

All makes and models of automobiles are found to have issues from time to time. The only way that these issues can be put in perspective, however, is to compare them to competitive makes and models. As the media fueled the notion that Toyota automobiles had serious defects, the actual data did not support this notion. A definitive joint study by the National Highway Safety Administration and NASA found no electronic flaws in Toyota vehicles that would cause dangerous self-acceleration issues.

For 2012,Toyota topped the Insurance Institute of Highway Safety’s list with 15 models in 2012. The National Highway Traffic Safety Administration gave the 2012 Toyota Camry a 5-star rating. This is not to say that individual vehicles did not have flaws that caused problems. Any electro-mechanical device made by man can malfunction. There seems to be no definitive data that shows that there was a systematic problem with Toyota vehicles.

 

• Investigations and Results

There is absolutely no evidence of sudden unintended acceleration caused by electronic problems in Toyota vehicles. The only causes NASA found were improperly installed floor mats and sticky gas pedals that can be slow to return. There has been only one documented accident caused by the floor mats — the one involving the loaner Lexus, where the dealer had used the wrong floor mat and failed to attach it properly with the provided restraining clips — and there have been no documented cases of accidents caused by the very small number of sticky pedals. Most accidents have been attributed to driver error.

Toyota Floor Mat and an accelerator

Reaction

When complaints of self-acceleration were first reported, Toyota did not know how to handle them. Rather than say that they are investigating the complaints and will issue a complete report at the conclusion of their investigation, Toyota representatives reacted to the complaints in ways that confounded marketing and crisis management experts. They confused everyone by jumping to conclusions and suggesting different causes in rapid succession. First, they attributed the problem to operator error, which is the most frequent cause of self-acceleration problems in automobiles (the issue that nearly triggered demise of Audi in the US market during the mid-1980s).

Then, Toyota suggested the cause of the problem was floor mats that trapped the gas pedal. Some engineers blamed “sticky” gas pedals. This was followed by the suggestion that faulty electronics caused the unintended acceleration. Instead of reassuring the marketplace, Toyota acted in a way that caused owners to fear for their safety and prospective buyers to look for other makes and models. For example, Jim Lentz, president and chief executive officer of Toyota Motor Sales, USA, went on the Today Show and looked like a “deer in the headlights” in response to Matt Lauer’s cross-examination. In a poll taken before Lentz spoke, 37% said they were less likely buy Toyota cars. The negative numbers jumped to 56% after he spoke. The uncertainty created by Toyota representatives triggered a series of costly recalls, lawsuits, and lost business – causing Toyota and their dealership network to incur further losses from hefty discounts and implementing the recalls.

 

Feb. 24, 2010, Akio Toyoda, the president and CEO of Toyota, issued the following statement in regards to the recalled vehicles:

“Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota’s priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers’ voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that. I regret that this has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced. Especially, I would like to extend my condolences to the members of the Saylor family, for the accident in San Diego. I would like to send my prayers again, and I will do everything in my power to ensure that such a tragedy never happens again.”

 

• Market share

Toyota Market Share in the US

• Criteria

• Quality, Safety
• Brand image, Reputation
• Responsibility
• Management
• Customer supports

 

• ACTION PLANS

Toyota got into a crisis that drove it to reflect intensively and to make dramatic changes to improve its responsiveness to customer concerns — but lost billions of dollars of value in the process.

 

• Proposed a solution so the defects are unlikely to reoccur
• Providing sufficient, independent, and credible data
• Making ads to back up historic quality and safety
• Getting in touch with every customer
• Improving the communication channel with other companies
• Create and monitor database of repairs and concerns
• Improve technology to communicate with customers
• Bring back the customer loyalty

APPENDIX: Timeline of Major Events

March 29, 2007:  NHTSA opens a preliminary investigation into pedal entrapment on MY’07 Lexus ES350 models based on five consumer complaints alleging three crashes and seven injuries. The all weather floor mat is identified as the possible cause of these incidents.

July 26, 2007:  A fatal crash occurs in San Jose, CA involving a ‘07 Camry in which the driver suffers serious injuries and the driver of the struck vehicle is killed.

September 13, 2007:  After determining the fatal San Jose crash was caused by floor mat entrapment, NHTSA tells Toyota a recall is necessary.

 

September 26, 2007:  Toyota recalls 55,000 floor mats in ’07 and ‘08 Camrys and ES350s.

 

August 28, 2009:  A fatal crash occurs in Santee, CA. The vehicle is found to have an all weather floor mat from another Lexus vehicle. Investigators find that the vehicle’s previous driver had reported an entrapment incident to the dealership.

 

September 25, 2009:  NHTSA tells the company that the floor mat recall is insufficient and the agency expects a recall for the defect in pedal design. Three days later, Toyota tells NHTSA the company will recall the gas pedals.

 

October 5, 2009:  Toyota recalls 3.8 million vehicles for pedal entrapment by floor mat and sends an interim letter to consumers telling them to remove floor mats.

 

January 21, 2010:  Toyota recalls 2.3 million vehicles for the sticky pedal defect.

 

March 30, 2010: The U.S. DOT(Department of Transformation) announces two studies into unintended acceleration. One looks at possible electronics causes for unintended acceleration in Toyotas; the other examines unintended acceleration and the safety of vehicle electronics across the automotive industry.

 

April 5, 2010: NHTSA demands the maximum, $16.375 million, civil penalty on Toyota for its failure to notify the agency of the sticky pedal defect for more than four months after discovering it.

 

December 20, 2010:  Toyota agrees to pay the maximum $16.375 million civil penalty as the result of another NHTSA investigation into whether their recall of 5.5 million vehicles for pedal entrapment was conducted in a timely manner.

Y.K, Z.L, T.H