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Kodak Case Study "Part 1"

Kodak Case Study "Part 1"

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1?
l
II
I
I
CASE
8.
THE
RISE
AND
FALL OF
EASTMAN
KODAK:HOW
LONG
WILL lT
SURVIVE
BEYOND
2011?
463
The
Rise
and
Fall
of
Eastman
Kodak:
How
Long
Wi
ll
It
Survive
Beyond
201
This
casewas
preparedby Gareth
R.
Jones,
Texas
A&M
University.
In
201,1,
Antonio
Perez,
CEO
of
the
Eastrnan
Kodak
Co.,
was
reflectingon
his
company's
current
situation.
Sincehe
hadbecome
CEO
in
2005
andlaunched
his
strategyto
make
Kodak
a
leader
in
theconsumer
andbusiness
imag-
ing
markets,
progress
had been
slow.
His
efforts
to
cut
costs
while
investing
heavily
to
developnew
digitalprod-
ucts
hadresulted
in
Kodaklosing money
in
most
of
theprevious
years,
andKodakhad
already
cutits
profit
esti-mates
for
201"1.
After
spending
billions
of
dollarsto
create
thedigital
competences
necess
ary
to
give
Kodaka
competitive
ad-
vantage,
and
after cutting
tens
of
thousands
of
jobs,thecompany's
future
was
stitl
in
doubt.CouldKodak
survivegiventhefact its
digital
rivalswere
continuallyintroducing
new
and
improved
products
that
made itsown
look
out
of
date?
WasKodak's
newdigital
business
model
reallyworking
and did
it
have the
digital
products
in
place
to
re-
build
its
profitability
and
fulfill
its
"You
press
thebutton,we do therest"promise?Or,afterten
years
of
declining
sales
andprofits,
was
the
company
on the
verge
of
bank-
ruptcy
in
the
face
of
intense
globalcompetition
on
allproduct
fronts?
Kodak's
History
Eastman
Kodak
Co.was
incorporated
in
New
Jerseyon
Octob
er
24,1901,
Bs
successor
to
the
Eastman
Dry
Plate
Co.,
the
business
originally
established
by
GeorgeEastman
in
September
1880.
The
Dry
Plate
Co.
had
been
formedto
develop
a
dry
photographicplate
that
was
more
portable
and
easier
to
use
thanother
plates
in
therapidlydevelopingphotography field.
To
mass-produce
the
dry
plates
uniformly,Eastmanpatented
a
plate-coating
machineand began
to
manufacture
the
plates
commer-cially.Eastman's
continuinginterest
in
theinfant
photo-graphic
industryted
to
hisdevelopment
in
1884
of
silver
halide
paper-based
photographic
roll
film.
Eastman
capped
this
invention
with
his
introduction
of
the
f,rst
Copyright
@ 2011
by Gareth
R. Jones.
This
cosewas
prep*red
by
Gareth
R.
lones
as
the
basis
for
class
discussion
ratherthanto illus-
trateeithereffective
or
ineffective
handlingof
an
administrative
sirua-tion.
Reprinted
b"v
permission
of
Gareth
R.
Jones.
All
rights
reserved.
For
themost
recent
financial
results
of
the
compilny
disctrssed
in this
case,
go
to
hUp:ffinance.yahoo.com,input
thecompany'sstock
symbol
(EK),
anddownload
thelatest
company
report
from
its
homepage.
portable
camera
in
1,888.
This
camera used
his
ownpatented
film,which
was
developedusinghis
ownpropri-
etarymethod.ThusEastmanhadgained
control
of
all
the
stages
of
the
photographic
process.
His
breakthroughsmadepossiblethedevelopment
ofphotography
as a mass
leisure
activity.
The
popularity
of
the
"recorded
images"
businesswas
immediate,and
sales
boomed.Eastman's
in-
ventions
revolutionized
thephotographicindustry,
andhis
companywas
uniquely
placed
to
leadthe
world
in
the
developmentofphotographictechnology.
Fromthe
beginnitg,
Kodak
focusedon
fourprimary
objectives
to
guide
thegrowth
of its
business:
(1)
mass
production
to
lower
production
costs,
(2)
maintaining
the
lead
in
technological
developments,
(3)
extensive
product advertising,and(4)thedevelopment
of
a
multi-national
business
to
exploit
the
world
market.
Althoughcommonnow,
those
goals
wele
revolutionary
at
the
time.
In
due
course,
Kodak's
yellow
boxes
could
be
found
in
everycountry
in
the
world.
Preeminent
in
world
markets,
Kodak
operated
research,manufactur-
ing,and
distribution
networksthroughoutEurope
and
therest
of
theworld. Kodak'sleadership
in
the
develop-
ment
of
advanced
color
film
for
simple,
easy-to-usecameras
and
in
quality
film
processingwas
maintained
by
constantresearch
and
development
in
its
many
research
laboratories.
Its
hugevolume
of
productionallowed
it
to
obtain
economies
of
scale.
Kodak
was
also
its
ownsupplier
of
the
plastics
and
chemicalsneeded
to
produce
film,
and
it
mademost
of
the
component
parts
for
its
cameras.
Kodak
became
one
of
the mostprofltable American
corporations,and
its return
on
shareholders'
equity
aYer-
aged
18%
for
many
years.
To
maintain
its
competitive
advantage,
it
continued
to
investheavily
in
research
and
development
in
silverhalidephotography,remaining
prin-
cipally
in
thephotographic
business.
In
this
business.
as
the
company
used
its
resources
to
expand
sales
andbecome
a
global
business,
the
name
Kodak
became
a
household
word
signifying
unmatched
quality.
By
L99A.approxi-
mately
40Y"
of
Kodak's revenues
came
from
sales
outsidethe
United
States.
Starting
in
the early
1"970s,
however. and
especiall-v
inthe
1980s,
Kodakran
into
major
problerns.
reflected
in
the
dropin
return
on equity.
Its
preerninence
was
being
increas-
ingly threatened
as
the
photographic industry
and theindus-
try
competition
changed.
Major
innovations
were
taking
place
within
the
photography
business.
andnewmethods
of
 
464
CASESTUDIES
recording
images
and memories beyond silverhalide
tech-nology,most
noticeably digital
imaging,wereemerging.
lncreasing
Competition
In
the
1970s
Kodak
began
to
faceanuncertainenviron-
ment
in
all
its
product
markets.
First,
thecolor
film
and
papermarket
from
whichKodak
made
75Yo
of
its profits
experienced
growingcompetition
from
Japanese
compa-
nies,
led
by
Fuji
Photo
Film
Co.
Fuji
invested
in
huge,
low-
cost
manufacturing
plants,
usingthelatesttechnologyto
mass-produce
film
in
largevolume.
Fuji'slow
production
costs
and
aggressive,
competitive
pricecutting
squeezed
Kodak's
profit
margin.
Finding no
apparentdifferences
inquality
and
obtaining
more
vivid
colors
with
the
Japanese
product,
consumers
began
to
switch
to
the
cheaperJapanese
film,
and
this shift
drasticallyreducedKodak'smarket
share.
Besides
greater
industrycompetition,
another
liabilityfor
Kodak
was
that
it
haddone
little
internally
to
improve
productivity
to
counteractrising
costs.
Supremacy
in
the
marketplace
had
madeKodak
complacent,
and
it
had
beenslow
to
introduce
productivity
and
qualityimprove-
ments.
Furthermore,
Kodak(unlike
Fuji
in
Japan) pro-
duced
film
in
many
different
countries
in
the
worldratherthan
in
a
single
country
and
this
alsogave
Kodaka
costdisadvantage.
Thusthe
combinationof Fuji's
efficient
pro-duction
and
Kodak'sown
management
styleallowed
theJapanese
to
become
the
cost
leaders-to
chargelower
prices
and
stillmaintain
profit
margins.
Another
blow
onthe
camera
front
came
when
Kodak
lostitspatentsuit
with Polaroid
Corp.
Kodak
had
forgone
the
instant
photography
business
in
the
1940s
when
it
turned
down
Edwin Land's
offer
to
develophisinstantphotography
process.
Polaroid developed
it,
andinstantphotography
was
wildly
successful,
capturing
a
significantshare
of
the
photographicmarket.
In
response,
Kodak
set
outin
the
1960s
to
developitsown instant
camera
to
com-pete
with
Polaroid's.
According to
testimony
in
the
patent
trial,
Kodak
spent
$g+
million
perfecting
its
system,
onlyto
scrub
it
when
Polaroidintroduced
thenewSX-70
cam-
era
in
L972.
Kodak
thenrushed
to
producea
competing
instant
camera,
hoping
to
capitalize onthe
$6.5
billion in
sales
of
instant
cameras.
However,
a
federaljudge
or-deredKodak
outof
the instantphotography
business
for
violating
seven
of
Polaroid'spatents
in
itsrushto produce
aninstant
camera.
The
cost
to
Kodak
for
closing
its
in-
stant
photographyoperation
andexchangingthe
16.5
mil-lion
cameras
sold
to
consumerswas
over
$800
million.By
1985
Kodak reportedthat
it
hadexitedtheindustry
at
a
cost
of
$494
million;
however,
in
L99L
Kodak
also
agreed
to
payPolaroid
$925
millionto
settle
out
of
court
a
suit
that
Polaroid had
brought
against
Kodak
for
patentin-fringement.
Onits
third
productfront,
photographic
processing,
Kodak
also experiencedproblems.
It
faced
stiff
competition
from
foreign
manufacturers
ofphotographic
paper
and
from
new
competitors
in
thefilm-processing
market,
fncreasingly,
film
processors
were
turningto
cheapersources
of
paper
to
reduce
the
costs
of
film
processing.
Once again the
Japanese
had developed
cheaper sources
of
paperand wereeroding
Kodak's market
share.
At
the
same
time,
many
newinde-pendentfilm-processing
companies
had emerged
andwere
printingfihnat
far
lower
rates
than
Kodak's
own
official
developers.These
independentlaboratorieshad openedto
serve
the
needs
of
drugstores
and
supermarkets,
and
many
ofthemoffered twenty-four-hour
service.
They
usedthe
less
expensive
paper
to
maintain
their
costadvantageandwere
willing to
accept
lower
profit
margins
in return
for
a
highervolumeof
sales.
As
a
result,
Kodak
lostmarkets
for
itschem-
ical
and
paper
products-products
that
had
contributed
significantly
to
its
revenues
and
profits.
The
photographic
industry
surrounding
Kodak
had
changed
dramatically.
Competition
hadincreased
in
allproduct
areas,
and
Kodak,while
still
thelargestproducer,facedincreasing threats
to
its
profitabitity
as
it
was
forced
to
reduce prices
to
match
the
competition.
The
Emergence
of
Digital
lmaging
Another
majorproblemthat Kodak
had
to
confront
was
not
because
of
increased
competition
in
its
existing
prod-uctmarkets
but
because
of
the
emergence
af
newindus-
tries
that
providedalternative
means
of
producing
and
recording
images.
The
introduction
of
videotaperecorders,
and
later video
cameras, gave
consumers
an
al-
ternative
way
to
use
their
dollars
to
produce
images,
par-
ticularly
moving
images.
Video
basically destroyed
the
old,
film-based
homemovie
business
onwhich
Kodakhad
a
virtual
monopoly.
After
Sony's
introductionof
the
Betamax
machine
in
1975
the videoindustry
grew
into
a
multibillion-dollar
business.
VCRs
and
first
L6mm
and
then
compact8mm
video
camerasbecame increasingly
hot-selling
items
as
their
prices
fell
with
thegrowthin
demand and
the standardization
of
technology.Then
the
later
introduction
of
laser
disks,
cornpact
disks,
and, inthe
l-990s,
DVDs
were
also
significant
developments.Thevast
amount
of
data
that
can
berecordedon
thesedisks
gave
them
a
great
advantage
in
reproducing
images
throughelectronic
means.
It
was
increasinglyapparent
thatthewhole nature
of
the
imagingand
recording
process
waschangingfromchemicalmethods
of
reproduction
to
electronic,digital
methods.
Kodak's
managers
shouldhaveperceived
this
transformation
to
digital-basedmethodsas
a
disruptivetechnology
because
its
technical
preeminencewas
based
onsilver
halide
photography.
However,
as
is
alwaysthe
case
with
such
technologies,
therealthreat
lies
in
the fu-
ture.
These
changes
in
the
competitive
environment
caused
enormous
difficulties
for
Kodak.
Betwe
en
L972
andLg&Z,prof,tmargins
from
sales
declined
from
L6Yo
to
1"07o.
Kodak's
glossy
image lost itsluster.
It
was
in
thisdeclining
situation thatColby
Chandler
took
over
as
chairmanin
July
1983.
 
Kodak's
NewStrategy
Chandler
saw
the
need
for
drarnatic
changes
in
Kodak's
businesses
and
quickly
pioneered
four
changes
in
strategy:
(1)he
strove
to
increase
Kodak's
control
of
its
existingchemical-basedimaging
businesses;
(2)
he airned
to
make
Kodak
the
leader
in
electronic
imaging;
(3)he
spear-
headedattempts
by
Kodak
to
diversify
into
new
busi-
nesses
to
increase
profitability;
and
(a)
hebegan
on
major
efforts
to
reducecosts
and
improve
productivity.
To
achieve
the
first
three
objectives.hebegan
a
huge
program
of
acquisitions,realizing
thatKodak didnot
have
thetime
to
venture
new
activitiesinternally.
Because
Kodak
was
cash
rich
(it
was
one
of
the richest
global
companies)
andhad
low
debt,
financirrg
these
acquisitions
was
easy.
For thenext
sixyears,
Chandler acquired
businesses
in
four
main
areas.
By
1989
Kodak had
been
restructured
intofour
mainoperating
groups:
imaging,
information
sys-
tems,
health,and
chemicals.
At
its
annualrneeting
in
1988
Chandler
announced
that
with
the
recentacquisition
of
Sterling
Drug
for
$5
billion
the
companyhad achieveditsobjective:
"With
a
sharp focuson these
four
sectors,
we
are
serving
diversified
markets
from
a
unified
base
of
science
and
manufacturing
technology.The
logical
synergy
of
the
Kodakgrowth
strategy
means
that
weare
neither
diversi-
fied
as
a
conglomerate
nor
a
company
with
a
one-product
family."
The way
these
operatinggroups
developed
underChandler'sleadership
isdescribed
in
the
following
text.
The
lmaging
Group
Imaging
comprised
Kodak'soriginal
businesses,
including
consumer products,
motion picture
and audiovisual
prod-
ucts,
photo
finishing,and
consumerelectronics.
Theunit
wascharged
with
strengtheningKodak's
positionin
its
ex-
isting
businesses.
Kodak's
strategy
in
itsphotographicim-
aging
business has
been
to
fill
gaps
in
itsproduct
line
by
introducing
new
products
either made
by
Kodak
orbought
from
Japanese
manufacturers
andsold under
theKodak
name.
For
example,
to maintain
market
share
in the
camerabusiness
Kodak
introduced
a
new
lineof
disk
cam-
eras
to
replace
theInstamatic
lines.
Kodak
also
bought
a
minority
stake
and
entered
intoa
joint
venturewith
Chinon
of
Japan
to
producea
range
of
35mmautomatic
film
cameras
that
wouldbe
sold
under
the
Kodak
name.
This
arrangement
would
capitaltze
on
Kodak's
strong
brand
imageandgive
Kodak
apresence
in
this
marketto
maintain
its
camera
and
film
sales.
Kodaksold
500,000
camerasand
gained
LSY,
ofthedeclining
film
camera
mar-ket.
In
addition,Kodak investedheavily
in
developing new
andadvanced
film
such
as a
new range
of
"I)X"
coded
fllm
to
matchthenew
35mmcamera
market
that
possesses
the
vividcolor
qualitiesof
Fuji
film. Kodak
had
not
developed
vividfilmcolor
earlier
because
of its
belief
that
consumers
wanted
"realistic"
color-its
managers
were
still
fixated on
improving
coredeclining
fllm
business.
Kodak
also
made
major
moves
tosolidify
its
hold
on
the
film-processing market.
It
attempted
to
stem
the
in-
flow
of
foreign
low-costphotographicpaper
by
gaining
controloverthe
processing
market.
In
1986
it
acquiredFox
Photo
Inc.
for
$90
million
and becamethelargestna-
tional
wholesale
photographfinisher.
fn
1987
it
acquired
the
American
Photographic
Group
and
in
1989
it
solidi-fied
its hold on
thephoto-finishing
market
by
forming
a
joint
venture,Qualex,
withthe
photo-finishing
opera-
tions
of
Fuqua
industries.These acquisitionsprovidedKodak
with
a
large,captivecustomer
for
itschemicalandpaper
products
as
well
as
control
over
thephotofinishingmarket.
Also,
in
1986
Kodakintroduced
new improved
one-hour
fllm-processing
labs
to
compete
with
other
photographic
developers.
To
accompany
the
new
labs,
Kodak
popularized
the
Kodak
"Color
Watch"
system
that
requires
these
labs
to
use
only
Kodakpaper
andchemicals.
Kodak's
strat
egy
was
to
stem
theflow
of
busi-
ness
to one-hour mini-labs
and
also
establishthe
industrystandard
for
quality
processing.
It
succeeded,
but
thepace
of
change
to
the
digitalworld
wasaccelerating
and
bythe
end
of
the
1980s,
giventhesoaring
popularityof
digital
PCs,
Kodak's
managersshould have
recogntzed
they
wereon
thewrongtrack.
Kodak's
rapidly
declining
profitability
forced
it
to
engage
in
a
massive
internal
cost-cutting
effort
to
im-provetheefficiency
of
thephotographicproducts
group.
Beginning
in
L984
it
introducedmore
and
morestringentefflciencytargetsaimed atreducing
waste
while
increas-
ing
productivity.
In
1986,
it
established
a
baseline
for
measuring
the
total
cost
of
waste
incurred
in
the
manu-
factureof
film
and
papff
throughoutitsworldwide
oper-
ations.
By
L987
it
had
cutthat
waste
by
15o/o,ond
by
1989
it
announced
total
cost
savings
rvorth
$500
million
annu-
ally.
This
was
peanutsgiventhe
rapidly
changingcompet-
itive
situation-Kodak's
managers
didnot
want
toshrink
their
large,
bureaucratic
company
that
had
becomecon-servative
and
paternalistic
over
time.
As
a
result,
Kodak's
profits
dropped
dramatically
in
1989as
all fllm
makers
woke
up
to
the
new
competitive
reality
and
Polaroid
and
Fuji
also
aggressively
tried
to
capture
market
share
byengaging
in
pricecutting
and increased
advertisingto
in-
crease
market
share.
The
result
was
even
further
major
declines
in
profitability.
These
rising
expendituresoffset
most
of
the
benefits
of
Kodak's
cost-cutting
effort
and
there
was
little
prospect
of
increasing
profltability
be-cause
Kodak's
corephotographicimaging
business
was
in
decline-Kodak
alreadyhad80%
of
themarket;
it
was
tied
to
the
fortunesof
oneindustry.
This
fact,plus
thein-
creasinguse and
growingapplications
of
digital
imaging
techniques,
led
to
Chandler's
second
strategicthrust:
an
immediate
policy
of
acquisitionand diversification
into
new
industries,
includingtheelectronicimaging
business
with
the
stated
goal
of
being
"first
in
fllm
imaging
and
digital.
He
thought the
two
could
still
co-exist.
He
could
not
understand
thatdigital
imagingwas
a
disruptive
technology.

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