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SCHULICH SCHOOL OF BUSINESS

SGMT6800U Assignment 2
Kodak (A)

Manish Gulati Sandeep Sharma


Oct 25, 2010

Kodaks Digital Imaging Strategy Sony Corporations' plan to launch a film-less digital camera sent fear through Kodak and it later decided to explore digital imaging field. Digital imaging was a disruptive technology that was emerging in early 1980s. In 1983, CEO Colby Chandler decided to invest in digital imaging technology and created a photographic and information management division at Kodak. Even though digital imaging technology was potentially revolutionizing, Kodak didn't see it as attractive as its existing silver-halide technology. Kodak was a successful company in its industry but it got blind sighted by its extreme focus on existing customers and their needs. It followed a customer intimacy (focus) strategy i.e. to anticipate existing customers' need and create products that they wanted. Therefore, instead of taking digital imaging as a disruptive innovation, Kodak's approach was towards sustaining innovation by convergence of conventional imaging science with electronics and followed an evolutionary model of development. Its focus was to provide products its existing client wants in a cost effective manner. Kodak's strategy for digital imaging has been way off. Kodaks big bet on its first digital product i.e. Photo CD didnt yielded results as expected. Moreover, it totally underestimated and failed to leverage upon world's first electronic image sensor it launched earlier and software it developed for manipulating color and images on CD-ROM that was later adopted by computer industry as a standard. Between 1983 and 2000, Kodak was led by three CEO and each one had a different strategy and direction where Kodak should be heading. Kodak strategy

shifted from convergence of digital and film-based imaging to selling hardware such as digital camera and printers. To make hardware business successful Kodak formed alliances within computer and electronics industry. But Kodak clearly missed first mover advantage in the digital camera market and the competition was already tough by 1995 and digital camera and printers were becoming more of commodities with lower profit margins. After incurring major loses in hardware business the strategy was changed again to picture business, and network and consumables from where it derived more than 50% of revenue and had more than 50% market share. Kodaks strategy, in general, was reactive to the changing market needs and competition. It faced tough competition from its rival firms such as Fuji Film, which initiated the price competition in film-based segment. At the same time new entrants in photography industry such as Sony changed the form of competition by introducing digital cameras. Over years its major sources of revenue changed from film-based consumables to digital imaging and printing. In 2000, Kodaks focused on value chain of photography i.e. 1) image capture, 2) services such as online photo manipulation, and 3) image output such as digital kiosk, inkjet printers, paper and ink. Kodak also moved back to one of its basic formula of success advertise the product by boosting advertisement spending. Decision to Invest in Digital Imaging During the 1980s, 1990s, and early 2000s Kodak took several steps to develop competitive digital imaging products. However, it failed to achieve the expected overall success. Following is a summary of the important decisions and directions in each era, and our evaluation of each.

1980s: In 1980s Kodak approached to create the new digital world by following their old strategy - focus on the customers, extensive advertising, and mass production at low cost. The company increased its involvement with several outstanding universities to conduct joint research in newer and upcoming technologies. Kodak acquired many companies to achieve technical capacity quickly or buy market share that was hard to build. This strategy had served them well earlier. However, in these times when the pace of changes has quickened considerably the effectiveness of such an approach is under severe doubt. Continued focus on current customers to develop newer technologies did not prepare Kodak for a market remodeled by the disruptive potential of the digital imaging technology. Aligning with universities and opening up a research lab in Japan were good decisions, but their success was limited because they were not housed in an independent organization which led to research projects competing with projects based on old technologies having better short term returns. 1990s: The company direction changed with the appointment of George M. C. Fisher as the company CEO in 1993. He dwelt less on the future of profit making silver-halide technology but rather shifted focus to digital imaging which was a small fraction of overall revenues and still a loss making business back then. Consequently, the digital imaging operations were separated from its traditional silver-halide division. Moreover, he believed that the profits are going to come from hardware sales. Therefore, the company devoted substantial energy to produce state-of-the-art products every few months.

With the rapid development of the digital imaging technology, such hardware products - digital cameras, scanners, thermal printers, writeable CDs etc were increasingly becoming commoditized. Competition in the market became extremely tough, and as expected the hardware focused strategy, after several quarters of sluggish sales and profits, appeared to have gone awry. Post 1990s to early 2000s: In this era the new direction was towards a network and consumable based digital imaging business model that was built on the premise that there was money to be made in uploading traditional pictures onto the internet, reprints, inkjet paper, and photo-editing software. The strategy had some moderate success initially. However, with the advent of internet, photographs were stored online and shared via emails. Printing of photographs, thus, reduced dramatically rendering the consumable driven business irrelevant. Now: Kodak, these days, has made investments in developing simple-to-use digital cameras, DSLRs, printers, and web solutions for storage and image manipulation (after its purchase of Ofoto). Driving company growth based on hardware margins is not a good strategy because the digital imaging technology is become increasingly commoditized. Unless a company comes up with a radical technological innovation, for e.g. photographs that are 3D, it is extremely difficult to sustain any competitive advantage in hardware. Strategy Execution Evaluation

In 1983, CEO Colby Chandler recognized the importance of changing trend in digital imaging and thus created a photographic and information management division. In our opinion the execution was not perfect and had some flaws. As per Bower & Clayton1, in order for new disruptive technology to be successful it should be housed in an independent entity so that it has access to resources and does not compete with other successful projects within organization. Even though Kodak invested in digital imaging, many executive found it hard to believe in its success as the profit margins were low. The focus was still on the high profit margin products. The second mistake made by Kodak was in its marketing research for the new digital product. They focused on the conventional market research method by determining market size and growth potential but in reality no market existed for the new digital image products yet or otherwise was in a very infant stage. Moreover, they underestimated the importance of information received from own research and development teams and focused more on the information from marketing team. Kodak announced its first digital product to be PhotoCD, which turned out to be a flop. As evident from the case, the company was still focused on old performance metrics of the photography industry i.e. highest quality image, whereas new players such as Sony were competing on different performance metrics all together, such as digital photo taking capabilities. Also, because of its narrowed focus on Photo CD, Kodak failed to leverage on its software algorithms that were becoming industry standard for manipulating colour and images on CD-Rom. Kodak management identified digital imaging as an important technology. However, the problem was that they didn't follow disruptive innovation strategy but

continued to stick with evolutionary model of sustainable development, where they wanted to develop these digital products as extension to their existing silver-halide technology. In late 1993 new CEO Fisher, motivated from his experience at Motorola, tried to change culture at Kodak. Although strategy execution was somewhat successful at the top management level, it mostly failed at the middle level because of the culture of the organization in which people were used to taking orders from senior and not willing to change. Kodak's strategy execution was never clear and always changing; it seemed they didn't know what to do in the changing marketplace. For example they started with photographic and information management division, later separated it from traditional silver-halide division, and finally combined two divisions again in 2000. Also they first focussed on digital and film-based imaging integration, then on hardware and finally on consumables. The biggest challenge facing Kodak now is that they are able to create value by bringing in new products and deliver value to customers, but not able to capture value themselves e.g. they are still making loss on every digital camera they sell. What Should They do Next Where should they play in the value chain: The company should consider moving away from consumable based approach because in digital imaging a consumer does not need to buy many consumables unless he wishes to take hard copy prints of the pictures. The need to take prints of photographs has dramatically dropped because people use internet / social media to share and store them. The hardware has also become commoditized with minimal differentiation between competitor products, keeping profit margins very thin. Lately, small incremental

improvements in hardware features are being achieved at a very rapid pace, which get quickly copied by competitor companies. Therefore, it would be more prudent if Kodak positions itself on the services side in the digital imaging chain, for e.g. kiosks at retailers, digital mini-labs, and online services for image manipulation, storage, printing, and delivery. The company can look into novel options like running photography courses for amateurs and/or professionals. It is definitely beneficial to help users along and train them in the ways of photography, because as users become more skilled, they'll feel the need to purchase extra lenses, extra batteries, external flashes, and other accessories. Moreover, Kodak continues to develop new technology, and has approximately 500 patents in the digital area alone. The company can license them to other companies who want to use them in their products. How should they organize to be effective: Kodak should structure its operations and organizational hierarchy that will enable them to better identify and develop disruptive technologies2. Identifying if a technology is a disruptive or a sustaining innovation is the key. Here, asking technical personnel can be helpful because they are more attuned than marketing and financial managers to revolutionary technologies. Listening to lead customers will enable a company to improve a sustaining technology. However, they can mislead an organization during disruptive technology development. Comparing the likely scope of disruptive technology improvement to the slope of performance improvement demanded by existing markets can help identify strategically critical disruptive technologies. Once a strategic disruptive technology is identified, Kodak should nurture it on a modest scale and give it time to grow. Because the market of disruptive technology is very

small to start with, it is difficult to understand this market using the conventional market research techniques. So, the company must identify newer techniques by experimenting rapidly. A disruptive technology cannot generate short term profits and therefore the responsibility to build the technology should be given to an independent division so that it does not compete with existing technologies for funds and resources. Therefore, Kodak should keep digital and film based business lines separate. Are they making any headway: The graph below succinctly demonstrates that Kodaks financial performance has not been good in the last five years3. Irrespective of economic conditions, the returns on Kodak stock have consistently declined in the years from 2004 to 2009. Unfortunately, Kodak's sagging stock price shows that the new businesses have not gotten big enough, fast enough to offset the decline of its old business.

-References
1

Joseph L. Bower and Clayton M. Christensen, Disruptive Technologies Catching the Wave, HBR JanFeb 1995 2 Joseph L. Bower and Clayton M. Christensen, Disruptive Technologies Catching the Wave, HBR JanFeb 1995, (Page 9) 3 Kodak 2009 Annual Report (Page 24), http://www.envisionreports.com/EK/2010/38902fe10e/document_0/Eastman_Kodak_AR_3-30-10.pdf