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kodak_fj

kodak_fj

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10/05/2012

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Kodak/Fuji- Questions

‡ Compare the financial performance of Kodak and Fuji for the period 1982 to 1992. ‡ What factors explain any observed differences in operating performance for the two firms?

Porter¶s Five Strategic Forces
Degree of Actual and Potential Competition
Rivalry Among Existing Firms Threat of New Entrants Threat of Substitute Products

Industry Profitability

Bargaining Power in Input and Output Markets
Bargaining Power of Buyers Bargaining Power of Suppliers

Rivalry Among Existing Firms
‡ Growth
‡ ‡ ‡ ‡ ‡ ‡ Concentration Differentiation Switching Costs Scale/ Learning Economies Fixed-Variable Costs Exit Barriers

Growth -- World Wide Market
‡ ‡ ‡ ‡ U.S. 31% Western Europe 23% Japan 16% Other 30%

Growth
Segments Photo Paper Micro 1989 1993 Avg Million $ Million $ Growth 9,200 12,312 7% 6,920 1,918 9,261 2,223 7% 3%

Growth
Equip X-ray Micro Finish Equip TOTAL 1,462 1,100 410 242 21,252 1,779 1,214 475 294 27,558 4% 2% 3% 4% 5.9%

Rivalry Among Existing Firms
‡ Growth

‡ Concentration
‡ ‡ ‡ ‡ ‡ Differentiation Switching Costs Scale/ Learning Economies Fixed-Variable Costs Exit Barrier

Concentration
‡ ‡ ‡ ‡ ‡ Kodak Fuji Agfa Polaroid Konica

Concentration Film

Film Kodak Fuji Konica

1984 88% 7% 3%

1988 83% 12% 3%

Concentration Paper
Paper K Fu K a ak 1984 64% 10.3% 9.8% 1988 61% 16% 9%

Concentration Conclusion
‡ Top Three have 98% of the market in color film ‡ Top four have 92.5% of the market in paper ‡ Market is an oligopoly.

Rivalry Among Existing Firms
‡ Growth ‡ Concentration

‡ Differentiation ‡ Switching Costs
‡ Scale/ Learning Economies ‡ Fixed-Variable Costs ‡ Exit Barrier

Differentiation and Switching Costs
‡ Very little quality difference between Kodak and Fuji ‡ Generic 35 mm film introduced in 80s
± lower in quality but not bad for many ± response improve the quality of brand names

‡ No switching costs involved

Rivalry Among Existing Firms
‡ ‡ ‡ ‡ Growth Concentration Differentiation Switching Costs

‡ Scale/ Learning Economies ‡ Fixed-Variable Costs ‡ Exit Barriers

Scale - Exit Barriers
‡ Very heavy fixed costs ‡ Very high levels of R&D ‡ Exit barriers probably different from a legal perspective depending on the country of operation

Threat of New Entrants
‡ ‡ ‡ ‡ ‡ Scale economies First Mover advantage Distribution access Relationships Legal barriers

Threat of New Entrants -- Photo industry
‡ Scale of economies would appear to almost be prohibitive ‡ First mover advantage -- Kodak is a household name ‡ Distribution access
± Fuji has entered into an agreement with WalMart (Currently not at case time) ± Kodak has purchased Photo stores (not at case time)

Threat of Substitute Products
‡ Disposable 35 mm cameras ‡ Electronic imaging beginning to be a threat
± Some big players: Sony, Canon, Toshiba, DuPont and 3M have moved into this arena ± Both Kodak and Fuji are putting R&D dollars in this area

Kodak
‡ Dominated the market until recently ‡ Three primary areas of business
± Imaging and information - 57% of sales, 50% of profits ± Chemicals - 18% of sales, 23% of profits ± Health Division - 25% of sales, 27% of profits

Kodak
‡ Imaging and Information restructured into autonomous business units in 1985 ± Revenues increased ± Sales and administrative costs increased more ‡ Several peripheral businesses were sold in the 80s, Interactive Systems, Eastman Kodak Credit Corporation, for examples

Fuji
‡ Founded in 1934 ‡ Three main business segments
± Commercial Products - medical imaging, ...motion picture film ± Magnetic Products ± Consumer Photographic Products -- the largest, 70% of the Japanese film market

Fuji
‡ Quality comparable to Kodak ‡ Export sales account for 40% of sales ‡ R&D runs at about 7% of sales

Compare the financial performance of Kodak and Fuji for the period 1982 to 1992.

‡ Go to Excel

Pre-tax margins
82-84 85-88 ‡ Kodak 14.7% 10.2% ‡ Fuji 18.1% 18.3% 89-92 4.9% 16.9%

ROA
82-84 85-88 89-92 ‡ Kodak 8.6% 5.3% 2.4% ‡ Fuji 7.1% 6.0% 5.2%

Asset Turnover
82-84 85-88 ‡ Kodak 0.977 0.841 ‡ Fuji 0.893 0.785 89-92 0.809 0.688

ROE
82-84 85-88 ‡ Kodak 12.5% 12.7% ‡ Fuji 12.9% 10.2% 89-92 8.6% 8.5%

Sustained Growth
82-84 85-88 89-92 ‡ Kodak 4.3% 3.9% 0.3% ‡ Fuji 12.0% 9.4% 7.9%

Days Inventory
82-84 ‡ Kodak 110 ‡ Fuji 135 85-88 119 116 89-92 88 118

Days Receivables
82-84 ‡ Kodak 65 ‡ Fuji 73 85-88 84 66 89-92 80 70

Days Payables
82-84 ‡ Kodak 22 ‡ Fuji 60 85-88 35 66 89-92 33 71

COS as Percent of Sales
82-84 85-88 ‡ Kodak 58.5% 53.9% ‡ Fuji 56.1% 55.0% 89-92 51.8% 53.1%

SG&A as Percent of Sales
82-84 85-88 ‡ Kodak 19.8% 24.3% ‡ Fuji 19.4% 21.5% 89-92 27.8% 24.9%

R&D as Percent Of Sales
82-84 ‡ Kodak 7.3% ‡ Fuji 5.8% 85-88 7.9% 6.0% 89-92 7.4% 6.1%

Analysis of NROA-1992 ‡ Kodak
± ROE: 20.5% ± RNOA: 8.2% ± NOPAT Mgn:7% ± FLEV: 2.318 ± Spread: 4.7% ± Op T/over: 1.269

Fuji
7.0% 6.9% 6.5% .035 3.7% 1.066

Accounting Analysis
‡ Depreciation ± Fuji uses declining balance ± Kodak uses St. line ‡ Inventories ± Fuji use weighted average ± Kodak uses LIFO for US, FIFO or average costs for rest

Accounting Analysis - Goodwill
‡ Kodak uses 40 year life ‡ Fuji uses 20 year life

What would the ratios have looked if Kodak used the same goodwill amortization ‡ Pretax margin for 89-92 would have been 4.2% ‡ ROA would have been 2% instead of 2.4% ‡ ROE would have been 7.3% instead of 8.6% ‡ Sustained growth would have been .2% instead of .3%

What does the ratio analysis show
‡ Serious concern with Kodak¶s pretax margin. Made even worse with the Goodwill change ‡ In recent years Kodak has improved its asset use (Asset Turnover) ‡ Days in inventory differences probably due to different inventory valuation methods

What does the ratio analysis show
‡ Collections of receivables for Kodak have lengthen a bit Fuji has remained about the same ‡ Kodak¶s COS ratio is slightly better ‡ Kodak has more SG&A expenses ‡ Kodak spends more on R&D

What does the ratio analysis show
‡ Fuji maintains about an additional month of credit from suppliers ‡ Kodak¶s ROE is comparable to Fuji¶s. ‡ Kodak has more debt. ‡ Kodak pays out significantly more in dividends than does Fuji

What factors explain any observed differences in operating performance for the two firms? ‡ ‡ ‡ ‡ Organizational differences? R&D strategy Business Diversification Pricing strategy

Organizational Differences
‡ Kodak has traditionally been centrally organized
± Recently tried to decentralize its imaging and information businesses ± Corporate administrative duplicated SG&A went up

‡ Fuji appears to have been always decentralized

R&D Strategy
‡ Kodak has consistently out spent Fuji by 1% to 2%
± Kodak is also involved in the pharmaceutical industry which is heavy R&D

Business Diversification
‡ Kodak is more diversified than Fuji ‡ Revenue% and ROS per segments Revenue ROS 87-89 90-92 87-90 90-92 Imaging 40.0% 36.9% 16.9% 15.3% Information 23.5% 20.8% 1.9% -6.9% Chemicals 18.7% 19.2% 17.6% 14.5% Health 17.8% 24.5% 16.3% 1.5% ‡ Has Diversification been a good thing for Kodak?

Pricing Strategy
‡ Fuji appears to price its product much higher in the domestic market
± Gives Fuji cash flows ± Allows them to price low in the export market

‡ However 46% of Kodak¶s revenue, 90-92, from outside the US came from imaging (Core Business) versus 27% domestic revenues

Differences in financing strategies and performance of the two firms? ‡ Kodak¶s payout ratio is about .8 Vs .07 for Fuji ‡ Why the big difference?
± Tax Differences? - US taxpayers typically prefer capital gains and so do Japanese ± Ownership structure? ± Look at Exhibit 6 p. 333

Differences in financing strategies and performance of the two firms? ‡ Debt policy
± Kodak¶s interest bearing debt to total capital (interest-bearing debt + equity) has ranged from around 7% in 1982 to around 63% in 1991 ± Fuji¶s interest bearing debt to total capital has ranged at around 14 to 20 % over the entire period

‡ Conventional wisdom seems to be that Japanese firms can afford more leverage than US firms. We don¶t find that the case here?

Questions for discussion
‡ Does Kodak retain its non-core businesses? ‡ How does Kodak respond to Fuji¶s challenges to their home photo market? ‡ How does Kodak respond to the challenges from the generic label film? ‡ How much R&D effort should be allocated to electronic imaging?

What Kodak has done
‡ In 1993, CEO resigned. Replaced by CEO from Motorola ‡ In 1994 sold its Chemical business ‡ In 1994, sold the Health care businesses ‡ In 1994, CEO announced that Kodak would become a leader in electronic imaging -- The Electronic and imaging Division was formed

What Kodak has done
‡ In 1994, Kodak announced it would combine corporate and Imaging Group staffs ‡ In 1995, filed a petition with the US Trade Representative's Office alleging that the Japanese Govt. had allowed Fuji to strangle Kodak¶s access to the Japanese Market.

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