discussion for strategy panning
Module 07: Discussion The Nature of Change In this module, we learned that everything is in a state of constant change. This is a challenge of strategic management, as the industry environment is driven by technology, consumer needs, politics, economic conditions, and many other influences. Case 8 Eastman Kodak’s Quest for a Digital Future • • • • • • • Discuss the key factors that drove the evolution of the photography industry, and how did these factors impact Kodak’s business model? Based on your understanding of the industry life cycle, discuss the stage the photography industry was in during Kodak’s quest for a digital future. Discuss the strategies that Kodak employed to adapt to the changing industry environment, and how effective were these strategies? Discuss what strategies would have been most appropriate for Kodak to pursue at that stage? How did Kodak’s organizational ambidexterity, or lack thereof, impact its ability to manage strategic change and respond to disruptive technologies? Directions: Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate. Your initial post should address all components of the question with a 500 word limit. Case8 Eastnian Kodak’s Quest for a Digital Future* On January 19, 2012, the Eastman Kodak Company declared bankruptcy-it entered “voluntary Chapter 11 business reorganization.” Its two-decade journey of transition from traditional photography into digital imaging was effectively over. In 1990, Kodak had launched its Photo CD system for storing photographic images; in 1991, it had introduced its first digital camera and, in 1994, its then CEO, George Fisher, had announced: “We are not in the photographic business … we are in the picture business.” With senior executives recruited from Motorola, Apple, General Electric, Silicon Graphics, and Hewlett-Packard, Kodak’s digital imaging efforts had established some notable successes. In digital cameras, Kodak was US market leader for most of 2004-2010; globally, it ranked third after Canon and Sony. It was a technological leader in megapixel image sensors. It was global leader in retail printing kiosks and digital minilabs. Performance metrics told a different story. In 1991, Eastman Kodak was America’s 18th-biggest company by revenues. Yet, by 2011, it had fallen to 334th. During the same period its employment had shrunk from 133,200 to 17,100. Between 2000 and 2011, its operating losses totaled $5.2 billion. As CEO Antonio Perez prepared for his new role under the supervision of Kodak’s court-appointed, chief restructuring officer, James Mesterharm, he reflected on Kodak’s two decades of decline. How could a company that had been a pioneer of digital imaging and had invested so heavily in building digital capabilities and launching new digital imaging products have failed so miserably to profit from its efforts? And what could he have done differently to have avoided this fate? These same questions haunted the CEOs of other companies: if one of America’s most successful companies could be destroyed by new technology, what did the future hold for their own businesses? Kodak’s History, 1901-1993 George Eastman transformed photography from a professional, studio-based activity into an everyday consumer hobby. His key innovations were silver halide roll film and the first fully-portable camera. The Eastman Kodak Company, established in Rochester, New York, in 1901 offered a full range of products and services for the amateur photographer: “You push the button, we do the rest” was its first advertising slogan. By the time George Eastman died in 1932, Eastman Kodak was one of the world’s leading multinational corporations w ith production, distribution, and processing facilities throughout the world and with one of the world’s most recognizable brand names. *This case was prepared by Robert M. Grant. ©2021 Robert M. Grant. 414 CASES TO CONTEMPORARY STRATEGY ANALYSIS After World War II, Kodak entered a new growth phase with an expanding core business and diversification into chemicals Cits subsidiary, Eastman Chemical, exploited its polymer technologies) and healthcare (Eastman Pharmaceutical was established in 1986). Kodak also faced significant competitive challenges. In cameras, Japanese companies came to dominate the world market; in film, Fuji Photo Film Company embarked on an aggressive international expansion. In addition, new imaging technologies were emerging. Polaroid pioneered instant photography; Xerox led electrostatic plain-paper copying; while the advent of the personal computer ushered in new image management and printing technologies. Kodak was alert to the emergence of digital technology and introduced several products that embodied new imaging technologies: • The world’s first megapixel electronic image sensor 0986), followed by a number of new products for scanning and electronic image capture. • Computer-assisted image storage and retrieval systems for storing, retrieving, and editing graphical and microfilm images. • Data storage products included floppy disks (Verbatim was acquired in 1985) and 14-inch optical disks 0986). • Plain-paper office copiers (Kodak acquired IBM’s copier business in 1988). • The Photo CD system 0990) allowed digitized photographic images to be stored on a compact disc. • Kodak’s first digital camera, the 1.3 megapixel DCS-100, priced at $13,000 launched in 1991. Committing to a Digital Future Kodak’s commitment to a digital imaging strategy was sealed by the appointment of George Fisher as CEO. Fisher had a doctorate in applied mathematics, 10 years of R&D experience at Bell Labs, and had led strategic transformation at Motorola. To focus Kodak’s efforts on the digital challenge, Fisher’s first moves were to divest Eastman Chemical Company and most of Kodak’s healthcare businesses and to create a single digital imaging division headed by newly hired Carl Gustin (previously with Apple and Digital Equipment). Kodak’s Digital Strategy Under three successive CEOs- George Fisher 0993-1999), Dan Carp (2000- 2005), and Antonio Perez (2005- 2012)- Kodak developed a digital strategy intended to transform Kodak from a traditional photographic company into a leader in the emerging field of digital imaging. The scale and scope of this transformation was outlined by Antonio Perez in terms of the “fu ndamental challenges” that Kodak was engaged in (Figure 1). During 1993- 2011, Kodak’s strategy embodied four major themes: • an incremental approach to managing the transition to digital imaging; • different strategies for the consumer market and for the professional and commercial markets; • external sourcing of knowledge through hiring, alliances, and acquisitions; • an emphasis on printed images; • harvesting the traditional photography business. CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE FIGURE 1 Eastman Kodak’s “fundamental challenges” The Scope of Transformation TO FROM IAnalogue technology 1—~l IDigital technology I Long design cycle ; I Rapid prototyping l_n_du_ s_t_ria_l_m_a_n_u_fa_c_tu_r_in_g_p_r_o_ c e_s_se_s_ ~ f – – – ~ l I Flexible manufacturing processes ~I f—~l Value based on solutions (product+ I Value based on physical products ~.- – – – – – – – – – – – – – ‘ consumables + servi ces) _:—l Just-in-time, just-in-place, customized M _ as_s_-p_r_o d_ u_c_e_d ,_l_ar_g_e_in_v_e_nt_o_r_ie_s _ _ ~I H _i_g_h _m_a_rg_i_n_s,_h_ea_v_y_i_n f_ra_ s_tr_u_c_tu_r_e _ ~ f – – – ~ l ~I I Lower margins, lean organization Source: Based upon Bob Brust, “Completing the Kodak Transformat ion;’ Presentation, Eastman Kodak Compa ny, September 2005. © Kodak.Used w ith permission. An Incremental Approach “The future is not some harebrained scheme of the digital information highway or something. It is a step-by-step progression of enhancing photography using digital technology,” declared Fisher in 1995.2 This recognition that digital imaging was an evolutionary rather than a revolutionary change would be the key to Kodak’s ability to build a strong position in digital technology. If photography was to switch rapidly from the traditional chemical-based technology to a wholly digital technology where customers took digital pictures, downloaded them onto their computers, edited them, and transmitted them via the internet to be viewed electronically, the new digital value chain make redundant most of Kodak’s core resources and capabilities. Moreover, most of this digital value chain was already in the hands of computer hardware and software companies. Fortunately for Kodak, during the 1990s, digital technology made only selective incursions into traditional photographic imaging. As late as 2000, digital cameras had achieved limited market penetration; the vast majority of photographic images were still captured on traditional film. Therefore, central to Kodak’s strategy was a hybrid approach where by Kodak introduced those aspects of digital imaging that could offer truly enhanced functionality for users. Thus, in the consumer market, Kodak recognized that image capture would continue to be dominated by traditional film for some time (digital cameras offered inferior resolution compared with conventional photography). However, digital imaging offered immediate potential for image manipulation and transmission. If consumers continued to use conventional film while seeking the advantages of digitization for editing and emailing their pictures, this offered a valuable opportunity for Kodak’s vast retail network. Kodak had installed its first self-service facility for digitizing, editing, and printing images from conventional photographs in 1988. In 1994, Kodak launched its Picture Maker, a self-service kiosk located in retail stores where customers could scan conventional photographs and edit and print digital images in a 415 416 CASES TO CONTEMPORARY STRATEGY ANALYSIS variety of formats. George Fisher emphasized the central role of retail kiosks in Kodak’s digital strategy: Four years ago, when we talked a bout the possibilities of digital photography, people laughed. Today, the high-tech world is stamp eding to get a piece of the action, calling digital imaging perhaps the greatest growth opportunity in the compute r world. And it may be. We surely see it as the greatest future e nable r for people to truly “Take Pictures. Further.” We start at re tail, our distributio n strongho ld . . . We believe the w idespread photo-retailing infrastructure will continue to be th e principal avenue by which people obtain the ir pictures . Our strategy is to build on and extend this existing market strength w hich is available to us, a nd at the same time be prepared to serve the rapidly growing, but relatively small, pure digital market that is developing .3 By the beginning of 2004, Kodak was the global leader in self-service digital printing kiosks, with 24,000 installed Kodak Picture Makers in the United States and over 55,000 worldwide. Despite the inferior resolution of digital cameras, Fisher recognized their potential and pushed Kodak to establish itself in this highly competitive market. In addition to digital cameras for professional use, in 1994, Kodak developed the QuickTake camera for Apple: at $75 it was the first popular-priced digital camera. In March 1995, Kodak introduced the first full-featured digital camera priced at under $1000. The Consumer Market: Emphasizing Simplicity and Ease of Use Kodak pursued different approaches to consumer and professional/commercial markets. While the commercial and professional market offered the test-bed for Kodak’s advanced digital technologies, the emphasis in the consumer segment was to maintain Kodak’s position as mass-market leader by providing simplicity, quality, and value. In the consumer market, Kodak’s incremental strategy provided an easy pathway for customers to transition to digital photography while also exploiting Kodak’s core brand and distribution strengths. Consistent with its original vision of “You push the button, we do the rest.” Kodak envisaged itself as providing security, reliability, and simplicity for customers bewildered by the pace of technological change. This encouraged Kodak to adopt a customer solutions approach to digital photography. “For Kodak, digital photography is all about ease of use and helping people get prints-in other words, getting the same experience they’re used to from their film cameras,” noted Martin Coyne, head of Kodak’s Photographic Group .4 A solutions approach recognized that most consumers had neither the time nor the patience to read instructions and to integrate different devices and software. Kodak believed that its integrated system approach would have particular appeal to women , who made up the major part of the consumer market. The result was Kodak’s EasyShare system, launched in 2001. According to Willy Shih, head of digital and applied imaging, EasyShare’s intention was to : provid e consume rs w ith the first easy-to-use d igital photography exp e rie nce .. . Digital p hotography is just the first ste p … Peop le n eed to get their pictures to their PCs and the n want to sh are by printing or e-mail. So w e developed a syste m that m ad e the fu ll experie nce as easy as possible. 5 CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE FIGURE 2 Kodak’s EasyShare network: “Your pictures-anytime, anywhere” Phone cam Digital still camera Consumer media Mobile services PC-based, online services Professional printing Retail kiosk printing Home printing Source: Based upon Bob Brust, “Completing the Kodak Transformation;’ Presentation, Eastman Kodak Compa ny, September 2005. © Kodak.Used with permission. Figure 2 shows Kodak’s conceptualization of its EasyShare system. By 2005, most of the main elements of the EasyShare system were in place: • Kodak’s range of EasyShare digital cameras had carved out a strong position in a crowded market. • EasyShare software allowed the downloading, organization , editing, and emailing of images, together with the ordering of online prints. EasyShare software was bundled with Kodak’s cameras as well as being available for downloading for free from Kodak’s website. • The EasyShare printer dock introduced in 2003 was the first printer that incorporated a camera dock allowing the “one touch simple” thermal-dye printing direct from a camera. Antonio Perez’s arrival in 2003 reinforced Kodak’s push into printers: “If a company wants to be a leader in digital imaging, it necessarily has to participate in digital output.”6 • Online digital imaging services: Kodak had been quick to recognize the potential of the internet for allowing consumers to transmit and store their p hotographs and order prints. Kodak’s Picture Network, launched in 1997, allowed consumers to have their conventional photographs digitized by a re tail photo store, then uploaded to a personal internet account on Kodak’s Picture Network. In 1998, Kodak launched its online printing service, PhotoNet, enabling consumers to upload their digital images and order prints. Kodak also partnered with AOL to offer You ‘ve Got Pictures. By acquiring Ofoto in 2001, Kodak became the leader in online photofinishing and online image storage. In January 2005, Kodak renamed Ofoto “Kodak EasyShare Gallery.” By 2005, therefore, Kodak was present across the entire digital value chain- this integrated presence was underpinned by proprietary technology at each of these stages (Figure 3). 417 418 CASES TO CONTEMPORARY STRATEGY ANALYSIS FIGURE 3 Kodak’s technological position within the digital imaging chain • Pioneer in both CCD and CMOS image sensors for digital cameras. Image capture u f- •Technical and market leadership in OLED (organic light emitting diode) screens w hich were displacing liquid crystal displays (LCDs). Image storage • Established presence through floppy disks, 14-inch optical disks, compact disks (Photo-CD), and most recently flash memories. Image manipulation • Kodak had developed algorithms for processing and manipulating digital images that were used by its proprietary software for both commercial and consumer markets. Image transmission • Kodak had algorithms for compressing image files while minimizing image loss. They were used in proprietary systems but had not become industry standards. Image printing Document and image management • Technological strengths in thermal and ink-jet printing and color science. • World leadership in photographic paper and other print media. In commercial sector, Kodak offered systems to store, retrieve, edit, and print text and graphics. In consumer sector, Kodak had built a strong on line presence through Ofoto/ Kodak Gallery allow ing users to archive and organize digital images. H I Professional, Commercial, and Healthcare Markets The commercial and professional markets were important to Kodak for two reasons. First, they were lead customers for many of Kodak’s cutting-edge digital technologies. News photographers were early adopters of digital cameras. The US Department of Defense pioneered digital imaging for satellite imaging, weather forecasting, and surveillance activities. NASA used Kodak cameras and imaging equipment for its space missions and satellites. For commercial applications ranging from real estate brokerage to security systems, digital imaging offered image transmission and linkage with IT management systems for image storage and retrieval. The huge price premium of commercial consumer products made it attractive to focus R&D on these leading-edge users in the anticipation of trickle-down to the consumer market. In commercial printing and publishing (which became the Graphic Communications Group in 2005), Kodak assembled a strong position in commercial scanning, formatting, and printing systems for the publishing, packaging, and data processing industries. Kodak’s opportunity was to exploit the transition from traditional offset printing to digital, full-color, variable printing. This opportunity built on two key strengths: first, Kodak’s proprieta1y inkjet technology (including its technically superior inks) and, second, its leadership in variable-data printing- printing that permitted individually customized output (as in personalized sales catalogues or bills). Kodak built its commercial printing business on both internally developed technologies and acquisitions. These included Heidelberg’s NexPress and Digimaster businesses, and Scitex, supplier of Versamark high-speed inkjet printers. Kodak also built a presence in prepress and workflow systems used by commercial printers. In medical imaging, Kodak faced declining sales of X-ray film and related chemicals and accessories. Through a series of acquisitions and internal developments, Kodak established a portfolio of products for digital X-rays, laser imaging, picture archiving and communications systems- including systems for digitizing and storing conventional X-rays. Kodak also built up a strong position in dental imaging systems comprising hardware, software, and consumables. However, Kodak sold its Health Group to Onex Healthcare Holdings in 2007 for $2.55 billion. CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE Kodak’s capability in creating integrated imaging and information solutions was of particular value in large public sector projects. Kodak’s digital scanning and document management systems were used in national censuses in the United States, the United Kingdom, France, Australia, and Brazil. At the German post office, a Kodak team achieved a world record, creating digitized copies of 1.7 million documents in 24 hours. Hiring, Alliances, and Acquisitions Kodak’s business system had been based upon vertical integration and self-sufficiency: at its Rochester base, Kodak developed its own technology, produced its own products, and supplied them worldwide through its vast global network. In digital imaging, not only did Kodak lack much of the expertise needed to build a digital imaging business, but also the pace of technological change was too rapid to rely on in-house development. Therefore, as Kodak transformed its capability base from chemical to digital imaging, it looked outside for the knowledge it required. Kodak recruited executives and technical specialists it needed for its new digital strategy. Key executives were hired from a variety of technology-intensive companies including Silicon Graphics, IBM, Xerox, Hewlett-Packard, Lexmark, Apple, GE Medical Electronics, Olympus Optical, and Lockheed Martin. Table 1 shows the backgrounds of Kodak’s top management team. TABLE 1 Eastman Kodak’s senior management team, April 2012 Name Position Joined Kodak Robert L. Berman Senior Vice President 1982 Kodak veteran Philip J. Fa raci President and COO 2004 Phogenix Imaging, Gem plus Stephen Green Director, Business Development, Asia-Pacific 200S Creo Inc. Pradeep Jotwan i President, Consumer Business 2010 Hewlett-Packard Brad W. Kruchten President Fil m and Photofi nishing Systems Group 1982 Kodak vetera n Antoinette Mccorvey CFO and Senior Vice President 1999 Monsanto/Solutia Gustavo Oviedo Chief Customer Officer 2006 Schneider Electric Antonio M. Perez Chairman and CEO 2003 Hewlett-Packard Laura G. Quatela General Counsel and Chief Intellectual Property Officer 1999 Clover Capital Management, Inc., SASIB Railway GRS, and Bausch & Lomb Inc. lsidre Rosello General Manager, Digital Printing Solutions 2005 Hewlett-Packard Eric H. Samuels Chief Account ing Officer and Corporate Controller 2004 KPMG, Ernst & Young Patrick M. Sheller Chief Administrative Officer, General Counsel and Secretary 1993 McKenna, Long & Aldridge, Federal Trade Commission Terry R. Taber Vice President 1980 Kodak veteran Note: Includes corporate officers, senior vice presidents, and division heads. Source: www.kodak.com. © Kodak. Used with permission. Prior company experience 419 420 CASES TO CONTEMPORARY STRATEGY ANALYSIS Kodak acknowledged that the digital imaging chain already included companies that were well-established, sometimes dominant, in particular activities. For example, Adobe Systems dominated image-formatting software; Hewlett-Packard, Epson, and Canon were leaders in inkjet printers; and Microsoft dominated PC operating systems. Willy Shih, head of Kodak’s digital imaging products from 1997 to 2003, observed: “We have to pick where we add value and commoditize where we can’t.”7 In many cases, this meant partnering with companies that were already leaders in digital technologies. Kodak forged alliances with Canon, AOL, Intel, Hewlett-Packard, Olympus, and IBM. Kodak made acquisitions where it believed that a strong proprietary position was essential to its strategy and in technologies where it needed to complement its own expertise. Its major acquisitions over the period are shown in Table 2. TABLE 2 Kodak’s major acquisitions, 1994- 2011 Date Company Description 1994 Qualex, Inc. Provider of photo-finish ing services; acquired to complement Kodak’s on line photofinishing service 1997 Wang Laboratories Acq uisition of Wang’s software unit 1997 Chinon Industries Japanese camera producer; majority stake acquired; o utstand ing shares purchased in 2004 1998 Pictu reVision, Inc. Provider of PhotoNet online d ig ital imaging services and retail solutions; com plement to Kodak’s Picture Network business 1998 Shantou Era Photo Mat erial, Xiamen Fuda Photographic Materials Strengthened Kodak’s position in photographic film in China 1999 Imation Supplier of medical imaging products and services 2000 Lum isys, Inc. Provider of desktop computed radiography system s and X-ray fi lm digitizers 2001 Bell & Howell Imaging businesses only acq uired 2001 Ofot o, Inc. Leading US online photofinisher 2001 Encad, Inc. Wide-format commercial inkjet printers 2003 PracticeWorks Digital dental imaging and dental practice management soft ware 2003 Algotec Systems Ltd. Developer of picture archiving syst em s 2003 Lucky Film Co., Ltd. Acqu isition of 20% of China’s leading photographic fi lm supplier 2003 LaserPacific Media Corporation Provider of postproduction services for filmmakers 2004 NexPress Acqu ired Heidelberg’s 50% of th is j oint venture, w hich supplied high-end, on-demand color printing syst ems and black-and-w hite variabledata printing systems 2004 Scitex Digital Printin g A leader in hig h-speed variable data inkjet print ing (renamed Kodak Versa m ark, Inc.) (Continues) CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE TABLE 2 (Continued) Date Company Description 2004 National Semiconductor Acquisition of National’s imaging sensor business 2005 Kodak Polychrome Graphics LLC Kodak acquires Sun Chemical’s 50% stake in the joint venture, w hich is a leader in graphic communication 2005 Creo Inc. Leading supplier of prepress and workflow systems used by commercial printers 2008 Design2Launch Developer of col laborative end-to-end digital workflow solutions for transactiona l printing 2008 lntermate NS Dan ish supplier of Intelligent Print Data Stream software for managing high speed printers 2009 Bowe Bell & Howell Acquisition of document scan ner division 2011 Tokyo Ohka Kogyo Co, Ltd. Acquisition ofTOK’s relief printing plates business Source: Based on Eastman Kodak 10-K reports, various years. Emphasis on Printed Images A consistent feature of Kodak’s digital strategy from 1993 to 2012 was the belief that digital technology would not eliminate printed images. Kodak’s emphasis on printed images was reinforced by its own capabilities: printing photographic and other images onto paper and other media lay at the heart of Kodak’s chemical and chromatic knowhow. When Antonio Perez was appointed CEO in 2005, Kodak’s emphasis on inkjet printers for the consumer market intensified. This reflected Perez’s own background as former head of Hewlett-Packard’s printer division. Yet, even with Kodak’s “treasure trove” of inkjet technologies, establishing Kodak in the mature, intensely-competitive inkjet printer market was a struggle. By 2011 , Kodak held just 6% of the US market, compared to 60% for Hewlett-Packard. Harvesting the Traditional Photography Business Based upon the premise that the transition to digital photography would be gradual, Kodak anticipated that the transition period would allow it to generate cash from its legacy film business while investing in digital imaging technologies and products. Kodak’s prediction was initially correct. Through the 1990s, film sales continued to grow in the United States, reaching a peak of 800 million rolls in 1999. However, by 2004, sales had halved to under 400 million and by 2011 were below 100,000. Kodak’s forecasts proved wrong in relation to emerging markets. Kodak’s acquisitions of Chinese photographic film producers were based on the assumption that sales of roll film in China would continue to increase into the 21st century. In reality, the transition to digital imaging occurred at much the same pace in emerging markets as in the mature industrialized countries. 421 422 CASES TO CONTEMPORARY STRATEGY ANALYSIS Eastman Kodak in 2012 By 201 2, Eastman Kodak’s business was organized around three business segments. Exhibit 1 describes each of these segments. Eastman Kodak’s Business Segments CONSUMER DIGITAL IMAGING GROUP (“CDG”) SEGMENT GRAPHIC COMMUNICATIONS GROUP (“GCG”) SEGMENT CDG’s mission is t o enhance people’s lives and social GCG’s strategy is to transform large graphics markets interact ions t hrough the capabilities of digital imaging with revolutionary technologies and customized ser- and printing tech nology. CDG’s strategy is to drive prof- vices that grow our customers’ busi nesses and Kodak’s itable revenue growth by leveraging a powerful brand, a bu siness w ith them. deep know ledge of the consumer, and extensive digital imaging and materials science intellect ual property. • Prepress Solutions is comprised of digital and t raditional consumab les, including plates, chemist ry, Digital Capture and Devices includes digital st ill ♦ and media, prepress output device equipment and and pocket video ca meras, digital picture frames, related services, and proofing solutions. Prepress accessories, and branded licensed prod ucts. These solut ions also include flexographic packaging solu- products are sold direct ly to ret ailers or dist ributors, t ions, which is one of Kodak’s four digital growt h and are also available to customers through the init iat ive businesses. ♦ Internet . .. As an nounced on February 9, 2012, t he high-vol ume commercial inkjet print ing equipment, devices bu siness . . consumables, and related services, as well as color Retail Systems Solutions’ prod uct and service and black-and-white electrophotographic pri nting offerings to retailers include kiosks and consum- eq uipment. . ables, Adaptive Picture Exchange (“APEX”) drylab ♦ ♦ Digital Printing Solutions includes high-speed, ♦ company p lans to phase out it s dedicated capt ure ♦ The Business Services and Solutions group’s systems and consumables, and after sale service and product and service offeri ngs are composed of support . .. Koda k has t he largest installed base of high-speed product ion and workgroup document retai l photo kiosks in t he world. sca nners, related services, and digita l cont rollers for Consumer Inkjet Systems encompasses Kodak driving digital output devices, and workflow soft- All-in-One desktop inkjet printers, ink ca rtridges, ware and solutions. Workflow software and solut ions, and media.. w hich includes consulting and professional business Consumer Imaging Services: Kodak Gallery is a process services, ca n enable new opportunities for leading online merchandise and photo sharing our customers to transform from a print service pro- service .. vider to a marketing service provider.. CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP (“FPEG”) SEGMENT • photographic paper, photochemicals, professional output systems, and event imaging services. Industrial Materials ♦ FPEG provides consumers, professionals, and the entertain- encompasses aerial and industrial film products, fi lm for the production of ment industry with film and paper for imaging and pho- printed circu it boards, and specialty chemica ls, and tography. Although the markets … are in decline … due represents a key component of FPEG’s strategy to d ig ita l substitution, FPEG maintains leading market of extending and repurposing our materials sci- positions for these products. The strategy of FPEG is to ence assets. provide sustainable cash generation by extending our materials science assets in traditional and new markets. Traditional Photofinishing includes color negative ♦ Film Capture includes consumer and professional photographic film and one-time-use cameras. • Entertaining Imaging includes origination, intermediate, and color print motion picture films, Source: Eastman Kodak 10-K report, 2011 : pp. 5- 8. special effects services, and other digital products Reproduced by permission of Eastman Kodak Company. and services for the entertainment industry. Competition In most of the markets where it competed , Kodak was subject to intense competition. In digital cameras, phones incorporating cameras had decimated all but the quality segment of the market. Online photographic services were also ferociously competitive. Although Kodak’s Gallery was the market leader, it competed with a host of other online competitors, including: Shutterfly, Snapfish , Walmart.com’s Photo Center, Fujifilmnet.com, Yahoo Photos, and Sears.com. Kodak’s highest margins were earned on consumables, notably, photographic paper. However, Kodak faced strong competition, mainly from Xerox, Hewlett-Packard, 3M, and Oji, as well as from many minor brands. Its attempts to differentiate itself through superior technology, particularly in inkjet printing paper, were only partially successful in resisting the tide of commoditization. Across all markets, Kodak suffered from the growing trend for consumers to view their photographs on screens rather than in printed form. In commercial markets, competitive pressures were less severe than in the consumer sector. Also, Kodak has greater opportunity to differentiate its offerings through packaging hardware, software, and services into customized “user solutions.” Kodak’s Resources and Capabilities Digital imaging was a classic “disrnptive technology.”8 For traditional photographic companies, it was “competence destroying” 9- digital technology undermined the usefulness of many of their resources and capabilities. Yet, as late as 2011, Kodak still possessed some potentially valuable resources and capabilities. 423 424 CASES TO CONTEMPORARY STRATEGY ANALYSIS • Brand and distribution: Kodak’s traditional resource strengths had been its brand and its global distribution presence. However, two decades of decline and wrenching technological changes had weakened both. Despite Kodak’s brand recognition, it was unclear whether it added value and market appeal to Kodak’s consumer and commercial products. • Technology: For two decades Kodak had maintained one of the world’s biggest research efforts in imaging. During 2000-2005, its research labs in the United States, the United Kingdom, France, Japan, China, and Australia had employed more than 5000 engineers and scientists, including more than 600 PhDs. Between 1975 and 2011, Kodak had been issued 16,760 patents. Table 3 identifies some of Kodak’s principal areas of technological strength. • New Product Development: Despite Kodak’s strengths in basic and applied research and its long history of successful new product launches, the company had struggled to move away from its traditional long and meticulous product development process to embrace the fast-cycle world of electronics. Table 4 shows financial data for Eastman Kodak, while Table 5 shows data for its business segments. TABLE 3 Kodak’s technical capabilities Area of technology Kodak capabilities Color science Kodak is a leader in the production, cont rol, measure ment, specificat ion, and visual perception of color, essent ial to predicting t he performance of imagecapture devices and imaging system s. Koda k has pioneered colorim etrymeasuring and quantifying visual response to a stimulus of light. Image processing Incl udes technologies to control image sharpness, noise, and color reproduction. It is used to maxi mize the information content of images and to compress data for economica l storage and rapid t ransmission. Kodak is a leader in image processing algorit hms for auto matic color balancing, object and text recognition, and image enhancement and manipulation. These are especially important in digita l photo-finishing for image enhancem ent, incl uding adjustments for scene reflectance, lighting conditio ns, sharpness, and a host of other condit ions. Imaging system s analysis Provides techniq ues to measure the characteristics of imaging system s and components. Predict ive system modeling is especially important in Kodak’s new product development, w here it can predict t he impact of individ ual components on t he performance of the entire system. Sensors A world leader in image sensor techno logy, w ith 30 yea rs’ experience in t he desig n and manufacture of both CCD and CMOS electronic image sensors used in ca meras, machine vision products, and satellite and m edical imaging. In k t echno logy A world leader in dyes and pigment s for color p rinting. Pioneer of micro-milling technology (originally invent ed for drug delivery syst ems). It has adva nced knowledge of humecta nts (which keep print -head nozzles from clogg ing), and surface tension and viscosity modifiers (which contro l ink flows). (Continues) CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE TABLE 3 (Continued) Area of technology Kodak capabilities Inkjet technology Innovations in the electronic and thermal control of inkj et heads coupled w ith innovation in inks have given Kodak technologica l advantages in inkjet pri nting. In commercial printing, Kodak’s continuous inkjet technology has permitted the flexibility of inkjet printing to be matched w ith substantial improvement s in resolution and color fidelity. Microfluid ics Microfluidics, the study of miniature devices that handle very small quantities of liquids, is relevant to fi lm coating, fluid mixing, chemica l sensing, and liquid inkjet printing. Print media A leader in ap plying polymer science and chemica l engineering to ink-receiving materials. Experti se in specially constructed inkjet media in w hich layers of organic/inorganic polymers are coated onto paper or clear film and multilayer coated structures of hydrogels and inorganic oxides. Electronic display technology Through its joint venture with Sanyo, Koda k pioneered organic lig ht-emitting d iode (OLED) technology for self-luminous flat panel displays. Kodak’s OLED display panel s extended from small-screen devices to larger displays. Software EasyShare software focused on ease of image manipulation, printing, and storage (even without a computer). Commercial software leads in workflow solutions (Kodak EMS Business Software), scanning software (Perfect Page), and printing soft ware (Kodak Professional Digital Print Production Software); strengths in control software and printing algorithms that overcome techn ical limitations of inkj et printing and optimize co lor and tone reproduction (e.g., the Kodak One Touch Printing System). Source: Kodak. www.kodak.com. TABLE 4 Eastman Kodak: Selected financial data, 2006- 2011 ($million) 2011 2010 2009 2008 2007 2006 Sales 6022 7167 7609 9416 10,301 10,568 R&D costs 274 318 35 1 478 525 578 Operating ea rn ings (600) (336) (28) (82 1) (230) (476) Interest expense 156 149 119 108 113 172 Net earnings (764) (687) (210) (442) 676 (601) Cash 861 1624 2024 2154 2947 1496 Receivables 1103 1196 1395 1716 1939 2072 Inventories 607 746 679 948 943 1001 Property, plant, and equipment 895 1037 1254 1551 1811 2602 Tota l asset s 4678 6226 7691 9179 13,659 From income statement From balance sheet 14,320 (Continues) 425 4 26 CASES TO CONTEMPORARY STRATEGY ANALYSIS TABLE 4 (Continued) 2011 2010 2009 2008 2007 2006 Current liabil it ies 2150 2820 2896 3438 4446 4554 Long-term borrowings 1363 1195 1129 1252 1289 2714 Postemployment liabilities 3053 2661 2694 2382 3444 3934 Other long-term liabilities 462 625 1005 111 9 1451 1690 Total liabilities 7028 7301 7724 8191 10,630 12,932 Shareholders’ equity (2350) (1075) (33) 988 3029 1388 Net cash from operating activities (998) (219) (136) 168 328 956 Net cash used in investi ng act ivities (25) (112) (22) (188) 2408 (225) Number of employees 17,100 18,800 20,250 24,400 26,900 40,900 From cash flow statement Source: Modified from Eastman Kodak annual reports, 2006-2011 . TABLE 5 Eastman Kodak: Results by business segments, 2007- 2011 ($million) 2011 2010 2009 2008 2007 Consumer Digital Imaging Group 1739 273 1 2626 3088 3247 Film, Photofinishing, and Enterta inment Group 1547 1762 2262 2987 3632 Graphic Communications Group 2736 2674 2718 3334 3413 3 7 9 Net sales from continuing operations All other 6022 7167 7609 9416 10,301 Consumer Digital Imaging Group (349) 278 (10) (1 77) (1 7) Graphic Communications Gro up (191) (95) (107) 31 104 Film, Photofinishing, and Enterta inment Gro up 34 91 187 196 281 (1) (16) (1 7) (25) (506) 273 54 33 343 Consumer Digital Imaging Group 929 11 26 1198 1647 2442 Graphic Communications Gro up 1459 1566 1734 2190 3723 Film, Photofinishing, and Enterta inment Gro up 913 1090 1991 2563 3778 8 17 6408 9960 Consolidated tota l Earnings (losses) from continuing operations before interest and taxes All other Total of segments Segment total assets: All other Total of segments Source: Mod ified from Eastman Kodak 10-K reports. 3301 3782 4923 CASE 8 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE Reflections As Perez reflected upon Kodak’s two decades of digital transformation, he was struck by the paradox of Kodak’s progress. In terms of adapting to a highly disruptive technological revolution, Kodak had been surprisingly successful. For a company that had dominated its traditional market for so long and so thoroughly as Kodak had, to survive the decimation of its core technology, and to build the capabilities needed to become a significant player in a radically different area of technology was unusual. Yet, in terms of financial performance, Kodak had failed. For all of Kodak’s technical and market achievements, Perez and his two predecessors, Dan Carp and George Fisher, had been unable to build a financially viable digital imaging business. Where had they gone wrong? • It was difficult to argue that Kodak had been too slow or that it had failed to recognize the digital threat. As early as 1979 Kodak produced a remarkably accurate forecast of the evolution of digital imaging; in addition, it had been a pioneer of digital cameras. 10 • It was also difficult to argue that Kodak’s failed digital strategy was the result of an inability to develop the capabilities needed to compete in digital imaging. Kodak’s market leadership in digital cameras pointed to its ability to build technological know-how, apply that know-how to develop attractive new products, and market those products in fiercely competitive digital markets. • Perhaps Kodak’s emphasis had been on the wrong markets and wrong products? Kodak’s biggest losses had been in the consumer market-Kodak’s traditional stronghold. Was this market simply too unattractive because of intense competition? Had Perez’s emphasis on printing been misplaced? Might Kodak’s scarce resources been better spent on other parts of the digital value chain (such as image capture through cameras and sensors and displays)? • A further possibility was that Kodak’s vision of establishing itself as a leader in digital imaging was misconceived. In 2000, Kodak had announced its intention to be at the center of the $225 billion “infoimaging” industry. But did this “infoimaging” industry really exist? Or was digital imaging part of the overall computing and communication sector? Finally, Perez wondered as to what lessons could be drawn from the comparative success of Fujifilm. For all of Fuji’s similarities to Kodak, its performance had been radically different: its revenues had grown (in terms of US dollars), and it had been consistently profitable (Exhibit 2). 427 428 CASES TO CONTEMP ORARY STRATEGY ANALYSIS Fujifilm Holdings Corporation 1992 2011 Sales ($million) Net income ($million) Employees Sales ($million) Net income ($million) Employees Fujifilm Holdings• 91 26 593 24,868 27,440 1412 35,274 Eastman Kodakb 20,577 1146 132,600 6022 (764) 17, 100 Notes: “2011 d ata are for financial year to March 31, 2012. b2011 data are for year ended December 31, 2011. Despite the strong similarities between Fujifilm and display materials, graphic arts materials, data storage Kodak- both compa nies were heavily dependent on tapes, industrial X-rays, and optical devices. film during the ea rly 1990s and both had diversified into Document solutions (44.8% of total sa les) comprised other imaging technologies (Fujifi lm had a major posi- office supplies, office printers, and document prod- tion in plain-paper copiers through its Fuji/Xerox joint uct services. venture)- the two companies responded to the digital Fujifilm’s diversification ha s com bin ed se lective revolution w ith different strategies w hich led to very dif- acq uisition s (since 2000, $9 billion has been spent ferent financial results. on 40 acqu isition s) and intern al development based Like Kodak, Fuj ifilm recognized the implications of upon Fujifi lm’s existing technica l capabilities. In digital imaging for its core bu siness and struggled to part icu lar, it ha s built upon its chemical and coatings adapt its strategy. However, a key difference was Fuji’s experti se to diversify into cosmetics, pharmaceuti- recogn ition t hat digital imaging alone would be unlikely ca ls (especia lly drug delivery systems), compo nents to support the business of a large company, hence its for LCD panels, and a variety of plastics prod ucts. The emphasis on diversification. Under its ch ief executive, quest to exploit technical capabilities in “function al Shigetaka Komori, Fujifi lm underwent a major rest ruct ur- compound molecular design, chemica l reactio n con- ing between 2000 and 201 0 (especially during 2005/6 trol, and organic synthesis t ech nologies” resulted and 2009/1 0) involving business closures, employee lay- in severa l discove ries. For exa mple, human skin offs, and fi nancial write-downs. was observed to be similar to photographic fil m: it Comparing Fujifilm and Kodak in 2012, the most contain ed co llagen and was about the sa me th ick- obvious difference is Fujifi lm’s business diversity. Its ness. Fuj ifi lm discovered t hat many of th e antioxi- three business segments comprise a va riety of different dants used to preserve phot ographic film cou ld be businesses: used for skin ca re prod uct s. Imaging solutions (14.8% of total sales) included traditional photo imaging products (photographic paper, film, and supplies) and electronic imaging (mainly digital cameras). Information solutions (40.5% of tota l sa les) included medica l systems, pharmaceuticals, cosmetics, flat panel Sources: Based on Fujifilm. www.fujifilm.com; “The last Kodak moment7” Economist (January 14, 2012); Stefan Kohn, “Disruptive Innovations Applied: A Review of the Imaging Industry;’ http://www.iande.info/wp-content/u ploads/201 1/03/ StefanKohnDisruptivelnnovationsFujifi lm.pdf, accessed September 20, 2012. CASE 8 EASTMAN KODAK’S QUEST F OR A DIGITAL FUTURE Notes 1. “Eastman Kodak Company and its U.S. Subsid iaries Com- me nce Voluntary Chapte r 11 Business Reorganization ,” Press Release (January 19, 2012) . 2. “Kodak’s ew Focus,” Business Week (January 30, 1995) : 62-68. 3. Eastman Kodak Company, “Ko dak Lead e rs O utline Road Ahead to Get Kodak ‘Back on Track’,” Press Release (Novembe r 11, 1997). 4. Eastman Kodak Company, “The Big Picture : Kodak and Digital Photograp hy,” www.Kodak.com/ US/en/corp/ presscente r/ presentations/020520mediaforum3.shtml. Website no longer available . 5. See www.Kodak.com/ US/ en/ corp/ p resscenter/ p resentations/ 020520mediaforu m3.shtml, accessed Octobe r 29, 2009. Website no lo nger ava ilable. 6. “Interview w ith Anto nio Pe rez, President and COO , Kodak,” PMA Mag az ine (Fe brua1y 2004). 7. “Why Kodak Still Isn’t Fixed ,” Fortune (May 11, 1998). 8. J. L. Bower and C. M. Christensen , “Disruptive Technologies: Catching the Wave,” Harvard Business Review (January/February 1995) . 9. M. Tushman and P. Ande rson , “Techno logical Discontinuities and Organizatio nal Environments,” Administrative Science Quar terly 31 (1986): 439-465. 10. An drew Hill of the Financial Times obse rved: “In 1979, the com pany put together a graphic timeline laying out roughly w hen Kodak’s custome rs would ma ke the transitio n to d igita l imaging, starting w ith governme nt clie nts, moving through graphic businesses and end ing , in a bout 2010, w ith reta il consumers. In 1991, the group drew up a digital strategy . . . Even th e pote ntial threat fro m came ra-enable d mob ile p ho nes was ‘war-gamed’ by Kodak executives in the early 2000s.” (“A Victim o f Its Own Success,” Fin ancial Times, April 2, 201 2.) 429
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