Eastman Kodak Company: An Industry and Company Analysis

William DuncanTodd Bailey

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Table of Contents:

Brief History & Introduction…………………………………………………………………………….......3

External Analysis:

Industry Overview…………………………………………………………………….……………4-6

General Environment……………………………………………………………………………..6-7

The Industry Environment: Porter’s Five Forces………………..….………………...7-8

Competitive Groups………………………………………………………………………….…….8-9

Internal Analysis:

Financial Analysis……………………………………………………………………...…………9-10

Tangible & Intangible Resources…………………………………………………….…...10-11

Core Competencies……………………………………………………………………………….…11

SWOT Analysis………………………………………………………………………...…………12-13

Eastman Kodak’s Current Strategies……...…………………………….………………12-14

Major Problems…………………………………………………………………..…………………..15

Future Strategies………………..…………………………………………..…………………..15-16

Bibliography……………………………………………………………………………………………..............17

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Brief History & Introduction:Eastman Kodak Company

At first, photography was a “studio-based activity,” mostly used by

professions, that was transformed by George Eastman into a rapidly growing hobby

that could be consumed by anybody (Grant, 568). The first fully portable camera

and silver halide roll film sparked Kodak to start a company in Rochester, New York

that “offered a full range of products and services for the amateur photographer.

Kodak quickly became a leader in portable photography with “production,

distribution, and processing facilities throughout the world and with one of the

world’s most recognizable brand names” (Grant, 569).

Kodak began to expand its brand by diving into chemicals and healthcare

after the Second World War. The company was aware of emerging technologies and

“as early as 1979 Kodak produced a remarkably accurate forecast of the evolution of

digital imaging and it had been a pioneer of digital cameras” (Grant, 584). In 1980,

Kodak’s R&D launched initiatives which “resulted in products that embodied several

new electronic technologies” (Grant, 569).

From 1993-2012, Kodak has been attempting to transform “from a

traditional photographic company to a leader in the emerging field of digital

imaging” (Grant, 570). During this stretch, Kodak embodied four themes, one of

which most likely being the most detrimental strategy to the business: “harvesting

the traditional photography business” (Grant, 570) and the belief that customers

would be “bewildered by the pace of technological change” (Grant, 572).

Kodak began to analyze their strengths and weaknesses and acknowledged

that other companies had distinct competitive advantages and underwent multiple

mergers and acquisitions to capitalize on their individual capabilities. Currently,

Kodak is a digital imaging company who focuses on mostly imaging for commercial

purposes, for example, 3D printing and motion picture and commercial films but has

entered a bankruptcy plan as of January 2012.

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External AnalysisIndustry Overview

For the purposes of this analysis, Eastman Kodak will be classified under the

Digital Imaging industry, acknowledging that the industry contains sub-industries

that, when combined, place a company in the Digital Imaging industry.

Recent trends have not been friendly to the Digital Imaging industry.

According to Statista.com, digital imaging unit sales in the United States have

incrementally decreased each year since 2010 (Digital Imaging Sales in the United

States 2009-2012 | Statistic).

2009 2010 2011 201244

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46

47

48

49

50

51

52

53

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Total Unit Sales in Millions

Total Unit Sales in Millions

The sales of digital imaging in the United States parallels this trend, peaking

in 2008 and, like many industries due to the economic crisis of 2008, has been

consistently declining to an eight year low of $6,695 million (Digital Imaging: CE-

Sales in the U.S. 2005-2012 | Statistic).

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2005 2006 2007 2008 2009 2010 2011 20120

2000

4000

6000

8000

10000

12000

Sales in Millions US dollars

Sales in Millions US dollars

Technology has allowed the Digital Imaging industry to have many fingers

and uses due to the wide array of applications for digital imaging. Uses range from

personal photography to medical to commercial and film.

The industry and sub-industries are full of “many players, low entry barriers,

falling real prices, and commoditization” (Grant, 580). In the healthcare imaging

market, or diagnostic imaging, which includes digital radiology, “is estimated at $9.7

billion in 2012 and expected to reach $13.3 billion by 2018, at a compound annual

growth rate of 5.4 percent from 2012 to 2018.” North America holds the strongest

segment of this market with about 41.9 percent of the market revenue share in

2012. “However, emerging economies, including China, India, Brazil, and Mexico, are

expected to witness high growth rates in the next six years” (Digital Radiology

Global Market to Reach $13.3 Billion by 2018).

Commercial photography did see positive growth in 2012. According to

Statista.com, revenue of commercial photography in the US grew from $1,532

million in 2011 to $1,699 in 2012 and is forecasted to almost reach $2,000 million in

2020 (Forecast: Commercial Photography Revenue United States 2020 | Statistic).

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2008 2009 2010 2011 20120

200

400

600

800

1000

1200

1400

1600

1800

2000

Revenue of Commercial Photography in the United States

Revenue in millions US Dollars

The General EnvironmentEconomic:

The economic crisis of 2008 has continued to effect domestic and global

markets through 2012.

Technological:

Smartphones are continually increasing putting cameras on phones and

developing the technology for the smartphone cameras. Digital cameras have

become the standard for commercial and personal photography as prices for

cameras continue to fall as technology improves and becomes more available to the

public.

Political/Legal:

Regulations such as the “Toxic substances control act, clean air and water act,

etc. impact the way [the industry] manufactures products and process waste for

proper disposal” (Lan, Tony).

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Socio-cultural:

Smartphones and cameras in smartphones have caused picture-sharing

social media to boom. Facebook, for example, purchased Instagram, in 2012 for $1

billion (Lan, Tony).

The Industry Environment: Porter’s Five Forces

Bargaining Power of Buyers:

The bargaining power of buyers is particularly high, especially regarding

consumer electronics in digital imaging. Demand is extremely volatile while

technology changes can cause well-established subsidiaries like GE’s and Kodak’s

healthcare departments to be sold or shut down (Lan, Tony).

Bargaining Power of Suppliers:

Due to suppliers being located numerously around the world, supplier

power is low. Most raw and finished materials needed for products in this industry

can be commonly found, thus “Kodak has several supplier contracts spanning one to

three years” (Lan, Tony).

Threat of New Entrants:

Research and development of new products and technologies to stay ahead

of such a volatile industry would bring trouble to any new, inexperienced player

looking to enter the industry. Not only that, the high capital needed to enter and

succeed in this industry to purchase “printing equipment such as hardware,

software, photographic paper and chemicals is estimated to be 45.7% of purchases

versus wages at 26.8% of revenue, making the threat of new entrants low, but

possible. (Lan, Tony).

Threat from Substitutes:

There is an extremely high threat from substitutes as the technology in

mobile phones develops faster and faster. Cameras in mobile phones and social

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media sites have almost completely eliminated the need to carry portable cameras

and use image sharing platforms such as Kodak’s Easyshare (Lan, Tony) .

Rivalry from Existing Players:

The rivalry from existing players in the digital imaging industry is also very

high. Just in media sharing, Kodak’s Easyshare, Shutterfly, Snapfish, Walmart.com’s

Photo Center, Fujifilmnet.com Yahoo Photos, and Sears.com all compete with social

media sites like Instagram. Consumables also hold many strong players including

Hewlett-Packard, Xerox, 3M, and Oji (Lan, Tony).

Strategic Groups One thing that is unique about this industry is the wide variety of strategies

used by the companies under this classification. Ultimately, all companies are

science-focused with the application of the sciences being utilized in many forms.

However, companies like Kodak, Fujifilm, and Hewlett-Packard are all focused on

business solutions and products, rather than intensive scientific research. These

companies do not have the strongest scientific research capabilities and know that

companies such as 3M and Xerox have R&D capabilities that affect other industries.

3M and Xerox are examples of the next strategic group. This group is much

more scientific and research based. Companies in this group focus more on creating

technological solutions and improvements. For example 3M has divisions that work

on creating efficient energy, mining, and automotive solutions as well as many more.

Apple, Samsung, and other smartphone producers are a part of the third

strategic group. These companies do not focus on digital imaging; however, with the

new influx of demand for phone cameras and the popularity of photo-sharing social

media outlets, these companies have essentially taken over the portable camera

market. Digital single-lens reflex cameras (DSLR) are not as commonly seen on the

streets as often as one sees people taking pictures on their phone. These companies

are more focused on computer and software than digital imaging solutions.

The difference between the two groups is recognition of capabilities and

competencies. Kodak, for example, has acknowledged that they are inefficient at

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solutions such as in healthcare, which is why they closed a majority of that

department except for imaging products.

Internal Analysis

Financial AnalysisOn January 19, 2012, Eastman Kodak Company had to declare bankruptcy

(“voluntary Chapter 11 business reorganization”) after being a strong competitor in

its industry (18th biggest company by revenues in 1991 and 34th biggest company by

revenues in 2011). The Chapter 11 bankruptcy filing allowed Kodak the freedom to

cut retiree health benefits. However, because the company had to file for

bankruptcy, it could not escape its pension obligations; the UK pension fund

required an additional $800 million top-up. Under the Chapter 11 protection, the

company could not seek new sources of financing so Kodak would be constrained to

strategic initiatives that required additional capital expenditure. By the end of the

first quarter of 2012, Kodak’s financials showed improvements such as Selling,

General and Administrative expenses down $84 million and investment in

unprofitable business were cut, and Kodak’s cash balance was $1.4 billion, up $500

million from the end of 2011 (Grant, 582). Next, we calculated some profitability

ratios for the company to see how they were performing. The first ratio we

calculated was the company’s return on assets, which we calculated it to be around -

16%. Its negative net earnings and its larger amount of total assets caused such a

calculation. Next, we calculated the company’s net profit margin, which we

calculated it to be almost -13% because of its negative net earnings with high sales.

The main financial comparison we can see is the comparison of Eastman

Kodak and Fujifilm Holdings Corporation. Both companies had strong similarities,

but the main difference was how the two companies responded to the digital

revolution with different strategies that led to different financial performances. The

big difference was Fujifilm’s diversity compared to Kodak’s diversity. Fujifilm was

very successful in their transformation; the financial comparison in 1992 and 2011

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between Fujifilm and Eastman Kodak represents Fujifilm’s success. In 1992,

Eastman Kodak had $20,577 million in sales, $1,146 million in net income, and

132,000 employees compared to Fujifilm who had $9,126 million in sales, $593

million in net income, and 24,868 employees. However, in 2011 the two companies

saw different financial performances. In 2011, Eastman Kodak had $6,022 million in

sales, $-764 million in net income, and 17,100 employees compared to Fujifilm who

had $27,440 million in sales, $1,412 million in net income, and 35,274 employees.

The comparison between the two companies proves how one company’s

transformation strategy was better than the other.

Tangible & Intangible ResourcesWhen analyzing the Eastman Kodak’s case, the internal analysis part

required that we distinguish between the company’s tangible and intangible

resources. Our first step was to determine its major tangible resources: property,

plant, and equipment. Because of their recent financial performances, Eastman

Kodak had declared bankruptcy and relied on transformational changes in order for

it to regain its competiveness and performance within its industry. Ending 2011,

Eastman Kodak had $895 million in property, plant, and equipment, a decrease from

2009, its lowest included on the balance sheet since 2006. The decrease in property,

plant, and equipment is a result from its past performances where it totaled $3.8

billion in operating losses during the first decade of this century. In order to

compensate for their financial position, Eastman Kodak had to transform its

business and make cuts and changes, so it can reach its performance and gain a

competitive advantage it once had. Since 2003, the CEO Antonio Perez said that it

has “already effectively exited certain traditional operations, closing 13

manufacturing plants and 130 processing labs, and reducing our workforce by

47,000” (Grant, 568). Other raw materials that make up its tangible resources are

lithographic aluminum which is the primary material used in the manufacture of

offset printing plates, Silver is an essential material used in the manufacture of films

and photographic papers, paper base is an essential material in the manufacture of

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photographic papers, and electronic components that are used in the manufacturing

of commercial printers and other electronic devices (investor.kodak.com).

The next step in our internal analysis of Eastman Kodak was to determine

the intangible resources: technology, skills, brand, and reputation. The original

strength of Kodak’s intangible resources was its brand and global distribution

presence. Kodak’s brand has been its key strength, but the two decades of decline

and technological changes weakened its image. In 2011, MPP Consulting had ranked

Kodak the 77th most valuable US brand. Its distribution presence was unrivalled in

its industry, but it was weakened from decline and technological changes; the

declining demand for printed photographs will weaken its distribution presence.

Another intangible resource is its technology. It maintained being one of the world’s

biggest research efforts in imaging, and, in 2000-2005, Kodak’s research labs in the

US, U.K., France, Japan, China, and Australia had employed over 5,000 engineers and

scientists. Its technological efforts helped issue them 16,760 patents between 1975

and 2011, but the company sought to sell some of the patents in order to help raise

capital (Grant, 581). Lastly, Eastman Kodak’s new product development struggled to

transition into the fast-cycle world of electronics despite its strengths in basic and

applied research and its long history of successful new product launches (Grant,

582).

Core CompetenciesEastman Kodak’s core competencies are fundamental towards their success

and how they promote their business and gain competitive advantages over their

rivals. The main core competency is Kodak’s brand. Even though they took a drastic

financial downturn and had to file bankruptcy, MPP Consulting ranked Eastman

Kodak the 77th most valuable US brand in 2011. The next core competency is its

distribution system for its distribution system was still unrivaled in the industry

(Grant, 581). The use of brand loyalty and its distribution system could have offered

hybrid solutions during the transition period between traditional and digital

imaging (Grant, 581). Lastly, their core competence lies within their R&D for

technology. For two decades, Eastman Kodak had one of the world’s biggest

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research efforts in imaging, and, during 2000-2005, its labs in the US, U.K., France,

Japan, China, and Australia had employed more than 5,000 engineers and scientist

with more than 600 PhDs (Grant, 581).

SWOT AnalysisStrengths:

Eastman Kodak’s strengths help distinguish what competitive advantages it

has over other competitors within its industry. The main strength the company has

is its strong brand name. Even at Eastman Kodak’s weakened state, they are still

ranked in the top 100 for the most valuable US brand name. Next, their vast

distribution system is unrivalled in its industry, but the declining demand for

printed images can depreciate the asset that once was unrivalled. Kodak also has a

strong R&D by focusing on technology. Its research efforts in imaging brings a lot of

capabilities that Eastman Kodak could capitalize. Lastly, their portfolio of

acquisitions and strategic alliances or joint ventures provided balance sheet

strength that meant it was still one of the strongest firms financially in the industry

(Grant, 576).

Weaknesses:

The key weakness to Eastman Kodak was its decision to transform its

capability base from chemical to digital imaging. This ended up being a major

weakness for Eastman Kodak because it required CEO George Fisher to launch a

major hiring campaign to put in place the executives and specialists required for its

new digital strategy. A major problem with the transformation was that Kodak was

entering a new chain of digital imaging that already included well established

companies (Grant, 575). Another weakness was its emphasis on printed images,

Perez’s major investment to build Kodak’s presence in the market for consumer

inkjet printers. This was most widely criticized of all of Kodak’s digital imaging

initiatives because it was trying to establish itself in a very mature, intense

competitive market, and by 2011, Eastman Kodak held only 6% of the US market

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compared to Hewlett-Packard’s 60% market share (Grant, 578). Lastly, the switch

from photography film to digital photos was a questionable decision because they

now are placed in a highly competitive and mature market. The main comparison

we can see is by comparing Kodak with Fujifilm. Like Eastman Kodak, Fujifilm made

major changes to adapt to the emerging markets. Unlike Eastman Kodak, Fujifilm

was very successful with its diversity and enabled it to make selective acquisitions

and its technical capabilities resulted in several discoveries (Grant, 585).

Opportunities:

Eastman Kodak’s opportunities provide insight for what it should do for the

future in order to become competitive once again and bounce back from their poor

financial performances. Opportunities such as continuing research for new

technologies can help Eastman Kodak gain a competitive advantage over rivals in

the industry. It can help the company better meet their customers’ needs and

improve new products allowing them to diversify. Another opportunity would be for

the company to tap into new emerging markets such as Brazil and India.

Threats:

Threats can cause Eastman Kodak and the rest of the industry to fail and have poor

financial performances. In times of recession or poor economic times can cause a

reduction in customers and decrease sales and revenues. Another threat is the

intense competition because rivals within the industry can offer superior products

that could attract customers away from Eastman Kodak. Substitute products such as

the new smartphones can hurt the company from gaining sales and revenues.

Because smartphones are becoming more widely available and more enhanced,

people are able to capture quality images with the smartphone. Lastly, the transition

into digital imaging is a huge threat because they entered a market where they did

not strategize properly, and it drastically hurt their performance.

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Eastman Kodak’s Current StrategiesEastman Kodak’s strategy took a transformational change into digital

imaging. The company developed a strategy to transform Kodak from a traditional

photographic company into a leader in the emerging market of digital imaging. The

fundamental challenges that they faced was the transformation from analogue

technology to digital technology, long design cycle to rapid prototyping, industrial

manufacturing process to flexible manufacturing process, value based on physical

products to value based on solutions, mass-produced and large inventories to just-

in-time and just-in-place inventories, and the transformation of high margins and

heavy infrastructure to lower margins and a lean organization. Their strategy

included 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; and emphasis on printed images; [and] harvesting

the traditional photography business” (Grant, 570). The incremental approach

theme was a hybrid approach where “Kodak introduced those aspects of digital

imaging that could offer truly enhanced functionality for users” (Grant, 571). The

consumer market strategy emphasis was to maintain its position as mass-market

leader by providing simplicity, quality, and value. So, Kodak offered a variety of

services that would allow customers to digitize conventional photographs, edit

images, and obtain printed photographs in an array of formats. In 2001, they

launched Kodak’s EasyShare system (Grant, 572-73). The company’s strategy for

professional and commercial markets was very important because “they were lead

customers for many of Kodak’s cutting-edge digital technologies” (Grant, 574). The

company established a strong position in commercial scanning, formatting, and

printing systems because of its proprietary inkjet technologies and its leadership in

variable-data printing. The hiring, alliances, and acquisitions strategy implemented

by George Fisher was intended to put in place executives and specialists needed for

its new digital strategy. Eastman Kodak faced challenged where it can add value, so

it partnered with companies in leading technologies and made acquisitions where it

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believed was essential to its strategy (Grant, 575-76). Eastman Kodak’s emphasis on

printed images was criticized of all its digital imaging initiatives because it was

entering a highly intense and mature market. Its strategy for harvesting the

traditional photography business was because of its failed future forecasts to

emerging market demand, so it accelerated its withdrawal from the film industry. It

withdrew several film products and other unprofitable markets such as cameras

and its Kodak EasyShare Gallery. Lastly, it had to accelerate its job cutting in order

to accompany its recent financial performances (Grant, 578-79).

Major Problem The main problem for Eastman Kodak was the transformation to digital

imaging with the growing trend for consumers to view their photographs on screen

rather than in printed form. It had invested heavily in building digital capabilities

and launching new products, but it failed miserably to generate income, posing the

main question of what the future holds for Eastman Kodak (Grant, 569).

Future StrategiesWith Eastman Kodak’s recent financial performances being so poor, we hope

our future strategies will help make a turnaround for the company. Our first main

strategy would be to disband the Consumer Digital Imaging Group Segment of

digital capture and devices, but keep its retail systems solutions, consumer inkjet

systems, and consumer imaging services. We recommend they keep these services

around because they have the largest installed base of retail photo kiosks in the

world, their investment in technology provides numerous capabilities for their

inkjet systems, and because they are a leader in online merchandise and photo

sharing service. To go along with their Consumer Group, we recommend they create

an optics division in the Consumables segment. With doing so, we also recommend

they partner with a company such as Ray Ban Sunglasses or Costa del Mar since they

are established as an industry leader in optics and style to help increase consumer

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awareness and increase sales by providing more diversified products to consumers.

It is unreasonable to think that going into the optics industry against such strong,

established competitors would be smart. However, partnering with an established

brand would present opportunities to give those companies a competitive

advantage and sell more products, thus selling more optic glass, and use the optic

company as a platform for advertisement through partnership. Customers who buy

glasses will notice the advantage of glasses with Kodak lenses and be intrigued to

further look into other Kodak consumer products.

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