Read the Kodak case. Create a PowerPoint to conduct Porter’s Five force analysis. Totally 6 slides. Outline is given under attachment. Follow the outline. Due date is 4/12/2016, 20:00 p
Note: The time period you have to focus is between 1983- 2000 !!!
Below is the case.
In February 2003, Daniel A. Carp, Kodak’s chief executive officer and chairman, was reviewing 2002 data with the company’s senior executives: film sales had dropped 5% from the already weak previous year and revenues were down 3%, sliding to $12.8 billion. The film industry was “under pressure unlike ever before”, and Carp predicted a “fairly long downturn”1 for traditional photography sales as more and more consumers were turning to digital cameras, which did not require film. The company had been investing heavily in digital imaging since the early 1980s, pioneering image-sensor technology in 1986 and entering the market with a variety of products during the 1990s.
In addition, Kodak was moving more of its manufacturing to China, where it could still boast film sales, and was planning to slash 2,200 jobs, or 3% of its work force, especially in the photo-finishing business. The picture for 2003 was not any brighter: Carp expected revenues to grow slightly to $13 billion and net income to be flat or down from the $770 million the company had earned in 2002.
A native of Wytheville, Virginia, Carp had graduated in management from MIT, and had begun his career at Kodak in 1970 as a statistical analyst. Since then he had held a variety of positions, including general manager of sales for Kodak Canada, general manager of the consumer electronics division, general manager of the European, African, and Middle Eastern regions in 1991, and president and chief operating officer in 1997. Carp was finally appointed CEO on January 1, 2000. After more than 30 years at the company, he realized this struggle was one of the toughest in the company’s century-long history. How could he use digital imaging to revitalize Kodak?
Kodak’s early days, 1880-1983
In 1880, after three years of photographic experiments, George Eastman, a young bank clerk, invented and patented a dry-plate formula and a machine for preparing large numbers of plates. In that same year, he leased the third floor of a building on State Street in Rochester, New York, and founded the Eastman Kodak Company. Although the company originally faced economic and technological challenges, it developed its first snapshot camera in 1888 and quickly became an American household name.
In 1904 Eastman articulated the company’s competitive philosophy: “Nothing is more important than the value of our name and the quality it stands for. We must make quality our fighting argument.”2 Based in Rochester, “the Kodak town”, as the first ads stated, the company operated its own laundry service, a bank, a cafeteria, and a blacksmith, among other services. There wasn’t much that Kodak didn’t provide for its employees: indoor golf courses, bowling alleys, and movie theaters. Kodak ran most of these services until the 1980s.3
From the very beginning, the founder of the company realized that success came from a user- friendly product, and, as he succinctly described it, his objective was “to make the camera as convenient as the pencil.”4 Marketing was regarded as an essential tool for the company’s success; film advertisements started as early as 1885. Eastman himself coined the slogan “You press the button, we do the rest” when he introduced the first Kodak camera in 1888. Eastman identified four basic principles for his business: mass production at low cost, international distribution, extensive advertising, and focus on the customer. To these principles he added the policy to foster growth and development through continuous research.
In 1884, Eastman replaced glass photographic plates with a roll of film, expressing a profound belief in “the future of the film business.”5 During the black-and-white film era, Kodak’s leadership stemmed not as much from its technical leadership as from its marketing campaigns and its relationships with retailers (both for shelf space for its film rolls and for photo-finishing with Kodak’s paper). Although some competitors, like Ilford in the United Kingdom, had succeeded in setting new standards of quality during the war years, the perceived quality of the existing products was so high that consumers were not willing to pay for an enhanced product.6
The idea that money came from consumables, not from hardware, emerged early: cameras were relatively cheap and film fueled the company’s growth. Especially with the advent of color film, which required conspicuous investments in R&D, many firms lagged behind. Kodak had been involved with the development of color film since 1921 and had spent over $60 million in research up to 1957, reaching a total of $121 million only on color film research by 1963.7 In addition, Kodak’s photofinishing process had become the industry standard and most rival brands, though of excellent quality when properly processed, tended to fare badly in the typical photo shop.8 From the early 1960s attempts to entry the market had become extremely rare, especially because the film composition’s balance between chemical and physical properties and the know-how embedded in manufacturing made the creation of compatible products a very expensive and risky option.
Over time the belief that all the money came from film led the company to pay little attention to equipment. A Kodak executive commented, “No matter what they said, they were a film company. Equipment was ok as long as it drove consumables. If a camera helped sell more film, Kodak would sell it, but there was little concern about what kind of cameras consumers wanted, or how to make them better.”9
The role played by film was so pivotal that most corporate power centered on Kodak Park’s massive film-making plant, and historically CEOs came out of manufacturing jobs at the Park. They were alike in many ways: most of Kodak’s senior management received the same training, attending MIT’s Sloan School of Business as a sort of finishing academy. Since a mistake in the massive manufacturing process would cost thousands of dollars, and the company’s profitability was steadily more than satisfactory, the company avoided anything risky or innovative and developed a set of “procedures and policies to maintain the status quo.”10
Kodak reached $1 billion in sales in 1962. In the 1960s the company started to introduce new products (126 cameras in 1960s, 110 in the early 1970s) that moved beyond consumer photography to
medical imaging, and graphic arts. Most of these products exploited the traditional silver-halide technology and represented incremental improvements.
In 1969 Polaroid’s basic patents on instant photography expired. Seven years later Kodak announced its first instant camera, and, thanks to its marketing and distribution capabilities, sold 16.5 million instant cameras between 1977 and 1985, severely threatening Polaroid. However, the company was forced to abandon this product line in 1985 because of a patent infringement suit by Polaroid. By 1976 Kodak controlled 90% of the film market and 85% of camera sales in the United States. Kodak’s technological strengths and speed to market precluded the emergence of any serious competitor11. In 1981 Kodak’s sales reached $10 billion, but growth began to decelerate thereafter because of increased competitive pressures, especially from the Japanese Fuji Photo Film Company. For an overview of the film market, see exhibits 1, 2, 3, 4, 5 and 6.
In 1981 Sony Corporation announced its plans to launch Mavica, a filmless digital camera that would display pictures on a television screen. Pictures could then be printed out on paper. Although CEO Colby Chandler contended that people “liked color prints” and that Kodak could quickly come out with its own digital camera, management became concerned over the longevity of silver-halide technology. A company’s executive remembered, “It sent fear through the company.” The reaction was, “Oh, my goodness, photography is dead.”12
Diversification at Kodak, 1983 – 1993
Diversification in other businesses
Between 1983 and 1993 Kodak went through seven restructurings. Kodak acquired IBM’s copier services business; Clinical Diagnostics, which produced in-vitro blood analyzers; Mass Memory, which sold Verbatim floppy disks; and other bioscience and lab research companies. In the late 1980s management looked further afield and chose to acquire Sterling Drug, a pharmaceutical company that sold popular products like Lysol and aspirin. The company believed that the pharmaceutical industry was related to its core “chemical” business: R&D played a pivotal role, and margins were high. Kodak paid $5.1 billion to acquire Sterling, of which $4.4 represented goodwill. Unfortunately, the stock price rose by only 2% from 1987 to 1993, and film market shares sunk by 5% between 1987 and 1992.13
Competition in the core imaging business: Fuji Photo Film Co.
“We were the imaging company of the world. We literally had no competition for so long, management hadn’t become accustomed to it. Historically, if there was a competitor, Kodak would blow them away.”
A former Kodak executive14
Fuji Photo Film Co., headquartered in Tokyo, was founded in 1934 as a comprehensive maker of photographic materials, producing film for movies and other applications, dry plates, and photo printing paper. In the 1960s Fuji started looking for alternatives to the development and production of silver-halide film and established a joint venture with Rank Xerox (Fuji Xerox).15
Fuji entered the U.S. market in 1965 as a private brand supplier. Although the company began to market film under its own brand name in 1972, its strategy consisted of following Kodak rather than attacking it directly. In 1976 Fuji was the first to introduce 400-speed color film, and more and more
photo-finishers switched to its photographic paper and other supplies, which were 20% cheaper than Kodak’s. In a case study of Fuji and the Japanese market, M.F. Winters, a Kodak market analyst, warned senior executives about the company’s eroding market share, but the report was ignored, because “they didn’t believe the American public would buy another film.”16
At the beginning of the 1980s, Fuji had revenues of $2.4 billion, only one-fifth of Kodak’s, but its net income over the previous five years had grown an average of 40% annually, more than twice Kodak’s rate. With a 70% film market share in Japan, Fuji’s other businesses included cameras, carbonless copying paper, copiers, and videotapes. Fuji signaled its ambitions to capture U.S. market share in 1981, when it won the sponsorship as the official film of the 1984 Olympics. Kodak had balked at the cost of officially sponsoring film supplies, and Fuji, taking advantage of the opportunity, boosted its U.S. market share to 12%. Peter Palermo, who was then Kodak’s senior vice president of imaging, observed, “It was December seventh [Pearl Harbor Day] at Kodak.”17
An important element in Fuji’s success was its highly productive research laboratories in Ashigara. In 1986 Fuji began selling a disposable camera, which became a big hit in Japan. Kodak claimed that its labs had already developed similar products early in the 1980s, but the company had failed to patent them, some said because of their inconsistency with the traditional razor-blade model.
By 1985, Fuji’s share of the U.S. market had grown to 11%, while 3M’s Scotch brand had a 3.7% share. New labels, eager to gain a foothold in this highly profitable film market, included Konica, Agfa, dozens of private-label varieties, and Indian, English and Korean brands. Consumers were learning that they could get high-quality pictures with cheaper film (film prices were generally 20% lower than Kodak’s), and retailers devoted more shelf display to private labels since they could make higher margins on their own products. By the end of 1993 the worldwide film market was still dominated by Kodak, but Fuji had gained a 21% market share.
Kodak’s exploration of digital imaging, 1983-1989
In 1983 CEO Colby Chandler created a photographic and information management division to explore new technologies, especially digital imaging. In addition, the company hired John White, who had worked in the upper ranks of the Pentagon before getting into the software business, to push Kodak forward in this exploratory phase. White said:
Kodak wanted to get into the digital business, but they wanted to do it in their own way, from Rochester and largely with their own people. That meant it wasn’t going to work. The difference between their traditional business and digital is so great. The tempo is different. The kind of skills you need are different. Kay [Whitmore, President] and Colby [Chandler, CEO] would tell you they wanted change, but they didn’t want to force the pain on the organization.18
The exploration of a broad range of technologies (e.g., communication, electronics, computer science) responded to the company’s need to shape the new imaging business. The CEO was still foreseeing a silver-halide-based future, but recognized the need to “blend new technologies, to meet the expectations of a growing customer base.”19 The basic idea sounded simple: “anticipate customers’ needs, create the products they want, then market those products better and more cost effectively than anyone else in the industry.” 20 From Chandler’s perspective the new digital world could be overcome by applying the same formula defined by George Eastman at the beginning of the century: focus on the customer, extensive advertising, and mass production at low cost. Still, he conveyed a sense of urgency in formulating his strategy in the 1984 annual report:
Kodak has historically evaluated future needs of a photographic market, conducted research to determine its size and growth potential, designed the goods, created manufacturing capacity and rolled out the new products. Today the pace of change has quickened. One Kodak strategy is to work with other major companies. Another proven Kodak approach is selective acquisition. Kodak is also increasing its involvement with several outstanding universities to conduct joint research in fields such as manufacturing productivity, biotechnology, microelectronics, and integrated circuitry.
In transforming itself, Kodak was abandoning its history as a stronghold of vertical integration. “One of the things we’ve learned is that one company can’t do everything,” Kodak president Kay R. Whitmore said. “We’re prepared to acquire if it fits our strategic plan and gets us there sooner, or gives us a technical capacity we don’t have in-house, or buys a market share that would be hard to build.”21
In the mid-1980s Kodak built a research lab in Japan to study developments in electronics, in particular in digital cameras, because there was “a gut feeling that we ought to have a lab in the heartland of the consumer electronics revolution”, said E.P. Przybylowicz, who operated as chief technical officer at the time. But it soon turned out to be “an impossible situation”: the research lab had been put on a pay-as-you-go basis, and that meant that scientists had to look for financial support from individual business units, rather than from an overall corporate strategy.
The exploration of new technologies led Kodak to develop the 8mm Kodakvision video system together with TDK and Mitsushita; to acquire other companies, like the Datatape division of Bell and Howell, which manufactured high technology analog and digital recording equipment; and to devote internal resources to research. Relative to internal R&D, Chandler’s stated strategy was to “continue support to extensive research in chemistry, optics, and increasingly in electronics.”22 But some executives still found it difficult to believe in something that was not as profitable as traditional film. “We’re moving into an information-based company”, Leo J. Thomas, senior vice president and director of Kodak research, stated, “[but] it’s very hard to find anything [with profit margins] like color photography that is legal.”23
In 1986 Kodak launched the world’s first electronic image sensor with 1.4 million pixels (or picture elements), and the following year the electronic photography division was established. By 1989 Kodak had introduced more than 50 products that involved electronic image capture or conversion, such as printers and scanners (including products like Business Imaging Systems’ Imagelink scanner 9000, Printer Products’ XL 7700 digital continuous tone printer, Copy Products’ Ektaprint 1392 printer, professional Photography’s Premier image enhancement system and Motion Picture and Television’s HDTV projection system). Within the information sector, four centers of excellence were established to develop image acquisition, storage system, software, and printer products. The same year the CEO declared his intent for the company to “be the world’s best in chemical and electronic imaging” by “exploring and defining the best ways to manage the convergence of conventional imaging science with electronics.”24
Although the company had been the first to introduce an image sensor, one of the core elements of a digital camera, the first widely announced digital product was the Photo CD. Kodak wanted to shape the new market creating the “film-based digital imaging.”25
“Film-based digital imaging”, 1990-1993
The Photo CD, developed in collaboration with Phillips, was designed to combine “the best of the photographic medium with the best attributes of electronic imaging.”26 The Photo CD started as a blank compact disc. A roll of film could be taken to a photofinisher, and images, rather than being printed, were then stored on the disc. Images could then be viewed on a TV screen with a special Photo CD player or on a computer screen with a CD-ROM. The project was expected to be a $600 million business by 1997 with $100 million earnings from operations, but there was little evidence that consumers were willing to pay $500 for a player that plugged into a TV, plus $20 per disc27.
From the company’s perspective new products had to rely on a hybrid film/electronic imaging technology because “for the foreseeable future” silver-halide technology was going to provide the highest-quality images attainable at the lowest price. But managing the alliance of chemical-based and electronic image was also a way to maintain leadership by shaping a Kodak-friendly new environment. Kay Whitmore, who had become chief executive officer in 1990, commented, “As this company did with black-and-white and color, we intend to set the standards and lead the way in film-based digital imaging.”28
This blending of digital features and traditional photography allowed film to still play a pivotal role. Kodak planned to sell new hardware products improved by digital features, to license technology to computer manufacturers, to have more prints from discs at photofinishers, and to apply the knowledge acquired in digital imaging to the motion picture business and commercial products. But money still had to come from consumables, that is photographic film and paper, just “adding the flexibility offered by electronics.”29
The first professional digital camera was introduced in 1991, but in Kodak’s Annual Reports, management presented the Photo CD as the company’s innovative offering. Unfortunately, the Photo CD did not prove to be a success: it had been targeted to the wrong market, the consumer segment, even though its invention team had suggested that its real potential lay in the commercial market. Scott Brownstein, who led the Photo CD team, said that senior managers at the time wanted a quick hit and did not “understand our real vision or strategy.”30 Brownstein and his group were looking for alliances with computer companies to make CD-ROMs compatible with the Photo CD, but when senior executives managed to get a meeting with Bill Gates, he remembered the lack of interest of Whitmore, who apparently fell asleep.31 Later, when the Photo CD team managed to deal with the computer companies, they still had problems explaining the details to Whitmore. An industry observer commented:
Kodak’s strategy for digital imaging has been way out of focus for years. Product development was uncoordinated, and marketing was ineffectual. The Photo CD, a compact disc that stores photographs for viewing on TV screens or PC monitors, was a flop as a consumer product. Kodak introduced it in 1992 to consumers who didn’t like the prices: $500 for a player that plugs into a TV, plus $20 per disk. And the computer industry adopted its software algorithms as the standard for manipulating color and images on CD-ROM. How did Kodak miss that? The entire digital revolution has been a trickle-down affair.32
On August 6, 1993, Kodak announced that CEO Kay Whitmore would step down. The members of the board were looking for a chief executive with “exceptional drive and energy” and in late 1993 they selected George M.C. Fisher, former CEO of Motorola. The first outsider ever to run the 116- year-old Kodak, Fisher, after receiving his Ph.D. in applied mathematics, had apprenticed at AT&T’s Bell Labs, where he did work related to photography, such as conveying and compressing images. Fisher believed that Kodak was a company built on “imaging,” not only on film, and that opportunities for growth could come from a focus on the core business and the exploitation of new digital technologies.
Back to the core business
Fisher’s first step was to divest the company’s health segment, with the exception of the health sciences unit, which included mostly X-ray film and other diagnostic imaging hardware and consumables. Kodak sold Sterling Drug, L&F Products, and Clinical Diagnostics in less than eight months, collecting $7.9 billion that it used largely to pay off debt. In December 1993 the company decided to spin off Eastman Chemical, which had been formed in 1920 to supply raw materials for Kodak’s photographic business, but by 1993 only 8% of its sales derived from Kodak. As a result, the balance sheet improved, and S&P’s rating on Kodak’s debt raised from BBB+ to A+. In completing the divesture of the company’s unrelated businesses, Fisher demonstrated his confidence in the future of the imaging segment, after a decade of pessimism. “People began to think electronics was going to take over the photography business. And if you are looking at the world from within the photography business, that would be a very scary event. But the fact of the matter is, I grew up in the electronics business and I looked at the photography and imaging business from the electronics side and it’s not such a scary event. Electronics will add a lot to photography and a lot to imaging.”33
Growing in the film business: Fisher’s legacy in China
Fisher believed that scenarios about the future of silver-halide photography had been too pessimistic and that emerging markets, particularly China, represented an overlooked growth opportunity. He commented, “I think maybe people didn’t properly understand that the world is a lot bigger than the United States and that something fundamental had changed in the last five years. About four billion people are now accessible as a market.”34
Kodak had begun its push into China in 1993, and when Fisher joined Kodak, the company was third in film share and fourth in paper share, with only 30 employees. From his days at Motorola Fisher had established enormous credibility with officials in Beijing: from 1994 to 1997 Kodak negotiated with local officials and in March 1998 finally reached a deal that left Kodak committing $1.2 billion and that led to the creation of two joint ventures with the Chinese government. To improve its cost structure, by 2002 Kodak had moved facilities to China that manufactured digital, conventional, and single-use cameras, kiosks, and mini-labs. In addition to building its manufacturing presence, Kodak focused on creating a network of retail outlets that helped sales of film rolls. By the beginning of 2002 Kodak had 63% of the Chinese retail film market, with 7,000 Kodak Express film stores. An industry expert who toured Kodak’s operations in China in 2000 observed, “Kodak’s China operations represent the best of what an American industrial company can be in the emerging markets, in our opinion. It appears a true jewel for Kodak long term, and one that Mr. Fisher deserves full credit for discovering.”35 Exhibit 19 reports on the company’s retail presence in China.
Digital imaging in Fisher’s era, 1993 – 1997
By the time Fisher arrived at Kodak, the company had already spent $5 billion on digital imaging R&D, but little had emerged from the labs. Product development and sales efforts were scattered over more than a dozen divisions, and at one point the company was engaged in developing 23 different digital scanner projects36. In 1994 Fisher separated the company’s embryonic digital imaging operations from its traditional silver-halide photographic division, and created a digital and applied imaging division, in order to centralize the company’s efforts in the area while building on Kodak’s core capabilities in imaging technology and color science. Carl E. Gustin Jr., formerly with Digital Equipment Corporation and Apple Computer, was appointed general manager, and John Scully, former CEO of Apple Computer, was hired as a marketing and strategy consultant. In February
Fisher appointed Harry Kavetas, a former IBM executive credited with rejuvenating Big Blue’s credit unit, as Kodak’s chief financial officer.
Fisher saw considerable potential in the company’s electronic imaging patent portfolio: he quickly pushed the introduction of the digital print station (a product sold to retailers that allowed customers to digitize their photos and to use them in many ways), new models of digital cameras, and thermal printers and paper to make prints from the cameras once the images were loaded into a personal computer. Fisher was determined to bring to market all those digital programs that had been languishing in the labs:
Mr. Fisher unveiled a huge reorganization that would point Kodak back to the imaging business started by George Eastman in 1880. Yet, instead of dwelling on the future of the silver- halide photographic technology that has made Kodak the world’s biggest photographic company, he talked mainly about digital imaging – a business that makes up a small fraction of Kodak’s sales and has proved a consistent loss-maker.37
When Fisher joined the company he stressed that Kodak would focus on “profitable participation in the five links of the imaging chain: image capture, processing, storage, output, and delivery of images for people and machines anywhere.”38 In particular, Fisher, who had already turned Motorola into one of the world’s finest manufacturers of pagers and cell phones, believed that “Kodak could be successful in the equipment business” because it possessed the capabilities to “do much besides make film.”39 His first step was to re-engineer the company from top to bottom, and “ten teams of senior managers – two of them led by Mr. Fisher – were charged with rethinking everything from product development to how to expand Kodak’s markets:”40
He wanted a 50% reduction in the cost of quality in two years. Each business would be required to calculate its customer satisfaction index and to show improvements. Every division had three years to reduce defects and improve reliability. Cycle times on everything from routine paperwork to manufacturing goods were to be improved by a factor of ten over three years.41
In his early days Fisher spent considerable time in meetings with Bill Gates and other leaders of the computer industry, with the aim of forming alliances and developing new products, because he thought that profitability on the hardware side could only come with the help of the computer and electronics industry. He hoped to “fill in the blanks” of Kodak’s digital product line, which was marked by the initial failure of its consumer Photo CD product and digital camera for professionals, priced at $29,000.42 Fisher believed that to be a winner in digital imaging Kodak had to become a high tech-company: “[Fisher] has devoted substantial energy to making Kodak more like Motorola, capable of producing new state-of-the-art products every few months. Company factories are churning out an impressive array of digital cameras, scanners, and other devices at a breakneck clip.”43
But competition in the market for digital cameras was tough: when Kodak introduced the DC40 in 1995, there were two other models under $1,000, but by 1996 there were 25 different brands in the category. And not all executives believed in Fisher’s new vision of the company. In fact competition from Hewlett Packard, Canon, Fuji and others was not the only difficulty that Fisher had to face. As one industry executive commented:
The old-line manufacturing culture continues to impede Fisher’s efforts to turn Kodak into a high-tech growth company. Fisher has been able to change the culture at the very top. But he hasn’t been able to change the huge mass of middle managers, and they just don’t understand this [digital] world.44
Fisher, who was used to dissent and open discussion in Motorola, where “they argued like cats and dogs, loudly, sometimes”45, realized that Kodak executives tended to be very polite and things looked much easier than they actually were. Kodak’s employees didn’t like confrontations and venerated authority: “It was so hierarchically oriented that everybody looked to the guy above him for what needed to be done.”46 Fisher tried to introduce the Motorola-style of open discussion, but change was difficult. The razor-blade culture in Kodak was so deeply ingrained that even disposable cameras had been considered almost sacrilegious.
At an analysts’ meeting in late 1997, after three quarters of sluggish sales and profits, Fisher admitted that 60% of the company’s losses were “costs linked to digital cameras, scanners, thermal printers, writeable CDs and other products”47 and announced a reversal of his hardware-based digital strategy:
We don’t intend to be in the film business, in the computer business, in the digital imaging business. We’re in the picture business. And our intention is to use whatever technology is available to us to truly help people do more with their pictures. Electronic imaging will not cannibalize film. One of the mistakes we at Kodak have made is that we’ve tried to do it all. We do not have to pursue all aspects of the digital opportunity and we see our opportunity in the output and service side.48
When the new management was brought on 3 years ago, one of its strategies for growth was to focus more on the hardware. This strategy has not been successful, considering the losses on digital cameras. Kodak continues to derive most of its profits from business units where more than 50% of revenue is generated from consumables and where the company has more than 50% market share.49
Toward a fully digital world, 1998 – 2003
Fisher established a new vision for the company’s role in the digital age, a “network and consumables”–based business model:
We see a networked world in making, taking and processing pictures. We will stick ourselves in the middle of that world with services that people are willing to pay for, like creating photo albums online or simply sending photos from point A to point B. Or they’ll use one of our 13,000 kiosks. People without computers can go to a kiosk and send photos halfway around the world. We will always sell fil