When Eastman Kodak Company declared bankruptcy (“voluntary Chapter 11 busi- ness reorganization”) on January 19, 2012, CEO Antonio Perez was emphatic that this was not the end of the road for Kodak:

Kodak is taking a significant step toward enabling our enterprise to complete its transformation. . . . We look forward to working with our stakeholders to emerge a lean, world-class, digital imaging and materials science company.1

Yet, despite Perez’s brave words, most observers saw little likelihood that Kodak would emerge as a significant player in the imaging sector. The reality was that after billions of dollars of investment in new technologies and new products, Kodak had failed to build a viable digital imaging business.

Kodak’s strategy of transitioning from traditional photography into digital imaging had been in place for over two decades. 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 new CEO, George Fisher, had declared: “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.

Financial performance was a different story. In 1991, Eastman Kodak was America’s 18th-biggest company by revenues; by 2011, it had fallen to 334th: over the same period its employment had shrunk from 133,200 to 17,100. During 2000–2011 its operating losses totaled $5.2 billion.

As Antonio Perez prepared for his weekly meeting with Kodak’s chief restructur- ing 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 generate income from its efforts? And what did the future hold for Kodak?

Case 12 Eastman Kodak’s Quest for a Digital Future

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Kodak’s History, 1901–1993

George Eastman transformed photography from a professional, studio-based activ- ity 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 advertis- ing slogan. By the time George Eastman died in 1932, Eastman Kodak was one of the world’s leading multinational corporations with production, distribution, and processing facilities throughout the world and with one of the world’s most recog- nizable brand names.

After the Second World War, Kodak entered a new growth phase with an expand- ing core business and diversification into chemicals (its subsidiary, Eastman Chemical, exploited its polymer technology) and healthcare (Eastman Pharmaceutical was established in 1986). Kodak also faced major competitive challenges. In cameras, Kodak’s leadership was undermined by the rise of the Japanese camera industry; in film, Fuji Photo Film Company embarked on a strategy of aggressive interna- tional expansion. In addition, new imaging technologies were emerging: Polaroid pioneered instant photography; Xerox led the new field of electrostatic plain-paper copying; while the advent of the personal computer ushered in new image manage- ment and printing technologies.

Early Moves into Electronics

Kodak’s top management was well aware of technological developments in imaging during the 1980s. Kodak’s R & D resulted in a number of products that embodied new imaging technologies:

● The world’s first megapixel electronic image sensor (1986), 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 (1986).

● Plain-paper office copiers (Kodak acquired IBM’s copier business in 1988).

● The Photo CD system (1990) allowed digitized photographic images to be stored on a compact disk, which could then be viewed and manipulated on a personal computer.

● 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 with the appointment of George Fisher as CEO. Fisher had a doctorate in applied mathematics, ten years

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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 (other than medical imaging) 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 (1993–1999), Dan Carp (2000–2005), and Antonio Perez (2005–2012)—Kodak developed a digital strategy intended to transform Kodak from a traditional photographic company to a leader in the emerg- ing field of digital imaging. The scale and scope of this transformation was clearly recognized by all three CEOs. In 2005, Antonio Perez summarized the “fundamental 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.

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

Figure 1 Eastman Kodak’s “Fundamental Challenges”

The Scope of Transformation

FROM

Analogue technology

Long design cycle

Industrial manufacturing processes

Value based on physical products

Mass-produced, large inventories

High margins, heavy infrastructure

Rapid prototyping

Flexible manufacturing processes

Value based on solutions (product + consumables + services)

Just-in-time, just-in-place, customized

Lower margins, lean organization

Digital technology

Source: Based upon Bob Brust, “Completing the Kodak Transformation,” Presentation, Eastman Kodak Company, September 2005. © Kodak. Used with permission.

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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 abil- ity to build a strong position in digital technology. If photography was to switch rapidly from the traditional chemical-based technology to a wholly digital technol- ogy where customers took digital pictures, downloaded them onto their computers, edited them, and transmitted them through the internet to be viewed electronically, Kodak would face an extremely difficult time. Not only would the new digital value chain make redundant most of Kodak’s core competitive advantages (its silver halide technology and its global network of retail outlets and processing facilities): 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.

Hence, central to Kodak’s strategy, was a hybrid approach where Kodak intro- duced those aspects of digital imaging that could offer truly enhanced func- tionality for users. Thus, in the consumer market, Kodak recognized that image capture would continue to be dominated by traditional film for some time (digi- tal 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 opportu- nity 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 edit and print digital images from a variety of digital inputs, or from digital scans of conventional photo prints. Picture Maker allowed customers to edit their images (zoom, crop, eliminate red-eye, and add text) and print them in a variety of formats. George Fisher emphasized the central role of retail kiosks in Kodak’s digital strategy:

Four years ago, when we talked about the possibilities of digital photography, peo- ple laughed. Today, the high-tech world is stampeding to get a piece of the action, calling digital imaging perhaps the greatest growth opportunity in the computer world. And it may be. We surely see it as the greatest future enabler for people to truly “Take Pictures. Further.” We start at retail, our distribution stronghold . . . We believe the widespread photo-retailing infrastructure will continue to be the principal avenue by which people obtain their pictures. Our strategy is to build on and extend this existing market strength which is available to us, and at the same time be prepared to serve the rapidly growing, but relatively small, pure digital market that is developing. Kodak will network its rapidly expanding installed base of Image Magic stations and kiosks, essentially turning these into nodes on a mas- sive, global network. The company will allow retailers to use these workstations to bring digital capability to the average snapshooter, extending the value of these images for the consumers and retailers alike, while creating a lucrative consumable business for Kodak.3

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Despite growing ownership of inkjet printers, a very large proportion of con- sumers continued to use photo-print facilities in retail stores. By the beginning of 2004, Kodak was the clear leader in self-service digital printing kiosks, with 24,000 installed Kodak Picture Makers in the US and over 55,000 worldwide.

Kodak also used digital technology to enhance the services offered by photofin- ishers. Thus, the Kodak I.Lab system offered a digital infrastructure to photofinish- ers that digitized every film negative and offered better pictures by fixing common problems in consumer photographs.

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 high-priced digital single reflex lens cameras for professional use, Kodak developed the QuickTake camera for Apple: at $75 it was the cheapest digital camera available in 1994. In March 1995, Kodak introduced the first full-featured digital camera priced at under $1,000.

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. Kodak’s incremental strategy was most evident in the consumer market, providing an easy pathway for customers to transition to digital photography while exploiting Kodak’s core brand and distribution strengths. This transition path was guided by Kodak’s original vision of “You push the button, we do the rest.” Kodak envisages itself as the mass-market leader in digital imaging, providing security, reli- ability, and simplicity for customers bewildered by the pace of technological change. Thus, Kodak would offer an array of services that would allow consumers to digitize conventional photographs, edit digitized images, and obtain printed photographs in a variety of formats.

Simplicity and mass-market leadership also implied that Kodak provided the fully integrated set of products and services needed for 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 systems approach rather than a product 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:

provide consumers with the first easy-to-use digital photography experience . . . Digital photography is more than just about digital cameras. This is just the first step . . . People need to get their pictures to their PCs and then want to share by printing or e-mail. So we developed a system that made the full experience as easy as possible.5

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The result would be a comprehensive digital system within which consum- ers could take digital pictures on digital cameras or phone-cameras (or have conventional photographs digitized), view their images on a variety of devices, and print their digital images at home, at retail kiosks, or through Kodak’s online processing service. 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 posi- tion in a crowded market (by 2005 some 40 companies were offering digital cameras).

● EasyShare software allowed the downloading, organization, editing, and emailing of images and 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 which 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 photographs and order prints. Kodak’s Picture Network was launched in 1997. Consumers could have their conventional photographs digitized by a retail photo store, then uploaded to a personal internet account on Kodak’s Picture Network. The following year Kodak launched its online printing ser- vice, PhotoNet, enabling consumers to upload their digital photo files and

Figure 2 Kodak’s EasyShare Network: “Your Pictures—Anytime, Anywhere”

Phone cam

Consumer mediaDigital still camera

Mobile services

PC-based, online services

Home printingRetail kiosk printing

Professional printing

Kodak EasyShare

Gallery

Source: Based upon Bob Brust, “Completing the Kodak Transformation,” Presentation, Eastman Kodak Company, September 2005. © Kodak. Used with permission.

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order prints of them. 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 technological strengths at each of these stages (Figure 3).

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 technolo- gies: 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, including the Mars probe and the IKONOS Earth-orbiting satellite. For many commercial applications ranging from real estate brokerage to security systems, digital imaging offered huge advantages because of its ability to transmit images (especially through the internet) and link with sophisticated IT management systems for image storage and retrieval. The huge price premium of commercial con- sumer products (up to 100 times that of a basic consumer version) 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 commer- cial scanning, formatting, and printing systems for the publishing, packaging, and

Figure 3 Kodak’s technological position within the digital imaging chain

Image capture

Image storage

Image manipulation

Image transmission

Image printing

Document and image

management

In commerical sector, Kodak offered systems to store, retrieve, edit, and print text and graphics. In consumer sector, Kodak had built a strong online presence through Ofoto/Kodak Gallery allowing users to archive and organize digital images.

• Technological strengths in thermal and ink-jet printing and color science.

• Kodak had algorithms for compressing image files while minimizing image loss. They were used in proprietary systems but had not become industry standards.

• Kodak had developed algorithms for processing and manipulating digital images that were used by its proprietary software for both commercial and consumer markets.

• Established presence through floppy disks, 14-inch optical disks, compact disks (Photo-CD), and most recently flash memories.

• Pioneer in both CCD and CMOS image sensors for digital cameras. • Technical and market leadership in OLED (organic light emmitting diode) screens which were displacing liquid crystal displays (LCDs).

• World leadership in photographic paper and other print media.

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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 proprietary 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 inter- nally developed technologies and acquisitions—notably Heidelberg’s Nexpress and Digimaster businesses, and Scitex, supplier of Versamark high-speed inkjet printers. Kodak also built a presence in pre-press and workflow systems used by commercial printers.

In medical imaging, Kodak also faced the decline of its sales of X-ray film and in 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. Kodak sold its Health Group to Onex Healthcare Holdings in 2007 for $2.55 billion.

Kodak’s capability in creating integrated imaging and information solutions was of particular value in certain public sector projects. Kodak’s digital scanning and document management systems were used in national censuses in the US, the UK, 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. Hence, as Kodak transformed its capability base from chemical to digital imaging, it looked outside for the knowledge it required.

Kodak had traditionally been a lifetime-employment company that grew its own senior executives. The arrival of George Fisher from Motorola changed all that. Under Fisher’s leadership Kodak launched a major hiring campaign to put in place the executives and technical specialists it needed for its new digital strategy. Key executives who relocated from Silicon Valley to Rochester included Kodak’s first head of its digital imaging division, Willy Shih, whose prior experience included Silicon Graphics and IBM. Kodak also brought in senior hires from Xerox, Hewlett- Packard, Lexmark, Apple, GE Medical Electronics, Olympus Optical, and Lockheed Martin. Table 1 shows the backgrounds of Kodak’s top management team.

Kodak acknowledged that the digital imaging chain already included companies that were well established, sometimes dominant, in particular activities. For exam- ple, Adobe Systems dominated image-formatting software; Hewlett-Packard, Epson, and Canon were leaders in inkjet printers for home use; 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 The challenge was to identify activities and products where Kodak could add value.

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In many cases this meant partnering with companies that were already leaders in digital technologies and hardware and software products. Kodak forged a web of joint ventures and strategic alliances with Canon (for developing and manufacturing digital, SLR cameras), AOL (You’ve Got Pictures service for uploading, storing, and sharing digital photographs), Intel (development of digital image storage media and ASP system for archiving and downloading medical images), Hewlett-Packard (technology exchange; Phogenix Imaging joint venture to develop inkjet solutions for Kodak photo-finishing labs), Olympus (sharing digital camera technology), Sanyo Electric Co. (joint development of OLED displays), and IBM (manufacturing alliance to produce CMOS imaging sensors).

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. Although Kodak’s profits were under pressure for most of the period, its size and balance-sheet strength meant that it was still one of the financially strongest firms in the industry. The bursting of the stock-market bubble in technology stocks in 2000 allowed Kodak to make a number of key acquisitions for modest outlays. Its major acquisitions over the period are shown in Table 2.

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: the printing of photographic

Table 1 Eastman Kodak’s senior management team, April 2012

Name Position Joined Kodak Prior company experience

Robert L. Berman Senior Vice President 1982 Kodak veteran Philip J. Faraci President and COO 2004 Phogenix Imaging, Gemplus Stephen Green Director, Business Development, Asia-Pacific 2005 Creo Inc. Pradeep Jotwani President, Consumer Business 2010 Hewlett-Packard Brad W. Kruchten President Film and Photofinishing

Systems Group 1982 Kodak veteran

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.

Isidre Rosello General Manager, Digital Printing Solutions 2005 Hewlett-Packard Eric H. Samuels Chief Accounting 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.

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and other images onto paper and other media lay at the heart of Kodak’s traditional chemical and chromatic know-how. Throughout the Fisher/Carp/Perez era, Kodak continued to invest heavily in its printing know-how and in printers: both commer- cial and consumer. Under Perez, the impetus behind photographic printers for the consumer market intensified, reflecting Perez’s own background as former head of Hewlett-Packard’s printer division.

Perez’s decision to make a major investment to build Kodak’s presence in the mar- ket for consumer inkjet printers has been the most widely criticized of all Kodak’s digital imaging initiatives. Even with Kodak’s “treasure trove” of inkjet technologies and its tweaking of the traditional “razors-and-blades” model by charging low prices for ink and higher prices for printers, establishing Kodak in such a mature, intensely

Table 2 Kodak’s major acquisitions, 1994–2011

Date Company Description

1994 Qualex, Inc. Provider of photo-finishing services; acquired to complement Kodak’s online photofinishing service

1997 Wang Laboratories Acquisition of Wang’s software unit 1997 Chinon Industries Japanese camera producer; majority stake acquired; outstanding

shares purchased in 2004 1998 PictureVision, Inc. Provider of PhotoNet online digital imaging services and

retail solutions; complement to Kodak’s Picture Network business 1998 Shantou Era Photo Material, Xiamen

Fuda Photographic Materials Strengthened Kodak’s position in photographic film in China

1999 Imation Supplier of medical imaging products and services 2000 Lumisys, Inc. Provider of desktop computed radiography systems and X-ray film

digitizers 2001 Bell & Howell Imaging businesses only acquired 2001 Ofoto, Inc. Leading US online photofinisher 2001 Encad, Inc. Wide-format commercial inkjet printers 2003 PracticeWorks Digital dental imaging and dental practice management software 2003 Algotec Systems Ltd. Developer of picture archiving systems 2003 Lucky Film Co., Ltd. Acquisition of 20% of China’s leading photographic film supplier 2003 LaserPacific Media Corporation Provider of post-production services for filmmakers 2004 NexPress Acquired Heidelberg’s 50% of this joint venture, which supplied

high-end, on-demand color printing systems and black-and- white variable-data printing systems

2004 Scitex Digital Printing A leader in high-speed variable data inkjet printing (renamed Kodak Versamark, Inc.)

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,

which is a leader in graphic communication 2005 Creo Inc. Leading supplier of pre-press and workflow systems used by com-

mercial printers 2008 Design2Launch Developer of collaborative end-to-end digital workflow solutions

for transactional printing 2008 Intermate A/S Danish supplier of Intelligent Print Data Stream software for man-

aging high speed printers 2009 Böwe Bell & Howell Acquisition of document scanner division 2011 Tokyo Ohka Kogyo Co., Ltd. Acquisition of TOK’s relief printing plates business

Source: Eastman Kodak 10-K reports, various years.

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competitive market would be a struggle. By 2011, Kodak held only 6% of the US market, compared to 60% for Hewlett-Packard.

Harvesting the Traditional Photography Business

On the basis that the transition to digital photography would be gradual, Kodak believed that the transition period would give it the opportunity to generate cash flows from its legacy film business while investing in digital imaging technologies and products. Kodak’s prediction of a gradual transition from film to digital imag- ing was largely correct. Through the 1990s, film sales continued to grow in the US, reaching a peak of 800 million rolls in 1999. However, the decline that began in 2000 accelerated during the first decade of the 21st century. By 2004, sales had halved to under 400 million. By 2011, sales had fallen to below 100,000.

Kodak’s forecasts proved wrong in relation to emerging market demand. Kodak’s acquisitions of Chinese photographic film producers were based on the assumption that sales of roll film 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.

Under Perez, Kodak accelerated its withdrawal from film. During 2011 and 2012, it withdrew several film products, including film for slides. It also withdrew from other unprofitable markets (including cameras) and divested other businesses, including its Kodak EasyShare Gallery to rival Shutterfly. Retrenchment was accompanied by accelerated job cutting.

Eastman Kodak in 2012

Eastman Kodak’s business was organized around three business segments. Exhibit 1 describes each of these segments.

Competition

In most of the markets where it competed, Kodak was subject to intense com- petition: as with most forms of digital hardware, the dominant forces were many players, low entry barriers, falling real prices, and commoditization. In the case of digital cameras, phones incorporating cameras had decimated all but the quality seg- ment of the market. Online photographic services were also ferociously competitive: Kodak’s Gallery was the market leader, but 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. In supplying photo- finishers and commercial printers, Kodak was able to benefit from its leadership in retail kiosks and labs. To fight commoditization in printing paper, Kodak pioneered a number of technical advances, particularly in inkjet printing paper,

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including its Colorlast technology, designed to preserve the fidelity and vibrancy of photographic prints. However, across all markets, Kodak was suffering from the growing trend for consumers to view their photographs on screens rather than in printed form.

In commercial markets, competitive price pressures were less severe than in the consumer sector, in particular the opportunity for Kodak to differentiate its offering through packaging hardware, software, and services into customized “user solutions.”

Kodak’s Resources and Capabilities

Digital imaging was a classic “disruptive technology.”8 For traditional photographic companies it was “competence destroying”9—the new technological regime meant that many of their resources and capabilities became close to useless. For the cam- era companies—Nikon, Canon, Olympus, and Pentax, for example—digital imaging

EXHIBIT 1

Eastman Kodak’s business segments

CONSuMER DIGITAL IMAGING GROuP (“CDG”) SEGMENT

CDG’s mission is to enhance people’s lives and social

interactions through the capabilities of digital imaging

and printing technology. CDG’s strategy is to drive prof-

itable revenue growth by leveraging a powerful brand,

a deep knowledge of the consumer, and extensive dig-

ital imaging and materials science intellectual property.

◆ Digital Capture and Devices includes digital still

and pocket video cameras, digital picture frames,

accessories, and branded licensed products. These

products are sold directly to retailers or distribu-

tors, and are also available to customers through

the Internet . . . As announced on February 9, 2012,

the Company plans to phase out its dedicated cap-

ture devices business. . .

◆ Retail Systems Solutions' product and service

offerings to retailers include kiosks and consum-

ables, Adaptive Picture Exchange (“APEX”) drylab

systems and consumables, and after sale service

and support . . . Kodak has the largest installed base

of retail photo kiosks in the world.

◆ Consumer Inkjet Systems encompasses Kodak

All-in-One desktop inkjet printers, ink cartridges,

and media . . .

◆ Consumer Imaging Services: Kodak Gallery is a

leading online merchandise and photo sharing

service . . .

GRAPHIC COMMuNICATIONS GROuP (“GCG”) SEGMENT

GCG’s strategy is to transform large graphics markets

with revolutionary technologies and customized ser-

vices that grow our customers’ businesses and Kodak’s

business with them.

◆ Prepress Solutions is comprised of digital and tra-

ditional consumables, including plates, chemistry,

and media, prepress output device equipment and

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was not such a threat: digital backs could be added to standard camera archi- tectures; optical capabilities remained important. For the film companies—Kodak, Fujifilm, and Agfa—digital imaging rendered chemical capabilities obsolete. This is why the transition period between traditional and digital imaging was so important for Kodak. During the transition period, Kodak could exploit its brand loyalty and vast distribution system to offer hybrid solutions, while building the resources and capabilities required for digital imaging. The problem for Kodak was that it was now competing with companies that had well-developed microelectronics and software engineering capabilities: Canon, Hewlett-Packard, Sony, Adobe Systems, to mention just a few.

By the time it had entered bankruptcy in January 2012, Kodak was clearly in a weakened state; nevertheless, it had maintained, and accumulated, potentially valu- able resources and capabilities.

● Brand: Kodak’s traditional resource strengths had been its brand and its global distribution presence. Two decades of decline and wrenching

related services, and proofing solutions. Prepress

solutions also include flexographic packaging solu-

tions, which is one of Kodak’s four digital growth

initiative businesses.

◆ Digital Printing Solutions includes high-speed,

high-volume commercial inkjet printing equip-

ment, consumables, and related services, as well

as color and black-and-white electrophotographic

printing equipment . . .

◆ The Business Services and Solutions group’s

product and service offerings are composed of

high-speed production and workgroup document

scanners, related services, and digital controllers for

driving digital output devices, and workflow soft-

ware and solutions. Workflow software and solu-

tions, which includes consulting and professional

business process services, can enable new oppor-

tunities for our customers to transform from a print

service provider to a marketing service provider . . .

FILM, PHOTOFINISHING AND ENTERTAINMENT GROuP (“FPEG”) SEGMENT

FPEG provides consumers, professionals, and the enter-

tainment industry with film and paper for imaging

and photography. Although the markets . . . are in

decline . . . due to digital substitution, FPEG maintains

leading market positions for these products. The strat-

egy of FPEG is to provide sustainable cash generation

by extending our materials science assets in traditional

and new markets.

◆ Entertaining Imaging includes origination, inter-

mediate, and color print motion picture films, spe-

cial effects services, and other digital products and

services for the entertainment industry.

◆ Traditional Photofinishing includes color nega-

tive photographic paper, photochemicals, profes-

sional output systems, and event imaging services.

◆ Industrial Materials encompasses aerial and

industrial film products, film for the production of

printed circuit boards, and specialty chemicals, and

represents a key component of FPEG’s strategy of

extending and repurposing our materials science

assets.

◆ Film Capture includes consumer and professional

photographic film and one-time-use cameras.

Source: Eastman Kodak 10-K report, 2011: pp. 5–8. Reproduced by permission of Eastman Kodak Company.

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570 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

technological changes had weakened both. Yet, as late as 2011, MPP Consulting had ranked Kodak the 77th most valuable US brand. Yet, for all Kodak’s brand recognition, the key issue was the extent to which it added value and market appeal to Kodak’s consumer and commercial products.

● Distribution: Kodak’s distribution presence was still unrivalled in the indus- try. However, as demand for printed photographs declined, so this too was a depreciating asset.

● Technology: For two decades Kodak had maintained one of the world’s big- gest research efforts in imaging. During 2000–2005, its research labs in the US, the UK, 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. During 2011–2012, it sought to sell its patents in order to raise capital. Table 3 identifies some of Kodak’s principal areas of technological strength.

Table 3 Kodak’s technical capabilities

Area of technology Kodak capabilities

Color science Kodak is a leader in the production, control, measurement, specification, and visual perception of color, essential to predicting the performance of image-capture devices and imaging systems. Kodak has pioneered colorimetry—measuring and quantifying visual response to a stimulus of light.

Image processing Includes technologies to control image sharpness, noise, and color reproduc- tion. It is used to maximize the information content of images and to com- press data for economical storage and rapid transmission. Kodak is a leader in image processing algorithms for automatic color balancing, object and text recognition, and image enhancement and manipulation. These are especially important in digital photo-finishing for image enhancement, including adjustments for scene reflectance, lighting conditions, sharpness, and a host of other conditions.

Imaging systems analysis

Provides techniques to measure the characteristics of imaging systems and components. Predictive system modeling is especially important in Kodak’s new product development, where it can predict the impact of individual components on the performance of the entire system.

Sensors A world leader in image sensor technology, with 30 years’ experience in the design and manufacture of both CCD and CMOS electronic image sen- sors used in cameras, machine vision products, and satellite and medical imaging.

Ink technology A world leader in dyes and pigments for color printing. Pioneer of micro-milling technology (originally invented for drug delivery systems). It has advanced knowledge of humectants (which keep print-head nozzles from clogging), and surface tension and viscosity modifiers (which control ink flows).

(continued)

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CASE 12 EASTMAN KODAK’S QuEST FOR A DIGITAL FuTuRE 571

Inkjet technology Innovations in the electronic and thermal control of inkjet heads coupled with innovation in inks have given Kodak technological advantages in ink- jet printing. In commercial printing, Kodak’s continuous inkjet technology has permitted the flexibility of inkjet printing to be matched with substan- tial improvements in resolution and color fidelity.

Microfluidics Microfluidics, the study of miniature devices that handle very small quantities of liquids, is relevant to film coating, fluid mixing, chemical sensing, and liquid inkjet printing.

Print media A leader in applying polymer science and chemical engineering to ink-receiv- ing materials. Expertise in specially constructed inkjet media in which lay- ers of organic/inorganic polymers are coated onto paper or clear film and multi-layer coated structures of hydrogels and inorganic oxides.

Electronic display technology

Through its joint venture with Sanyo, Kodak pioneered organic light-emitting diode (OLED) technology for self-luminous flat panel displays. Kodak’s OLED display panels 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 work- flow solutions (Kodak EMS Business Software), scanning software (Perfect Page), and printing software (Kodak Professional Digital Print Production Software); strengths in control software and printing algorithms that over- come technical limitations of inkjet printing and optimize color and tone reproduction (e.g. the Kodak One Touch Printing System).

Source: www.kodak.com.

Table 3 Kodak’s technical capabilities (Continued)

Area of technology Kodak capabilities

● 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.

● Financial Resources: Chapter 11 had given Kodak freedom from its credi- tors and allowed it to cut retiree health benefits. However, it offered little escape from its pension obligations. While its US pension scheme was judged fully funded, its UK pension fund required an additional $800 million top-up. By the end of the first quarter of 2012, Kodak’s financial position was showing some improvements: with selling, general and administrative expenses down by $84 million and investment in unprofit- able businesses cut, Kodak’s cash balance was $1.4 billion, up $500 mil- lion from the end of 2011. However, under Chapter 11 protection, Kodak would not be able to seek new sources of financing and would be tightly constrained as to any strategic initiatives that required significant capital expenditure.

Table 4 shows financial data for Eastman Kodak, while Table 5 shows data for its business segments.

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572 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Table 4 Eastman Kodak: Selected financial data, 2006–2011 ($million)

2011 2010 2009 2008 2007 2006

From income statement Sales 6,022 7,167 7,609 9,416 10,301 10,568 Cost of goods sold 5,135 5,221 5,850 7,247 7,757 8,159 Selling, general, and admin. 1,159 1,275 1,298 1,606 1,802 1,950 R & D costs 274 318 351 478 525 578 Operating earnings (600) (336) (28) (821) (230) (476) Interest expense 156 149 119 108 113 172 Other income (charges) (2) 26 30 55 86 65 Restructuring costs 121 70 226 140 543 416 Income taxes 9 114 115 (147) (51) 221 Net earnings (764) (687) (210) (442) 676 (601) From balance sheet Total current assets 2,703 3,786 4,303 5,004 6,053 5,557 Including: Cash 861 1,624 2,024 2,154 2,947 1,496 Receivables 1,103 1,196 1,395 1,716 1,939 2,072 Inventories 607 746 679 948 943 1,001 Property, plant, and equipment 895 1,037 1,254 1,551 1,811 2,602 Other long-term assets 803 1,109 1,227 1,728 4,138 3,509 Total assets 4,678 6,226 7,691 9,179 13,659 14,320 Total current liabilities 2,150 2,820 2896 3,438 4,446 4,554 Including: Payables 706 959 2,811 3,267 3,794 3,712 Short-term borrowings 152 50 62 51 308 64 Other liabilities: Long-term borrowings 1,363 1,195 1,129 1,252 1,289 2,714 Post-employment liabilities 3,053 2,661 2,694 2,382 3,444 3,934 Other long-term liabilities 462 625 1,005 1,119 1,451 1,690 Total liabilities 7,028 7,301 7,724 8,191 10,630 12,932 Shareholders’ equity (2350) (1075) (33) 988 ,3029 1,388 From cash flow statement Net cash from operating activities (998) (219) (136) 168 328 956 Net cash used in investing activities (25) (112) (22) (188) 2408 (225) Net cash flows from financing activities 246 (74) 33 (746) (1294) (947) Number of employees 17,100 18,800 20,250 24,400 26,900 40,900

Source: Eastman Kodak annual reports.

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 annihilation 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

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CASE 12 EASTMAN KODAK’S QuEST FOR A DIGITAL FuTuRE 573

Table 5 Eastman Kodak: Results by business segments, 2007–2011 ($million)

2011 2010 2009 2008 2007

Net sales from continuing operations Consumer Digital Imaging Group 1,739 2,731 2,626 3,088 3,247 Film, Photofinishing, and Entertainment Group 1,547 1,762 2,262 2,987 3,632 Graphic Communications Group 2,736 2,674 2,718 3,334 3,413 All other — — 3 7 9 Consolidated total 6,022 7,167 7,609 9,416 10,301 Earnings (losses) from continuing operations before interest and taxes Consumer Digital Imaging Group (349) 278 (10) (177) (17) Graphic Communications Group (191) (95) (107) 31 104 Film, Photofinishing, and Entertainment Group 34 91 187 196 281 All other — (1) (16) (17) (25) Total of segments (506) 273 54 33 343 Segment total assets: Consumer Digital Imaging Group 929 1,126 1,198 1,647 2,442 Graphic Communications Group 1,459 1,566 1,734 2,190 3,723 Film, Photofinishing, and Entertainment Group 913 1,090 1,991 2,563 3,778 All other — 1 — 8 17 Total of segments 3,301 3,782 4,923 6,408 9,960

Source: Eastman Kodak 10-K reports.

technical and market achievements, Perez and his two predecessors, Dan Carp and George Fisher, had been unable to build a financially viable digital imaging busi- ness. 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 and it had been a pio- neer of digital cameras.10

● It was also difficult to argue that Kodak had failed in implementing its digital strategy in terms of being a laggard in developing 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 prod- ucts? Kodak’s biggest losses had been in the consumer market, Kodak’s tradi- tional 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? While some products were spe- cific to digital imaging—editing software such as Adobe’s Photoshop, sensors

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574 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Despite the strong similarities between Fujifilm and

Kodak—both companies were heavily dependent on

film during the early 1990s and both had diversified

into other imaging technologies (Fujifilm had a major

position in plain-paper copiers through its Fuji/Xerox

joint venture)—the two companies responded to the

digital revolution with different strategies which led to

very different financial results.

Like Kodak, Fujifilm recognized the implications

of digital imaging for its core business and struggled

to adapt its strategy. However, a key difference was

Fuji’s recognition that digital imaging alone would be

unlikely to support the business of a large company,

hence its emphasis on diversification. Under its chief

executive, Shigetaka Komori, Fujifilm underwent a

major restructuring between 2000 and 2010 (espe-

cially during 2005/6 and 2009/10) involving business

closures, employee layoffs, and financial write-downs.

Comparing Fujifilm and Kodak in 2012, the most obvi-

ous difference is Fujifilm’s business diversity. Its three busi-

ness segments comprise a variety of different businesses:

Imaging solutions (14.8% of total sales) included tra-

ditional photo imaging products (photographic paper,

film, and supplies) and electronic imaging (mainly digi-

tal cameras).

Information solutions (40.5% of total sales) included

medical systems, pharmaceuticals, cosmetics, flat panel

display materials, graphic arts materials, data storage

tapes, industrial X-rays, and optical devices.

Document solutions (44.8% of total sales) com-

prised office supplies, office printers, and document

product services.

Fujifilm’s diversification has combined selective

acquisitions (since 2000, $9 billion has been spent

on 40 acquisitions) and internal development based

upon Fujifilm’s existing technical capabilities. In par-

ticular, it has built upon its chemical and coatings

expertise to diversify into cosmetics, pharmaceuticals

(especially drug delivery systems), components for

LCD panels, and a variety of plastics products. The

quest to exploit technical capabilities in “functional

compound molecular design, chemical reaction

control, and organic synthesis technologies” resulted

in several discoveries. For example, human skin was

observed to be similar to photographic film: it con-

tained collagen and was about the same thickness.

Fujifilm discovered that many of the antioxidants

used to preserve photographic film could be used for

skin care products.

Sources: www.fujifilm.com; “The last Kodak moment?” Economist, January 14, 2012; Stefan Kohn, “Disruptive innovations applied: A review of the imaging industry,” http://www.iande.info/wp-content/uploads/2011/03/ StefanKohnDisruptiveInnovationsFujifilm.pdf, accessed September 20, 2012.

EXHIBIT 2

Fujifilm Holdings Corporation

1992 2011

Sales ($million)

Net income ($million) Employees

Sales ($million)

Net income ($million) Employees

Fujifilm Holdingsa 9,126 593 24,868 27,440 1,412 35,274 Eastman Kodakb 20,577 1,146 132,600 6,022 (764) 17,100

Notes: a2011 data are for financial year to March 31, 2012. b2011 data are for year ended December 31, 2011.

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CASE 12 EASTMAN KODAK’S QuEST FOR A DIGITAL FuTuRE 575

Notes

1. “Eastman Kodak Company and its U.S. Subsidiaries Commence Voluntary Chapter 11 Business Reorganization,” Press Release ( January 19, 2012).

2. “Kodak’s New Focus,” Business Week ( January 30, 1995): 62–68.

3. Eastman Kodak Company, “Kodak Leaders Outline Road Ahead to get Kodak ‘Back on Track’,” press release (November 11, 1997).

4. Eastman Kodak Company, “The Big Picture: Kodak and Digital Photography,” www.Kodak.com/US/en/corp/ presscenter/presentations/020520mediaforum3.shtml. Website no longer available.

5. See www.Kodak.com/US/en/corp/presscenter/ presentations/020520mediaforum3.shtml, accessed October 29, 2009. Website no longer available.

6. Interview with Antonio Perez, President and COO, Kodak, PMA Magazine (February 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. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly 31 (1986): 439–465.

10. Andrew Hill of the Financial Times observed: “In 1979, the company put together a graphic timeline laying out roughly when Kodak’s customers would make the transition to digital imaging, starting with government clients, moving through graphic businesses and ending, in about 2010, with retail consumers. In 1991, the group drew up a digital strategy . . . Even the potential threat from camera-enabled mobile phones was ‘war-gamed’ by Kodak executives in the early 2000s.” (“A Victim of Its Own Success,” Financial Times, April 2, 2012.)

for image scanning, online imaging archive—for the most part, digital imag- ing was part of the overall computing and communication sector. It com- prised smartphones and tablet computers, broadband services, data storage devices, printers, and social networking services.

Finally, Perez wondered as to what lessons could be drawn from the compara- tive 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).

Perez’s reflections on Kodak’s past were cut short by the arrival of James Mesterharm, from turnaround consultants AlixPartners, who had been appointed Kodak’s chief restructuring officer. Together Perez and Merterham would discuss the implications of Chapter 11 bankruptcy for Kodak’s corporate strategy for 2012 and beyond.

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