Critical Thinking Essay: Industry Evolution and Change

Case 10 Eastman Kodak’s Quest for a Digital Future

On January 19, 2012, the Eastman Kodak Company declared bankruptcy—it entered “voluntary Chapter  11 business reorganization.” Its two-decade journey of transition from traditional photography into digital imaging was effectively over. In 1990, Kodak had launched its Photo CD system for storing photographic images; in 1991, it had intro- duced its rst 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 2004–10; globally, it ranked third after Canon and Sony. It was a technological leader in mega- pixel 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 2000–11, its operating losses totaled $5.2 billion.

As Antonio Perez prepared for his new role under the supervision of Kodak’s chief restructuring of cer, James Mesterharm, he re ected 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 pro t from its efforts? And what could he have done differently to have avoided this fate?

These same questions haunted the CEOs of other companies: if one of America’s most successful companies could be destroyed by new technology, what did the future hold for their own businesses?

Kodak’s History, 1901–93

George Eastman transformed photography from a professional, studio-based activity into an everyday consumer hobby. His key innovations were silver halide roll lm and the rst fully portable camera. The Eastman Kodak Company established in Roches- ter, 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 rst advertising 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 facil- ities throughout the world and with one of the world’s most recognizable brand names.

This case was prepared by Robert M. Grant. ©2019 Robert M. Grant.

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After the Second World War, Kodak entered a new growth phase with an expand- ing core business and diversi cation 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, Japanese companies came to dominate the world market; in lm, Fuji Photo Film Company embarked on an aggressive international expansion. In addition, new imaging technologies were emerging: Polaroid pioneered instant photography; Xerox led the new eld of electrostatic plain-paper copying; while the advent of the personal computer ushered in new image management and printing technologies.

Kodak was alert to the emergence of digital technology and introduced several products that embodied new imaging technologies:

● The world’s rst 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 micro lm images.

● Data storage products included oppy disks (Verbatim was acquired in 1985) and 14-inch optical disks (1986).

● Plain-paper of ce 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 rst 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, 10 years of R  &  D experience at Bell Labs, and had led strategic transformation at Motorola. To focus Kodak’s efforts on the digital challenge, Fisher’s rst moves were to divest East- man Chemical Company and most of Kodak’s healthcare businesses (other than med- ical 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 (1993–99), Dan Carp (2000–05), and Antonio Perez (2005–12)—Kodak developed a digital strategy intended to transform Kodak from a traditional photographic company to a leader in the emerging eld of digital imaging. The scale and scope of this transformation was outlined by Antonio Perez in terms of 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;

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● 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 technology,” declared Fisher in 1995.2 This recognition that digital imaging was an evo- lutionary rather than a revolutionary change would be the key to Kodak’s ability to build a strong position in digital technology. If photography was to switch rapidly from the traditional chemical-based technology to a wholly digital technology where cus- tomers 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 dif cult 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 lm.

Hence, central to Kodak’s strategy, was a hybrid approach where Kodak introduced those aspects of digital imaging that could offer truly enhanced functionality for users. Thus, in the consumer market, Kodak recognized that image capture would continue to be dominated by traditional lm for some time (digital cameras offered inferior res- olution compared with conventional photography). However, digital imaging offered immediate potential for image manipulation and transmission.

If consumers continued to use conventional lm while seeking the advantages of digitization for editing and emailing their pictures, this offered a valuable opportunity

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

TO

FIGURE 1 Eastman Kodak’s “fundamental challenges”

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

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for Kodak’s vast retail network. Kodak had installed its rst 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, people 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 massive, global network. The company will allow retailers to use these workstations to bring digital capability to the average snap- shooter, extending the value of these images for the consumers and retailers alike, while creating a lucrative consumable business for Kodak.3

Despite growing ownership of inkjet printers, a very large proportion of consumers 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 United States and over 55,000 worldwide.

Kodak also used digital technology to enhance the services offered by photo n- ishers. Thus, the Kodak I.Lab system offered a digital infrastructure to photo nishers that digitized every lm negative and offered better pictures by xing common prob- lems 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 re ex 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 rst full-featured digital camera priced at under $1000.

The Consumer Market: Emphasizing Simplicity and Ease of Use

Kodak pursued different approaches to consumer and professional/commercial markets. While the commercial and professional market offered the test-bed for Kodak’s advanced digital technologies, the emphasis in the consumer segment was to main- tain 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 exploit- ing 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 envisaged itself

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as the mass-market leader in digital imaging, providing security, reliability, and sim- plicity for customers bewildered by the pace of technological change.

Simplicity and mass-market leadership 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 lm cameras,” noted Martin Coyne, head of Kodak’s Photographic Group.4 A systems 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 rst easy-to-use digital photography experience … Digital photography is just the rst 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

Figure 2 shows Kodak’s conceptualization of its EasyShare system. By 2005, most of the main elements of the EasyShare system were in place:

● Kodak’s range of EasyShare digital cameras had carved out a strong position in a crowded market.

● EasyShare software allowed the downloading, organization, editing, and email- ing of images and the ordering of online prints. EasyShare software was bun- dled 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 rst printer that incor- porated 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

FIGURE 2 Kodak’s easyShare network: “Your pictures—anytime, anywhere”

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

Phone cam

Consumer mediaDigital still camera

Mobile services

PC-based, online services

Home printingRetail kiosk printing

Professional printing

Kodak EasyShare

Gallery

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into printers: “If a company wants to be a leader in digital imaging, it neces- sarily has to participate in digital output.”6

● Online digital imaging services: Kodak had been quick to recognize the poten- tial of the Internet for allowing consumers to transmit and store their photo- graphs and order prints. Kodak’s Picture Network, launched in 1997, allowed consumers to have their conventional photographs digitized by a retail photo store, then uploaded to a personal Internet account on Kodak’s Picture Net- work. In 1998, Kodak launched its online printing service, PhotoNet, enabling consumers to upload their digital images and order prints. Kodak also part- nered with AOL to offer You’ve Got Pictures. By acquiring Ofoto in 2001, Kodak became the leader in online photo nishing and online image storage. In January 2005, Kodak renamed Ofoto “Kodak EasyShare Gallery.”

By 2005, therefore, Kodak was present across the entire digital value chain—this integrated presence was underpinned by proprietary technology at each of these stages (Figure 3).

Professional, Commercial, and Healthcare Markets

The commercial and professional markets were important to Kodak for two reasons. First, they were lead customers for many of Kodak’s cutting-edge digital technologies: news photographers were early adopters of digital cameras; the US Department of Defense pioneered digital imaging for satellite imaging, weather forecasting, and sur- veillance activities; NASA used Kodak cameras and imaging equipment for its space missions and satellites. For commercial applications ranging from real estate brokerage to security systems, digital imaging offered image transmission and linkage with IT management systems for image storage and retrieval. The huge price premium of commercial consumer products made it attractive to focus R & D on these leading-edge users in the anticipation of trickle-down to the consumer market.

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 commercial sector, Kodak o ered 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 les 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 oppy disks, 14-inch optical disks, compact disks (Photo-CD), and most recently ash memories.

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

• World leadership in photographic paper and other print media.

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In commercial printing and publishing (which became the Graphic Communica- tions Group in 2005), Kodak assembled a strong position in commercial scanning, formatting, and printing systems for the publishing, packaging, and data processing industries. Kodak’s opportunity was to exploit the transition from traditional offset printing to digital, full-color, variable printing. This opportunity built on two key strengths: rst, 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 internally 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 work ow systems used by commercial printers.

In medical imaging, Kodak also faced the decline of its sales of X-ray lm and in related chemicals and accessories. Through a series of acquisitions and internal devel- opments, 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 docu- ment management systems were used in national censuses in the United States, the United Kingdom, France, Australia, and Brazil. At the German post of ce, 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-suf ciency: at its Rochester base, Kodak developed its own technology, produced its own prod- ucts, 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 recruited executives and technical specialists it needed for its new digital strategy. Key executives who relocated from a variety of technology-intensive com- panies including Silicon Graphics, IBM, Xerox, Hewlett-Packard, Lexmark, Apple, GE Medical Electronics, Olympus Optical, and Lockheed Martin. Table 1 shows the back- grounds 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 example, Adobe Systems dominated image-formatting software; Hewlett-Packard, Epson, and Canon were leaders in inkjet printers; and Microsoft dominated PC operating systems. Willy Shih, head of Kodak’s digital imaging products from 1997 to 2003, observed: “We have to pick where we add value and commoditize where we can’t.”7

In many cases, this meant partnering with companies that were already leaders in digital technologies. Kodak forged alliances with Canon, AOL, Intel, Hewlett-Packard, Olympus, and IBM.

Kodak made acquisitions where it believed that a strong proprietary position was essential to its strategy and in technologies where it needed to complement its own expertise. Its major acquisitions over the period are shown in Table 2.

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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 and other images onto paper and other media lay at the heart of Kodak’s traditional chemical and chromatic know-how. Under Perez, the impetus behind photographic printers for the consumer market intensi ed, re ecting Perez’s own background as former head of Hewlett-Packard’s printer division.

This effort to build Kodak’s presence in the market 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 competitive market would be a struggle. By 2011, Kodak held just 6% of the US market, compared to 60% for Hewlett-Packard.

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-Paci c

2005 Creo Inc.

Pradeep Jotwani President, Consumer Business 2010 Hewlett-Packard

Brad W. Kruchten President Film and Photo- nishing Systems Group

1982 Kodak veteran

Antoinette McCorvey

CFO and Senior Vice President 1999 Monsanto/Solutia

Gustavo Oviedo Chief Customer O cer 2006 Schneider Electric

Antonio M. Perez Chairman and CEO 2003 Hewlett-Packard

Laura G. Quatela General Counsel and Chief Intellectual Property O cer

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 O cer and Corporate Controller

2004 KPMG, Ernst & Young

Patrick M. Sheller Chief Administrative O cer, General Counsel and Secretary

1993 McKenna, Long & Aldridge, Federal Trade Commission

Terry R. Taber Vice President 1980 Kodak veteran

Note: Includes corporate o cers, senior vice presidents, and division heads. Source: www.kodak.com. © Kodak. Used with permission.

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TABLE 2 Kodak’s major acquisitions, 1994–2011

Date Company Description

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

1997 Wang Laboratories Acquisition of Wang’s software unit

1997 Chinon Industries Japanese camera producer; majority stake acquired; out- standing shares purchased in 2004

1998 PictureVision, Inc. Provider of PhotoNet online digital imaging services and retail solutions; complement to Kodak’s Picture Net- work business

1998 Shantou Era Photo Material, Xiamen Fuda Photo- graphic Materials

Strengthened Kodak’s position in photographic lm in China

1999 Imation Supplier of medical imaging products and services

2000 Lumisys, Inc. Provider of desktop computed radiography systems and X-ray lm digitizers

2001 Bell & Howell Imaging businesses only acquired

2001 Ofoto, Inc. Leading US online photo nisher

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 lm supplier

2003 LaserPaci c Media Corporation

Provider of postproduction services for lmmakers

2004 NexPress Acquired Heidelberg’s 50% of this joint venture, which sup- plied 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 prepress and work ow systems used by commercial printers

2008 Design2Launch Developer of collaborative end-to-end digital work ow solu- tions for transactional printing

2008 Intermate A/S Danish supplier of Intelligent Print Data Stream software for managing 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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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 ows from its legacy lm business while investing in digital imaging technologies and prod- ucts. Kodak’s prediction was initally correct. Through the 1990s, lm sales continued to grow in the United States, reaching a peak of 800 million rolls in 1999. However, by 2004, sales had halved to under 400 million and by 2011 were below 100,000.

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

During 2011 and 2012, Kodak withdrew several lm products, including lm for slides. It also withdrew from other unpro table markets (including cameras) and sold other businesses, including its Kodak EasyShare Gallery to rival Shutter y.

Eastman Kodak in 2012

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

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 digital

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 distributors,

and are also available to customers through the

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

company plans to phase out its dedicated capture

devices business. . .

◆ Retail Systems Solutions’ product and service o erings 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 . . .

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Competition

In most of the markets where it competed, Kodak was subject to intense competition. In digital cameras, phones incorporating cameras had decimated all but the quality 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: Shutter y, Snap sh, Walmart.com’s Photo Center, Fuji lmnet. com, Yahoo Photos, and Sears.com.

Kodak’s highest margins were earned on consumables, notably photographic paper. However, Kodak faced strong competition, mainly from Xerox, Hewlett-Packard, 3M, and Oji, as well as from many minor brands. Its attempts to differentiate itself through superior technology, particularly in inkjet printing paper, were only partially successful

GRAPHIC COMMUNICATIONS GROUP (“GCG”) SEGMENT

GCG’s strategy is to transform large graphics markets with

revolutionary technologies and customized services 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

related services, and proo ng solutions. Prepress

solutions also include exographic 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 equipment,

consumables, and related services, as well as color

and black-and-white electrophotographic printing

equipment . . .

◆ The Business Services and Solutions group’s prod- uct and service o erings are composed of high-speed

production and workgroup document scanners,

related services, and digital controllers for driving

digital output devices, and work ow software and

solutions. Work ow software and solutions, which

includes consulting and professional business pro-

cess services, can enable new opportunities 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 entertain-

ment industry with lm and paper for imaging and pho-

tography. Although the markets . . . are in decline . . . due to

digital substitution, FPEG maintains leading market posi-

tions for these products. The strategy 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 lms, special

e ects services, and other digital products and ser-

vices for the entertainment industry.

◆ Traditional Photo nishing includes color negative photographic paper, photochemicals, professional

output systems, and event imaging services.

◆ Industrial Materials encompasses aerial and industrial lm products, lm 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 sci-

ence assets.

◆ Film Capture includes consumer and professional photographic lm 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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in resisting the tide of commoditization and, across all markets, Kodak was suffered 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—digital technology undermined the use- fulness of many of their resources and capabilities Yet, as late as 2011, Kodak still pos- sessed some potentially valuable resources and capabilities.

● Brand and distribution: Kodak’s traditional resource strengths had been its brand and its global distribution presence. Two decades of decline and wrench- ing technological changes had weakened both. Despite Kodak’s brand recog- nition, it was unclear whether it added value and market appeal to Kodak’s consumer and commercial products.

● Technology: For two decades Kodak had maintained one of the world’s big- gest research efforts in imaging. During 2000–05, its research labs in the United States, the United Kingdom, France, Japan, China, and Australia had employed more than 5000 engineers and scientists, including more than 600 PhDs. Bet- ween 1975 and 2011, Kodak had been issued 16,760 patents. Table 3 identi es some of Kodak’s principal areas of technological strength.

● New Product Development: Despite Kodak’s strengths in basic and applied research and its long history of successful new product launches, the company had struggled to move away from its traditional long and meticulous product development process to embrace the fast-cycle world of electronics.

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

Re ections

As Perez re ected 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 tech- nological 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 signi cant player in a radically different area of technology was unusual. Yet, in terms of nancial performance, Kodak had failed: for all of Kodak’s technical and market achieve-

ments, Perez and his two predecessors, Dan Carp and George Fisher, had been unable to build a nancially viable digital imaging business. Where had they gone wrong?

● It was dif cult 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

CASE 10 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE 487

TABLE 3 Kodak’s technical capabilities

Area of technology Kodak capabilities

Color science Kodak is a leader in the production, control, measurement, speci cation, 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 reproduction. It is used to maximize the information content of images and to compress 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-

nishing for image enhancement, including adjustments for scene re ectance, lighting conditions, sharpness, and a host of other conditions.

Imaging sys- tems analysis

Provides techniques to measure the characteristics of imaging systems and com- ponents. Predictive system modeling is especially important in Kodak’s new prod- uct 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 sensors used in cam- eras, 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 modi ers (which control ink ows).

Inkjet technology

Innovations in the electronic and thermal control of inkjet heads coupled with innovation in inks have given Kodak technological advantages in inkjet printing. In commercial printing, Kodak’s continuous inkjet technology has permitted the ex- ibility of inkjet printing to be matched with substantial improvements in resolution and color delity.

Micro uidics Micro uidics, the study of miniature devices that handle very small quantities of liquids, is relevant to lm coating, uid mixing, chemical sensing, and liquid ink- jet printing.

Print media A leader in applying polymer science and chemical engineering to ink-receiving materials. Expertise in specially constructed inkjet media in which layers of organic/ inorganic polymers are coated onto paper or clear lm and multilayer coated struc- tures 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 at 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 ow solutions (Kodak EMS Business Software), scanning software (Perfect Page), and printing software (Kodak Professional Digital Print Production Software); strengths in con- trol software and printing algorithms that overcome technical limitations of inkjet printing and optimize color and tone reproduction (e.g., the Kodak One Touch Printing System).

Source: www.kodak.com.

488 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

TABLE 4 Eastman Kodak: Selected nancial data, 2006–2011 ($million)

2011 2010 2009 2008 2007 2006

From income statement

Sales 6022 7167 7609 9416 10,301 10,568

Cost of goods sold 5135 5221 5850 7247 7757 8159

Selling, general, and admin. 1159 1275 1298 1606 1802 1950

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 including 2703 3786 4303 5004 6053 5557

Cash 861 1624 2024 2154 2947 1496

Receivables 1103 1196 1395 1716 1939 2072

Inventories 607 746 679 948 943 1001

Property, plant, and equipment 895 1037 1254 1551 1811 2602

Other long-term assets 803 1109 1227 1728 4138 3509

Total assets 4678 6226 7691 9179 13,659 14,320

Total current liabilities including 2150 2820 2896 3438 4446 4554

Payables 706 959 2811 3267 3794 3712

Short-term borrowings other liabilities 152 50 62 51 308 64

Long-term borrowings 1363 1195 1129 1252 1289 2714

Postemployment liabilities 3053 2661 2694 2382 3444 3934

Other long-term liabilities 462 625 1005 1119 1451 1690

Total liabilities 7028 7301 7724 8191 10,630 12,932

Shareholders’ equity (2350) (1075) (33) 988 3029 1388

From cash ow 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 ows from nancing 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.

CASE 10 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE 489

accurate forecast of the evolution of digital imaging and it had been a pioneer of digital cameras.10

● It was also dif cult 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 ercely competi- tive 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 inten- tion to be at the center of the $225 billion “infoimaging” industry. But did this

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 1739 2731 2626 3088 3247

Film, Photo nishing, and Entertainment Group 1547 1762 2262 2987 3632

Graphic Communications Group 2736 2674 2718 3334 3413

All other — — 3 7 9

Consolidated total 6022 7167 7609 9416 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, Photo nishing, 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 1126 1198 1647 2442

Graphic Communications Group 1459 1566 1734 2190 3723

Film, Photo nishing, and Entertainment Group 913 1090 1991 2563 3778

All other — 1 — 8 17

Total of segments 3301 3782 4923 6408 9960

Source: Eastman Kodak 10-K reports.

490 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

“infoimaging” industry really exist? Or was digital imaging part of the overall computing and communication sector?

Finally, Perez wondered as to what lessons could be drawn from the comparative success of Fuji lm. For all of Fuji’s similarities to Kodak, its performance had been rad- ically different: its revenues had grown (in terms of US dollars), and it had been con- sistently pro table (Exhibit 2).

EXHIBIT 2

Fuji lm Holdings Corporation

1992 2011

Sales ($million)

Net income ($million) Employees

Sales ($million)

Net income ($million) Employees

Fuji lm Holdingsa 9126 593 24,868 27,440 1412 35,274

Eastman Kodakb 20,577 1146 132,600 6022 (764) 17,100

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

Despite the strong similarities between Fuji lm and

Kodak—both companies were heavily dependent on

lm during the early 1990s and both had diversi ed into

other imaging technologies (Fuji lm had a major posi-

tion in plain-paper copiers through its Fuji/Xerox joint

venture)—the two companies responded to the digital

revolution with di erent strategies which led to very dif-

ferent nancial results.

Like Kodak, Fuji lm recognized the implications of

digital imaging for its core business and struggled to

adapt its strategy. However, a key di erence was Fuji’s

recognition that digital imaging alone would be unlikely

to support the business of a large company, hence its

emphasis on diversi cation. Under its chief executive,

Shigetaka Komori, Fuji lm underwent a major restructur-

ing between 2000 and 2010 (especially during 2005/6

and 2009/10) involving business closures, employee lay-

o s, and nancial write-downs.

Comparing Fuji lm and Kodak in 2012, the most

obvious di erence is Fuji lm’s business diversity. Its

three business segments comprise a variety of di erent

businesses:

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

ditional photo imaging products (photographic paper,

lm, and supplies) and electronic imaging (mainly

digital cameras).

Information solutions (40.5% of total sales) included

medical systems, pharmaceuticals, cosmetics, at panel

display materials, graphic arts materials, data storage

tapes, industrial X-rays, and optical devices.

Document solutions (44.8% of total sales) comprised

o ce supplies, o ce printers, and document prod-

uct services.

Fuji lm’s diversi cation has combined selective

acquisitions (since 2000, $9 billion has been spent on

40 acquisitions) and internal development based upon

CASE 10 EASTMAN KODAK’S QUEST FOR A DIGITAL FUTURE 491

Fuji lm’s existing technical capabilities. In particular, it has

built upon its chemical and coatings expertise to diver-

sify 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 tech-

nologies” resulted in several discoveries. For example,

human skin was observed to be similar to photographic

lm: it contained collagen and was about the same thick-

ness. Fuji lm discovered that many of the antioxidants

used to preserve photographic lm could be used for

skin care products.

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

Notes

1. “Eastman Kodak Company and its U.S. Subsidiaries Com- mence 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 Technol-

ogies: Catching the Wave,” Harvard Business Review ( January/February 1995).

9. M. Tushman, and P. Anderson, “Technological Disconti- nuities 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 Suc- cess,” Financial Times, April 2, 2012.)