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CASE ANALYSIS: Eastman Kodak Company

Sara Seed
March 2, 2006
BUSA 499: Strategic Management
Pacific Lutheran University
Dr. Pham
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CASE ANALYSIS: Eastman Kodak Company

Executive Summary

The purpose of this report is to analyze the strategic position of Eastman Kodak
Company (Kodak) and discern any sustainable competitive advantages held by the company.
Beginning with a discussion of Kodak’s industry and commentary on the political, economic,
social, and technological environment in which the company operates, the report then narrows to
focus on Michael Porter’s Five Forces: barriers to entry, threat of suppliers, threat of buyers,
threat of substitutes, and rivals. Once a thorough analysis of the industry and its environment is
complete, it is necessary to detail Kodak’s value chain and identify resources and capabilities
specific to the firm. Finally, these core competencies are subjected to a VRIO analysis to
determine if they are valuable, rare, and not easily imitable. If the Kodak has the organization in
place to utilize these resources and capabilities, they have a sustainable competitive advantage.

The Company

Kodak Company was founded in 1880 in Rochester, New York and engages in the
imaging technology industry. The company operates in four segments: Digital and Film Imaging
Systems, Health, Commercial Imaging, and Graphic Communications. For most of its history,
Kodak focused on film technology and became a world leader in film and film camera sales. In
the mid-1970s, Kodak controlled 90% of the film market. With the advent of and increasing
demand for digital imaging technology throughout the 1990s and early 2000s, Kodak faced
declining demand for its film products and decreasing market share in the overall camera market.

Industry

Yahoo! Finance lists Kodak in the “photographic equipment and supplies” industry.
Kodak is the second-largest player in this industry, with a market capitalization of $8.1 billion,
behind Canon ($58.4 billion); however, Kodak competes with other companies not categorized
in this sector, such as Sony and Hewlett Packard.
Kodak’s 2004 annual report defines the industry as “imaging technology,” which is a
broader, more ambiguous phrase, but it more accurately depicts the field on which Kodak
competes. The industry is no longer defined by who can provide the best equipment or supplies.
Instead the industry is defined by who has the newest and most innovative technology. It is
important for Kodak to view itself as a player in the imaging technology business rather than
simply photography. As discussed in the technology section of the following P.E.S.T. (political,
economic, social, and technological environment) analysis, digital imaging is seeing growth in
areas that traditional photography (point-and-shoot film photography with little versatility) never
could have entered. Kodak is in the business of developing, producing, and selling imaging
technology in whatever form it requires.
While Kodak and its competitors operate worldwide, this report will focus on trends in
the digital camera market United States. The company operates in several businesses outside the
digital camera market, which will be discussed as pertinent to the analysis, but the case focuses
specifically on digital cameras. Furthermore some discussion of international opportunities and
markets is necessary, yet a full analysis of Kodak in a global context is beyond the scope of this
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report. Instead, the focus will remain on the political, economic, social, and technological
environment of the U.S..

P.E.S.T Analysis

Political Environment
There are two major issues in the political environment of the United States that directly
affect the market for image technology products. While there are likely numerous political
issues that could affect Kodak’s business, patent infringement and privacy are two that
continuously lead headlines.
As technological advancements are made at faster rates, Kodak is faced with an
increasing likelihood of involvement in patent infringement suits. Technologies build upon each
other, and Kodak may find itself using other company’s technology or vice versa. Furthermore,
with the high rate of advancement and large research and development budgets of Kodak and its
competitors, it is possible that competing companies may develop the same technology
independent of each other. This could lead to patent infringement issues depending on when
products are released and how dependant products are on a particular technological
advancement. Kodak and Sony were involved in patent infringement suits with each other that
could result in payments of hefty licensing fees for either company.
Privacy also becomes a prominent political issue as digital technology becomes smaller
and more compatible with unrelated equipment already in everyday use. For example, cameras
embedded in cellular phones have been used to take pictures underneath women’s skirts on
crowded public streets. Phones with cameras are often not allowed in defense facilities or
companies that protect extensive research and development with high security. Also, digital
imaging allows large-scale distribution of images that was not possible by the average consumer
as little as 15 years ago. As privacy laws are continually established and redefined in the age of
the internet, Kodak must evaluate the implications of how consumers make use of their products.

Economic Environment
From an economic perspective, Kodak’s products are used both as consumer and
industrial goods, and this distinction is important to keep in mind when looking that the impact
of various external factors on Kodak’s sales. Pocket digital cameras are ultimately purchased by
individual consumers (from retailers), but health imaging systems or scanning equipment are
capital investments for businesses.
It is possible to make broad generalizations about the impact of various economic factors
on Kodak’s business, but one must also be conscious of how such factors may affect certain parts
of the business differently. The distinctions become most evident in a discussion of inflation and
interest rates. For consumers, cameras are a luxury item. Increasing inflation and interest rates
cut into disposable income, and consumers may curb spending if the Fed continues to see
inflation as a threat and raises short-term interest rates. Current discussion in the press hints that
the Fed has reached a stopping point in rate hikes, and consumer spending numbers have been
strong. However, if high oil prices continue long term, consumers may be forced to spend less of
their disposable income, which could negatively impact camera sales. This trend could also
affect spending in the industrial segment as well. Companies make capital expenditures on
borrowed funds. While interest rates (the cost of borrowing) are still historically low, increasing
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rates may encourage companies to postpone expenditures. Kodak may see a slowdown in sales
growth in the heath imaging segment for example, if this were the case.
An important trend in consumer spending that will affect Kodak is the decreasing growth
of film sales. Film photography is projected to be obsolete by 2008. Kodak’s current strategy
has been to invest revenues from film sales into development of digital products; however, as
film sales slow, Kodak will need to finance digital research and development from other areas.
Another implication of declining film sales is its effect on the Kodak brand name. Kodak was
recognized throughout its history as a leader in film engineering and processing, but this brand
identity will need to carry over to Kodak’s digital products to be successful.
Also, Kodak is facing changes in the economic strengths of its competitors. Larger
consumer electronics manufacturers operate on smaller margins (5%-10%) thank Kodak (30%)
typically did. The digital age has now forced Kodak to compete with these electronics
manufacturers (who weren’t necessarily in the film market). Kodak will face stiffer price
competition against companies who are able to operate on smaller margins than Kodak is used
to.
Finally, while this analysis focuses on the U.S. market, Kodak sells product worldwide
and thus some discussion of economic trends in an international context is necessary. Kodak’s
sales abroad are highly sensitive to the strength of the U.S. dollar. Management cites a weak
U.S. dollar as the primary reason for the sales increase in 2004. It is important here to realize
that recent sales growth reported by Kodak isn’t necessarily attributable to increasing demand.
By contrast, Kodak has potential to see growth in emerging economies. China and Russia are
two large markets in particular who are experiencing growth in disposable income. However,
these markets likely contain entry-level camera users, and the countries may not have the
infrastructure in place (i.e. personal computers for digital-sharing and in-store photo
development kiosks) to fully utilize Kodak products. While the level of demand for Kodak
products in these economies may or may not be robust, they certainly offer areas of expansion
for digital imaging products.

Social Environment
One of the largest social trends in recent years has been the growth of internet
communities. Sites such as mySpace and facebook.com link millions of members to each other.
Users create profiles, leave messages for each other, and host blogs and discussions. These
communities have extensive photo-sharing capabilities where users can upload photos to share
with their friends, decreasing the need for photo-developing.

Technological Environment
The technological environment within which Kodak operates is subject to continuous
innovation at an increasing pace. Part of this increasing amount of technological innovation has
been fueled by a desire for compatibility and “do-it-all” devices. Consumers want their cell
phones, personal computers, laptops, televisions, cameras, and mp3 players to all work with each
other. Not only must all of these devices be compatible with each other, but some of them must
be combined. Cell phones can take pictures, send emails, and store music, and still be plugged
into a personal computer or laptop. These devices are highly portable as well. The days of
lugging heavy camera equipment are over. A pocket-sized digital camera is lightweight and
offers the same quality as expensive 35mm cameras in their heyday.
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With the trend toward integration and portability, we have seen growth of photo
processing at in-store kiosks. The total number of prints has remained stagnant over the past six
years; traditional prints have declined while the number of digital prints has risen. This shows
that demand for printed photos has not fallen; it is just of a different kind. Today, customers can
transport memory cards holding hundreds of pictures to their local supermarket or drugstore and
edit and develop pictures in less than five minutes. The number of prints made at home peaked
in 2005 and is projected to fall in 2006, while the number of prints made at retailers in 2006 will
nearly double.
With the rapid development of new technology comes a need to replace cameras
periodically. Consumer electronics can become obsolete before the customer carries them out of
the store. A 1.3 mega pixel camera may have been top-of-the-line in 2002, but today you can’t
find one on a Best Buy shelf. If the rate of technological innovation continues, Kodak could
expect a comparable growth rate in sales of new products. However, if the rate of innovation
slows, consumers will be able to hold on to older models for longer periods of time and still be
using “recent” technology.

Michael Porter’s Five Forces

Barriers to Entry
The substantial barrier to entry in the imaging technology market is brand recognition.
An entry level digital camera is priced around $170. With the added cost of a memory card and
any warranties, consumers can expect to pay at least $250 for a beginner camera. Consumers are
unlikely to try new brands of a relatively expensive product without some knowledge of the
company’s reputation. Current players in the market (Kodak, Nikon, Canon, Olympus, Sony,
etc.) are highly recognizable and have established quality products. This strong brand
recognition and loyalty make it unlikely that new entrants could rapidly gain market share.

Suppliers
Kodak does not likely face significant risk from suppliers of materials to its industry.
The raw materials for digital cameras include plastic, metal, microchips, etc.. Companies
providing these materials have become specialized in their production and distribution. Any
forward integration on the part of suppliers would involve a substantial change in business focus.
The imaging technology industry, as discussed earlier changes rapidly and requires extensive
research and development—an area that would represent a stark change for Kodak’s raw
material suppliers.
Highly specialized labor also supplies Kodak’s industry. While Kodak requires a certain
amount of manual labor for assembly of products, the company must also rely on technological
innovation to continue to develop new products. The company must be able to attract bright and
talented individuals away from competitors to develop and market products. Kodak’s history of
layoff and reorganizations may tend to deter new hires, or result in the loss of valuable
employees who search job security elsewhere. In this way, labor poses a threat to Kodak, in the
sense that the company must attract and retain good employees.

Buyers
The ultimate consumers of Kodak products are individual citizens and businesses making
capital investments. Kodak principally markets to the end consumer, but sales are actually made
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to retailers. Consumers purchase digital cameras and related products through retailers such as
Best Buy, Wal-Mart, Target, and Circuit City, who have considerable control over sales of
Kodak products. Salespeople in stores direct consumers to particular cameras, which may or
may not be Kodak products. Retailers also choose which products to run sales on and how to
arrange displays in their stores. Furthermore, retailers can add value to the product through the
sale of store warranties, adding even more control over how the entire product package is
conveyed and marketed at the point of sale to the consumer.
Kodak also manufactures and sells photo-finishing kiosks to department stores,
drugstores, grocery stores, supermarkets and similar facilities. The buyer also has the power
here. Stores typically will not display kiosks from several competing brands—the space simply
is not available. Kodak must sell and these kiosks to retailers, which may ultimately compete
with the retailer’s in-house photo-processing business. However, the buyer has the power here
as well, because they choose whether or not to invest in Kodak kiosks for their stores.
Finally, businesses investing in capital goods represent buyers of Kodak products.
Healthcare imaging systems and digital scanners and copiers are capital goods and inputs for a
variety of businesses. Here, Kodak’s follow-up service and customer relationship management
is important to success of sales. Buyers in these segments probably to not represent a threat of
backwards integration for the same reason suppliers of raw materials did not represent a threat to
Kodak—development and maintenance of these products is simply beyond the scope of their
business.

Threat of Substitutes
Kodak faces threats from the substitutes of camera phones, store brands, and video
technology. As technology increases the capacities of cellular phones, camera phones could
potentially eliminate the need for pocket digital cameras. Cell phones also have extensive
sharing capabilities (users can send photos to other phones) that cameras do not enjoy. Kodak
needs to establish partnerships with cell phone manufactures to insure that they will not be
forced out of business by a proliferation of camera phones.
Also, store brands could pose a threat to Kodak cameras and photo-finishing equipment
(kiosks). The company felt pressure from store brands in its film camera market when stores
such as Wal-Mart or Walgreen’s began selling disposable cameras. As prices continue to fall,
mass merchandisers such as Wal-Mart may be able to cost-effectively manufacture digital
cameras at high volumes. Furthermore, Kodak photo-finishing kiosks face competition from
store-brand kiosks that can provide the same quality at a lower price.
Finally, Kodak must consider videos as a substitute to photos. Logically, people take
pictures which extract a part of some moment in time to substitute being able to record that time
span in its entirety. As storage capacity and the ability to play digital videos grow, videos may
become more useable. For example, Apple recently released a version of the iPod that can play
videos. Consumers no longer need a bulky, stationary TV set to view videos. Many digital
cameras come with video recording capabilities, although often only in 30 second time intervals,
and the function uses considerable battery power, making their capabilities limited for video
recording.

Rivals
The growth of digital technology has increased the number of competitors in the
photography field. In the past, when Kodak enjoyed 90% of the film market share, they focused
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on chemical engineering to create superior film products. This engineering was not easily
duplicable and highly specialized. Today, companies in the consumer electronics industry such
as Sony, Hewlett Packard, and Panasonic are able to directly compete against Kodak in the
camera markets using their existing infrastructure and talent. These consumer electronics giants
may have more access to suppliers as well as access to a broad range of expertise and knowledge
in other areas of research and development outside of cameras alone, which could be an
advantage as electronics become increasingly integrated.
Kodak also competes against other camera makers such as Olympus, Nikon, Canon, and
Fuji. These companies are all foreign, which means they are subject to different regulations, and
they are growing quickly. These brand names have become increasingly popular in the U.S. with
total sales growth in 2003 ranging from 8.8% (Canon) to 47.4% (Olympus). Fuji in particular
has been moving into the kiosk market where Kodak had the largest market share.

Value Chain Analysis

When analyzing the value chain of Kodak two areas in particular emerge where Kodak
has strength and adds the most value to its product: Development and Sales and Marketing.

Development  Production  Sales &  Distribution


Marketing

Development
Digital cameras will continue to see growth if the product remains innovative, easy to
use, and compatible with other products (such as computers and cell phones). Kodak adds value
to their digital products through continued investment in research and development. Launch of
the EasyShare camera line showcased a product that was simple, of good quality, and
comparable to existing products on the market. Development of this product helped Kodak
increase brand recognition in the digital camera market and move away from its previous
stronghold in the film camera market.

Production
Production is an area that is obviously important to Kodak but is not a key point of added
value. The company does not claim to pursue a low-cost strategy, which would indicate a focus
on production efficiency. The company is not in the business of operations engineering, and thus
doesn’t add considerable value at this link in the chain.

Sales and Marketing


Kodak has a number of marketing tools (in the form of complementary products) in use
that add considerable value to digital cameras. A proliferation of photo-finishing kiosks in high-
traffic locations enables users to fully utilize their cameras. Digital cameras and cameras in
general are rendered virtually useless without the capability to store, develop, and share pictures.
Kiosks, online photo-sharing sites such as Ofoto (owned by Kodak), as well as online developing
services enhance the appeal of Kodak digital camera products.
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Furthermore, strategic relationships and partnerships developed with retailers will add
value to the product. Customers will appreciate the reliability of a good retailer, and Kodak must
work to maintain those relationships in order to see sales growth at the retail level.

Distribution
On-time deliveries and good inventory management are important to any business, but
distribution is not an area where Kodak adds a significant amount of value. As was the case with
the production function, Kodak is not pursing a low-cost efficiency strategy. Value comes from
the quality of the product itself, not availability. Digital cameras are not impulse buys, and
customers typically spend time shopping at a variety of stores or online before making a
purchase. When the time of purchase arrives, customers likely already have a particular model
in mind, so instant availability is not as important. This is not to say that Kodak can afford to be
late on shipments or not hold inventories, but to acknowledge that distribution is not a large
source of added value for the Kodak value chain.

VRIO Analysis of Resources and Capabilities

The final step of this Kodak case analysis is to identify resources and capabilities held by
Kodak and evaluate them on the basis of the VRIO framework to determine if Kodak holds any
competitive advantages. The VRIO framework examines each resource or capability in terms of
whether or not it is valuable, rare, costly to imitate, and able to be exploited by the organization.
If a resource meets all of these criteria then it can be termed as a competitive advantage for the
company.

Resources and Capabilities


As a result of the preceding industry and company analysis, the following resources and
capabilities have been identified for Kodak.
1. Financial Resources: Re-investment of film revenues into digital research and
development. Kodak has made a commitment to invest proceeds from existing film
segment sales into development of digital products.
Value: This strategy will prove to be valuable to Kodak. Film products are in the
declining stage of their products life cycle. Sales will drop 10-12% annually in coming
years and eventually phase out. Taking revenues from the previous cash cow and
directing them to digital products adds resources and thus value to an industry that is
growing.
Rarity: While other competitors have access to this same financial resource, they do
not hold a comparable share of the film market to Kodak. Thus the ability to extract
considerable value from a declining market diminishes when one does not have a strong
presence in that market to begin with, thus Kodak holds an element of rarity in this
respect.
Imitable: While competitors could easily pursue a similar strategy without any
opposition, they will be unable to extract much value, as stated previously.
Organization: Kodak’s organizational structure does not allow it to fully exploit this
financial resource. Kodak is organized into four reporting segments: Digital and Film
Imaging Systems, Health, Commercial Imaging, and Graphic Communications. All of
these sell digital products and conduct their own research and development. How does
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Kodak decide to allocate the revenues from film product sales? While cameras and the
Digital and Film Imaging Systems segment accounts for the majority of Kodak’s
revenue, net sales in Heath Imaging, Commercial Imaging, and Graphic Communications
grew by 10%, 2%, and 109% respectively in 2004. Net sales for Digital and Film
Imaging Systems fell 1%. Should Kodak invest in the areas that are growing the fastest
of the area that is its core business? Kodak does not have a clear plan as to what area of
digital technology it will develop with this financial resource and thus it cannot be a
source of competitive advantage for the company.

2. Customer relationship management: Maintaining sales distribution channels. As


discussed earlier, Kodak products are primarily sold through retail outlets. Kodak’s
success in the film markets has inevitably helped build strong relationships with buyers
because they enjoy margins on the sale of Kodak products. Success in digital markets
can be facilitated through continued management of these customer relationships.
Value: Good, functional relationships with customers will add value to the company
in that buyers have considerable amount of control over sales of the product as discussed
earlier in the five forces analysis. Strong foundations with the retailers will encourage
them to push Kodak products ahead of competitors, adding value.
Rarity: This particular element is not necessarily rare because many large consumer
electronics manufacturers have established customer relationships in their business areas
outside cameras.
Imitable: Solid customer relationships are initially costly to imitate, but once
established they will be easier to maintain. A company trying to imitate customer
relationship will have to be better than the market leader to make any inroads. Getting
new customers is always more costly than keeping old ones, so maintaining relationships
is important.
Organization: Kodak’s organization is set up well to maintain customer relationships.
Retailers deal with salespeople who specialize in Digital and Film Imaging Systems, for
example, rather than a centralized sales department. Retailers are also interacting with
salespeople and departments who don’t have to concern themselves with sales in the
Health segment for example, and instead they are held accountable to a particular
segment, rather than overall company performance.

3. Cost-cutting capabilities through reduction of manufacturing space and personnel.


Kodak has undergone numerous restructuring initiatives since the 1980s. Often,
companies operating in declining markets or changing industries can re-organize to
establish a business model superior to that of its competitors or implement cost-cutting
measures to gain an advantage.
Value: Kodak’s re-organization measures primarily involved personnel reductions,
and failed to result in increasing sales since the 1980s.
Rarity: Competitors have not been undergoing cost-cutting measures to increase
sales. Instead, competitor’s sales have been fueled purely by demand. In this sense,
Kodak’s cost-cutting measures are rare, but unhealthy.
Imitable: Cost-cutting measures and restructuring are easily imitable. They can be
costly in the sense that it may be difficult to recruit and retain new talent if there is a
constant fear of layoffs, but in the short-term, cost-cutting boosts the bottom line.
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Organization: Kodak’s organizational reporting system has a recent history of


restructuring and reorganization. These methods are only effective if they have a history
of being successful, or happen so rarely that employees and investors can put faith in a
restructuring effort. Kodak’s history of failed restructuring attempts does not offer a
competitive advantage because the organization has overused the strategy.

4. Network of digital service and image output capabilities. Kodak has the largest market
share in photo-finishing kiosks. These kiosks are increasingly versatile—for example
they can receive images from camera-enable cellular phones. Furthermore, Kodak offers
online photo-sharing and developing services through kmobile.com and Ofoto, as well as
home developing products fully compatible with its product line.
Value: Digital service and image output products enhance the perceived value of a
digital camera. Demand for digital cameras will continue to grow as long as their
features can be fully enjoyed by consumers through photo-sharing and developing
services.
Rarity: While online photo-sharing services are widely accessible and often free,
Kodak’s in-store kiosks hold an element of rarity. Stores typically do not have large
numbers of kiosks, so it is unlikely that a Fuji kiosk, for example, will be placed adjacent
to a Kodak kiosk. Also, Kodak holds the majority market share, making it difficult for
competitors to make inroads.
Imitable: The technology for digital service and image output products is easily
imitable. Photo-sharing software is available to everyone and is often offered for free,
but development and maintenance of kiosks (photo developing) may deviate too far from
the core business of a competitor who focuses on sale of hardware to individual
consumers.
Organization: The preceding value chain analysis showed that Kodak added value in
the sales and marketing link of the chain. While digital service and image output
capabilities function as products for sale, they are also marketing tools that Kodak can
package with its digital cameras.
Although this capability may or may not be very costly to imitate, Kodak’s network
of digital service and image output facilities likely are a source of competitive advantage
for the company. They add value, are rare, and Kodak has the organization in place to
capitalize on this capability.

Competitive Advantages

In conclusion, a thorough external and internal analysis of Eastman Kodak Company


does not yield any solid sustainable competitive advantages. The P.E.S.T analysis five forces
investigation detailed key drivers and trends in the industry. From this, resources and
capabilities available to Kodak were gleaned and submitted to the VRIO test to search for
competitive advantage. Kodak has potential competitive advantages in the areas of customer
relationship management and their existing network of digital service and image output
capabilities; however, it is unlikely that these advantages are fully sustainable given Kodak’s late
grasp of the digital markets. Kodak’s ability to keep up with the fast pace of technology as it
moves out of film markets into the digital world will ultimately determine if the company can
prosper in coming years.
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Sources

Barney, Jay B. and William S. Hesterly, Strategic Management and Competitive Advantage.
Pearson Prentice Hall: New Jersey, 2006.
Bush, Jason. “Russia: Shoppers Gone Wild.” Business Week 20 Feb. 2006 p. 46.
Eastman Kodak Company 2004 Annual Report <www.kodak.com>
“Fujifilm, Konica Minolta and Eastman Kodak Establish EVERPLAY Standard”
<http://biz.yahoo.com/prnews/060222/nyw112.html?.v=46>.