SCHULICH SCHOOL OF BUSINESS

SGMT6800U –
Assignment 2
Kodak (A)

Manish Gulati
Sandeep Sharma

Oct 25, 2010

 Kodak’s Digital Imaging Strategy

Sony Corporations' plan to launch a film-less digital camera sent fear through

Kodak and it later decided to explore digital imaging field. Digital imaging was a

disruptive technology that was emerging in early 1980s. In 1983, CEO Colby

Chandler decided to invest in digital imaging technology and created a

photographic and information management division at Kodak. Even though digital

imaging technology was potentially revolutionizing, Kodak didn't see it as attractive

as its existing silver-halide technology.

Kodak was a successful company in its industry but it got blind sighted by its

extreme focus on existing customers and their needs. It followed a customer

intimacy (“focus”) strategy i.e. to anticipate existing customers' need and create

products that they wanted. Therefore, instead of taking digital imaging as a

disruptive innovation, Kodak's approach was towards sustaining innovation by

convergence of conventional imaging science with electronics and followed an

evolutionary model of development. Its focus was to provide products its existing

client wants in a cost effective manner.

Kodak's strategy for digital imaging has been way off. Kodak’s big bet on its

first digital product i.e. “Photo CD” didn’t yielded results as expected. Moreover, it

totally underestimated and failed to leverage upon world's first electronic image

sensor it launched earlier and software it developed for manipulating color and

images on CD-ROM that was later adopted by computer industry as a standard.

Between 1983 and 2000, Kodak was led by three CEO and each one had a

different strategy and direction where Kodak should be heading. Kodak’ strategy
shifted from convergence of digital and film-based imaging to selling hardware such

as digital camera and printers. To make hardware business successful Kodak

formed alliances within computer and electronics industry. But Kodak clearly missed

first mover advantage in the digital camera market and the competition was

already tough by 1995 and digital camera and printers were becoming more of

commodities with lower profit margins. After incurring major loses in hardware

business the strategy was changed again to picture business, and network and

consumables from where it derived more than 50% of revenue and had more than

50% market share.

Kodak’s strategy, in general, was reactive to the changing market needs and

competition. It faced tough competition from its rival firms such as Fuji Film, which

initiated the price competition in film-based segment. At the same time new

entrants in photography industry such as Sony changed the form of competition by

introducing digital cameras. Over years its major sources of revenue changed from

film-based consumables to digital imaging and printing. In 2000, Kodak’s focused on

value chain of photography i.e. 1) image capture, 2) services such as online photo

manipulation, and 3) image output such as digital kiosk, inkjet printers, paper and

ink. Kodak also moved back to one of its basic formula of success “advertise the

product” by boosting advertisement spending.

Decision to Invest in Digital Imaging

During the 1980s, 1990s, and early 2000s Kodak took several steps to

develop competitive digital imaging products. However, it failed to achieve the

expected overall success. Following is a summary of the important decisions and

directions in each era, and our evaluation of each.

 1980s: In 1980s Kodak approached to create the new digital world by

following their old strategy - focus on the customers, extensive advertising, and

mass production at low cost. The company increased its involvement with several

outstanding universities to conduct joint research in newer and upcoming

technologies. Kodak acquired many companies to achieve technical capacity quickly

or buy market share that was hard to build.

This strategy had served them well earlier. However, in these times when the

pace of changes has quickened considerably the effectiveness of such an approach

is under severe doubt. Continued focus on current customers to develop newer

technologies did not prepare Kodak for a market remodeled by the disruptive

potential of the digital imaging technology. Aligning with universities and opening

up a research lab in Japan were good decisions, but their success was limited

because they were not housed in an independent organization which led to research

projects competing with projects based on old technologies having better short

term returns.

1990s: The company direction changed with the appointment of George M.

C. Fisher as the company CEO in 1993. He dwelt less on the future of profit making

silver-halide technology but rather shifted focus to digital imaging which was a

small fraction of overall revenues and still a loss making business back then.

Consequently, the digital imaging operations were separated from its traditional

silver-halide division. Moreover, he believed that the profits are going to come from

hardware sales. Therefore, the company devoted substantial energy to produce

state-of-the-art products every few months.

 With the rapid development of the digital imaging technology, such hardware

products - digital cameras, scanners, thermal printers, writeable CDs etc – were

increasingly becoming commoditized. Competition in the market became extremely

tough, and as expected the hardware focused strategy, after several quarters of

sluggish sales and profits, appeared to have gone awry.

Post 1990s to early 2000s: In this era the new direction was towards a

network and consumable based digital imaging business model that was built on

the premise that there was money to be made in uploading traditional pictures onto

the internet, reprints, inkjet paper, and photo-editing software.

The strategy had some moderate success initially. However, with the advent

of internet, photographs were stored online and shared via emails. Printing of

photographs, thus, reduced dramatically rendering the consumable driven business

irrelevant.

Now: Kodak, these days, has made investments in developing simple-to-use

digital cameras, DSLRs, printers, and web solutions for storage and image

manipulation (after its purchase of Ofoto).

Driving company growth based on hardware margins is not a good strategy

because the digital imaging technology is become increasingly commoditized.

Unless a company comes up with a radical technological innovation, for e.g.

photographs that are 3D, it is extremely difficult to sustain any competitive

advantage in hardware.

Strategy Execution Evaluation

 In 1983, CEO Colby Chandler recognized the importance of changing trend in

digital imaging and thus created a photographic and information management

division. In our opinion the execution was not perfect and had some flaws. As per

Bower & Clayton1, in order for new disruptive technology to be successful it should

be housed in an independent entity so that it has access to resources and does not

compete with other successful projects within organization. Even though Kodak

invested in digital imaging, many executive found it hard to believe in its success as

the profit margins were low. The focus was still on the high profit margin products.

The second mistake made by Kodak was in its marketing research for the

new digital product. They focused on the conventional market research method by

determining market size and growth potential but in reality no market existed for

the new digital image products yet or otherwise was in a very infant stage.

Moreover, they underestimated the importance of information received from own

research and development teams and focused more on the information from

marketing team. Kodak announced its first digital product to be PhotoCD, which

turned out to be a flop.

As evident from the case, the company was still focused on old performance

metrics of the photography industry i.e. highest quality image, whereas new players

such as Sony were competing on different performance metrics all together, such as

digital photo taking capabilities. Also, because of its narrowed focus on Photo CD,

Kodak failed to leverage on its software algorithms that were becoming industry

standard for manipulating colour and images on CD-Rom.

Kodak management identified digital imaging as an important technology.

However, the problem was that they didn't follow disruptive innovation strategy but
continued to stick with evolutionary model of sustainable development, where they

wanted to develop these digital products as extension to their existing silver-halide

technology. In late 1993 new CEO Fisher, motivated from his experience at

Motorola, tried to change culture at Kodak. Although strategy execution was

somewhat successful at the top management level, it mostly failed at the middle

level because of the culture of the organization in which people were used to taking

orders from senior and not willing to change.

Kodak's strategy execution was never clear and always changing; it seemed

they didn't know what to do in the changing marketplace. For example they started

with photographic and information management division, later separated it from

traditional silver-halide division, and finally combined two divisions again in 2000.

Also they first focussed on digital and film-based imaging integration, then on

hardware and finally on consumables. The biggest challenge facing Kodak now is

that they are able to create value by bringing in new products and deliver value to

customers, but not able to capture value themselves e.g. they are still making loss

on every digital camera they sell.

What Should They do Next

Where should they play in the value chain: The company should

consider moving away from consumable based approach because in digital imaging

a consumer does not need to buy many consumables unless he wishes to take hard

copy prints of the pictures. The need to take prints of photographs has dramatically

dropped because people use internet / social media to share and store them. The

hardware has also become commoditized with minimal differentiation between

competitor products, keeping profit margins very thin. Lately, small incremental
improvements in hardware features are being achieved at a very rapid pace, which

get quickly copied by competitor companies.

Therefore, it would be more prudent if Kodak positions itself on the services

side in the digital imaging chain, for e.g. kiosks at retailers, digital mini-labs, and

online services for image manipulation, storage, printing, and delivery.

The company can look into novel options like running photography courses

for amateurs and/or professionals. It is definitely beneficial to help users along and

train them in the ways of photography, because as users become more skilled,

they'll feel the need to purchase extra lenses, extra batteries, external flashes, and

other accessories.

Moreover, Kodak continues to develop new technology, and has

approximately 500 patents in the digital area alone. The company can license them

to other companies who want to use them in their products.

How should they organize to be effective: Kodak should structure its

operations and organizational hierarchy that will enable them to better identify and

develop disruptive technologies2. Identifying if a technology is a disruptive or a

sustaining innovation is the key. Here, asking technical personnel can be helpful

because they are more attuned than marketing and financial managers to

revolutionary technologies. Listening to lead customers will enable a company to

improve a sustaining technology. However, they can mislead an organization during

disruptive technology development. Comparing the likely scope of disruptive

technology improvement to the slope of performance improvement demanded by

existing markets can help identify strategically critical disruptive technologies. Once

a strategic disruptive technology is identified, Kodak should nurture it on a modest

scale and give it time to grow. Because the market of disruptive technology is very
small to start with, it is difficult to understand this market using the conventional

market research techniques. So, the company must identify newer techniques by

experimenting rapidly. A disruptive technology cannot generate short term profits

and therefore the responsibility to build the technology should be given to an

independent division so that it does not compete with existing technologies for

funds and resources. Therefore, Kodak should keep digital and film based business

lines separate.

Are they making any headway: The graph below succinctly demonstrates

that Kodak’s financial performance has not been good in the last five years3.

Irrespective of economic conditions, the returns on Kodak stock have consistently

declined in the years from 2004 to 2009. Unfortunately, Kodak's sagging stock price

shows that the new businesses have not gotten big enough, fast enough to offset

the decline of its old business.

-References
1
Joseph L. Bower and Clayton M. Christensen, ‘Disruptive Technologies – Catching the Wave’, HBR Jan-
Feb 1995
2
Joseph L. Bower and Clayton M. Christensen, ‘Disruptive Technologies – Catching the Wave’, HBR Jan-
Feb 1995, (Page 9)
3
Kodak 2009 Annual Report (Page 24),
http://www.envisionreports.com/EK/2010/38902fe10e/document_0/Eastman_Kodak_AR_3-30-10.pdf