The Uphill Battle At Eastman Kodak Case Study

When Eastman Kodak emerges from bankruptcy this summer or fall, it will be a shadow of the blue-chip corporate giant it once was.

A celebrated company whose little yellow packages of film documented generations of birthday parties, weddings and anniversaries, the new Kodak will be more commercially focused, providing printing and imaging services to businesses as well as film to the movie industry.

Consumers will probably still be able to find Kodak-brand film in vacation spots around the world. They will still be able to buy digital cameras bearing the Kodak name. And they will still be able to download and print their digital pictures at kiosks in their local drugstores.

But those businesses will no longer be owned or controlled by Kodak. As part of the more than yearlong bankruptcy process, they were sold to others.

Antonio M. Perez, Kodak’s oft-criticized chief executive, who has been trying to stage a turnaround of the company since 2005 and has overseen it through bankruptcy proceedings, said in a news release this week that the company had a “clear path forward” and was positioned for a “profitable and sustainable future.”

But some skeptics sounded warnings about Kodak’s outlook, noting that certain commercial businesses that the company is banking on are fiercely competitive and that Kodak’s own projections show steep declines in growth in other business lines.

The steady decline and evolution of Kodak’s business has been felt most strongly in Rochester, where the predecessor for the company was founded by George Eastman in 1881.

A classic, all-American company town whose landscape is dotted with the legacy of Mr. Eastman and Kodak, Rochester and some of its residents admit that the days of Kodak as a corporate giant were well behind it.

“I cannot remember a case that I’ve ever been associated with in any way where so many people wanted the company to succeed but so few people thought it actually could,” said John C. Ninfo II, a retired United States bankruptcy judge whose grandfather worked at Kodak and whose great uncle tended the gardens at the Eastman house. “For some, the bankruptcy proceeding has been a sorrowful thing, like losing a family member.”

But critics of the company also said its unwillingness — seemingly even in the throes of bankruptcy — to acknowledge that many of its products had fallen out of favor and become almost quaint in an increasingly digitized world was its ultimate downfall.

“The company made a big mistake of riding the cash cow — film — to the point that there was simply no more milk coming from it,” said George T. Conboy, the chairman of Brighton Securities, a stock brokerage and financial services firm in Rochester.

In the bankruptcy process over the last year, many of Kodak’s most recognizable businesses were either transferred or sold.

Early last year, it announced plans to stop making digital cameras, pocket video cameras and digital picture frames. Kodak recently entered an agreement to license its name for digital cameras to another company. It sold part of its online photo publishing service to the Internet publishing firm Shutterfly for $23.8 million.

But the bankruptcy process hit a major snag last year when the company struggled to sell what it considered to be a crown jewel — a package of 1,100 digital imaging patents.

Kodak had hoped the patents could go for as much as $2.6 billion. But a consortium of buyers that included some of the world’s largest technology companies, like Apple, Google and Facebook, bought the patents in December for far less, about $527 million. The firms have not said how they plan to incorporate or use the Kodak technology, and many of the patents are for processes and methods that consumers often cannot see. That money was used to repay a big chunk of a loan that Kodak had obtained shortly after filing for bankruptcy in early 2012.

“What that situation signified — which was part of the problem with the whole business model — is that they thought their technology and their patents were more valuable than they really were,” said Jay T. Westbrook, a professor at the University of Texas Law School. “They clung to that right until the end.”

Another big hurdle in the bankruptcy proceedings was cleared this week when Kodak said it would spin off two businesses to the Kodak Pension Plan in Britain for $650 million in cash and debt as part of a deal that would absolve Kodak of $2.8 billion of claims the pension had made against the company. The agreement still needs the approval of the bankruptcy court.

The two segments that were sold include document imaging and the business that made Kodak a household name, its camera film and photographic paper lines, along with the kiosks found in Target and Walgreens stores where consumers can download and print pictures.

Officials with the British pension fund, which retained the right to use the Kodak brand, have indicated that they intend to hire a management team to run the business. A spokesman for Steven Ross, chairman of the fund, could not reach Mr. Ross for a requested interview.

The film business is in a decline, but observers said the deal was probably the best alternative for the pension fund.

“They can either run the business and throw off cash every year to pay the pensioners,” Professor Westbrook said. “Or they can keep the business for a year or two or five years and maybe something will happen that will make it look better and sell it then.”

As for Kodak’s new focus on the commercial side of the business, analysts worry that future growth and profits could prove difficult there as well.

For instance, in a presentation Kodak provided this year to its creditors in the bankruptcy court, Kodak showed a sharp 34 percent decline in growth through 2017 in the segment that includes the entertainment imaging and commercial films business.

Another business Kodak is banking on for its future is its commercial printing and packaging business, which creates packaging labels for companies, like the plastic labels found on a bottle of juice. Analysts describe that as a highly fragmented and competitive industry and say that Kodak’s share of the market is fairly small.

In an e-mailed response to questions, a Kodak spokesman said that the company “has a compelling and unique combination of advantages to lead this industry.”

But some observers see an uphill battle.

“This is a company that is going from being a behemoth that owned the market to a niche player scrapping for share,” Mr. Conboy said. “It will be a different game for the new Eastman Kodak.”

By Nitin Pangarkar March 5th, 2012StrategyInnovation

“You press the button, we do the rest.”

So went the advertising slogan coined by Kodak in the late 19th century.

It was a motto that opened the door to mass-market consumer photography – a popular culture pioneered by Kodak, but which its recent sorry decline has shown it failed to keep pace with.

The habit of button-pressing is of course more popular then ever – see Facebook, Tumblr, Flickr et al. But for Kodak, recently forced to file for bankruptcy protection, the company’s failure to reinvent itself to the instant gratification realities of the digital era meant there was increasingly little of “the rest” for it to do.

Founded by inventor and philanthropist George Eastman, Kodak’s little yellow film packages became one of the world’s most recognised brands. Indeed for much of the twentieth century Kodak was an American industrial icon – at one point enjoying a similar status as tech giant Apple does today.

Since the turn of the century however, the fortunes of the once mighty photographic firm have plummeted. By early 2012 Kodak’s shares were trading at around 40 cents, down from $40-45 just seven years earlier. The NYSE even went as far as to warn the company that it risked being delisted.

So where did it go wrong?

Kodak factfile
  • Kodak was founded by George
    Eastman in 1892, credited with
    inventing the first photographic film
    in roll form
  • Kodak was added to the Dow
    Jones Industrial Average in 1934,
    remaining a Dow component for
    seven decades
  • A Harvard study in 1976 found
    that Kodak accounted for 90
    per cent of film sales and 85
    per cent of camera sales in the US
  • In 1988 Kodak employed 145,000 worldwide. Most recent figures put it now at just over 18,000

One common explanation about Kodak’s demise is that it missed the digital revolution – or simply that the ubiquity of digital cameras made photographic film redundant while Kodak bosses buried their heads in the sand. While that explanation has some merits, it is far from the full picture. In fact Kodak was a pioneer in the development of digital cameras, producing the first prototype megapixel digital camera in 1975.

Presented to sceptical Kodak executives, the bulky device was powered by no less than 16 batteries and took a full 23 seconds to record a single image, using a cassette tape as the equivalent of today’s memory card. (You can see a picture of the camera on this Kodak blog, the title of which is a story in itself: “We had no idea”)

Even when digital cameras reached the consumer market in the mid- to late-1990s, some of Kodak’s early models vied with models from Olympus and Sony for top-selling spots.  In fact, the early cameras made by Canon, the current global leader in digital cameras, lagged well behind those of Kodak in terms of consumer acceptance as well as critical reviews.

Kodak didn’t lack technical expertise either and, even today, has considerable intellectual property in the digital imaging space with its thousands of patents worth several billion dollars.  Why then is Kodak struggling to survive despite a strong start in the promising – and still rapidly growing – arena of digital imaging?

Bridging the gap

Nitin Pangarkar’s book is available from Amazon by following this linkIn my recent book High Performance Companies: Successful Strategies from the World’s Top Achievers I suggest that successful innovators must be able to integrate (as in combine) external and internal knowledge.  An excellent example of this is the case of Fanuc, the Japanese maker of machine tool controls.

Based near the foot of Japan’s iconic Mount Fuji, Fanuc used to make mechanical and hydraulic controls in the 1970s. But after the first oil shock in 1973, operating costs of those controls became prohibitive because they consumed a lot of oil.

In response, Fanuc began a huge effort to shift to computer controls.  It overcame gaps in its own knowledge by partnering with diverse sources including the University of Tokyo, its customers, end-users and sometimes even existing as well as potential competitors, such as GE and Siemens which had their own aspirations in this industry.

The external knowledge from these partnerships was combined with a number of other elements including its own internal knowledge, some bold strategic bets (being the first to use an Intel microprocessor in a dusty, dirty and hot factory environment) and a far-sighted leadership which had the vision of global leadership.

Not only did Fanuc manage to successfully adopt new electronic technology, it also became a dominant leader. Indeed a recent Bloomberg article recently called it “The Microsoft of machine tools” – a company whose products effectively run the world’s factories.

Kodak’s failure to adapt to the new technology stands in stark contrast to Fanuc’s case because Kodak had greater resources in terms of its brand reputation, its finances and its technological prowess in digital imaging. Kodak’s failure lay in its strongly inward focus.

Although it was a pioneer in the technical aspects of digital imaging, it lacked skills in areas such as lens making and manufacturing (making efficient and reliable electronic devices) to successfully commercialise products based on its innovations in digital imaging.

Critical integration

Pioneers of their timeWhile Kodak did make efforts to outsource its camera manufacturing (and thus fill some gaps in expertise), the outsourcing arrangement did not achieve the integration of external knowledge with Kodak’s own internal knowledge that was so critical to continued innovation. As a result, Kodak remained stuck in the lower end of the digital camera spectrum and could never compete in the high end of the spectrum, which is where the bulk of the profits are.

That all begs the question: Why did Kodak fail to achieve the integration of external and internal knowledge?  After all, Kodak was for decades a greatly admired company which owned an iconic brand.  It had mastered all aspects of the film business including R&D, manufacturing, marketing and worldwide distribution.

The answer lies in the quality of management. Unlike Fanuc which had the towering figure of Dr Inaba, a key scientist in his field of robotics and numerical controls; in its effort to provide the visions needed to adapt to the new technologies and then lead the world market, Kodak went through a number of CEOs – it is on its fourth CEO since 1990.

The short tenure of each CEO made working towards a distant goal of industry leadership in the fast evolving technology of digital imaging rather difficult.

Very often, when CEOs change, they bring new priorities and the pursuit of a distant goal can be easily ‘misplaced’ in these reshuffles, or, worse yet, the goals themselves may be changed.  Kodak also went through numerous restructurings which were traumatic for the employees and sometimes also taking it into unfamiliar and hypercompetitive markets such as printers, again diluting its focus.

The key stumbling block was its inability to convert its technical expertise into tangible products that could be sold profitably

Complacency also played its part. Kodak is based in Rochester, New York, where it was the largest employer and has a towering influence. It has helped many local causes – in fact of one of the premier music schools in the world (the Eastman School of Music at the University of Rochester) bears the name of Kodak’s founder.

Possibly, in its efforts to continue to be good to the local community, Kodak let its costs get out of control.  Like many corporate peers such as GM, legacy costs (funding generous retirement packages) became a huge burden, especially when revenues started to decline.

So what lessons do Kodak’s problems hold for others?

From my perspective, the key stumbling block was its inability to convert its technical expertise into tangible products that could be sold profitably (in other words a sustainable business model). Kodak had several gaps in its expertise to design a complete business model but lacked the clarity of vision or the continuity of leadership to acquire the resources in a systematic fashion, let alone integrate them with its considerable internal knowledge of digital imaging.

Other companies facing similar technological discontinuities would do well to remember the critical role of integration of internal and external knowledge to achieve innovation, which would, in turn, improve their chances of successful adaptation.

Nitin Pangarkar is Associate Professor in the Department of Business Policy, NUS Business School, specialising in strategic management. He holds a PhD from the University of Michigan and an MBA from the University of Delhi.

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