Lecture notes - Case study - Kodak case study F - Strategy Organization and Marketing PDF

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Case study of Kodak Introduction- The Main Issues Core competencies can become core digitizes, want to excel at doing something, to get new capabilities but you are rigid in holding capability structure towards what the new market wants you to do. Kodak did not succeed in the new area of digital photography. Kodak is a market leader that fails to keep up with technological changes. Kodak’s share price went down to zero in 2012 and the number of employees declined fast in a number of years. See graph below.

In 1985/1986 the budget for Research and Development (exhibit 5 and 6 in case) was 9% which is a really high budget. Usually a company invest 3-4% in R&D. With such a high budget the conclusion can be made that they understand that a technology changes is coming. Uncertainty in technology and in markets (what the customers want), this means that it is hard to create good strategies.

Questions Discussed in Class 1. Evaluate Kodak's strategy in traditional film photography. What were the strengths?

-Kodak used a razor and blade-strategy. In this case the camera is the razor but the high profit margins come from the blade, in this case the papers used to print papers and chemical equipment.

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The core competencies where the chemicals.

- It is very hard for companies to change their strategic beliefs which was the case for Kodak. 2. How have value creation and appropriation changed in digital photography relative to traditional photography?

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Today people uses software for example to improve quality of pictures and it has moved from printing pictures to projecting pictures and sharing them. How ever there is no economic value in any of the stages today and that is a problem.

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Not so many people had personal computers when Sony introduced Mavica.

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Hard to find something that is so profitable as films. But from a customers point of view films are expensive.

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The market for printing pictures is gone. Today people want to be able to share and store pictures.

3. How would you assess Fisher's attempt to transform Kodak? why did it fail?

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His mistake was not to change how middle managers think. He should litte by little have changed the mind of middle managers and the culture.

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The company where not able to manage conflicts. Constructive conflicts are important in the decision making process. This is usual when people come from the same background and therefor have the same way of thinking. Changing composition of middle managers (diversity) would have been good.

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Confirmation bias (people look for evidence that prove of beliefs rather than challenge it) explain why Kodak didn’t adapt their core competencies. Was not information from the market that was clear enough to convince managers.

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Strategic decisions can be made in three ways, top-down deduction, trial and error and analogical reason. Analogical reasons (from past experiences )where important in the case of Kodak and this can be dangerous especially because the middle managers had the same background.

4. How had Kodak's positioning been evolving over the years? Was Fuji stoppable? Evaluate Kodak's response to Sony's introduction of the Mavica in 1981. Was it appropriate?

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Fuji became official sponsor of 1984 Olympics they took even more market share. Looking at exhibit 4 we can see that Kodak is loosing market share while Fujis is increasing their and in 2005 Fuji have the higher market share.

-The original strategy of Kodak was to try to benefit differentiation. Fuji offered lower prices, when market get mature there is more room to play role as cost leader. When market get mature it is hard to play successfully as a player that benefit differentiation. Kodak should have tried to react, either by offering better products than Fuji or by competing on price. -

Relating to Mavica a mistake that they made during the 80s was that they focused on the threats rather then the opportunities. Kodak started a massive unrelated diversification, this means something that is unrelated to your core business. They invested a lot of money in R&D and where first on delivering technology to the digital imaging sector but didn’t manage to bring this results of R&D into marketable products. -Secondly Kodak forgot to defend their core product/market. Overinvest in R&D in the digital imaging area because Kodak get threatened by the introduction of Mavica and forget defending your original market. Still needed R&D to show that you have better products or produce less expensive products then Fuji, instead Fuji was able to monopolize that market.

5. What was Kodak's position in digital imaging in 2003? Would Kodak's position be different had the firm adopted a different digital imaging strategy?

-Kodak wanted to “create a profitable bridge between the new and old world of photography”. -Looking at the revenue and ROS there is no evidence that digital photography was a bad idea. There where years when digital imaging was higher then traditional photography. There was no proof that services for digitalizing photos was a bad idea. With Facebook and Instagram for example it is however possible to store and share pictures for free. With high technological and changes in market it was however hard to know what was the right course because the changes takes time before you see them in the graphs.

-Moves facilities to China which is a sign of a mature market. The low prices of cameras show that it is not an attractive market. In the five forces it is by professor assessed to be low competition, because there are a lot of companies coming from different sectors. Producing camera devices is not profitable. That the camera can not be differentiated by zoom, pixels etc and this can be seen by the price fall. The commodization of the camera industry is a fact, for example on vacation people don´t bring a camera anymore. 6. How do you assess R&D performance? Where the heavy R&D investments effective?

- It is hard to measure NPV when uncertainties. A good metric for assessing effectiveness from R&D is revenues from products that have been introduced in the last years. - It was a mistake of Kodak to invest so much money in the digital image technology. As mentioned above they failed to transfer the technology to marketable products. Kodak should have understood that with the strategic beliefs it was not feasible. -

The goals where conflicting, looking as strategy implementation as a stool that entails new product development and operations excellence for the achievement of sustained performance. Need to transfer R&D into products. Need R&D, strategy and good operations to get a stable stool. See figure below.

Sustained Performance

Strategy

Opera tions

Vertical Coordination (alongthehierarchy)

NPD Horizontal integration AcrossR&D, marketing manufacturing, purchasing, logistics

Summary and specific issues related to the case: Kodak used a razor-blade strategy, cameras where sold at a low cost and film fueled Kodak ´s growth and profits. In 1981 Sony announced a filmless digital camera that would display pictures on a television screens. As a result of that the company believed that photography was dead they diversified into businesses unrelated to photography such as copier service businesses and clinical diagnostics. Fuji was first with introducing 400-speed color film (1976) and because their photographic paper and supplies costed 20% less then Kodak customer switched to them and when Fuji became official sponsor of 1984 olympics they took even more marketshare. Issue: Kodak forgot to defend their core product. 1985 customer had learned that they could get highquality pictures with films that costed much less then Kodaks. Issue: With lower prices (cost leadership) they took marketshare. When market get mature it is hard to play role as a differentiator which is their original strategy, Kodak should have tried to react. Another mistake that they made during the 80s was that they focused on the threats rather then the oppurtunities. Fuji started selling disposable cameras in 1986 which became a hit in Japan, a product that Kodak had developed in 1980s but not patented because of inconsistency with razor-blade model. Issues: Was fast on delivering new technology but didn´t get it out to market. It was also hard for company to change their strategic beliefs. In 1991 Kodak annononces their first professional digital camera and the photo CD. In 1993 Kodak gets a new CEO Fisher and focus is put again on core buisnesses and exploiting new digital technologies. Digital imaging operations was separated from silver-halide photographic divisions. Fisher changes culture at top but the many middle managers don’t want to understand the digital world and razor-blade culture was so deeply ingrained and executives avoided confrontation. Issue: Company didn’t manage conflicts. Then because they had the same background they had the same way of thinking, a change in the composition of middlemen would have been good. Digital imaging market expanded in 1993 and 1994 as many products came out and by 1996 twentyfive models costs under 1000 dollars. In 1999 there is 19 900 cuts in job (20% of the payroll) but they were now number two in sales in the US. Manufacturing was moved to China in 2002 to reduce costs. Issue: By the price fall the conclusion can be made that cameras can not be differentiated. Commodization of cameras can be seen when people take pictures with their Iphone.

Conclusions that can be drawn: By looking at the revenues for products introduced in the last couple of years the conclusion is that that Kodak failed to get out marketable products. Big efforts where put on R&D (9%) however the company didn’t manage to transfer it to a marketable product. They should have understood that with this strategic belief (razor-blade) it was not feasible. Strategic beliefs are hard to change, the company delivered new technology but did not change their business model. The goals where conflicting, looking as strategy implementation as a stool that entails new product development and operations excellence for the achievement of sustained performance.

It is harder to change strategic beliefs in time of technological/market discontinuities. Change of paradigm is also slow to arrive at completion. Confirmation bias is “the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives than by negatives” which means that humans will look for evidence that prove their hypothesis rather then challenging it. This related so Kodak, for example when putting so much money into something like the photo CD it is easier to look at why this is the future rather then things as this is a too expensive product for customers to buy it and therefor pay 20 dollars for a disc.

Porters Five Forces Competition Framework Potential entrants- Threats of new entrants Entrants threat to industry profitability depends upon the height of barriers to enter. Threat of entry is assessed to be moderate. -It is assessed that capital requirements needed to be established in an industry is relateively high. In comparison to for example Boeing they are low but in relation to opening a pizza outlet they are high because with rapid changes in technology research and development is needed which is costly. -Due to the high economies of scale and firms that are producing at the lowest cost production there are low threat of entrants. -Learning economies exist which means that cumulative volume of production gives advantage in average cost which means low threats of entrance. -Product differentiation and customer loyalty are low. As mentioned above the price fall can be related to that cameras can not be differentiated today. This means higher threat of entrance. -Weak access to proprietary technologies such as patents and industrial secrets means higher threat of entrance. -Because of higher margains for retailers on smaller brands the access to channels of distribution are low which means higher threat of entrance. Threats of substitutes Substitutes are products or services that are not considered competitors but fulfill a strategically equivalent role for the customer. The threat of substitutes are high based on that companies are quick when it comes to matching features and price with specifications. Rivalry among existing competitors When going in to digital photo the number of businesses increased which stimulates price competition. The diversity of competitors as well as product differentiation (more of a commodity product) also make price competition more aggressive. The excess capacity should be high due to that demands for products fast can go down as well as scale economies are high which means aggressive price competition. There should also be high ratio of fixed to variable costs which also mean more aggressive price competition. Bargaining power of buyers The extent to which buyers are able to depress profitability depends on buyers price sensitivity and relative bargaining power. The customers are in this case to a high extent able to depress profitability.

Buyers price sensitivity is assessed to be high due to that today the camera has turned into a commodity and the competition between customers are low because there is many different companies offering qualitative offerings to their customers. Relative bargaining power is also high due to that are many sellers per customer and customers are able to easily compare prices....