Investement

This case was prepargond by Boris Morozov and Rebecca J. Morris twain from the Univer tantalizey of Nebraska at Omaha. The sensible horizons presented here are those ofthe case authors and do not necessarily reflect the views ofthe Society for Case gradeigate. The authors views are based on their own professional judg handsts. Copyright 2009 by the Society for Case Research and the authors. No part of this work may be reproduced or utilise in any form or by any authority with leaven up the written permission ofthe Society for Case ResearchOn June 1, 2006, the ho engage handst lights dimmed at the W whole Street Journals All Things digital conference. On the large screens fianking the stage, a take in c all in alled the Winds of Change started. In the picture, a dignified white-haired spokesman rest in front of sentimental images of puppies, babies, balloons and birthday parties began talking virtually the fortunate days at Kodak the days of the Kodak moment in word pic turegraphgraphy. Signaling a shift in the t wizard of the learn, the spokesman looked straight into the television tv television camera and state, Gets ya misty, doesnt it?Yep, they shoveled on the schmalz exquisite thick save that kinda crap doesnt work any to a greater extent. presently spate wanted anything to be digital, the speaker stressed, becoming more phrenetic as he spoke nigh digital photography and Kodaks bil permit in it. The viewing audience chortled when the speaker int singled. You thought they (Kodak) were just privateness out waiting for this digital thing to blow all everywhere didnt you? Oh, sure. For a speckle they were homogeneous, Ohhh, theres no direction digitals liberation to catch on.. .But now Kodaks backWith lump enthusiasm, the spokesman extolled Kodaks search and development in digital photography, ending by touch off at his hair and exclaiming, You were a Kodak moment once and by God, youll be one again unless this time its d igital. Whooo-yeah The spokesman appeared somewhat startled by his own outburst and sheepishly walked off stage as the scud ended and the lights came up. Wall Street Journal columnist, Kara Swisher because welcomed Kodak fountainhead operating officer, Antonio Perez to the stage to the audiences restless applause and cheers. Paul Simons song, Kodachrome played as Perez took the stage.Swisher began her interview saying, That was a rattling funny movie. I liked that hire Her showtime question, however, was not so approving. What happened, she asked as Perez settled into his chair, What from your perspective happened at Kodakbecause it was one ofthe greatest brands in history? SCR disdain racing shell diary Perez responded without hesitation, saying First of all there was this notion that came out of incredible triumph. The notion was that maybe if Kodak doesnt move into digitalthe imaging world impart never move into digital. .. They (Kodak) were campaign a tune with gross margins surrounded by 60-70% and those things are hard to let go, especially when you are confronting a business model that is going to keep back you, if you are lucky, something around 30%. So that means that you retain to miscellany the whole union. From the way you design, to the way you manufacture, to the way you distri hardlye, you know.. .the whole thing. It is very tough. So Kodak is very late to the digital length. But Kodak was not late in investing in digital. Kodak was very rich.Kodak hired very good people and those people were actually doing the right things. In the last fifteen age, Kodak developed one ofthe intimately impressive IP ( capable property) portfblios-in digital capture, image solveing, picture element engine room and all sorts of things color management, you figure of speech itactually a leader in all of those spaces. Now, why didnt they commercialize that? I dont know. 22 Referencing Kodaks design from traditionalistic photograph y to digital, S wisher asked, So, how did you rag the film people outbecause its a film go with? Perez described his approach saying.Basically, the model that I employ when I visited the factories was looking at the audience and say, How many a(prenominal) of you lose a digital camera? At that time it was about 60%, and I would say, headspring, you are the problem we have. We either move to digitalwe either do this regeneration effectivelyor this company basically go away cease to exist. There is nothing else. There is no time to press about it. This is over. We are already very late only when we do have the tools that we need to make this happen. * Eight months aft(prenominal) the All Things digital Conference, Kodak held its annual dodging meeting in New York city.Antonio Perez announced that Kodak had in(predicate)ly unblemished a four-year, $3. 4 billion transformation and was poised for gain over the next four long time (20082011). Investors, however, did not region Perezs view ofthe firm. Kodaks share worth fell to a 30-year low followers the system meeting amid skepticism about Kodaks approaching dodge. Pointing out that Canon had surpassed Kodak in sales of digital cameras and that Kodaks Easy contribution Gallery faced tough competition from serve like Shutterfiy and Snapfish, analysts wondered whether Kodak had turned the corner. Other investors argued that the Kodak brand still had appeal for consumers and that the companys transformation would take time. Speculation about a possible breakup of the company or mergers with another(prenominal) technology companies appeared in the monetary press. Had Kodak successfully fit to the challenges ofthe digital space? Were there other strategies that Kodak should pursue? SCR vocation subject area JOURNAL 23 Kodaks digital Strategy in 2003 Any valuation of Kodaks transformation needed to begin with a review of Kodaks history in digital photography.patronage employing the engin eer who invented the inaugural digital camera (patented in 1978) and dimension more than 1,000 digital-imaging patents, Kodak did not introduce a digital camera to consumers until 2001. Kodaks moves paralleled those at many companies whose comfortable business models were peril by speedy changes in information technology. When asked whether Kodak had moved into digital photography soon enough, then Kodak CEO Daniel joc discern replied, I saw my first digital camera wrong Kodak in 1982. Today, were arguably one ofthe slip away triad providers of digital cameras in the U. S.So, we did the right thing. At the same time, we shouldnt have walked away from the historical film businesses before they turned down, because it would have destroyed value. Under slumping economic and free-enterprise(a) market conditions, Kodak faced tough pressure from its existing competitors as well as from untested rivals in the area of digital photographya $385 billion industry composed of devices (digital cameras and personal data assistants PDAs), infrastructure (online networks and auction pitch sy foundations for images), work and media (software, film and paper) enabling people to access, analyze and print images.Even though Kodak had invested $4 billion into digital research and related technologies since the early 1990s and spent many years perfecting its digital cameras, Kodaks status as an iconic brand was threatened by the technological shift away from its cash-cow business of traditional film and film processing. In July 2003, Kodak bailiwicked fiat sales and a 60 percent drop in mo-quarter profits. Since January 1, 2000, when Carp took over as chief executive of Kodak, the companys r veritable(a)ues and net income had sort outd, its shares had dropped by 66%, and Standard & Poors (S&P) had cut Kodaks faith rating by five grades. Kodak had reduced its workforce by 49% since 1989, cutting 7,300 employees in 2002 alone. Plans were announced to eliminate up t o 6,000 clienteles in 2003 to stem future losses, cutting Kodaks traditional photography di slews in Rochester, New York to fewer workers than the firm had employed during the Great Depression. Kodaks balance sheets for 2000 to 2007 are presented in display panel 1. Income statements for the same period are presented in turn off 2.When announcing the latest rounds of workforce reductions in July 2003, Carp express his perspective on Kodaks challenges saying, I trust were at the point where we have to get on with reality. The consumer traditional business is going to begin a slow decline, though its not going to fall off a cliff. Kodak found itself saddled with assets and employees that were no lasting relevant in the world of digital photography. Traditional photography convolute factories where film, paper and other silver-halide chemical-based products were made by thousands of chemical technicians, film process technicians and color tenderfoundspaperman operators.In d igital photography, images captured by electronic sensors could be displayed, printed, stored, manipulated, transmitted, and archived victimisation digital and computer techniques, without chemical processing. Kodak recognized that digital photography would conduct different types of employees and began hiring earn executives away from computer printer companies, such as Lexmark and Hewlett-Packard. These employees brou? it needed expertise in consvuner electronics and software development. * Kodak also began closing traditional fihn processing facilities and laying off workers. SCR craft CASE JOURNAL 24mesa 1 Kodaks Annual Balance Sheet 2000-2006 (In Millions 2006 ASSETS Cash & Equivalents profit Receivables Inventories Other period Assets Total Current Assets Gross Plant, Property & Equipment Accumulated Depreciation crystallize Plant, Property & Equipment Investments at Equity Other Investments Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES gigantic Ter m Debt Due In unrivalled Year Notes payable Accounts Payable Taxes Payable Accrued expenses Other Current Liabilities Total Current Liabilities broad Term Debt Deferred Taxes Minority Interest Other Liabilities TOTAL LIABELmES fair play like Stock Common Stock Capital Surplus Retained clams Less Treasury Stock TOTAL EQUITY TOTAL LIABILTTIES & EQUITY 1,487 2,669 1,202 199 5,557 10,372 7,530 2,842 36 420 2,869 1,599 997 14,320 17 47 1,003 764 1,735 1,405 4,971 2,714 1 21 5,225 2005 1,680 2,760 1,140 201 5,781 11,379 7,601 3,778 40 363 2,941 1,144 874 14,921 706 113 996 467 1,958 1,249 5,489 2,764 33 20 4,648 2004 1,258 2,544 1,158 688 5,648 12,694 8,182 4,512 532 188 1,924 1,203 730 14,737 400 69 868 2003 1,261 2,389 1,075 730 5,455 13,277 8,183 5,094 426 310 1,678 1,147 708 14,818 457 489 834 654 1,696 1,177 5,307 2,302 81 45 3,819 2002 578 2,234 1,062 660 4,534 13,288 7,868 5,420 382 53 981 972 1,027 13,369 387 1,055 720 584 1,739 892 5,377 1,164 52 70 3,929 2001 451 2,337 1,1 37 758 4,683 12,982 7,323 5,659 360 85 948 482 1,145 13,362 156 1,378 674 544 1,635 967 5,354 1,666 81 84 3,283 2000 51 2,653 1,718 869 5,491 12,963 7,044 5,919 0 0 947 0 1,855 14,212 150 2,056 817 572 1,358 1,262 6,215 1,166 61 93 3,249 581 1,989 1,083 4,990 1,852 67 25 3,992 12,932 12,954 10,926 11,554 10,592 10,468 10,784 0 978 881 5,332 5,803 1,388 14,320 0 978 867 5,935 5,813 1,967 14,921 0 978 845 7,832 5,844 3,811 14,737 0 978 842 5,852 3,264 14,818 0 978 849 6,840 5,890 1,111 13,369 0 978 849 6,834 5,161 2,894 13,362 0 978 871 7,387 5,808 3,428 14,212 SCR BUSINESS CASE JOURNAL Table 2 Kodaks Annual Income Statement 2000-2006 (In Millions 2006 2005 14,268 8,783 2004 13,517 8,311 2003 13,317 8,102 2002 12,835 7,391 2001 13,234 7,749 25 2000 13,994 7,105 gross sales Cost of Goods Sold Gross Profit SeUing, General, & Administrative Expense in operation(p) Income Before Deprec. Depreciation, Depletion, & Amortization Operating Profit Interest Expense Non-Operating Income/Expens e Special Items Pretax Income Total Income Taxes Minority Interest Income Before Extraordinary Items & dis run Operations Preferred Dividends Adjusted Available for Common Extraordinary Items quit Operations Adjusted Net Income 13,274 8,278 4,996 3,101 1,895 1,331 564 262 86 -727 -339 254 7 5,485 3,485 2,000 1,406 594 211 49 -1,194 -762 689 4 5,206 3,340 5,215 3,339 5,444 3,260 2,184 818 1,366 173 -66 -164 963 153 17 5,485 3,333 2,152 919 1,233 219 -26 -891 97 32 -11 6,889 3,747 3,142 889 2,253 178 96 -39 2,132 725 0 ,866 1,031 835 168 62 -821 -92 -175 2 1,876 858 1,018 148 -23 -651 196 -66 24 -600 0 -600 0 1 -601 -1,455 0 -1,455 -57 150 -1,362 81 0 81 0 475 556 238 0 238 0 27 265 793 0 793 0 -23 770 76 0 76 0 0 76 1,407 0 1,407 0 0 1,407 SCR BUSINESS CASE JOURNAL 26 The switch by consumers to digital photography was coming much blistering than pass judgment and Kodaks traditional film, papers and photofinishing businesses were declining. By the end of 2003, analysts expected tha t digital cameras would begin to outsell film cameras for the first time in the coupled States. The digital photography industry was fast-paced and more crowded, offering razor thin profit margins.In September 2003, Kodak aimounced an aggressive four-year plan to transform the company into a digital photography firm, replacing decliniag revenues and profits in the traditional fihn segment with amplification digital revenues and profits. Job cuts and plant closures were prominent aspects of the firms restructuring plans. Kodak armounced digital and film imaging strategy focused on four components (1) repugn the traditional film business for cash and manufacturing share leadership (2) move in distributed outturn (3) Grow the digital capture business, and (4) Expand digital imaging services. The traditional film business would be managed through organizational consolidation, cost reduction and reductions in both advertising spending and the effect of unique products.Kodak ho ped to expand its leadership in emerging markets, such as china and Russia, anticipating pie-eyed yield in these two markets for traditional fihn products. Distributed output referred to the market for printed photos. Kodak plarmed to dominate all channels for printed photos sell (minilabs and kiosks), home (printer docks and photo papers) and online printing of photos (Kodaks Ofoto site). The digital capture component of the plan addressed digital cameras and Kodaks plans to become the industry standard for ease of use and to achieve top three worldwide market share by 2006. Last, Kodak planned to expand services both online (photo album sharing) and in diligent markets (sharing and printing of photos captured with erratic phones).By the end of trading on the day ofthe digital strategy announcement, Kodaks inventory fell to an 18-year low. Institutional investors criticized Kodaks announced strategy, expressing annoyance at the companys intention to invest in inkjet printing , a business dominated by Hewlett Packard. Investment analyst. Shannon Cross, expressed the concerns of many investors saying, There are so many questions with regard to Kodaks future strategy the track record weve seen out of management in name of world able to hit targets and implement a strategy has been pretty spotty. The Years 2003-2007 Although shareholders and numerous investment analysts openly criticized the strategy, Kodak began implementing the new digital vision for the company.Since 2003, Kodak had pared costs through layoffs and plant closings in the traditional film division, interchange off underperforming business units and increased its research and development investment in ink-jet printers. More than one hundred buildings in Kodak Park in Rochester, New York that had formerly housed thousands of employees had been razed, imploded, or change by 2007. From the companys peak in 1988, Kodak had cut 115,000 employees through divestitures, plant closings, and la yoffs. Kodak expected to end 2007 with only 30,000 employees. Although communication channel cuts would eventually represent cost reductions and improvements to the firms bottom line, restructuring costs since 2003 were estimated to total $3. 8 billion. Investment analysts believed that the highschool costs of Kodaks shift to a digital strategy would be worth the price if the company was successful at growing profits from its digital products. Other analysts were unconvinced, saying We are increasingly unbelieving that EK (Kodak) can efficiently generate SCR BUSINESS CASE JOURNAL 27 digital revenue growth and we think additional plant closings, job cuts and development costs will continue depressing results. * Some analysts disquieted that the continual charges against earnings and mounting debt might leave Kodak strapped for important bullion for research and development. Competitive pressures in digital photography made innovation important but raised concems for some ana lysts. Kodak lost their magic touch.There are way too many people producing similar technology better, one analyst said. The important events in Kodaks history since 2003 are shown as Table 3. Leadership of Kodak also was in transition during this period. In May 2005, Antonio M. Perez replaced Daniel Carp as Chief Executive Officer of Kodak. Perez had come to Kodak in 2003 after working 25 years for Kodaks competitor, Hewlett-Packard. Perez brought his extensive expertise in digital imaging technologies to Kodak and quickly became the leader of Kodaks digital transformation. Perez had been instrumental in formulating Kodaks restructuring strategy as he was Kodaks President and Chief Operating Officer in 2003. Despite the ongoing criticism of investment analysts, Perez remained optimistic about Kodaks prospects saying. We said in 2003 that it would take us four years to transform this company. The first two years were loaded with restructuring costs, and the analysts are reacting to that. My response is Well, hello, we are following our plan. We said wed grow digital revenue and profits, and generate a well amount of cash, and we are doing all SCR BUSINESS CASE JOURNAL Table 3 Key Events for Kodak 2003-2007 28 Date January 26, 2005 February 2,2005 process 2005 May 11,2005 January 5,2006* January 12, 2006 January 30,2006 March 2006 August 1,2006* January 10,2007 February 1,2007 April 26,2007 May 2007* May 14, 2007Event Kodaks digital revenue rose 40% in the fourth quarter of 2004, more than offsetting a 16% decline in revenue for traditional film products. Kodak announced that for the first time, Kodak held the star(p) market share for digital cameras in the United States with 21. 9% share. Kodak changed the name of Ofoto, the online photo-sharing and printing site they had acquired, to Kodak EasyShare Gallery. Antonio M. Perez was announced as the next CEO of Kodak. Perez took over on June 1, 2005. Former Kodak CEO, Daniel Carp retired at age 57. Kodak a nnounced a 10-year partnership with Motorola to develop mobile camera phones with Kodak sensors. Nikon stopped making just about of its traditional film cameras.Kodaks digital revenues for 2005 exceeded revenues from traditional film for the first time. digital revenues were 54% of total sales. Konica Minolta announced that it was exiting the photography industry. Some ofthe firms photography assets were sold to Sony. Kodak announced that it would outsource the action of all digital cameras to Flextronics, a hint electronics manufacturing services provider headquartered in Singapore. Kodak announced the sale of the health concern imaging division to ONEX for $2. 35 billion. Half of the proceeds were to be used for debt reduction. The sale of the division resulted in a decrease of 8,100 employees for Kodak.Kodak announced the first quarterly profit in eight quarters. Revenues for digital photography products had declined by 13%. Kodak announced a partnership with BestBuy to crea te the BestBuy Photo Center. The centralise provided Kodaks EasyShare Gallery to BestBuy online consumers. The partnership would also provide for display of Kodak Gallerys photo gifts (mugs, purses, and so on ) in BestBuy stores. BestBuy would also offer pre-paid cards for prints and gifts. Kodaks digital consumer group sales (cameras, printers and retail printing) fell 14% due to Kodaks decision to stop offering low-end digital cameras and an industry-wide decline in printing snapshots.Kodak announced a partnership with Target to produce a co-branded site that permitted consumers to order photo prints online and select them up in Target stores. The partnership also provided for display of Kodak Gallerys photo gifts in Target stores and for pre-paid photo cards. SCR BUSINESS CASE JOURNAL 29 One ofthe important changes championed by Perez was Kodaks new business model in inkjet printers. Kodak was upending the traditional business model in inkjet printers. Instead of determine t he printer devices low and making profits on high-priced ink cartridges, Kodak planned to sell higher-priced printers that used significantly less expensive printer cartridges. For example, Kodaks new line of all-in-one printers was priced at $149-$299, at least $50 more than comparable models. * The cost ofthe Kodak printer cartridges was significantly less, however, running $10 for sullen ink and $15 for the color cartridge. * The Kodak printers were expected to save consumers 50% over the life ofthe printer due to the cheaper printer cartridges. * Although some analysts reacted positively to the new pricing model, others were doubtfiil saying. They (Kodak) are not fools, they are going after the saintly spot ofthe market, the people who print a huge tally of photos at home, but they are up against big companies that can give a haircut to their own prices if they * There was also some skepticism that consumers would pay more initially in order to save gold over the lifetime of the product.A market research analyst described the consumers perspective saying, When it comes to printers, consumers look for the features they want, and then find the least expensive device that offers them. It is only later that they get sticker shock, when theyre spending $50 for ink. For its part, HP had adopted a wait-and-see carriage regarding Kodaks new printer pricing model. If Kodaks printers gained share, HP was prepared to respond. Kodak is going into a gunfight with a knife, responded Nils Madsen, marketing director for HP inkjets. * Kodak predicted that it would take at least three years for the new printers to be profitable. * Despite insurance coverage a narrower first-quarter net loss in 2007, Kodaks financial results were move to show signs of stress.Sales of Kodaks digital camera group (including digital cameras, printers and retail printing) fell 14% during the first quarter of 2007. Traditional film revenues declined 13% over the antecedent year. Kodak was losing less money, however, investors were expecting more. Kodak needs not only to restructure, but to change its business. Thats a bigger project. They dont have an overnight fix, said one investment blood line manager. Sacrificing current earnings to focus on long term success was a gutsy decision and members of the investment community wondered whether Kodaks executives had the fortitude to continue to pursue it and whether tiie path Perez had outlined for the company was indeed the right path. One investment manager siunmarized his perspective saying.That company (Kodak) used to be my best-loved example of an old-tech company coffin nail the eight ball. Kodak has crossed the Rubicon and gotten by denial. It may be struggling to figure out which road to take, but finally the company understands that the one it was on was getting it nowhere. You know what happens if you sit back and let history happen to you, so youve got to take a shot, and thats what theyre Kodak also had to consider its strategies in light of changes within the digital photography industry. Much had happened since the launch of Kodaks digital strategy in 2003. Important trends include apace improving technologies, increases in the quality and use of SCR BUSINESS CASE JOURNAL 30 amera-enabled mobile phones, maturing conduct in the United States, rapid ad excerpt of digital photography in foreign markets, and increasing hawkish challenges. Improved Technologies and a Shorter Product Life Cycle Like most technologies, the market for digital photography continued to rapidly change. expert innovations ameliorate the resolution of digital cameras (increased the mega pixels captured and thus improved the quality ofthe photos when enlarged). Improvements in ocular and electronic technologies and subsequent reductions in production costs resulted in the interpolation of higher margin, digital single-lense reflex (SLR) cameras into the market.These cameras featured interchangeable lenses and appealed to consumers buying their second digital camera and to photography enthusiasts who could utilize the traditional camera lenses they already owned on the new SLR digital camera bodies. Many digital SLR models offered significantly better image quality than point-and-shoot digital cameras due to their use of larger imaging chips. Industry insiders expected well growth in the digital SLR segment of the market as consumers looked for more capabilities and flexibility in their digital cameras. Canon, Nikon, Sony and Panasonic dominated the market for low-cost digital SLRs in 2007. camera makers found the product life round of the digital era to be markedly different than the rather stable product life cycle of traditional photography.For example, the Nikon topof-the-line F-series of fllm cameras had been redesigned only six times over ahnost 50 years of production. By 2006, new features-laden digital camera models were introduced every few months rather than yea rs apart. Makoto Kimura, president of Nikon Imaging summed up the change saying, In the past, as a camera maker we were able to take it uncomplicated, watch what was happening. Now, weve had to improve ourself Industry analysts believed that the faster product life cycle and the demands for technological innovations upgrade consumer electronics companies rather than traditional camera makersin manufacturing and in distribution.Electronics companies such as Sony possessed the ability to design and manufacture many of the components integral to digital cameras whereas traditional photography companies such as Kodak lacked these capabilities and had to purchase components ftom other electronic companies. Distribution of cameras also shifted with the digital age in a way that favored consumer electronics companies. Consumers were increasingly acquire even relatively expensive digital cameras at electronics chains such as Best Buy, Staples, and Circuit urban center rather than a t smaller specialty photography shops. Consumer electronics companies already dumb the inventory and logistics demands of the national chains, composition traditional photography companies struggled to gain blue-chip shelf space. As one researcher put it, A new wave of technology has given the newcomers the upper hand.For the consumer electronics companies, digital photography has been all upside, go the photo industry was stuck in a slow growing stage. Gains in Mobile Phone Camera Quality and Usage Technological improvements in the resolution of photos captured on mobile phones had increased significantly. In 2006, Nokia offered a mobile phone model with Wi-Fi capabilities and an integrated three-mega pixel camera. Other mobile phone manufacturers offered phones with an integrated two-mega pixel camera. Consumers increasingly expected that their mobile SCR BUSINESS CASE JOURNAL 31 phones would sustain an integrated camera. Approximately 30 one thousand thousand U. S. obile phone owners used their phones to capture images in 2005, an increase of clxxx% over the previous year. By 2009, nearlv 70% of mobile phones were expected to contain cameras with multimega pixel resolutions. Analysts further expected that the improved resolution ofthe integrated cameras in most mobile phones would decrease the demand for disposable traditional film cameras and could have a negative impact on low-end stand-alone digital cameras. Because consumers carried their mobile phones with them constantly, the integrated cameras provided a convenient way to capture images during their day-by-day activities as well as at special events, such as concerts and parties.Improvements in mobile phone cormections to wireless networks also made it easy for users to upload and share images with friends and family. Figure 1 depicts the increase in digital image captured using mobile phones. 62 Figure Digital Images Captured military manwide, 2002-2009 50OT c 400 D Camera phone images captured 9 Digital camera images captured 2002 2003 2004 2005 2K6 2007 2008 2009 Source Lyra Researcti, lrc. , Consumer Imaging Intelligence, Second-Half 2005 Forecast Maturing U. S. regard In 2006, signs indicated that the digital camera market was maturing. After growing by almost 670% from 2000-2005, unit sales of digital cameras were slowing with an increase of only 26% forecasted for 2009. Prices of digital cameras were also declining, making profitability more effortful for makers of low-end cameras.For example, digital cameras with less than 4 mega pixels of resolution dropped in price by 40% in 2006. In contrast, higher-end digital SLRs tended to maintain the same price points, adding value for consumers by packing each successive model with even more features. There was a glimmer of hope for some growth in the digital photography industry as some analysts believed that U. S. consumers were upgrading their digital cameras more frequently than had been previously expected . The replacement rate was estimated at every two SCR BUSINESS CASE JOURNAL 32 to three years rather than every four years as initially predicted. However, demand was expected to decline in 2007 and beyond as many consumers had completed their upgrade cycle and fewer new consumers were entering the market. An expected retardation in the U. S. economy further contributed to a slowdown in demand for digital cameras.Higher delight rates were beginning to depress consumer spending in 2005 as the percentage of disposable income that U. S. households paid for their mortgages and consumer debt was increasing. Growth Possibilities Abroad Digital camera sales were expected to slow down in sum America in 2007, but remained strong in Europe and Japan. acclivitous markets were also expected to provide growing demand as camera prices fell. In 2007, digital cameras were in strong demand in fundamental and Eastem Europe. Unit sales of digital cameras showed substantial increases in Russia (up 30%), Ukraine (up 70%), Poland (up 15%), Hungary (up 18%), and the Czech Republic (up 7. 7%) over 2005 sales. Although more cameras were purchased, sales revenues actually declined as a result of declining prices due to technology advances and competitive pressures.The top three vendors in the region in 2006 were Canon, Sony and Olympus (in order of share). Analysts expected continued sales growth in the region but noted that demand for digital cameras had matured in the Czech Republic. China was seen as a market with enormous potential for digital camera sales due to improving economic conditions and Chinas more open flummox to the rest ofthe world as the 2008 Olympic Games in Beijing approached. Sales were expected to grow from approximately 3 million units in 2004 to between 6. 5 and 10 million units in 2008. Growth in Chinese disposable income in the major(ip) industrialized cities such as Beijing, instill and Guangzhou had created a market of 400 million potential cus tomers for products such as digital cameras. Interest in photography was keen among Chinese consumers as more Chinese began trip outing abroad and wished to bring home photos from their trips. The World Tourism Organization predicted that approximately 100 million Chinese would travel abroad in the year 2020 (an increase of cholecalciferol% over 2003 figures). Digital camera sales to consumers outside urban areas in China were expected to be slower. Lower disposable income and need for higher priority items like household appliances caused rural Chinese consumers to delay their purchase of digital cameras. * Furthermore, distribution channels in rural areas were not well developed. No major electronics chain equivalent to Best Buy or Circuit city existed outside the major Contrary to earlier industry predictions, Chinese consumers did not buy traditional film cameras as their purchasing power increased, but preferred to leapfrog the older technologies to buy the latest digital camera models. Sales of traditional film cameras and film canisters declined much more rapidly in China than had been anticipated leaving companies that had depended on selling these products at risk of being jumped over by the newer technologies such as digital cameras and camera-phones. By 2006, more Chinese consumers owned cameraphones than digital cameras. *SCR Battling for Market Share BUSINESS CASE JOURNAL 33 The disruptive technology of digital photography had proved challenging for many traditional camera makers. In 2006, Konica Minolta announced that it would withdraw completely from the photography industrydespite being the ternary-largest producer of traditional photo film. Nikon announced plans to gradually halt production of five models of traditional film cameras, leaving only two film cameras in its product portfolio. * Other traditional camera companies, such as Canon, thrived in the new digital world. Canon had become the world leader in digital cameras with an ahnost 19% share in Consumers were offered more choices in the digital camera marketplace as companies in the consumer electronics industry began offering digital cameras. Notable examples included Samsung, a consumer electronics company with a strong position in the camera-phones segment and Hewlett Packard with strongholds in printers and personal computers.Consumer electronics companies were formidable entrants into the digital photography industry due to their strong brand awareness with consumers, open distribution channels and have it off with many of the technologies involved in creating digital cameras. The competitive position of the companies in the digital camera industry rose and fell as consumers demanded more features, improved technologies and lower prices. The U. S. market shares of the top ten digital camera makers are shown as Table 4. Analysts believed that the strong gains shown by Canon and Nikon from 2005-2006 were due to their introduction of lowcost digita l single lens reflex cameras (SLRs). Worldwide, Canon led in digital camera sales with a 18. % share in 2006. * Sony followed with a 15. 8 percent share while Kodak was third at 10%. ** Both Canon and Sony benefitted from consumer saki in single-lens reflex models as well as growing demand in emerging markets. Sonys share ofthe global market increased as a result of its purchase ofthe digital single-lens reflex division of Konica Minolta in 2006. In the digital SLR segment ofthe industry. Canon held 46. 7% share in 2006, followed by Nikon in second with 33% share and Sony at third with 6. 2% o H a m en Olympus Samsung Fujifilm Panasonic Casio (N 068, 500 940, 800 867, 000 045, 700 185, 856, 500 496, 400 444, 700 046, 300 955,000 inChange Change From Shipments Market From anterior Previous Share Year Year 21% 000 000 18% 39% 780 000 17% 10% -31% 050 000 25% 44% 31% 326 400 68% 130. 600 18% -5% 964, 800 -15% 120% 680,500 N/A -19% 1,780,600 199% 350,000 N/A 136% 405,000 N/A Shipme nts m 587 600 330 000 880 000 381 600 804 900 317 400 N/A 1,782,600 N/A N/A V/N es H a 2 Ho 2006 2005 2004 Shipments Market Share Market Share cn 00 Canon Sony Kodak Nikon 00 20% 17% 16% 10% cn o o cn ( N g E g o 19. 4% 21. 9% 6. 2% 8. 1% 10. 4% N/A 8. 0% N/A SCR BUSINESS CASE JOURNAL 35 In segmented market share, signincant differences were seeming(a) in the purchasing preferences of male versus female consumers.Men seemed to prefer Canon while women preferred Kodak. * Analysts attributed the gender difference to womens preference for simplicity and desire for high-quality prints that could be shared with family and friends. Kodak met these needs for women with their point-and-shoot camera models and the EasyShare docking station. Men preferred the SLR models offered by Canon while Kodak was their fourth most popular choice behind Sony and Olympus. Gender differences were also observed in what users did with their digital photos. Women believed digital prints were more impor tant than men (63% versus 53%). Women printed approximately 35% ofthe digital photos they took while men printed only 25%. Men took the picture and put it in the computer. But then it was like a roach motel for pictures. They never got out, one industry insider reported. Although digital camera makers recognized gender differences in purchasing and usage behaviors, care was taken to address the needs and preferences of both men and women when designing and marketing photography products. For example. Canon utilized Russian lawn tennis star Maria Sharapova in television advertising because she appealed to both men and women. by Representative data on the number of camera models and suggested retail prices offered the top five digital camera companies is provided as Table 5. jaPM a a O -t P GO O PH o O O I U U O m 00 3 O) - II II 1 O uj N 0gt (Zl H et S a PH 11 I C S a ON n Os O ON 5 . -i g A a (-. S o 6 6O . agi 00 0U-3 le a y ob e C3 .a o CM s a Pi O 6 II O O Os 2 O S o u 1 o 00 00 o si 5bp -2 SS fe PL, ao o O g a es .5 a -3S a o U SCR BUSINESS CASE JOURNAL A New Kodak Emerges 37 In January 2008, Kodak announced that its turnaround was officially over. In advance of the companys annual strategy meeting in New York City on February 7, 2008, Perez announced It is with great pride that I introduce the new Kodak, a company with a new spirit and winning attitude.While complementary a difficult and unprecedented business transformation, we also created breakthrough products and services that feature Kodaks hallmark innovation, winning customer acceptance and critical acclaim for a brand renowned for its smart use of technology. In 2008 and beyond, we will leverage the innovative thinking of Kodak people to deliver on our commitments to shareholders and increase the value of this great company. Kodak executives pointed to multiple metrics to demonstrate the extent of the firms transformation. Kodaks industrial park in Rochester, New York had been red uced from 1,600 acres to 700 acres since 1998. xi film plants had been shuttered, leaving the company with only three film plants worldwide. As shown in Figure 2, the number of Kodak workers had been reduced from 145,300 in 1988 to around 30,000 at the end of 2007. More than half ofthe remaining employees were considered new, joining Kodak since the launch ofthe firms digital strategy in 2003. Revenues from the Consumer Digital Imaging Group (CDIG) had increased substantially since 2003. CDIG included digital cameras, inkjet printers, camera sensors, digital picture frames, online photo finishing, and digital photo kiosks. As shown in Table 6, CDIG revenues had almost doubled, growing from $2. 37 billion in 2004 to $4. 63 billion in 2007. Kodak did not report profitability data by product segment. SCR BUSINESS CASE JOURNAL 38 Figure 2 Kodak Sales, Gross Profit Net Income Per Employee*** 2002-2006 350,000 300,000 250,000 200,000 150,000 = o Q 100,000 50,000 0 50,000 2002 H Emp loyees D Sales/Employee Gross Profit/Employee Net Income/Employee 70,000 $183,357 $77,771 $11,000 2003 63,900 $208,404 $81,612 $4,147 2004 54,800 $246,661 $95,000 $10,146 2005 51,100 $279,217 $107,339 $(26,654) 2006 40,900 $324,548 $122,152 $(14,694) o o o o m ( . -H ON o 1-H s? ON ON rj 004 Perc ri n 00 Tl Tl Tl 00 H m ON o ON VO O .-H NO ON Tl .-H in n VO o t a O n rj VO O 00 O 1-H 00 CN T-H o o TH ri VO ri m O a Gro o tems ai a s a O a o (3 S U g u a S onsnmer Digi CJ r 1 extraneous the U. Inside the U. S raphic Comm ilm Photofi Outside the U. Inside the U. S U U 11 other ealth Gronp . 5 5 s S e t (3 / anna n u SCR BUSINESS CASE JOURNAL 40 Building implosions were another symbol ofthe firms makeover.Kodak had shed more than 100 buildings since the 199Os, imploding three massive buildings during the summer of 2007 that had formerly housed manufacturing processes for the firms film, paper and other chemical-based products. As the dust of the old chemical plants was cleare d, Kodak executives gave presentations for technology stock analysts praising Kodaks successful turnaround. The presentations were empower A New Kodak Emerges and emphasized the end of Kodaks restructuring program the creation of high margin businesses, such as consumer inkjet printers and camera sensors and Kodaks expected return to sustainable profitability.According to company executives, Kodak had a clear advantage in the digital space due to its specialized knowledge of materials science (the result ofthe firms 100-plus years of experience in traditional photography) and digital image science (through the firms strong intellectual property in digital technologies). However, stock analysts remained skeptical of the success of Kodaks transformation, continuing to question the competitive success ofthe inkjet strategy and Kodaks value proposition for camera sensors. Analysts further questioned the adequacy of Kodaks spending for research and development given the number of major initiatives it was pursuing. In 2007, Kodak spent 5. 19% of sales or $536 million on research and development, while Canon spent $3,351 billion or 8. 22% of sales on a more singular research agenda. Others continued to express concern about the commoditization of many of the business segments in which Kodak operated, persistently asking Frank Sklarsky, Kodaks chief fmancial officer, So, where are you making your money? I just want to know. It isnt clear The stock analysts continued malaise over Kodaks fixture was refiected in their stock recommendations with ten of eleven key analysts rating the shares as either neutral or as Despite the Kodak officers assertion of successfiil transformation, there was open speculation in the press about the possibility of a breakup of Kodak or mergers with either Xerox or Hewlett Packard.Perez dismissed the notion of a merger with HP saying, I dont have any comments about that. All those rumorsthere are many other rumors too. I wouldnt pay much attention. Other rumors included mergers with Dell, a leveraged buyout by a private equity firm or billionaire investor. Warren Buffets interest in Kodak as an investment. When questioned about the possibility of a breakup, Perez retorted, They dont know anything about the company. Why would you do that? I dont see any good financial reason to do that. Were the winds of change continuing to blow for Kodak? Was Kodaks transformation successful or were there other changes needed?Was it time for Kodak to merge or pursue a breakup? Or was a leveraged buyout Kodaks best option for remaining independent?EndnotesDigital Camera Turns 30-Sort Of. The Associated Press, http//www. msnbc. msn. com/id/9261340/. Online Extra What it Boils Down To for Kodak. (November 23, 2003).