Kodak At The Digital CrossroadsEssay Preview: Kodak At The Digital CrossroadsReport this essayExecutive Summary ReportKodak at a Crossroads:The Transition from Film Based to Digital PhotographyMarch 26, 2007The world we live in is evolving and advancing at a staggering pace, and in the digital technology/photography industry companies are finding that in order to survive intense competition they must abandon old business strategies that centered on traditional film processing and embrace strategies that focus on digital photography. For decades, Kodak thrived on a classic business model: sell lots of cameras at low prices in order to mark up profits on the inks, chemicals, and papers used for creating the prints. This strategy collapsed as the digital revolution and foreign competitors found a way to improve the technology at a cheaper price and at a much improved rate. As a result of these driving forces, Kodak no longer controls the photography business. That is the key issue that Kodak is facing. Is Kodak up for this challenge? Can Kodak successfully compete in the digital world?
Since January 2000, Kodaks revenues and net income have declined, its shares have dropped by 66 percent, and the companys S & P rating has dropped by 5 grades. Kodak has attempted to minimize its losses by reducing its workforce, cutting 7,300 employees in 2002. The company is struggling to survive, and although it invested over $4 billion in digital technologies since the nineties, is not gaining ground in the digital photography industry. On September 25, 2003, Kodaks CEO, Daniel Carp, proposed that the company invest more heavily into the digital market, and devote its resources to becoming a “digital-oriented growth company” in anticipation of becoming a $20 billion company by the year 2010. Are these realistic expectations, for a company whose foundation and history are based in the traditional film industry, and whose competitors are leading the way in an industry where innovation and differentiation are the keys to success?
Financial AnalysisKodaks financial performance from 1993 to 2003 supports their steady decline in the photography industry. In 1993, they reported operating income of $3,122,000 down to $1,848,000 by 2003. This decline represents more than a 40% decrease in just ten years. In analyzing their Income Statement and Balance Sheet from 1993 to 2003, there are evident declines across the board in their entire financial performance. In 1993 they had a gross margin of 57.52% falling to 38.95% in 2003. This is almost a 20% decline in only 10 years. As their gross profit margin continues to decrease it will become more difficult for them to cover their operating expenses and yield any type of profit. Their current ratio in 1993 was 1.63; however by 2003, it declined to 1.03. While this is above one and higher than the previous five years, it is still a rather poor ratio. If for some reason Kodak would have to convert its assets to cash to cover their liabilities, the result would be very little cash reserve to spare. This downward pattern holds true for their debt-to-equity ratio. In 1993, their debt-to-equity was 5.06 dropping to a ten year low in 1995 of 1.83, back up in 2003 to 3.54. The general rule of debt-to-equity is to be lower than 1. The higher the ratio increases over one, the more excessive their debt, the lower their credit worthiness, and the weaker their balance sheet.
Industry/Competitive AnalysisThe early 2000s brought about a large scale transformation in the photography industry. The traditional photography industry has become a mostly mature market, and changes in technological and digital advancements have created the rapid growth of the digital photography market. By 2002, more than 23 million households owned digital cameras, with the demand expected to rise with more than 33 million households owning digital cameras in 2003. The digital photography market has quickly become a commodity market, in which buyers hold a substantial amount of bargaining power.
There are numerous products and services available and consumers are able to choose among the variety of offerings. Consumers are also becoming increasingly technologically sophisticated, and educated on the products that they are able to select from. Competition is also very intense in the digital photography industry. There is a narrow margin between the leaders and the followers, which largely determines a companys level of success in the digital photography industry. Anticipating such rapid change and technological advancement, adopting proactive measures is crucial to being a leader in the race, which companies such as Sony, Canon, Fuji, and HP along with Kodak are all attempting to achieve.
Company Resources/Capabilities AnalysisSince 1888, Kodak has led the way in the photography world, making picture-taking something simple and enjoyable, creating new products and processes, making photography easy to use. Despite their long, successful history, the birth of the digital photography era changed the concept of the picture taking process, and forced Kodak to reevaluate its present strategy and determine whether its current business model is enough to sustain a competitive advantage and continue to be a leader in the transition to the new digital photography industry. Thus far, Kodak is struggling to differentiate itself, and is in need of generating a basic generic strategy to springboard the rest of the companys strategies after, and provides a new direction for the company.
The companys strengths rely predominantly on the history of the company – the foundation that it was built on. Kodak has been an industry leader in the traditional film market, and has had historically strong margins supporting that leadership role. They also maintain a strong brand image. Society recognizes Kodak as a company they can count on for quality pictures. The rapid transition from traditional to digital has left Kodak clinging on for survival and weaknesses in the company have emerged as declining revenues have begun to overshadow previous financial gains. They failed to take the initiative in creating innovative products and differentiation in a market that has become largely dominated by educated consumers and intense competition. They did not capitalize on their strong brand image, and have not been able to utilize their resources to leverage company strengths
Consequently, Kodak has made significant progress. The company’s initial $9.4 billion in revenue was well outperformed by film producers and distributors, creating a “bigger picture” brand with a growing presence in more emerging markets. It also had a growing number of new products that continue to generate significant revenues for the company. And they’ve done so well on digital. Kodak continues to be a leader in digital production, with one of the best line-up values at its time. The company’s digital business could be seen as an investment opportunity for many.
Another development to develop with a larger picture of its product and its market is for the company to invest the money it makes, rather than try to invest it all on more risky projects. In recent years, Kodak has seen its overall image deteriorate, which would mean it will have to make a better investment of its business resources, such as its new 3D printing business. In addition, it has had significant changes in its own operations and the company’s budget is not sufficiently constrained, making it harder for it to maintain its competitive edge.
The company already has some big changes. On the financial front, the company’s stock price stabilized, and the net margin ratio decreased to .95 in recent months. It also has reduced its dividend and it made a modest cut by a couple percent this year. Additionally, it raised its dividend from $5 a share per share to .3 for the year with only modest increases from the previous year. These moves come amidst recent price pressures within the industry, and while they have largely offset them, they have also been very positive for the company.
For years after its acquisition of Kodak in 2013, the company’s stock price stabilized, as was the case with much of the other recent acquisitions. During that time, the company has steadily raised dividends, which have been good for the company. During the final quarter of 2014, that dividend increase was down to less than 20 cents a share. Despite the loss in annual revenue to the company and the fact that it had a long way to go to meet its annual goal of $4.6 trillion in sales, Kodak’s long-term dividend growth would have been substantially higher had the company reinvested its money in more expensive companies. With more than 5,000 employees around the world, Kodak has a lot of capital to develop and sell its films, as well as a strong brand. However when it comes to innovation, Kodak’s innovation is at a crossroads.
The company is facing this year’s market. This represents a challenge to Kodak. The company has a very small business model, and Kodak needs more of an investment model to stay relevant. This could be particularly problematic if the company tries to get ahead of its own competitive advantage but also has to compete with other film producers and distributors. Such a strategy could make it easier for Kodak to attract and retain new members to its lineup, but it could also put an increased strain on new members who may have less to offer. At a minimum, Kodak needs to maintain its strength or the company will lose credibility within the film industry.
In the case of the other recent acquisitions, the company has also raised its dividend. It has lowered its dividend, but not from its current level of $1, at a significantly higher level than its original target. Additionally, it has cut its dividend from $2 a share in 2013 to $1 in 2014. To get