A Case Study on Downfall of Kodak
A case study on Kodak’s failure and what they could have done to save it
Here we study why Kodak, one of the biggest brands of the 90s failed as a business organization and what could they have done possibly to prevent it.
Introduction:
The first pocket Kodak camera ($5 Pocket Kodak) with the tagline “You press the button; we do the rest” was introduced in 1895. In the 1970s, it acquired 90% of US film market. It made many remarkable contributions in the field of film, rolls and camera. Kodak even invented the first digital camera in 1975. But, instead of marketing the new technology, the company held back for fear of hurting its lucrative film business, even after digital products were reshaping the market. Due to factors like disruptive technology and inability to anticipate the wave of incoming digital era and other wrong management decisions (like focussing on film making even when new digital era is ushering, etc) Kodak failed. Also, inability to compete with the nearest rival Fuji Film was one of the defining factors for its downfall. The net sales declined sharply from 2005 onwards and the company was ultimately filed for bankruptcy in 2012.
Methodology:
- Annual reports were collected for Kodak for the years 1992-2012.
- Using the concept of Inflation, the profits and net sales over years (1992-2012) were converted to the monetary value of 2012.
- The net sales and profit were plotted to have an overview of the business performance of Kodak from 1992-2012.
- The pair of years which marked the steep downfall was identified and a comparative study was done on how Kodak performed in the previous years as compared to this year.
- The objective functions and corresponding constraints were then identified and analysed.
- How Kodak could have stopped or countered this rapid fall had also been discussed.
Data-set and analysis:
Below is the data from 1992-2012 (Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934) of Kodak’s gross profit and net sales:
(Data set is prepared from the link at the bottom of the file)
| Years | gross profit (in million $) | Gross profit w.r.t year 2012 | Net Sales (in million $) | Net sales w.r.t 2012(in $) |
| 1992 | 8527 | 34443.34 | 16545 | 66830.67 |
| 1993 | 6016 | 22500.55 | 16364 | 61203.28 |
| 1994 | 8301 | 28577.1 | 13557 | 46671 |
| 1995 | 7,018 | 22070.24 | 14980 | 47109.18 |
| 1996 | 7,642 | 21909.85 | 15968 | 45780.75 |
| 1997 | 6,562 | 17039.62 | 14,538 | 37750.98 |
| 1998 | 6,113 | 14934.93 | 13,406 | 32752.76 |
| 1999 | 6,102 | 12927.26 | 14,089 | 29847.95 |
| 2000 | 5,619 | 11848.77 | 13,994 | 29509.12 |
| 2001 | 4,568 | 9308.57 | 13,229 | 26957.76 |
| 2002 | 4,610 | 8933.46 | 12,835 | 24872.23 |
| 2003 | 4,158 | 7807.84 | 12,909 | 24240.35 |
| 2004 | 3,935 | 7124.14 | 13,517 | 24471.93 |
| 2005 | 3,651 | 6368.92 | 14,268 | 24889.54 |
| 2006 | 2,409 | 3980.76 | 10,568 | 17463.12 |
| 2007 | 2,516 | 3902.77 | 10,301 | 15978.72 |
| 2008 | 2,169 | 3188.75 | 9,416 | 13842.93 |
| 2009 | 1,768 | 2369.36 | 7,606 | 10193.07 |
| 2010 | 1823 | 2125.04 | 5,993 | 6985.92 |
| 2011 | 793 | 844.44 | 5,148 | 5481.92 |
| 2012 | 591 | 591 | 4,114 | 4114 |
Figure 1:
Graph representing the gross profit over the years (1992-2012) with respect to monetary value of 2012 (this is because of inflation).
Figure 2:
Graph representing the Net sales over the years (1992-2012) with respect to monetary value of 2012 (this is because of inflation).
From figure 2, we can observe that the company’s sales remained between 13000-16500 million $ (approx.) but since 2005, there was a steady fall in net sales. From 1992-2005, we can see that the company recovered its losses every time after a fall in sales. But, after 2005 the company could not recover their sales revenue and it reached an all-time lowest sale of 4000 million $ in 2012, when they were filed for bankruptcy. So, we study the Annual report of (2005-2006) to know the reasons of their fall.
The mean net sales of (1997-2005) i.e. before Digital era was $28800.39m as compared to $12368.65m in Digital Era (2006-2012).
Mathematical perspective:
If the objective function of Net sales is denoted by
subject to some constraints
x1= sales from CDG: consumer digital imaging group
x2= sales from FPG: film and photofinishing systems group
x3= sales from KHG: health group
x4= sales from others
CDG includes the following: Digital Products, Retail Printing, On-Line Web Services, Imaging Sensors, All-in-One Inkjet Printers etc.
FPG includes the following: markets films (motion picture, consumer, professional, industrial and aerial), one-time-use and re-loadable film cameras, consumer and professional colour photographic papers, photographic processing chemicals, wholesale photofinishing services, on-site event imaging solutions, and equipment service and support.
KHG includes the following: Laser imagers, digital print films, computed and digital radiography systems, dental radiographic imaging systems, dental practice management software, advanced picture-archiving and communications systems (PACS), and healthcare information systems (HCIS).
Others includes the following: Company’s display business, business development and other small, miscellaneous businesses.
Constraints is a limiting factor/cause which affects(decreases) the overall efficiency of a system or process. Here the constraints for each of the choice variables (x1, x2, x3, x4) are identified which ultimately affects the Net sales. Then it is dealt with to increase the profit. The following steps are followed to maximize any objective function with constraint(s)
Identifying the constraint (i.e. sub variables) for each of the variables (x1,x2,x3,x4):
- Constraints for CDG & FPG (x1, x2) group:
The sales of Photographic films, retail printing (kodak Labs) were one of the major revenue earners for the CDG group. But when people moved from printing the photos to sharing them online, there was a huge fall in net sales by approximately 5.8 percentage points, driven primarily by the consumer digital capture.
Net worldwide sales of the consumer film capture SPG, including consumer roll film (35mm and APS film), one-time-use cameras (OTUC), professional films, reloadable traditional film cameras and batteries/videotape, decreased 29% in 2006 as compared with 2005, primarily reflecting industry volume declines.
So, the above-mentioned subsectors: sales of Photographic roll films, retail printing, OTUC, professional films etc. are the internal constraints for the CDG and FPG groups limiting the overall net sales.
Fujifilm disrupted the imperfect competition which was set up by kodak. So, Kodak was forced to sell their products at prices lower compared to existing market products. Due to this unfavourable price/mix, the sales decreased by approximately 3.8 percentage points. (External constraint)
- Constraints for KHG(x3) group:
The decrease in sales was attributable to declines in volume of approximately 5.6 percentage points, primarily driven by the digital output and radiology film SPGs, partially offset by the growth in the digital capture. Net worldwide sales for the Health Group segment were $2,497 million for 2006 as compared with $2,655 million for the prior year, representing a decrease of $158 million, or 6%.
In this case the sales of traditional radiology film were the main Constraint. This was largely due to the medical institutions switching to digital medical tools (like digital X-rays etc) rather than the conventional analogue ones.
- Other Constraints (x4):
The cost of digital photography equipment such as cameras, displays, and printers etc. were at that time very high and they were not technologically competent to develop the digital photography equipment.
Thus, Cost and technological Constraints were one of the main reasons and can be classified in external constraints.
Exploiting the constraints to elevate its performance (possible solutions/ recommendations):
- Development of new market strategy: All the constraints of the above choice variable were mostly affected by Consumer Shift to Digital.
The essence of marketing is asking first, “what business are we in?” and not “how do we sell more products?”. Kodak made a classic mistake: it didn’t ask the right question. It focused on selling more product, instead of the business that it was in.
Kodak did not fail because it missed the digital age. Actually, the first digital camera was invented by a Kodak’s employee (Steve Sasson) in 1975. However, instead of marketing the new technology, the company held back for fear of hurting its lucrative film business (which earned them approx. $7051, $5325 and $4156(in millions) revenues in 2004,2005 & 2006 respectively). Sasson himself told The New York Times that management’s response to his digital camera was “that’s cute – but don’t tell anyone about it.”
They focused on the sales of films rather than making the camera digital. Kodak choose to use digital to improve the quality of film. Advantix Preview film and camera system, which Kodak spent more than $500M to develop and launch. One of the key features of the Advantix system was that it allowed users to preview their shots and indicate how many prints they wanted. The Advantix Preview could do that because it was a digital camera. Yet it still used film and emphasized print because Kodak was in the photo film, chemical and paper business. Advantix flopped. Why buy a digital camera and still pay for film and prints?
2. Adapting the business design to changing conditions. Barabba (in his Book “The Decision Loop”) offers three different business designs—make-and-sell, sense-and-respond and anticipate-and-lead. The right design depends on the predictability of the market. Kodak’s unwillingness to change its large and highly efficient ability to make-and-sell film in the face of developing digital technologies lost it the chance to adopt an anticipate-and-lead design that could have secured the it a leading position in digital image processing.
3. Research & development: Separating out and then optimizing different functions usually reduces the effectiveness of the whole. There was, however, little appreciation for the effort being conducted in the Kodak Research Labs with digital technology.
Instead of focusing on the digitalization they researched on increasing their film sales.
4. Cost and technological Support: Due to lack of technological competency and proper financial support, Kodak Digital cameras were unable to compete with their contemporaries like Fujifilm, Canon etc.
Fuji DS-1P (world’s first commercial digital camera) was priced in U.S. with accessories, $20,300 whereas Kodak’s DCS-100 cost up to $25,000 in US. This is where kodak lost the contemporary market.
Lessons learnt:
Disruptive technologies have massive potential to bring down even the most successful of empires. A business is not about the existing products, but the consumers’ needs, which changes with time. So, management and marketing decisions can go a long way in deciding the fate of a particular business.
Source and references:
- The Goal; by Eliyahu Goldratt and Jeff Cox
- The Decision loop: by Barabba
- Annual reports of Eastman Kodak (www.annualreports.com)
- (Paper) Applying the Theory of Constraints in the course of process management; by Michael Marton, Iveta Paulova.
The data used in the above analysis was prepared from the files in the link below:
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