The Eastman Kodak company (colloquially known as Kodak) is an American company specializing in imagery recording and film technology. For the past 100 years, it pioneered innovation in photography by developing affordable portable cameras and supplying various consumables and accessories to enable their work. It has been the first company to develop a mass-produced digital camera, which enabled the company to stay ahead of the competition in the first half of the 2000s, holding up to 27% of the total digital market (Eastman Kodak Co, 2007). However, the company’s decision-making process over the last 5 decades has become rigid and based on the relative stability of the filming market (Clemen & Kwit, 2001).
As a result, the company failed to foresee the massive emergence of digital products and the adoption of thereof by competitors and adjacent industries, leading to a situation where Kodak could not supply the booming demand. The company lost its leading positions as the physical film market was replaced by digital products, devaluing the company’s entire supply chain and causing the effective death of the once-leading international giant (Dan, 2012). The purpose of this case study is to analyze the decision-making process that made Kodak keep its razorblade approach instead of shifting from physical filming to digital in 2007.
Company Background
The Eastman Kodak company was created by George Eastman, who invented and patented the technology for dry-plate film and the machine to produce it. These precursors of portable cameras became extremely popular, and in four years managed to replace the photographic glass plates previously used for creating photographs. The company was built on the premise of predicting consumer demand and providing the right product to satisfy personal needs. Eastman’s concept for Kodak involved producing compact and convenient products that would be as easy to use as a pencil.
Being a visionary, Eastman identified quality as the primary offer of his company and popularized the brand with high-resolution photographs. The second time Kodak was tested by the need for innovation came in 1963, with the emergence of colour technology. The company expected large growth in the demand for colourful photos over the existing black-and-white technology and invested significantly in research, development, and technological rearmament (Munir & Phillips, 2005). The results of these efforts were highly effective, as Kodak’s new product lines, which included cameras, medical equipment, and graphical tools, increased the company’s sales by 1 billion dollars a year, which grew to 10 billion dollars in 1981 (Dan, 2012).
Kodak’s venture into the digital field started in 1975 when it developed the first digital camera of its kind (Mulligan, 2002). However, the technology was not launched into production, as the company feared that it would hinder the profitability of its own business and threaten the existing film-based line of products. There were early signs of the future tragedy, since Sony declared the development of its own digital camera (Mavica) in 1981 (Nakamura, 2016). A decade later, Kodak started researching its own digital technology in order to compete in the emerging digital marketing. The company ran a robust customer behaviour program to determine the parameters for the new product line. The EasyShare line of family products provided digital cameras with a photo preview feature, as well as easier compatibility with the existing PCs. The product line was a great success, resulting in Kodak’s sales in digital cameras alone to surge to 5.7 billion dollars a year in 2005 (Eastman Kodak Co, 2005).
However, the company failed to recognize the growth potential in the digital market, which was manifested in the shrinkage in revenues and market share of traditional film cameras, leading to a collapse by 2007, when the company declined from first place to fourth, with market share dwindling from 27% to mere 9.6% (Eastman Kodak Co, 2007). Followed the series of ineffectual attempts to reinstate itself in the market, Kodak had to close enterprises and lay off thousands of workers, instead relying on litigations to pay off debts and exit bankruptcy. Although the company retained its name and remained in business, it is no longer the leader of the technological race in the digital camera age.
Decision-Making Process in Kodak
In order to understand the decision-making process in Kodak in 2007, it is required to understand the operational variables that the company was dealing with, such as its existing product line, marketing strategy, value chain, and social factors/actors in its internal and external environment (Probst & Raisch, 2005). It is easy to criticize the company using hindsight judgment, but it is much harder to evaluate the decision while using the same information the company had at the moment. The following sections will present these parameters.
Kodak’s Traditional Marketing Strategy
From its inception in the 1880s, Kodak made money by using RTP (Return-to-Producer) strategy, also known as the razor blade strategy. The idea behind it is as follows:
- The company sells cameras at prices lower than potential competitors, and possibly below the mean production price, attracting the customers with high quality of the gadget for a bargain price.
- Sell various consumables and accessories to allow the customers to use their cameras and receive the benefits of high-quality photography. Selling films was the primary source of revenue for Kodak for almost 100 years.
- Provide additional services at a bargain price to maintain a loyal customer base. Every major city had several Kodak shops located in various districts, which not only sold film tape and accessories, but also printed the user’s photos on paper, provided maintenance for their cameras, and offered warranty.
This strategy ensured quick and easy access to Kodak cameras for millions of Americans, reaching the point where the word Kodak became a euphemism for camera just like Xerox became the word for a printer, and Windows – for an operational system. Since it worked for so long, Kodak started seeing itself as a company that produces film-based cameras, rather than a company that enables its customers to take quality photos by producing cameras that are as simple and convenient as a pencil.
Explanation of Decision
Economists believe that over the past 15 years, Kodak’s market capitalization has consistently declined from $ 31 billion to $ 150 million (Fisher, 2018). Business analysts in one voice say that at the turn of the new century, Kodak was not fast enough when it switched to digital technology (Bhargava, Bafna, & Shabarisha, 2018). The company was ahead of competitors, with the transition to digital photographic equipment depriving it of its main source of income – the sale of photographic film. The problem was not a quick change of technology, but a flawed marketing strategy.
Kodak’s downfall was a result of a consistent process, where the company ignored the warning sign of the market shift. During the given period, other companies, such as Sony, heavily capitalized on the lack of caution of the Kodak. Therefore, it did not intentionally choose to dismiss the changes in the industry, but the firm was confident in their old strategies. Today, the company owns 1,100 patents in force, whereas, more recently, the company’s research laboratories were located around the world (Moorman & Day, 2016). In addition, Kodak invented the first digital camera just six years after Armstrong’s space expedition. It does not mean inattention to the figure the reason for the current marketing position of the company. The fact is that instead of promoting the development, Kodak entered into a struggle with other manufacturers of photo electronics, hoping to prevent, restrict, close the market, tried to crush competitors, not to lower prices (Kotter, 2012). Thus, a marketing error is not in inertness – this is a regular mistake of a market leader who believes that managing the market is enough, rather than shaping the market.
Kodak’s marketing strategy, which was concentrating on generating revenue sources in patent licensing, in fact, proved flawed. In recent years, the company managed to get about $ 1 billion from Samsung and LG on a patent for previewing images (Fisher, 2018). It also led to attack Apple, where a lawsuit was filed against the iPhone manufacturer in the US International Trade Commission (Mendes, 2007). However, the defence by patents is always a loss in a dynamic market, and the struggle against competitors is ineffective, compared to the battle for the market.
Understanding and Application of theory
Many theories have been proposed in an attempt to explain Kodak’s failure. The company was highly loyal to its old traditional strategies because they were working in the given period. There are explanations stating that Kodak was blind to the rise of digital technologies, including the camera. However, the clear answer is that Kodak’s internal organizational structure and leadership were flexible enough to adjust for the market shifts. In addition, shareholders were highly invested in preserving the traditional film aspect alongside the old product lines. The external reasons included overall market change, which was moving from physical films to digital versions (Teece & Linden, 2017). Although the role of government was not significant, it also had an effect on Kodak’s unprofitability.
Furthermore, Kodak’s failure was mainly due to the lack of diversification on the product line, which would have allowed them to transition from prints towards digital cameras slowly. Other companies, such as Fujifilm, were eager to adapt to the current market shifts, where the digitalisation was the key factor (Line & Wang, 2017). However, it is important to note that Kodak was also in an attempt to adjust for the changing environment, but the actions and decisions were done incorrectly due to the old central traditions of the company. Kodak’s management ignored the signs of warning about the decrease of the print photo market, and the company wasted a lot of resources to bring back the disappearing industry by installing 10000 kiosks in stores of their partners (Albarran, 2013). All these inefficiencies and market alterations impacted the company’s financial state.
In the beginning, Kodak attempted to introduce restructuring procedures by reducing the production of their main product lines in order to give space for engineers to generate innovations and research developments. These R&D sections were relocated to be closer to customers, who could provide feedback about the alterations (Brown, 2016). However, Kodak came to the realization that digital cameras cannot be replaced by the innovated print photo products because the internet was a better tool at storing images and files.
Later, the Facebook company appeared, which made the print photos more irrelevant, because it was a unique platform, where people were able to share pictures at an instant without any physical printing processes. Kodak began to develop strategies, which aimed at utilizing Facebook’s appeal by anticipating that increased sharing would lead to more printing. Therefore, Kodak bought Ofoto image distributing website in accordance with their plan (Lucas Jr & Goh, 2009). However, the given approach was a failure due to the lack of complete understanding of internet photo sharing. An increase in online images did not result in more printing, but it further reduced their target market size.
The fall of the print went along with challenges in creating modern digital cameras. In a few years, there was a significant increase in the number of phone sales, which possessed better cameras, and they were integrated into the device. It was becoming clear that it was a non-profitable business. The average cost of a digital camera in 2000 was $ 393, and by 2012, this figure decreased to $ 78 (Fisher, 2018). Although Kodak tried to revitalize the print photo market, the company’s attempts were highly unprofitable and unsuccessful. In the given situation, semiconductor manufacturers survived, who developed and sold technology modules for cameras or smartphones, such as Sony, or digital SLR manufacturers like Canon and Nikon (Raskino & Waller, 2016). They were specializing in the niche of expensive devices with interchangeable lenses, but Kodak did not fall into any group with its simple cameras.
Moreover, Kodak abandoned the development and production of its digital cameras and began to rely on smartphones. Not having its technology for the production of sensors and image processing, the company was at a disadvantage at the beginning of the digital race. Surprisingly, Kodak continued to pursue this unprofitable business. While Fujifilm actively invested in the medical and health sectors to decrease its dependency on the complex photo industry, Kodak was involved in a highly lucrative department of health-related imaging in 2007 (Line & Wang, 2017). It was done to infuse more resources into the losing digital camera division. The sale brought in $ 2.35 billion, and it was not profitable to sell the given product line, because the largest generation of baby boomers was getting older (Line & Wang, 2017). It meant that these people would require X-ray imaging in order to proceed with health checks and other health-related procedures (Weeks, 2015). In short, getting rid of the revenue unit from the field of healthcare became one of the biggest mistakes of Kodak.
Conclusions and Observations
Outside research and observations conclude that Kodak was indeed unable to prepare itself for the digital explosion of interest in 2007. However, the error was made not due to any particular decision or overestimation of the market. The error was systemic. The company utilized a rational thinking perspective (RTP) with a resource-based view, rather than a generative thinking perspective (GTP) with a market-based view (Bromiley & Rau, 2016). This type of thinking and decision-making is often adopted by large corporations with a solid lead over its competitors. RTP is a very stable platform that provides accuracy and efficiency of decisions in a stable market environment (Cook & Gonzalez, 2016). GTP, on the other hand, helps revolutionize the market and help think outside of the box (Dong, Garbuio, & Lovallo, 2016). To understand why they chose to commit to their existing strategy rather than remodel the company to a digital-based enterprise, it is necessary to look at their value chain.
In 2007, the company had a perfectly balanced production and distribution line fit for razorblade strategy the company implemented for decades, with a small branch in digital electronics. To change itself to a new market model and capture the momentum, the company had to dispose of the majority of its suppliers, repurpose the production facilities, create a large R&D department from scratch, and change its business model to generate revenue from camera sales rather than accessories. By 2007, reforming anything was late, as the switch from film to digital should have happened in 1998, at the very least. The company’s RTP pattern of decision-making did not help either, as it prevented Kodak from thinking outside the box and robbed it of the will to conceptualize and brace for changes a decade earlier. In 2007, Kodak made the best decision in the worst possible situation, but it was not enough.
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