Next slides are the outlineDetermine each one is low or modera.docx

Next slides are the outline
Determine each one is low or moderate or hight.
Gives some explanations to show why
Only put key words. Then in the remark, write full sentences to
explain.
1
Porter’s Five Force Anaylsis
Buyers bargaining power: Low? Moderate? High?
Suppliers bargainining power: Low? Moderate? High?
Threat of new entrants: : Low? Moderate? High?
Threat of subsitutes(Outside of the industry) : Low? Moderate?
High?
Rivalry among competitor: : Low? Moderate? High?
The reasons why buyers bargaining power
is low or moderate or high?
1
2
3
The reasons why Suppliers bargainining power

The reasons why Threat of subsitutes is low or moderate or
high?
The reasons why Threat of new entrants
The reasons why Rivalry among competitor is low or moderate
or high?
1
2
3
4
Instruction:
Read the Kodak case. Create a PowerPoint to conduct Porter’s
Five force analysis. Totally 6 slides. Outline is given under
attachment. Follow the outline. Due date is 4/12/2016, 20:00 p
Note: The time period you have to focus is between 1983- 2000
!!!
Below is the case.

Kodak (A)
In February 2003, Daniel A. Carp, Kodak’s chief executive
officer and chairman, was reviewing 2002 data with the
company’s senior executives: film sales had dropped 5% from
the already weak previous year and revenues were down 3%,
sliding to $12.8 billion. The film industry was “under pressure
unlike ever before”, and Carp predicted a “fairly long
downturn”1 for traditional photography sales as more and more
consumers were turning to digital cameras, which did not
require film. The company had been investing heavily in digital
imaging since the early 1980s, pioneering image-sensor
technology in 1986 and entering the market with a variety of
products during the 1990s.
In addition, Kodak was moving more of its manufacturing to
China, where it could still boast film sales, and was planning to

slash 2,200 jobs, or 3% of its work force, especially in the
photo-finishing business. The picture for 2003 was not any
brighter: Carp expected revenues to grow slightly to $13 billion
and net income to be flat or down from the $770 million the
company had earned in 2002.
A native of Wytheville, Virginia, Carp had graduated in
management from MIT, and had begun his career at Kodak in
1970 as a statistical analyst. Since then he had held a variety of
positions, including general manager of sales for Kodak Canada,
general manager of the consumer electronics division, general
manager of the European, African, and Middle Eastern regions
in 1991, and president and chief operating officer in 1997. Carp
was finally appointed CEO on January 1, 2000. After more than
30 years at the company, he realized this struggle was one of
the toughest in the company’s century-long history. How could
he use digital imaging to revitalize Kodak?
Kodak’s early days, 1880-1983
In 1880, after three years of photographic experiments, George
Eastman, a young bank clerk, invented and patented a dry-plate
formula and a machine for preparing large numbers of plates. In
that same year, he leased the third floor of a building on State
Street in Rochester, New York, and founded the Eastman Kodak
Company. Although the company originally faced economic and
technological challenges, it developed its first snapshot camera
in 1888 and quickly became an American household name.
In 1904 Eastman articulated the company’s competitive
philosophy: “Nothing is more important than the value of our
name and the quality it stands for. We must make quality our
fighting argument.”2 Based in Rochester, “the Kodak town”, as
the first ads stated, the company operated its own laundry
service, a bank, a cafeteria, and a blacksmith, among other
services. There wasn’t much that Kodak didn’t provide for its
employees: indoor golf courses, bowling alleys, and movie
theaters. Kodak ran most of these services until the 1980s.3
From the very beginning, the founder of the company realized
that success came from a user- friendly product, and, as he

succinctly described it, his objective was “to make the camera
as convenient as the pencil.”4 Marketing was regarded as an
essential tool for the company’s success; film advertisements
started as early as 1885. Eastman himself coined the slogan
“You press the button, we do the rest” when he introduced the
first Kodak camera in 1888. Eastman identified four basic
principles for his business: mass production at low cost,
international distribution, extensive advertising, and focus on
the customer. To these principles he added the policy to foster
growth and development through continuous research.
In 1884, Eastman replaced glass photographic plates with a roll
of film, expressing a profound belief in “the future of the film
business.”5 During the black-and-white film era, Kodak’s
leadership stemmed not as much from its technical leadership as
from its marketing campaigns and its relationships with retailers
(both for shelf space for its film rolls and for photo-finishing
with Kodak’s paper). Although some competitors, like Ilford in
the United Kingdom, had succeeded in setting new standards of
quality during the war years, the perceived quality of the
existing products was so high that consumers were not willing
to pay for an enhanced product.6
The idea that money came from consumables, not from
hardware, emerged early: cameras were relatively cheap and
film fueled the company’s growth. Especially with the advent of
color film, which required conspicuous investments in R&D,
many firms lagged behind. Kodak had been involved with the
development of color film since 1921 and had spent over $60
million in research up to 1957, reaching a total of $121 million
only on color film research by 1963.7 In addition, Kodak’s
photofinishing process had become the industry standard and
most rival brands, though of excellent quality when properly
processed, tended to fare badly in the typical photo shop.8 From
the early 1960s attempts to entry the market had become
extremely rare, especially because the film composition’s
balance between chemical and physical properties and the
know-how embedded in manufacturing made the creation of

compatible products a very expensive and risky option.
Over time the belief that all the money came from film led the
company to pay little attention to equipment. A Kodak
executive commented, “No matter what they said, they were a
film company. Equipment was ok as long as it drove
consumables. If a camera helped sell more film, Kodak would
sell it, but there was little concern about what kind of cameras
consumers wanted, or how to make them better.”9
The role played by film was so pivotal that most corporate
power centered on Kodak Park’s massive film-making plant,
and historically CEOs came out of manufacturing jobs at the
Park. They were alike in many ways: most of Kodak’s senior
management received the same training, attending MIT’s Sloan
School of Business as a sort of finishing academy. Since a
mistake in the massive manufacturing process would cost
thousands of dollars, and the company’s profitability was
steadily more than satisfactory, the company avoided anything
risky or innovative and developed a set of “procedures and
policies to maintain the status quo.”10
Kodak reached $1 billion in sales in 1962. In the 1960s the
company started to introduce new products (126 cameras in
1960s, 110 in the early 1970s) that moved beyond consumer
photography to
medical imaging, and graphic arts. Most of these products
exploited the traditional silver-halide technology and
represented incremental improvements.
In 1969 Polaroid’s basic patents on instant photography expired.
Seven years later Kodak announced its first instant camera, and,
thanks to its marketing and distribution capabilities, sold 16.5
million instant cameras between 1977 and 1985, severely
threatening Polaroid. However, the company was forced to
abandon this product line in 1985 because of a patent
infringement suit by Polaroid. By 1976 Kodak controlled 90%
of the film market and 85% of camera sales in the United States.
Kodak’s technological strengths and speed to market precluded
the emergence of any serious competitor11. In 1981 Kodak’s

sales reached $10 billion, but growth began to decelerate
thereafter because of increased competitive pressures,
especially from the Japanese Fuji Photo Film Company. For an
overview of the film market, see exhibits 1, 2, 3, 4, 5 and 6.
In 1981 Sony Corporation announced its plans to launch
Mavica, a filmless digital camera that would display pictures on
a television screen. Pictures could then be printed out on paper.
Although CEO Colby Chandler contended that people “liked
color prints” and that Kodak could quickly come out with its
own digital camera, management became concerned over the
longevity of silver-halide technology. A company’s executive
remembered, “It sent fear through the company.” The reaction
was, “Oh, my goodness, photography is dead.”12
Diversification at Kodak, 1983 - 1993
Diversification in other businesses
Between 1983 and 1993 Kodak went through seven
restructurings. Kodak acquired IBM’s copier services business;
Clinical Diagnostics, which produced in-vitro blood analyzers;
Mass Memory, which sold Verbatim floppy disks; and other
bioscience and lab research companies. In the late 1980s
management looked further afield and chose to acquire Sterling
Drug, a pharmaceutical company that sold popular products like
Lysol and aspirin. The company believed that the
pharmaceutical industry was related to its core “chemical”
business: R&D played a pivotal role, and margins were high.
Kodak paid $5.1 billion to acquire Sterling, of which $4.4
represented goodwill. Unfortunately, the stock price rose by
only 2% from 1987 to 1993, and film market shares sunk by 5%
between 1987 and 1992.13
Competition in the core imaging business: Fuji Photo Film Co.
“We were the imaging company of the world. We literally had
no competition for so long, management hadn’t become
accustomed to it. Historically, if there was a competitor, Kodak
would blow them away.”
A former Kodak executive14
Fuji Photo Film Co., headquartered in Tokyo, was founded in

1934 as a comprehensive maker of photographic materials,
producing film for movies and other applications, dry plates,
and photo printing paper. In the 1960s Fuji started looking for
alternatives to the development and production of silver-halide
film and established a joint venture with Rank Xerox (Fuji
Xerox).15
Fuji entered the U.S. market in 1965 as a private brand supplier.
Although the company began to market film under its own brand
name in 1972, its strategy consisted of following Kodak rather
than attacking it directly. In 1976 Fuji was the first to introduce
400-speed color film, and more and more
photo-finishers switched to its photographic paper and other
supplies, which were 20% cheaper than Kodak’s. In a case study
of Fuji and the Japanese market, M.F. Winters, a Kodak market
analyst, warned senior executives about the company’s eroding
market share, but the report was ignored, because “they didn’t
believe the American public would buy another film.”16
At the beginning of the 1980s, Fuji had revenues of $2.4 billion,
only one-fifth of Kodak's, but its net income over the previous
five years had grown an average of 40% annually, more than
twice Kodak's rate. With a 70% film market share in Japan,
Fuji's other businesses included cameras, carbonless copying
paper, copiers, and videotapes. Fuji signaled its ambitions to
capture U.S. market share in 1981, when it won the sponsorship
as the official film of the 1984 Olympics. Kodak had balked at
the cost of officially sponsoring film supplies, and Fuji, taking
advantage of the opportunity, boosted its U.S. market share to
12%. Peter Palermo, who was then Kodak’s senior vice
president of imaging, observed, “It was December seventh
[Pearl Harbor Day] at Kodak.”17
An important element in Fuji's success was its highly productive
research laboratories in Ashigara. In 1986 Fuji began selling a
disposable camera, which became a big hit in Japan. Kodak
claimed that its labs had already developed similar products
early in the 1980s, but the company had failed to patent them,
some said because of their inconsistency with the traditional

razor-blade model.
By 1985, Fuji’s share of the U.S. market had grown to 11%,
while 3M’s Scotch brand had a 3.7% share. New labels, eager to
gain a foothold in this highly profitable film market, included
Konica, Agfa, dozens of private-label varieties, and Indian,
English and Korean brands. Consumers were learning that they
could get high-quality pictures with cheaper film (film prices
were generally 20% lower than Kodak’s), and retailers devoted
more shelf display to private labels since they could make
higher margins on their own products. By the end of 1993 the
worldwide film market was still dominated by Kodak, but Fuji
had gained a 21% market share.
Kodak’s exploration of digital imaging, 1983-1989
In 1983 CEO Colby Chandler created a photographic and
information management division to explore new technologies,
especially digital imaging. In addition, the company hired John
White, who had worked in the upper ranks of the Pentagon
before getting into the software business, to push Kodak
forward in this exploratory phase. White said:
Kodak wanted to get into the digital business, but they wanted
to do it in their own way, from Rochester and largely with their
own people. That meant it wasn’t going to work. The difference
between their traditional business and digital is so great. The
tempo is different. The kind of skills you need are different.
Kay [Whitmore, President] and Colby [Chandler, CEO] would
tell you they wanted change, but they didn’t want to force the
pain on the organization.18
The exploration of a broad range of technologies (e.g.,
communication, electronics, computer science) responded to the
company’s need to shape the new imaging business. The CEO
was still foreseeing a silver-halide-based future, but recognized
the need to “blend new technologies, to meet the expectations of
a growing customer base.”19 The basic idea sounded simple:
“anticipate customers' needs, create the products they want,
then market those products better and more cost effectively than
anyone else in the industry.” 20 From Chandler’s perspective

the new digital world could be overcome by applying the same
formula defined by George Eastman at the beginning of the
century: focus on the customer, extensive advertising, and mass
production at low cost. Still, he conveyed a sense of urgency in
formulating his strategy in the 1984 annual report:
Kodak has historically evaluated future needs of a photographic
market, conducted research to determine its size and growth
potential, designed the goods, created manufacturing capacity
and rolled out the new products. Today the pace of change has
quickened. One Kodak strategy is to work with other major
companies. Another proven Kodak approach is selective
acquisition. Kodak is also increasing its involvement with
several outstanding universities to conduct joint research in
fields such as manufacturing productivity, biotechnology,
microelectronics, and integrated circuitry.
In transforming itself, Kodak was abandoning its history as a
stronghold of vertical integration. "One of the things we've
learned is that one company can't do everything," Kodak
president Kay R. Whitmore said. "We're prepared to acquire if it
fits our strategic plan and gets us there sooner, or gives us a
technical capacity we don't have in-house, or buys a market
share that would be hard to build."21
In the mid-1980s Kodak built a research lab in Japan to study
developments in electronics, in particular in digital cameras,
because there was “a gut feeling that we ought to have a lab in
the heartland of the consumer electronics revolution”, said E.P.
Przybylowicz, who operated as chief technical officer at the
time. But it soon turned out to be “an impossible situation”: the
research lab had been put on a pay-as-you-go basis, and that
meant that scientists had to look for financial support from
individual business units, rather than from an overall corporate
strategy.
The exploration of new technologies led Kodak to develop the
8mm Kodakvision video system together with TDK and
Mitsushita; to acquire other companies, like the Datatape
division of Bell and Howell, which manufactured high

technology analog and digital recording equipment; and to
devote internal resources to research. Relative to internal R&D,
Chandler’s stated strategy was to “continue support to extensive
research in chemistry, optics, and increasingly in
electronics.”22 But some executives still found it difficult to
believe in something that was not as profitable as traditional
film. "We're moving into an information-based company”, Leo
J. Thomas, senior vice president and director of Kodak research,
stated, “[but] it's very hard to find anything [with profit
margins] like color photography that is legal."23
In 1986 Kodak launched the world’s first electronic image
sensor with 1.4 million pixels (or picture elements), and the
following year the electronic photography division was
established. By 1989 Kodak had introduced more than 50
products that involved electronic image capture or conversion,
such as printers and scanners (including products like Business
Imaging Systems' Imagelink scanner 9000, Printer Products' XL
7700 digital continuous tone printer, Copy Products' Ektaprint
1392 printer, professional Photography's Premier image
enhancement system and Motion Picture and Television's HDTV
projection system). Within the information sector, four centers
of excellence were established to develop image acquisition,
storage system, software, and printer products. The same year
the CEO declared his intent for the company to “be the world’s
best in chemical and electronic imaging” by “exploring and
defining the best ways to manage the convergence of
conventional imaging science with electronics.”24
Although the company had been the first to introduce an image
sensor, one of the core elements of a digital camera, the first
widely announced digital product was the Photo CD. Kodak
wanted to shape the new market creating the “film-based digital
imaging.”25
“Film-based digital imaging”, 1990-1993
The Photo CD, developed in collaboration with Phillips, was
designed to combine “the best of the photographic medium with
the best attributes of electronic imaging.”26 The Photo CD

started as a blank compact disc. A roll of film could be taken to
a photofinisher, and images, rather than being printed, were
then stored on the disc. Images could then be viewed on a TV
screen with a special Photo CD player or on a computer screen
with a CD-ROM. The project was expected to be a $600 million
business by 1997 with $100 million earnings from operations,
but there was little evidence that consumers were willing to pay
$500 for a player that plugged into a TV, plus $20 per disc27.
From the company’s perspective new products had to rely on a
hybrid film/electronic imaging technology because “for the
foreseeable future” silver-halide technology was going to
provide the highest-quality images attainable at the lowest
price. But managing the alliance of chemical-based and
electronic image was also a way to maintain leadership by
shaping a Kodak-friendly new environment. Kay Whitmore, who
had become chief executive officer in 1990, commented, “As
this company did with black-and-white and color, we intend to
set the standards and lead the way in film-based digital
imaging.”28
This blending of digital features and traditional photography
allowed film to still play a pivotal role. Kodak planned to sell
new hardware products improved by digital features, to license
technology to computer manufacturers, to have more prints from
discs at photofinishers, and to apply the knowledge acquired in
digital imaging to the motion picture business and commercial
products. But money still had to come from consumables, that is
photographic film and paper, just “adding the flexibility offered
by electronics.”29
The first professional digital camera was introduced in 1991,
but in Kodak’s Annual Reports, management presented the
Photo CD as the company’s innovative offering. Unfortunately,
the Photo CD did not prove to be a success: it had been targeted
to the wrong market, the consumer segment, even though its
invention team had suggested that its real potential lay in the
commercial market. Scott Brownstein, who led the Photo CD
team, said that senior managers at the time wanted a quick hit

and did not “understand our real vision or strategy.”30
Brownstein and his group were looking for alliances with
computer companies to make CD-ROMs compatible with the
Photo CD, but when senior executives managed to get a meeting
with Bill Gates, he remembered the lack of interest of
Whitmore, who apparently fell asleep.31 Later, when the Photo
CD team managed to deal with the computer companies, they
still had problems explaining the details to Whitmore. An
industry observer commented:
Kodak’s strategy for digital imaging has been way out of focus
for years. Product development was uncoordinated, and
marketing was ineffectual. The Photo CD, a compact disc that
stores photographs for viewing on TV screens or PC monitors,
was a flop as a consumer product. Kodak introduced it in 1992
to consumers who didn't like the prices: $500 for a player that
plugs into a TV, plus $20 per disk. And the computer industry
adopted its software algorithms as the standard for manipulating
color and images on CD-ROM. How did Kodak miss that? The
entire digital revolution has been a trickle-down affair.32
On August 6, 1993, Kodak announced that CEO Kay Whitmore
would step down. The members of the board were looking for a
chief executive with “exceptional drive and energy” and in late
1993 they selected George M.C. Fisher, former CEO of
Motorola. The first outsider ever to run the 116- year-old
Kodak, Fisher, after receiving his Ph.D. in applied mathematics,
had apprenticed at AT&T's Bell Labs, where he did work related
to photography, such as conveying and compressing images.
Fisher believed that Kodak was a company built on “imaging,”
not only on film, and that opportunities for growth could come
from a focus on the core business and the exploitation of new
digital technologies.
Back to the core business
Fisher’s first step was to divest the company’s health segment,
with the exception of the health sciences unit, which included
mostly X-ray film and other diagnostic imaging hardware and
consumables. Kodak sold Sterling Drug, L&F Products, and

Clinical Diagnostics in less than eight months, collecting $7.9
billion that it used largely to pay off debt. In December 1993
the company decided to spin off Eastman Chemical, which had
been formed in 1920 to supply raw materials for Kodak’s
photographic business, but by 1993 only 8% of its sales derived
from Kodak. As a result, the balance sheet improved, and S&P’s
rating on Kodak’s debt raised from BBB+ to A+. In completing
the divesture of the company’s unrelated businesses, Fisher
demonstrated his confidence in the future of the imaging
segment, after a decade of pessimism. “People began to think
electronics was going to take over the photography business.
And if you are looking at the world from within the
photography business, that would be a very scary event. But the
fact of the matter is, I grew up in the electronics business and I
looked at the photography and imaging business from the
electronics side and it’s not such a scary event. Electronics will
add a lot to photography and a lot to imaging.”33
Growing in the film business: Fisher’s legacy in China
Fisher believed that scenarios about the future of silver-halide
photography had been too pessimistic and that emerging
markets, particularly China, represented an overlooked growth
opportunity. He commented, “I think maybe people didn’t
properly understand that the world is a lot bigger than the
United States and that something fundamental had changed in
the last five years. About four billion people are now accessible
as a market.”34
Kodak had begun its push into China in 1993, and when Fisher
joined Kodak, the company was third in film share and fourth in
paper share, with only 30 employees. From his days at Motorola
Fisher had established enormous credibility with officials in
Beijing: from 1994 to 1997 Kodak negotiated with local
officials and in March 1998 finally reached a deal that left
Kodak committing $1.2 billion and that led to the creation of
two joint ventures with the Chinese government. To improve its
cost structure, by 2002 Kodak had moved facilities to China that
manufactured digital, conventional, and single-use cameras,

kiosks, and mini-labs. In addition to building its manufacturing
presence, Kodak focused on creating a network of retail outlets
that helped sales of film rolls. By the beginning of 2002 Kodak
had 63% of the Chinese retail film market, with 7,000 Kodak
Express film stores. An industry expert who toured Kodak’s
operations in China in 2000 observed, “Kodak’s China
operations represent the best of what an American industrial
company can be in the emerging markets, in our opinion. It
appears a true jewel for Kodak long term, and one that Mr.
Fisher deserves full credit for discovering.”35 Exhibit 19
reports on the company’s retail presence in China.
Digital imaging in Fisher’s era, 1993 – 1997
By the time Fisher arrived at Kodak, the company had already
spent $5 billion on digital imaging R&D, but little had emerged
from the labs. Product development and sales efforts were
scattered over more than a dozen divisions, and at one point the
company was engaged in developing 23 different digital scanner
projects36. In 1994 Fisher separated the company’s embryonic
digital imaging operations from its traditional silver-halide
photographic division, and created a digital and applied imaging
division, in order to centralize the company’s efforts in the area
while building on Kodak’s core capabilities in imaging
technology and color science. Carl E. Gustin Jr., formerly with
Digital Equipment Corporation and Apple Computer, was
appointed general manager, and John Scully, former CEO of
Apple Computer, was hired as a marketing and strategy
consultant. In February
Fisher appointed Harry Kavetas, a former IBM executive
credited with rejuvenating Big Blue's credit unit, as Kodak's
chief financial officer.
Fisher saw considerable potential in the company’s electronic
imaging patent portfolio: he quickly pushed the introduction of
the digital print station (a product sold to retailers that allowed
customers to digitize their photos and to use them in many
ways), new models of digital cameras, and thermal printers and
paper to make prints from the cameras once the images were

loaded into a personal computer. Fisher was determined to bring
to market all those digital programs that had been languishing
in the labs:
Mr. Fisher unveiled a huge reorganization that would point
Kodak back to the imaging business started by George Eastman
in 1880. Yet, instead of dwelling on the future of the silver-
halide photographic technology that has made Kodak the world's
biggest photographic company, he talked mainly about digital
imaging - a business that makes up a small fraction of Kodak's
sales and has proved a consistent loss-maker.37
When Fisher joined the company he stressed that Kodak would
focus on “profitable participation in the five links of the
imaging chain: image capture, processing, storage, output, and
delivery of images for people and machines anywhere.”38 In
particular, Fisher, who had already turned Motorola into one of
the world’s finest manufacturers of pagers and cell phones,
believed that “Kodak could be successful in the equipment
business” because it possessed the capabilities to “do much
besides make film.”39 His first step was to re-engineer the
company from top to bottom, and “ten teams of senior managers
- two of them led by Mr. Fisher - were charged with rethinking
everything from product development to how to expand Kodak's
markets:”40
He wanted a 50% reduction in the cost of quality in two years.
Each business would be required to calculate its customer
satisfaction index and to show improvements. Every division
had three years to reduce defects and improve reliability. Cycle
times on everything from routine paperwork to manufacturing
goods were to be improved by a factor of ten over three
years.41
In his early days Fisher spent considerable time in meetings
with Bill Gates and other leaders of the computer industry, with
the aim of forming alliances and developing new products,
because he thought that profitability on the hardware side could
only come with the help of the computer and electronics
industry. He hoped to “fill in the blanks” of Kodak’s digital

product line, which was marked by the initial failure of its
consumer Photo CD product and digital camera for
professionals, priced at $29,000.42 Fisher believed that to be a
winner in digital imaging Kodak had to become a high tech-
company: “[Fisher] has devoted substantial energy to making
Kodak more like Motorola, capable of producing new state-of-
the-art products every few months. Company factories are
churning out an impressive array of digital cameras, scanners,
and other devices at a breakneck clip.”43
But competition in the market for digital cameras was tough:
when Kodak introduced the DC40 in 1995, there were two other
models under $1,000, but by 1996 there were 25 different
brands in the category. And not all executives believed in
Fisher’s new vision of the company. In fact competition from
Hewlett Packard, Canon, Fuji and others was not the only
difficulty that Fisher had to face. As one industry executive
commented:
The old-line manufacturing culture continues to impede Fisher's
efforts to turn Kodak into a high-tech growth company. Fisher
has been able to change the culture at the very top. But he hasn't
been able to change the huge mass of middle managers, and they
just don't understand this [digital] world.44
Fisher, who was used to dissent and open discussion in
Motorola, where “they argued like cats and dogs, loudly,
sometimes”45, realized that Kodak executives tended to be very
polite and things looked much easier than they actually were.
Kodak’s employees didn’t like confrontations and venerated
authority: “It was so hierarchically oriented that everybody
looked to the guy above him for what needed to be done.”46
Fisher tried to introduce the Motorola-style of open discussion,
but change was difficult. The razor-blade culture in Kodak was
so deeply ingrained that even disposable cameras had been
considered almost sacrilegious.
At an analysts’ meeting in late 1997, after three quarters of
sluggish sales and profits, Fisher admitted that 60% of the
company’s losses were “costs linked to digital cameras,

scanners, thermal printers, writeable CDs and other products”47
and announced a reversal of his hardware-based digital strategy:
We don’t intend to be in the film business, in the computer
business, in the digital imaging business. We’re in the picture
business. And our intention is to use whatever technology is
available to us to truly help people do more with their pictures.
Electronic imaging will not cannibalize film. One of the
mistakes we at Kodak have made is that we’ve tried to do it all.
We do not have to pursue all aspects of the digital opportunity
and we see our opportunity in the output and service side.48
Analysts commented:
When the new management was brought on 3 years ago, one of
its strategies for growth was to focus more on the hardware.
This strategy has not been successful, considering the losses on
digital cameras. Kodak continues to derive most of its profits
from business units where more than 50% of revenue is
generated from consumables and where the company has more
than 50% market share.49
Toward a fully digital world, 1998 – 2003
Fisher established a new vision for the company’s role in the
digital age, a “network and consumables”–based business
model:
We see a networked world in making, taking and processing
pictures. We will stick ourselves in the middle of that world
with services that people are willing to pay for, like creating
photo albums online or simply sending photos from point A to
point B. Or they'll use one of our 13,000 kiosks. People without
computers can go to a kiosk and send photos halfway around the
world. We will always sell film, paper and chemicals. But in the
future, we will let people take pictures and scan them in digital
form, and we will make money on the different media (CDs or
the Internet, for example) or material for output - inkjet paper,
thermal papers, and traditional silver halide paper.50
Fisher developed the idea of a “horizontal company”, based on
the outsourcing of most digital photographic equipment and on
alliances (e.g., with Intel): “Traditionally, our business is

chemically based, and we do everything. In the digital world, it
is much more important to pick out horizontal layers where you
have distinctive capabilities. In the computer world, one
company specializes in microprocessors, one in monitors, and
another in disk drives. No one company does it all.”51
But on the film side, in 1998 the company was caught off guard
by Fuji, which deeply cut prices to grab U.S. market share,
where Kodak still enjoyed the highest margins. In one year
Kodak lost more than four points in market share: Fisher
observed that Fuji was “literally buying presence in this
country, buying customers in this country, selling film at
unbelievably low price because they could afford it and because
they had an infinite source of money coming out of a protected
market in Japan.”52 As a result of this price war, by the end of
1999 the company had to cut $1.2 billion in costs and 19,900
jobs, or about one-fifth of its payroll, the most severe cutback
ever at Kodak.
In January 2000, one year before his contract was to expire,
Fisher stepped down as chairman and handed over the post to a
veteran insider, company president Daniel A. Carp, who had
made his name as a brand builder rather than a technology guy.
From Fisher, Carp inherited the idea of the horizontal company
and the “network and consumables”–based business model:
We see digitization in creating a film and a photo-finishing
aftermarket that should fuel an explosion of pictures and use of
digital and 35mm technology. At its core, Kodak's digital
strategy is to create a profitable bridge between the old and new
worlds of photography. Even as it hopes to jump-start sales of
digital cameras, the company wants to transfer as many of its
customers' traditional snapshots as possible to digital form. It
figures there's big money to be made uploading traditional
pictures onto the Internet and in expanding its share of the
market for reprints, inkjet paper, and photo-editing software.53
Between 1999 and 2000, the digital strategy pursued by Fisher
and Carp led the company to achieve a number two in digital
cameras behind Sony, with a 25% market share, a running print-

on- demand website, and promising joint ventures to popularize
new distribution channels such as digital photo kiosks and the
Internet.54 The company was gradually changing its focus:
“Just as the early Kodak pursued the holy trinity of film, paper
and chemicals, and dominated all three, the new Kodak
worships the digital trinity of image capture (cameras), services
(online photo manipulation) and image output (digital kiosks,
inkjet printers, paper and inks).55
On the output side, the Kodak network of 19,000 Picture Maker
kiosks at retail stores was turning out to be quite successful. At
$15,000 each, Carp said they were highly profitable and
accounted for $200 million in sales; “with 95% of customers
who used them coming back repeatedly, they produced steady
photo paper sales.”56 Kodak also engaged with Hewlett Packard
in an ongoing battle for the printing segment, investing a large
portion of its R&D budget in inkjet printers, which drove sales
of high-margin inkjet consumables and specialized paper. 57
In fall 2000 another round of corporate restructuring brought
digital and applied imaging and consumer imaging under one
organization, a move that was expected to end the internal war
between the film and the digital segments.58 But in 2001 Kodak
was still losing $60 on every digital camera it sold.59 Still,
Carp continued to invest in digital imaging, and the company
actually boosted its advertising spending.60 Kodak’s
commitment to building and consolidating its brand could be
traced back to one of George Eastman’s basic formulas for
success: “advertise the product.” In the 1970s the company had
even moved to TV, sponsoring all-American programs like “The
Adventures of Ozzie and Harriet” and “The Ed Sullivan show”,
and by 1995 it was using 177 advertising agencies (consolidated
into four accounts by Fisher the following year).61 In 2001 the
company was trying to develop a more integrated marketing
effort and message to the customer, with its “Where it all
clicks” theme, and consumer imaging, digital and applied
imaging and Kodak.com were all going to market with one ad
campaign.62

The company also invested a considerable portion of its R&D
dollars developing software for image manipulation, to enhance
what could be done on a computer to a digital picture and at a
retail store to traditional film. In October 2002 it launched in
the Midwest the first mass-market product for digital film
processing. With this new software, film was still developed
traditionally, but instead of shining light through each negative
onto photographic paper to create an image, digital processing
scanned each negative, converting its image to a string of ones
and zeros stored in a computer's memory. The computer then
analyzed each image, looking for areas that had been exposed to
too much or too little light. Using laser to paint each image
pixel by pixel, the computer filled in light where needed and cut
back on light where a flashbulb had supplied too much in the
original negative. Carp commented, "This is the most important
innovation for us since color. Using digital technology to
enhance photos consumers take with existing analog cameras is
an extension of Kodak's basic strategy of making it easier to
take pictures.”63
At the 2002 Kodak annual meeting, Carp outlined four strategic
paths to move Kodak into the new millennium:64
· ! Expand the benefits of film. Kodak aimed to grow
its share in the worldwide market by offering premium products
(e.g., the Max HQ or the Max Versatility products), by
leveraging its distribution, and by increasing its exposure
through more targeted marketing campaigns. Kodak pricing of
the low end of its film portfolio had narrowed over time, after
the price war with Fuji between 1998 and 1999;
· ! Drive image output in all forms, to achieve higher
margins at retailers. The company was planning the introduction
of the Perfect Touch premium processing system and the
expansion of its portfolio of digital mini-labs;
· ! Simplify the digital photo experience for
consumers, with an emphasis on products such as the EasyShare
digital camera platform, Picture Maker kiosks, and Picture CDs;

· ! Grow in emerging markets, in particular China and
India, where the company already operated thousands of Kodak
Express Stores. Although the company optimistically outlined
a scenario in 2002 in which the consumer digital business would
break even in late 2003, by January 2003 digital cameras had
not yet boosted the bottom line, while prices were plummeting:
fourth quarter earnings were worse than analysts expected, and
the company announced new layoffs.65 However, despite
financial problems, the company maintained control over a
majority of photofinishing transactions in the United States, and
had 15% of the U.S. digital camera market.66 See exhibits 18
and 20 for financial information about Kodak. The Digital
Imaging Industry The digital imaging market began to expand
in 1993 and 1994, with the introduction of a host of new
products. In August 1994, there were 22 different models of
filmless cameras on the market. One year later, only three
models were priced under $1,000, but by 1996 25 different
brands joined the category. In these early years there was a
great deal of uncertainty about how market segments for digital
cameras would evolve. Based upon quality and price, the market
was generally separated into three levels. On the high end was
studio photography, including magazine and catalog publishers,
commercial photography studios, and in-house studios at
corporations, hospitals, and government agencies. Leaf was an
early leader in the studio camera market, but it quickly faced
competition from companies such as Dicomed, Kanimage, Sony,
and Kodak. In the mid-range segment, customers included
photojournalists and professional photographers, who required a
slightly lower resolution. This segment was very crowded, but
Fuji and Kodak both had fairly popular offerings. The low end
of the market included both consumer and business applications,
such as real estate, insurance, and advertising as well as images
displayed on computer screens or web sites. The first offering in
the low-end market was Apple’s QuickTake 100, priced at $749
in early 1994. Major competitors that followed included
Logitech’s Pixtura and Kodak’s DC-40. All three cameras used

an image sensor developed by Kodak in 1986.
· Other digital products originally included 35 mm scanners,
initially offered by Nikon, Polaroid, and Minolta; image-
editing, dominated by Adobe’s Photoshop; and printers, where
the first players were Fuji, which offered a thermo-autochrome
printer that garnered a great deal of attention, Epson, which had
a color ink jet printer for the low-end priced under $700, and
Kodak, which offered a widely acclaimed dye sublimation
printer. It was difficult to determine clear leaders in each
category, however.
· By the end of the 1990s, the digital imaging industry was a
portfolio of four major sub-markets, each with its own
competitive dynamics: digital cameras, home printing, online
services, and retail solutions (kiosks and mini-labs). The
process of acquiring, digitizing, storing, printing, manipulating,
transmitting, retrieving and projecting digital images had
evolved over time in terms of ease of use and availability of
options (Figure A).
· Figure A The Digital Imaging Chain
· Source: Casewriter.
The digital camera markets began to expand rapidly in the late
1990s, and with 6 million units sold in 2001 (almost a 50%
increase over year 2000) volumes were approaching early mass-
market penetration, especially in the United States, where the
installed base had reached 13 million households, 12.5% of the
total. Digital cameras sales in September 2002 had increased
60% over the previous year, with a plummeting average price of
$350. Although competition in the field was strong and largely
based on price, features, and functionality (in an IDC study
conducted in 2001, consumers were found to have relatively low
brand awareness in digital cameras), the market was
consolidating into a few major vendors like Sony, Kodak,
Olympus, and Hewlett Packard. True profitability remained
elusive for most, and since a lean cost structure played a pivotal
role, vendors were moving manufacturing infrastructures to
China. Exhibits 7, 8, 9, 10, 11 and 12 show data about the

traditional and digital cameras market.
In the film world, all images captured were processed at retail
locations, however, in the digital world, users had multiple
photo processing alternatives. Printing efforts focused on
home/office printing, Internet photo service providers, and
retail photofinishing. As concerned home printing, industry
experts estimated that in 2002 almost 80% of digital prints were
done in the office or at home, but that by 2005 home printing
would decline to a 65% of all digital prints.67 Four vendors
dominated the inkjet-printers market: Hewlett Packard,
Lexmark, Epson, and Canon. Much more profitable, however,
was the consumable-side of the business: inkjet consumables,
where Hewlett Packard enjoyed the lion’s share, while Kodak
had a small role thanks to its relationship with Lexmark, and
high-grade inkjet paper. Hewlett Packard and Kodak dominated
the specialty paper market with estimated EBIT margins of 25%
after retail mark-up.
In 2000 more than a hundred companies were competing in
online services, which mainly consisted of digitization, photo-
finishing and storage, but by the end of 2002 three major
players were still in the market: Kodak/Ofoto, Shutterfly, and
Fuji. For instance, Ofoto, founded in 1999 and acquired two
years later by Kodak, provided free online storage of photos and
charged a fee for prints, enlargements, photo cards, albums,
frames, and other photo-related merchandise, which were then
delivered to the customers’ doorstep. In addition, for less than
$4 Ofoto’s clients could have their traditional silver-halide
pictures digitized and posted online. In 2002, online photo-
finishing services accounted for 10% of all digital prints.68
Prices had gone down with the elimination of service fees, but
industry experts expected the model to be profitable in a few
years since there was no retail markup. See exhibits 13, 14 and
15 for more details on printing and photofinishing.
According to a report by International Data Corporation, in
2001 36% of the 31 million images captured were printed and
15% of them were processed at retailers, although digital mini-

labs and kiosks were expected to capture the lion’s share in the
future.69 Over the previous two decades, the photo processing
industry had gone through dramatic changes. Early on, retailers
had formed regional wholesale labs to sustain film processing
and over the 1980s and the 1990s Kodak and Fuji promoted a
massive consolidation that endowed the two players with almost
total control of the market. Concurrently, new photo-processing
units, designed to fit into retailers’ shops, enabled local service
of 24-hour and then one-hour processing. As a result, the
amount of film sent to wholesale labs for processing declined.
Retailers offered two main processing solutions, mini-labs and
kiosks, which were introduced in the mid-1990s to bridge
between traditional inputs and new digital opportunities. With
the advent of digital imaging, retailers turned to digital kiosks,
which eliminated scanners from the system, and digital mini-
labs, which could print digital files as easily and at the same
quality as they could print silver-halide based photos. In
addition, both digital mini-labs and kiosks provided for digital
uploads from CDs, Zip discs, floppies, DVDs, and numerous
flash cards. Once digitized, images could be archived on CDs or
other media. The digital mini-labs market, which represented in
2002 almost 15% of the total mini-lab installed base, was
dominated by Fuji with its Frontier products. Fuji, with more
than 5,000 labs in place, had 60% of the U.S. digital mini-lab
market and had signed deals to install machines in 2,500 Wal-
Mart and about 800 Walgreen outlets. The two chains handled
about 40% of the U.S. photo-processing market. Kodak lagged
behind with about 100 digital mini-labs in service, because its
1997 agreement with Gretag ended in 2002 with the German
imaging company’s filing for bankruptcy. In the same year,
Kodak joined forces with Noritsu Koki to close the gap,
projecting to sell 1,000 mini-labs by the end of 2003.70 Exhibit
16 shows the evolution of the installed base of mini- labs and
kiosks in the United States, while exhibit 17 focuses on the
competitive dynamics of the retail mini-lab market. The
Rochester-based company predominated in the offering of

kiosks, with its 34,000 Picture Makers, providing retailers with
a modular solution that consisted of three stations: Picture
Maker Order Station, Digital Station, and Print Station. Each of
these stations could be purchased individually and retailers
could upgrade from one to the next without problems of
compatibility.71
Appendix A presents an overview of Kodak’s competitors in
digital imaging.
Appendix A Competition in Digital Imaging
Competitor
Overview
Canon, Inc.
Headquartered in Tokyo, Canon had 2002 estimated sales of
$23.4 billion and a net income of $1,04 billion. Office
equipment (copiers, business machines, information and
telecommunication equipment), its largest business, accounted
for 76% of sales, with an operating margin of 18%, the optical
segment accounted for 7.5% of total sales, with negative
margins of –5%, while the camera segment, which included film
cameras, video cameras, and digital cameras, accounted for
16.5% of sales, with margins of 12%,72 an increment of 1.5
points over year 2000.73 In the camera segment, digital cameras
generated 44% of sales, and had the best operating margin
(14.1% versus 11.7% in film cameras and lenses and 5.4% in
camcorders)74. In 2001, the company presented a “two-pronged
product model strategy”, the F series, which pursued photo
quality, and the S series, which went after speed. In 2002 the
company introduced the I series, with the aim of combining the
two qualities with an emphasis on design. Since Canon brought
out its 2002 models (IXY Digital 320, PowerShot S45,
PowerShot G3), the company had surpassed Fuji Photo Film in
digital cameras for a top domestic market share of 23%. The
company’s global market share in digital still cameras was 12%,
while in traditional single-lens cameras it was more then 38%.
Canon was one of the early pioneers in electronic photography ,
being the first to commercialize a still-video camera in 1986.

Fuji Photo Film Co.
Fuji business was divided into three divisions: imaging
solutions, which included photographic film, photo printing
paper, developing services, cameras and digital cameras, and
which accounted for 32.7% of 2002 sales; information solutions,
which included equipment for printing, medical diagnosis, IT
systems, LCD components, and other electronic devices,
generating 28.5% of sales; and document solutions, which
included printers and copiers handled by Fuji Xerox, with
38.8% of sales. Operating margins for the three segments were
respectively estimated to be 29%, 49%, and 22%.75
The company’s foray into digital cameras was the Fuji DS-100,
released in 1993 at $3,200;76 the DS-100 featured a 720x488
(350,000) pixel area array CCD and could store up to 21 images
on a removable memory card. By 2000 the company had become
one of the two leading digital camera manufacturers (the other
being Olympus Optical), with sales of one million units, a
leading domestic share, and a global share estimated at 20%.
Fuji’s strengths in digital cameras stemmed from high-picture
quality, which was delivered by its in-house-developed charge-
coupled devices (CCDs), thanks to a photodiode aligned in a
unique honeycomb fashion, and cost competitiveness, achieved
through in-house production of both CCDs and lens, which
made up most of a camera’s cost. In the digital camera business,
Fuji’s operating profit margin for 2001 was estimated at 5%,
while its traditional mainstay business (color film, color paper,
X-ray film, and photo-sensitive plates and film) generated over
15%.77
Although R&D emphasis in the 1990s had been on developing
digital imaging systems,78 Fuji’s strategy in digital imaging
was similar to Kodak’s in emphasizing the coexistence of film
and digital. Both companies focused on the incremental effects
of digital technology on traditional film-based halide
technology. In 1999, at a panel discussion hosted by the Photo
Imaging Manufacturer’s and Distributor’s Association, a Fuji
executive stated that “right now, film has too large a

price/performance advantage over digital to be replaced any
time soon”, and Harushi Yagi, managing director and general
manager of the international marketing division, said of Fuji’s
unceasing R&D investment in traditional silver photography: “It
is too early to predict whether digital products and services will
really grow within the next few years, [but] we are certain that
consumers will still enjoy photography, which after all they can
nowadays get with excellent quality and at favorable prices.”79
In 2002 the company declared its plan to shift from a silver-
halide-film-based company to a digital products maker, to
compensate for an expected decline in demand for silver halide
over the medium term,80 with products such as digital cameras,
mini-labs, and X-ray equipment. The weighting of digital
products in overall sales was estimated to have surpassed 50%
for the first time in 2001, with a contribution to operating profit
of 50%. By contrast, Kodak’s digital weighting remained a low
25%. An important part of Fuji’s digital strategy was the
installations of digital mini-labs to expand its market share in
photographic film. Digital mini-labs, $100,000 computer and
processing machines located behind store counters, handled
inputs from conventional film, digital camera cards, digital
media (including floppy disks, ZIP disks, and CDs), and prints,
and offered a variety of services, including high-quality prints,
variety prints (e.g., prints with text, frames, and greeting cards),
and data writing, for storage on CD-R, floppy disk, MO disk, or
ZIP disk.81 The company introduced the Frontier in 1996 as the
“core of a picture applications infrastructure in the digital
era.”82 Fuji had a share of more than 60% of
the U.S. market for digital mini-labs, with installations of 5,000
machines at the end of March 2003, while Kodak had only 100
mini-labs in service.83 Shipments of Fuji’s digital mini-labs
benefited from its acquisition of Wal-Mart’s photo-finishing
division in 1997, and from the replacement of existing Kodak’s
products by customers like the leading drug chain Walgreen’s.
Hewlett Packard Co.

The new Hewlett Packard, merged with Compaq Computer
Corporation, had combined revenues of approximately $81.7
billion in fiscal year 2001, with operations in more than 160
countries. The company's offerings were categorized into four
core business groups: the imaging and printing group (printer
hardware, all-in-ones, digital-imaging devices such as cameras
and scanners, and associated supplies and accessories); the
enterprise systems group, which provided the key technology
components of IT infrastructure; services, and the personal
systems group (desktop PCs, notebooks, workstations, thin
clients, smart handheld and personal devices). In January 2002,
at the International Consumer Electronics Show, CEO Carly
Fiorina dedicated most of her speech to the power of digital
imaging, arguing that it was the next big thing in the computing
and communications industries.84 Hewlett Packard's imaging
and printing research teams had been working so fast to get
ahead in this emerging line of business that they filed for 2,500
related patents in 2001 alone. By 2002 the company had gained
a 7.5% global market share in digital cameras. Hewlett
Packard’s success in digital imaging was based on the
aggressive pricing of cameras and printers, with the aim of
increasing sales of high-margin inkjet consumables.
Nikon
In 2000 Nikon reorganized its two sales groups, consumer and
industrial products, into four new categories: imaging products
(film cameras, digital cameras, interchangeable camera lenses),
precision equipment (IC steppers, LCD steppers), instruments
(microscopes, measuring instruments, inspection instruments),
and others (e.g., binoculars, telescopes). In the 1990s, Nikon’s
share in traditional film cameras had maintained a stable market
share of 20% on a unit base85. In 2000 it held a 30% market
share for SLR cameras and a 6% market share for compact and
digital cameras, which had been profitable since 1999 (but with
margins lower than on traditional cameras). In the 1990s, Nikon
had targeted the more profitable higher-end segment, but from
the beginning of the 2000s it started its expansion into the more

popular 2-megapixel cameras. Analysts had compared Nikon’s
strategy in digital imaging with Canon’s, because of its aim to
“link digital cameras sales to peripherals, printing paper, ink,
and other consumables, graphic engines, and CMOS sensors.”86
From 2000 to 2002, digital still cameras had been performing
well, with an increasing contribution to sales of the imaging
business (from 32% of the group sales in 2000 to 47% in
200287), but with top players shipping three million to four
million cameras per year, Nikon’s scale of operation was still
comparatively small.88
Sony Corp.
The company had sales of $19 billion for third quarter 2002, up
1.2% from the previous year, and an operating profit of $1.5
billion. The electronic segment of the world’s largest supplier
of audio-video equipment recorded sales of $12 billion, down
4.6% from the previous year, because of the PCs’ negative
performance, but a rising operating profit. Digital cameras and
camcorders fueled profitability.89 Sony, which first
demonstrated its Mavica digital camera in 1982, initially
focused its marketing efforts on high-end pre-press and
professional photography applications. But during the 1990s
success came from its original Mavica, which stored images on
3.5-inch floppy disks, more familiar to Americans than the
image-storage chips used by most Japanese vendors90. In 1999
Sony enjoyed an 80% market share in the low-end segment,
which on its own accounted for 46% of the digital mix sales.
Industry experts believed that Sony’s breakout performance
with technically lower quality products highlighted two key
strengths of the company, its brand and its customer orientation,
which was reflected in its products’ ease of use91. By 2002
Sony’s bestseller model was still the Mavica. The company
boasted the number-one position in 2001 in the United States
with a 23% share, and a number-two position in both Europe
(with a share of 16%, second to Canon) and Japan (17% share
versus Fuji’s 25%). Sony maintained EBITDA margins of more
than 10% on its digital photo products: the greatest profit driver

in the digital camera world is the CCD business, with EBITDA
margins of more than 20% and a 60% worldwide market share.
·

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