Kodak Eastman Kodak Has Been Facing Difficulty

Kodak

Eastman Kodak has been facing difficulty external environmental circumstances for nearly two decades, as the digital photography revolution has severely impacted Kodak's business. The company's revenues have declined for at least the past five years, and in four of those years Kodak recorded a loss. In the fifth year, 2007, the profit derived from "extraordinary items" rather than operating income (MSN Moneycentral, 2011). The company's businesses include digital and still cameras, inkjet printers, retail printing kiosks, imaging sensors, document scanners and photographic film, paper and processing chemicals (Eastman Kodak 2010 Annual Report). The declining demand conditions have been in place for a long time, but Kodak does not seem to have any answers as to how to build its business, either in photography or in other imaging product or service lines. Inkjet printer systems are one of the only growth businesses for Kodak, with sales up 45% in 2010. Every segment in which Kodak competes is subject to intense competition, often from large and well-established competitors. The company's struggles have cost it financial as well. Kodak no longer has any equity. While it remains solvent and has taken steps to reduce its long-term debt level, Kodak has seen its asset value erode more quickly that its liability level (MSN Moneycentral, 2011). The current stock price of $3.34, not far off the 52-week low, reflects these struggles (Ibid).

There is nothing exceptional about the corporate governance at Kodak. The firm does offer equity-based compensation to its executives, although with the recent stock price problems it is debatable whether or not this compensation is worth anything. The company has an internal set of corporate responsibility principles, policies, guidelines and objectives, all of which is made publicly available on the Kodak.com website (2011). The company also produces a global sustainability report. The Board of Directors contains 14 external members and 1 internal member, the CEO. This indicates a high level of governance within the company, having an external board. Two of the members come from an accounting background and another is an expert in securities law, providing at least some ability to address accounting-related issues under Sarbanes-Oxley.

With respect to internal strengths, Kodak's recent performance may indicate that it has few, but it is worth remembering that the company still does $7 billion in revenue. Kodak's most important strength is its brand name. The company may not be as ubiquitous as it used to be, but everybody knows the Kodak name and it is still highly respected among consumers, suppliers and potential employees. The company's financial struggles have had little bearing on its prestige. The second strength of Kodak is that it has continued to rebrand itself as an imaging company. Kodak's successes in inkjet printers, for example, show that it is able to generate new imaging business when it puts a good product on the market. The third main strength of Kodak is in its leadership and governance. Kodak is driven by talented people, and has retained much of its research and development capability as well. The company's struggles are less a problem of leadership than they are of changing technology and customer preferences. The fourth strength of Kodak is the new product pipeline. In the past ten years, as Kodak has worked to recover from the damage done to its market share in the 1990s, the company has consistently launched new products and work to build its innovation capabilities.

That said, Kodak still has a number of key weaknesses. The company is burdened by the financial drag of its pension obligations. The company has defined-benefit plans both in the U.S. And internationally (2010 Annual Report) and there are indications that these obligations are unfunded (Trainer, 2011). This could put the company into bankruptcy. The lack of equity and the poor stock performance are another category of weakness, as these can impede the company's ability to raise capital in the future; certainly it would be difficult to go to the stock market for more money. Its debt has also been downgraded, indicating that raising money in the future will, even if possible, be more expensive (AP, 2011). A third weakness as Eastman Kodak relates to the corporate culture. When photography went digital, Kodak had no answer, and ultimately the company has been slow to move. While it positions itself as an innovator, the market evidence contradicts this. The fourth weakness is the ongoing erosion of the company's capabilities. As the company contracts, it loses people, divisions and technological capacity. This effectively sets off a death spiral in which Kodak loses its ability to enter new markets while experiencing reduced capacity to market its existing customers as well.

In the external environment, there are a number of opportunities, however. Imaging in general is a growing business with many more people taking more pictures, fueled by the digital photography revolution (Laukat, 2009). In addition, opportunity is created by technological innovation. When digital cameras supplanted film it spelled the end of prosperity for Kodak. Today, smartphones are spelling the end of prosperity for digital camera makers (Sterling, 2010). The pace of innovation is becoming such that new opportunities are created -- if Kodak can make a better smartphone camera lens or processing application, it can take advantage of this opportunity. Another opportunity lies in medical imaging. Kodak was once strong in this business, and the rapidly aging population (especially of baby boomers) means that demand for medical imaging products is expected to grow over the next decade or two. A fourth opportunity in the external environment is diversification away from imaging. While imaging has traditionally been the firm's bread and butter, it is clear that Kodak has few growth prospects in this business. It may be time to search outside of imaging for growth opportunities.

There are many threats in the external environment. In the 2010 Annual Report, Kodak notes that it faces intense competition in virtually all of its industries. Competitors compete both with cost leadership and differentiation strategies. Another threat for Kodak is the health of the economy. For both consumers and corporate customers, a poor economy results in delayed purchase decisions and this hurts Kodak's businesses. A third threat that Kodak faces comes from its creditors. With the ratings downgrade from Moody's the company's cost of debt will increase. Creditors may also simply be unwilling to lend more to Kodak or to renew existing debt, especially in light of the company's unfunded pension liabilities. As a result, Kodak could find itself in a cash crunch, leading perhaps even to bankruptcy. A fourth threat in the external environment comes from technological change. While this can also be an opportunity, technological changes in the past have devastated Kodak's business and the same could happen again in the future. If Kodak does not take the lead in technological innovation, new technologies could wipe out what few lucrative businesses it has.