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Eastman Kodak Company, commonly known as Kodak is an American multinational imaging and photographic equipment, materials and services company headquartered in Rochester, New York, United States. It was founded by George Eastman in 1889. Kodak is best known for photographic film products. During most of the 20th century Kodak held a dominant position in this sector. In fact, Eastman Kodak Co. is one of the dominant market share holders within the camera and other photography-related industries. Kodak pioneered amateur photography and is often credited for the invention of roll film and the first camera.
The markets for color film and color photofinishing in 1954 were controlled by Kodak. It had over 90% of the amateur color negative film market. In 1994, Kodak appeals to court to terminate 1921 and 1954 decrees that restrict pricing policies. Moreover, fifteen years ago, Kodak was the fourth most valuable brand in the world after Disney, Coca-Cola and Microsoft, but today, the company has totally sunk. Indeed, on January 19, 2012, the company filed for bankruptcy. We will first discuss about the termination of the 2 decrees and then, try to find out what went wrong in the company that lead to bankruptcy. Finally, we will discuss about the changes I would have made if I was the CEO of Kodak in order to avoid such an end.
Question 1: What are the decrees affecting Kodak’s actions? Why were they put into place?
Two decrees affecting Kodak’s actions had been put into place, in 1921and then in 1954. According to the first decree, Kodak had to stop imposing different forms of dealing contracts on retailers, divest all of the acquired firms, license its photofinishing processes and technically assist anybody willing to start a photofinishing business. The decree’s main goal was to provide better conditions for healthy competition in the photo industry. With the development of the color film market, Kodak became its unique leader.
The company sold its color film only as a package together with processing. Thus, by bundling the cost of film and processing, Kodak effectively monopolized the photofinishing industry. This resulted in the second decree which placed a permanent restriction on Kodak from bundling the sale of its color films to the photofinishing process. It also required Kodak to divest itself of some of its photo labs. Thus, the decrees of 1921 and 1954 had facilitated the development of a competitive market for the sale of films as well as processing. The decrees against Kodak aimed to limit its market power and prevent monopolization of the photographic industry.
Question 2: Who are the competitors for Kodak? What market share does Kodak have compared to its rivals? What competitive advantages does Kodak have?
Kodak’s competitors are as follow: Fuji, Konica, Agfa and 3M. These are the four firms manufacturing and selling camera film in the US. However, despite a subtle difference in the quality of film, Kodak’s sales considerably exceed the ones of its competitors even though the prices charged by the company are generally higher. According to court, Kodak’s sales in dollar terms constitute about 75% of all the film sales in the US. About 241,000 major retailers provide Kodak film, while only about 71,000 provide its nearest rival, Fuji, even though its prices are reported to be 10% lower. As for the other competitors, their market share is relatively small: Konica accounts for only 4% of sales, Agfa for 3% and 3M for 8%. Kodak’s market share also increased thanks to several acquisitions it made; the most important one was the acquisition of Qualex in 1994 that currently accounts for 70% of all the wholesale macro lab photofinishing market in the US. The main competitive advantage that Kodak has is the consumers ’trust and loyalty: despite much higher prices, 50% of consumers will only buy Kodak film, while 40% will prefer to purchase Kodak products. Moreover, the company also provides various incentives to those retailers who sell extra or only Kodak film.
Question 3: What is the relevant geographic product market for film?
According to the definition, a relevant product market includes “all those products which are regarded as interchangeable or substitutable by the consumer by reason of the products characteristics, their prices and their intended use”. We can presume that the relevant market for film includes all of the five firms: Kodak, Fuji, Konica, Agfa and 3M. However, not all of these firms’ products are viewed as fully interchangeable and substitutable by the consumer as stated in the definition. According to statistics, about 50% of consumers will only buy Kodak film despite of substantial price increases.
This phenomenon indicates the consumers’ adamant belief in the superior quality of Kodak film. There were two different viewpoints on the relevant geographic product market for film discussed in the case. According to the district court, the relevant geographic market for film is worldwide, since foreign manufactures sell considerable amounts of film in the United States and Kodak’s market share is only 36% globally. However, the government argues that this determination is wrong and that the relevant geographic market in this case should be limited to the United States. The main explanation here is that a relevant geographic market comprises an area where the firm can exercise the market power. Taking into consideration the fact that Kodak charges much higher prices in the US comparing to other countries, the relevant geographic market for this case can be identified as the United States.
Question 4: What evidence does the government provide that Kodak still maintains significant market power in the United States ?
First of all, according to the government, Kodak had engaged in geographical price discrimination against its United States customers. The evidence shows that Kodak charges a higher price for its film in the United States than it charges for the same film in other parts of the world. The prices that Kodak sets within the US are normally above the competitive levels. This, as the government states, is one of the proofs that Kodak exercises market power in the United States. Another important thing is the US customers’ strong preference for Kodak film and the resulting premium price that Kodak is able to obtain for its film in this country. Despite the price disparity, Kodak still continues to maintain 67%-75% share in the US. However, the evidence shows that the quality of Kodak film is not better than its rivals’ film quality.
The last item evidence relied upon by the government to support a finding that Kodak has market power within the United States is the fact that Kodak’s own elasticity of demand is two. According to the government, an own elasticity of two indicates that Kodak is earning excessive profits from its film. This, as the government states, is strong evidence that Kodak exercises market power in the United States. The significance of an own elasticity of two, in the government’s view, is that it indicates that the sales price of Kodak film is twice the short-run marginal cost. Thus, from Kodak’s own elasticity of two, the government concludes that Kodak is exercising significant market power in the United States.
Question 5: What risks are associated with terminating the decrees? More specifically, what actions might Kodak take that would hurt competition or unfairly hurt competitors?
Terminating the decrees will definitely have some negative impacts and can seriously hurt the competition. It will provide Kodak with many relatively cheap ways to exclude competitors, such as introducing various price reductions and discounts, which the company can afford due to high sales volumes and profit margins. However, the same offers will be too expensive for the rivals, which might drive some of them out of business and only increase Kodak’s market share. Termination of the 1954 decree will again allow Kodak to bundle the sale of its film to photofinishing, as it did before and will involve some serious risks as well. As it has been admitted by the company, one of its main goals is improving its bargaining position with retailers. Since Kodak already enjoys market power over the film it sells to retailers, the termination of the decree will only strengthen its film monopoly and make it even more challenging for the rivals to compete. Thus, it is unlikely that terminating the decrees and allowing bundles will benefit the competition in any way.
Question 6: It was reported that Kodak filed for bankruptcy protection on January 2012. Please provide your comments on the failure of Kodak. If you were CEO of this company, what would you transform and reorganize in the company in the past decade?
On January 19, 2012, Kodak filed for bankruptcy protection. The company was doing very well since its beginning in 1889, it was number one and above all, the consumers liked this brand. So, what exactly went wrong? What exactly lead a leader company in digital imaging and photography to bankruptcy? According to many people, economists, businessmen or just consumers, Kodak was killed by one thing, which is the digital camera revolution and an incompetent management that avoided embracing the innovations and changes to their market. In fact, rather than diversifying their product portfolio, they got stuck in cameras and printing and even then, did a poor job of innovating in both fronts. For most of the 20th century, Kodak was one of the largest producers of film for both still and motion picture cameras and it stuck with that business model even after the advent of digital cameras made its films, chemicals and papers obsolete.
Kodak watched the market for amateur photography shrink for 30 years ; yet, management consistently made decisions trying to defend and extend the historical market rather than move the company into faster growing, more profitable opportunities. The irony of Kodak’s decline, however, lies in the fact that the company’s own researchers had invented the first digital camera way back in 1976. That should have put Kodak in a position to dominate the industry with a stream of new products such as cameras, printers, printer papers and inks, just as it had in the old days. But it never happened. Despite the fact that Kodak invented much of the technology for digital photography, its leaders chose to license it to others rather than develop the market because they feared cannibalizing existing sales.
Indeed, why would they risk reducing their high sales volume, their sales revenue or market share by introducing new products when the business is going perfectly? But they were wrong to think like that because it led them to their end. Kodak had been such a beloved brand for so long that its executives thought Americans would never desert it. By the time they woke up to the fact that film sales were dropping precipitously, it was already too late because the digital revolution was in full swing. There again, Kodak found itself behind the curve after its executives failed to anticipate how rapidly and completely the new devices would transform the photography market. Thus, the Kodak problem is that it did not move into the digital world well enough and fast enough.
The former « king of photography » failed to reinvent itself in the digital age. So, Kodak’s failure was entirely due to strategic decisions either avoided or made poorly. As a result, from 2003 to 2010, Kodak reduced its workforce by 50,000 employees and closed 13 of its 15 film plants and 130 photo labs. By the end of 2011 it was rapidly running out of cash, its market share had plunged and its stock was selling for just 54 cents a share. The company found itself reduced to selling off its patents simply in order to stay afloat.
In this kind of business, I think that the success is related to one simple thing which is innovation. As a CEO, the most important thing is to know when and how to do some changes in the business ; so, first of all, if I was the CEO, I would have changed the management team and hired people who were more open to innovation and who did not fear changes and were ready to take risks in order to achieve a better position and at the same time increase sales, revenue and market share. Then, the company was already leading since its foundation so if I was the CEO back then, in order to keep that high position in the photography and digital imaging sector, I would have always sought new technologies and innovations to always be one step ahead of competition.
Even if sometimes innovating can be a failure it will never be worse than getting stuck with the same products for ages. Innovation is the key to success, but in order to make the innovation a success, it is essential to know the customers’ expectations and adapt the products to their need. By better meeting consumers demand, the innovation of new products is unlikely to fail. Furthermore, Kodak already had the consumer’s trust and loyalty which was a plus to its success. If we took into consideration the fact that photography became part of the daily life because of the phones; that half of the camera users did not know anything about photography; that printing pictures became less and less common because of social medias; that thanks to digital cameras, people took unlimited amount of pictures and most of those pictures went directly into social medias such as Facebook, Twitter… It would have been intelligent and profitable to produce new products facilitating all of the previously mentioned elements years ago before bankruptcy and before competitors.