Proposed Strategies for Eastman Kodak

Recommendation:

We have carefully considered many strategic alternatives and we recommend that Eastman
Kodak pursue the following strategies: increase sales of digital cameras and utilize the Kodak
kiosks for accessory sales. Implementing a corporate restructure that will positively change
Kodak’s culture is a tremendous idea, but it time consuming and has historically failed to be
successful. Decreasing dividend payouts is also a good idea, but not at this present time.
Therefore, due to the intense need for performance, Kodak should focus on gaining market share
and profit performance in 2006.

Issues:

Kodak focuses on building its presence in the document imaging industry with a focus on
commercial digital imaging, photocopiers, and commercial inkjet printers. The challenges we
face are how to keep costs down so that we can increase our profit margin and how to develop
our core competencies even further to capitalize market share.

Four alternate strategies are outlined below with an explanation of each option combined with
their strengths and weaknesses:

Strategic Alternatives:

1. Increase sales of digital cameras

Digital cameras are in perfect alignment with our goal of building presence in the
commercial digital imaging industry. Increasing sales of digital cameras will establish
Kodak as a key competitor in the digital imaging industry.

Pros:
• Kodak can gain market share in the industry.
• Marketability will make way for new product lines.
• An increase in production will lead to economies of scale; thus, lowering costs.
• “Old fashioned” film is phasing out to digital imaging – Kodak must adapt.

Cons:
• Changing from pushing film photography to pushing digital cameras will decrease profits
at first (because film has a higher profit margin).
• Customers who enjoy film may feel abandoned.
• Manufacturing buildings may become obsolete due to impossible adaptation to digital
camera manufacturing. New buildings and equipment may be necessary.
• Kodak will loose their core competency of film photography.
 This option is a necessary change. Kodak must enter the digital industry; digital cameras
are a necessary first step in the process and can become a core competency. Once it is
successfully implemented costs will decrease and with Kodak’s dominant brand name,
Kodak will become a key player in the industry. If Kodak refuses to adapt to the needs of
the market, we will eventually disappear along with the traditional film users.

2. Utilize the Kodak kiosks for accessory sales

The Kodak kiosks are a vital component to Kodak’s success. Their marketability is
already established; it just needs to be further exploited. Kiosks create customized
personal pictures and are virtually in every corner of every major retail store. Kodak
would just need to create related sales to the kiosk product. This would be done by
adding Kodak products next to the kiosks in the stores; customers would then buy
products that increase their picture’s value or are a convenience.

Pros:
• The supplies and supply chain is already established.
• Customers are already buying Kodak kiosk products for the added value of their personal
pictures; it is a natural step to increase value even further.
• Kodak would enter the digital industry even further. The digital industry can be bettered
by the traditional, physical “film-like” accessories that Kodak already has access to.
• The trusted brand name will attract new customers that enjoy the convenience of the easy
to use kiosk and available accessories.
• Sales and profit will increase from little change.

Cons:
• Convincing major retailers to buy more products and maintaining those commitments can
be difficult.
• A contract to have the kiosk remain in the store is imperative to gain for this to be a
success.
• The increase in demand for the kiosk (due to the added convenience) would require more
kiosk maintenance control.

This is a low risk strategy because of the already existent supply chain. The sales team
would have to push more products, but that is what they do best. Kiosks are a middle
step from traditional film to digital; it is a place where they can easily get physical copies
from their personal digital cameras (hopefully that Kodak made) and get frames,
scrapbook supplies, and/or memory cards. Adding accessories to the kiosk keeps the
customer in mind and Kodak’s sales up.

3. Implement a corporate restructure that will positively change Kodak’s culture.

Restructures have happened many times at Kodak; however, none have been successful
because of the underlying culture. The underlying culture consistently causes lowering
 cost initiatives to fail by stagnating innovation and lower-level decision making. The
massive size of Kodak cannot have micromanaging if it wants to compete in the global
market. Kodak’s past history of success and profits has maintained their presence in the
market, but it will not last in the long-run if we do not restructure successfully.

Pros:
• Leadership is more of a one-on-one relationship.
• Innovations from the lowest levels of Kodak are capable of success; a must in the digital
industry.
• The intellectual property of our employees will be better utilized because they would no
longer fear the culture’s disdain of change.
• Managerial costs will decrease and managerial value will increase since they will be able
to use their time for better purposes (like analysis, cost saving initiatives, research and
development, efficient processes, etc.).
• Productivity would increase because employees would go “above and beyond” because
they see their potential importance to the company.
• The restructure, in whole or in part, is already in place – the unwanted culture just needs
to be eliminated.

Cons:
• The underlying culture is difficult to detect and change.
• Once everything is in place and seemingly successful, the unwanted culture may
resurface and collapse restructure.
• Stockholders will be weary of the changes necessary for success.
• Analysts may criticize the restructure which will lower stock price.

Changing the underlying culture of a company is incredibly difficult in any company,

especially one (like Kodak’s) that has existed for 130 years. As stated earlier,
restructures have occurred many times and have been unsuccessful. This time it must be
done right; its success will cause innovation in an idle company and lower costs to better
compete in the global market.
4. Decrease Dividend Payouts

Decreasing dividend payouts would create an increase in retained earnings. For Kodak to
have as much financial challenges as it has had and still pay one of the highest dividends
is unreasonable. Over the past nine years (See Exhibit 1) we have paid out almost 4-
billion dollars in dividends where those funds could have been used for innovative or
cost-lowering ventures. Therefore, we must continue to decrease our dividend payout.

Pros:
• Decreasing dividends increases retained earnings that can be reinvested into the
company.
• The reinvestment can be used toward developing and maintaining our focus goals.
• More cash on hand can easily be used toward new ventures.

Cons:
• Shareholders will not be pleased with lower dividends. Many investors may be invested
solely because of the historically high dividend.
• Analysts may criticize the decrease in dividends which will lower stock price.

Due to the market perception of Kodak, it would not be wise to implement another
decline in dividends at this time. However, it would be practical to lower them in the
future to aid in the competition of privately owned Fuji because dividends are a cost
disadvantage to Kodak.

Summary:

Kodak must develop its presence in the digital industry more than anything else. If Kodak
creates a strong presence in the industry by creating core competencies, it will gain market share
from its competitors and increase profit. This is why we recommend that Kodak increase sales
of digital cameras and Kodak utilize the Kodak kiosks for accessory sales because of their low-
cost capabilities and good potential profit margins.
Exhibit 1

Eastman Kodak's Nine Year Dividend Payout

Common Stock
Year Dividend Shares Dollar Amount Paid
1997 1.72 324,901,439 $ 558,830,475.08
1998 1.76 323,949,681 $ 570,151,438.56
1999 1.76 315,603,811 $ 555,462,707.36
2000 1.76 300,169,250 $ 528,297,880.00
2001 2.21 290,929,293 $ 642,953,737.53
2002 1.80 291,769,113 $ 525,184,403.40
2003 1.15 286,573,885 $ 329,559,967.75
2004 0.50 286,679,276 $ 143,339,638.00
2005 0.50 287,200,986 $ 143,600,493.00
Total Paid Out: $ 3,997,380,740.68