16th European Business History Association 2012 Kodak versus Fujifilm how to explain in the context of business history?

? Takeshi Yuzawa Gakushuin University 1. Introduction Eastman Kodak(Kodak) was the largest photographic filmmaker established in 1880 in the world and one of the representative firms which ranked 43th in the Fortune 500 in 1955. However, Kodak retreated to 327th in 2011 and filed protection for Chapter 11 bankruptcy on 19 January 2012. There are various comments on the Kodaks business failure that Kodak was late to adapt to the wave of digitalization. But Kodak noticed the coming of the digital age in 1970s and invented a digital camera, the first in the world in 1975. Kodak aggressively entered into new business, and promoted M&A, but they could not make use of these strategies for the profit center. Why couldnt Kodak transform itself at the time of digital revolution? When we analyze the failure of Kodak, it might be useful to compare with Fujifilm, Japanese filmmaker. Fujifilm stayed in the Fortune Global 500 in 2010, though it is now struggling to keep its situation by branching into new businesses. From 1970s Kodak was struggling with the various problems: challenge of instant camera, Polaroid, competition with Fujifilm, and digitalization of business. Successive CEOs made various efforts to deal with the problems and to improve its business. But they were not successful. The reason why Kodak could not succeed in escaping from the insolvency might be explained by the Innovator s Dilemma proposed by Clayton Christensen of Harvard Business School. He analyzed the successful company where managers could not decide the dynamic strategies in the context of their traditional company culture. in their straightforward search for profit and growth, some very capable executives in some extraordinarily successful companies, using the best managerial techniques, have led their firms toward failure. Yet companies must not throw out the capabilities, organizational structures, and decision-making processes that have made them successful in their mainstream markets just because they dont work in the face of disruptive technological change. The vast majority of the innovation challenges they will face are sustaining in character, and these are just the sorts of innovations that these capabilities are designed to tackle. Managers of these companies simply need to recognize that these capabilities, cultures, and practices are valuable only in certain conditions.( Christensen, (2000), p225 ) 1

However we should seek for the origins of Kodaks failure from historical background, and we will find that Kodaks managers were quite sensitive to the innovation and very active to introduce new products. 2. Kodaks strategy in 1980s-1990s Under Colby Chandler chairman and CEO (1983-1990), Kodak vigorously diversified new business including hardware and software business. He had an ideal for the management of Kodak. He wrote that Kodak goal is straightforward: to use the companys world-class status in the disciplines of chemistry, imaging, optics, and information management with new strengths in electronics and life sciences to maintain leadership in current markets, while establishing strong positions in new areas of opportunity. The new organization provides the framework for strategy. To pursue this objects, he instituted the Venture Board that reviewed promising ideas for new business. The primary objective of the new system was to increase the quality and quantity of well-evaluated ideas on which to base new venture pursuits, product line expansion, and program improvement decisions. A second objective was to encourage broader participation in the generation and implementation of ideas.(Colby Chandler (1986), pp.5-6) At the time of Chandler CEO, Kodak established the KODAK KAR 4000 Information System for computer-assisted storage and retrieval of microfilm images in 1983 and began new image management systems like the Kodak EKTAPRINT Electric Publishing System and the Kodak Information Management System in 1984. The company introduced The KODAK XL 7700 Digital Continuous Tone Printer, which produced large format thermal color prints in 1989. Kodak developed the KODAK EKTACHEM DT60 Analyzer, a desk-top unit for the convenience of dry-chemistry blood serum analysis to the physician's office in 1983 and expanded healthcare business with the establishment of the Eastman Pharmaceuticals Division in 1986. In 1988, Kodak acquired Sterling Drug Inc. to be a profitable participant in ethical and over-the counter drugs. Kodak entered video market with Kodak Videocassettes and announced a full line of flexible floppy disks for personal computers in 1984. Kodak started KODAK FLING, the first one-time-use camera which contained a KODACOLOR Film Cartridge in 1988, and extended series of one-time-use cameras including Panoramic 35 Camera. In 1986, Kodak announced KODAK ULTRALIFE Lithium Power Cells, the world's first 9-volt lithium cells for consumer use, and entered the general consumer battery market with a line of KODAK SUPRALIFE Batteries. 2

It is notable that Alfred D. Chandler s Strategy and Structure ; chapters in the

history of the industrial enterprise, which was first published in 1962, was highly
appreciated and that numerous management books were stressing the role of diversification in business. While Colby Chandler was at the top of Kodak, he was full of energy for promoting the strategy of diversification. However, Kodak was not accepted favorably in the stock market, though it might be necessary to consider the difficult time for business under Reaganomics. Table 1 Share price of Kodak, 1983-1990 The share price 1983 1984 1985 1986 1987 1988 1989 1990 of Kodak High Low 91 64 78 60 70 70 53 39 52 43 40 33 45 42

In 1990, Kay Whitmore succeeded to Chandler as CEO of Kodak, and started to abandon the former CEOs policy of diversification and vertical integration. He said "One of the things weve learned is that one company cant do everything.(Gavetti,G.,Henderson,R. and Giorgi,S (2005), p.3). Consulting with analysts who questioned the whole logic of Clay Chandlers diversification policy, Whitmore challenged to restructure the company by hiring managers from outside. A new state-of-the-art sensitizing plant, whose construction started in 1986, was completed in 1991 for coating color films for the professional and motion picture markets. This field of business continued as one of the mainstreams of Kodak until it stopped manufacturing in 2009 after conducting 74- year as a photography icon. In 1992, Whitmore sold its 100,000th X-OMAT X-ray film processor, which was first introduced in 1956. However, Kodak established KODAK PREMIER Image Enhancement System which helped the commercial and industrial photography labs, and promoted document management systems with high speed printing capability. Whitmore was eager to introduce Kodak Professional Digital Camera System which enabled photojournalists to take electronic pictures with cameras equipped by Kodak with a 1.3 megapixel sensor. He also promoted the agreement with Sanofi, a leading French pharmaceutical company, that would result in a number of joint ventures between the companies. At the time of Whitmores chairmanship, Kodak continued primarily Imaging, Information, Chemical and Health Segments, though he denied Clay Chandler s diversification policy. Whitmore endeavored to cut costs of workforce and promoted the early retirement package that led to 8300 layoffs. He also cut research and development costs. But he 3

was not succeeded in cutting costs and in enhancement of earnings, and was ousted in 1993.(The New York Times, July 29 2004). George M.C. Fisher became CEO of Kodak in 1993, after he left his job as CEO of Motorola. He was the first outsider to lead Kodak in 117 years. Fisher, after having received his Ph.D. in mathematics, had apprenticed at AT&Ts Bell Labs, where he did work related to photography. Fisher had been credit with leading Motorola into the digital age, and it was his expertise in the digital sector that his appointment at Kodak. (Jones, Gareth R.(2002), C623) Fisher wanted Kodak to be a horizontal company that outsourced most digital photographic equipment and built 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.(Gavetti, et al., p.6)(CNN Money, Keeping Kodak focused, interview on Jan. 1999.). Fisher felt Kodak was built on imaging, not film, and that it could grow by focusing on its core business and exploiting new digital technologies. Fisher spun off Eastman Chemical Company in 1994, including Distillation Products business which was founded in 1920. Eastman Chemical had been formed to supply raw materials for Kodaks photographic business, and got 8% of its sales from Kodak. (Eastman Chemical Company is now included in Fortune 500, and flourishing with more than 10,000 employees world widely). He divested Kodaks health segment, except for the health sciences unit, which included X-ray film, other diagnostic imaging hardware, and consumables. Kodak sold Sterling Drug, L&F Products, and Clinical Diagnostics. The company sold the sales, marketing, and equipment service operations of its Office Imaging business and its facilities management business (formerly known as Kodak Imaging Services) to Danka Business Systems PLC. (However, Danka Business System was later acquired by Konica-Minolta Business Solutions USA in 2008) Fisher demonstrated his confidence in the future of imaging. I grew up in the electronics business and I looked at the photography and imaging business from the electronics side and its not such a scary event. Electronics will add a lot to photography and a lot to imaging. (Gavetti, et al.,p.5). As chairman and CEO of Eastman Kodak from November 1993 to December 2000, Fisher established a digital imaging strategy for Kodak that was to set the direction of the company up until 2004.Grant, p.4. Though Many Kodak insiders resisted Fishers initiatives..., Fisher tried to introduce the 4

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.( Gavetti, et ai., p.6) . Lamoreaux, et al. explained that Regardless of the method of reform, the end result of the restructuring of the 1980s and1990s was a striking retreat from conglomeration. According to one calculation, by 1989 firms had divested as many as 60 percent of the acquisitions they had made outside their core businesses between 1970 and 1982. The deals that led to these divestments generally took one of two major forms. In the first, one large firm bought another which had substantial investments in its core business, increasing its market share in that activity and spinning off unrelated subdivisions at the same time. In the second, the so-called bust-up, the various parts of a conglomerate were sold off separately, usually to firms specializing in the same line of business as the division. In either case, the end result was to increase the extent to which large firms focused their energies and resources on their core businesses. Although most of the nations largest enterprises continued by historical standards to be highly diversified, these deals marked a significant shift back in the direction of specialization. (Lamoreaux , et al., pp.43-44) Fisher might follow the popular trend in American business world at that time, but it is notable that the number of employees greatly reduced from 96300 in 1994 to 78400 in 2000, especially in two years, 1996 and 1997, 17400 employees were cut. Table 2 Number of employees at Kodak between 1994 and 2000 Number of employees USA 54300 54400 53400 54800 46300 43300 43200 78400 Worldwide 96300 96600 94800 97500 86200 80650 1994 1995 1996 1997 1998 1999 2000

Fisher attempted to transform Kodak from a chemical based company into a technological based company. Fisher believed that investing in equipment development was the best strategy to increase Kodaks profitability. He spent $5 billion to research digital imaging and attempted to form alliances with other technological companies to develop new products. He wanted to change the vertical structure of Kodak into a horizontal company that outsourced most of its equipment. Fisher had segmented his product development and sales over many divisions. But there was poor communication and sharing of information. By late 1997, 60% of Kodaks losses were due to costs of digital cameras, writeable CDs and other product developments. In 1998, Kodak lost 5

another 4% of market shares due to decline in film sales. In order for Fisher to have been successful he needed to change Kodaks philosophy from a stubborn company to a flexible and innovative one, but he did not have much support from his middle managers. Fisher s attempt to transform Kodak was a failure. Dennis Yu, Team G 3. Kodaks strategy in 2000s Daniel A. Carp succeeded George Fisher as CEO on January 1st, 2000 and chairman next year. Unlike Fisher, Carp was a Kodak veteran. He started as a statistical analyst at Kodak in 1970 and had worked in several divisions and several functions as well as heading up Kodaks regional businesses in Latin America and Europe. As chief executive, his approach had been to develop and refine the strategic direction established by Fisher, to build upon areas of strength, and to respond quickly to developments in the market for digital imaging products. Carps approach maintained the distinct strategies for the consumer and commercial market. The result was to establish some clear areas of focus for Kodakespecially in the professional and commercial sector. (Grant, pp.8-9) While he was the top of Kodak, he promoted the field of a dental radiography film and a high-quality digital cinema system. The company completed its acquisition of Bell & Howell Company's imaging businesses, and focused exclusively on the wide-format inkjet printing industry. The company introduced the KODAK 8500 Digital Photo Printer, a photo-quality, thermal desktop printer. Kodak and Sanyo Electric Co. unveiled a prototype fifteen-inch flat-panel display, the next generation of full-color displays based on Kodak's patented organic light-emitting diode (OLED) technology. Kodak strengthened the sales of KODAK EASYSHARE, a new line of digital cameras, but the share of the digital cameras was not increased. By January 2003, digital cameras remained unprofitable, but Kodak controlled most photofinishing transactions in the United States, and had 15% of the U.S. digital camera market .( Gavetti et al., p.7) Table 3 U.S. Digital camera market share, 1998-2002 1998 1999 2000 2001 2002 Sony Kodak HP 59% 17% 5% 53% 27% 9% 3% 28% 24% 13% 15% 18% 15% 4% 14% 34% 13% 20% 5% 6

Olympus 9%

Fuji Canon Nikon Other

1% 2% NA 5%

2% 1% NA 6%

5% 7% 4%

3% 5% 4%

4% 9% 4% 11%

21% 20%

Source: Adapted from Credit Suisse First Boston, 2002 (Gavetti, et al., p.12) Antonio Perez joined Kodak as President and Chief Operating Officer, in 2003, elected CEO in 2005 and became Chairman in 2006. He had extensive expertise in digital imaging technologies, stemming from a 25-year career at Hewlett-Packard Company (HP), where he was a corporate vice president and a member of the companys Executive Council. Perez lead the digital transformation of Kodak, aimed at delivering innovative digital products and services to consumer and commercial customers in the fastest-growing segments of the imaging industry.. Kodak unveiled a new digitally oriented strategy to accelerate growth to expand into a range of commercial businesses. The company was organized under five primary operations: Commercial Printing, Display & Components, Health Imaging, Digital & Film Imaging Systems, and Commercial Imaging. In spite of various efforts, however, conducted by the successive CEOs of Kodak, the company revenues have only increased at a five year average (2002-2006) rate of 0.07%, compared to an industry average of 3.8%. The company, which made a net profit of $770 million in 2002 and $556 million in 2004, reported a net loss of $1,261 million in 2005 and $691 million in 2006. Declining revenues from film and photofinishing systems segment. Table 4 Kodak Net Sales, Earning and Dividend (2004-2011)(in millions) 2011 Net(loss)earning (764) Dividend per share (Kodak Annual Reports) The film and photofinishing systems segment of the company reported poor financial performance from fiscal years 2004 to 2006. Revenues from this segment have declined from $7,015 million in 2004 to $4,156 in 2006, a decrease of 40.8%. This segment encompasses consumer and professional film, photographic paper and photofinishing, 7 2010 2009 7,606 2008 2007 678 2006 (691 ) 0.5 2005 14,268 (1261) 0.5 2004 13,517 544 0.5 Total Net Sales 6,022 7,187 9,416 10,301 13,274 0.5 0.5

(687) 209 (442)

aerial and industrial film, and entertainment products and services, which provided consumers, professionals and cinematographers with traditional products and services. The film and photofinishing systems segment accounts for about 31.3% of the companys total revenues. Continued poor performance of the largest segment would affect the overall financial performance of the company. (SWOT analysis for Kodak by Datamonitor in 2007) Digital cameras are one of the most competitive markets. In the Table3, Kodak could share the digital camera market from 13% to 27% in the end of twentieth century, but gradually its share declined. However, even in 2007, one report on Kodak wrote that Worldwide digital camera revenue is forecast to reach $31 billion in 2009. Sales of digital cameras in Asia and other parts of the world are estimated to keep growing, up from a combined 10% share of demand in 2004, to account for 33% of worldwide revenue by 2009. Eastman Kodak offers a range of digital cameras, film and accessory products, around the world. Growing trend towards digital photography provides the company with an opportunity to further expand its product sales.(Datamonitor, p.36). The company hedged its bets and launched an all-out blitz on the digital camera market. A series of EasyShare was the digital cameras produced by Kodak. The company spent a tremendous amount of time and energy studying customer behavior . (Desai,J.p.3) A report written in 2009 by a group of Wisconsin School of Business recommended four key factors: (1) redesign Kodaks marketing communication message to position it as the premier provider of imaging solutions that connects the consumer with their loved ones; (2) through marketing communications, walk the consumer from image capturing, through storage, to sharing, allowing them to process each of Kodaks product offerings; (3) increase marketing focus on digital cameras to leverage brand equity (reposition); (4) increase prices on digital cameras.(Castano,A. et al., p4). However, Kodaks market share in the digital cameras was gradually decreasing in the 21th century. It is also important to recognize that the digital camera market is facing intense competition from mobile phones capable of taking and sending pictures. Consumers are moving away from low-end cameras as mobile phone makers introduce products. Now almost all handsets are embedded with cameras, with a majority shifting to multi-mega pixel resolutions. The market for standalone digital cameras was shrinking in addition to the facts that every competitors raced into the market and that the digital cameras were now becoming commodities, with low profits. Table 5 World Digital Camera Market Shares by companies Company 2009 2010 8

---------------------------------------------------Canon Sony Nikon Samsung Kodak Panasonic Olympus Fuji Other 19.0 16.9 11.1 10.9 8.8 7.6 6.2 5.4 14.1 19.0 17.9 12.6 11.1 7.4 7.6 6.1 4.9 13.4

(Sawa, Kazuyo abd Yasu, Mariko(2011)) One of the drastic policies under Perez was that Kodak sold all of the assets and business operations of its Health Group segment to Onex Healthcare Holdings, Inc. on April 30, 2007. The business is continuing under the name Carestream Health, Inc. The price was composed of $2.35 billion in cash at closing and $200 million in additional future payments if Onex achieves certain returns with respect to its investment. About 8,100 employees associated with the Health Group transitioned to Carestream Health, Inc. as part of the transaction. The sales included the manufacturing operations focused on the production of health imaging products, as well as an office building in Rochester. Kodak recognized a pre-tax gain of $986 million on its sale during 2007. The company used a portion of the initial $2.35 billion cash to fully repay its approximately $1.15 billion of Secured Term Debt. (Kodak Annual Report, 2008). What was the main object for Kodak to sell the Health Group to Onex Healthcare Holding? One report appreciated the sales of Health Group that the company now has the infrastructure to compete in the digital business. Eastman Kodak continues to explore for ways of reducing costs and hasten the shift to the digital business model. The restructuring program allows the company to grow profitably and provide better return to investors. (Datamonitor 2007 p.39 ) I wonder if this explanation was correct even at that time. If we see the revenue structure in the annual reports at Table 6, it is difficult to understand the reason why Kodak sold the Health Group. According to the table, Health Group was a profit segment along with Film Photofinishing Entertainment Group from 2004 to 2006. Is it possible to understand that Kodak wanted to get a high return from the sale of Health Group, which was comparatively successful segment, and to deal with the urgent financial problems, rather than to develop the health care segment as one of Kodaks 9

main business? In reality, Kodak has high debt and other liabilities such as pension and other postretirement liabilities. Long-term debt of the company stood at $2,714 million at the end of December 2006, as compared to total shareholders equity of $1,388 million. Eastman Kodak has pension and other postretirement liabilities of $3,964 million. Net cash from operating activities also declined to $956 million in fiscal year 2006, as compared to $1,208 million. High debt and other liabilities combined with declining net cash from operating activities could precipitate a liquidity crisis at the company. Datamonitor, p.38 Table6 Four Groups net sales and earning (loss), 2004-2009 2009 Consumer Digital Imaging Group -Earning(Loss) Film Photofinishing Entertainment G. -Earning(Loss) Graphic Communications G. -Earning(Loss) Health Group Earning(Loss) All other -Earning(Loss) Total (Kodak Annual Reports) It might be very reasonable strategy for Kodak, which was yearly restructuring with lots of expenses, to deal with 8100 employees at once by the sale of Health Group. From 2003 to 2010, Kodak reduced the number of employees by more than two thirds, while Fujifilm increased the number of employees gradually even in spite of the long economic depression. Kodak had to spend every year a great amount of money for the restructuring, which was great burden for the companys finance. Generally speaking, Japanese companies do not account the restructuring cost in the expenditure, though there might be some difference of accounting system between USA and Japan. 4 (13) 7606 7 (17) 9 (25) 2726 (42) --3334 31 --3413 104 --3632 141 2497 278 69 (214) 2990 1334 (41) 370 83 (231) (91) 484 70 (257) 2655 2686 2257 159 2987 196 3632 281 4156 358 5325 7051 540 854 2619 35 3088 (177) 3247 (17) 2920 1 3215 2366 (131) (139) 2008 2007 2006 2005 2004

9416 10301

13274 14268 13517

10

Table 7 Number of employees at Kodak and Fujifilm 2003 Kodak 62,300 Fujifilm 72,633 2004 2005 2006 2007 2008 2009 2010 18,800 74,216 54,800 51,100 40,900 26,900 24,400 20,300 73,164 75,638 75,845 76,358 78,321 76,252

( Kodak and Fujifilm Annual Reports) Table8 Restructuring cost at Kodak and Fujifilm (% of net sales) 2001 2002 2003 2004 2005 2006 2007 2008 Kodak Fujifilm 5.0% 0.8 0.0% 0.0 3.6 0.0 5.1 0.0 4.8 3.2 3.5 3.4 5.3 0.0 1.5 0.0

Canon and Nikon did not show any restructuring cost in this period. (Castano ,A et al., p.31) 4.Kodak Directors attitude toward Bankruptcy On January 19 2012, Kodak made the Chapter 11 filing in United States Bankruptcy Court in Lower Manhattan. The company explained in detail about its current situation in the Annual Report in 2012, in which the directors considered seriously how to rebuild the company in addition to the reasons why the company fell into bankruptcy. If we are unsuccessful with the Companys strategic investment decisions, the Companys financial performance could be adversely affected. The Company has focused its investments on businesses in large growth markets that are positioned for technology and business model transformation, specifically, consumer inkjet, commercial inkjet (including the Companys Prosper line of products based upon the Companys Stream technology), packaging solutions, and workflow software and services. While we believe each of these businesses has significant growth potential, consumer inkjet, commercial inkjet, and workflow software and services also require additional investment. If we are unsuccessful in growing the Companys investment businesses as planned, the Companys financial performance could be adversely affected.(Kodak Annual Report 2012, p11). From the sentence, Kodaks directors are anticipating the restricted business fields which are not expected to develop in the future. The Companys failure to implement plans to reduce the Companys cost structure in anticipation of declining demand for certain products or delays in implementing such plans could negatively affect the Companys consolidated results of operations, financial position and liquidity. We recognize the need to continually rationalize the Companys workforce and 11

streamline the Companys operations to remain competitive in the face of an ever-changing business and economic climate. Additionally, if restructuring plans are not effectively managed, we may experience lost customer sales, product delays and other unanticipated effects, causing harm to the Companys business and customer relationships Additionally, the Companys ability to execute restructuring within the entities filing for chapter 11 is subject to the approval by the Unsecured Creditors Committee and Bankruptcy Court. (Kodak Annual Report 2012, p.11). This part above all strengthens the restructuring, which looks like just to improve the financial position of the company, but what is much more important for Kodak is how it mobilizes able labor force to promising fields of Kodak. If we cannot continue to license or enforce the intellectual property rights on which the Companys business depends, or if third parties assert that we violate their intellectual property rights, the Companys revenue, earnings, expenses and liquidity may be adversely impacted. The Companys ability to execute the Companys intellectual property licensing strategies, including litigation strategies, such as the Companys legal actions against Apple Inc. and Research in Motion Limited, could affect the Companys revenue, earnings and liquidity The Companys failure to develop and properly manage new intellectual property could adversely affect the Companys market positions and business opportunitiesWe have made substantial investments in new, proprietary technologies and have filed patent applications and obtained patents to protect the Companys intellectual property rights in these technologies as well as the interests of the Companys licensees. (Kodak Annual Report 2012, pp.12-13One of Kodaks major strategies was to suit competitors for its patent or license and Kodak's biggest revenue score of 2010 was $838 million it collected from patent licensing, evidently including a settlement it reached with LG after suing the South Korean company for patent infringement. But I am not sure this strategy would differentiate Kodak from other companies. According to Table9, Kodak does not high invest on R&D, if compared with that of Fujifilm. Table9 R&D costs of Kodak and Fujifilm as % of sales (%) Kodak 2001 2002 2003 2004 2005 2006 2007 5.9% 5.9 5.6 6.8 6,3 6.6 5.9 6.8 5.3 6.4 5.2 6.6 2008 5.3 7.9

Fujifilm 6.1% 6.3 (Castano ,A et al., p31)

12

The competitive pressures we face could harm the Companys revenue, gross margins and market share. The markets in which we do business are highly competitive with large, entrenched, and well financed industry participants. we encounter aggressive price competition for all the Companys products and services from numerous companies globally. Over the past several years, price competition in the market for digital products, film products and services has been particularly intense as competitors have aggressively cut prices and lowered their profit margins for these products. The Companys results of operations and financial condition may be adversely affected by these and other Industry-wide pricing pressures. If the Companys products, services and pricing are not sufficiently competitive with current and future competitors, we could also lose market share, adversely affecting the Companys revenue and gross margins.(Kodak Annual

Report 2012, p13). It is very strange why Kodak conducting business world widely
writes this in Annual Report and no one sympathizes the current situation of Kodak with this paragraph. If we cannot effectively anticipate technology trends and develop and market new products to respond to changing customer preferences, the Companys revenue, earnings and cash flow, could be adversely affected. We must develop and introduce new products and services in a timely manner to keep pace with technological developments and achieve customer acceptanceDue to changes in technology and customer preferences, the market for traditional film and paper products and services is in decline. The Companys success depends in part on the Companys ability to manage the decline of the market for these traditional products by continuing to reduce the Companys cost structure to maintain profitability.(Kodak

Annual Report 2012, p14) This sentence explain the attitude of Kodak directors how
they still persist in traditional film and paper products and service in decline. Even if a chapter 11 plan of reorganization is consummated, continued weakness or worsening of economic conditions could continue to adversely affect the Companys financial performance and the Companys liquidity. The global economic recession and declines in consumption in the Companys end markets have adversely affected sales of both commercial and consumer products and profitability for such products and was a factor leading to the Company filing for voluntary petitions for relief under chapter 11 of the U.S. Bankruptcy Code. Continued slower sales of consumer digital products due to the uncertain economic environment could lead to reduced sales and earnings while inventory increases. While the Company is seeking to increase sales in markets that have already 13

experienced an economic recovery such as Asia, there is no guarantee that anticipated economic growth levels in those markets will continue in the future, or that the Company will succeed in expanding sales in these markets ...If the global economic weakness and tightness in the credit markets continue for a greater period of time than anticipated or worsen, the Companys profitability and related cash generation capability could be adversely affected and, therefore, affect the Companys ability to meet the Companys anticipated cash needs, impair the Companys liquidity or increase the Companys costs of borrowing.( Kodak Annual Report 2012, p.14). Excellent management should show how to deal with severe economic situation, and there are many companies which are successful in making use of bad business circumstances. Due to the nature of the products we sell and the Companys worldwide distribution, we are subject to changes in currency exchange rates, interest rates and commodity costs that may adversely impact the Companys results of operations and financial position. As a result of the Companys global operating and financing activities, we are exposed to changes in currency exchange rates and interest rates, which may adversely affect the Companys results of operations and financial position. (Kodak Annual Report 2012, p.14). As far as the companies are doing business world widely, these problems are precondition of their business, and why does the Report dare to write this? We have outsourced a significant portion of the Companys overall worldwide manufacturing, logistics and back office operations and face the risks associated with reliance on third party suppliers. We have outsourced a significant portion of the Companys overall worldwide manufacturing, logistics, customer support and administrative operations to third parties. To the extent that we rely on third party service providers, we face the risk that those third parties may not be able to, say, develop manufacturing methods appropriate for the Companys productsFurther, even if the Company honors its payment and other obligations to the Companys key suppliers of products, components and services, such suppliers may choose to unilaterally withhold products, components or services, or demand changes in payment terms. As a result of such risks, we may be unable to meet the Companys customer commitments, the Companys costs could be higher than planned, and the Companys cash flows and the reliability of the Companys products could be negatively impacted,(Kodak Annual Report 2012,p.15). Kodak sought the horizontal organization after the change of policy since 1990. Before that, Kodak under Clay Chandler was taking the strategy of diversification with the vertical organization. There is no mention about why Kodak outsourced a significant portion of the Companys overall world wide manufacturing , logistics, and back office operations? Fujifilm is 14

principally seeking for diversification and regards manufacturing products in house. The Companys sales are typically concentrated in the last four months of the fiscal year, therefore, lower than expected demand or increases in costs during that period may have a pronounced negative effect on the Companys results of operations. The demand for the Companys consumer products is largely discretionary in nature, and sales and earnings of the Companys consumer businesses are linked to the timing of holidays, vacations, and other leisure or gifting seasons. Further, with respect to the Graphic Communications Group segment, equipment and consumable sales in the commercial marketplace peak in the fourth quarter based on increased commercial print demandThese external developments are often unpredictable and may have an adverse impact on the Companys business and results of operations.(Kodak Annual

Report 2012, p.15). There are many companies confronting with seasonal changes of
demands including agricultural products. Directors of Kodak should know how they deal with these seasonal problems. The Companys future results could be harmed if we are unsuccessful in the Companys efforts to expand sales in emerging markets. Because we are seeking to expand the Companys sales and number of customer relationships outside the United States, the Companys business is subject to risks associated with doing business internationally, such as : multiple languages, recruiting personnel, complying with governmental regulation, complexity of managing international operations, exposure to foreign currency exchange rate fluctuations, and so on.There can be no assurance that we will be able to market and sell the Companys products in all of the Companys targeted markets. If the Companys efforts are not successful, the Companys business growth and results of operations could be harmed(Kodak Annual Report 2012, p.16). It is very difficult to understand why Kodak Annual Report explain these primitive matters when the big company is doing business in the world. The Companys inability to effectively complete, integrate and manage acquisitions, divestitures and other significant transactions could adversely impact the Companys business performance including the Companys financial results. As part of the Companys business strategy, we frequently engage in discussions with third parties... Integration and other risks of transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. If we fail to identify and complete successfully transactions that further the Companys strategic objectives, we may (Kodak Annual Report, p.16). Directors of Kodak look like stressing the problems which might occur in integration and M&A, 15

rather than pointing out the possibilities of branching into new fields by taking the risk of transactions. On the whole, we can understand from analyzing the new annual report of Kodak what the directors are considering about the current situation which Kodak is now facing , and how they are going to tackle the problems. 5.Fujifilms strategy

The Economist on Jan 14th 2012 compared Kodak with Fujifilm in the article, The
last Kodak moment? Kodak is at deaths door; Fujifilm, its old rival, is thriving. Why?. While Kodak suffers, its long-time rival Fujifilm is doing rather well. The two firms have much in common. Both enjoyed lucrative near-monopolies of their home markets: Kodak selling film in America, Fujifilm in Japan. A good deal of the trade friction during the 1990s between America and Japan sprang from Kodak's desire to keep cheap Japanese film off its patch. ...Both firms saw their traditional business rendered obsolete. But whereas Kodak has so far failed to adapt adequately, Fujifilm has transformed itself into a solidly profitable business, with a market capitalisation, even after a rough year, of some $12.6 billion to Kodak's $220m. Why did these two firms fare so differently? The article pointed out several reasons why Kodak was not successful as well as the success of Fujifilm.: the company culture of Kodak, a complacent monopolist , which was based on long tradition, and a slow decision making by the executives because of mentality of perfect products; Kodaks policy of outsourcing businesses, which were not profitable at that time, but which might be later critical for Kodaks diversification; failure to read correctly emerging market like China, where people skipped from no camera to digital one without buying films; inconsistency among successive leaders on the company strategy. Fujifilm could succeed in diversification and developing new technologies incubated in the company. Cosmetic is one of the fields found in the process of film production. Shigetaka Komori, CEO of Fujifilm, has spent around $9 billion on 40 companies since 2000, and slashed costs and jobs. In one 18-month stretch, he booked more than $3.3 billion in restructuring costs. He was lucky because there were little shareholder pressure for short-term performance, which made it easier for Fujifilm to pursue Komori's vision. American shareholders might not have been so patient. Surprisingly, Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one. This comparison of the two companies may be partly true, and partly not true. To 16

explain this, we have to tell historical background of Fujifilm and its current situation. It started in 1934 as a subsidiary of a chemical company, Dainippon Celluloid Company (now DAICEL). At that time, Fujifilm was the second filmmaker next to Sakura film made by Konishiroku (late Konica) from 1873. Both companies competed severely in Japanese market, and in 1970s Fujifilm gradually surpassed the share of Sakura with tremendous advertisements. Fujifilm advanced into American and European markets from 1960s, and it was an epoch-making for Fujifilm to be an official sponsor of film at Los Angeles Olympic in 1984. After that, the name of Fujifilm become popular in America and started to take a certain amount of film market though Kodak dominated the market by more than 70%. Naturally, Kodak wanted to enter into Japanese market, but its share stayed at 7-10%. Kodak accused the closed market and Japanese traditional business system which were supported by MITI. The battle of Kodak and Fuji was filed at WTO, and finally it was cleared in 1998 that Japanese market was open and foreign filmmakers were assured to do business fairly. .( Tsurumi, Y.&T., (1999)) But ironically around this time, Kodak and Fujifilm were not competing each other in the film market, but they had to compete against a new object, a tsunami of digitalization. Fujifilm had an opportunity in 1962 to establish Fuji Xerox as a joint venture with Rank Xerox, which was absorbed into Xerox Corporation in 1997. Fuji Xerox was one of the excellent companies in Japan. When Xerox Corporation became in deficit, Fujifilm aacquired additional 25% of Fuji Xerox's outstanding shares in 2001, increasing the shareholding in that company to 75% and transformed that company into a consolidated subsidiary. Fuji Xerox is now taking a major role in Fujifilm. In 2006, Fujifilm Group shifted to a holding company structure centering on the holding company FUJIFILM Holdings Corporation (FHC), which controls both the Group's two largest companies EFUJIFILM Corporation and Fuji Xerox Co., Ltd Now FHC has three major business streams as follows. Imaging Solutions; Color Films and Others(Color negative films,QuickSnap single-use cameras,Color reversal films) Color Paper and Chemicals(Photographic paper for color prints, Photofinishing chemicals) Photofinishing Equipment(Film processors / Printing equipment, Digital minilabs / Inkjet-system dry minilabs, Thermal photo printers) Labs and FDi Services(Film processing services, Photo printing services) Electronic Imaging (FinePix digital cameras, Digital camera accessories) 17

 Information Solutions Medical Systems / Life Sciences (FCR / DR BENEO digital X-ray imaging and diagnostic systems, Digital mammography systems, SYNAPSE medical-use picture archiving and communications systems (PACS),Dry imaging films / Dry imagers, X-ray films, Digital endoscopes, Radiopharmaceuticals, Healthcare products) Graphic Arts (Materials and equipment for graphic arts, Computer-to-plate (CTP) plates, CTP plate setters, Software, Industrial inkjet printers / Inks) Flat Panel Display Materials (FUJITAC protective films for polarizers, WV films for expanding viewing angles, Transer films for manufacturing color filters) Recording Media (LTO Ultrium data cartridges, Data cartridges for IBM 3592) Office and Industry (Camera phone lens units, TV lens / CINE lens, Electronic materials, Inks for consumer-use inkjet printers, Industrial inkjet printer heads) Document Solutions Office Products (Color / monochrome digital multifunction devices,DocuWorks document handling software ) Office Printers (Color / monochrome laser printers) Production Services (On-demand publishing systems, Computer printing systems) Global Services(Comprehensive document outsourcing service) The structure of FHC is quite complicated, and each segment includes various businesses. However, we can roughly understand that FHCs Imaging Solutions contains most of Kodaks main business (Commercial Printing, Display & Components, Health Imaging, Digital & Film Imaging Systems, and Commercial Imaging), and that Document Solutions is remained under Fuji Xerox. Information Solutions includes various business from cosmetic to digital X-ray imaging and diagnostic systems. We will see the operation of these segments from financial data. Graph1 Revenue 2008-2012 Graph2 Net income 2008-2012

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Graph 3 Revenue( Imaging Solutions)

Graph4 Revenue(Information Solutions)

Graph 5 Revenue(Document Solutions)

Graph 6 Operating income (loss) (Imaging Solutions)

Graph 7 Operating income (loss) (Information Solutions)

Grapgh 8 Operating income (loss) (Document Solutions)

From these 6 graphs, we can understand that total revenue of FHC is slightly decreasing from 2007 onwards and that net income drastically fell down in 2009 and was in deficit in 2010 largely because of Lehman shock in autumn, 2008. If we see the grapgh 3, 4 and 5, we can know that the revenue of Imaging Solutions was becoming less and less , compared with those of Information Solutions and Document Solutions. The decline of Revenues was mainly caused by Imaging Solutions Graph 6, 7 and 8 show what segments are contributing to FHC in terms of profit. Imaging Solutions , making What is the tendency of income (loss) among three segments? It is remarkable that Imaging Solutions is in red from 2007 to 2012, though 19

other two segments are keeping income profitable. Especially Document Solutions is the most important as a profit center of FHC. I pointed out that Kodaks main business field overlap with Imaging Solutions of FHC, and it is easy why Kodak became into bankruptcy by the data from Fujifilm . Conclusion. 1. Kodak is criticized that it was late to take a response to the digital age owing to the conservative culture, a complacent monopolist of the company. However, Kodak was very sensitive to the coming digitalization and devised the various innovations like the first digital camera in the world. 2. At the time of Clay Chandler CEO, he promoted the diversification policy with the vertical organization, which was a popular ideas for the advanced companies. However, following CEOs denied Chandler s policy and divested many promising business in the future taking the policy of selection and concentration of resources . They shifted main business to digital cameras and printers with keeping film, which was categorized as an image company. Succesive CEOs were trying to adopt new business model and they seemed to introduce to Kodak faithfully. 3. Kodaks main reason for its bankruptcy is that they concentrated their business on narrow fields, which prevented to develop new business at the time of IT. From the ideas written in the annual report in 2012, we have to be pessimistic for their reconstruction. 4. Fujifilm had a common in many aspects at the end of twentieth century as far as the company can enjoy the monopolistic situation as a film maker. But the drastic change to the digitalization endanger the business of Fujifilm, but the company could find new businesses, because it was organized vertically and they can incubate them. 5. Fujifilm was lucky to consolidate Fuji Xerox from 2001, and it supports the financial position of Fujifilm Holding Company. Imaging Solutions sector, which is similar to Kodaks main business, is in deficit, and digital cameras are not strong in the market. 6. Information Solutions contains various businesses, and it is very difficult to appreciate their possibilities of success. It will be some time to know whether they will be major business or not, but as far as share market is concerend, investors are watching coolly Komoris strategy. The trend of share prices of FHC shows it.

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