Kodak In Russia Case Study

In the early 1990s, Kodak entered Russia. At the time, the country was deep in the middle of a turbulent transition from a Communist-run command economy to a fledgling democracy that was committed to pushing through the privatization of state-owned enterprises and economic reforms designed to establish competitive markets. Kodak’s entry into this market posed a number of challenges. Russian consumers had little knowledge of Kodak’s products, and the consumer market for photography was very underdeveloped.

Moreover, apart from state-run stores that were generally poorly run, here was little or no infrastructure in place for distributing photographic equipment and films and for processing film. To compound matters, Russian consumers were poor and unlikely to be able to afford all but the most inexpensive cameras and films. A decade later, Kodak’s entry into Russia is widely regarded as a major success. Russia accounts for a significant proportion of the $2. 59 billion in international sales in emerging markets that Kodak registered in 2004; and with a growth rate of 26 percent over the prior year,

Russia is the fastest-growing emerging market for Kodak, outstripping even China. How did Kodak do it? First, Kodak had a clear and consistent marketing message that it communicated to Russian consumers through a number of media, including radio, television, and print advertising. The marketing message was based upon the idea of “saving memories” by taking pictures in a quick and easy way. “You press the button and we will do the rest” the ads stated. As it turned out, this was the perfect message for a consumer market that was not used to photography.

To complement the core marketing message, Kodak spent heavily on promotional campaigns, exhibitions, conventions, sponsored events, and the like, in an attempt to educate consumers and raise awareness of the Kodak brand name. For example, in addition to standard media advertising, Kodak owns a traveling photo park with a fleet of hot air balloons that have become very popular in Russia. Kodak has also invested heavily in promoting a corporate image as a firm that takes a stand against corruption and black market practices. The company has been ery clear about its business practices and about its refusal to engage in shady dealings.

In a country where such practices were once commonplace, and still persist to a degree, this stance has been well received by consumers and has helped to build the company’s brand image as an enterprise that can be trusted—which, as it turns out, has been good for business. Kodak also boosted its corporate image by opening a factory in Russia to produce cameras, film, and chemicals for film processing. In addition to the public relations benefit, this move lso helped Kodak lower its costs by utilizing cheap Russian labor and by avoiding tariffs on imports of photographic products into Russia.

Recognizing the limited income of Russian consumers, Kodak’s product strategy has been to sell lower-end film and cameras in Russia. Kodak offers simple cameras for around $20 to Russian consumers, something that the company can afford to do because the cameras are made locally. It does not sell disposable cameras in Russia, since at $10 each the cost would be too high. Instead of trying to sell top-quality Kodak Gold film, hich is popular in the West, the cheaper brand, Kodak Color Plus, is marketed heavily in Russia.

Another of Kodak’s marketing tactics has been to try to build demand for its products by encouraging major enterprises to give cameras to valued employees, rather than the traditional bottle of vodka. Kodak has also worked closely with travel agents, giving them cameras to give away to their customers. Kodak’s hope, of course, has been that consumers will purchase Kodak film to use in these cameras, and to a large degree, that seems to have occurred.

Finally, Kodak realized that it needed to build a distribution channel for its products. Rather than invest directly in its own stores, the company set up a franchising program to open Kodak Express stores throughout Russia to sell its products and develop film. These owner operated stores adhere to strict business guidelines Kodak set down in its master franchise agreement. The stores are clean, attractively designed, have a consistent appearance that helps promote the Kodak brand, and are staffed by friendly and polite employees.

These stores rapidly set a ew standard for retailing in Russia. Within three years, more than 350 Kodak Express outlets had opened in Russia, and today there are several thousand. This case describes how Kodak entered Russia and promoted their product throughout. It describes how they marketed their product and adjusted to the economy of Russia. They also adjusted their production of cameras and film to the area by opening a factory in Russia to reduce costs. Opened a franchising program in Russia to distribute their products through local stores instead of investing in Kodak specific stores.

Table of Contents

Executive Summary

List of Abbreviations

List of Tables

List of Figures

1 Introduction

2 Main Part
2.1 Economic features of the photography equipment industry
2.2 Competition in the photography equipment industry
2.3 Changing in the photography industry
2.4 Key success factors for the digital photography segment
2.5 Kodak’s strategy in the digital photography industry
2.6 SWOT analysis of Kodak
2.7 Kodak’s financial performance
2.8 Recommendations for Kodak
2.9 Economic features of the photography industry since 2003
2.10 Kodak's strategy and performance since 2003

3 Conclusion

Appendix 1
Appendix 2
Appendix 3
Appendix 4

4 ITM Checklist

Executive Summary

Kodak is an American giant and a global player in the photography equipment industry. The company had a leading position in the world market for traditional films, papers and photofinishing business. However, in the beginning of the 21st century Kodak stood before a big challenge. While the sales for traditional photography equipments were declined continuously, the market for new digital photography grew rapidly. Kodak has decided to transfer from a traditional film to a digital-oriented growth company and had to focus all its forces to gain market shares and profits in this new market.

The object of this study is to analyze the strategy and performance of Kodak in the photography equipment business. Thereby industry’s dominant economic features and competitive environment, e.g. market data, competition and competitive forces, driving forces for market change and key success factors, are studied. Moreover, the SWOT analysis is applied to identify the resource strengths and weaknesses of Kodak as well as new market opportunities and threats for the company. On this basis, recommendations to Kodak to get success and win the leading position in the digital photography industry are provided.

It could be shown in this study that in spite of many efforts Kodak did not achieve high performances in the new digital photography market. This market was characterized by high competition, rapid growth, but low profit margins. In order to become the leader in the digital photography industry Kodak should intensify strategic alliances and partnerships, drive acquisition of rival firms, expand rapidly into new demographical markets, push the product innovation as well as broad the product portfolio, and build a strong brand in the new digital photography segment.

List of Abbreviations

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List of Tables

Table 1 – Competitors in different segments of the photography equipment industry.

Table 2 – Product differentiation of digital cameras by different competitors.

List of Figures

Figure 1 – Consumer photographic market revenue, 2000 – 2002.

Figure 2 – Annual change in unit sales of film rolls, film processing, and one-time-use cameras, 1999 – 2003.

Figure 3 – Number of the US households owning cameras, 1996 – 2003.

Figure 4 – Methods used by digital printing.

Figure 5 – Kodak's income, 1993 – 2003.

Figure 6 – Kodak's share price in USD, April 1998 – April 2008.

Figure 7 – Kodak's revenue and income, 2002 – 2007.

Figure 8 – Direct competitor comparison.

1 Introduction

Kodak is a well-known American company and a global player in the photography equipment business. The company offers a wide product portfolio of imaging and photographic materials and equipments. It had a leading position in the world market for traditional films, papers and photofinishing business. With the famous advertising slogan “You press the button, we do the rest”, Kodak has revolutionized the photography equipment industry by making photography easier, more useful and accessible for customers. The company has developed during the last 100 years from an American manufacturer of simple roll film cameras to a giant in the worldwide photography equipment industry.[1]

However, Kodak was in a difficult economic situation in the beginning of the 21st century. From the late 90ties the sales for traditional photography equipments were declined continuously. The reason was a rapid development of new digital technologies and a fast switching of customers to digital photography. Kodak stood before a big challenge and decided to enter the new digital photography market. This market is very competitive and requires Kodak concentrating all its forces to gain market shares and profits. The company must be able to develop new products and business models in an extremely short time, differentiate itself from competitors, build a strong brand in the new market, save cost through restructuring and optimizing, ensure profits by thin profit margin and please the shareholders. The question is whether Kodak can get success and grow by this enormous pressure and if the market can “share” its volume to the company like Kodak wishes with its new slogan “Share moments. Share Life”.

The object of this study is to analyze the strategy of Kodak and its effect on the photography business. Thereby industry’s dominant economic features and competitive environment, e.g. market data, competition and competitive forces (Porter’s five forces model), driving forces for market change and key success factors, are studied. Moreover, the resource strengths and weaknesses, new market opportunities and threats as well as financial performance of Kodak are analyzed. Consequently, recommendations to Kodak to get success and win the leading position in the digital photography industry are provided.

2 Main Part

2.1 Economic features of the photography equipment industry

To evaluate the photography equipment industry different industry’s dominant economic features, e.g. market size and market growth, competitive rivalry, buyer, products, and technical change are analyzed.[2]

Market size and market growth:

The photography equipment industry underwent a big change in the beginning of the 21st century. The market for consumer photography (traditional film cameras, film rolls, papers, and photofinishing business) was mature in developed regions like the US, Japan, and Western Europe. The market revenue for film sales, film processing, and traditional film cameras was declined continuously from $2.97, $6.93 and $1.65 billion in 2000 to $2.86, $6.68, and $1.21 billion in 2002, respectively (figure 1, appendix 1). The annual change in unit sales of film rolls and film processing decreased from 7% and 5 % in 1999 to -4 % and -3 % in 2003. Although the one-time-use camera gained more popularity from 2001 due to low price and convenience, its annual change in unit sales reduced from 25 % in 1999 to 12 % in 2001 and 8 % in 2003 (figure 2, appendix 1).

In contrast, the price decline and improvement in image quality led to a rapid growth of the digital camera market from 2000. While the number of US households owning traditional film cameras decreased from 91 millions in 1996 to 74 millions in 2003, the number of US households owning digital cameras increased from 0.3 millions in 1996 to 8 millions in 2000 and 33 millions in 2003. This corresponded to an annual change of 2.6 % and 43.5 % for traditional and digital cameras in 2003 (figure 3, appendix 2). The market revenue for digital cameras increased from $2.1 billion in 2000 to $2.96 billion in 2002 (figure 1, appendix 1). It was predicted, that the sales for digital cameras would replace the sales for traditional 35-milimeter film cameras in 2008.

Moreover, a downward tendency for printing from traditional films and an increased demand for digital printing could be observed. While the prints volume from traditional films reduced by 700,000 units in 2002, prints of digital images increased by 1.3 million units. Although the most digital images taken were saved, stored or kept, people tended to print more images instead of sending them by e-mail. The percentage of printed pictures from all digital images taken increased from 12 % in 2000 to 20 % in 2002. Additionally, the digital printing rose from 2.4 % of the total prints volume in 2001 to 6.1 % in 2002. In 2003, the volume of digital prints accounted for 2.1 billion images, whereby 77 % of those were printed at home and 18.7 % at online photo services, local retailers or digital self-service kiosks (figure 4, appendix 2). Companies did not get profits from the sales of printers, but mainly with the materials used for printing like paper and ink. Furthermore, an increasing in volume of digital prints at online photo services or digital self-service kiosks was expected.

Additionally, the demand for other digital imaging options, e.g. cell phone with integrated digital camera, increased rapidly worldwide. In the first half of 2003, 25 million photo-capable cell phones and only 20 million digital cameras were sold. It could boost the digital printing business if the quality of images taken by cell phones would be improved.

On the global scale a market expansion for both traditional and digital photography equipments was observed in emerging countries such as China, Russia and India. For example, Chinese consumers bought 4.6 million traditional film cameras and 0.4 million digital cameras in 2002. In 2005 more than 3 million digital cameras were expected to be sold in China. The Chinese market for films, photographic papers, cameras, scanners and printers was situated on the rapid growing stage.

It was predicted, that the digital photography industry would expand with a high growth rate of 26 % until 2012.

Competitive rivalry:

The photography equipment industry was dominated by few large companies which were different in various industry segments (table 1). Most of them are Japanese or American companies acting as multinational or global players. However, new rivals, e.g. from the Far East, should be also considered. The digital photography segment was very highly competitive and industry giants like Kodak tried to acquire smaller companies successful in the digital area to consolidate the market. The rapid growth of new markets in emerging countries (China, India, and Russia) constrained companies to expand their business in these regions in order to ensure competitive advantages in the future.

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Table 1 – Competitors in different segments of the photography equipment industry.

Buyer:

The most photography equipments were sold in stores or by specialized dealers. In the internet era customers could also buy photographic products directly from manufacturers via their online service. The wholesale had a certain influence on the manufactures due to the large purchase volume. Although the individual private customers made in fact the final buying decision, they did not have the bargaining power. From the private consumer group technically sophisticated buyers switched faster from traditional to digital photography. It was estimated that 60 % of them would buy digital cameras in 2002. Approximately half of digital camera buyers were between the ages of 35 and 54 and had an annual income more than $75,000. While men were the main buyers of digital cameras, women with children had a high demand for services such as digital printing.

Product differentiation and innovation:

The photography equipment market was predicted as a commodity market with high competition, rapid growth, good profits for leader, but not for the follower. Therefore product differentiation and innovation as well as associated pricing were very important for this industry. For example, the product differentiation for digital cameras and related products by different competitors is shown in table 2.

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Table 2 – Product differentiation of digital cameras by different competitors.

The digital photography business was characterized by rapid product innovation and short product life cycle which required a big effort in R$D. For instance, Kodak has invested more than $4 billion in research of digital based technologies since 1990. The company struggled to develop new products for new market segments.

The digital photography market was fast-paced and the technological change played an important role in this industry. Analysts expected that digital cameras would begin to outsell film cameras in the US in 2003 and consumer switch to digital photography would be nearly complete by 2008. Most competitors were industry giants which possessed or were able to build up the strong technological capabilities to meet demands. Moreover, companies tried to work together for development of new products and sharing development cost, e.g. Kodak and Lexmark cooperation for development of desktop photo inkjet printer, Kodak and Noritsu Koki for minilab, and Kodak and HP for digital photo printers for retail outlets.

2.2 Competition in the photography equipment industry

To analyze the competition in the photography equipment industry the Five Forces model of Porter was used. Thereby the impact of individual competitive forces and the collective strength of them were studied.

a) Rivalry among competitive providers – Intense

The intense rivalry among providers had the greatest effect on industry attractiveness due to the following factors:

- High number of different competitors in various industry segments.
- Competitors were multinational industry giants with high financial power and technological advance as well as long-term experiences.
- Competitors applied different competitive strategies based on their strength.
- Industry giant like Kodak acquired small companies successful in digital area to get faster access into the digital photography market.
- Decline in sales for traditional photography equipments and fast consumer switch to the new digital photography forced companies to develop and bring new digital products quickly to the market. High technological race between competitors, high R&D costs and thin profit margin were the result.
- Price decline for digital photography equipments boosted the competition.
- Consumers had low switching costs between providers.

b) Threat of substitutes – Strong

Rapid development of digital technologies caused a strong threat of substitutes for the photography equipment industry:

- Digital technologies revolutionized quickly the photography equipment industry. New products, services, and business model, e.g. digital cameras, digital printing and online photo services, could replace the traditional film and photography business in only few years.
- Digital cameras offered customers new and better technical opportunities in comparison to traditional cameras and gave them higher intrinsic values, e.g. re-shoot, storage and manipulation of images and short movies, instant preview, sending via e-mail, and digital printing. Moreover, the sleek design of new digital cameras embodied them as a fashion and “must-to-have” article.
- Price decline and image quality improvement enhanced considerably the threat of digital cameras as substitute for traditional film cameras.
- Although in 2003 more cell phones with integrated digital cameras were sold than digital still cameras, there was only a weak threat of photo-capable cell phones to the digital camera market. The reason was the low image quality and limited technical features of camera phones in terms of storage, zooming functionality, and power supply. However, if the popularity of on-screen photo viewing increased due to quality improvement of camera phones, it would lead to a decline of volume of printed photos and hence, revenues from film processing and printing.

c) Threat of potential new entrants – Moderate to strong

In spite of the rapid demand for digital photography equipments, technological complexity and high R&D costs were an obvious entry barrier. For this reason a moderate to strong threat of new potential entrants was expected:

- Companies with specialized competencies tried to expand their market in the new digital photography world, although they currently did not have a presence there. For example, HP produced digital cameras to continue demand for its printers and ink cartridges. Kodak had to enter as quickly as possible into the digital photography market because of the decline in sales for its traditional film business.
- Companies expanded their market in the emerging countries like China, India and Russia. However, new rivals from these regions, in particular from the Far East, could heighten the price competition and should not be disregarded.

d) Bargaining power of suppliers – Weak to moderate

- Manufacturers for products such as digital cameras could operate in multiple stages, e.g. from parts and components production to manufacturing and assembly. They could also buy components from suppliers and the switching cost to other suppliers was low. Moreover, the thin profit margins forced companies to cut costs and optimize the manufacturing process. Hence, supplier had only a weak bargaining power in this segment.
- In other cases companies like Kodak purchased machines made by a manufacturing partner in order to have presence in the market of digital minilabs. Here could the supplier have a moderate influence on companies.
- Companies and supplier also worked together to develop new products efficiently, improve product quality, and enhance the value added.

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[1] Available from http://www.kodak.com (accessed on 20.03.2008).

[2] Thompson et. al (2007). p. 219–234.

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