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case six

Eastman Kodak: Meeting the Digital Challenge
Robert M. Grant

January 2004 marked the beginning of Dan Carp’s fifth year as Eastman Kodak Inc.’s chief executive officer. By late February, it was looking as though 2004 would also be his most challenging. The year had begun with Kodak’s dissident shareholders becoming louder and bolder. The critical issue was Kodak’s digital imaging strategy that Carp had presented to investors in September 2003. The strategy called for a rapid acceleration in Kodak’s technological and market development of its digital imaging business and the commitment of some $3 billion in investment—financed in part by slashing Kodak’s dividend. Of particular concern to Carp was Carl Icahn who had obtained clearance to acquire 7% of Kodak stock. Icahn was not known for his patience or long-term horizons. He was famous for his role as a greenmailer and an initiator of boardroom putschs and leveraged buyouts. Opposition to Carp’s strategy was based upon the skepticism over whether the massive investments in digital imaging would ever generate returns to shareholders. Shareholder activist, Bert Denton, had an entirely different vision for Kodak. He viewed Kodak’s traditional photography business as a potential cash cow. If Kodak could radically cut costs, a sizable profit stream was available to be returned to shareholders. If shareholders wanted to invest in digital imaging they could then invest their money on more promising bets in the digital imaging field—Olympus, Canon, or Hewlett-Packard. The release of Kodak’s full-year results on January 22, 2004 added fuel to the flames. Topline growth was anemic while, on the bottom line, net income was down by almost two-thirds. In presenting the annual results to investors and analysts, Carp’s focus was on the future rather than the past. In updating Kodak’s 2002-2006 strategy he emphasized the distinct strategies for Kodak’s "traditional businesses” and its “digital businesses.” The traditional businesses would be “managed for cash to maximize value.” This meant revenue contraction of around 7% per year together with aggressive cost cutting. During 2004-2006, between 12,000 and 15,000 jobs would be axed and one-third of traditional factory space would close.1 For digital businesses the strategy was to “invest for profitable growth.” With a projected average annual growth rate of 26%, the balance of Kodak’s business would shift: in 2002 “traditional” had accounted for 70% of Kodak’s revenues. By 2006 this would be down to 40%. As evidence of Kodak’s ambitions, Carp announced the acquisition of Scitex, a producer of commercial ink-jet printers, PracticeWorks, a dental imaging company, and Chinon, a Japanese camera manufacturer. While Kodak's cost-cutting and downsizing in its traditional chemical imaging business were welcomed by the stock market, skepticism was expressed over Kodak’s growth targets for its digital businesses. As the Financial Times’ Lex column observed: …Two key problems remain. The first is that, as Kodak extends its imaging technology into consumer electronics, it will encounter severe competition from existing camera makers and the brutal profit margins of a business where prices seem in perpetual freefall. If prices continue to plummet, it may still all be too little too late. Though few would question Kodak's technological expertise, its

relative lack of experience in hardware was shown by its pride in attending the Las Vegas consumer electronics show for the first time this year. It has also been hit by a failure to develop new models fast enough and has tended to focus on the ultra-competitive entry-level market. … The other potential problem stems from predicting that descent curve for film. Much hope has been placed on growing demand for old-fashioned film cameras in emerging markets like China, India and Russia. So far, sales in the rest of the world as a whole have been declining at the same speed as the US…2

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