CASE 8 r THE RISE AND FALL OF EASTMAN KODAK: HOW LONG WILL lT SURVIVE BEYOND 2011? 459

but new digital products were slow to come online and itscompetitors were drawing ahead because they had thefirst-mover advantage. Also, in the 1990s consumers wereslow to embrace digital photography because early cam-eras were expensive, bulky, and complicated to use andprinting digital photographs was also expensive. By L997Kodak's digital business was still losing over $100 million a

year and Japanese companies were coming out with thefirst compact, easy-to-use digital cameras. To make thingsworse, Kodak's share of the film market was falling as

price wars broke out to protect market share and its rev-enues continued to plunge.

To speed product development, Fisher reorganizedKodak's product divisions into fourteen autonomous busi-ness units based on serving the needs of distinct groups ofcustomers, such as those for its health products or com-mercial products. The idea was to decentralize decisionmaking and put managers closer to their major customersand so escape Kodak's suffocating centralized style of de-cision making. Fisher also changed the top managers incharge of the film and camera units but he did not bring inmany outsiders to spearhead the new digital efforts -Kodak's top managers prevented him. However, the cre-ation of these L4 business units also meant that operatingcosts soared because each unit had its own complement offunctions; thus sales forces and so on were duplicated.

The bottom line was that Fisher was making littleprogress and was in a weak position and pressured by pow-erful top managers, backed by Kodak's directors. Daniel A.Carp, a Kodak veteran, was named Kodak's president andCOO, meaning that he was Fisher's heir apparent as

Kodak's CEO. Carp had spearheaded the global consolida-tion of its operations and its entry into major new interna-tional markets such as China. He was widely credited withhaving had a major impact on Kodak's attempts to fight Fujion a global level and help it to maintain its market share.Henceforth, Kodak's digital and applied imagirg, businessimaging, and equipment manufacturing-almost all its ma-jor operating groups-would now report to Carp.

However, Kodak's revenues and profits continued todecline throughout the 1990s and into the 2000s as itsteadily lost market share in its core film business to Fujiand to new cheap generic film makers. Prices and profitsplunged, and so did its market share-down over 25Y" inthe last decade to 66% of the I-J.S. market, meaning theloss of billions in annual revenues. Meanwhile, the qualityof the pictures taken by digital cameras was advancingrapidly as more and more pixels were being crammed intothern. And the price of basic digital cameras was fallingrapidly because of huge economies of scale in global pro-duction by companies such as Sony and Canon. Finally, thedigitat photography market was taking off, but couldKodak meet the challenge?

The answer was no. Kodak had effectively taken con-trol of Japanese camera manufacturer Chinon to make itsadvanced digital cameras and scanners and Kodak contin-ued to introduce low-priced digital cameras-but it was

just one more company in a highly competitive marketnow dorninated by Sony and Canon. Kodak also boughtonline companies that offered digital processing serviceover the Internet and began offering Kodak-branded digi-tal picture-maker kiosks in stores where customers couldedit and print out their digital images. Although Kodakwas making some progress in its digital mission-its digitalcameras, digital kiosks, and online photofinishing opera-tions were being increasingly used by customers-it wasbeing left behind by agile competitors. In 1999 Carp re-placed Fisher as CEO to head Kodak's fight to develop thedigital skills that would lead to innovative new products inall its major businesses. In 1999, its health irnaging groupannounced the then fastest digital image management sys-tem for echocardiography labs. ft also entered the digitalradiography market with three state-of-the-art digital sys-

tems for capturing X-ray images. Its document imaginggroup announced several new electronic document man-agement systems. It also teamed up with inkjet makerLexmark to introduce the stand-alone Kodak PersonalPicture Maker by Lexmark, which could print color pho-tos from both compact flash cards and SmartMedia. Itscommercial and government systems group announcedadvanced new high-powered digital cameras for uses suchas in space and in the military,

With these developments, Kodak's net earnings in-creased between 1998 and 2000, and its stock price rose.However, one reason for the increase in profits was thatthe devastating price war with Fuji ended in 1999 as bothcompanies realized it simply reduced both their prof,ts.The main reason was simply the fact that the stock marketsoared in the late 1990s and Kodak's stock price increasedwith it-for no good reason. Kodak was still not introduc-ing the new digital imaging products it needed to drive itsfuture profitability. Also, Carp made no major efforts toreduce costs in its film products division, where the power-ful managers who had backed Carp to become CEO madesure he did nothing to threaten their interests. It was thesame old story, a rising cost structure and declining rev-enues and profits.

Kodak in the 2000sRapidly advancing digital technology and the emer-gence of ever more powerful, easy-to-use digital imagingdevices increasingly began to punish Kodak in the 2000s.In the consumer irnaging group, for example. Kodaklaunched a new camera, the EasyShare, in 2A0L Over4 rnillion digital cameras were sold in 2000 and over6 million in 24U,. However, given the huge R&D costs todevelop its new products, and intense competition fromJapanese companies like Sony and Canon, Kodak couldnot make any money from its digital cameras becauseprofit margins were tazar thin. Moreover, every time itsold a digital camera, it reduced demand for its high-margin film products that really had been the source ofits incredible profitability in the past. Kodak was being

47O CASE STU DIES

forced to cannib alize a profitable product (film) for an

unprofitable one (digital imaging).Kodak was now a di'nosaur in the new digital world and its stock collapsed in2000 and 200L, falling from $S0 to $60 to around $30.

Investors now saw the writing on the wall as its prof-itability plunged.

Carp argued that Kodak would make more money inthe future from sales of the highly profltable photographicpaper necessary to print these images and from its photo-finishing operations. However) consumers were not print-ing out many of the photographs they took, preferring tosave most in digital form and disptay them on their PCs

and then on the rapidly emerging digital photo frames

market that basically made f,lm-based photograph albums

obsolete. Revenues would not increase from sales of filmor paper. Similarly, the photofinishing market was declin-

ing and its own Qualex and Fox photo finishing chains

were forced into bankruptcy.Kodak was also faring badly in the important health

imaging market, where its state-of-the-art imaging prod-ucts were expected to boost its profitability. However, com-

petition increased when health care providers demanded

lower prices from imaging suppliers and Kodak was forced

to slash its prices to rvin contracts with other large health

care providers. So intense was competition that in 2001

sales of laser printers and health-related imagining prod-

ucts, which make up Kodak's second biggest business, fellTolo and proflt fell 3}o/o, causing Kodak's stock price toplunge. Also, in 2001 Carp announced another major reor-

ganization of Kodak's businesses to give it a sharper focus

on its products and customers. Kodak would create fourdistinct product groups: the film group, which now con-

tained all its silver halide activities; sonsumer digital imag-

ing; health imaging; and its commercial imaging group,

which continued to develop its business imaging and print-ing applications. Nevertheless, revenues plunged from $fgbillion in 2001 to only $t: billion by 2002 and its profits dis-

appeared.Analysts wondered if Carp was doing any better than

Fisher and if real change was taking place. Now Carp was

forced to cut jobs, and by 2003 its workforce was down to78,000-sti11 far too high a number given its declining per-

formarrce. Carp was still trying to avoid the massive dorvn-

sizing that was still needed to take place to make Kodak a

viable company because its entrenched, inbred, and unre-

sponsive top managers frustrated real efforts to reduce

costs and streamline operations. Despite all the advances

it had made in developing its digital skills, Kodak's high

operating costs combined with its declining revenues were

driving the company further down the road to bankruptcy.

Would even layoffs or reorganization be enough to turnKodak's performance around at this point?

The year 20AZ proved to be a turning point in the pho-

tographic imaging business as sales of digital cameras and

other products began to soar at a far faster pace than had

been expected. The result for Kodak's film business was

disastrous because sales of Kodak film started to fall sharply

and so too did demand for its paper-people printed only

a small fraction of the pictures they took. From 2003 t*-r

2005 this trend accelerated, as it has ever since. Digitalcameras became the camera of choice for photographersworldwide and Kodak's fllm and paper revenues sank.

Kodak had become unprofitable, which was somewhet

ironic given that Kodak's line of EasyShare digital ca&?-

eras had become one of the best-selling cameras and

Kodak was the number two global seller with about L8**

of the market. However, profit margins on digital productswere tazot thin because of intense competition from com*

panies such as Canoo, Olympus, and Nikon. Profits earned

in digital imaging were not enough to offset the plungirrgprofits in its core film and paper making divisions.

The Decline and Fall of Kodak'sCore Film BusinessIn 2004 Carp announced Kodak's cash-cow film business

was in "irreversible decline" and that Kodak would stap

investinginitscorefilmbusinessandpoura11itsreSourCeSintodeve1opingnewdigita1productS,suchaSnewdigitatrcameras and accessories to improve its competitive posi-

tion and profit margins, To protect its competence in diei-

tal imaging, it bought the remaining 44"/, of Chinon, itrJapanese division that designed and made its digital cant-

eraS.Kodakbeganarnajorpushtodeve1opnewstate-aLthe-art digital cameras and to develop new skills in inkjetprinting to create digital photo printing systems so tts ,

users could directly print from its cameras - and achier'*

economies of scope. Also, Carp announced that Kodak

would invest to grow its digitai health imaging business

thathadgainedmarketshare,anditwouldlaunchane11initiative to make advanced digital products for the coffi-

mercial printing industry. :

Analysts and investors reacted badly to this nell's-

Xerox had tried to enter the digital printei business year:before with no success against HP, the market leader.

'

Moreover, they wondered how new revenues from digitelproducts could ever make up for the loss of Kodak's filmand paper revenues. Carp utto announced that to fun*S

this new strategy, Kodak would reduce its hefty dividen*i'by 72"/" from $1.80 to .50 a share, which would immedi-ately raise $1.3 billion to invest in digital products'

Investors had no faith in Carp's new plan, and Kodak's

stock plunged to $22,its lowest price in decades. Kodak's

top management came under intense criticism for notreducing its cost structure, and Kodak's stock price con-

tinued to fatl as it became clear its new strategy would do

1itt1etoraiseitsfa1lingrevenues'Thismightbethebegin-ning of Kodak's end.

In 2AA4 Carp finalty announced what the companv

should have done 10 years before. Kodak would cut itsworkforce by over 7A'/o by 2007; another 15,000 employees

would lose tireir jobs, saving a billion dollars a year in oper-

ating costs. Jobs would be lost in film manufacturing, at the

CASE 8 . IHI HI>E ANU FALL UT EA) I IVTAN NUUAN. NVYU LVTIV

support and corporate levels, and from global downsizingas Kodak reduced its total facilities worldwide by one-thirdand continued to close its out-of-date photo-flnishing labs

that served retailers. This news sent Kodak's share price up

by 20a/, to over $30. But it was now too late for Kodak tobuitd the competences that might have offered it a chance

to rebuild its presence as a digital imaging company.Therewere too many agile competitors and digital technologywas changing too fast for the company to respond-at least

under Carp's leadership.

Antonio Perez Takes Control of KodakIt had become clear that Carp would not radically re-

structure Kodak's operations and bring it back to prof-itability. Kodak's board of directors decided to hireAntonio Petez, a former HP printing executive, as itsnew president and COO, to take charge of the reorgani-zation effort. Percz now made the hard choices aboutwhich divisions Kodak would close and announced thetermination of thousands of more managers and employ-ees. Carp resigned and Petez's restructuring efforts wererewarded by his appointment as Kodak's new CEO. Hewas now in charge of implementing the downsized,streamlined company's new digital imaging strategy.

Perez announced a major three-year restructuring planin 2004 to continue to 2007 to try to make Kodak a leaderin digital imaging.

On the cost side, Perez announced that Kodak needed"to install a new, lower-cost business model consistent withthe realities of a digital business. The reality of digital busi-nesses is thinner margins-we must continue to move tothe business model appropriate for that reality." His mainobjectives were to reduce operating facilities by 33o/o,

divest redundant operations, and reduce its workforce by

another 20o/o. In ?0A4 Kodak ended all its traditional cam-era and film activities except for advanced 35mm film. Itallowed Vivitar to make film cameras using its name, butin 2aA7 that agreement ended. Kodak also implementedSAP's ERP system to link all segments of its value chainactivities together and to its suppliers to reduce costs afterbenchmarking its competitors showed it had a muchhigher cost of goods sold. Using ERP, Kodak's goal was toreduce costs from l9o/o to 14"/" by 2A07 and so increaseprofit margins.

From 20a4 to 2007 Perez laid off 25,000 more employ-ees, shut down and sold operating units, and moved to amore centralized structure. All four heads of Kodak's mainoperating groups report directly to Perez. In 2006 Kodakalso signed a deal with Flextronics, a Singapore-based out-sourcing company to make its cameras and ink-jet printersthat allowed it to close its own manufacturing operations.The costs of this transformation were huge. Kodak lost$900 million in 2004, $L.1 billion in 2005, and $1.6 billion in2006. Because of its transformation, and the high costs in-volved in terminating employees while investing in newdigital technology, its 2006 ROIC was a negative zao/a,

compared to its main digital rival, Canon, which enjoyed a

positive 14o/" ROIC!

Kodak's lncreasing Problems, 2007Kodak's revenues and proflts were falling fast but in itsthree main digital business groups-consumer imaging,

business graphics, and health imaging-Perez continued

his push to develop innovative new products. The goals

was to reduce costs in its declining fllm division, which stillenjoyed much higher profit margins than its digital busi-

ness groupsl Kodak had to increase proflt margins in all its

digital divisions if it was to survive.

The Medical lmaging GrouP

By 2006 the costs of research and marketing digital prod-ucts in its consumer and commercial units was putting in-tense pressure on the company's resources-and Kodakstill had to invest large amounts of capital to develop a

lasting competitive advantage in its medical imaging unit.Here too in the 2000s, Kodak had made many strategicacquisitions to strengthen its competitive advantage inseveral areas of medical imaging such as digital mammog-raphy and advanced X-rays. It had developed one of thetop five medical imaging groups in the world. However, inMay 20A6 Kodak put its medical imaging unit up for sale.

It realaed that this unit required too much future invest-ment in its own right if it was to succeed, and its consumerand commercial groups were not providing the profits nec-

essary to fund this investment. In addition, although themedical unit accounted for nearly one-fifth of Kodak'soverall sales in 2005, its operating profit plunged 21% as

profit margins fell because of increased competition frommajor rivals such as GE. In 20A7 Kodak announced that ithad sold its medical imaging unit to the Onex Corp.,Canada's biggest buyout firm, for $2.35 billion. By selling

its health imaging unit, Kodak cut another 27,000 jobs andits global workforce was now under 50,000 frorn a peak of1453A0 in 1-988. Once again Percz said, "'We now plan tofocus our attention on the significant digital growth oppor-tunities within our businesses in consumer and profes-sional imaging and graphic communications."

Developments in the Consumer lmaging GroupIn the consumer group, improving its digital irnaging prod-ucts and services was still the heart of Perez's businessmodel for Kodak; he was determined to make Kodak theleader in digital processing and printing. Perez focused ondeveloping improved digital cameras, ink-jet printers, andphotofinishing software and services.

continuously innovate new and improved models severaltimes a year to increase profit margins and keep its lead overcompetitors. It was the market leader in the United States by2005 in digital camera sales, and sales and revenues increased

472 CASE STUDIES

sharply. However, by 2006 Kodak's prospects deteriorated as

the growth in sales of its digital cameras came to a standstillbecause of increasing price competition. Now many newcompanies like Samsung were making digital cameras thathad become a cofitmodity product, and profit marginsplunged for all digital camera makers. Neverthelesg in 2006,the company brought out new digital camera products suchas its first dual-lens camera, and cameras with Wi-Fi thatcould connect wirelessly to PCs to download and print pho-tographs, and it used these innovations once again to raiseprices. Kodak also entered the growing digital photo framemarket in 20A7, introducing four new EasyShare-brandedmodels in sizes from 8 to 1-1 inches, some of which includedmultiple memory card slots and even Wi-Fi capability toconnect with Kodak's cameras.

Since 2A07,however, Kodak has been forced to cut theprices of its digital cameras to compete with Canon andSony. tLS. customers had lost faith that its EasyShare mod-els offered the best value and so Kodak's profits from thesales of its cameras continued to decline. At the same time,increasing digital camera sales led to a major decline insales of its film products. In 1"999, Kodak announced that itwas ending production of its consumer film products andits "yellow boxes" disappeared from sight as it sought tocut costs. In sum, its camera business offered little prospectof being able to raise its future profitability.

: A major change in strategYoccurred when Per ez Launched a major advertising cam-paign to launch its new Kodak EasyShare all-in-one ink-jet printers. This new line of color digital printers used anadvanced Kodak ink that would provide brighter picturesthat would keep their clarity for decades. ApparentlyPerez, who had been in charge of HP's printer businessbefore he left Kodak, had all along made the develop-ment of digital printers a major part of his turnaroundstrategy-even though profit margins were shrinking onthese products as well. However, Perez's printer strategyis based upon charging a higher price for the printer thancompetitors like HP and Lexmark, but then charging a

much lower price for the ink cartridge to attract a biggermarket share *a tazor and razor blades strategy. Blackink cartridges will cost $9.99 and color $14.99, which willaverage out to about L0 cents a print-far lower than the2A to 25 cents per print using an HP printer. Perez be-lieved this would attract the large market segment thatstill wants to print out large numbers of photographs andso would make this product a multibillion-dollar revenuegenerator in the future. Petez announced he expectedinkjet printing to result in double-digit increases in profitwithin three years.

Kodak's new printers did attract a lot of customers whowere alienated by the high costs of ink cartridges. However,as online photo processing and storage solutions becamemore and more popular, and new mobile devices made it in-creasingly easy to access photos from the Net-on iPods,iPads, and smartphones in general-users had less and less

incentive to burden themselves with paper-based photo al-bums. Nevertheless, its new printers did help increase rev-enueSandproflts,althoughtheyneverachievedthegainsPercz anticipated. In 2009 it announced its new line of ESPall-in-one digital printers that still used all its EasySharetechnology to help users print and share their photographsKodak's new printers were popular and helped to increaserevenues and profits. For example, in 201V2011 sales in-creased by over 40o/o but this was still not enough to makeup for declines in revenues elsewhere in digital imaging.

sumer strategy was to invest in developing both online andphysical "digital kiosks," channels to allow customers tadownload, process, print, and store their photographs us-ing its EasyShare software. Kodak's EasyShare Internetservice allows customers to download their images to itsonline website, Kodak Gallery, and receive back bothprinted photographs and the images on a CD.

In , majoi effort to develop 1r, .*pire of digital pro-cessing kiosks, Kodak began to rapidly install them in stores.pharmacies, and other outlets as fast as possible, especiallvbecause they used its inks and paper. It configured these

kiosks to give customers total control over which pictures todevelop at what quantity, quality, and size. Kodak and Wal-Martsignedanalliancetoput2,,000kiosksintoI-,00GWa1martstoresandby2006Kodakhadover65,000kiosksHowever, this was an expensive business to operate andprofit margins were razor thin as competition incteased,

These moves proved popular because it was easy to use

andphotofinishingrevenuesincreasedasitbuiltabaseof3*million customers. But profit margins were slim becausecompetition increased and many other free online programswere being introduced, such as Google's Picasa. BetweenJuly 2010 and 20Ll profits dropped from $36 million to $?million and did nothing to help Kodak's bottom line.

Kodak also made major attempts to penetrate themobile imaging market because of the huge growth in theuse of cameras in mobile phones in the 2000s. The KodakMobile Imaging Service offers camera phone users severaloptions to view, order, and share prints of all the digitalphotos on their phones. Users can upload and store pic-turesfromtheircamerasintheirperSonalKodakga11ervaccounts; then after editing using Kodak's free EasySharesoftware they can send their favorite photos back to theirmobile phones or wirelessly link to its picture kiosks tcr

arrangetoprintthebestphotographs'Kodakalsojoinedup with social media sites like Facebook and Picasa, nowIinked to Google+, to easily download photos to membersof their social community. And of course it has developedapplications for the Appte iOS, Blackberry OS, andAndroid OS mobile operating systems to make it easy for ,

users to connect their Kodak EasyShare pictures to rvhat-everkindsofmobi1ecomputingdevicestheyareusing.Kodak benefits from revenues received when mobil*customers take advantage of its processing and printingservices while they upload and share photographs; for

CASE 8 O THE RISE,AND FALL OF EASTMAN KODAK: HOW LONG WILL IT SURVIVE BEYOND 2OI1? 473

example, any user can request a paper copy or an enlarge-ment of a particular photograph or a series of photos con-tained in an album. Kodak kiosks also allow users toupload pictures wirelessly through Bluetooth; customerscan beam photos right to the kiosk from mobile device toget Kodak prints and more.

one problem, however, lvas that increasing sales ofpowerful cameras in smartphones led to a major decline inthe number of customers who intended to upgrade to amore advanced digital camera-smartphones were canni-balizing sales of digital cameras. In addition, this has notproved to be an important source of additional revenues;its greater market share has not translated into higherprofits. By 2010 there was intense competition in all areasof the digital imaging and information markets, includingPCs, smartphones, MP3 players, and gaming consoles, asmore and more people gravitated online and became usedto the Web as the place to process and store their docu-ments in whatever form-written, graphic, photographic,video, music, or movies. Although Kodak had achieved apresence in the consumer digital imaging and storage mar-ket segment, it still could not generate the profits neededto offset its losses resulting from the rapid decline of itscash-cow film business, and in its other business areas.

In fact, in July zan Kodak announced major falls inprofits and sales across many of its product groups. Sales oflameras were down by 8% and revenues from its:hotofinishing operations were down I4%. Sales of ink andnkjet printers had increased by ove r 40%, a bright spot, butrevertheless overall sales had decreased by 10% comparedo the previous year, and the group had lost $gZ rnillion.

f'he Graphic Communications Group\lthough its consumer digital business is its most visiblerusiness group, by 20a7 Percz had recogn ized that its;raphic communications group that dealt with businessustomers also offered an opportunity to grow revenuesnd profits if it could develop distinctive competences.'rofit margins are much higher in commercial imaging andackaging because the users of these products are compa-ies with large budgets. The five main customer groups:rved by this group are commercial printers, in-plantrinters, data centers, digital service providers, and pack-ging companies. For each of these segments, Kodakeveloped a suite of digital products und services thatffered customers a single end-to-end solution to deliverle products and services they need to compete in theirrsiness. Kodak was able to develop this end-to-end solu-cn because of its acquisition of specialist digital printing)mpanies such as KPG, CREO, Versamark, and Express.:om each acquisition Kodak gained access to more prod-;ts and more customers along with more servicei and'lutions to offer them. Perez claimed that no other com-:titor could offer the same breadth of products andlutions that it offers. Kodak's product line includes irn-:e scanners and document management systerns, and the

industry's leading portfolio of digital proofing solutionsand state-of-the-art color packaging solutions that can becustomized to the needs of different customers, whetherthey need cardboard boxes or rigid or flexible cardboardor plastic packaging,

Following his decision to rnake Kodak a major com-petitor in consumer ink-jet printing, by za1g, with his Hpprinting background, Percz also decided to make it amajor player in commercial printing as well, bringing itinto direct competition with HR Xerox, and Canon. Kodakhad developed an award-winning wide-format inkjetprinting process, including the most robust toner-basedplatforms for four-color and monochrome printing. Kodakalso claimed to have the leading continuour inkJet tech-nology for high-speed, high-volume printirrg, ,r *"ll as im-printing capabilities that can be combined with traditionaloffset printing for those customers still in the process ofmaking the transition to digital printing.

At the same time, Perez decided to invest resources toimprove Kodak's packaging solutions to utilize its expert-ise in color processing, and he made packing anotheravenue to increase revenues and profits. Kodak an-nounced in July 2A1J that second-quarter sales from thisgroup were $685 million, similar to the previous year.However, this group also lost $+S million, compared to $j.7million in the same quarter the year before beiause of theenormous development and marketing costs necessary tosupport growth in its commercial inkjet operations.

Will Kodak Survive?In January 20A9 Kodak posted a $137 million loss andannounced plans to cut 4500 jobs, which brought its work-force down to about 18,000. In June 20a9 it announced itwould retire its Kodachrome film-the main source of itsincredible past financial success. In fact, its losses have beenincreasing in the last five yearq but the extent of these losseshas been disguised because of the way the company hassold many of its assets to reduce its losses and has engagedin patent battles. For exarnple, in 2007 it sold its rfurrtManagement Film Group to Rohm & Hass, and in 2009 itsold its Organic Light-Emitting Diode (OLED) businessunit to LG Electronics. Both were advanced LED flatscreentechnologies that it could no longer afford to invest in-butthis brought in a few hundred million dollars.

Then, to flnd new sources of revenue to offset losses,Kodak launched a series of lawsuits against other electron-ics companies, claiming that they had infringed on its hugeIibrary of digital patents that it has generated over theyears. In 2008 Kodak selected its first targets, samsung andLG, which it claimed had used its technology in rhe .u*-eras in their mobile phones. A U.S. judge decided in 20Agthat these companies had infringed on its patents but theydecided not to appeal. Kodak announced it would settleout of court and develop cross-license agreements withthese companies; it is estimated that Kodak received over$900 million from these settlements.

474 CASE STUDIES

Ernbotdened by its success, Kodak decided to take onApple and Research in Motion (RIM) in March 2010. TheKodak complaint, filed with the (J.S. International TradeCommission (ITC), claimed that Apple's iPhone and

RIM's camera-enabled BlackBerrys infringe on a Kodakpatent that covers technotogy related to a method for pre-viewing images. At the end of March the ITC ruled infavor of Kodak, which seerned to have won its patent dis-

pute with Apple and RIM, a victory that might provide itwith $t billion in new licensing revenue. OvernightKodak's stock soared by 25%. Then Apple flled a counter-suit, and in April 2011 it sold its Microfilm Unit to raise themillions needed to fund its lawsuits. In Jun e 2AI1 the ITC,under a new judge, issued a mixed ruling and announcedthe final decision would not be made until August 2011-and Kodak's stock plunged 25o/o.

Perez claimed he would use the proceeds from intellec-tual property licensing to continue to invest in the company's

now core growth businesses-inkjet printing, packaging and

software, and services-in order to counter falling revenue

from camera film. However, since 20A7 Kodak's stock has

plunged from $Z+ to around $2.50 in July 2A11. It seems thatPerez's strategies have done little or nothing to turn around

Kodak, whose market value was only around $6S0 million inJuly 2AI1. Some analysts claimed the only reason the com-pany had not been acquired for this low price was that it had

$2.6 billion in unfunded pension obligations because of itshuge layoffs over the last decade. Given that it had less than

$900 million in cash in 2011, many wondered how long the

company would be able to survive-and what would push itinto bankruptcy.

References

www.kodak.coffi, Annual reports, L980-20L0.

www.kodak.coffi, 10K reports, L980 -}Afi-.

Philips NVCharles'W. L. Hill

Established in 1891, the Dutch company Philips l{yis one af the world's largest electronics enterprises.

Its businesses are grouped into four main divisions:

tighting, consumer electronics, professional products

(computers, telecammunications, and medical equip'

ment), and components (inchfiing chips). In each ofthese aress it ranks alongside the likes of Motsushita,General Electrtc, Sony, and Siemens os a global com-

petitor. In the lnte 1980s, the company hnd several

hundred subsidiaries in 60 countries, it operated

mnnufacturing plants in more than 40 countries, itemployed approximately 300,00A people, and it mnn-

ufactured thousands of different products. However,

despite its global reach by 1990, Philips wos a com-

pony in deep trouble. .$fter a decade of deterioratingperformance, in 1990 Philips lost $2.2 billion on rev-

enues af $ZA billion. A maior reason seems to have

been the inability of Philips to adopt to the changtng

competitive conditions in the global electronics indus-

try during the 1970s snd 1980s.

Philips' Traditional OrganizationTo trace the roots of Philips' current troubles, one has to go

back to World War II. Until then, the foreign activities ofPhitips had been run out of its head office in Eindhoven.

However, duringWorld War II the Netherlands was occupiedby Geffnany. Cut off from their home base, Philips' various

national organizations began to operate independently. Inessence, each major national organization developed into aself-contained company with its own manufacturing, market-ing, and R&D functions.

Following the war, top management felt that thecompany could be most successfully rebuilt through itsnational organizattons. There were several reasons forthis belief. First, high trade barriers made it logical thatself-contained national organizations be established ineach major national market. Second, it was felt thatstrong national org antzations would allow Philips to be

responsive to local demands in each country in which itcompeted. And third, given the substantial autonomvthat the various national organizations had gained dur-ing the war, top management felt that reestablishingcentralized control might prove difficult and yield feu"

benefits.At the same time, top management felt the need for

some centralized control over product policy and R&D inorder to achieve some coordination between national or-ganizations. Its response was to create a number of world-wide product divisions (of which there were fourteen hxthe mid-1980s). In theory,basic R&D and product devel-

opment policy were the responsibilities of the productdivisions, whereas the national organizations were respon-

sible for day-to-day operations in a particular countn"Product strategy in a given country was meant to be deter-mined jointly by consultation between the responsib1rCharles W. L. Hill, (Jniversity of Washington. Reprinted with permission.