(Kodak 2) Digital imaging is a vastly different technology than traditional photography.

Traditional, film-based photography allowed for vertical integration of nearly all of the process.
Kodak could serve the consumer market, manufacturing the cameras and film for purchase, as
well as the photo-finishing side, supplying developers with photo paper and chemicals. Value
creation in Kodak’s strategy came from supplying consumers with the highest quality photos.
The financial flows in the industry came from consumables (film and paper), and Kodak enjoyed
large economies of scale by producing all of these in-house. Kodak sold cameras, but mainly as
a vehicle to boost their film and paper sales where they saw large margins. Their model
consisted of strong advertising and mass-production at low cost. Given that Kodak controlled
90% of the film market and 85% of camera sales, Kodak already had market dominance.
Therefore, large entry barriers existed in the market: any new product on the market would have
to be compatible with their materials. Because of the delicate balance of physical properties,
significant R&D costs,and tactical knowledge required, entering was too big a risk for most
potential competitors. Kodak enjoyed high profits and relatively few competitors. Even as Fuji
entered the market and began capturing share, Kodak didn’t give much thought to competition
since they believed their quality was supreme.

The digital industry, on the other hand, was faster-paced and more segmented than the
traditional film industry. There were fewer profits to be made off of consumables because film
was not an necessary input. The industry was rapidly evolving, and while the initial
average-consumer segment (cameras under $1000) was small, ever-changing technology
allowed prices to continue to drop; by 1996, 25 different brands were competing in the
sub-$1000 market. This was much more competition than Kodak dealt with in traditional film.
Much of the value created in the industry was found in novel ways of storing, transferring, and
printing digitally-captured photos. Consumers had more options other than just development in
photo labs when home printing and internet photo services became popular. There was also a
shift from quality being the primary consumer value to convenience being a strong value.
Profitability was much lower in the digital age than with film-based photography, and margins
depended largely on lean manufacturing and cost reduction. Because of the emphasis on these
values, many manufacturing facilities were now offshored to China. With the advent of online
photo sharing and services, entry barriers lowered, promoting fiercer competition than
previously seen in the film age.

(Kodak 3). Kodak currently hopes to utilize digital imaging to revitalize the company. They face
an uphill battle as their current market position is very weak in cameras, but they do show
promise in the kiosk/printing business. Their weaknesses started in the 1980s, when Kodak’s
position in the digital industry was uncertain and was not aided by a wavering corporate
strategy. They had invested in R&D and, in 1986, pioneered an image-sensor that was widely
used in digital cameras, including by competitors. However, there was also significant resistance
to the move to digital realm within the company. Under numerous leaderships, Kodak deviated
from the company’s original strategy of “customer, advertising, low production cost” and rushed
certain digital products to market prematurely. Kodak also faced an agent problem in which the
C-Suite valued the move to digital and had a pioneering attitude, but middle management saw
things differently and wanted to stay with the status quo. To continue Kodak’s strategy the
traditional way, Kodak sunk significant R&D into “film-based digital imaging”, signaling an
unwillingness to move away from their core product of film. This venture was largely a flop.
Throughout that decade, digital efforts across Kodak continued to be uncoordinated.

Just a few years ago, Kodak had managed to capture market share in the digital kiosk space.
Though Fuji dominated, Kodak’s partnership with Noritsu Koki was beneficial and Kodak
projected they would close the gap. However, they continued to lose market share in digital
camera sales, which never had a positive contribution to their bottom line.

Kodak’s disjointed digital strategy in the 80s and early 90s put them at a disadvantage. If they
had focused less of their R&D on keeping film relevant and instead enacted a unified research
strategy to create low-cost technology, they could have benefitted from their prevalent name
recognition and dominated the digital market as well. The focus on becoming more horizontally
integrated that started in the late 90s was a positive shift. This allowed Kodak to spend less
money on developing capabilities from scratch, and instead use their name recognition
partnered with other firms’ existing investments to improve profitability.

(Kodak 4) Given Kodak’s shrinking market share and lack of profitability in the digital camera
market, they should cut this business altogether and instead becoming a supplier for
competitors (with their digital imaging sensor widely used, Kodak could continue to have a
revenue stream from their previous investments). They should focus on their kiosk and online
businesses where profit can still be gained from Kodak's long standing knowledge of mass
producing consumables (namely photo paper and any required chemicals). Additionally, Kodak
can further strengthen their competitive strategy by creating more horizontal opportunities. To
continue consumable profitability, Kodak should partner with home printing options to be the
preferred supplier of printer paper. Finally, given that consumers continue to rely more heavily
on the internet to provide the most convenient options, Kodak should invest in advertising and
increased offerings for their online business, allowing full suites of photo hosting, editing, and
printing on multiple media. If Kodak can become a one-stop shop for online consumers, they
can continue to see profitability at lower costs (less overhead) in the digital world.