Kodak, long dominant in the photography business, has struggled with the transition to digital technology. Beginning in the 1980s, the company saw a number of strategic shifts. The company is now faced with four potential paths ahead, each one representing a different strategic view of the company and the industry. This paper will first present some historical context to Kodak's current situation, and then discuss the different strategic options in turn. As a result of this analysis, a recommendation will be made with respect to the best path forward for Kodak. For most of its life, Kodak was a dominant photography company, with a business built on technological superior in silver halide imaging and on economies of scale. Only when Japanese firms began entering the U.S. market did Kodak face any serious competition. By the time this was occurring, the first digital cameras were being introduced. At this point, Kodak was a vertically integrated company that had undergone minor horizontal diversification, to products with strong technological overlap with the core photography business. The response of Kodak to the emergence of new competition and new technologies was disjointed. The early responses saw a wave of horizontal diversification. Some of it like the entry into pharmaceuticals was entirely unrelated to the existing Kodak business. During this period, Kodak struggled for the first time in its history to maintain a position of technological leadership. The company also suffered from a lack of innovation, fuelled in part by a strong corporate culture and in part by the fact that all of the company's leaders rose to power via the same path right down to the same business school.

When the company brought in outside leadership during the Fisher era, the company divested itself of unrelated horizontal diversification and began to focus more intently on vertical integration and a shift towards more electronic products. In more recent years, the strategy has shifted back to horizontal integration -- Kodak wants to work with suppliers in order to create new and innovative products. Thus at this point Kodak is oriented towards horizontal integration but is in a position where it can choose any path. Much of the cultural inertia that plagued the company throughout the 1990s has been eliminated over the past several years, putting Kodak in a position to move forward.

Current Situation

Kodak's core business of film photography has in recent years taken a beating. Photography revenues are well off their peak but the business still contributes 68% of revenues and 59% of profit. The problem for Kodak is that the business is in a state of long-term decline. Revenues are down 14.6% from the highs four years ago and the declines are steady. This industry has shifted from a virtual monopoly for Kodak to a state of monopolistic competition. Customers are increasingly price sensitive. The primary threat to the business is digital photography, a substitute that is becoming increasingly affordable. Kodak is involved in this business, and generates income from photo printing kiosks, but its digital camera business is a massive money-loser. The second largest business at Kodak is the health business, which involves various forms of medical and diagnostic imaging. This business accounts for 18.6% of revenues and 27.3% of profits. The health business is growing slowly in terms of revenues with 2003 expected to be the best ever. However, profits in the business have been shrinking steadily, indicating a steep decline in margins. Again, this is due to competition from digital. The long-run trend for both photography and medical imaging is upward in general, but whether the gains in these businesses are enjoyed by Kodak depends on the decisions the company makes with respect to technology and partners.

The third business is professional, which accounts for 12.2% of revenues and 15.6% of profits. Both revenues and profits in this business are substantially off their peaks. Other businesses are negligible in terms of their importance. Thus, all three of Kodak's businesses are struggling. Each is at a point in its lifecycle where traditional technologies are either mature or in decline, and the only growth in these businesses is in emerging technologies.

The worldwide markets for digital camera technology are expected to grow rapidly in the coming years. Other businesses are mature. Kodak's share of digital cameras has decreased and the business is not profitable. Kodak's only recent successes have come with ancillary products, including photo kiosks. The company's business remains focused on the North American market, but there is potential for horizontal expansion geographically. Some of Kodak's executives feel that there is room for growth in film in emerging markets and have moved into those markets. Kodak has a healthy presence...

The company added IBM's copier business, Clinical Diagnostics and Sterling Drug. The underlying idea was that Kodak management felt it was in the chemical business rather than the imaging business, so pharmaceuticals and health care was in line with its core competencies. The company was dominant in its photography business and was likely seeking to diversify into businesses that it felt it could understand.
During the 1983-89 period, the company entered the digital imaging industry, which is effectively vertical diversification within the core imaging business, utilizing new technology. This move was made because technological innovation made the move possible. It fit with the general diversification strategy that Kodak was pursuing at the time. In addition, this move led to further market opportunities down the road.

The move into film-based digital imaging, again vertical diversification, was from a strategic perspective a natural extension of the digital imaging initiatives of the 1980s. Kodak was being innovative in blending technologies to anticipate the needs of the market with this strategy. The company did not follow this strategy wholeheartedly however, leading to the lost opportunity to get in front of the blending of this technology with personal computing.

Fisher's moves marked a retrenchment from the horizontal aspects of the previous era's diversification. The first step was to separate digital from traditional imaging within the company, a move that made digital imaging a stronger vertical diversification compared with its previous position. The digital print station is an example the type of vertical diversification pursued by the company, and this laid the foundations for Kodak's move into retail later. Many of the products introduced in the mid-90s era were more horizontal diversification, as Kodak during this period viewed equipment as a business in which it could succeed. Many such ventures ultimately failed as once again Kodak showed that it had trouble making horizontal diversification stick.

From 1998-2003 the company continued along a path of horizontal diversification despite previous horizontal failures. It changed its tactics, however, in that Kodak partnered with other entities rather than attempting to develop everything internally. The picture-maker kiosks were also introduced in this period, a vertical extension of its earlier digital print stations that would mark one of the most successful innovations during this period.

One clear trend in the different moves that Kodak made from 1983-2003 was that its most successful moves came from vertical diversification. Kodak was generally able to succeed in those instances when it viewed itself as an imaging company and acted on that theory. It succeeded in medical diagnostics, and with the print stations. The company generally failed with respect to its horizontal ventures. Because these ventures typically did not play to Kodak's core competencies, the company was unable to outperform and ended up either shutting down the venture or selling the business. Kodak's future strategy should reflect this history, and focus primarily on the ways in which the company can diversify vertically, as an imaging company, rather than attempting to redefine the company's business and expand vertically into industries where it lacks distinctive competencies and sources of competitive advantage.

Analysis of Alternatives

The first alternative is to expand film's benefits. This alternative is predicated on the idea that market share can be improved by offering premium products and increasing its exposure. The strategy is weak for two key reasons. The first is that film is a declining market. If Kodak increases its share of a declining market, it is still subject to declining revenues and profits. The second problem with this alternative is the idea that Kodak can increase its exposure through more targeted marketing -- the idea that Kodak is underexposed in the photography business is ludicrous. This alternative is essentially a vertical integration strategy where Kodak seeks to extract more value from its existing core business. While this strategy probably appeals to the old guard, it holds very little potential for growth. The rationale for this option would appear to be a lack of creativity and a stubborn attitude in the face of an obvious and profound shift in the external industry environment. While Kodak does retain competence in film photography, the business is in decline.

The second alternative…