Has the "Kodak Moment" Passed?

Kodak’s Rise and Fall – Company overview

The story of Kodak starts with a classic case of science and entrepreneurialism. George Eastman and his partner Henry Strong worked developing photographic technology and in 1891 proudly released their first product, the Brownie. This was a cardboard camera costing $1 and came with the strap-line “You push the button, we do the rest.” It was the world’s first mass market camera.

Kodak Listed in 1930 on the Dow Jones Industrial Average index, and released their most famous product, Kodachrome in 1935 which was the first replaceable cartridge film. Kodak released the instamatic camera in 1963, and in 1975 Steve Sasson invented the first digital camera andwas originally told “that’s cute, but don’t tell anyone about it.” Kodak management were more concerned with maintaining their highly profitable film business than developing the digital camera.

Kodak’s share price was at its highest point in 1997, reaching an impressive $92.3 with a company value of $25bn. However 1997 was the tipping point for Kodak, their shares would never reach the same levels again. Competitors had reaslised the potential of digital photography and had started developing their own products, but Kodak was focused on protecting their core film business and although they were developing digital photography, it wasn’t receiving the funding it needed to compete.

As Kodak entered the 2000’s it realised it needed to diversify after revenues plummeted for its core film business. Kodak invested in the pharmaceutical industry, purchasing Algotec Systems. Kodak had also started to invest in domestic printers and ink supplies. However these decisions weren’t enough to save Kodak and in 2004 Kodak were delisted from the Dow Jones and they responded over the next few years selling off divisions and cutting staff.  Kodak announced it would stop selling its Kodachrome in 2009, which was a clear concession to the digital age, after sales film had practically dried up.

2012 Kodak were warned if they did not raise their share price above $1 they would be delisted from the NYSE. Finally on 19^th January 2012 Kodak filed for chapter 11 bankruptcy protection, and their share price stood at $0.36 and a company value of just $132m. Shareholder wealth destruction of 99.6%

Kodak’s Shareholder Value & Managerialism

Although Kodak’s demise has been over a long period of time there are still clear elements of theory that relate to this case. There has been a clear destruction of shareholder value, which can be seen in the current value of the company and the non-existent dividend payments these days. The elements that contribute to shareholder value are; strategy, organisational capabilities and finance. Kodak clearly had the finances and organisational capabilities to maintain shareholder value, being one of the largest companies in the US. The strategy however has been found dramatically lacking. Kodak’s strategy to defend their film market rather than developing the digital camera market was their single largest error. Kodak invented the digital camera and still failed to develop it, the strategy was too narrow minded to take into account their promising R&D, and has seen competitors come in and dominate the market. This shows if one element of shareholder value is incomplete how it leads to a destruction of shareholder value. The reasons why the strategy were missing are slightly less clear, but it is possible to link it to managerialism, this is where managers act in their self interests. The executives at Kodak had one of the most successful companies in the world and they had a regular income from the film market. They became focused on making as much money out of their current business and generating shareholder wealth, but ignored the future prospects of the market and the company, which inevitably lead to shareholder wealth destruction.

Value Maximisation as an Objective

Value maximisation has two main points, firstly, purposeful behaviour requires the existence of a single-valued objective function. The value maximisation theory clearly doesn’t work here because if you are trying to create as much value as you can but your being outperformed by competitors then you simply can’t create value. In this case it leads not to social welfare maximisation but a decrease in the social welfare, as Kodak employees pension funds are currently under threat, after Kodak filed for bankruptcy protection. The second theory that social welfare issues and externalities occur because governments fail to set rules and boundaries, again doesn’t apply to Kodak. In a free market Kodak have been out manoeuvred strategically and are paying the price for not adapting soon enough, competitors have acted within the rules and there has been no foul play. It has not been the governments fault, it was Kodak’s.

Looking Past Kodak’s Figures

There have been many investors looking at their portfolios over the past five years wondering how that giant hole has been created where the value of Kodak once stood, and it’s the classic case of how investors fail to look at anything other than the numbers. Kodak looked for many years to be a stable investment, but if they had taken the time to stop and question how Kodak can invent the digital camera and not control this market as well as their traditional film market, then maybe they would have seen the corporate failure sooner. If investors had looked behind the numbers and seen the static strategy of the company and realised the market would change sooner or later, rather than being drawn in by the impressive EPS, profit and ROCE figures, then it would have saved a lot of investor embarrassment.

Kodak’s Value Destruction Pentagon

By flipping the value creation pentagon around you can create a value destruction pentagon. This works by failing to use an element of the value creation pentagon correctly.

Kodak clearly failed to correctly engage some of the elements of the value creation pentagon. Firstly Kodak sold off several divisions of its company raising over £2billion, however this was not used to create value for the shareholders, it was used to fill the cash flow gap that had been created from the reduced revenues from the core film business. This shows that if divesting monies are not correctly used it leads to greater destruction of value.

Kodak also seems to have tried to extend the planning horizon of its central film business, to create or maintain value. Kodak believed it could continue selling its film so made projections based on this belief. When sales weren’t being matched, it caused Kodak to make huge losses and destroy value. Kodak had over-extended its planning horizon and based it on incorrect figures.

Again we come back to Kodak failing to invest within the digital market, and one section of the pentagon is raise investment in positive business units. Kodak failed to invest the funds in a rapidly growing market that had the ability to create more value. Failing to invest in this positive business unit caused the 99.6% shareholder wealth destruction.