To: Kelly Johnston, CEO
From: Chief Restructuring Officer
In Reference to:
Executive Summary: * Eastman Kodak is an industry leader in developing, manufacturing, and marketing different imaging products for leisure, commercial, and medical use. * Recently, Kodak attempted to reorganize its architecture * Kodak has been slowly executing a plan to make the transition from a film business, to a profitable and sustainable digital company. Kodak has faced great difficulties such as: * Restructuring costs * High competition * Rapid growth * Low profit margins. * Our company’s architectural restructuring plan was motivated by: * Competition * Our virtual monopoly was eroded through the entry of other firms. * Technological Advancement * Advances in technology have allowed firms to produce new products faster. * Changing Market Environment * These changes have caused us to fall from a once prominent monopoly in the film industry, to such a small player in the digital industry. * To win back market share and increase profits, Kodak did a mass restructuring that failed to provide the expected results. * Decentralize Decision Making * Altering the decision making process from a top-level approval requirement to a more decentralized decision making process of small business units and managers. * Management Annual Performance Plan (MAPP) * Implemented to help motivate our managers to be more innovative, productive, and responsible for customers’ demands and needs. * During this process, critical errors were made. Developing a structure involving decision rights, rewards, and an evaluation system of both individuals and each of the business units. * Components should be changed simultaneously, not successively. * Should spin off other Subsidiaries like Eastman Chemicals in 1993 to boost profits. * Kodak should be seeking partnerships, expanding into new markets, growing our product portfolio, and driving innovation within the new digital oriented segment
Key Factors that initially made us Successful
Kodak is a company with a large amount of underlying value. Our company has brought the world of photography to everyday people has established itself as a major player; being the number one supplier of film. Despite the general consumer base has made the transition to digital photography, there are still many applications of Kodaks film line; these range from cinematography to medical applications using Kodak film.
Kodaks Intellectual Property Portfolio also holds a tremendous amount of value to our company and has helped bring Kodak to the success it is today. Our patents and copyrighted property are used in many different fields, including our competitors in the digital imaging and film industry throughout their production process. Our printing services also provide another key aspect towards our underlying value. Our printing services, Kodak Online Photo Printing and Kodak Booths, provide exceptional services and allow Kodak to simply out price any competition that enters the market.
Key Factors that motivated us to Change our Architecture
Several factors contributed to the change in organizational architecture of our company, they are as follows: * Competition: For many years Kodak was the largest supplier of film, and essentially had a monopoly of the industry. However, throughout the 1980’s, this virtual monopoly was eroded through the entry Fuji films and their high quality film, as well as Kodak launching unsuccessful products such as the Kodak Disc in 1982. In addition to this new product, stores began producing their own generic brands of film to develop more competition within the film industry. This increased competition has slowly eroded the monopoly power that existed for Kodak, creating a more competitive film market. * Technological Advancement: Advances in technology have allowed firms to produce new products in a matter of months instead of years. Despite the fact that our company was one of the pioneers in the production of film, advancements in design capabilities, improved communications, and robotics have created environments that allow faster and similar product development. This allows for consumers to be presented with various products and styles with multiple functions in a matter of months instead of years. This has also contributed to the increased competition within our industry. * A Changing Market Environment: With the increased competition within the market place along with the advancements in technology, we have faced great challenges. These changes have caused us to fall from a once prominent monopoly in the film industry, to such a small player in the digital industry. Kodak has profited from the transition to digital imaging, however these profits are nowhere near the magnitude of what was lost with the monopoly like power in our film processing and picture development. During this change in market environment, our losses in market share have been reflected from our stock price. In 1984 Kodaks stock price was $71, $14 dollars lower than the price in 1984. Subsequently, our earnings per share had also dropped. Throughout the 1990’s, Kodak began to struggle financially as the shift from film to digital began.
When we tried to alter the organizational structure of Kodak to regain profits and market share, we made some detrimental mistakes that affected some basic operations of the firm. * Decentralizing Decision Making: Altering the decision making process from a top-level approval requirement to a more decentralized decision making process resulted in 17 new subsidiary units with profit and loss responsibilities. The responsibility of decisions on new products, pricing, marketing, and other important issues was given to the new business unit managers. The decentralization of our decision making has failed to have an impact on our performance. This transition has failed to help us recover and regain profits and market share. * Management Annual Performance Plan (MAPP): Altering the company’s performance evaluation and reward system was another mistake we should look at fixing. This system was implemented to help motivate our managers to be more innovative, productive, and responsible for customers’ demands and needs. Adopting the MAPP system in 1987 reduced our manager’s base salary by 10% and replaced it with a variable bonus. This bonus ranged from 10-20% and was rewarded to managers based on individual, unit, and company objectives. However this shift has also failed to produce the results that were expected when this plan was initiated. The MAPP system has failed to motivate managers to help improve their overall performance. As a result, this has also failed to help Kodak regain market share and profits.
Kodak should have handled this restructure differently. As a company, we failed in our restructuring because we made changes to the assignment of decision rights without taking into consideration the important issues of performance evaluation and rewards. We should have developed a restructuring involving decision rights, rewards, and a system to evaluate the performance of both individuals and each of the business units. While restructuring a company, it is imperative that these three components are changed simultaneously. Components should not be changed successively. Our restructuring failed because we decided to make our decision making more decentralized, and when that did not work, we decided to implement the MAPP with the idea that changing the performance evaluation and reward systems would motivate managers. These 3 variables should be viewed as compliments.
As a company that has been slow to react to the digital revolution, we have become a prime example of economic Darwinism, or “survival of the fittest”. While companies such as Canon, Nikon, and Sony continue to gain market share, we have failed to respond to these challenges. This has resulted in eroded market share and shrinking profits.