Kodak/Fuji- Questions

• Compare the financial performance of

Kodak and Fuji for the period 1982 to
1992.
• What factors explain any observed
differences in operating performance for
the two firms?
Porter’s Five Strategic Forces
Degree of Actual and Potential Competition

Rivalry Threat of Threat of

Among New Substitute
Existing Firms Entrants Products

Industry Profitability

Bargaining Power in Input and Output Markets

Bargaining Power Bargaining Power
of Buyers of Suppliers
 Rivalry Among Existing Firms
• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barriers
 Growth -- World Wide Market
• U.S. 31%
• Western Europe 23%
• Japan 16%
• Other 30%
 Growth
Segments 1989 1993 Avg
Million $ Million $ Growth
Photo 9,200 12,312 7%

Paper 6,920 9,261 7%

Micro 1,918 2,223 3%

 Growth

Equip 1,462 1,779 4%

X-ray 1,100 1,214 2%
Micro 410 475 3%
Finish 242 294 4%
Equip
TOTAL 21,252 27,558 5.9%
 Rivalry Among Existing Firms
• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barrier
 Concentration
• Kodak
• Fuji
• Agfa
• Polaroid
• Konica
 Concentration Film

Film 1984 1988

Kodak 88% 83%
Fuji 7% 12%
Konica 3% 3%
 Concentration Paper

Paper 1984 1988

Kodak 64% 61%
Fuji 10.3% 16%
Konica 9.8% 9%
 Concentration Conclusion
• Top Three have 98% of the market in color
film
• Top four have 92.5% of the market in
paper
• Market is an oligopoly.
 Rivalry Among Existing Firms
• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barrier
 Differentiation and Switching
Costs
• Very little quality difference between
Kodak and Fuji
• Generic 35 mm film introduced in 80s
– lower in quality but not bad for many
– response improve the quality of brand names
• No switching costs involved
 Rivalry Among Existing Firms
• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barriers
 Scale - Exit Barriers
• Very heavy fixed costs
• Very high levels of R&D
• Exit barriers probably different from a legal
perspective depending on the country of
operation
 Threat of New Entrants
• Scale economies
• First Mover advantage
• Distribution access
• Relationships
• Legal barriers
Threat of New Entrants -- Photo
industry
• Scale of economies would appear to almost
be prohibitive
• First mover advantage -- Kodak is a
household name
• Distribution access
– Fuji has entered into an agreement with Wal-
Mart (Currently not at case time)
– Kodak has purchased Photo stores (not at case
time)
 Threat of Substitute Products
• Disposable 35 mm cameras
• Electronic imaging beginning to be a threat
– Some big players: Sony, Canon, Toshiba,
DuPont and 3M have moved into this arena
– Both Kodak and Fuji are putting R&D dollars
in this area
 Kodak
• Dominated the market until recently
• Three primary areas of business
– Imaging and information - 57% of sales, 50%
of profits
– Chemicals - 18% of sales, 23% of profits
– Health Division - 25% of sales, 27% of profits
 Kodak
• Imaging and Information restructured into
autonomous business units in 1985
– Revenues increased
– Sales and administrative costs
increased more
• Several peripheral businesses were sold
in the 80s, Interactive Systems, Eastman
Kodak Credit Corporation, for examples
 Fuji
• Founded in 1934
• Three main business segments
– Commercial Products - medical imaging,
...motion picture film
– Magnetic Products
– Consumer Photographic Products -- the
largest, 70% of the Japanese film market
 Fuji
• Quality comparable to Kodak
• Export sales account for 40% of sales
• R&D runs at about 7% of sales
 Compare the financial performance of
Kodak and Fuji for the period 1982 to 1992.

• Go to Excel
 Pre-tax margins
82-84 85-88 89-92
• Kodak
14.7% 10.2% 4.9%
• Fuji
18.1% 18.3% 16.9%
 ROA
82-84 85-88 89-92
• Kodak
8.6% 5.3% 2.4%
• Fuji
7.1% 6.0% 5.2%
 Asset Turnover
82-84 85-88 89-92
• Kodak
0.977 0.841 0.809
• Fuji
0.893 0.785 0.688
 ROE
82-84 85-88 89-92
• Kodak
12.5% 12.7% 8.6%
• Fuji
12.9% 10.2% 8.5%
 Sustained Growth
82-84 85-88 89-92
• Kodak
4.3% 3.9% 0.3%
• Fuji
12.0% 9.4% 7.9%
 Days Inventory
82-84 85-88 89-92
• Kodak
110 119 88
• Fuji
135 116 118
 Days Receivables
82-84 85-88 89-92
• Kodak
65 84 80
• Fuji
73 66 70
 Days Payables
82-84 85-88 89-92
• Kodak
22 35 33
• Fuji
60 66 71
 COS as Percent of Sales
82-84 85-88 89-92
• Kodak
58.5% 53.9% 51.8%
• Fuji
56.1% 55.0% 53.1%
 SG&A as Percent of Sales
82-84 85-88 89-92
• Kodak
19.8% 24.3% 27.8%
• Fuji
19.4% 21.5% 24.9%
 R&D as Percent Of Sales
82-84 85-88 89-92
• Kodak
7.3% 7.9% 7.4%
• Fuji
5.8% 6.0% 6.1%
 Analysis of NROA-1992

• Kodak Fuji
– ROE: 20.5% 7.0%
– RNOA: 8.2% 6.9%
– NOPAT Mgn:7% 6.5%
– FLEV: 2.318 .035
– Spread: 4.7% 3.7%
– Op T/over: 1.269 1.066
 Accounting Analysis
• Depreciation
– Fuji uses declining balance
– Kodak uses St. line
• Inventories
– Fuji use weighted average
– Kodak uses LIFO for US, FIFO or
average costs for rest
 Accounting Analysis - Goodwill
• Kodak uses 40 year life
• Fuji uses 20 year life
What would the ratios have looked if Kodak
used the same goodwill amortization
• Pretax margin for 89-92 would have
been 4.2%
• ROA would have been 2% instead of
2.4%
• ROE would have been 7.3% instead of
8.6%
• Sustained growth would have been .2%
instead of .3%
 What does the ratio analysis
show
• Serious concern with Kodak’s pretax
margin. Made even worse with the
Goodwill change
• In recent years Kodak has improved its
asset use (Asset Turnover)
• Days in inventory differences probably due
to different inventory valuation methods
 What does the ratio analysis
show
• Collections of receivables for Kodak have
lengthen a bit Fuji has remained about the
same
• Kodak’s COS ratio is slightly better
• Kodak has more SG&A expenses
• Kodak spends more on R&D
 What does the ratio analysis
show
• Fuji maintains about an additional month
of credit from suppliers
• Kodak’s ROE is comparable to Fuji’s.
• Kodak has more debt.
• Kodak pays out significantly more in
dividends than does Fuji
 What factors explain any observed
differences in operating performance for the
two firms?
• Organizational differences?
• R&D strategy
• Business Diversification
• Pricing strategy
 Organizational Differences
• Kodak has traditionally been centrally
organized
– Recently tried to decentralize its imaging and
information businesses
– Corporate administrative duplicated SG&A
went up
• Fuji appears to have been always
decentralized
 R&D Strategy
• Kodak has consistently out spent Fuji by
1% to 2%
– Kodak is also involved in the pharmaceutical
industry which is heavy R&D
 Business Diversification

• Kodak is more diversified than Fuji

• Revenue% and ROS per segments
Revenue ROS
87-89 90-92 87-90 90-92
Imaging 40.0% 36.9% 16.9% 15.3%
Information 23.5% 20.8% 1.9% -6.9%
Chemicals 18.7% 19.2% 17.6% 14.5%
Health 17.8% 24.5% 16.3% 1.5%
• Has Diversification been a good thing for Kodak?
 Pricing Strategy
• Fuji appears to price its product much
higher in the domestic market
– Gives Fuji cash flows
– Allows them to price low in the export market
• However 46% of Kodak’s revenue, 90-92,
from outside the US came from imaging
(Core Business) versus 27% domestic
revenues
 Differences in financing strategies and
performance of the two firms?

• Kodak’s payout ratio is about .8 Vs .07

for Fuji
• Why the big difference?
– Tax Differences? - US taxpayers typically
prefer capital gains and so do Japanese
– Ownership structure?
– Look at Exhibit 6 p. 333
 Differences in financing strategies and
performance of the two firms?

• Debt policy
– Kodak’s interest bearing debt to total capital
(interest-bearing debt + equity) has ranged from
around 7% in 1982 to around 63% in 1991
– Fuji’s interest bearing debt to total capital has
ranged at around 14 to 20 % over the entire period
• Conventional wisdom seems to be that
Japanese firms can afford more leverage than
US firms. We don’t find that the case here?
 Questions for discussion
• Does Kodak retain its non-core
businesses?
• How does Kodak respond to Fuji’s
challenges to their home photo market?
• How does Kodak respond to the
challenges from the generic label film?
• How much R&D effort should be allocated
to electronic imaging?
 What Kodak has done
• In 1993, CEO resigned. Replaced by
CEO from Motorola
• In 1994 sold its Chemical business
• In 1994, sold the Health care businesses
• In 1994, CEO announced that Kodak
would become a leader in electronic
imaging -- The Electronic and imaging
Division was formed
 What Kodak has done
• In 1994, Kodak announced it would
combine corporate and Imaging Group
staffs
• In 1995, filed a petition with the US Trade
Representative's Office alleging that the
Japanese Govt. had allowed Fuji to
strangle Kodak’s access to the Japanese
Market.