MOR 559

STRATEGIC RENEWAL AND ORGANIZATIONAL TRANSFORMATION

PROFESSOR MICHAEL MISCHE

BUSINESS CASE PROBLEM

Spring 2000

The Situation

In Rochester, NY a strong, cold wind is whipping in from Lake Ontario and mere 30 miles away sits Ontario, Canada. A dark gray sky signals the coming of a cold winter. It’s late in the afternoon and dusk comes early to this part of the country. Rochester, a city dominated by three companies, is a city in economic decline.

In Los Angeles, where the Santa Anna winds are keeping the surface temperatures at warm 70 degrees, nothing could be more contrasting to the scene in Rochester. The talk in the Southland is turning to the annual USC v. UCLA game, a tradition that entertains the focus of the city known for its short attention span, and the frequent question that most SoCalers ask, “Does the BMW need detailing this week?” emerges once again at the end of the week. Southern California is, after all, the 15th largest economy in the world.

Since the early 1990’s, Kodak, one of the three Rochester companies, has been under enormous pressure and has failed to achieve and sustain any significant growth in earnings, stock valuation and market capitalization. With sales of $14.2 billion, its earnings are around $1.69, on an adjusted basis. On a comparative basis, its sales performance has significantly lagged the industry.

ANNUAL GROWTH RATES

KodakIndustryS&P 500

Sales1.40%53.00%18.00%

Income32.30%93.60%16.30%

Over the past 12 months, Kodak’s stock price has plummeted. Its five-year high was $92.90 in February 1997 and its most recent 52-week high was $71.18, a decline of 23.4 percent. On November 7, 2000 the stock closed near $48, off another 42 percent from the year’s high. On an equity valuation basis, Kodak is not competitive with other traditional brands such as Coca Cola, Gillette, Proctor & Gamble and doesn’t come near the high technology sector represented by Cisco, Nokia, Applied Materials and Hewlett-Packard.

After investing more than $5.0 billion of shareholders’ money in digital technologies, Kodak managed to generate only an anemic $20 million in earnings. Its foray in to this marketplace has been marked by false starts and re-starts. Japanese giant Fuji has made significant in-roads into the core business of Kodak and has sufficient cash flow to compete on price. After a succession of poorly executed strategies and cost-cutting moves, the tenure of CEO George Fisher has come to a merciful and unceremonious end. Dan Carp, a lifetime employee has been selected the new CEO of the corporation.

As you are contemplating your upcoming, yet another sunny weekend, a call comes from a prominent investment banking firm informing you that the new CEO of Kodak is planning a trip to Los Angeles, where a special meeting of the board of directors is planned. The CEO has requested that you discuss your impressions and view of the company’s future with the board. You have 20 minutes, no more, no less.

The Challenge

You have been invited to the quarterly meeting of the board of directors of Kodak Corporation. At stake is a major consulting contract with the board of Kodak. You have 20 minutes, no more, no less and questions will be asked. You are asked to provide discussion and analysis on the following three topics:

  1. Using historical financial data, analyze and comment on Kodak’s five-year financial performance and strengths/weaknesses relative to alternative investments. Consider, for example, the following issue:
  • What do you attribute the discrepancies (if any) in financial ratios to between Kodak and its competitors?
  1. Comment on Kodak’s historical performance and strategies and whether these strategies are sustainable and appropriate for competing in the 21st Century. Consider, for example, the following issues:
  • What have been the historical sources of Kodak’s competitive advantage and to what extent are these sources still viable?
  • What trends and factors are driving the need to find new sources of competitive advantage for Kodak?
  1. To what extent is Kodak’s digital strategy viable? Consider, for example, the following issues:
  • What operational strategies and tactics, competencies, value propositions and resources (financial, technological and human) are necessary to successfully implement the digital strategy?
  • What vulnerabilities, if any, are created by the digital strategy?
  • What financial resources are required to support the strategy?
  • To what extent will the digital strategy renew Kodak and lead it to market dominance?
  • What structural costs must be reduced or eliminated to fund the strategy.

Format and Instructions

You have twenty minutes for the presentation, plus 10 minutes for questions and answers.

Your presentation will be monitored, so please adhere to the allotted time.

Your presentation will be evaluated using multiple criteria that includes:

  • Responsiveness to the discussion questions posed by the board.
  • Depth of understanding as demonstrated through analysis.
  • Professionalism of presentation as demonstrated through graphics, content and presentation style and substance.
  • Clarity of content, presentation, logic, argument, etc.
  • Effectiveness of time management.
  • Responses to questions asked by board members.