Eastman Kodak Investment Analysis
...maker of photographic film. III. Assessment of the Environment, Corporate Competencies, Objectives and Corporate Level Marketing Strategy Strengths and Weaknesses (Cont’d) Hot-swappable CD writers are one example of Kodak’s ability to modernize. Joint ventures with companies such as Heielberger Druckmaschien AG to form NexPress (digital printing), Sanyo Electric to create SK Display Corp. (electric displays), and with Hewlett – Packard to Phogenix (retail photo finishing) are examples of Kodak’s ability to form partners with other companies to develop the next and newest product. Furthermore, Kodak is one of the top three digital camera market leaders with Sony and Olympus, which capture sixty percent of the digital camera market. In fact, Kodak co-developed with Fuji and three other companies the Advanced Photo System that combines digital-image processing and printing technology. However, in a disappointment to Kodak, Fuji won contracts to provide supplies to all of the one-hour photo labs of convenience chain giant, Wal-Mart. A look at Kodak’s corporate resources and competencies, Table III-2 below, assists to illustrate where the company focuses its marketing strategy. III. Assessment of the Environment, Corporate Competencies, Objectives and Corporate Level Marketing Strategy Corporate Level Marketing Strategy Competency Strength/Weakness of Organization Strength/Weakness of Competition Importance to Consumers Financial Strength Medium High Low Variety of Products High High High Variety of Market Segmentation High Medium Medium Innovation High – Medium High – Medium High – Medium Effectiveness of Distribution Channels Medium Medium High Table III-3: Corporate Resources and Competencies As illustrated in Table III-3, the strength/weakness of competition has an intense effect on the strength/weakness of the organization, as based on the listed matrix of competencies. Variety of products lists as one of the most important aspects of the company to consumers. It is important to consumers that the products they choose are compatible with other products they may need to purchase, therefore variety of products produced ranks as high. Company innovation and the effectiveness of the distribution channels also rank as very high in importance to consumers. People constantly look for the newest innovative merchandise. Furthermore, the way in which a company distributes their supplies is important so as consumers know where and how they can purchase Kodak supplies and accessories. On the other hand, company financial strength is of low importance to consumers, yet of high importance to the company and its competitors. III. Assessment of the Environment, Corporate Competencies, Objectives and Corporate Level Marketing Strategy Corporate Level Marketing Strategy (Cont’d) Through focusing on marketing mix variables, Kodak has established firm objectives to assist in meeting consumer expectations based on the firm’s competencies. These objectives include: • Continued investment in Research and Development (R & D) • Expansion into foreign markets and secure a larger market share (Fuji Photo is an intense global competitor) • Overcome the current 2.54 percent decrease trend in sales • Continue to produce innovative product Collaboration of Kodak’s four marketing strategies and objectives create the foundation for subsequent years of company operation. Market Growth Rate High 20% STAR Single Use Cameras QUESTION Digital Cameras, PDAs Low 2% CASH COW Film DOG Ribbon Printers High 10 1.0 0.1 Low Relative Market Share Table III-3: Boston Consulting Group Model By using the Boston Consulting Group Model, Table III-3, the area of most strategic importance lies in the Question and Star quadrants. Kodak’s newest products, digital cameras and PDAs, demonstrate Kodak’s ability to be innovative and up-to-date in today’s technology. Kodak’s single use cameras, in the Star quadrant, are a product that has changed with technology. Kodak’s innovation has kept the product from entering a Cash Cow stage by advancing from just film, single use cameras, to now incorporating digital technology into the single use product. Kodak must continue to stay one step ahead of its largest competitor, Fuji, to keep from losing market share. IV. Current Segmentation and Competitive Strategy Current Segmentation Usage Situation Benefits Sought Snapshots & Portraits Cinematography Medical Imaging Photo Development/Sharing Preserve Memories Intense Intense Moderate Intense Medical Technology Enhancement Weak Weak Intense Moderate Share Information/Pictures Intense Intense Moderate Intense Quality of Image Intense Intense Intense Intense Note: Intense, Moderate, and Weak refer to strength of competing companies relating to usage and benefits sought. In comparing Kodak with its competitors, it is important to look at the market segmentation and benefits sought by each of the markets. A market segmentation benefit analysis for Kodak is illustrated below. Table IV-1: Market Segmentation Benefit Analysis Kodak serves multiple segments using marketing strategies tailored to fit each segment’s wants and needs. Kodak’s specific differentiated segments include a photography group, a health imaging group, a commercial imaging group, and – their newest group – a display group. Of the benefits listed in Table IV-1, the most sought benefit across the board is the quality of image. Kodak has used this knowledge and thus incorporated quality imaging into their competitive strategy. At the same time, medical technology enhancement is the weakest benefit sought across two of the four usage situations. Therefore, Kodak must focus their primary resources and strategy on image quality. IV. Current Segmentation and Competitive Strategy Competitive Strategy Kodak has developed a competitive strategy in order to stay on top and above of its competitors. Name brand, usage simplicity, variety of products, and quality imaging are major components to their strategies. Kodak has worked diligently to sustain its popular name brand that has been around for many years and is trusted. Kodak has also focused on ease of use and simplicity. One such example is the digital camera, Kodak Easy Share. This digital camera can be attached to a transfer docking station, and with a single press of a button, can transfer pictures to either a computer or to a printer. Kodak’s photo paper encompasses variety of product and quality imaging. The photo paper is versatile and high quality and can be used with Kodak’s printers, but also with non-Kodak printers, making the paper appealing to even those consumers who may not have previously purchased Kodak products. Through an analysis of Porter’s Model of Competitive Intensity, Figure IV-1, Kodak’s position varies and is moderately stable. Kodak’s largest threat is Fuji Photo, which is also a global leader in the photo industry. Besides the risk of Fuji Photo, the threat of new entrants does not seem strong. IV. Current Segmentation and Competitive Strategy Competitive Strategy (Cont’d) The threat would have to stem from an entrant that would also bring a substitute to film and digital photography. As long as Kodak maintains a their commitment to their quality products and trusted brand name, buyers and suppliers will continue to benefit from the Kodak name and the competitive intensity will remain strong. Feature/Price Factors for Strategic Advantage Uniqueness Perceived by Customer Low Cost Position Volume Broad Market DIFFERENTIATED Film LOW COST PROVIDER Particular Segment FOCUS BASED ON EITHER DIFFERENTIATION OR LOW COST Single Use Cameras Lastly, Kodak’s competitive strategy, as described in Table IV-2, is primarily combined of a focus based on either differentiation or low cost. The strongest leader in the photographic world is the leader who has the ability to provide a differentiated product at a low cost. In order to stay ahead of Fuji Photo, Kodak has reduced product prices to consumers. This move has resulted in Kodak sustaining itself at the top, but according to financial statistics, as addressed in the financial analysis section, price-cutting has injured Kodak financially. Table IV-2: Porter’s Model of Competitive Strategy V. Sales Forecast A simple regression analysis was performed to project future Kodak sales based on actual sales data for the periods between YR1995 and YR2000. Microsoft’s Excel regression method was used to generate a relationship of sales to number of periods or years (Sales=15718.75-353xPeriod). Based on the sales projections, an average growth rate of -2.54% was derived as shown in Table V-1. The accuracy of the projection generated an “R square” value of 0.72 as shown in Table V-2. Table V-1: Sales Forecast Table V-2: Microsoft Excel ANOVA Analysis Output VI. Financial Analysis of Historical Financial Statements Short Term Solvency (000’s) EAST KD (EK) 2002 Industry Ave 1 EAST KD (EK)1 2001 Industry Ave 1 EAST KD (EK)1 2000 Industry Ave 1 Short Term Solvency Net Working Capital -$843,000.00 N/A -$737,000.00 N/A -$724,000.00 N/A Current Ratio 0.843 2.620 0.862 2.186 0.884 1.979 Quick Ratio 0.646 2.117 0.662 1.692 0.607 1.346 The proxy industry average was calculated using a proxy industry of Fuji Photo, Concord Camera, Lexar Media, Sony, and Canon. The data for each year and each company was gathered from both the Lexis-Nexus web site (www.ohiolink.com) and from the individual company web sites (This data was averaged without the Eastman Kodak data being included in the calculations. Table VI-1: Short Term Solvency Ratios vs. Industry The Short Term Solvency ratios shown in Table VI-1 above indicate that Eastman Kodak (EK) is currently having difficulties with their short-term obligations. Their Net-Working Capital amounts for the last three years have remained steady at almost three-quarters of a billion dollars. Table VI-1 also indicates that both the Current Ratio and Quick Ratio have also remained constant and well below the industry average. They appear to be using this additional debt in building their long-term assets rather than short-term assets such as cash, marketable securities, or inventory. This strategy may work for shareholders but makes EK look risky to Bondholders. That may be great for shareholders but not so great for bondholders wanting interest payments. VI. Financial Analysis of Historical Financial Statements Short Term Solvency (Cont’d) The photography supply industry is very competitive with minimal future growth due to the advent of digital technology being used in cameras. Knowing this, future sales and resulting cash flows will be much less predictable making Eastman Kodak a high risk for Bondholders. (000’s) 2002 2001 2000 Rate: 100 Yen = $1 EK (FUJIY) EK (FUJIY) EK (FUJIY) Short Term Solvency EASTMAN FUJI EASTMAN FUJI EASTMAN FUJI KODAK PHOTO3 KODAK PHOTO KODAK PHOTO Net Working Capital -$843,000 $7,272,150 -$737,000 $6,786,840 -$724,000 $6,230,950 Current Ratio 0.843 2.036 0.862 1.955 0.884 1.782 Quick Ratio 0.646 1.535 0.662 1.451 0.607 1.337 Table VI-2: Short Term Solvency EK vs. Fuji Photo When comparing Eastman Kodak to their major competitor, Fuji Photo, all of the Short Term Solvency ratios indicate that Fuji Photo is in a better financial position to meet their short-term obligations (Reference Table VI-2). We believe that EK’s weak position in this market will continue to erode leaving Fuji to claim a larger share. VI. Financial Analysis of Historical Financial Statements Activity and Efficiency Activity and Efficiency EAST KD (EK) 2002 Industry Ave EAST KD (EK) 2001 Industry Ave EAST KD (EK) 2000 Industry Ave Total Asset Turnover 0.960 0.959 0.990 1.127 0.985 0.982 Inventory Turnover 7.745 5.089 8.087 5.552 4.875 3.675 Average Collection Period 63.530 70.391 64.480 64.823 69.197 71.573 Table VI-3: Activity and Efficiency Ratios vs. Industry Eastman Kodak’s ability to use the firm’s assets to generate sales has remained steady and on par with the industry average for the last three years as shown on Table VI-3. The firm’s inventory turnover has beaten the industry average in each of the last three years. They appear to be better at managing their inventory than their industry competitors and better at converting that inventory into cash. Based upon the information above, in 2002 Eastman Kodak was burdened with 25 less days of sales in inventory than the industry average [360/7.745 –360/5.089]. Eastman Kodak’s ability to collect on their receivables has also remained constant over the last three years. Their average collection periods have remained either at or better than the industry average; that is an indication that the firm is able to effectively collect on credit accounts. When comparing EK with Fuji Photo, Eastman Kodak has outperformed their major competitor in each of the last three years (Reference Table VI-4). EK has implemented their lean strategy and it seems to have yielded significant benefits in terms of inventory management and the ability to turn their inventory into cash. VI. Financial Analysis of Historical Financial Statements Activity and Efficiency (Cont’d) Financial Leverage (Debt) EAST KD (EK) 2002 Industry Ave EAST KD (EK) 2001 Industry Ave EAST KD (EK) 2000 Industry Ave Debt Ratio 0.792 0.493 0.783 0.531 0....