Japan Technology

"Success is never a destination - it is a journey" (Satenig St. Marie) and there is a company that understands that journey. Kodak has been around for many years providing families around the world with innovative and high quality products. Many homes worldwide recognize and associate film with the Kodak name. "The company ranks as a premier multinational corporation, with a brand recognized in virtually every country around the world" (Kodak History). However, the changes in technology create a dilemma for Kodak. The company's considerations for digital imaging will change its long history with 35mm film production. Will the shift from 35mm to digital imaging affect Kodak's successful journey? To find an answer to this question, we must analyze Kodak from an economic perspective. An economic perspective views many different factors and determines whether it is in Kodak's best interest to pursue digital imaging, will give enough evidence to support a rational decision.

The era of digital photography is well under way. After surpassing sales of film cameras in 2003, the demand for digital devices in the US and other developed markets continues to swell. According to market research firm IDC, during the first nine months of 2004, "U.S. shipments of digital still cameras grew by close to 50%, vs. the same period in 2003. Conversely, we think U.S. shipments of traditional film cameras declined at a double-digit rate in 2004, and we expect a similar drop in 2005" (Stice).

With the technology currently available, digital photography holds several major advantages over traditional film photography. The benefits can be categorized by cost, time, and versatility (Bhatia). Kodak wisely restructured its manufacturing to remain a strong competitor in the industry's market demand for traditional 35mm film. Film cameras are slowly declining in existing markets. Kodak takes full advantage of the situation by shifting its core focus to the increasingly demanded digital imaging technologies. But since emerging markets continue their demand for traditional products, an efficient number of production factors are still available in China and India, where Kodak will continue service and support products for existing markets. Their strategy is to fill the profit gap left from traditional product sales losses with sales gains from the new digital products plus gain top market share.

In 2004, Kodak Operating Systems (KOS), charged with Kodak's Manufacturing and Logistics, began making manufacturing plans to restructure decisions as they realized the opportunity costs of having un- or under-used factors of production at PPC1 (See Fig. 1). Some facilities, machines, and labor were not being used, while other factors were not be utilized for their multiple duty potential. Pt. A1 represents this underutilization. Kodak's goal uses the least amount of factors of production to achieve the greatest amount of product in order to see economies of scale. Using less resources and smaller facilities means the PPC curve shifted inward (PPC2), therefore KOS had to determine the best combination of traditional and digital products they could most efficiently manufacture along their production possibilities curve. Point DP1 represents an ideal situation for Kodak: multiple resources focused on the core digital technologies with only a minimal but efficient amount of resources to fill the traditional products demand. This presented the added burden of predicting the future of the traditional product demand declines in order to remove fixed costs before volumes fell. KOS' success rewarded the company with reduced production costs of traditional products that allowed for extra cash flow and freed up assets to utilize for the restructuring project.

Although the initial cost of digital imaging equipment is comparable to or only slightly higher than professional 35-mm film photography equipment, the cost savings prove significant over time. "In the professional light or producer/consumer class of digital cameras, many models currently sell for less than $1250" (Bhatia). Overall cost savings result from a few differences between digital imaging and traditional film photography. First, in digital imaging, no film is purchased. An individual may keep images in removable storage media, also known as memory cards. After images are taken, they are transferred from the memory card to a computer, and the memory card is erased for reuse. This process can be repeated over and over. In addition, a person has the ability to erase inadequate images from the memory card while still in the camera. This flexibility allows the user to retake as many images as desired because reviewing or deleting images has no cost factor.

Memory card prices range from $20 to $90 depending on storage capacity. With these reasonable costs, demand for digital camera memory cards continues to increase, according to the law of demand ceteris paribus. Considering the average price of a 256MB memory card is $50, what will happen if Kodak reduces prices further? How will this affect revenue? The answer depends heavily upon the price elasticity of the memory cards because price elasticity and total revenue provide close links with one another. Consider the following hypothetical example. Customers currently buy one 256MB memory card from Kodak at the price of $50. The price decreases to $40 and customers continue to buy one memory card. This would make the price elasticity of demand zero or inelastic. Therefore, because the memory card is inelastic, total revenue will increase as price increases or decrease as price decreases.

Digital imaging is also finding its way into doctor's offices because digital images are convenient because of their linkage to an image database, which allows the user to attach patient information, pathology or other date to each image. Filing photographs and 35-mm slides on the other hand can be time consuming and requires significant office space. Since digital images are stored on a computer, they do not require the physical storage space of traditional prints and trays of 35-mm slides. Desired images obtain retrieval instantly if the clinician knows any of the attached information. In particular, this aids in the sequential retrieval of images made on a patient during subsequent visits or in the viewing of all images in the collection of a particular disease process when putting together a lecture.

However, Kodak enters the fray with a major disadvantage. It continues to generate the majority of its sales in the traditional film market, which is experiencing long-term decline. Although the move to lure customers toward its digital offerings makes strategic sense, "the near-term impact is being somewhat mitigated by what we view as