Kodak/Fuji- Questions

1
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?

2
Porters Five Strategic Forces
Degree of Actual and Potential Competition
Threat of New Entrants
Rivalry Among Existing Firms
Threat of Substitute Products
Industry Profitability
Bargaining Power in Input and Output Markets
Bargaining Power of Buyers
Bargaining Power of Suppliers
3
Rivalry Among Existing Firms

• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barriers

4
Growth -- World Wide Market

• U.S. 31
• Western Europe 23
• Japan 16
• Other 30

5
Growth
6
Growth
7
Rivalry Among Existing Firms

• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barrier

8
Concentration

• Kodak
• Fuji
• Agfa
• Polaroid
• Konica

9
Concentration Film
10
Concentration Paper
11
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.

12
Rivalry Among Existing Firms

• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barrier

13
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

14
Rivalry Among Existing Firms

• Growth
• Concentration
• Differentiation
• Switching Costs
• Scale/ Learning Economies
• Fixed-Variable Costs
• Exit Barriers

15
Scale - Exit Barriers

• Very heavy fixed costs
• Very high levels of RD
• Exit barriers probably different from a legal
  perspective depending on the country of operation

16
Threat of New Entrants

• Scale economies
• First Mover advantage
• Distribution access
• Relationships
• Legal barriers

17
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)

18
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 RD dollars in
  this area

19
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

20
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

21
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

22
Fuji

• Quality comparable to Kodak
• Export sales account for 40 of sales
• RD runs at about 7 of sales

23
Compare the financial performance of Kodak and
Fuji for the period 1982 to 1992.

• Go to Excel

24
Pre-tax margins

• 82-84 85-88 89-92
• Kodak
• 14.7 10.2 4.9
• Fuji
• 18.1 18.3 16.9

25
ROA

• 82-84 85-88 89-92
• Kodak
• 8.6 5.3 2.4
• Fuji
• 7.1 6.0 5.2

26
Asset Turnover

• 82-84 85-88 89-92
• Kodak
• 0.977 0.841 0.809
• Fuji
• 0.893 0.785 0.688

27
ROE

• 82-84 85-88 89-92
• Kodak
• 12.5 12.7 8.6
• Fuji
• 12.9 10.2 8.5

28
Sustained Growth

• 82-84 85-88 89-92
• Kodak
• 4.3 3.9 0.3
• Fuji
• 12.0 9.4 7.9

29
Days Inventory

• 82-84 85-88 89-92
• Kodak
• 110 119 88
• Fuji
• 135 116 118

30
Days Receivables

• 82-84 85-88 89-92
• Kodak
• 65 84 80
• Fuji
• 73 66 70

31
Days Payables

• 82-84 85-88 89-92
• Kodak
• 22 35 33
• Fuji
• 60 66 71

32
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

33
SGA as Percent of Sales

• 82-84 85-88 89-92
• Kodak
• 19.8 24.3 27.8
• Fuji
• 19.4 21.5 24.9

34
RD as Percent Of Sales

• 82-84 85-88 89-92
• Kodak
• 7.3 7.9 7.4
• Fuji
• 5.8 6.0 6.1

35
Analysis of NROA-1992

• Kodak Fuji
• ROE 20.5 7.0
• RNOA 8.2 6.9
• NOPAT Mgn7 6.5
• FLEV 2.318 .035
• Spread 4.7 3.7
• Op T/over 1.269 1.066

36
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

37
Accounting Analysis - Goodwill

• Kodak uses 40 year life
• Fuji uses 20 year life

38
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

39
What does the ratio analysis show

• Serious concern with Kodaks 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

40
What does the ratio analysis show

• Collections of receivables for Kodak have
  lengthen a bit Fuji has remained about the same
• Kodaks COS ratio is slightly better
• Kodak has more SGA expenses
• Kodak spends more on RD

41
What does the ratio analysis show

• Fuji maintains about an additional month of
  credit from suppliers
• Kodaks ROE is comparable to Fujis.
• Kodak has more debt.
• Kodak pays out significantly more in dividends
  than does Fuji

42
What factors explain any observed differences in
operating performance for the two firms?

• Organizational differences?
• RD strategy
• Business Diversification
• Pricing strategy

43
Organizational Differences

• Kodak has traditionally been centrally organized
• Recently tried to decentralize its imaging and
  information businesses
• Corporate administrative duplicated SGA went up
• Fuji appears to have been always decentralized

44
RD Strategy

• Kodak has consistently out spent Fuji by 1 to 2
• Kodak is also involved in the pharmaceutical
  industry which is heavy RD

45
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?

46
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 Kodaks revenue, 90-92, from
  outside the US came from imaging (Core Business)
  versus 27 domestic revenues

47
Differences in financing strategies and
performance of the two firms?

• Kodaks 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

48
Differences in financing strategies and
performance of the two firms?

• Debt policy
• Kodaks interest bearing debt to total capital
  (interest-bearing debt equity) has ranged from
  around 7 in 1982 to around 63 in 1991
• Fujis 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
  dont find that the case here?

49
Questions for discussion

• Does Kodak retain its non-core businesses?
• How does Kodak respond to Fujis challenges to
  their home photo market?
• How does Kodak respond to the challenges from the
  generic label film?
• How much RD effort should be allocated to
  electronic imaging?

50
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

51
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
  Kodaks access to the Japanese Market.