Eastman Kodak was the industry leader in film production for several years and dominated the market with little or no serious business competition from other companies. The company enjoyed this exclusive position until the 1980s when increased competition from new contenders challenged the future success of Kodak. These competitors developed high-quality film in direct competition with Kodak, while embracing technological advances to introduce new, successful products into the market faster than Kodak could. In response, Kodak saw its market position erode and stock prices fall. Kodak elected to make significant organizational changes in the company to regain its competitive advantage and reclaim its position as a leader. However, these changes were made in the wrong way and the company was unable to regain lost profits or recapture its market share.
For many years one single name was synonymous with film – Eastman Kodak. Before the 1980s, the firm had nearly absolute control of the total market, with little competition from other companies. However, other competitors eventually developed technology that could produce high-quality film in competition with Kodak. Unfortunately for Kodak, the intrusion on their market share did not end here. While Kodak historically controlled the timing of new products into the market, soon “improved communications, design capabilities, and robotics” made it easier for other companies to gain this control. They introduced products quicker and easier than Kodak, further eroding Kodak’s market position, and resulting in significant financial losses for the company (Brickley et al, 2008, p. 359). In response, Kodak made significant organizational changes in the company, seeking to regain its competitive advantage (Buell & Aikman, 1985). The purpose of this paper is to examine these changes.
Kodak was motivated to make changes in its organizational structure as a result of increased competition. As Kodak saw its market share erode, the company also saw its stock prices and earning per share tumble (Brickley et al, 2008, p. 359). However, during that same time, profits soared at The Fuji Corporation and other companies (“Fuji”, n.d.). Senior leadership soon realized that they had to make significant changes to the company’s organizational architecture to regain lost profits and reclaim its market share.
Unfortunately for Kodak, the company made significant mistakes in implementing these changes. Historically, decisions at the company were made exclusively by senior leadership. However, the company overhauled the decision-making structure and created independent business units, each with profit-and-loss responsibility with unit leaders now having decision-making authority. The vision behind this change was that the new structure would allow the company to introduce new products into the market more efficiently (Brickley, 2006, p. 359). According to the text, this change was ineffective and did little to help the company.
The second change in architecture was the revision of management compensation structures. In 1987, Kodak adopted a “Management Annual Performance Plan”, decreasing manager salaries and adding a variable compensation element to their compensation package (Brickley, 2006, p. 359). Like the failed decentralization plan, the MAPP did not have the intended effect on these managers, nor on the company’s profits.
There were other steps that Kodak could have taken to implement a new and successful organization structure. The company made radical changes to the corporate culture without first considering all its elements. Certain managers historically succeeded at Kodak because they were “excelled in office politics” (Brickley, 2006, p. 359). It is also well-established that “agents do not act in the best interests of principles automatically” (Brickley, 2006, p. 335). As such, these employees presumably continued with the same behavior, while the company failed to invest in significant monitoring activities to ensure that they made the requisite changes.
Further, despite their new-found responsibility, the managers did not have the appropriate information to be successful. The case study is unclear as to what the company expected regarding creativity and profitability, but several Kodak launches failed during this time (“Eastman Kodak”, n.d.”). Additionally, the performance-based system appears to be based on asymmetrical information, with senior leadership having more information than the subordinates required (Brickley, 2006, p. 269). Without this information, the managers were offered a revised compensation structure that would be effective in cutting costs for the company but did not serve in their best interests.
Lastly, the failure of Eastman Kodak is a true example of economic Darwinism. In theory, Darwinism is about the survival of the fittest, including the important component of reproduction (“Darwinism”, 2008). To remain successful in the market, Kodak needed to continue to be competitive, and provide consumers with the quality products that they had come to expect, in a timely fashion. Instead, their new products failed, and the company is no longer regarded as an industry leader (Buell & Aikman, 1985). As the external business environment changed, Kodak failed to evolve with it and ultimately needed to file for bankruptcy while it continues to try and reinvent itself (AP News, 2014). Arguably, the damage is done, and the company may now be a dinosaur.
Following increased competition from other companies, Eastman Kodak needed to make certain changes to its organizational structure. These changes should include changes to decision making authority, compensation and performance appraisals (Brickley et al., 2008, p. 359). However, because Kodak made these changes the wrong way, the company was unable to regain lost profits or recapture its market share.
AP News. (2014, March 12). Eastman Kodak names Clarke as new CEO. Bloomberg Business Week. Retrieved from http://www.businessweek.com/ap/2014-03-12/eastman-kodak-names-clarke-as-new-ceo
Brickley, J., Zimmerman, J., & Smith, Jr., C. S. (2008). Managerial economics and organizational architecture (5 Ed.). Boston: McGraw-Hill Irwin.
Buell, B, & Aikman, R (1985, June 10). Kodak is trying to break out of its shell. Business Week, 92.
Darwinism: Why we are, as we are. (2008, December 20). The Economist. Retrieved from http://www.economist.com/node/12795581
Eastman Kodak Company. History. (n.d.). History of Fuji Photo Film Co., Ltd. Retrieved from http://www.fundinguniverse.com/company-histories/eastman-kodak-company-history/
Fuji Photo Film Co., Ltd. History. (n.d.). History of Fuji Photo Film Co., Ltd. Retrieved from http://www.fundinguniverse.com/company-histories/fuji-photo-film-co-ltd-history/