Eastman Kodak

Eastman Kodak – Case Analysis Problem The problem in this case is concerned with Eastman Kodak losing its market share in film products to lower-priced economy brands. Over the last five years, in addition to being brand-aware, customers have also become price-conscious. This has resulted in the fast paced growth of lower priced segments in which Kodak has no presence. Kodak plans to address this issue by introducing a new brand, “Funtime” in the economy brand segment. Kodak also proposes to replace their Superpremium brand by launching “Royal Gold” which would target a broader audience. Solution If I were responsible for solving the problem, in addition to Kodak’s repositioning strategy, I would do the following: * While the strategy to enter the ‘Economy Brand’ segment is strong, I would set the price of Funtime at $2. 91 * Match the dealer margins given by other suppliers for the new product Funtime * Allocate $5 million of advertising support to support Funtime As an alternate strategy, we could also offer Funtime on a year-round basis. However this approach has some drawbacks which make it less attractive than our primary strategy. Segmentation Analysis Target Market: The US photo film market is 670 million rolls units and divided into four segments. As shown in Exhibit 1, the Superpremium segment with an average retail price of $4. 35 accounts for roughly 5% of the market. The Premium brand segment has an average retail price of $3. 49 and accounts for a 67. 67% market share. The fast growing Economy brand segment occupies about 13. 34% of the market with an average retail price of $2. 91. Finally the Price Brands segment occupies 14% of the market with an average price of $2. 0. Internal Analysis: Kodak’s flagship product, Gold Plus, enjoys approximately 66% of the market share with revenues of $2. 79 per unit. The total profit from Gold Plus without advertising expenses amounts to $371. 4 million. Kodak has no major competitors in this segment and continues to lead with its existing brand image. Kodak’s Superpremium product Ektar has per unit revenue of $3. 42 resulting in total profits of about $30. 7 million. As shown in Exhibit 2, Kodak’s net income comes to about $356 million. Focus Segments: From the above analysis we can conclude that Kodak has a stronghold on the Premium Brands segment with Gold Plus. However, Kodak is non-existent in the Economy Brands segment. The Economy Brands segment is currently growing at around three times the market growth rate and Kodak’s competitors are gaining market share through this segment. In a market that is becoming more price sensitive, Kodak’s attempts to gain market share through Ektar have not yielded results. Hence Kodak’s main focus segments should first be Economy Brands and then Superpremium Brands. Hence this reaffirms Kodak’s strategy of launching Funtime and Royal Gold in the Economy and Superpremium brand segments respectively. Pricing & Dealer Margins As Funtime is a new entrant in the economy segment, we can use the going-rate pricing method and match the price of this product with that of the segment leader. Even though the body of price-sensitive customers is increasing, the importance of brand name in the customer’s decision making is still strong, a fact reflected from the growth of the Economy segment versus the Price segment. The price of Funtime price should be set at $2. 1 – equal to the Economy segment leader (Fujicolor Super G). Such a pricing strategy will help to capture a significant proportion of the 40% “samplers” in the near term and increase the market share. As Funtime will be available only in lean seasons, it requires strong distribution support. Kodak must offer 25% dealer margin on Funtime to match other suppliers in the Economy segment. This will be consistent with the dealer margins of other suppliers and will provide an incentive for retailers to promote Funtime sales during off-seasons. The price of $2. 1 per film would allow Kodak to offer 25% dealer margin by keeping its margins reasonably intact. With the revised price of $2. 91 and dealer’s margin of 25% Kodak’s revenue is expected to be $3. 8 million. Increasing dealer margins to 25% is not a possibility in the case of Kodak Gold Plus since this would lead to a yearly loss of $77 million considering Kodak Gold plus unit volume in 1993. Advertising Support As Kodak is introducing Funtime to target the fast-growing Economy brands market and since it will be available only in off-seasons and in limited quantity, it should be supported by advertising. Kodak Gold Plus being the flagship brand will receive 60% of the dollar advertisement support. As Royal Gold has a larger profit margin ($0. 96 per unit), it will receive 30% of the dollar advertisement support. The remaining (10%) of the dollar advertisement will be used for supporting Funtime. The distribution of the marketing budget can be justified from the break–even analysis given in next section. Break Even Analysis Funtime: Advertising Budget for Funtime: $5 million Break-Even volume =Advertising budgetUnit Contribution =$ 5 million$0. 44 =11. 6 million units Cannibalization (only during off-season) Assuming that Kodak Gold Plus sells about 20% of its yearly sales during off-seasons, the resulting cannibalisation will amount to: 454 million units x 0. 2 x 0. 84 x 0. 05 = $3. 8 million Hence, Break-Even volume =$3. 8 million$0. 44 = 8. 6 million units Based on Exhibit 5, we will be able to realise break even sales within a year. Royal Gold: Profit from Ektar = $30. 7 million (Exhibit 4) Number of Royal Gold units to be sold to recover this =$30. 7 million$0. 96 = $31. 9 million units Advertising budget for Royal Gold: $15 million Break-Even volume: =Advertising budgetUnit Contribution =$ 15 million$0. 96 =15. 6 million units Incremental gain as a result of cannibalization of Gold Plus: ($0. 96 – $0. 84)*0. 05*454 = $2. 7 million This profit is equivalent to =$2. 7 million$0. 96 = 2. 8 million units Equivalent sales required = 44. 1 million units Based on Exhibit 5, we will be able to realise required sales within a year. Alternate strategy With the focus on the low-priced brands, it makes sense to evaluate the option of making the Funtime brand available through the year vis-a-vis the currently planned periodic off-season availability. However, in doing so, the Funtime brand dents into Kodak’s flagship – the Gold Plus’ market. Critique of alternate strategy: If Funtime is made available during the peak-sales months as well, it is likely to dent into Gold Plus’ market share by 5%. So as to break even, we would need to sell 65. 9 million units of Funtime to make up for this cannibalisation (Refer Exhibit 6). However, given the current market scenario this seems improbable. Hence, it doesn’t make business sense to sell Funtime through the year. Conclusion With full fledged execution of the above-stated strategy, Eastman Kodak would establish itself successfully in all three significant segments viz, Super-premium, Premium, and Economy. This newly established presence would also lead to above-average growth in revenues. This would not only help Kodak in regaining its lost market share but also facilitate in further strengthening its position as the leader in the film roll market. Exhibit 1 Segmentation of US Film Market in 1993 (Approx. )| Segments| Number of rolls (million units)| Average Unit Price ($)| Total Market Size | | | | ($ million)| Superpremium brand| 33. 5| 4. 35| 145. 7| Premium brand| 453| 3. 49| 1581| Economy brand| 89. 5| 2. 9| 259. 6| Price brand| 94| 2. 4| 225. 6| TOTAL| 670| -| 2211. 9| Exhibit 2 US Sales Revenue & Profit for Kodak in 1993| KodakProduct| Unit Volume (million units)| Revenue($ million)| Net Profit ($ million)| Advertising Expenses($ million)| Net Profit including Advt Expenses ($ million)| Kodak Ektar1| 26. 8| 91. 55| 35. 7| 5. 0| 30. 7| Kodak Gold Plus| 442. 2| 1234. 62| 370. 39| 45. 0| 325. 39| TOTAL| 469. 0| 1362. 17| 406. 1| 50| 356. 1| : Assuming Kodak Ektar contributes 4% of unit sales & Kodak Gold Plus contributes 66% Exhibit 3 Proposed Market Segmentation in 1994| | Primary Strategy1| Alternate Strategy2| BRANDS| Number of rolls3 (million units)| Average Unit Price ($)| Total Market Size ($ million)| Number of rolls (million units)| Average Unit Price ($)| Total Market Size ($ million)| Superpremium brand| 57. 3| 4. 25| 243. 5| 57. 3| 4. 25| 243. 5| Premium brand| 439. 7| 3. 49| 1534. 5| 421. 4| 3. 49| 1470. 7| Economy brand| 107. 3| 2. 90| 311. 2| 125. 6| 2. 90| 364. 2| Price brand| 104. 3| 2. 40| 250. | 104. 3| 2. 40| 250. 3| TOTAL| 708. 6| -| 2339. 5| 708. 6| -| 2328. 7| 1: Kodak Funtime will be sold during off-season. 2: Kodak Funtime will be sold throughout the year. 3: Assuming 3% annual growth for Superpremium and Premium Brands; 15% for Economy Brands and 11. 4% for Price Brands. Exhibit 4 Pricing & Retailer Margin for Kodak Products| KodakProduct| Unit Price ($)| Retailer margin per unit5 ($)| Kodak revenue per unit ($)| Unit Profit ($)| Kodak Ektar1| 4. 27| 0. 85| 3. 42| 1. 33| Kodak Royal Gold2| 4. 19| 1. 15| 3. 35| 0. 96| Kodak Gold Plus3 | 3. 49| 0. 70| 2. 79| 0. 4| Kodak Funtime4| 2. 91| 0. 73| 2. 33| 0. 44| 1: Kodak Ektar gross margin is 89%, other costs are 50% of unit revenue. 2: Kodak Royal Gold gross margin is 88%, other costs are 50% of unit revenue. 3: Kodak Gold Plus gross margin is 70%, other costs are 40% of unit revenue. 4: Kodak Funtime gross margin is 55%, other costs are 30% of unit revenue. 5: Assuming, Kodak Ektar and Kodak Gold Plus have 20% retailer margin Exhibit 5 Sales Revenue & Profit for Kodak in 1994| | Primary Strategy| Alternate Strategy| Kodak Brand Name| Unit Volume1 (million)| Revenue ($ million)| Advt. Expenses ($ million)| Net Profit incl. Advt. Expenses ($ million)| Unit Volume2 (million)| Revenue ($ million)| Advt. Expenses ($ million)| Net Profit incl. Advt. Expenses ($ million)| Kodak Royal Gold| 50. 37| 168. 7| 15. 0| 33. 35| 50. 4| 168. 7| 15. 0| 33. 35| Kodak Gold Plus| 428. 2| 1194. 6| 30. 0| 329. 7| 410. 0| 1143. 9| 30. 0| 314. 4| Kodak Funtime| 19. 96| 46. 5| 5. 0| 3. 78| 38. 1| 88. 9| 10. 0| 6. 79| Total| 498. 5| 1409. 8| 20. 0| 366. 83| 498. 5| 1401. 5| 55. 0| 354. 54| 1: Assuming 5% cannibalization of premium segment by Kodak Royal Gold and 1% cannibalization by Kodak Funtime. : Assuming 5% cannibalization of premium segment by Kodak Royal Gold and 5% cannibalization by Kodak Funtime. Exhibit 6 Advertisement Budget = $10 million Break-Even volume =$10 million$0. 44 = 22. 7 million units Cannibalisation (throughout the year) 454 million units x 0. 84 x 0. 05 = $19 million Break-Even volume =$19 million$0. 44 = 43. 2 million units Sales required to break even = 65. 9 million units ——————————————– [ 1 ]. We assume 5% cannibalisation of Kodak Gold Plus by Funtime

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