Caso Kodak

ESTIMATING DEMAND IN EMERGING MARKETS FOR KODAK EXPRESS

David M. Currie and Han Alon wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other idenWing information to protect confidentiality.

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Anna Johnson gazed at the information she had accumulated on various countries and wondered how she could use it to estimate the demand for Kodak Express outlets. She had learned from the Kodak market research department that demand for KE outlets depended on household income. To support one Kodak Express outlet, one of che following was needed: one million households with annual incomes equal to or exceeding the equivalent of US$15,000, two million households earning the equivalent of between US$10,000 and US$14,999, four million households earning the equivalent of between US$5,000 and US$9,999 or 10 million households with incomes less than the equivalent of US$5,000 (see Exhibit 1). According to the market research department, these averages seemed to apply throughout the world, when international dollars (purchasing power parity adjusted) were used as a benchmark.

Unfortunately, the statistics Johnson was able to find did not tell her che household income in U.S. dollar¬equivalents in various countries or how many households in each country fell into a specific income bracket. She would need to complete a series of intermediate calculations to transform the original macroeconomic data to information that was useful for estimating the demand for Kodak Express outlets. Then, on the basis of market demand, Kodak would be able to use this information to decide how to allocate its investments across the various emerging markets.

The purpose of Johnson's calculations was to identify che markets with the most potential. The commitment to open KE outlets in a particular country was a significant investment that needed to have a promising Further, determining the markets with the most potencial was in line with Kodak's philosophy of "investing where you sell the most."

Johnson sat in front of her computer, attempting to develop a model that would help her to estimate the market demand for KE outlets. She picked up a pencil and paper and began to sketch the process she would follow to use the data at her disposal to determine demand for KE outlets. Once she detened che process, she would prepare a spreadsheet model, plug in che data for a country and see whether the result was reasonable.

This document is authorized for use only by HILDA ANAMIN MATEOS in Econom?a para la Toma de Decisiones

Enero 2013 taught by Alfredo Gonzalez Cambero from January 2013 to April 2013.

For the exclusive use of H. MATEOS

Page 2 9B11A026

KODAK'S GLOBAL STRATEGY

The manufacture and distribution of photography items had been the major focus of Eastman Kodak Corporation since George Eastman commercialized personal cameras using roll film in 1888.1 The next year, the company became internacional when it extended distribution of products outside che United States. In 1900, Kodak introduced the first Brownie camera, the company's effort to make photography available to a mass market. By 2002, che company's products were available in more than 150 countries. However, the company was faced with increased competition from two fronts: Japan's Fuji Photo Film Co. produced and marketed many of che same photography products as Kodak, and Kodak had been slow to respond to che emergence of digital photography .2

Worldwide revenues for Kodak's products exceeded US$5.5 billion in 2010, a decrease of US$800 million compared with 2009 and a decrease of US$1.6 billion compared with 2008. The decline was partially due to the global economic slowdown, particularly in Europe, Middle East and Africa: revenues from these regions had decreased by more than US$1 billion in the previous two years.3

To offset the decline in sales volume in Europe, Middle East and Africa, Kodak's strategy was to expand sales finto emerging markets such as India and China. Because of China's enormous population and its citizens' cultural affinity for taking pictures, China was one of the cornerstones of Kodak's emerging market strategy. Even expanding che market to just half of China's population would add the equivalent of another United States or Japan to che world photographic market .4

KODAK EXPRESS OUTLETS

Despite Kodak Express outlets being independently owned, they were contractually obliged to buy and display exclusively Kodak products, and they utilized Kodak's store specifications and the company's brand elements. The outlets provided three benefits to Kodak:

1. A front-line retailing presence

2. Wide distribution of Kodak products, services and brand name

3. A strategic asset for Kodak for market development

The company was making an effort to have a more extensive distribution of its Kodak Express outlets throughout the world. Through these outlets, Kodak planned to launch "grass-root marketing development progams."5

Kodak, "Building the Foundation," hftpl/kodak.wm/US/en/corp/kodakHistoryMuildingTheFoundation.shtml, accessed January 26, 2004.

2 Daniel Gross, Photo Finished: Why Eastman Kodak Deserves to Lose Its Dow Jones Industrial Average Membership," Slate January 6, 2004, hftp://slate.msn.com/ida09351, accessed January 26, 2004.

Kodak 2010 Annual Repod;

~.envisionrepods.comffiW2011/22103MA11V38495aae4W4783a4829c3e66124a1Kodak AR 10k Secured 3-28- 11.pdf, accessed Juno 16, 2011.

4 David Swift, "Remas of David Swift, Chairman & President, Greater China Region, Eastman Kodak Company," Goldman Sachs 21st Century China Conference, September 1999, pp.1-8.

5 Ilan Alon, "Interview: International Franchising with Kodak in China," Thunderbird International Business Review, November/December 2001, pp. 737-754.

This document is authorized for use only by HILDA ANAMIN MATEOS in Econom?a para la Toma de Decisiones

Enero 2013 taught by Alfredo Gonzalez Cambero from January 2013 to April 2013.

For the exclusive use of H. MATEOS

Page 3 9B11A026

DATA AVAIBILIW

Johnson focused on four sets of data that were readily available from reliable sources for a variety of countries: population, purchasing power, income distribution and average household The first data set, population, seemed straightforward. Any analysis of a country's purchasing habits would begin with consumers, whether on an individual (per capita) basis or a household basis. Population estimates for 2010 are shown in Exhibit 2. More recent statistics were difficult to locate because most countries conducted a census only once every 10 years. Between censuses, all population statistics were estimates.

Determining the dollar-equivalent level of income from one country to another was a more challenging task. Many statistics comparing one country with another merely converted data into U.S. dollars using an average exchange rate for the year. Although Chis method was useful for some purposes, it was potenfially misleading when used for consumption pattems because it ignored the cost of living from one country to

another. For example, a family eaming B65,000 in China eamed the equivalent of approximately

US$10,000 using an exchange rate conversion of RMB6.5 RMB per U.S. But RMB65,000 in China purchased much more than US$10,000 purchased in the United States; thus, the family in China would be considered much better off by Chinese standards, and their consumption pattems might be closer to a family in the United States eaming US$48,000.

To account for Chis difference, economists frequently standardized data for differences in purchasing power, called purchasing power parity (PPP). Johnson was able to find gross domestic product (GDP) per capita in U.S. dollars using PPP for the countries in which she was interested (see Exhibit 3).

A related problem was that GDP was not the same as national income, and Johnson needed to know a household's income. After some research, she discovered that because the difference usually was not significant, economists frequently used GDP as a proxy for national income. Therefore, the GDP per capita for these countries could serve as a substitute for income per capita. That meant that the average person in India eamed the equivalent of US$3,339 annually on a PPP basis in 2010.

Income distribution was another important issue because if more people eamed low incomes in a country, they wouldn't be able to support as many KE outlets. Johnson needed to determine how many households corresponded to different income levels for any country. Data on income distribution are shown in Exhibit 4. For any country, population was divided into equal portions called quintiles (fifths), and each quintile showed the share of national income accruing to that quintile. For example, in India the bottom 20

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