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'WE ARE ABOUT HALFWAY THROUGH WHERE WE NEED TO BE'By telephone from Rochester, N.Y., Kodak CEO George Fisher shared his perspective on the company's problems and future with correspondents Geoffrey Smith and William C. Symonds. (Note: This is an expanded version of the interview that appears in the October 20, 1997 issue of Business Week.)
A: In a sense, yes, but in another sense, no. We are about halfway through where we need to be in the restructuring and turnaround of Kodak. That is why I signed on for two more years. The first half of this thing was the easy part--restructuring and focusing on some fundamentals: cycle time, cost improvement through productivity improvement, filling product holes that we had, and getting growth initiatives started. We knew there would be some immediate cost-reduction benefits from the moves we made. We saw those for the first three years. But we also knew that unless the growth initiatives kicked in, it would be difficult to sustain improved returns on net assets without significant cost reductions. In that sense, we're pretty much on track. Halfway through the year--at the end of the second quarter--our return on net assets is running at 25%, while return on equity is 31%, and aftertax profit is at 9%. Those are not bad measures compared to three or four years ago. But a funny thing happened on the way to the forum, and we had two things that we didn't properly anticipate. No. 1 was the very significant and extremely aggressive pricing actions taken in the U.S. marketplace by Fuji. Those were more aggressive than we had expected by far. That is putting considerable presure on our profits. The second thing is the strength of the dollar. We did not anticipate that the dollar--and the relative values of the yen, mark, and pound--would be where they are. That will cost us $500 million in sales and 45 cents [per share] on earnings. Even so, we are gaining share in most of the world's markets. We lost some share in the U.S. market. But last year we gained share in worldwide consumer film. In the first half, we were about flat worldwide. Those two things [were] superimposed on the fact that our growth initiatives--emerging markets, digital, and APS [advanced photo system]--have not come in as fast as we hoped. So we are in the situation we announced: Our earnings will be down about 25% from last year's as a whole. None of us like that, obviously. It forces us to deal with reality in the following sense: We have to assume that the exchange rate is nothing we will do anything about. So therefore we have to assume the dollar will stay strong and maybe get stronger. We will have to assume that we have to get our cost structure in line to be flexible enough to deal with the price aggressiveness of our competitors going forward without giving up market share. So we are in the midst of implementing actions that would significantly revamp our cost structure.
A: My job is to come out with a healthy, vital, growing Kodak, which means we have to continue to invest in the future. So a lot of the reductions we will take will be necessary to make sure we continue to fund our future in various growth initiatives. I am not talking about stripping the place, or about not investing in the future. This [process of turning around Kodak] is a marathon, not a 100-yard dash. What we will have to do is look very hard at our overhead structures, our management structures, and our portfolio in the film business and equipment business and make some tough decisions with respect to people. Yesterday, we completed the first round, where we reduced our management ranks by [some] 20%. This ain't fun.
A: Our senior people have implemented the plan. It is based on going through strategic priorities and sorting out what is important. These are all good people, and a lot of them have service with Kodak. At the same time, the essential thing to do is to pare down the management structure as part of the effort to streamline decision-making. [To do that] we have gone through the organization step-by-step over the past few weeks. Going forward, we will proceed to reduce our administration overhead functions by some percentage over the next few months. We have set out ambitious productivity improvement goals in equipment manufacturing and in sensitized goods manufacturing [i.e., film]. We are also in the middle of looking at our portfolios in equipment manufacturing, which includes digital, and in R&D, which supports digital and sensitized goods. We are in the middle of this whole process. I can talk more to this in November.
A: No, I don't expect to lay out the whole thing in November. This will be a continuing thing. We won't have the whole thing defined by then. We will say what we can say by then. We will make it clear that some savings we will realize will support our investments in the future.
A: In a large part of the digital world, you need to run SG&A [selling, general, and administrative costs] around 15% [of sales], depending on the form of distribution. Now we're at 27%. I didn't say we would get the whole company down to 15%. But we had a plan to reduce this significantly over five years. What the events of this summer have shown us is that we don't have that time. So we are accelerating all our plans. By how much? [We'll] probably accelerate it over one to two years.
A: We haven't even decided to take a charge yet, so to say we are going to take one would be misleading. We are looking at what might be necessary in the way of a charge. We haven't reached any conclusions.
A: I don't know how many of these people have ever run a company. They are looking at numbers and not looking at running the business. We will do whatever we have to do to be healthy and still have a healthy future. We are very mindful of the need to reduce costs. Q: Some of your critics say your problem is you're too much of a nice guy. A: I can't help it if I'm a nice guy. My real responsibility is to our shareholders and our employees to make sure I make the right total decisions. We have made some very hard decisions. I don't know of very many companies who have restructured the way we have and sold off major chunks of the business and taken out 15,000 people. So we have done some awful hard things, and the employees hae been very resilient. Some people lose sight of what we have done. Having said that, I am a nice guy, and I hope I remain one. Q: Do you plan to make significant changes in strategy? A: To the outside world, it may look that way. We will accelerate some of the things we started over the last few years. But fundamentally, we are not changing our strategy.
A: That is a very good question. There is not a home market right now. There is a PC desktop market, and people like Cannon and Epson are doing a good job there. We don't intend to compete with them. But in the consumer space [as opposed to PC market], we will compete. When the time is right, we will have products to offer them, whether we offer them or source them from somewhere else. The printers that we have right now in our kiosks are very high quality and very good. It's the type of quality you'll ultimately need for the consumer market. Today's ink-jet printer doesn't have that. We have lots of options. But this is a critical point in our future. The digitization strategy that will carry us for the next 10 years is one that assumes people still capture most of their pictures with film, and we subsequently put them into the digital domain by scanning them at kiosks or having people selecting them to have them scanned when the film is developed. The latter opportunity give us the opportunity to provide all sorts of picture services, including shipping pictures [images] from point A to point B. So we are not just putting kiosks out. The kiosks are nodal points on a picture network so pictures can move all over the world and over each country in a seamless way.
A: Like any company, we have had problems in any dimension of running the business. I would say that marketing is an area where we could improve. It is the reason we brought in Carl Gustin [to be head of marketing]. We are segmenting marketing activities and one of [President] Dan Carp's real strengths is marketing. I'm basically a technologist, but I have had some of the biggest marketing successes in the high-tech world. I consider myself a pretty decent marketer. We have had a myriad of execution problems, but nothing beyond the normal. Had we not seen this excessive pricing action in consumer film, and had not the dollar been so strong, we would be having a totally different conversation. I've been quite public on Advantix, where we've made some mistakes. So we do need to be strengthening ourselves in marketing.
A: We're sitting there with almost 70% market share and you [critics] want us to be a gunslinger. But you can't be reckless, or you'll throw hundreds of millions of dollars down the drain with one slip of the tongue. But we have been tactically responding to a lot of the pricing issues we've seen in the marketplace. We'll be saying more about this in November. But even then, no one can seriously think I'm going to tell the world what my strategy is on pricing color film. Guess what, I'm not going into great detail. We certainly do not intend to continue to lose share at the rate we lost it over the summer months, which was two to three points. We've lost a point or point and half of share [every year] for the last 15 years. We can live with it up to a point. The intention is not to lose any share in U.S. maket. And we cannot live with losing share [like we did] this summer.
A: In the long-term it is very important. In the short term, it probably won't yield that much. We feel confident we will get favorable judgments on major parts of this case. But the process is such that undoubtedly the Japanese will appeal this. They will drag us through that, and then once they get the final decision, they have 15 months to implement it before we [the U.S.] can take unilateral action. So we are talking about a couple of years' process under favorable scenarios. We have never deluded ourselves that this is a short-term answer to the Japanese market.
A: I think we could always get better. We've made a lot of improvement. It was a strong culture with a strong set of values before I came here. But the ability to change quickly in light of quickly changing market conditions remains a big issue for this company.
A: It depends on pricing pressures and [the dollar]. But with the growth initiatives we now have under way, I think long-term we can meet the 10% annual EPS growth rate, year over year. That will take some reasonable growth. I'm still pretty confident we can get there. I am including this year in that average. That means we'll have some good years and bad years. [But even] with a 25% decline [this year], on average we'll meet our commitments and have enough revenue growth to have 10% EPS growth.
A: The narrow digital business -- digital cameras, CD-ROMs, and some digital printers -- did not meet the end-of-year target as a result of a collapse in CD-ROM prices. We didn't expect that, and we should have. When are we going to make money? I'm not going to guess at that.
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Updated Oct. 9, 1997 by bwwebmaster
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