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A Radical Shift In Focus For Polaroid


The Corporation

A RADICAL SHIFT IN FOCUS FOR POLAROID

In 1989, Polaroid Corp.'s chief executive, I. MacAllister Booth, hoped to fend off a hostile takeover by giving big shareholders a glimpse into Polaroid's research lab. At the time, the ailing company was developing a sleek, new instant camera. Equally impressive: an electronic imaging system to print out X-rays without costly chemical development. Both projects, Booth argued, would energize Polaroid's lackluster sales and reverse its declining profits. Stockholders, impressed with the new products, agreed. The takeover attempt by Shamrock Holdings Inc. failed.

Unfortunately, the future didn't quite develop the way Booth pictured it. Polaroid's latest instant camera, the Captiva, which is now being shipped to U.S. retailers, is receiving mixed reviews. And the Helios Laser Imaging System that Booth believed would propel the company into the high-tech age is struggling to find a market among medical-equipment makers. Worse, the profit growth that shareholders long for has yet to materialize (chart).

So what does Booth do now? Polaroid's CEO vows to abandon his company's longstanding two-track strategy. He says he will accelerate the push into electronic imaging--even at the expense of Polaroid's bread-and-butter photo business. To help cut costs during the transition into electronics, Booth plans to slash by a third the $75 million the company spends on photo research and development each year. "There are many more opportunities in the business world than just selling cameras and films," Booth says. His goal: a $2 billion electronics business by 2000. And he predicts that Polaroid's profits will resume an upward trajectory, with operating earnings climbing by 12% to 14% a year.

CHEERS. Booth's decision finally to deemphasize instant photography, which accounts for 85% of Polaroid's business, has been warmly greeted on Wall Street. The stock has jumped by more than 30% since late March, to around 37. Also cheering investors is an anticipated profit rebound in 1994. Startup costs for Helios and Captiva will gobble at least $70 million this year. But as those expenses wind down, margins should rise sharply next year, says analyst Peter J. Enderlin of Smith Barney, Harris Upham & Co. He sees 1994 profits advancing by about 85% over his 1993 estimate, to $135 million, with revenues rising 8%, to $2.5 billion.

There's just one problem: Polaroid is cutting back investment in what it knows best to push into fast-moving markets in which it doesn't yet have any successful new products. Indeed, the company's electronics sales totaled just $43 million last year. "Polaroid may be giving up too much in its core photography business and hoping for too much in new businesses," says Enderlin.

And does the move away from conventional photography sound familiar? If so, it's because Polaroid's strategy is remarkably similar to that of its troubled Rochester (N.Y.) rival, Eastman Kodak Co. Like Kodak, Polaroid went on an acquisition binge after Sony Corp. startled the world in 1982 with an all-electronic camera. Polaroid acquired a mishmash of fiber-optic, ink-jet printer, and medical-diagnostics operations. Poor results later prompted Booth to fold or sell off every one. Also like Kodak, Polaroid has a penchant for restructuring. Since 1988, it has reorganized itself three times. The most recent shuffle came last fall, when it rearranged its businesses into three divisions: film and videotape products, medical and graphics systems, and other electronic products.

Still, Booth's latest strategy represents a radical departure for the Cambridge (Mass.) photography company. While it began experimenting with electronic imaging in the 1980s, the company that invented instant photography always considered the film business its core. But getting consumers, whose business accounts for one-third of revenues, to snap more pictures has been difficult--especially in an era of camcorders. While camera sales last year were up a third since 1990, to 4 million units, film sales remain stuck at about $1.4 billion--the same as in 1989.

WRONG DIRECTION? Polaroid's latest shot at a consumer revival may not help much. The Captiva camera goes on sale in the U.S. in late July, but many retailers wonder whether consumers will warm to Polaroid's new instant-photography product. The small camera produces equally small prints--almost 50% smaller than Polaroid's existing snapshots, which measure almost 3 inches by 4 inches. With even larger 4-by-6 prints the fastest-growing size at photo labs, "I would have to question" the appeal of a smaller print, says David Ritz, president of 500-store chain Ritz Camera Centers Inc.

For the moment, Polaroid isn't listening to such naysayers. "We did extensive testing to find the acceptable trade-off between camera size and picture size," says Joseph R. Oldfield, head of Polaroid's photography business. Indeed, Polaroid expects the camera, which is just two-thirds the size of its OneStep, to be a big draw among consumers put off by the bulkiness of instant cameras. While the Captiva has been available in Europe for six months, Oldfield won't divulge sales figures except to say that they're "exceeding our expectations."

Polaroid can't afford a poor showing. Captiva is the most researched product in the company's 56-year history--five years and $100 million in the making. And it will be launched with a splashy, $30 million marketing campaign. Morgan Stanley & Co. analyst Brenda Lee Landry says Captiva must drive camera sales to 5 million units a year to achieve profit targets. Booth calls the estimate "achievable."

Still, even Polaroid acknowledges that the company's future no longer lies in instant photography. That's why Booth, 61, a cautious manager who has spent his entire career at Polaroid, is pushing into electronic imaging. So far, he's focusing on markets such as medical imaging and graphic arts. There, he hopes to marry Polaroid's chemical and coating expertise to new technology. The result: electronically produced "hardcopy" images, such as printers' page proofs, that don't require conventional processing.

Helios is the key piece of Booth's strategy. Using laser technology, it reproduces an image on a carbon-coated polyester film that Polaroid makes, eliminating the wet chemicals of X-ray and other body-scan films. Once Helios is on track, Polaroid hopes to use the technology in a graphic-arts system for catalog and magazine printers.

To help pay for its electronics R&D, Polaroid is hoping to squeeze more out of the camera-and-film business. The company says Captiva will be its last "megadesign" project. Most new cameras will simply be modifications of existing models, says Oldfield. Polaroid's ProCam is a good example of the frugal new approach. Roughly 75% of the parts in the camera were designed previously for other cameras. Oldfield says that lowered ProCam's development costs to just 35% of traditional outlays.

Despite Booth's commitment to electronics, Helios has run into problems. First introduced in 1990, the system has been sold to several hospitals. But Polaroid has yet to find a medical-equipment manufacturer to incorporate Helios as a standard printer with its imaging products. And that's critical if Polaroid is to develop a sizable market. The problem: Helios makes an 8-by-10 print instead of the 14-by-17 size preferred by doctors who read X-rays and CAT scans.

COLD SHOULDERS. What's more, Polaroid hasn't cracked the ultrasound business, where the smaller-size prints are the norm. That's because most hospitals now use less sophisticated laser-printer technology made by Sony or Agfa. And those printers can also produce the bigger images needed by other departments. Acuson Corp., for example, bypassed Helios for its new Aegis digital ultrasound machine largely because it felt hospitals weren't interested.

Booth acknowledges that the transition from instant photography to electronic imaging will need fine-tuning along the way. Already, Polaroid is planning to modify Helios to produce the larger prints desired by physicians. Still, Booth says the big benefits of the electronics push should be apparent by 1995. Shareholders who had such high hopes for Polaroid's new products undoubtedly hope that's true.Gary McWilliams in Cambridge, Mass.


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