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Kodak's New Focus


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KODAK'S NEW FOCUS

Not long after taking the helm of Eastman Kodak Co. in late 1993, George M.C. Fisher bought a new house. Not just any house. He and his wife, Ann, chose a spacious estate on East Avenue, a boulevard that strikes out from the center of Rochester, N.Y., and meanders into the suburbs. On the same road a few miles closer to town, sits another house once owned by a Kodak chairman named George: the 50-room mansion built in 1905 by George Eastman, the company's visionary founder.

Coincidence? Fisher thinks it could be more like destiny. Acutely aware that the responsibility for restoring Eastman's legacy rests on his shoulders, Fisher has mentioned their common address on more than one occasion. He often jokingly refers to Eastman as "the other George." And he likes to point out the parallels between his strategy and the game plan of Kodak's founder, who combined technological genius with something in short supply at the company recently--marketing vision.

Not many executives would compare themselves to one of the icons of American industry. But George Fisher, 54, doesn't lack self-confidence. In giving up his CEO post at fast-growing Motorola Inc. to come to Kodak, he traded a virtually sure thing for one of America's toughest management challenges. Kodak has spent billions on research and development, diversification, and repeated restructurings. Yet Kodak earned less in 1993 than it had in 1982. Although blessed with a powerhouse brand name, it seemed trapped in the slow-growth photography industry, hobbled by huge debts, a dysfunctional management culture, and a dispirited workforce.

After barely a year at the helm, Kodak's new chief has clearly shaken up the sluggish giant. He has sold off its health-care businesses and refocused the company around its core imaging business. Asset sales have also allowed him to slash debt from a burdensome $7.5 billion in 1993 to an estimated $1.5 billion last year.

Fischer has started to tackle the bloated, hierarchical management. And although morale is still shaky, Fisher has given staffers hope that Kodak has a future. "I'd call George's first year a spectacular success," says University of Michigan management professor C.K. Prahalad, who has consulted for both Kodak and Motorola. "He has cleaned up the company and created a new spirit, a new willingness to compete. He has laid the foundation."

The key question now is whether Fisher can do for Kodak what he did for Motorola. The Schaumburg (Ill.)-based company is a top example of a U.S. technology goliath that competes successfully against not only the Japanese but also hard-charging companies of Taiwan, Singapore, and South Korea. Kodak, in contrast, has kept margins high by ceding ground to archrival Fuji in the U.S. and internationally in its core photography market. Fisher vows to end that. "You don't sell market share," he says. "That is religion with me. You don't have a business in a few years if you keep doing that." Last year, for the first time in more than a decade, Kodak says it increased its global market share in photography.

But as Kodak delves into the fast-evolving area of digital imaging, Fisher faces a raft of rivals besides Fuji. From Japan, Kodak will face the likes of Canon and Sony in such brutally competitive sectors as printers and digital cameras. In Taiwan, Fisher could be going up against nimble manufacturers of CD-ROM reading devices and other computer peripherals. From Singapore to Shanghai, scrappy rivals are gearing up.

Fisher's strategy to transform Kodak into a revitalized global player, as outlined in several lengthy interviews with BUSINESS WEEK, is fairly straightforward. First, he will continue to work on Kodak's culture and costs. "There are textbook types of things that are wrong with this company," he says. "Decisions are too slow. People don't take risks." Fisher is applying lessons learned at Motorola: By focusing on basics such as quality, customer needs, and shorter product-development time, he hopes to squeeze out costs and produce a more dynamic culture. He says it will take three to five years to see dramatic progress.

CRACKING CHINA. That will require growth. Kodak's golden goose is its consumer photography operation, which produces 75% of its operating profit on just 42% of its revenue. Fisher is convinced that Kodak's traditional film and paper business can grow at 7% to 9% annually for the next decade, about double the growth rate in recent years.

How? In part, by getting serious about expansion in Asia. Fisher has visited China three times in his new job and is tight-lipped about his plans there, but it is clear that the Greater China region looms large. He has appointed Wilbur J. Prezzano, essentially the company's No. 3 executive, to head a team of people overseeing a major thrust into China, Hong Kong, and Taiwan. Fisher says Kodak has "set aside a lot of money in 1995 and beyond for China." So far, Fuji clearly dominates those markets.

The CEO also says he sees dramatic growth in barely tapped markets such as Russia, India, and Brazil. Kodak saw a 400% growth rate in Russia in 1994, admittedly from a small base, by franchising hundreds of new Kodak Express minilabs and retail shops. In so doing, the company seems to have stolen a march over its major European competitor, Germany's Agfa. Overall, about 50% of Kodak's sales are non-U.S. now, and Fisher says in 10 years he expects it will be 60% to 70%. "Half the people in the world have yet to take their first picture," says Fisher. "The opportunity is huge, and it's nothing fancy. We just have to sell yellow boxes of film."

Aside from geographic growth, Fisher is also counting on strong results from the company's thus-far disjointed entry into the digital imaging market. Kodak's boss has gathered the company's far-flung digital projects into a single division and hired Carl Gustin, a former Apple Computer Inc. and Digital Equipment Corp. marketing executive, to head the unit.

In March, Kodak will relaunch its poorly marketed Photo CD product to make it more useful to millions of desktop PC users (table). Another promising product: the new CopyPrint station, which uses digital technology to make enlargements from ordinary prints. None is exactly revolutionary. But again, the model is Motorola, which succeeded by pushing low-cost electronic items that turned into hits. "I'd bet we have at least one home run of the sort Motorola hit in cellular telephones," says Fisher.

It's a tantalizing turnaround plan. But so far, critics complain, progress is slow. Kodak on Jan. 31 reported that its net earnings from continuing operations before extraordinary charges fell 3.2% last year, to $965 million, as its revenues rose by 7%, to $13.7 billion. At around 48, Kodak stock is little changed since Fisher's arrival in December, 1993.

NO ADVANTAGE. Even some Fisher boosters caution that he has taken on a monumental task. The core photo business is brutal, marked by growing capacity and falling prices. Just to keep profits flat, Kodak needs to cut manufacturing costs substantially every year. "This is a tougher challenge than Motorola," says Richard S. Braddock, former chairman of Medco Containment Services Inc. and a Kodak outside director. "Kodak has very high shares and high margins. That's a difficult combination."

In the digital imaging arena, Kodak has a very different problem: It's just one of many hopefuls in a nascent industry. By its own count, Kodak faces no fewer than 599 global competitors working on optical-storage technology that could challenge its Photo CD. And other rivals are chasing the emerging digital market. Casio, for example, just introduced a $700, feature-laden digital camera. In other niches, from scanners to printers, Kodak faces such giants as Canon, Fujitsu, Sony, and Hewlett-Packard. "Kodak has some good technology," says Jacques P. Kauffmann, an imaging consultant in Wilmette, Ill. "But they haven't yet shown any outstanding products. So far, they're just one player among many."

But if anyone can force new products through Kodak's cumbersome decision-making process it's Fischer. Few CEOs boast his credentials as a technologist and manager. After getting his PhD in applied mathematics from Brown University, he started as a scientist at Bell Labs. In 1976, he moved into management at Motorola, where he quickly made his mark as head of the pager division by breaking into the Japanese market. In 1988, Fisher took on the CEO's title.

As Motorola's CEO, Fisher excelled at motivating people, pushing decision-making down, and picking among the company's many promising technologies. Profits more than doubled during his tenure. But when the Kodak search committee came calling, Fisher was ready to listen. "I was already a success," he recalls. "But I was too young to begin to think about the end of my career." A $2 million salary, $5 million signing bonus, and juicy stock options helped seal the deal.

Once he arrived, it didn't take Fisher long to focus on Kodak's most visible problem: its balance sheet. Much of the nearly $7.5 billion in debt was the result of past acquisitions, notably Sterling Drug Inc. in 1988. A lot of the cash being generated by photography was going to service debt instead of funding new products and businesses. "We were going to milk the imaging business to death," says Fisher. By February, 1994, he decided to sell the sprawling health and household-products divisions, bringing in $7.9 billion. By yearend, Kodak's debt was down to $1.5 billion.

Kodak executives say the quick decision to sell non-imaging operations was vintage Fisher. He rarely handles a piece of paper twice and usually gives executives a decision on the spot. That's a dramatic change at a company where "paralysis by analysis" had become an art. "People can study a problem around here forever," says Leo J. Thomas, the executive vice-president who heads the imaging group. "George has a willingness to use the 80/20 rule," which holds that it's O.K. to be right just 80% of the time if you act quickly.

CUSTODIAL MENTALITY. The push for quick decision-making is part of a broad campaign by Fisher to overhaul Kodak's lethargic culture. When Fisher arrived, he found an insular company that venerated authority and frowned on confrontation. "It was so hierarchically oriented that everybody looked to the guy above him for what needed to be done," he says. Having been beaten down so long, he says, Kodak developed a custodial mentality geared to protecting current businesses rather than seeking new frontiers. "Why is Kodak in such a state of doldrums and Motorola so vibrant?" he asks. "One drives for growth, and the other doesn't."

To help break down the rigid hierarchy, Fisher has turned himself into an ambassador of informality. Low-key, genial, he almost never raises his voice or shows anger. Past Kodak CEOs tended to be aloof and autocratic. But managers liken Fisher's style to that of a coach--or a parent. "It's like talking to your father," says Carl F. Kohrt, general manager of the $1.6 billion health sciences unit. "You don't want to disappoint him."

Fisher frequently pops in on researchers for updates on projects and chats casually with staffers in the cafeteria, where he breakfasts almost every workday--invariably on a bowl of Special K cereal and a mug of coffee. Employees are invited to send him E-mail messages, and they do--as many as 30 a day. His secretary prints them out, and he usually responds the next day with handwritten notes on the printouts--a personal touch staffers seem to appreciate.

More important, Fisher is trying to teach his managers that Kodak's ultimate fate rests on them. During management presentations, Fisher often flashes a slide with a single word on it: accountability. Kodak managers have frequently missed targets by a mile and suffered no consequences--but no longer, Fisher vows. In the annual planning process for this year, he worked hard with executives on coming up with realistic numbers and has been adamant that he will hold laggards responsible.

Kodak executives concede that many employees are reeling from the shift in direction. Staffers are also angered over a Fisher-ordered cutback in benefits last summer. And an announcement in December that 800 more jobs would be cut at the Kodak Park manufacturing complex in Rochester has further soured the air. "People's feelings about the company are still on a roller coaster," says Kohrt.

But Kodak execs say there's progress. In the labs, Kodak never used to measure the time it took to complete projects or even how fast they were progressing. With Fisher's emphasis on cycle time, managers have set up formal gauges.

The labs are key because the new, improved Kodak will need things to sell. Beginning in the late 1970s when Kodak recognized that digital imaging would emerge as a rival to chemical-based photography, it began frantically spending huge sums on digital-imaging R&D--as much as $5 billion over the past decade. But executives were divided over whether introducing digital gear would cannibalize high-margin film and paper sales. By the time Fisher arrived, little had emerged from the labs. Product development and sales efforts were scattered over more than a dozen divisions. At one point, Kodak was working on 23 separate digital scanner projects.

Fisher folded most digital efforts into a new Digital & Applied Imaging Div. To run it, he turned to Gustin, one of several outsiders Fisher hired to help him revitalize Kodak's management. An ebullient former advertising executive who talks at a rapid clip, Gustin says he was amazed at the technology languishing in Kodak's closet. Outsiders agree that Kodak has top technology in several key digital imaging areas. Among them: color-management software to ensure true reproduction and charged-couple devices (CCDs) that act as the eyes for digital cameras and scanners. One big problem, Gustin quickly surmised, was lack of marketing ability. To help overcome that drawback, Gustin has just has hired five experienced marketing executives from places like Apple Computer, Sun Microsystems, and Hewlett-Packard.

Gustin says he and his team will soon silence critics who believe stodgy Kodak is incapable of achieving the six-month development cycles typical in the computer industry. Back in November, Gustin says, he started a project to develop a $1,000 desktop version of a four-month-old, $10,000 color thermal printer that spits out high-quality color images on special paper using a heat-transfer process. That version weighs about 60 pounds and has 500 parts. In less than a month, he says, Kodak engineers built a 14-pound, 65-part prototype with better performance specs.

Gustin promises a raft of new digital products early next year. In addition to the less expensive thermal printer, he's aiming to introduce a $300 digital scanner and a digital camera in the $300 range. Apple's QuickTake digital camera, made by Kodak, is among the cheapest now on the market, at $700. Gustin's division had revenues of about $500 million in 1994, roughly 4% of Kodak's total sales. Gustin has told Fisher that it will grow by 67% in 1995 and will take another leap the following year.

Meanwhile, Gustin is looking to resurrect Kodak's faltering Photo CD project. Launched in mid-1992, it was badly misdirected at the consumer market as a high-tech way to see photographs on TV. But few photo buffs wanted to spend about $1 to transfer each snapshot to a compact disk. In March, Kodak will relaunch Photo CD, this time aimed at the PC user. By adding software to each Photo CD platter, Kodak plans to make it easier to retrieve photos and use them in electronic documents. A personnel manager, for example, could load a Photo CD with pictures of employees into a CD-ROM drive and create an organizational chart complete with photos.

Although digital imaging embraces everything from Sega video games to on-demand cable-TV movies, Kodak is sticking mostly to its historical niche of color still images. That's a plenty big enough market. But Kodak doesn't have the clout or the technology to do it alone. That's why Fisher and Gustin have been trying to get other industry players to adopt Kodak's technologies as standards in the computer and multimedia worlds.

Fisher's platinum Rolodex of information-industry contacts has been crucial in the hunt. He has used his contacts at the University of Illinois' National Center for Supercomputing Applications in a drive to get Photo CD accepted as a standard for sending images over the Internet. He has also met with other corporate heavyweights--among them Microsoft's Bill Gates and Scott McNealy of Sun Microsystems--to discuss licensing and partnership deals. Microsoft will include Kodak's color management standards in its Windows 95 operating system. Kodak also says it's working with leading telecom companies on ways to make it easier to send images over phone lines. And on Jan. 17, Kodak said it would license a technology from Live Picture Inc. that will speed image processing on Photo CDs. Other deals should be announced in the first quarter.

All this has caught the eye of Fisher's Japanese competitors. A rival executive in Tokyo, who declined to be identified, said Kodak may have an advantage because of its "total market segment approach" to digital imaging. While most Japanese companies are developing scanners and peripherals, they are not part of an integrated whole. This could allow Kodak to set crucial industry standards. If, for example, Fisher can make the Photo CD a standard for the multimedia PC market, that could have big competitive implications. "Kodak is a market leader," says the executive. "It's been in imaging longer than anyone."

At the same time Fisher is competing with Japanese companies, he's also cooperating. Take Kodak's new film-and-camera system, developed in partnership with five Japanese companies, including Fuji, Canon, and Nikon. The Advanced Photographic System (APS) is scheduled for launch in early 1996. Its drop-in film cartridges uill eliminate the problem of misloading. More important, APS cameras will digitally record information such as shutter speed and aperture on a magnetic strip running across the film spool. That data will help a new generation of photo-processing gear churn out better prints.

Based on the growth spurt that accompanied prior new film standards, such as the Instamatic, 110, and Disc formats, Kodak sees a nice uptick in film and camera sales. But with heavy investment needed to start APS production, it's less certain that profits will surge as quickly. APS could displace higher-margin, traditional 35mm sales. Another danger: Kodak developed the Disc and 110 film standards itself. This time, it will be in a foot race with the Japanese.

NO LONGER AFTERTHOUGHTS. Even if its technology is right, a fundamental problem Kodak faces is that it has never been good at manufacturing electronic gear in high volumes and low cost. Nearly all of its equipment is aimed at the less competitive, pricey end of the market, from copiers to scanners. And when Kodak tried to sell consumer products in the past--8mm camcorders, videotape, even batteries--it quickly dropped out when the competition got too stiff. "They're going into a totally different business, with totally different distribution channels and much slimmer margins," says one former Kodak executive. "They have an incredibly long road ahead."

Another challenge will be to get hot new products rolled out around the world quickly, rather than treating non-U.S. markets as afterthoughts. There are tantalizing signs of progress on that front, executives say. "We're seeing a big difference in the way the international operations are treated when it comes to new product," says John Fitzgerald, president of Kodak Taiwan Ltd. in Taipei. "Now we introduce products at the same time worldwide or sometimes we even get them before." Kodak introduced its new single-use camera, code-named "Falcon," in Japan last November, for example, even though it won't be introduced in the U.S. until mid-February.

It's all part of the broad transformation Fisher believes is finally taking hold at Kodak. In a recent speech to a group of employees, he concluded with this quote from Niccol Machiavelli's The Prince: "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things." Or, he added, more invigorating. But then, if Fisher didn't relish a challenge, he would still be chairman of Motorola.

Fisher's Bold Beginning...

FOCUSED STRATEGY Company had been floundering, unsure which businesses to pursue. Fisher decided imaging was key to the future and sold Kodak's health and household-products arms.

CREATED DIGITAL IMAGING UNIT With product development and sales scattered among divisions, digital effort was ill-focused. Fisher gathered most of the talent into one division and hired an experienced computer marketing executive to head it.

REPAIRED BALANCE SHEET By selling off businesses, notably the Sterling drug operation, he has slashed the company's total debt from $7.5 billion to $1.5 billion. Photography cash machine is now available to fund growth, not debt payments.

IMPROVED MORALE After years of restructurings and uncertain direction, employees were disheartened. By stressing bright future and improving communication, Fisher has perked up spirits.

BEGAN OVERHAULING CULTURE By stressing accountability, quality, and cycle time, Fisher is beginning to transform Kodak's slow-moving culture. Made pay more dependent on performance.

...And The Challenges Ahead

REIGNITE GROWTH Fisher believes Kodak can double its growth rate in photography, a tough challenge in slow-growing global market. Key target: Asia, especially China, where Kodak lags behind Fuji.

HIRE NEW TALENT Company needs outside blood. So far, Fisher has hired a new CFO and head of digital imaging. Badly needs marketing depth.

IMPROVE CUSTOMER FOCUS Kodak still is driven by

engineering mentality that devises products first before finding buyers. Company must become more market-savvy.

SIGN JOINT VENTURES Kodak can't do it alone in digital arena. Company has to expand its technology base. Fisher's platinum rolodex should work here. Promise of big announcements in 1995.

CUT COSTS FURTHER Plenty of fat still around. Big targets include receivables, inventories, corporate overhead. No way Kodak can compete in digital arena with its high cost structure.

Kodak's New-Product Offensive

ADVANCED PHOTOGRAPHIC SYSTEM "Smart" film and camera to be introduced in 1996. Stores data, such as shutter speed, on film as each picture is taken,

permitting much finer processing

and printing.

IMPROVED SINGLE-USE CAMERA

To be introduced in the U.S. this spring. Sleek plastic design and better flash mark big improvement over old disposable cameras.

PHOTO CD Relaunch planned for March. Kodak will seek to revive product by marketing it to desktop-computer users.

THERMAL PRINTERS Kodak's $10,000 thermal printer is a market leader, producing near-photographic-quality prints. Company aims to get $1,000 version to market in 1996.

COPYPRINT STATION Allows consumers to make high-quality copies and enlargements from ordinary prints, not negatives. In hundreds of photo stores already. Combines a digital scanner, PC, and thermal printer.

QUICKTAKE CAMERA Introduced in mid-1994. Has Apple's name on it, but Kodak makes it. First low-cost (about $700) digital camera for desktop applications.

ROYAL GOLD FILM Replacement for flagging high-end Ektar film is doing well.By Mark Maremont in Rochester, N.Y., with Margaret Dawson in Taipei and Robert Neff in Tokyo


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