A Victim Of Its Own Success

5 Apr, 2012

Most businesses have a breeze running through them," says one person closely involved with Eastman Kodak for the past quarter-century, "but here, it was a monster hurricane."

Nobody doubts the magnitude of the change that the photographic group has faced. The speed with which Kodak's core market for traditional silver halide roll-film has collapsed over the past 10 years is blistering.

However, one compelling theory is it was not the speedy pace of the transition that undermined Kodak, which filed for Chapter 11 bankruptcy protection in January, but the fact that it was drawn out over decades. In other words, Kodak first pioneered digital technologies in the 1970s and 1980s but, until relatively recently, the urgency of the challenge was never quite sharp enough to persuade its employees, investors and executives that it had to overhaul – or even sacrifice – time-honoured ways of doing business.

Obstacles To Change

In 2000, with Wall Street sceptical about the promise of digital photography, Kodak was still searching for a way to bridge the gulf between its dominance of the highly profitable roll-film business and a lower-margin, highly competitive digital future. Successive chief executives talked up the opportunities, but each failed to break down the structural, cultural and strategic obstacles to change.

For instance, even as online photo-sharing took off around the turn of the century, Kodak found its ambitions hobbled by the need to preserve established customer relationships. In 2001, Kodak bought Ofoto.com, one of the upstart image-sharing sites, which later became the basis for its Kodak Gallery online service. But Bob LaPerle, who worked on the Kodak.com site from 2000 to 2005, claims clients such as US pharmacy chains threatened to drop Kodak products in favour of archrival Fujifilm, if the group marketed its online gallery aggressively. "They were quite specific," he claims. "If [we] put the Kodak brand on [our] consumer website and it competed directly with [their] film and photofinishing business . . . they would shift to Fuji. They made that very clear." Ofoto was fully rebranded as Kodak only in 2005.

External dependence on customers for Kodak's "consumables" was matched by internal divisions between analogue and digital teams. One former Kodak executive, hired in the 1990s to help bring the company into the digital era, says: "I couldn't get anywhere without running into the consumer product or professional division selling film or paper – and every time I wanted to make a move, they would argue that I was destroying margin and destroying value."

This structure was buttressed by what Willy Shih, a former head of Kodak's consumer digital division, calls an "entitlement culture" among some long-serving employees, who had become used to the benevolent legacy of pension, health and other benefits instituted by Kodak founder George Eastman.

The company's dominance of the sector and confidence in its brand and marketing also led it to rest on its strategic laurels. Fujifilm of Japan had successfully dented Kodak's roll-film dominance in the 1980s. In the 1990s, Fuji was forced to diversify simply in order to achieve the scale to compete with Kodak. It used its film expertise to create components for flat-panel LCD screens, for instance, and when the consumer film market finally dropped off the cliff-edge, these other businesses cushioned Fuji's fall.

Giving Kodak A New Focus

By the time Antonio Pérez took over as chief executive in 2005, divisions within the company had started to break down. Frank Sklarsky, chief financial officer from 2006 to 2010, says "over time, people started working together very, very well. We became a more collaborative culture and people reached a deep understanding that the traditional business did have to be a funding source of the digital business". By this stage, however, it was more than 10 years since George Fisher, CEO from 1993 to 1999, had set out to change Kodak's mindset. What had been a nagging worry had become a crisis acute enough to force real change.

Mr Pérez continued to reduce the industrial "footprint" of the group, cutting costs in line with the decline in the market. But, as the most profitable business disappeared, so the company took, in the words of one person close to top management, "a double-hit" as margins and sales fell, exacerbated by the 2008 financial crisis and recession. The group spent $3.4bn restructuring itself between 2004 and 2007, but early retirements and the post-crisis low interest rates increased the weight on the company of its generous pension and benefit systems.

Fans of Mr Pérez say he has a particular talent for identifying the potential in Kodak's patent portfolio, which had previously been used mainly to support the core business. The former Hewlett-Packard executive used patents to seed innovation in the printer market and to generate income in their own right. Critics hold him responsible for speeding up the decline of the company's roll-film sales and pushing Kodak down a route of intense, possibly futile competition in the printer market.

Either way, the strategy could not avert bankruptcy. Under the shelter of Chapter 11, Kodak says it can lighten its legacy burden, bring in added financing, and clear the way for more sales of intellectual property and non-core businesses.

Even if Mr Pérez succeeds in dragging the group back to prosperity, the "new Kodak" will look quite different from the company that, as recently as 1994, made the top 20 of the Fortune 500. The group itself now aims to "exploit the competitive advantage at the intersection of materials science and digital imaging science".

Larry Matteson, who in 1979 drew up a timeline laying out Kodak's likely digital transition, left the group in 1991. Having watched his forecasts unroll from a position as professor of business administration at Rochester's Simon Graduate School of Business, he says: "I can't think of another major company in the US that has undergone as tough a transformational problem as Kodak. When IBM changed, its core capabilities remained essentially the same; in Kodak, everything changed, right through research labs, to marketing, to sales."

Even so, it is possible to write several alternative histories. Kodak could have hung on to Eastman Chemical, which was spun off in 1994 and is still a thriving chemicals, fibres and plastics manufacturer, and kept an insurance policy against the prospect of wrenching change in photography. It could have built a parallel digital operation. It could have cut costs faster or licensed its intellectual property sooner. It could even have tried to stay off the digital train altogether.

This, however, is hindsight. At the time, all these alternative options would have involved other sacrifices and risks, many unacceptable to the board or the shareholders.

"I don't think we made a wrong directional decision," says the person who identified the "monster hurricane". But he admits: "There may have been points where we didn't pursue the directional decisions with vigour."

Lessons For Others

What can today's market leaders learn from the humbling of the empire Eastman created, under executives who saw what was coming next but still could not adapt? Companies such as Apple, Google, Amazon, or Samsung may never groan under the same burden of guaranteed benefits as old Kodak. Most boast, for now, more flexible, flatter hierarchies than their 20th century industrial counterparts. The rapid and constant changes in their technologies should foster an attitude of preparedness.

Still, their directors ought to keep asking themselves this question: what is our Kodak moment, and how can we avoid it?

This article is the second of a two-part series on Kodak. For the first, click here

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