Larry, We Hardly Knew Ye

A year ago, Polaroid Corp. very publicly recognized there was more than instant photography to its future. CEO I. MacAllister Booth reorganized the company, carving out an electronic-imaging division to focus on emerging markets for advanced computer scanners and snazzy digital cameras. There was one piece of the puzzle missing: an experienced electronics executive to run the business. The company launched a massive search to find one.

Polaroid is still searching. The Cambridge (Mass.) company thought it had the job filled in early October with a top software executive Booth had courted for months. But the recruit, Larry Gerhardt, CEO of Test Systems Strategies Inc., quietly left Polaroid after less than a week. Gerhardt says he was "allowed to back out" for personal reasons. A company spokesman, responding to written queries from BUSINESS WEEK, says Gerhardt "never really started to work here."

HELIOS STALLED. The embarrassing departure leaves Polaroid's nascent electronics division without leadership at a crucial time. More important, it raises questions about whether the company is ready to enter the electronic age. Polaroid acknowledges that photographic profits can sustain the company for only a few more years. But Booth also has pledged to lift pretax operating profits to at least 12% of sales, from an estimated 8% this year. Moreover, the company's first major foray into electronics, a $200 million investment in Helios, an innovative dry-process imaging system, has fallen short of expectations. That project, say several former Polaroid employees, has limited research and development funding available for other electronics ventures.

Conrad H. Biber, who in April retired as head of electronic-imaging research, says Helios "has taken more effort and funding than anticipated. Therefore, the other electronic-imaging thrust has been falling behind." Indeed, Biber and others say, the lack of financing was a critical reason behind Gerhardt's departure. Gerhardt denies that, but analysts say Polaroid will have to scrimp to meet its ambitious financial goals. As a result, "there's still a question long-term whether they can crank up these new businesses to cover the decline in instant-photography products," says Peter J. Enderlin of Smith Barney Shearson.

Short term, things look better. Polaroid's new Captiva, a compact, point-and-shoot instant camera introduced in U.S. stores in September, is a snappy success. "It's one of the hottest-selling photographic items of the Christmas season," says David Ritz, president of Ritz Camera Centers Inc., a Beltsville (Md.) chain with 500 stores nationwide.

Analyst Brenda Lee Landry of Morgan Stanley & Co. says Captiva should end a six-year slide in camera sales, pushing unit volume up 400,000 this year, to 4.4 million. The resulting film revenues are a big reason Polaroid earnings are expected to jump 40%, to $42 million from just $30 million a year ago, in the quarter ending Dec. 31. And 1994 looks even better: Earnings could soar 30%, to $140 million, for the year.

But Polaroid is struggling with a series of Helios missteps. Stalled for two years by engineering glitches, the system was finally shipped in March--just as hospitals were cutting back on equipment purchases. Helios should generate just $10 million in sales this year--well below the $25 million analysts originally expected. Meanwhile, Xerox Corp. has disclosed plans to team with 3M and Bayer's Agfa to deliver similar dry-process technology.

Polaroid says its Helios problems are due mostly to weak demand. "There can be no denying the negative impact of the current economic climate," says the company spokesman. But customer satisfaction is "extraordinarily high." And Booth has promised to bring Helios laser technology to the printing industry sometime next year.

As long as Helios falters, though, Booth will be hard-pressed to generate the sort of profits needed to fund new electronics investments. That could hurt his efforts to revamp Polaroid's staid, cautious culture to compete in markets where product life cycles last months rather than years. "Current management very much appreciates the need to accelerate the pace of change," says Carl J. Yankowski, a highly respected marketing executive who himself left Polaroid four weeks ago to become president of Sony Electronics Inc. Booth's problem seems to be keeping the people who might make that change happen.

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