Can George Fisher Fix Kodak?

For a time, it seemed he had. But the bad news keeps piling up, and Fisher has to refocus, fast

Earlier this year, Kodak Chairman George M.C. Fisher looked unstoppable. The man who gained near mythic stature as CEO of Motorola Inc. wrote in the annual report that 1996 marked a "watershed" in his efforts to turn around one of America's most troubled brand names. "The picture at Kodak is clearly changing," an ebullient Fisher told shareholders.

Or so it seemed. After a series of cutbacks, layoffs, and restructurings going back to the start of the decade, Eastman Kodak Co. finally had some good news. The photography giant had gained market share in eight of its nine major businesses, and sales had grown 7%--a strong performance, by Kodak standards--to $16 billion. Earnings for the year reached $1.29 billion, more than double the level of 1994, Fisher's first year. That performance had powered the stock to a record high of 94 in January, a gain of nearly 80% since Fisher's arrival.

But suddenly, Fisher and Kodak are in deep trouble. On Oct. 14, Kodak will announce third-quarter results that can only be described as shocking, including an expected 25% drop in operating profits for the year and a free fall of 40% to 45% for the quarter. And far more painful bloodletting is certain on Nov. 11, when Fisher will meet with analysts to unveil a major restructuring.

The next few weeks, as Fisher and his team hammer out the details of that plan, will be among the most critical in Kodak's 118-year history. With pressure rising on Wall Street--the stock has since tumbled 33%, to 63--the pitfalls are many. Inside the company, Fisher needs to rally troops weary of bad news and fearful of layoffs that never seem to fix Kodak's fundamental problems. But to have any credibility with investors, the steps Fisher outlines on Nov. 11 must be decisive and substantial. "This is a critical point," Fisher concedes.

Problem is, Fisher still seems to have been taken by surprise by the depth of the company's problems. The issues that have dogged it--confused marketing, a bloated cost structure, intensifying competition from Fuji Photo Film Co., a strong dollar--have either been around for a while or could have been anticipated. And although Kodak has raised expectations about its mid-November announcement, Fisher told BUSINESS WEEK that he doesn't "expect to lay out the whole thing in November".

LOTS OF FAT. For the past few weeks, Fisher says he and his staff have been furiously devising a plan to "significantly revamp our cost structure." He is seeking to cut both Kodak's manufacturing costs and to accelerate a five-year plan to slash overhead and administrative costs, which now stand at 27% of sales. He also needs to cut the payroll. Fuji's sales per employee, for example, are twice those of Kodak. In recent months, Fisher pushed out two of his top lieutenants, including the heads of the core consumer products and digital imaging units. And on Oct. 6, he cut loose 200 of the company's most senior 1,000 executives. Simultaneously, Fisher is vowing to take action to slow the loss of market share in the core color-film business to Fuji.

Yet even now, Fisher, who has long been averse to deep cost-cutting, seems reluctant to wield the ax. Asked about the cries on Wall Street that he cut Kodak's ranks by 10% to 20%, he says, "I don't know how many of these people have ever run a company." But Kodak-watchers insist there's plenty of fat to cut. Wall Street is pressing Fisher to lay off as many as 20,000 of Kodak's 94,800 employees and cut $1 billion from its $4.5 billion in annual expenses. Fisher says he will closely look at cutting expenses elsewhere, possibly by outsourcing photo equipment now manufactured in-house, such as digital cameras and CD-ROMs. He may also exit stagnant businesses such as microfiche, microfilm, and copiers.

When Fisher joined Kodak four years ago, no one could have imagined he would be facing such serious problems this far into his tenure. After building Motorola into one of the country's most successful high-tech companies, Corporate America venerated him. In a comment that reflected the reverential attitude of the Kodak board, director and Coca-Cola Co. Chairman Roberto C. Goizueta said: "When we began this search, our No.1 candidate was God, and we stepped down from that."

"DISTRESSING." But critics say Fisher has been slow to address Kodak's basic internal problems: a corporate culture mired in a mind-set left over from an earlier manufacturing age, and excessive costs. Rather than announcing a new era with tough layoffs four years ago and bringing in a new team to oversee the photo business, he decided to minimize cost-cutting in Kodak's traditional film business in the hope that digital revenues would grow enough to support it. "Everything that could go wrong has gone wrong," says one institutional investor with a big Kodak stake. "It's shocking and distressing."

In public, Fisher remains upbeat. "We are about halfway through where we need to be in the restructuring and turnaround of Kodak," says Fisher. In his first three years, Fisher sold off $8.9 billion in noncore assets, including Eastman Chemical Co. and a copier business. That helped reduce the total head count by 14,000 and slashed Kodak's debt to $1.5 billion from $7.5 billion.

It will take stronger medicine than that, however, to restore Kodak to health. Despite Fisher's efforts, Kodak's overhead expenses, at 27.6% of sales, remain higher than those of most competitors. Meanwhile, the number of employees at continuing operations has climbed by 3,000.

At the same time, the company is being battered on all fronts by younger, more nimble competitors. From long before Fisher's arrival, the company's dream has been to use cash from the mature film businesses to fund an entry into a new, faster-growing arena. In the 1980s, the company looked to everything from drugs to copiers. None provided the growth engine Kodak needs. Fisher has pinned his hopes on digital imaging, where he's pouring some $500 million a year into research and product development. So far, the payoff has been elusive. This year alone, the digital business will lose an estimated $200 million. And while Fisher is still struggling to reinvent Kodak as a digital company, serious questions remain about whether that business--and Kodak's approach to it--can ever pan out. "To win at this game will require speed and flexibility--and that's not what I think of when I think of Kodak," says Robert I. Krinsky, principal at IdeaScope, a Cambridge consulting firm that counts HP among its clients.

The trouble is, Kodak faces ferocious competition from Japanese companies such as Sony and Canon, as well as Hewlett-Packard and other U.S. rivals more accustomed to the blistering pace of change in digital technology. And with dominant formats for things like image compression and low-cost photo-quality printers still emerging, building the business requires nerves of steel and a willingness to change course fast. Even as Fisher makes the attempt, Fuji has been aggressively slashing film prices and stealing share from Kodak, reducing cash flow when Fisher needs it most.

DOUBLE TROUBLE. Trying to nurture growth in both the analog and digital worlds at the same time may be Kodak's greatest challenge. "Can Kodak balance the needs of their revenue- and profit-generating film business with their new investments in digital technology?" asks Antonio M. Perez, head of the consumer group at Hewlett-Packard. While HP is known for letting its divisions compete against one another to produce the strongest possible competitor, Kodak has taken care that its new digital products encroach as little as possible on its film business. Donald W. Strickland, president and CEO of PictureWorks Technology Inc. and Kodak's former vice-president for software, says there's no doubt about the quality of Kodak's technology. But he says that "the fear of cannibalization always slowed things down."

It's now clear that the expectation that Fisher could somehow magically transfer his successes at Motorola to Kodak was naive. The two companies are radically different organizations, at far different stages of development, and facing far different challenges. Fisher did "a terrific job of keeping Motorola on the leading edge of technology," says Robert Duncan, a professor at Northwestern University's J.L. Kellogg Graduate School of Management. Most important, he pioneered cellular telephones and pagers, turning them into must-have products for millions.

Fisher had hoped for a similar hit at Kodak. "I'd bet we have at least one home run of the sort Motorola hit in cellular phones," he told BUSINESS WEEK in January, 1995. But so far, Fisher has nothing more than a single or two--despite an investment of billions in product development. In part, that's because Kodak is operating in a sharply different marketplace. Motorola thrived by developing new technology that provided clear, significant advantages over old products--and often sold it first to business, where price was less of a concern.

CONFUSION. But Kodak is a consumer mass-marketer. Competition is fiercer, and consumers can be more finicky about adopting pricey new products. And despite its history as one of the world's best-known brands, Kodak lately seems increasingly out of touch with its customers. It has so far sunk $500 million into launching a film and camera system known as Advantix. Manufacturing glitches left retailers short of products, while a confusing ad campaign never explained to consumers why they should buy Advantix. But even if Kodak had done a better job of getting the word out, the system, which combines old-fashioned silver halide film with some digital features, might still be a bust. Kodak says APS units now account for 20% of point-and shoot-camera sales. But retailers say its potential is limited. Photo buffs are turning to digital cameras, while the rest of the market seems happy with 35mm.

The marketing has not been any better on the digital side of the business. There, products have suffered from "an absence of marketing" rather than bad marketing, says Shelly Lazarus, CEO of Ogilvy & Mather Worldwide Inc., which recently won most Kodak advertising. It's a damning oversight for a brand-name marketer like Kodak. "We don't yet know what the potential is," says Lazarus.

CRUCIAL CASE. Fisher is also dealing with a far more ingrained and bureaucratic culture at Kodak than he ever faced during his days at Motorola. Although he has taken steps to shake things up--such as instituting pay-for-performance standards--the old-line manufacturing culture continues to impede Fisher's efforts to turn Kodak into a high-tech growth company. "Fisher has been able to change the culture at the very top," says one industry executive. "But he hasn't been able to change the huge mass of middle managers, and they just don't understand this [digital] world."

Trade policy is an area in which Fisher's Motorola expertise seemed transferable. At Motorola, he successfully lobbied Washington to help open up the market for Motorola's products in Japan, while combating Japanese dumping here at home. Soon after arriving at Kodak, he launched a similarly aggressive effort to pry open the $2.8 billion Japanese market for film and paper, where Kodak still has only a meager 10% share, vs. 70% for Fuji. Fisher argues Fuji's dominance has enabled it to treat Japan as a "profit sanctuary" from which it can fund its assault on the rest of the world.

Fisher has maneuvered this dispute to the top of Washington's trade agenda. At his urging, the U.S. has filed a case before the World Trade Organization alleging that Japan has thrown up numerous hidden barriers to the sale of foreign film, even while cutting official duties on imports. With the WTO decision expected in early November, Kodak is optimistic it will rule in its favor--a step that could help Kodak raise its share of the world's second-biggest film market to as much as 30% says Ira Wolf, head of Kodak Japan. He also says that a fairer fight in Japan would make for a fairer fight not only in the U.S., but also in critical developing markets such as China. But with Fuji on the verge of opening a South Carolina plant that will produce 100 million rolls of color film a year--equal to about 14% of the U.S. market--even a victory might do little to reverse the trend on Kodak's home turf.

Ironically, given his background at Motorola, Fisher's digital strategy has been one of the biggest drags on Kodak's performance. He has devoted substantial energy to making Kodak more like Motorola, capable of producing new state-of-the-art products every few months. Company factories are churning out an impressive array of digital cameras, scanners, and other devices at a breakneck clip. And sales of digital products last year--the most recent numbers available--were $1.5 billion, up 25%. Because of the breadth of its products, Kodak is far ahead of any other company in digital imaging sales.

MAGIC TRICKS. The problem is that competitors such as Hewlett-Packard, Canon, and Epson are rapidly producing competing products at ever lower prices, and Kodak is having trouble developing any kind of technological leadership. Fisher acknowledged in July that he was surprised at how aggressive others were at following Kodak with new products, particularly digital cameras, and at slashing prices. As recently as late last year, Fisher had hoped Kodak's digital business would be profitable in 1997. But partly because of aggressive competition that has kept its camera profit margins low, losses through the first half climbed to $100 million. Analysts estimate that the losses grew to $150 million in the third quarter.

The biggest test of Fisher's digital strategy comes next year. That's when he'll unveil its core component--a global network of digital printing stations, called Image Magic, now being installed in retail stores worldwide. Consumers will be able to use the devices to access photos they store on the Internet, manipulate them in various ways, and print them. So far, tens of thousands of Image Magic kiosks have been installed, but the Internet connections won't be done until next year.

Competitors and industry consultants question if Kodak's kiosks will become profitable before alternative digital imaging technology becomes widely available. HP, Canon, Epson, and others are rapidly producing lower-cost photo-quality printers. And some marketing experts believe that consumers will prefer these devices, which they can use at home, to Fisher's kiosks. "Kodak is trying to get customers to conform to their old business model, but consumers are likely to favor a more direct approach," of printing pictures at home and playing with them on their PC, says James F. Moore, chairman of GeoPartners Inc. in Cambridge, Mass., a strategy consultant who has worked for HP and other high-tech giants.

Kodak executives are keenly aware that a low-cost, photo-quality printer is a crucial weapon missing from their digital arsenal. Fisher is hoping to be a dominant player in what he views as two distinct markets: the home digital darkroom and kiosk-based digital imaging at retailers. But as recently as June, Kodak was still struggling with how to enter the home market. In interviews with BUSINESS WEEK, three top Kodak executives argued for three different approaches to the consumer printer market. Former digital imaging chief Robert M. Unterberger wanted to wait until a low-cost printer technology emerged that would deliver superior picture quality. Robert L. LaPerle, head of digital consumer products, thought Kodak should immediately begin selling inkjet printers. And Fisher said Kodak would begin selling inkjet printers as soon as consumer demand picked up, possibly by reselling units made by another supplier.

Meanwhile, Fisher can't afford to neglect the old analog business, where Kodak is being hammered by Fuji. In addition to steep price cuts, Fuji has significantly stepped up marketing efforts and increased its U.S. visibility. Its green-and-white blimp has become ubiquitous at sporting events. More substantively, Fuji last year signed an exclusive deal for Wal-Mart Stores Inc.'s photofinishing business, the nation's largest. The result: Fuji's U.S. market share has jumped to 16%, up from 11% as recently as last year, while Kodak's has dropped into the high 60s.

Fisher says Kodak has been responding "tactically" to Fuji's price cuts all year with special promotions of its own. But that appears to have done little good, and he's now planning a counterattack, which, according to Kodak's ad agency, will include a major new campaign. "We do not intend to continue to lose share at the rate we lost over the summer months," says Fisher. Although he won't disclose details of his plans for Fuji, he adds it won't involve a price war--for an obvious reason. Every 1% cut in Kodak film prices results in roughly a 1% drop in earnings per share, figures Jonathan Rosenzweig, an analyst at Salomon Brothers Inc. The best Kodak can hope for is to slow, but probably not stop, Fuji's gain in U.S. market share, Fisher concedes.

Those inroads by Fuji are steadily eroding Kodak's profits. And that's the key reason many outsiders are arguing that Fisher needs to take drastic action to reduce Kodak's costs. Cost-cutting is especially critical on the digital side of the business, where Kodak faces a horde of lean and mean competitors. To slim down, Fisher is considering reducing its manufacturing of hardware by outsourcing some digital photography equipment. "Competing head-on in hardware with the rest of the world is probably not going to be a profitable business for Kodak," says Strickland.

When Fisher arrived in Rochester four years ago, he was hailed as a corporate savior. Kodak employers and managers believed that Fisher would magically increase profits, develop new products, and restore the company's prestige--all with few painful cutbacks or changes to the Kodak mind-set. Probably no one could have lived up to those expectations, and trying to do so has cost Fisher precious time. Kodak can still be made into a much more profitable, growth-oriented company. But to do so, George Fisher has to be a lot tougher--and faster.

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