"No Excuse Not To Succeed"

How COO Antonio Perez is hustling Kodak into the Digital Age

Dressed in a cream-colored suit amid a sea of dark jackets, Antonio M. Perez looked more like an MC of a glitzy Vegas show than a corporate chieftain as he took the stage before a standing-room-only crowd of camera-shop owners and photo buffs in America's gambling mecca. And the chief operating officer of Eastman Kodak Co. (EK ) displayed a showman's bravado when he declared: "Kodak holds a winning hand."

Certainly, some in the room figured Perez was bluffing. Kodak is desperately trying to reinvent itself for the Digital Age, and 58-year-old Perez, who oversaw Hewlett-Packard Co.'s (HPQ ) rise to dominance in inkjet printers, was hired a year ago to lead the way. Kodak is in a race against time as its traditional film business disappears: Sales peaked at $14 billion in 1999 and have dropped to $13.3 billion in 2003. Today, Kodak finds itself in the awkward position of having to establish itself in a field dominated by others.

It's a painful irony for the company. For a century, Kodak enjoyed near-monopoly power -- until Fuji Photo Film Co. (FUJIY ) came along. Kodak even came up with the first digital camera in 1975. But it is only now that the company is starting to capitalize on the technology.

CLEAR VISION. Perez has gotten off to a quick start at a company once known for its destructively slow decision-making. He has made clear what many at the Rochester (N.Y.) headquarters long denied -- that Kodak's main business has to be digital imaging. In September, the company announced a sharper focus on digital businesses for its consumer, commercial, and health units that it predicts will increase the company's revenue 23%, to $16 billion, in 2006, and to $20 billion by 2010.

Perez helped figure out how to pay for the transition -- mostly by reducing investment in film and laying off nearly a quarter of Kodak's 60,000 workforce. He has instilled a new discipline at the company that is speeding product development. And he is uncovering new uses for Kodak's 20,000 patents. "The intellectual property and knowhow is unbelievable in the company," he says. "There is no excuse not to succeed."

But the toughest challenges still lie ahead. Perez has to get Kodak's engineers and marketers to work together to come up with products that will hold their own in areas where the company has little credibility. For example, after rummaging around Kodak's hallowed labs, Perez believes he has found a breakthrough technology that will change the inkjet printer business. And that is all he will say.

Sounds like wishful thinking to some. "It's not about patents. It's all about commercializing the technology," says Vyomesh Joshi, who worked under Perez at HP and now runs its imaging and printing group. "That's where they're going to have a hard time."

All the while, Perez has to be careful not to upstage Chief Executive Daniel A. Carp, a 33-year Kodak veteran, who has been pushing the digital transition but realized he couldn't do it alone. "We needed leaders who had 'been there, done that' because this is not a turnaround. It's a transformation," Carp says.

And Perez needs Carp. He is leaning on the 55-year-old CEO for his institutional knowledge of Kodak, ties to employees, and strategic vision. If Perez plays his hand right, and there are many outside the company who believe he will, he could be the CEO of Kodak within a few years. Kodak says it never comments on succession plans.

Although Carp and Perez share a common vision for Kodak, they could hardly be more different. Carp has a folksy charm that hints at the small Virginia town where he grew up, though he spent much of his career running Kodak's operations in Latin America and Europe. Perez has a bolder manner: He was born and raised in Spain, tells (bad) jokes, and plays the guitar. Colleagues say he tends to work from instinct; Carp is more analytical.

LOWER MARGINS. The new Kodak is starting to take shape. In the first quarter, it reported that sales were up 11% from the year before, to $2.9 billion, and that net income more than doubled, to $28 million. "We're not claiming victory, but this is a great step," says Perez. Digital sales rose 44%, boosted by a doubling of camera sales, while film revenue slipped 2%. Digital products now account for a third of the company's annual revenue but just an estimated 10% of operating income. That's the price Kodak will have to pay: The digital business offers much lower margins than film. By 2006, Kodak predicts its gross margins will be about 31%, down from a high of nearly double that.

Perez, for all his showy enthusiasm, is well aware of the old attitude problems at Big Yellow. The biggest is a strange complacency -- some call it arrogance -- when it comes to selling what are widely acknowledged to be innovative products. "They tend to bring out one product and think, that's it -- that they've now solved all the problems and the world will beat a path to their door," says Frank J. Romano, a professor of printing at Rochester Institute of Technology. The printer dock for the Kodak EasyShare digital camera is a case in point. Introduced last year, the dock finally made it easy for digital shutterbugs to print their photos without a computer. If, that is, they used a Kodak camera. Such proprietary standards are a no-no in the digital world. Although the dock topped $100 million in sales in its first year, it could have done much better. Now Kodak is looking for ways to make the dock work with other cameras.

Perez has helped change how Kodak operates to ensure the company doesn't make the same mistake again. He has sharpened the focus of an integrated product-delivery program that helps marketers and gearheads work more closely together. And Perez has sped the reorganization of each Kodak business unit into special product groups. These are teams dedicated to specific areas such as digital cameras, online services, or photo kiosks. By partly tying compensation to each group's performance, he expects better results.

Some employees and customers already note a faster pace. Kodak introduced six new digital cameras in February, double last year's number. And it raced to upgrade 3,300 photo-processing kiosks at CVS Corp. (CVS ) drugstores to wirelessly handle photos from camera phones. The old Kodak might have discouraged the change because it could cut into sales of disposable cameras.

The new business units take a page from HP, a particularly innovative company that gives individual units focus and freedom. Perez thrived in that environment: Under his watch the printer division grew into a $10 billion business. But when he disagreed with some management changes, Perez left in 2000 and shortly after became CEO of Gemplus (GEMP ), a smart-card manufacturer in France. At Gemplus, Perez was seen less as a visionary than an imperious leader. After the tech market crash, his decision to cut jobs caused an uproar among union employees. They also criticized his well-padded pay package. "He was never committed," says Pierre-Jean Delmas, senior counsel for Gemplus at the time. Perez took a 20% pay cut but left in December, 2001.

At Kodak, though, Perez doesn't have the same reputation. He has found a company that for all its earlier conceit now sees the need for a change. That gives him a chance to turn Kodak into something it hasn't been for a while: a company whose best years are ahead of it.

By Faith Arner in Boston, with Rachel Tiplady in Paris

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