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A Kodak Moment

“You Press the Button, We’ll Do the Rest”: George Eastman, founder of Eastman Kodak in 1888.

Rarely does a simple company slogan outlast the most recent marketing campaign, but this corporate mantra has driven Kodak for well-over 100 years, through turbulent times and now into the digital age. The history of this American icon is riddled with technology breakthroughs and game-changing inventions that affected the way Americans captured and saved their memories, yet the last five years have put that icon status in jeopardy as the company tries to re-make itself in the digital imaging world.

To be clear, Kodak was not “caught sleeping” as the digital age emerged. Indeed, Kodak scientists produced one of the first working digital cameras in 1975, yet the company was extremely slow in adopting the technology for fear of damaging the cash cows of traditional film and printing. However, the year 2002 marked a seminal event for the company as it was the first year that worldwide film sales actually declined, and they were forced to take a hard look at their strategies in the new digital world.

Mr. Antonio Perez was brought in as COO in 2003 after 25 years at Hewlett Packard, where he developed the printing business and brought HP into the digital age. Mr. Perez was named CEO of Kodak in 2005, after a brutal seven year stock price slide from $85 to $22. The first hurdle to overcome was convincing investors (particularly one legendary mutual fund that owns over 20% of the company) that the management team could actually compete in this new world and that it wasn’t in the best interest of shareholders to break up the company and sell-off the assets. The hiring of Mr. Perez helped bolster investor confidence and he has since brought many outside “digital managers” into the executive offices in Rochester, NY to shape the company’s future. But not all changes took place at the executive level: Over the past three years, the number of Kodak employees was reduced from 75,000 to 35,000. Half of the current employees are considered “new”, meaning the original Kodak workforce was reduced by 75%. The culture and attitude of the company had to be re-made from a monopolistic conglomerate to a nimble cutting-age digital imaging fighter. Mr. Perez paraphrases Alfred Einstein when describing the culture changes: “to solve the problems you have today, you can’t be in the same state of mind as you were when the problems began.” A notable change in asset deployment was a switch from fixed to variable cost business models to allow faster market adaptations. However, as Mr. Perez painfully admits, writing off those massive fixed assets with restructuring charges over the past three years has made it difficult for investors to grasp the progress the company is making.

With the size and structure of the company now retro-fitted for the digital future, Mr. Perez has re-shaped the vision of the company to capitalize on Kodak’s two key knowledge advantages in the marketplace: Material Science and Digital Imaging. Mr. Perez hopes to capitalize on Kodak’s 100 years of intellectual property development in imaging to produce sustainable market leading digital businesses with clear technological advantages for the end-user. This transformation has not been easy, but he notes that 80% of Kodak’s revenue now comes from business lines that hold a top 3 market share position.

In 2007, the efforts of Kodak employees are beginning to show in the financials as the digital businesses now account for 60% of revenue and roughly half of earnings. Most notable is Kodak’s foray into the inkjet printing business, which wasn’t much of a surprise given Mr. Perez’s background at HP. After being on the wrong side of disruptive technology for many years, Kodak is trying to add a little disruption of its own in the printing business by reducing the cost of a printed page by 50% with breakthrough inkjet technology developed in-house. Mr. Perez believes Kodak can carve out a Billion dollar business with this technology by 2010.

Kodak’s stock price is still hovering around $25 – the same price it was in 2002, but this is clearly a different company. Kodak has not forgotten its cherished roots, but is making the difficult decisions to adapt in a changing marketplace, so that it can remain the cherished memory keeper for generations of consumers to come.

December 10, 2007
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