KODAK - THIS ELEPHANT MAY NEVER DANCE

Thirty years ago, it was evident that Kodak was making big strategic mistakes and was unwilling to listen or respond to strategic insights readily available from respectable outsiders. From 1973-80, while I was with The Boston Consulting Group, BCG continually and publicly pointed out (from publicly-available data) that by pricing its film in Japan at a premium to the U.S., Kodak was actually aiding the financial profitability and growth of Fuji, its major competitor in film. Simply pricing Kodak's film in Japan at U.S. levels would have held Fuji back for years.

In 1980, I became VP, Corporate Development for Atex, Inc. which was leading the electronic production revolution in newspaper and magazine publishing. Another innovative company, Scitex (from Israel) was making digital image processing practical, gaining visibility by selling Playboy a $ 1 million system to manipulate and enhance its centerfold photos. We could see ahead the merging of electronic text and pictures to do complete page makeup. Unable to structure a deal with Scitex, Atex chose to be acquired by/merge with Eastman Kodak Company on October 2, 1981 (Kodak’s second-ever acquisition). Kodak had phenomenal imaging capabilities in its R&D labs. Sony, interestingly, had just introduced its new Mavica electronic camera on August 24, 1981.

When I first met Walter Fallon, Chairman of Kodak, in the pre-merger meetings, he told us at Atex that we would be the electronics division for leading Kodak into a digital world and that we were “going to make this elephant (Kodak) dance”.

Well, it was an inspired idea and one that should have happened; however, when Walter retired in early 1983, his successor, Colby Chandler, and the new president, Kay Whitmore, apparently did not share Walter’s vision.

Kodak did not use its Atex acquisition to develop the digital frontier. Paul Brainerd, VP, Customer Service at Atex, left and formed Aldus Corporation to develop the revolutionary Pagemaker software package for desktop publishing running on a Macintosh which created hundreds of millions of dollars of value, including a few hundred million for Paul himself. Kodak had Paul and the idea in house at Atex, but did not believe it was possible to do on a personal computer. Adobe later acquired Aldus for $525 million in 1994.

Under Kodak management, Atex faltered rapidly and soon abdicated its dominant 60% market share position in publishing computer systems, fading to become insignificant in the market in a few years.

From then until today, Kodak perennially underperformed as Fuji kept gaining in traditional film and as the digital revolution proceeded. Kodak management kept blaming many factors for its weak performance but never addressed the real strategic issues.

Kodak’s culture of complacency, which promoted those who didn’t make mistakes (who were those who were reluctant to change), prevented the bold strategic change that was needed, much like what happened to Xerox Corporation.

Whitmore presided over 10 years of continued strategic stagnation and was unresponsive to a chorus of change suggestions from outside, including my own. Despite new leadership - George Fisher (from Motorola) in 1993, and Dan Carp (a Kodak lifer) in 1999, the self-inflicted strategic paralysis has continued.

Yesterday, Kodak announced the first dividend cut its 120-year history, a 72% reduction, and saw its stock drop 18% to $22.15 per share (lowest price in 15 years). Kodak also said it will not make new investments in film, will spend $2 billion on acquisitions, and will diversify into ink-jet printers.

The announced program again lacks credibility. Strong, entrenched competitors have been moving down experience curves rapidly for a long time and have built cultures to do so, embracing creative destruction and change. It is foolhardy to attack directly (in ink-jet printers, especially) strong, ensconced competitors accustomed to ferocious competition and unlikely to move out of the way for Kodak.

Kodak may continue to have large “milking” cash generation potential from selling share in traditional film. Also, significant growth could still come from building on current share positions in digital cameras and high-quality paper for printing digital photos. Kodak could still turn around, but it most likely won’t.

Unfortunately, Walter, this elephant just may never dance.

Richard Bird
September 26, 2003

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