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The fall of an icon

By MIKE DICKINSON
RBJ 25th Anniversary Edition
Rochester Business Journal
October 12, 2012

Kodak's descent into bankruptcy was the era's top business story

In 1982, Eastman Kodak Co.'s local employment peaked at 60,400. A city with that population today would rank as the 11th-largest in New York.
 
Kodak now has fewer than 5,000 employees. That number would rank 61st among the state's 62 cities, larger than only the tiny Oneida County city of Sherrill.
 
The city analogy might seem a stretch, but Rochester for more than a half-century was a company town. In addition to Kodak's direct employees, many thousands worked for suppliers and other firms that relied on the needs of the massive company and its workforce.
 
As recently as 2003, when the Rochester Business Journal published a special section titled "What if Kodak went dark?" some area officials declined to even consider the idea. Kodak, in the minds of many, was too big-or at least too important-to fail.
 
That sentiment was jolted Jan. 19 when the community awoke to learn that shortly after midnight Kodak had filed for Chapter 11 bankruptcy.
 
The decline of Kodak ranked as the top local business news story of the past 25 years in a recent Rochester Business Journal poll. It received 59 percent of the votes; no other story garnered more than 7 percent. Tied for No. 2 was the decline of manufacturing, a trend in which Kodak played a major role.
 
Kodak has not ranked as the region's top private-sector employer since the middle of the last decade. And it no longer ranks as the area's largest public company or manufacturer.
 
Some company observers point to the global digital trends that are gobbling up retailers, publishers and other industries as the key factor in Kodak's decline. Others say Kodak's chief executives and directors failed to steer the photo giant onto the correct course-whether that be digital imaging, chemicals, copiers or health care.
 
Kodak chairman and CEO Antonio Perez in August said the company decided in 2004 to become a digital company after more than 100 years as an analog firm.
 
"You can say we started very, very late," he said. "You can argue that, and you would probably win the argument. I'm sure you will win the argument."
 
Kodak now sees its future as built on commercial, packaging and functional printing solutions, along with enterprise services. The company has shifted from a business-to-consumer firm to a business-to-business enterprise. Indeed, in 2004 some 90 percent of its revenues were generated by consumer businesses; in 2012, two-thirds of revenues come from business to business, Perez said.
 
"It was the technologies we had, the differentiation we had, that led the company to become a fundamentally commercial company," he said.

The future foreseen
In an interview conducted shortly after Kodak filed for bankruptcy, Lawrence Matteson, an executive professor of business administration at the University of Rochester's Simon Graduate School of Business and a former Kodak executive, dismissed suggestions by some that Kodak had been led by idiots who failed to see the digital tidal wave.
 
Starting in the early 1980s, Kodak leaders acknowledged the impending transformation and its impact, Matteson said. Its existing lifeblood would dry up as digital imaging replaced the silver halide-based photographic industry that fueled Kodak's success and generated billions in revenues and profits. Kodak's leaders knew digital would be far less profitable: Where film generated a profit of up to 70 cents on a dollar, digital imaging might make a nickel.
 
"They never found a very powerful or profitable substitute for a business that required film," Matteson said.
 
That does not mean there was a shortage of plans for the future: copiers, health care, chemicals, digital imaging and printing.
 
One possible route to a new future for Kodak began in the 1970s. Kodak in 1975 entered the copier or electrophotographic business. Ultimately, Kodak and Xerox Corp. became the two major players in the high-volume copier market.
 
Ulysses Yannas, a longtime company watcher with Buckman, Buckman & Reid Inc. in New York City, began tracking Kodak in the early 1970s when Walter Fallon was CEO. Yannas maintained Kodak should have stayed with copiers. He praised the products' quality but conceded that Kodak did not know how to market them.
 
Kodak ultimately sold its copier division to Danka Business Systems PLC.
 
During the 1980s, Kodak launched Ektachem blood analyzers, based on film technology, which became a successful business, Matteson said. That division was sold to Johnson & Johnson in 1994. It continues to operate in Rochester, as Ortho Clinical Diagnostics, with some 1,000 employees.
 
Under the leadership of Colby Chandler and Kay Whitmore, Kodak saw an opportunity to leverage its organic chemistry research capabilities and intellectual property in the pharmaceutical industry, which in the late 1980s was highly profitable. In 1988, Kodak acquired Sterling Drug Inc., a maker of prescription and over-the-counter drugs.
 
Kodak did not find success in that industry. In 1994, with George Fisher then at the helm, Kodak sold off pharmaceutical and consumer health products subsidiaries and used the proceeds to pay down debt. It also veered away from diversification to focus on core imaging technologies, including digital imaging.
 
Another segment divested was Eastman Chemical Co. Some observers suggest Kodak missed an opportunity to focus on that business.
 
Kodak spun off the Tennessee-based chemical firm in 1994 as the country's 10th-largest chemical company. Today, Eastman Chemical is a Fortune 500 firm with 12,500 employees worldwide and 2011 pro forma revenues of $9.3 billion. Its market value is nearly $7.6 billion, compared with Kodak's current market capitalization of roughly $69 million.
 
"Could (Kodak) have kept it and focused on it? Yes, (but) that would have meant saying, 'Stop doing what you are doing in Rochester and focus on the chemical business in Tennessee.' It would have meant not leveraging any of the strengths (of Kodak)-not leveraging the R&D, not leveraging the manufacturing and not leveraging the brand," Matteson said.
 
Fisher won accolades for shedding Kodak's non-imaging health care businesses. Those deals generated $9 billion and revitalized Kodak's balance sheet.
 
"In the 1970s, (Kodak leaders saw) digital doing away with traditional photography and got into other businesses-and in debt," Yannas told the Rochester Business Journal in 1998 as Fisher was completing his fifth year as CEO.
 
Fisher's decision to divest those businesses shifted the company's focus to imaging science. Ultimately that move, however, would not bring about the growth he envisioned and did not succeed in finding a profitable path to take the company into the 21st century. It also failed to halt the ongoing layoffs; over more than two decades, Kodak has shed an average of 2,000 local jobs annually.
 
Another big use of cash came when Kodak invested more than $1.3 billion to tap the massive China market. But only seven years after the company launched its China push, officials said in 2005 that film sales in China had peaked. Kodak-beginning under Fisher and continuing under Daniel Carp-bet that China would follow a path first to film and later to digital. That proved incorrect or at best overly optimistic.

Beyond film
Carp, who succeeded Fisher as CEO in 2001, took the reins as a Kodak insider. Yet as CEO he put in motion efforts expected to sever the direct link with film.
 
"Carp was the one who changed it," Yannas said.
 
As CEO, Carp ordered a multiyear reshaping of Kodak Park. The multimillion-dollar project involves demolishing buildings, selling properties and revitalizing some sites.
 
Still, Carp misjudged how fast film would decline, company watchers say.
 
Kodak under Carp built a leading brand in digital cameras. When he departed as CEO, its EasyShare models were No. 1 in U.S. market share and were believed to rank No. 3 globally. Kodak also had built a leadership spot in kiosks-a business Kodak said in August that it plans to sell. The company this year also said it would exit the consumer digital capture business, which includes digital cameras.
 
Similarly, Kodak built a leading site for online photos, the Kodak EasyShare Gallery, but profits proved elusive; the company sold it during its bankruptcy process.
 
In the end, analysts say, Kodak's digital imaging strategy lacked the so-called razor blades necessary for the model to work: Company leaders severely misjudged the demand that would exist for hard copies of photos taken with digital cameras.
 
A lasting legacy of Carp's moves-at least at this point-appears to be a series of deals that built up Kodak's printing and graphic arts foundation. The company acquired printing giant Heidelberger Druckmaschinen AG's share in the Rochester-based joint venture NexPress Solutions LLC, along with Heidelberg Digital LLC. Kodak also purchased Sun Chemical Corp.'s stake in Kodak Polychrome Graphics for some $817 million and acquired Creo Inc. for nearly $1 billion.
 
Earlier acquisitions, including Scitex Corp. Ltd. for $250 million, gave Kodak depth in commercial digital printing. Ironically, Kodak had sold the business-which would become Kodak Versamark-to Scitex in 1993 in an earlier shift of management focus.
 
The deals hurt Kodak's balance sheet, but they have bolstered its emerging graphic communications segment.
 
Kodak eventually began to see it could not fund all of its promising businesses. Its Health Group was sold in 2007 to Onex Corp. and became Carestream Health Inc. Some thought that business, which employs 1,100 people here, could have become part of Kodak's future as well.
 
The company divested its remote sensing systems operation in 2004 to ITT Corp. It also sold various smaller pieces such as organic light-emitting diode and sensor businesses.

Kodak and Rochester
Kodak's decline has not, to the surprise of some non-local observers, left scorched earth in Rochester. Federal Reserve Bank of St. Louis data show the Rochester metropolitan statistical area with 126,000 manufacturing jobs on Jan. 1, 1990, compared with 61,800 such jobs on July 1 of this year-a 51 percent decline. Yet the region's non-farm employment on July 1 was 518,700 versus 490,100 in 1990, up nearly 6 percent.
 
It has helped that Kodak sold an array of businesses to other firms that have kept operations and employees here. At the same time, one of George Eastman's legacies-the University of Rochester-has grown even as Kodak has contracted. It is the region's largest private-sector employer.
 
Kodak plans to emerge from bankruptcy in 2013 with a leaner, more focused business that has little to do with photography.
 
"We are reshaping Kodak, rebalancing our company along the commercial, packaging and functional printing solutions, and enterprise services," Perez said. "These are segments of our business that are very large, segments that have long-term growth opportunities and where our capabilities are well-matched with the needs of the market."
 
The success of that transformation hinges on the answers to numerous questions, including how much money Kodak can generate from its asset sales, and whether the board and its executives have selected the correct path.
 
In his view, Matteson said, the challenge seen by Kodak over the past decades far eclipsed those encountered in remaking firms such as Intel Corp., IBM Corp. and Apple Inc. Kodak faced not only major marketplace shifts but also obsolescence of its core photographic research, production and manufacturing capabilities.
 
"It was one of the most difficult transformations any major American company has had to face," he said. 
 
10/12/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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