KODAK GRABS FOR GROWTH AGAIN George Fisher understands how to build and sell electronics, but can he cut fat and woo shutterbugs? The new CEO must be able to do all three.
By Peter Nulty

(FORTUNE Magazine) – THE DRAMATIC restructuring of U.S. industry won't be over, as the saying goes, until the fat lady sings. Hundreds of companies have performed massive renovations -- Ford, Chrysler, Texaco, Xerox, IBM. But now the diva enters. She is the last of the great, corpulent, 20th-century American enterprises to sing the rejuvenation aria. She walks to center stage. She turns to the audience. She is Eastman Kodak. Yes, deep change is coming to Kodak, one of the most bureaucratic, wasteful, paternalistic, slow-moving, isolated, and beloved companies in America. What will become of the maker of those cheery yellow boxes filled with sweet memory? Will Kodak join the herd stampeding down the information superhighway, buying up companies in search of growth in electronics? Or will it squeeze its head count mercilessly, sending tens of thousands of employees onto unemployment rolls, to boost earnings? The latest CEO to grapple with those questions knows that his tenure and his place in history depend on how effectively he can find answers. He is George M.C. Fisher, who resigned as chairman of Motorola to become chairman and CEO of Kodak in December. Fisher, 53, has a doctorate in applied mathematics and knows little of the chemistry or arcane secrets of film manufacturing that is Kodak's trade. He knows, however, that the company won't be reformed easily.

Five times in the past ten years Kodak's managers announced restructuring programs, but none penetrated deeply enough into the company's complex workings to improve earnings. Frustrated by these failures and pressured by investors, the board of directors, led by activists John J. Phelan Jr., former chairman of the New York Stock Exchange, and Roberto C. Goizueta, chairman of Coca-Cola, fired Chairman Kay R. Whitmore last year. They recruited Fisher, who upon his arrival promised something Kodak hasn't delivered in years: ''Kodak has a great franchise, and my hope is to build on that to get exciting growth.'' That promise, so simple and unexceptionable on its face, sparked controversy. It pumped up morale among employees who had feared an axman cometh. But it disappointed, and even angered, many investors and financial analysts who are convinced that fast growth at Kodak -- promised but not delivered by both Whitmore and his predecessor, Colby Chandler -- is all but impossible. The critics would like the company run from now on as a mature cash cow: cutting costs to generate as much cash flow as possible, buying in shares, and paying big dividends. ''Growth?'' snorts B. Alex Henderson, an analyst at Prudential Securities. ''I don't think so. Making Kodak grow is not like teaching an elephant to dance. It's like cloning an elephant into a mouse.'' The board appears to have opted for one last dance with Big Growth. (The directors have taken a vow of silence in this transition period, and Fisher, who was mapping out a strategic plan as FORTUNE went to press, declined to be interviewed for this article.) That leaves Fisher with an epic task to perform in a supercharged atmosphere. Says Eugene Glazer, an analyst at Dean Witter Reynolds: ''I don't think anybody can do this. But if he does, it will be one of the greatest feats in business annals.'' What's so tough about remaking Kodak? First, it is a chemical company that must transform itself, at least in part, into an electronics company. The chemical business, silver halide photography, is mature and slow growing. The / electronics business involves translating images into the digital language of computing so they can be manipulated on computer screens and transported electronically; it is still a small, fast-growing industry full of startups. The two businesses are, as Henderson says, like elephant and mouse. Kodak has tried both researching and buying its way into electronics with a scattershot approach that so far has failed. One of the biggest goofs was its acquisition of Atex in 1981. A supplier of word-processing systems to newspaper publishers, Atex might have added imaging capability to its products and made them the kind of total system in use now. Instead it lost its dominant market position and, in the late Eighties, $10 million to $20 million a year, says Jamie Kiggen, an analyst at Prudential Securities. Having paid over $80 million for Atex, Kodak sold it for $5 million in 1992. Whitmore branched off in another direction in 1988, buying Sterling Drug, the maker of Bayer aspirin, for $5.1 billion just as drug stocks were at their peak. His free-spending ways raised investors' ire. Says Henderson: ''In the past ten years Kodak has put over $10 billion into R&D, and earnings have gone from about $2.50 a share to $2.50.'' The geese that lay the golden eggs that Kodak misplaces too often are the fabulously profitable film and photographic-paper businesses. Gross margins on the little yellow boxes can be as high as 80%. But the geese are starting to get plucked. Fuji Photo Film of Japan and private store brands are undercutting Kodak's prices and eroding its market share, which has fallen from about 80% to 70% in just five years, says Strategic Marketing in New York City. Jack Thomas, president of the imaging division, reports that Kodak halted the slide in 1993, but it did so in part by lowering prices in special promotions. This year, after years of interminable debate, Kodak will make its first run at the low end of the market with a film called Funtime, to be priced about 20% below its standard Gold brand. Hoping to limit the profit margin erosion Funtime represents, Kodak will sell it only in the spring and fall -- not during the summer or at Christmas, prime time for snapshooters. The trend to lower prices could seriously hamper any growth plans Fisher may be contemplating. Kodak needs a large cash flow to finance expansion in electronics, pay down the company's high debt (over $7 billion since the Sterling purchase), and keep shareholders from open revolt by providing some growth in earnings per share. Despite the long odds, Kodak executives look as happy as folks at a church social posing for a group portrait and all saying cheese. If anyone can save them, they figure, Fisher can. He worked for ten years at Bell Laboratories, where he became an early believer in the communications revolution. In 1972 he helped invent an electronic blackboard on which one could write and have the image travel by phone to distant locations. He moved to Motorola in 1976 as a manufacturing boss and methodically built the wireless equipment business -- pagers and cellular phones -- into the fastest-growing part of the company with the best products of their kind in the world. ''He is a patient listener who will pounce suddenly and interrogate you to great depth. Then he'll lean back and listen some more,'' says Carl F. Kohrt, Kodak's vice president of health sciences. ''That's his research background.'' David Yaffie, a Harvard business school professor who watches Motorola closely, says, ''He was superb at Motorola, creating and managing explosive growth. He understood technology and how to drive it into the market. Kodak has technology but is slow to market.'' One other attribute gratifying to Kodak employees but irksome to some investors: Fisher reduced costs at Motorola only slowly. When approached to become CEO of IBM, he declined, in part because so much cutting was needed. Is Fisher right for Kodak? Maybe. But technological wizardry won't be enough. Fisher will have to wear many hats and take sweeping action. That means doing two things people think he can do -- and at least one that most think he can't:

-- ELECTRONICS. Kodak may have overpaid for what it has in the labs, but some of it is pretty promising. Take the company's state-of-the-art charged couple devices, or CCDs, sensors that replace film in digital cameras. A Kodak CCD is in a new camera called QuickTake 100 that Apple Computer markets (list price: $749). QuickTake dumps the images it captures directly into a Macintosh. Kodak also created the standard for storing photos digitally on CDs. Machines to play the photos on TV sets flopped in consumer markets, but small businesses such as real estate agents and travel agents use them to put sparkle in sales presentations. Expect Fisher to scour the labs for overlooked ideas and push them into the market, much the way Stanley Gault seized on Aquatred tires when he arrived at Goodyear in 1991. At Motorola, Fisher was adept at forming strategic alliances with other electronics companies to gain technology or market toeholds he needed. He will bring that to Kodak, which has traditionally worked alone. Even if Fisher builds the electronics business rapidly, it won't remake Kodak because it will be expanding on a small base. Henderson estimates annual sales now to be about $100 million. If Fisher can drive that figure to $1 billion in five years, and the business earns a respectable 10% operating margin, profits will be $100 million, a tadpole compared with what Kodak earns on photographic products ($1.3 billion on $7.3 billion of sales in 1993).

-- DOWNSIZING. If pressure on film margins grows, Fisher will have to cut more deeply than he has let on. Kodak spun off its Eastman Chemical division on December 31 but avows publicly that Sterling Drug is not for sale. However, reliable sources close to the company say that Fisher is ''looking hard'' at selling Sterling. The problem may be timing, as health care reform is battering the market value of drug companies. Another likely candidate for sale: the L&F division, which came with Sterling and makes household products like Lysol disinfectant. Fisher hired Harry Kavetas, former head of IBM's credit division, as chief financial officer. In less than two months, Kavetas cut Kodak's debt almost $1 billion, mainly by refinancing revolving credit. A Kodak executive predicts that ''Kavetas will play the heavy'' when cutting gets more serious. Kavetas recently seemed impatient with Kodak's unbudgeable culture and architecture. ''I like an office where you can hammer on the wall,'' he said, punching the air in his office with a fist. ''Then people know you're in.''

-- FILM. This is the wild card that Fisher must bet and that most investors have given up on. Kodak has to stem the erosion of its market share in North America and get big growth overseas. Can it? Yes, with the right people. Fisher will probably recruit marketing talent from outside. Kodak is appealing in court to have two dusty consent decrees, one dating from 1921 and the other from 1954, set aside. They bar Kodak, but not its competitors, from such practices as offering dealer promotions that bundle the price of film with the price of developing the photos. In advertising, Kodak has traditionally promoted picture-taking more than it has touted its product. Fisher will have to be more direct. During the Academy Awards ceremony in March, Kodak ran a TV ad that said: ''Ninety-three percent of Hollywood directors make their movies on Kodak film. What's in your camera?'' The film market abroad has great potential. Half of humanity, Kodak executives like to point out these days, don't take pictures yet. The company just signed a partnership deal with a distributor in China, and if Fisher is dreaming wildly of making it overseas, at least he has a role model: Coca- Cola. In the 1980s, Coke transformed itself into a growth company abroad and one of the best stocks on Wall Street. It is no coincidence that the man who recruited Fisher is the same man who led Coke's resurgence -- Roberto Goizueta. That is surely why the board is willing to risk one more dance with growth -- and why almost all of Kodak these days is saying cheese.