(FORTUNE Magazine) – Like a snapshot, Eastman Kodak long appeared frozen in time. The world's premier marketer of memories on photographic film and paper seemed a perfect fit for, say, 1958, the year Perry Como recorded his hit "Magic Moments." Kodak was proud, rich, and much admired by consumers, who trusted the high-quality film Kodak packaged in friendly yellow boxes. But the company was also uncommonly ponderous. It spent billions on research that never produced marketable products and on regiments of employees whose value-added was hard to detect.

In the 1980s, Kodak "restructured" five times in search of more efficiency. Management diversified into computers and pharmaceuticals in an effort to break out of the slow-growing photography business. All the moves were in vain. By the start of the 1990s, earnings were still bouncing around from $2.50 to $3.50 per share, just where they were in the late Seventies and early Eighties. Kodak obviously was in no condition to compete with the swift and lean corporations that will rule the 21st century.

Then along came George M.C. Fisher, 54, who had turned Motorola into the world's finest manufacturer of such wireless communications equipment as pagers and cellular telephones. Fisher was recruited by the board to get the aging giant on its feet. He's been on the job a bit over 16 months, so now is a good time to assess whether he really has a shot at preventing the foundering of another great American brand.

Since he arrived at Kodak's Rochester, New York, headquarters, Fisher has been getting solid hits, if not yet home runs, every time he comes to the plate. His latest was a glitzy rollout in late March of the strategy and products he hopes will make Kodak a power in electronic, or digital, imaging, including a new brand name that will adorn all the company's digital products: Kodak Digital Science (see box).

His early moves were aimed at getting the company focused again on its core expertise in image making. He sold the pharmaceuticals business that makes Bayer aspirin and the household products division that produces Lysol. His swift divestitures brought $8 billion, a good $500 million more than Wall Street had expected, and he used it to reduce Kodak's long-term debt from $7.8 billion to $1.6 billion.

At the same time, Fisher got serious about digital imaging. Kodak had been spending hundreds of millions on research into the technologies that almost certainly will one day edge out traditional film, at least for consumers. But the projects were so scattered throughout the vast company that no one project manager had much clout. As for a cohesive vision, forget it. Fisher put most of them into a new autonomous division, called digital and applied imaging, and demanded that the division get some products out the door. It now markets such wonders as electronic cameras that use no film and compact disks that store photographs in digital form. Then he negotiated a series of alliances so the new division could develop digital-imaging products in partnership with major powers in computing and telecommunications, including IBM, Hewlett-Packard, Sprint, and Microsoft.

Fisher's swift progress has surprised most of the company's once demoralized employees--and its investors. A share of Eastman Kodak has risen from about $40 a year ago to $52 in early April. "We are feeling very positive about Kodak right now," says Robert Bissel of Wells Fargo, one of Kodak's largest institutional stockholders. "Fisher is a gifted strategist more than he's a quarterly profit-tweaker."

Why not, then, simply proclaim Kodak the latest, greatest American turnaround and Fisher a king?

There are two good reasons to delay the coronation. First, for all the progress of a dashing first year, the company's somnambulant culture still has to be remade, and world-class efficiency is probably several years off. Wall Street was dismayed in early 1994 when Fisher announced that the company's earnings would not grow 5% as Kodak had earlier indicated. In fact, the company's pretax earnings for continuing operations, a good measure of underlying performance, actually fell 7% last year.

The problem is that in the film business, Kodak is still the high-cost producer. Fisher argues that Kodak's cost of manufacturing is as low as or lower than that of its archrival, Fuji Photo Film of Japan. That may well be true for the actual production process, which takes place in utter darkness inside huge, block-long machines. But all the overhead that Kodak piles on those machines is something else again. Michael Ellmann, a security analyst for Wertheim Schroder, points out that Kodak generates about $144,000 in revenue per employee compared with Fuji's $385,000. Kodak's own figures show that the company's cost of "sales, advertising, distribution, and administration" are 26% of revenue, vs. a benchmarked "best in class'' of 22%. Such measures may be crude, but they are telling. Turning them around will take some tough cost cutting that Fisher says he will undertake only slowly.

The second and maybe more important reason to hold the applause is that even if Fisher can remake the culture and turn Kodak into a model of corporate efficiency, he could still lose the game because of the arrival of digital imaging in the consumer market. It is an event over which Fisher at his best--and Kodak at its nimblest, most rejuvenated--has little control. The conversion from film to electronics may take 30 years or ten years or (watch out!) five years. When it comes, it could clobber not only Kodak but also Fuji, Polaroid, and any other company that has a huge investment in imaging based on chemicals.

Digital imaging means taking pictures, and then viewing, cropping, cleaning up the red eyes, printing, enlarging, and sending them to Grandma, electronically. It is a new industry whose customers are mainly businesses, including the news media, filmmakers, and advertising agencies, that can afford expensive hardware such as digital cameras costing up to $30,000. Eventually, though, hardware prices will fall enough to make digital imaging as common as home computers. Chemical photography will level off and then go into decline, at least in the computer-literate world.

Fisher's goal is to make sure Kodak can survive the ambush, whenever it comes. Not an easy task. Some 45% of the company's $13.5 billion in revenue and 75% of its profits come from traditional photography in North America. That means Kodak's biggest profit maker will be at ground zero when digital competition strikes. At the moment Kodak's digital ventures, which Fisher hopes will take up the slack when film fades, account for about $500 million of revenues and no profits (they're losing money). The digital division will have to grow to 26 times its present size to equal the existing traditional Kodak.

Fisher's solution is typically bold: He wants to grow both the traditional and the digital parts of the business as aggressively as possible, the digital side to become the future Kodak and the traditional side to feed that growth with capital investment (probably including acquisitions) and to pay a return to stockholders for as long as possible.

The key here is the traditional film and paper business, because it is the mother lode and because it is in harm's way. Worse, it has already been harmed. Over the past decade, Fuji and a passel of "private brand" film marketers, including Polaroid and Kmart (most of whom have their film made by 3M or Japan's Konica), have whittled Kodak's U.S. market share from 80% to about 70%. Fuji sets its price about 10% below Kodak's, and the private brands are typically 20% to 30% lower than Fuji.

As the company with probably the highest cost structure, Kodak has the dilemma of not being able to go as far down in price as the competition. In a price war, it has the most to lose. Even if Kodak were cost competitive, says David Reibstein, professor of marketing at the Wharton School, "monopolies always lose some market share to price-sensitive consumers when competition arrives. The monopoly usually positions itself as the high-quality product, and the erosion of share levels out." That may have happened last year when Kodak lowered prices slightly and began claiming higher quality. Nicholas Heymann, a security analyst for NatWest Securities, estimates that Kodak picked up one or two points of share.

To keep its brand edge and reclaim market share, Kodak is starting to play tough, going on the offensive in a number of ways. It won a major legal victory in May 1994 when it persuaded a federal judge to overturn a pair of consent decrees that have hobbled the company for years. One, dating from 1921, required Kodak to label all its products with the Kodak name, thus preventing the company from competing in the growing private-label market. The second, issued in 1954, prohibited Kodak from tying the sale of film to the processing of film. Kodak's lawyers argued successfully that Fuji and other competitors face no such restrictions and that Kodak, with 42% of the world market vs. Fuji's 33%, is not a monopoly. The government is appealing the judge's decision, but Kodak's arguments are compelling; the decision seems likely to stand.

The fastest-growing part of the film market is the single-use, or throwaway, camera, an inexpensive cardboard and plastic box with a role of film inside. Purchases of single-use cameras are growing 40% a year. Although Kodak didn't invent the gadget (Fuji did), it has extended its line to include telephoto, panoramic, portrait, and underwater versions, a full line that makes it unnecessary for store owners to carry more than one brand.

Next year a consortium of photography companies that includes Kodak, Fuji, and Nikon will introduce what the trade is calling the advanced photographic system (APS), which Kodak argues will result in a spurt of additional film sales. The consortium is keeping the new system under wraps, but it will include an easy-to-load film cartridge.

But talk of growth still makes some members of the financial community nervous. They watched for years as Kodak's top managers talked of growing the company's film business 8% a year even though the market was expanding only 4%. The 8% never materialized. Now Fisher is again talking of growing the old chemistry-based business. Alex Henderson, a security analyst for Prudential Securities, is a skeptic, particularly about the new APS: "The last change in film format was Kodak's disk system, and it was a total disaster. The ability of new camera cycles to lift film sales has been decelerating, and I believe that APS will be a bust." Responds Fisher: "I am not naive. I know this will take time. But Kodak has to grow. When a company this size doesn't grow, a kind of atrophy sets in, and then costs become uncontrollable. I also know that people get nervous when they hear me talking about Kodak growing again. But growth is what I am all about."