Managing for innovation means a major culture shift at once-stodgy Kodak. "For years, the mind-set at Kodak was like the civil service," says analyst Ulysses Yannas with Buckman, Buckman & Reid Inc. in Shrewsbury, N.J. "It was like management from the Dark Ages. Things have changed." That starts at the top, where former Hewlett-Packard Co. executive Antonio Perez—part of an influx of talent into the company in recent years—became CEO and president on June 1. Perez succeeds Daniel Carp, who in 2003 set the goal of getting more revenue from digital products and services than from film by the end of 2005. But such changes were a long time coming. Former Motorola Inc. CEO George Fisher met resistance when he arrived in 1994 as a would-be change agent.

Nowhere were the changes more essential than in R&D. The problem was not a lack of resources—Kodak has more than 4,000 engineers and scientists on staff, and a global network of research labs. But those assets were under-utilized. Kodak has invented great stuff over the years, including a copier system that might have given Xerox Corp. a run for its money a generation ago, had Kodak taken its version to market. But patents and new product lines were allowed to languish as cash rolled in from the film business, and Kodak often disdained technology invented elsewhere.

"What's gotten in the way has always been culture," says Christopher Chute, a senior research analyst with IDC who follows the digital photography market. It took the digital revolution to blow that mind-set away. Now Kodak is willing to buy what it needs, such as the digital sensor technology for cameras and phones it purchased from National Semiconductor Corp. in 2004. And it has rethought its consumer market, too. As competitors like Canon Inc. and Nikon Corp. peddled expensive cameras to technophiles, Kodak decided to market relatively low-cost, easy-to-use products built around the best software in the business. "They reminded themselves of what they came from 100 years ago—making it easy to share images," says Chute.

Kodak's IT group, which ushered in the era of massive IT outsourcing with its famous 1989 deal with IBM, is part of the change to a more interconnected, forward-thinking culture. "I feel much better prepared for this position thanks to the R&D job I held," says VanGelder. There was at first a fear of change within R&D, says Vicki Nagy, who replaced VanGelder as IT director there. "People wanted to know if they would still get the unique things they needed, or be forced onto look-alike systems. We had to teach our IT help desk to become a one-stop shop for all users. But we've built enough credibility to start playing a broader role in the labs as they work on things like how products scale, integrating security, and Web services." Still, there is more to be done. Says VanGelder, "We have not reached the limits of collaboration in areas like storage, and in product needs such as networking and wireless."

One way of sharing information across the company is the Kodak Technology Council, headed by CTO Bill Lloyd and made up of R&D staff members and managers from the technology and business organizations. It meets to consider issues such as privacy policies for image files and the network architecture needed to share information across the company's globally distributed design organization. "The key is to make sure you have senior, credible IT people working with the businesses and different functions," says VanGelder. "You need that day-to-day interaction in such an extraordinarily dynamic environment."

In the era of online image services, Kodak IT is also closer to the customer than it was in the past. So far, that mostly means tying the Kodak.com online store to back-office systems. "We provide networks and servers and security, and we have to make sure Kodak's online architecture is scalable," says VanGelder. "Ultimately, we see broader opportunities in managing digital assets and providing consulting services to the company's product groups."

Kodak's ability to execute its transformation strategy will determine the fate of one of the most famous names in business history. Wall Street is taking a cautious view, with Kodak shares trading near their 52-week low of $25—less than half their price five years ago. But there is optimism among Kodak watchers, too. Securities analyst Yannas expects new products such as dry inks for printers to help improve profit margins, and says that the growing volume of prints made from digital images will cause Kodak's photographic-paper business to start growing again in 2006.

Innovative products and services such as online image management could propel the venerable company into a successful new era, says IDC's Chute. "Five years into the future, Kodak may be a smaller company in terms of revenue, but a healthier one."