Kodak Refocuses to Keep Up With Customers

Eastman Kodak Co. has a really big problem. The photographic film business that sustained one of the world’s great brands for more than a century is headed the way of the daguerreotype. Digital cameras and images are the new mass market; in order to survive, Kodak must transform itself into a digital products and services company to replace the revenue lost as its traditional markets dwindle.

Last year, nearly 61 percent of Kodak’s $13.5 billion in revenue came from its traditional businesses, including film, paper and the nondigital products used in its healthcare, graphic communications and commercial imaging segments. But the first quarter of 2005 was terrible, with total revenue off 3 percent and a net operating loss of $143 million. The company expects sales from traditional business to drop another 17 percent this year, due in large part to the decline in demand for film.

The good news is that consumer digital sales are racing in the opposite direction, up 44 percent last year. Kodak shipped nearly 5 million digital cameras to pass Sony Corp. as the leading U.S. digital camera vendor in 2004. And Kodak’s revenue from digital products is expected to surpass film revenue by the end of this year. But there is a cloud around that silver lining: Margins on digital products are much thinner than those on film, typically 10 percent for digital cameras versus 60 percent to 80 percent for film. So replacing a dollar of lost film revenue with an equal volume of digital sales still leads to lower profits, making the growth challenge even more urgent.

Company Profile
Since its founding in the late 1800s, Kodak has devoted its energies to the mass market.
Corporate Headquarters
Rochester, N.Y.

Kim VanGelder

$13.5 billion (trailing 12 months)

Net Income–
$70 million (TTM)

Stock Price
$26.79 (May 26, 2005)

52 week high-low

To balance the old business with the new, says Kodak Chief Information Officer and Vice President Kim VanGelder, “we need to drive down cost dramatically and drive up growth. The challenge is to execute on both cost-cutting and innovation concurrently.” Information technology, she says, “is fundamental to both,” and the dual imperative is redefining her role at the company. “It feels like a different job, to simultaneously manage both a decrease in costs and to focus IT across the globe on changing processes and products as we grow,” she says.

Other CIOs are feeling the same pressure as companies move beyond the belt-tightening of the post-bubble era. “There has been a huge shift over the past 18 months, from a focus on cost to a focus on growth,” says Graham Waller, an analyst with Gartner Inc. Delivering projects that promote business growth was the top issue cited by CIOs in a recent Gartner survey. “The leading IT organizations are doing more to support innovation,” says Waller.

In another recent survey of business and technology executives by Bain & Co., 86 percent of respondents agreed that innovation is more important than cost reduction for long-term success, with 89 percent saying that IT can create significant competitive advantages.

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