Kodak's Blurry Focus
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When George Fisher came to
Eastman Kodak in 1994, he brought with him a reputation for being a
technological visionary and a manager who had figured out what it took to turn
a company around. Fisher's tenure at Motorola, one of the great business
success stories of the last two decades, had been marked by dramatic
improvements in quality, productivity, and innovation, capped by Motorola's
reinvention of the cellular-pager market. Similar feats were expected at
Kodak.
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Instead, Fisher has floundered. In his first two years, he did do an excellent
impersonation of a turnaround specialist, ridding Kodak of the nonfilm
businesses--Eastman Chemical and Sterling Winthrop Drug--that it had acquired
during the days when conglomeration was all the rage. But unlike such figures
as Jack Welch at GE or the late Mike Walsh at Tenneco, Fisher has not been able
to turn Kodak's "core competence"--as the management theorists would say--into
a consistent moneymaker. On the contrary, Kodak's near-monopolistic control of
the U.S. film market has been steadily eroded by Fuji Film's consistently lower
prices. Meanwhile, Hewlett-Packard and Canon have moved strongly into the
digital-camera market, which seems to be the future of photography as a
whole.
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As a result, Kodak has had
to lay off 27,000 employees since 1993, and just recently announced yet another
restructuring plan. More tellingly, perhaps, Fisher has devoted an inordinate
amount of the company's attention to its price war with Fuji. After Fuji cut
prices by as much as 30 percent last summer, Kodak began making noises about
charging its rival with "dumping" film here. Kodak had already spent much of
the last two years pressing a case before the World Trade Organization. It
charged Japan with illegal trade practices that kept Kodak out of consumer
markets there and gave Fuji a "profit sanctuary" which allowed it to accept
lower margins on its sales in the United States.
Although the actual
financial implications of the case were not huge, the psychological investment
that Kodak had put into the WTO charges was immense. That this was a tactical
error was made clear this month, when the WTO vindicated Fuji on all counts.
Instead of seeming like a minor blow, the decision was portrayed as powerful
evidence that Fisher's magic had failed him. But while dreaming of a trade
victory to solve fundamental business problems seems like a dubious recipe for
success, there's one important thing to remember: That was exactly the recipe
that Fisher had learned while he was at Motorola.
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Out of film.
The Kodak-Fuji case was, as innumerable press
accounts have pointed out, the most important case to come before the WTO in
its two years of existence. Unfortunately for Kodak--and for supporters of free
trade in general--it was also a case involving issues that seemed to fall just
outside the WTO's jurisdiction. The trade organization was created in 1995 as
the third leg of the world financial order, along with the International
Monetary Fund and the World Bank. But while the WTO clearly has the authority
to rule in tariff cases and quota cases, it doesn't seem to have authority over
cases involving more subtle restraints on trade, primarily those created by
arrangements between companies rather than by governments. (Click for more on
the U.S. role in that restriction.)
The
Fuji case dealt with the tightly interlocked relationship between Fuji and
Japan's four largest distributors of photographic film and paper, all of whom
sold Fuji exclusively. Now, even under traditional antitrust law exclusive
relationships are not necessarily illegal, since they make production and
distribution more efficient. And clearly consumer companies are constantly in
search of such arrangements. McDonald's sells only Coke. Martha Stewart's
sheets and towels are sold only at Kmart. Department stores often fashion
exclusive relationships with designers. Nonetheless, by being frozen out of the
wholesale distribution market, Kodak has been frozen out of Japan's consumer
market as well, particularly since Japan has a law restricting the number of
large retail stores.
The problem is that Kodak really had little
evidence to show that it was being frozen out by the Japanese
government . There was the retail-stores law, and Kodak produced evidence
of state intervention to restrict imports, but it was evidence from the 1960s
and 1970s. Fuji pointed out that Kodak had a larger market share in some
regions of Japan than in others, and that at different points in the last two
decades Kodak's market share actually fluctuated quite sharply. If what we're
dealing with is a monopoly situation, then it's an imperfect monopoly at best.
Given the limits on the WTO's jurisdiction, it was probably unreasonable of
Kodak to expect a real victory.
In a
sense, though, what's most striking about the WTO case is not that Kodak lost,
but that it put so much energy into winning. Kodak's history in Japan is
actually a complicated one. In the 1960s and 1970s, the company altered the
tint of its film to correspond to Japanese notions of skin tone (and I realize
how weird that sounds), and also invented film that could be developed in
normal light because so few Japanese photographers had darkrooms. In the 1980s,
Kodak opened a major research center in Tokyo, staffed with Japanese engineers,
and started a joint venture in which Canon made copiers sold under the Kodak
name. The truth about the Japanese market has always been that it is
penetrable, but only after tremendous effort. At one point, Kodak appeared to
be making that effort. But even as it lost focus in its sales efforts at home,
it lost focus abroad.
We've become so accustomed to hearing U.S.
companies complain about foreign competition that it's easy to see Kodak's
post-defeat recriminations as just more whining. But even if the WTO had to
rule as it did, the decision was a blow against open markets and seems likely
to increase protectionist sentiment at home. Still, there is something about
the Kodak suit that smacks of a company relying on a court to do the work it
couldn't do itself. If you're looking for reasons why, consider the
transformation of Motorola, from which Fisher came to Kodak. It was
accomplished not merely through technological innovation or total quality
management, but also through the remarkably effective lobbying efforts of the
company's representatives in Washington.
Under
CEO Robert Galvin in the mid-1980s, Motorola got protection from Japanese
dumping for the U.S. semiconductor industry. It got the Reagan administration
to negotiate telecommunications agreements with Japan that were then used to
ensure Motorola's access to the cellular market there. And it got the U.S.
trade representative to impose retaliatory tariffs on Japanese cellular
products until impediments to entering Japanese markets were lifted. These
political interventions were essential ingredients in Motorola's rebirth as a
high-tech company.
The point is not that Motorola was on the wrong
side of these questions, although dumping accusations too often mean, "They're
selling better-quality products cheaper." The point is that Motorola only got
its way by relying on a kind of military-industrial-complex approach to trade.
(Click for more details on Motorola's campaign.)
Surprisingly, though, Fisher
seems not to have recognized how important Motorola's high-powered lobbying
efforts were to its success in the trade wars. As a result, he threw Kodak into
the WTO case while failing to see how much it mattered that Kodak couldn't
stack the deck the way Motorola had. And in a sense, it's this failure to grasp
the specificity of Kodak's present problems, this inability to separate Kodak's
circumstances from Motorola's, that's characterized all Fisher's efforts over
the past two years. The past casts shadows on him that are too long.
