Kodak: Who's to blame?

Everything from the economy to internal tension to bad leadership helped push the company into bankruptcy.

By Kim Peterson Jan 19, 2012 6:19PM
Where did Eastman Kodak (EKDKQ) go wrong?

That's a popular question Thursday after the company announced it has filed for Chapter 11 bankruptcy protection. Common shareholders will probably get nothing for their holdings. Current and former employees are worried about pensions and benefits.

The company is doing its best to put on a business-as-usual face, making its case on the kodaktransforms.com website. But is there any hope for Kodak? And how can it avoid the same mistakes that got it to this point?

Let's take a look at who -- and what -- ruined Kodak.

The economy

The company says the global economic slowdown that began in 2008 knocked down its efforts to create a new life. In a video posted Thursday on Kodak's website, CEO Antonio Perez also acknowledges the steep drop in the traditional film industry.

"Since 2004, Kodak has reinvented itself and undertaken a major and challenging transformation in the face of both a precipitous secular decline in our film business -- for instance our consumer film business has been declining by 40% per year -- and a difficult global recession," he said.

The recession cut into Kodak's new businesses and accelerated the decline of film, he said. He said Kodak has not been paid what it it is rightfully owed, given the depth of its digital-image patents. Earlier this month, Kodak sued Apple (AAPL) and HTC for infringing some of its patents.

The board

Kodak's board has made some truly bizarre decisions over the years, such as the $5.1 billion deal in 1988 to buy Sterling Drug, the pharmaceutical company known for making Lysol cleaning products. Huh? That deal helped plunge Kodak into a mountain of debt that grew to $9.3 billion by 1993, Reuters reports. Kodak sold Sterling off in pieces a year later.

The board also agreed to sell Kodak's healthcare imaging business in 2007, trading a successful operation for a deeper plunge into the consumer camera market. It sold off the business, which made X-ray equipment for hospitals, just as the demand for healthcare and X-rays would increase, Reuters reports.

The board has also been selling off other potentially lucrative arms of Kodak, including its high-end Leaf photography unit and its image sensor technology.

CEO Perez

Reports say that for years, Kodak dealt with an internal civil war as employees who favored the traditional film business battled with those touting the digital revolution.

Perez should have managed this better. In fact, Perez could have pushed and prodded the company into digital a lot sooner.

The bottom line suffered greatly under Perez. It lost money in all but two years of his leadership, The Motley Fool notes. And Perez will get all the blame if the company's current venture into printers fails.

"Perez pigheadedly drove Kodak into the printing business, alluding back to his days as corporate vice president at Hewlett-Packard (HPQ), and attempted to defeat Hewlett at its own low-margin, highly competitive game," writes the Fool's Sean Williams. "Needless to say, it failed."

George Eastman himself

Yes, it's practically sacrilege to blame Kodak founder George Eastman, who is rightfully lauded for his genius and determination.

But Eastman was so intimately tied up in Kodak and created such a legacy with film -- not to mention a huge profit machine -- that business experts say his death paralyzed the company. Good business leaders have succession plans in place so that companies can keep operating and innovating.

"When (George Eastman) died, he had exerted such an influence on the company that one of the things that Kodak immediately became bound up in [was] nostalgia," a University of Missouri professor who has studied Kodak told Reuters. "Nostalgia's lovely, but it doesn't allow people to move forward."

Globalization and the digital revolution

The great irony with Kodak is that it was on board with digital camera technology before just about anyone else. One of the company's engineers, Steve Sasson, is credited with having invented one of the first digital cameras in the 1970s. Sasson's 8-pound camera had a resolution of .01 megapixels.

But Kodak was reluctant to push digital technology, worried it would eat into the traditional film business that was its cash machine. The company wouldn't begin selling mass-market digital cameras until 2001, the The Associated Press reports.

But what happened? Canon was already there, along with a number of Asian manufacturers. Globalization had made cameras plentiful and cheap. Profit margins for the business tanked. There was no way Kodak could compete.

So now Kodak is continuing a push into printers for home and commercial use. But can Kodak really continue down this path and expect to succeed? Much of that will depend on whether the company can successfully sell its huge trove of digital-imaging patents and how it uses the money from those deals.

The printer industry is not an easy choice for Kodak. It's dominated by Hewlett-Packard and other deep-pocketed rivals, and making any headway while emerging from bankruptcy will be very tough.

Tags: EK
6Comments
Jan 19, 2012 8:35PM
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This is such a sad day for those employees in Rochester, New York who were loyal to the company.  The company became an albatross in an industry where they should have been innovators.  Like the Titanic, it is sad to see the great ship go down.
Jan 20, 2012 12:34AM
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Perez came on board in 2003 with 63,000 Kodak employees, Now we are down to 17,000 - only 9,,000 in the USA. Only 8,000 are full time - the rest are part-time "temps", Only 3600 are salaried and the rest are hourly. Perez has done Kodak well. Still he can't even manage what's left. We've borrowed and relied on patent income for the past 5 years - but now the only choice was a Chapter 11. This speaks highly of the Board of Directors - which of course all support Perez (his hand picked supporters). Yes, all employees have lost their stock investments - BUT we are happy to see Perez lose ALL of his 6 million shares. But he still has his $14.6M Kodak pension fund - which hopefully that will take a hit - he doesn't deserve Millions for running Kodak into the ground. Maybe he should go back to college and get a Degree - which he has NONE other than an "honorary degree in 2009" from Rochester...

This guy has been a joke - and today in his all employee speach he stated he would no longer be flying on the Corporate Jet - gee we feel so sorry for him....

He as will the other Executive get their Golden Parachute and be on their way. The employees and Kodak will just go down the tubes.

Jan 19, 2012 7:11PM
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There usually are many factors in a company becoming defunct or filing b/k.  I was one of 11,500 GEMCO workers who were fired with a two week notice in '81 as a corporate raider did the number, ending a membership department store.  My late father was an amateur photographer and we had a darkroom in our last home.  Another factor were the Fotomat kiosks all over San Diego for years where people could drop off a roll of film for development.  One factor was the fact that one had to pay for the entire roll of photos, even ones that one did not like at all. 
Jan 20, 2012 11:41AM
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I worked at Kodak in 1975-1976 and was amazed back then at the over-staffed, bloated workforce.  As a new engineer I was given many small projects to do and found that they all had a history of being given to newbies just to give them something to do.  Also my manager told me to visit various departments or offices to gin-up projects to fill my time sheets.  I was sooooo bored, discouraged and wondered how this company could continue to exist. 
Then came the Japanese in the 80's with their fail-safe business models and manufacturing genius - we all saw how that collapsed and has yet to recover. 
I QUIT!
I left Kodak wondering what was going on there, little did I know then that I had a spark of revelation that the company was doomed to fail; only I was unable to fully recognize it and after many slow, prodding years the end is nigh!

Just think if I fully realized what I sensed, saw, and learned during my short tenure, I could have warned Kodak - I'm sure the powers at KP would have taken my advice - NOT!

I could have saved Kodak and now look at the mess they have. 
If they had listened I'd be richer than Bill Gates!  Ha, Ha, Ha! (Thank goodness I never bought the stock)

Jan 19, 2012 9:56PM
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Kodak was good at stealing other companies inventions. Such as the process of putting imaging material on a flexable film. They stole that from Ansco and it too until the 1940s for the lawsuits to be settled with Kodak paying millions to Ansco. Then there was the Polaroid rippoff in the 1970s. Kodak stole the instant photo process. Finally haveing to take it's cameras off the market and paying Polaroid millions yet again.

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