Strategic agility: flexibility is key.

TODAY'S CORPORATE HIGH-WIRE ACT MEANS ANTICIPATING AND ADAPTING TO FAST-CHANGING MARKETS AND CUSTOMER NEEDS. HERE'S HOW KODAK'S SECOND-LARGEST BUSINESS UNIT REINVENTED ITSELF, COORDINATING MARKETING, MANUFACTURING, AND R&D.

What does it take to become strategically agile in today's rapidly changing global market? At Eastman Kodak's second-largest revenue-producing unit, the $2.5 billion Professional & Printing Imaging division, we had to reinvent ourselves to anticipate and adapt to fast-changing environments and customer needs by moving quickly and resourcefully.

Kodak was not always driven by this strategy. In fact, we have changed from a vertically driven manufacturer organized by product sets to a market-focused organization driven by customer need. We determined that we would seek the best imaging solution for customers, not just one based on traditional photographic imaging using silver-halide film. In the process, we are striving to reach leadership in silver halide, digital imaging (which does not use film), and hybrid imaging (a combination of the two).

How management deploys assets in reaction to market changes and customer needs makes the difference between agility and inflexibility. Strategic agility coordinates marketing, manufacturing, and R&D. It assumes you have reached, or are moving, toward flexible manufacturing, and you have, or are building, a skilled and knowledgeable work force. Companies such as Hewlett-Packard, Motorola, and Boeing show uncanny ability to stay at the leading edge of technology while not outdistancing their customers.

Strategically agile manufacturers know clearly what they must do. It is hard enough to integrate work force and technologies in one marketplace, much less two or three. The decisions by AT&T, ITT, and Hanson plc to split themselves were a recognition of that reality. Kodak, too, divested its non-imaging business to give the company one clear vision, and spun off its chemical company to focus on its core imaging business.

THE BIGGER PICTURE

When strategic agility is fully implemented, it pervades every level of an organization. Over the last 10 years, Eastman Kodak and all other imaging manufacturers and marketers have had to face marketplace changes and competition, many of which were born of technological advances in imaging.

Some industry background: Silver-halide imaging is a core competency that our customers need and want. Silver-halide film still leads in cost, quality, familiarity, portability, and availability.

Digital systems, on the other hand, lead in speed and creative flexibility for deadline and budget-sensitive projects and where images are used repeatedly. As bandwidth and digital technology advance, these attributes will shift, even though the information-recording power of silver-halide imaging has not yet reached the limits of technology.

Digital applications now complement and, in some cases, replace traditional silver-halide film imaging. It would have been painful - but easier - to switch our focus to digital applications and harvest the silver-halide market. But our customers do not want just leading-edge digital solutions - they want both digital and silver-halide film technologies that work together in familiar and productive ways for each printing, publishing, commercial, and scientific application. We think imaging producers who have not integrated both will fail.

We have watched market failure happen in one industry after another, particularly among manufacturers of digital equipment that are driving changes in imaging. High-tech manufacturers have taught us that supplying breakthrough technology is not enough. Technology often runs ahead of a customer's ability to invest in and use it productively. Even the most user-friendly technologies have learning curves.

As a vertically integrated chemical-based manufacturer, Kodak did not have all the skills needed to provide the best solution, whether digital, silver-halide, or hybrid. P&PI now balances its strengths and weaknesses by pooling resources based on the core competencies of its partners. For example, Kodak co-develops digital cameras with Canon, Nikon, Hasselblad, and Sinar, among others. The manufacturers supply camera body and lenses. Kodak supplies image sensors with a resolution of 6 million pixels and image storage devices. Kodak has made alliances today with Adobe, Hewlett-Packard, IBM, Microsoft, Sega, and Wang Laboratories.

To develop our new Advanced Photo System, we even teamed with our arch-rival, Fuji Photo Film, since it made sense to jointly develop common technology standards. In fact, competition is no longer with one or several firms but with combinations and potential combinations of firms.

We also had to learn flexibility in order to let our customers purchase high-quality, customized products that closely fit their needs with few restrictions on timing, delivery, and quantity. Kodak built a film-manufacturing facility that combines consistent quality and fast changeovers for short runs, allowing us to reduce work-in-process cycle time for professional color films by one-third. We have achieved in excess of 97 percent on-time order fulfillment rates for customers, with a target of 100 percent, and we benchmark manufacturing against MRP II Class A, ISO 9000, and ISO 9002 quality and process standards.

MAKING THE LEAP

Strategic agility requires - in the words of one writer - a "paradigm leap." At P&PI, we had to change our thinking about how customers value products and services. Previously, each step of the imaging chain - capture, storage, processing, display, and communication - had well-defined customer groups. Now, our customers are enmeshed in a web of traditional and digital ways of producing and using images. Old value equations have been tossed out, and new equations may not last long enough to earn suitable returns. Agility means the ability to turn from one business design to another quickly and profitably.

P&PI employees, for example, have had to embrace the lower-margin, rapid product cycling of electronics, rather than fear digital technology as a threat to the longer-cycle and higher-margin silver-halide film business. In so doing, we had to change our philosophy about imaging, viewing it now as end-use driven. Images are not bound to a medium, such as silver-halide film, but to how they are used. We were forced to reorganize around customer needs because our customers do not use images in the same way or in the same markets. Today, P&PI has four units centered on user groups:

* Commercial services such as advertising agencies, commercial photographers, and commercial labs. Growth in digital desktop publishing systems has been rapid, but reliance on traditional silver-halide film dominates. We expect images used digitally will grow to 75 percent by the year 2000, but the chemical-based photographic print business will grow by 400 percent.

* Graphics focusing on image reproduction, such as in photojournalism, newspapers, printers, and pre-press trade shops. This market is making a fast transition to digital, especially since the commercial market is moving downstream into pre-press and print work. Five years ago, pre-press processes were manual; today, they are digital.

* Portrait and social photographers and labs who serve them. This competitive and mature market in the U.S. - but which is growing outside the U.S. - relies on silver-halide film and digital technology to compete. This market needs in-depth education in how to use digital to advantage.

* Special products for industries such as instrument recording, geophysical exploration, and printed circuit-board fabrication. These markets want digital systems solutions now.

WHAT WE'VE LEARNED

PP&I has learned several lessons about strategic agility:

1. Configure and offer solutions that provide high-value solutions in the customer's eyes, rather than high-value products. We now define quality as opportunities to please a customer at the time of sale and after - a more expansive definition than measuring defect rates. Relying on defect rates alone means we could produce a perfect product for a nonexistent or shrinking market.

2. Strategically agile manufacturing starts and ends with the customer. It is the flexibility and speed of meeting customer needs against competitive pressure that makes the difference. But understanding the customer's opportunity to profit is not as easy as conducting clinics for new car designs or designing packaging changes. Agility requires understanding the subtleties of product and service use that make the difference between profitable and unprofitable customer opportunity. Now, P&PI performs small-scale prototyping and test beds to define customer needs in detail. Prototyping has helped us reduce commercialization cycle time by 50 percent for professional color-reversal camera films. Similarly, we cut months from production of a digital camera for The Associated Press.

3. Agile manufacturers cannot afford to focus too closely and neglect the larger world. Companies compete for capital not just against competitors in specific marketplaces but against all other industries, so their capital positions must be competitive with the best businesses. In recognition of this, four years ago, P&PI constructed benchmarks to track sales, administration, and R&D expense and asset utilization from 30 world-class companies approximately our size, including Microsoft, Mattel, Gerber Products, U.S. Surgical Corp., Nalco Chemical, and American Greetings. None of these companies is in imaging, but they are leaders that created shareholder value over a five-year period and differentiated themselves with strong R&D and marketing. We now benchmark against these firms quarterly. We learned early that while our margins compared favorably to these companies', our sales, administration, and R&D expenses were too high, and asset utilization was poor. Since then, we have rationalized R&D, reduced days sales outstanding (although they still have room to go), cut inventory by seven weeks, and increased net asset turnover. In 1995, we improved inventory turns by 15 percent. We are not world-class in asset utilization, but we are moving that way and expect to reach our targets.

4. A manufacturer cannot move quickly if resources are tied up. This was a hard lesson to learn. Kodak had overwhelming market share for decades and legendary marketing prowess. We are an asset-intensive business, but as markets and customers change at increasing rates, we cannot survive without turning inventory and assets more quickly.

5. Agile manufacturing requires multi-skilled, adaptive, and empowered managers and employees. This requires a culture change and a lot of training on the job and off. Today, P&PI employees team by customer opportunity to meet changing goals and ensure that value, and not cost, is added. Kodak's sales representatives were formerly divided by geography and expected to know all customers' needs in their districts - ranging from photojournalists to commercial labs, portrait studios, print shops, and advertising agencies. This structure did not provide the level of expertise our professional customers needed, so now sales representatives concentrate on customer segments in-depth. Kodak will centralize the communications of its many business units in order to follow a companywide growth strategy.

6. Strategic agility means mastering change in manufacturing, marketing, and customer requirements. This means manufacturers and marketers need to test regularly people, equipment, and processes for cost, responsiveness, quality, and performance. It does not mean throwing out the old, but rather constantly reconfiguring core competencies and assets to be more flexible and responsive. No one knows precisely how or the rate at which our customers will continue to adapt to new technologies. Subsequently, we are forced to test continuously our responsiveness to and anticipation of marketplace changes, since applications of digital technologies proceed at a furious rate.

SENDING A CONSISTENT MESSAGE

Along with agility in manufacturing, it is essential to send consistent messages to target markets around the world. Without a strong global communications focus, the power of a global brand is not reinforced, and customers across the world will not have a clear vision of the company or its products. This is why P&PI is moving to centralized, worldwide marketing communications and brand identity. As first steps, we have created an Office of Brand Management and a Global Brand Council to leverage the Kodak brand and to sharpen focus and efficiency.

Without strategic agility, imaging producers and suppliers have no future. I am confident this is true as well for many other industries. By identifying changing customer needs quickly, agile manufacturers can respond with bold ideas that lead to global opportunities for growth.

Richard G. Pignataro is vice president of Eastman Kodak, a $15 billion imaging company based in Rochester, NY, and president of Professional & Printing Imaging, the second-largest division of Eastman Kodak.