Eastman Kodak and the idea of loyalty

I don’t know if there was ever was a Fortune 500 company more paternalistic than Eastman Kodak Co., and I am certain there never was one that enjoyed greater loyalty from its employees.

When I first came to Rochester, N.Y., in the mid-1970s, Kodak seemed more like a cult than a company.  Kodak never asked its employees to sing a company anthem or do gymnastics in the morning, as Japanese companies of that era did, but if it had, I am sure they would have been glad to do so.Kodak was one of the last examples of the age of the “organization man,” in which security was given in return for conformity.

I wouldn’t really want that era to return, but I don’t regard the age of the disposable employee as an improvement.People in Rochester said that once you were hired by Kodak, you were set for life.  There were people who were the second or third generation in their family to have worked all their adult lives at Kodak.  There were people whose whole lives revolved around Kodak.  They spent their spare time at the Kodak recreation center, they attended plays at the theater in Kodak Building 27, they banked with Eastman Savings and Loan Association (not actually a part of the company) and saved up for retirement in the Kodak Savings and Investment Plan.

All this security was repaid by a devotion to the company that is hard to understand in the light of the way things are today.  In 1980, Kodak announced a new consumer product – a snapshot camera with film on a disc instead of a roll.  We reporters at the Democrat and Chronicle naturally wanted to find out in advance what the announcement was going to be.  All of us had friends and neighbors who worked for Kodak (one in eight employed persons in the Rochester area worked for Kodak), and thousands of them knew what the announcement was going to be.  But nobody said a word.  The Kremlin-like secrecy was complete.

I had just started to cover Kodak for the D&C.  The company gave me a Disc camera to try out, and, as luck would have it, the camera short-circuited and melted the internal parts.  I wrote a light-hearted article about it, treating it the subject fairly gently, I thought.  Kodak loyalists in the community didn’t think so.  I was inundated with angry phone calls accusing me of playing into the hands of the enemy, Fuji Photo.Kodak Disc 4000

The Disc didn’t turn out to be as successful as Kodak hoped and, for that and other reasons, the company began layoffs a couple of years later than continued for more than a decade.  Kodak employed 50,000 people in Rochester through the 1970s, and in 1982 employment here shot up to 60,000.  The following year Kodak began a series of layoffs that have continued ever since.  Employment locally is now below 7,500 and falling.

By the time I left the Kodak beat in 1992, the feeling of loyalty had been replaced with a sense of betrayal.  The angry phone calls came whenever I wrote anything that reflected favorably on the company.

A friend of mine, a Kodak patent attorney who lost his job in the downsizing, said he came to realize the profound ambiguity of the idea of loyalty to a corporation – or any other organization.  You can be loyal to people, and you can be loyal to ideas, he said.  But if the people change, and the ideas change, what are you being loyal to?

Business executives such as CEO Jack Welch of General Electric – called “Neutron Jack” because, like the neutron bomb, he made the people disappear and left the buildings standing –  said that companies such as Kodak did their employees no favor by holding out the false hope of lifetime employment.  The employees were set up for a worse fall than if Kodak had been tougher all along.

I think there is truth in that, but there is a middle ground between treating employees as children and treating them as commodities.  A business corporation can’t be like a Mommy and Daddy to its employees, but it doesn’t have to follow Welch in terminating the supposedly worst-performing 10 percent of employees every year.

Eastman Kodak Co. for many years was the lengthened shadow of its founder, George Eastman.  One of the crises in the early days of the company was that large amounts of film proved defective – something that was traced to defects in the gelatin coating of the film.  To order to maintain the quality of Kodak products, Eastman determined to make the company as self-sufficient as possible for all its supplies.

That ideal of self-sufficiency persisted into the era when I started to cover Kodak.  A Wall Street stock analyst told me that he’s heard that Kodak even had a corporate blacksmith, just in case the company ever needed anything made of wrought iron.  I checked and found it was true.  The analyst and I agreed not to write anything about this, because the only effect would be probably to cost the poor guy his job.

The only way to assure a quality product was to have employees who were committed to doing a good job, and he felt the way to do that was through rewards, not punishments.  He instituted the Kodak Wage Dividend, in which a certain amount was set aside each year for bonuses based on Kodak’s stock dividend.  His many philanthropies included the Eastman School of Music and the Eastman Dental Clinic, which still add much to the quality of life in Rochester.

Eastman was not a soft or sentimental person.  He demanded his authority be unquestioned, and one of the motives for his generosity was to keep labor unions from organizing Kodak.   He was known as a tough business competitor.  He supposedly said once, “To succeed in business, you must be hard! hard! hard!  But remember to reserve a tiny corner of your heart for tenderness.”

I heard it said that Kodak prior to 1980 never had layoffs, not even during the Depression.  This isn’t accurate, but I think the company’s managers thought layoffs were an evil and to be avoided if possible.

I never envied Kodak workers.  My next-door neighbor in the late 1970s – we each rented half of a double house – had a college degree, but took a blue collar job at Kodak because the money he could get there was better than anything he could earn elsewhere.  A few years later he left Rochester to go back to graduate school, at a financial sacrifice and despite having a wife and young child to support, because he could not give the mindless obedience that was demanded of him.  But I’m not sure Kodak was any worse than other big manufacturers in that respect.

What caused Kodak’s downfall?  Its supremacy was based on the huge economies of scale it enjoyed for manufacturing photographic film, and in its ability to make tie-ins of its purchases of cameras, film and processing services.  Kodak lost the second as a result of a successful federal government anti-trust suit.  The company was caught in a double bind; it was forced to compete in a way that it hadn’t before, but the consent decree setting the suit imposed restrictions on Kodak that its competitors didn’t have to obey.  Moreover Kodak managers had an excuse for not competing all-out – the fear of being accused of violating the consent decree.

Kodak adopted a management philosophy in vogue in those days, which is that a company should maximize profit by concentrating on its core competencies and dropping low-profit lines of business.  Competitors such as Fuji Photo concentrated on increasing their share of the market, which they did.

Eventually electronic imaging replaced film photography.  Eastman Kodak seems to be holding its own in the marketplace, but it doesn’t have any built-in advantages that would give it the supremacy it enjoyed in the days of George Eastman and his immediate successors.  Indeed, it is a different company from Eastman’s.  The leaders have changed, and the philosophy has changed, so all that remains is the name.

I covered Eastman Kodak Co. for the Rochester Democrat and Chronicle during the 1980s, the start of its long period of decline, and I always thought one of the main sources of decline was the anti-trust suit against Kodak in the 1970s.

Kodak was found to be monopolizing the photographic film business and, as part of the settlement, the company agreed to make its cameras and photofinishing services compatible with the products of Fuji Photo and other companies.  Xerox Corp. at around the same time settling an anti-trust suit by licensing its patents to competitors.

This hit the two companies with a double whammy.  The two companies were forced to open themselves up to competition, yet they were shackled in their ability to compete.  Fuji Photo and Xerox competitors such as Canon were subject to no such restrictions.

Along with that came the business philosophy that was dominant in the 1980s, which is that profit margins were more important than market share, and that companies should exit low-profit markets rather than fight for market share. Fuji Photo in contrast operated according to the principle that if you can dominate the market, all else will follow.

Kodak exited its low-profit camera manufacturing business and concentrated on its high-profit film business. The result was that the company lost control of film formats, and was caught unprepared when Japanese companies introduced low-priced 35mm cameras along with new lines of 35mm film.

All this is yesterday’s news. The film business is no longer the foundation of Kodak.  But it is an example of the way important decisions were made in those days.  Nobody involved gave any thought to the impact of the anti-trust verdicts to the American economy or the position of the United States in the world.

[10/4/11]  Eastman Kodak is declining faster than I realized.  Click on Kodak and The Case Against ‘Managed’ Mutual Funds for a milestone.  (Hat tip to Anne Tanner for the link.)

[10/28/11]  Click on The Rise and Fall of Eastman Kodak for more.  (Hat tip to Bill Elwell for the link.)

Tags: Eastman Kodak Co., Job security, Lifetime employment, Work