Case study:
Eastman Kodak: For many years, Eastman Kodak had a virtual monopoly in film production. This market power resulted in large profits. It also permitted Kodak to control the timing for introducing new products to the marketplace and responding to changes in consumer demands.
By the 1980s, Kodak's market environment had changed materially. The Fuji Corporation produced high-quality film that eroded Kodak's market share. Increased competition also came from generic store brands. In addition, the 1980s witnessed a technological explosion. Improved communications, design capabilities, and robotics allowed companies to bring new products to market within months rather than years.
These changes in the market environment placed significant pressure on Kodak. Kodak's stock price dropped from over $85 per share in 1982 to just over $71 in 1984. This 16 percent decline in stock price appears particularly dramatic when it is compared to the substantial increase in stock prices for the market as a whole. Earnings per share at Kodak also dropped substantially. The company realized it had to change its organization to regain profits and market share. Colby Chandler, former CEO of Kodak, said at the 1984 annual meeting, "Like many companies, we are not used to working in an environment where there is rapid technological transfer from laboratory to the marketplace. But we know that will be important in our future".
During 1984, Kodak undertook a major corporate restructuring. Prior to the restructuring, decision making at Kodak was quite centralized. Top-level approval was required for most major decisions. The restructuring created 17 new business units with profit-and-loss responsibility. Business-unit managers were given increased decision-making authority for new products, pricing, and other important policy choices. By decentralizing decision rights, senior management hoped to make the company more responsive to changing customer demands and market conditions. The 1984 annual report stated, "In short, Kodak is finding new ways to stimulate the innovative nature of its people. The result: a spirit of independence, new ideas and a quickened pace in the process which turns new ideas into commercial realities".
Unfortunately for Kodak, changing the assignment of decision rights did not have a significant impact on the company's performance. In response, Kodak adopted the Management Annual Performance Plan (MAPP) in 1987. Under this plan, the base salary of management employees was reduced by 10 percent and replaced with a variable bonus. The bonus was to average 10 percent, ranging from 0 to 20 percent. Bonus payments were based on individual, unit, and company objectives.
The idea behind MAPP was that changing the performance-evaluation and reward systems would motivate managers to be more creative and industrious. The plan, however, did not have a large impact on managerial incentives or corporate profits. In 1993, Kodak officials were quoted as saying (1) that management had not really been held accountable for their failure to deliver results, (2) that management had to develop tougher work standards and demote failing employees, and (3) that in the past managers who advanced at Kodak had excelled in office politics but not necessarily leadership. Frustrated by the continued lack of success, Kodak's board of directors fired its CEO in late 1993. * Democrat and Chronicle (June 27, 1993).
1. What factors motivated Kodak to change its organizational architecture?
2. What mistakes did Kodak make in changing its architecture?
3. What might it have done differently?
4. How does this example relate to the concept of economic Darwinism