|Trends and Challenges for Work in the 21st Century|
Rebuilding the Social Contract at Work:
Lessons from Leading Cases
Thomas A. Kochan
Institute for Work and Employment Research
Sloan School of Management, MIT
Task Force Working Paper #WP09
May 1, 1999
Draft in Circulation
S ince George Eastman first started the company at the turn of the last century, Eastman Kodak has been one of the most important corporate citizens in the Rochester, New York, community. Over the 1900s, Kodak developed a reputation as one of the leading proponents of welfare capitalism.(1) In fact, the company maintained its reputation for paying high wages and providing lifetime job security into the 1980s. However, during the 1980s, the company embarked on a diversification and acquisition strategy by purchasing Sterling Drug Company and expanding into a wider range of products, such as office copying machinery. Increased competition in its film and camera markets and the subsequent loss of market share led to the replacement of CEO Kay Whitmore with the former CEO of Motorola, George Fisher.
Kodaks case study tells the story of a long-standing company with a reputation for social responsibility earned through its community activities, its implied commitment to lifetime employment, and its high-wage and comprehensive fringe benefit policies. A highly integrated firm, it also performed all of its own R&D, manufacturing, and sales functions. A business press article in 1998 echoed the investment communitys criticism of the company for maintaining this integrated model too long:
Many of Kodaks problems stem from the companys remarkable success in the century following its founding in 1892. Unfortunately, as the world changed rapidly over the past 20 years, Kodak remained stuck in its illustrious past. Other wold-class companies were adapting to the new realities of business by forming corporate partnerships, joint ventures and close relationships with suppliers. Yet Kodak always took its founders slogan, You press the button and we do the rest much too far. The company insisted on preserving its self-reliance to the point of making its own screws and springs and sheet metal. Millions of dollars were frittered away on research with no practical application. Damn the costs, Kodak was determined to be an industrial fiefdom in the 19th-century mold (Santoli 1998, 25).
Several key events serve as milestones in Kodaks attempt to redefine its social contract with employees: repeated downsizings in the late 1980s and early 1990s; the inauguration of a new CEO, who refocused the company on its core product markets; a major restructuring effort to cut costs; and an explicit, new social contract initiative.
As its market position deteriorated in the late 1980s and throughout the 1990s, the companys lifetime employment and integrated structure and strategy fell under increasing pressure. At first, the company resisted the push to make major changes and instead undertook periodic downsizings that slowly eroded Kodaks lifetime security promise.
The layoff decisions made in the 1980s have been criticized for their poor execution and lack of overall vision. Layoff decisions were often based on an employees most recent performance review, meaning recently hired talent was lost. A one-time buy-out program offered in 1983 was designed to reduce staff by 3,100; 5,000 employees accepted the offer. What was expected to be a one-time cut was followed by additional downsizings in 1986 (12,000), 1989 (4,500 announced as the target; 6,000 actually left), 1991 (3,000), and 1993 (10,000).(2)
George Fishers first strategies upon arriving at Kodak in 1993 were to grow the company out of its problems by focusing on its core film and imaging business and to implement at Kodak the disciplined, quality-focused manufacturing processes he presided over at Motorola. By 1995, however, further downsizing was announcedand this time 4,000 jobs were cut. Still, Fisher stopped short of a major restructuring.
In the mid 1990s, the company decided to refocus more narrowly on its core markets for film, cameras, and emerging imaging technologies. It sold Sterling Drugs and completed the separation of Eastman Chemical into a separate company. It also created a number of joint ventures or partnerships with firms such as AOL, Picture Vision, and a consortium of four other companies working to develop an Advanced Photo System for linking images and magnetically embedded information on negatives.
By 1997, under considerable pressure from investment analysts, Fisher and his management team realized that the company could not grow out of its competitiveness problems. At the same time, Kodak also faced major price competition from its biggest international competitor, Fuji, which was engaged in a major price-cutting campaign aimed at increasing its market share internationally and particularly in U.S. markets. In response, Kodak made more significant changes designed to reduce its costs and to re-capture market share in the companys core products.
As part of the restructuring effort, Kodak estimated that 19,000 jobs would be eliminated over the course of two years. The company also recruited a new set of senior executives and staff professionals. Hiring top leaders from outside the firm represented both another departure from Kodaks traditions and a signal of its leaderships determination to change both the culture and the performance of the company. According to one executive who examined the employment options open to the company when he first arrived at the firm in 1996,
[t]he company waited too long to make the hard decision to downsize the workforce to where it should be. If it had taken the hard action sooner, everybodythe shareholders and the employeeswould be better off today. But it was very hard to make these decisions, given the community scrutiny and impact this company has carried over the years.
The companys manufacturing operations became a central focus of attention and change. Once again, the 1998 business press offered commentary, this time in a more approving manner:
The cost-cutting crusade is at the core of all other business improvements under way at Kodak, and its heartening to investors that Kodak executives stress that eliminating waste is not a temporary preoccupation. Removing costs is a relentless, forever thing, Fisher insists. The trick is to take costs out and grow the business.
Taking on the role of cost-cutting czar has been Eric Steenburg, a 27 year Xerox veteran who was brought on. . . in the position of assistant chief operating officer. . . . Steenburg found a wealth of savings opportunities. He consolidated the office and business imaging segments, sold some non-core units, trimmed the number of vendors, reorganized procurement across the world, reduced inventory costs and is helping to oversee the installation of anew global software system from Germanys SAP.
Steenburg is improving manufacturing processes using the vaunted Six Sigma quality-assurance process, and he is moving labor-intensive manufacturing operations to locations like Tijuana, Mexico, while keeping capital-intensive work near Kodaks base in Rochester, New York. Some Kodak products are now being manufactured by outside contractors (Santoli 1998, 26-27).
An important feature of the companys restructuring efforts involved a series of speeches and related efforts by Fisher to redefine what the CEO has called its new social contract with the workforceone that is responsive to the realities of the market (Fisher 1997).
Fisher uses the term social contract to describe the new deal that the company wishes to make with its employees, promising employees 40 hours of training and career development per year and holding supervisors accountable for ensuring that their employees receive this amount of training. Regular surveys of employee satisfaction are to be conducted and supervisors bonuses are to be tied to their results.
Fisher believes the following outcomes will result from the initiation of this new contract:
The benefits for the employees are many. Over time, creating a new relationship with employees should lower workplace anxiety, close the chasm of fear and cynicism and rebuild trustanother one of our core values. Employees will be more marketable, more in demand. They will become leaders in an environment where everyone is expected to be a leader. Each will become responsible for the success of the business. Each will learn to take risks, be innovative, and not be afraid of failure for taking reasonable risks (Fisher 1997).
Fisher also sees the modern firm as being responsible for aligning the interests and meeting the goals of three different stakeholders:
To build for growth, the new relationship should create pay-for-performance cultures driven by a set of well-articulated company values and goals. At Kodak, as at most companies, our goals are customer satisfaction, employee satisfaction, and shareholder satisfaction. Customer satisfaction drives growth and profits, which lead to shareholder reward and satisfaction. But we cannot serve customers and create value for shareholders if we fail to achieve employee satisfaction. Each corner of the triangle is essential to build a pyramid of success (Fisher 1997).
The Kodak experience demonstrates that the vision and values of the CEO matter significantly, but that even a CEO who wants to carry on the tradition of being a socially responsible employer can no longer do so in an old-style, paternalistic fashion or with a full-employment guarantee. As a human resources (HR) executive (from another company) put it: Nobody is saying that they will provide lifetime jobs any more, and no employees would believe it anymore if it was said.
As a new socially responsible firm, Kodak is now is defining those responsibilities around three key points:
- Cushioning the effects of job loss by using early retirement, severance packages, job search assistance, extended health insurance coverage, and other means of aiding those downsized in transitioning to another job or into retirement.
- Redefining the new social contract at work as one in which the firm will provide opportunities for continued learning and education for employees to keep their skills current and marketable in the external labor market, as well as within the firm.
- Communicating openly and honestly about the competitive realities of the business and rewarding employees for their contributions to firm performance.
The future of employment relations at Kodak, therefore, will depend on how successful the company is in regaining market share and penetrating new markets related to film processing and imaging technologies. While the company believes that, once it completes the large-scale downsizing announced in 1998, it will have the proper level of employment, it will clearly continue to restructure its manufacturing function as productivity is improved and labor-intensive work is outsourced to lower-cost domestic or international firms. How a new social contractbased on the three principles listed aboveis received by the workforce will likely be determined by whether the downsizing is completed and the company continues to improve its market share and financial performance.