It’s no secret that General Electric has fallen on hard times. Its CEO, Jeffrey Immelt, was forced to step down last June. In December, it announced that it was laying off 12,000 employees in its massive power business. Its stock has lost half of its value and there’s talk that it may get kicked off the Dow after 110 years.
In an earlier age, such a dismal performance would likely been attributed to corporate rot — an aging industrial firm gets fat and lazy and loses its competitive edge. Yet there’s no sign of that at GE. On the contrary, it seems to be a strong operational company that is highly competitive in the markets in which it competes.
The problem with GE, it appears, is that it has become a square-peg business in a round-hole world. It’s not that it’s gotten lazy, but that it invested heavily in getting better and better at things people care less and less about. That’s a problem few people talk about. We like to believe that success breeds more success, but the truth is that success often breeds failure.
A Culture Of Excellence
The best way to understand how GE got disrupted is by looking at its power business, which got its start as far back as 1882, when Thomas Edison built Pearl Street Station, the first commercial power plant in the US. Since then, GE has dominated the competition, accounting for nearly 30% of the market for electricity generation equipment as of 2015.
It maintained its edge by relentlessly focusing on continuous improvement. In 1995, legendary CEO Jack Welch implemented Six Sigma at the company. The transformation took a wrenching five years of training, mentoring and a strong leadership push from the top, but it produced an estimated $12 billion in savings.
Welch’s successor, Jeffrey Immelt, continued in a similar vein. When he took over in 2000, he aggressively shifted the company away from financial services and media to focus the company back on its industrial roots. He also made a big push into software and analytics, intending to create an industrial operating system that would power profits in the new economy.
As he wrote in an expansive piece in Harvard Business Review, “All the major initiatives we implemented during my tenure as CEO were aimed at making GE one of the 21st century’s most valuable technology-driven industrial companies–one that can grow; one that can generate greater productivity for ourselves and our customers.”
Better, Faster, Cheaper
While Jack Welch’s Six Sigma initiative sought to reinvent how GE operated, Immelt’s transformation focused on how the company developed new products. For that purpose, he recruited lean startup guru Eric Ries to implement a more entrepreneurial approach and created the FastWorks program to drive these methods throughout the company.
Much like the Six Sigma effort, Fastworks was focused on results. Ries developed internal coaches — similar to Six Sigma black belts — who in turn trained thousands of GE executives. In its first year, the FastWorks program launched over 100 projects around the world.
One much-touted initiative was the development of the Series X engine. As Ries explains in his book, The Startup Way, when the project began he was confronted with a typical corporate business plan, with rosy projections and a long development cycle. If the assumptions in the plan were accurate, everything would turn out great and profits would flow in.
Yet Ries was skeptical. The plan involved multiple leaps of faith. It required overcoming serious challenges, from ambitious technical specifications to setting up an extensive distribution network. So he suggested they produce a minimal viable product to see if they could test some of those assumptions and speed time to market.
The project was a major success, greatly reducing development time an improving quality. It became a model for for implementing the FastWorks program across the company.
A March To Dominance
With the Six Sigma efficiency that Jack Welch put in place and the blazing speed of development that FastWorks made possible, GE began looking to further consolidate its position in the electricity generation market. It found the answer with its acquisition of the power division of Alstom, a French company that wanted to focus on its transportation business.
Analysts called the move “brilliant” and GE’s “best deal in a century.” It would expand GE Power’s international reach and greatly increase the installed base of power generators to feed lucrative service contracts. “I don’t think the company has ever been better positioned for an integration than we are with Alstom,” GE CFO Jeff Bornstein said.
Unfortunately, things didn’t turn out that way. The increasingly strong economics of renewable energy created an inflection point and demand for gas powered turbines decreased significantly. The Alstom acquisition underperformed and now GE is rapidly cutting costs in order to “right size” its investment in power generation.
From a certain point of view, GE did everything right. It continually improved its operations, brought in outside experts to shake things up and transformed its product development process. It made strategically sensible acquisitions in an industry it knew well. But the whole time it was getting better and better at things customers wanted less and less. That’s how you get disrupted.
Innovation Needs Exploration
The problem GE finds itself in now is amazingly common. Every business model fails eventually. It’s just a matter of time. Changes in technology, competitive landscape and customer preferences make that a near certainty. That’s why innovation needs exploration. We can’t expect the world to conform to our tidy, linear expectations.
Consider Procter & Gamble and IBM. Both companies, like GE, are over a century old and have a history of operational excellence. Both are no strangers to disruption and strategic missteps — IBM in particular seems to have its core business implode about every 20 years or so. Yet both are also able to invent new categories of business through new discoveries in their labs.
Yet it’s hard to think of any major invention that’s come out of GE since the CT scanner back in the 1970s. Clearly, this is not due to a lack of technical prowess — the firm ably competes in highly technical industries — but a lack of exploration. Its storied labs continuously improve its present lines of business, but do not venture out into the unknown so, not surprisingly, never find anything new.
Compare that to IBM’s quantum computing effort, which the firm has been working on for decades, long before any commercial potential was clear, and now looks to have a huge future. Other long-term initiatives such as artificial intelligence, and neuromorphic chips show similar promise. Procter & Gamble, for its part, has created three billion brands just since 2000. These were not so much strategic moves as the results of exploration and discovery.
Similarly, the long-term answer for GE’s woes probably lies in a market that doesn’t exist yet. Cutting costs, streamlining operations and increasing efficiency will only take it so far. It is notable, even admirable, that GE is able to continue to improve power generation after more than a century, but somewhat disturbing that it has failed to make new discoveries that lead to new markets. Until it can learn to do that again, its future will be in question.