The Mean Startup, How GE Failed at Doing Innovation By The Book – Part 1

General Electric (GE) was founded right after the American civil war at the early stage of the industrial revolution. Today, with around 300,000 employees working worldwide in a dozen of markets from home appliances, to energy and aircraft engines, GE is still a force to be reckoned with. Think of it as a Google that would have emerged from the birth of electricity, not the internet. But since 2008, GE market leadership steadily declined, making it the worst stock on the Dow Jones index on a constant basis. This decline devolved abruptly in 2016 with the retirement of its CEO Jeffrey IMMELT, a market cap divided by two while the stock market was up 41%, and a cascade of divestments (some of them to the Chinese HAIER — sign of times). Since then, while GE jet engines, medical scanners or power plants are still state of the art, the company went in a spiraling free fall.

What will be interesting to us in the middle of all this, is that GE did all the right things in term of innovation. Or at least, all the things that innovation gurus recommended as the best practices.

Startup Envy

In the middle of this turmoil, Jeffrey IMMELT had an epiphany six years ago. A clear strategic vision to reboot this falling giant. One that is shared by many CEOs right now but without the opportunity to do it at scale:

« Let’s put back the customer at the center of the business. »

How?

« By acting more like a startup. »

The way to reboot profits globally would come from « lean startup » principles. Since 2015 this was the Harvard Business Review-grade solution to understand digital, regain competitiveness, and survive the next century or so.

« Starting in 2009, over the course of several years I visited our controls and analytics labs and spent time in Silicon Valley. As the CEO of GE, I could get the best people in a field to talk to me about what was going on. I always capitalized on that. I met with tech leaders including Jeff Bezos, of Amazon; Paul Otellini, of Intel; Marc Benioff, of Salesforce; and Steve Ballmer (and later, Satya Nadella), of Microsoft, and had dinners with venture capitalists. I listened to them describe where they were going and how they went from strength to strength. I also read a lot. The two things that influenced me the most were Marc Andreessen’s 2011 Wall Street Journal article, “Why Software Is Eating the World,” and The Lean Startup—Eric Ries’s book, which I literally read in a day. » – Jeffrey R. IMMELT in HBR, Sept. 2017

Does it ring a bell in your own company?

Or, and don’t get confused if in your company you’re saying « design thinking » or « open innovation », these are all variations of this epiphany.

The real difference is that your board just makes a show of it and won’t allow you to do it at scale. Past a few workshops where post-its are aggressively used by executives and new business models are invented on the fly, no one really intends to actually do lean, design thinking or whatever. Worst case scenario you build a flagship innovation center and have a few weeks of press releases. Then it’s back to business as usual.

Not GE.

General Electric with nothing much to lose and still a lot of cash and assets, decided to go full steam and be serious about it. The press, financial analysts and keynote speakers loved it. The motto was « Lean startup? If GE can do it, you sure can! »

And as history just explained to us this was a industrial failure.

Let’s try to understand why…

To Be Fair

First of all let’s not shift the ENTIRE blame of GE fall from grace on the lean startup methodology.

Many root causes are obvious: an on-going lack of vision and strategy, an old incumbent culture, sudden market shifts, geopolitical turbulences… But more precisely, under Jeffrey IMMELT’s leadership, GE went essentially through a spectacular string of terrible acquisitions : Telemundo, Amersham, WMC Mortgage, Alstom… On top of that, the company managed to get hit by the US Securities and Exchange Commission for « creative » accounting and suffered from it quite a lot (as they should have).

This is quintessential to understand the demise of GE as an economic leader.

But if the problems were numerous, their ambition in developing a transversal startup mindset didn’t help and most probably just accelerated this whole mess.

The Scale Conundrum

One of the core beliefs of GE’s CEO was that « You can’t regard a transformation as an experiment. »

We’ve approached digital very differently from the way other industrial and consumer products companies have. Most say, “We’ll take an equity stake in a digital start-up, and that is our strategy.” To my mind, that’s dabbling. I wanted to get enough scale fast enough to make it meaningful. My view was that GE had as good a chance as anybody at winning in the industrial internet, because we were not starting from scratch: We had a $240 billion installed base of service contracts, a huge order backlog, and the ability to offer financing. We could build on our existing strengths to get even better. So we launched digital across all our businesses. By that I mean we launched a major effort to embed sensors in our products and build an analytics capability to help our customers learn from the data that the sensors generated. – Jeffrey R. IMMELT in HBR, Sept. 2017

See, this is very lucid.

You’re not going to reshape GE with, say, a corporate incubator churning through a dozen intrapreneurship projects a year, or by partnering with a VC fund to spray a few millions on a few more startups. Can you give me an example of any corporation that found its new business with such an approach these last five or ten years? (No you can’t.)

That being said, building up peripheral capabilities at being more customer-driven and lean could makes sense to test the waters. And then you do need to build at scale. That much I agree with. For instance a solid VC portfolio would need more than a hundred investments over two to three years to be able to record a success. Innovation is a volume game. This is why you need scale.

In the end the requirement for scale is driven by 1) the need to explore a large volume of uncertain options before unmasking real future opportunities and 2) reach a critical mass of feedback for each exploration to be able to decide something.

Let’s consider a company as GE through a heat map of uncertainties :

What you see here is how you would organize teams with different KPIs and mindsets about innovation.

The « red shirts » in Star Trek are the ones sent in the most dangerous zones away from the Enterprise. For business it’s where the future of the company is building up and yet completely uncertain. The red shirts that explore new technologies, you call them R&D. The ones that explore new market trends… you usually don’t have them (and no it’s not the marketing which is usually a yellow team at best).

red shirts star trek

But the red shirts can’t be made accountable to financial KPIs. There is no business plan where they are. If they can write one, they play too safe and are not doing their job. Their job is to map the future before it’s explained to you by Gartner or PWC.

If they don’t aim at bringing money back directly to the company, they still bring different and very necessary ROIs to the core business:

  • Sorting interesting future market opportunities from fads and hype (market intelligence)  ;
  • Getting to understand how to unlock the potential of a new technology and if there is a Moore’s law of sorts at play (technology scouting) ;
  • Identifying new capabilities to simplify and enhance current processes (process agility) ;
  • Growing new  cross-team expertise and accelerating best practices spread (cultural agility).

If you’re not dissociating these different objectives and allow them to flow back to your core business in a controlled way, you’re asking your core business to take crazy pills. Which for GE translated these last years in :

  • Let’s put huge touch screens on ovens because of millenials!
  • Let’s have biometrics sensors on faucets because they’re becoming cheap enough!
  • Let’s 3D print food because it’s the future!

Exploring these ideas make sense (a lot of sense). But thinking they’ll get to the market as such demonstrates a deeply flawed understanding of the market.

For instance, if you’re GE the millenials are not your market yet. They don’t have purchasing power, they don’t have families… Hell, most of them are still living with their parents. By the time they’re ready to buy home appliances, the market will have changed. THEY will have changed. Older millenials tomorrow won’t think and purchase as young millenials today. So getting an idea of how they think today is interesting for sure, but doesn’t linearly translate in products to be presented at the CES Las Vegas.

There is a very millimetric quality on how you manage the cold no-non-sense zone of a business and the red hot let’s-go-crazy fringes. Removing friction and letting all that be the same process with the same people and the same mindset, is kind of recruiting train drivers to race on Formula 1 and vice-versa. Who would do that?

But also if you want to be ultimately customer-driven then you have to focus all capabilities at delivering what the market asks right now. Not in ten years, not in five or two. Right now. This is not a logic compatible with innovation. You’re in the mobile market? Then deliver an iPhone look-alike with a notch that costs less than Apple flagship product. Sounds dumb? It sure is. It’s what the markets wants though. So what is it going to be: being innovative or market driven?

Do you want both now? OK, sure. But not at the same time with the same teams or your company will be torn apart. And then decide rapidly who is leading in the end: innovation (and like Apple you decide that the customer doesn’t know what he wants) or customers (and as L’Oréal you just want to deliver as fast as possible)?

All that being put back in perspective, if you say as Jeffrey IMMELT, that the first pitfall at being « more innovative » is managing innovation scale, I would wholeheartedly agree.

I just don’t know why GE would want to infuse « startup logic » across all teams and departments. Hot uncertainty zones and cold ones don’t work in the same way.

So maybe GE started to drink too much of the startup Kool-Aid and started to believe they where a 12 person team and not a 125 years incumbent with immense legacy business. Maybe in 2013, Eric RIES sold more what he conceptually had in stock. Or maybe the idea was just too nice to resist. We will neither know and to be honest it’s not that interesting in the end.

What is interesting is the cautionary tale that GE represents when innovation tools seem so nice that you apply them irresponsibly all across the board. The right scale at « being a startup » is about « red shirt » teams being able to test enough opportunities with enough market potential to probe the future and then have other teams that, with this knowledge, decide where to progressively nudge your core business before it’s too late.

There’s our first obvious post-mortem right there:

If scale matters in innovation it doesn’t mean that everyone should get involved.

Which will lead to the next article distinguishing mindsets and culture within a company and a second post-mortem on GE massive fail. Stay tuned.

Published by

Philippe Méda

Philippe has been training about 200 startups a year since 2007, consulted for dozens of multinationals on rupture innovation or corporate incubation. He also teaches innovation in key MBA programs in Paris and Shanghai.