Commodity hell. In these times of slower growth and higher risk, that’s where manufacturers will find themselves, hawking me-too products for minuscule profits against rival manufacturers and distributors from all over the world.
Unless, says General Electric’s Jeffrey Immelt, they focus tightly on creating innovative offerings that redefine markets or create entirely new ones.
Speaking Thursday at the Emerging Technology Conference at MIT, the GE chief executive described how his $132 billion company is tackling the job, and outlined the competitive advantages that giant global corporations can enjoy.
Rebuilding the House That Jack Built
Immelt has made some dramatic shifts at GE since taking over CEO duties three years ago from the legendary Jack Welch. His big focus: technology. “We fund innovation first,” he said. “Millions of dollars are won or lost on innovation. It’s the central necessity.”
Some changes reflecting this approach began at the top. Among GE’s corporate leaders in 2000, “only seven were engineers and 17 were lawyers,” Immelt noted. “Symbolically, we were in the wrong place.”
At GE’s famed, century-old central research lab in Schenectady, N.Y., “we were running a high-tech job shop, with about 1,000 projects,” Immelt said. “We cut that to 20 core projects that are meaningful to the company three to five years out” (see “GE Finds Its Inner Edison”).
GE makes everything from nanoscale sensors to industrial fans that, the company says, could suck all the air out of the Louvre in a second. Across this vast product spectrum, “our core competence, really, is in materials,” Immelt said. “We are placing bets on things we can do uniquely well. First, new ways to power the world. Second, molecular medicine. And third, nanotechnology.” Down the road, he said, GE also expects to push security products and water treatment systems because, Immelt said, “there is going to be a worldwide shortage of water.”
In some cases, GE expects payback in products within months. Often, however, it bets on much longer-term investments: “I don’t expect to see one penny of profit from photovoltaics in the next 20 years,” Immelt predicted.
The Empire Strikes Back
Only 11 of the TR100-the outstanding young innovators selected by Technology Review and honored at the Emerging Technologies Conference-have a giant corporation such as GE as their primary affiliation. But Immelt was hard-pressed to say nice words about startups.
For example, he said that while there are plenty of opportunities in the healthcare business, “there are more bad startups in healthcare than can be imagined.” The problem comes in delivering everything a customer needs-not just the products. “Some people see the invention as the end; it’s only the beginning. Many startups and VCs don’t have competency about how customers use the products.”
Companies such as GE “know how to use size as an advantage,” exploiting global distribution, established customer service groups, and a general comfort level, Immelt said. “GE offers customers stability and security, and we sell this hard.”
Rival firms may do better in getting a new business up to a $50 million level, “but we have built a competency for taking a business from $50 million to $1 billion,” he added. And for GE, growing revenues internally by one percentage point “is worth $10 billion in market capitalization,” he pointed out. “Growth at a big company is more valuable, and it’s a cultural imperative just as much as in a startup.”
Immelt warned against always seeing startups in a David-and-Goliath perspective. “A big company [running] with conviction, with speed, can change the world in a way that others can’t.”
From an investment perspective, it can control its own destiny. Since GE generates $16 billion in cash each year, “I’m my own banker,” he pointed out. “I can always fund my second round.”
Immelt did stress that GE works with many partners and is open to more collaborations. But among partners, he prefers universities to companies: “The people are smarter and we don’t get into arguments about distribution.”
So Far, So Good?
It’s early days for assessing how well Immelt’s vision is paying off for GE, the world’s largest public company in market capitalization. Last year, GE’s revenues grew by 4 percent. Profits climbed 7 percent-respectable in a troubled economy, but it’s the first time in more than a decade that profit has grown at slower than 10 percent.
GE’s overall shift in R&D approach got a thumbs-up from corporate research expert Henry Chesbrough, executive director of the Center for Technology Strategy and Management at University of California, Berkeley.
Moving R&D operations overseas “enables them to tap the best talent specialized to the particular strengths of that region, such as manufacturing process technology in China, computer modeling in India, materials and renewables in Germany,” Chesbrough said. “This is a template for the future of what will be increasingly global R&D.”
“GE is distinctive in channeling 30 percent of its R&D funds to long range activities,” he added. “This contrarian approach may enable GE to discover opportunities that others are not even looking for. However, there is a risk. Not all the smart people work for GE, and Immelt would be wise to build processes to connect to the smart people in universities, startups, and other places to drive innovation.”
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