GE has just dismissed its CEO, Jeffrey Immelt, who has been in office for sixteen years. Despite considerable work in transforming the business, an ambitious innovation drive, and a big push on some hot topics such as the Internet of Things and sustainable “eco” development, which together seemed to represent the ideal transformation strategy, the results have been disappointing, and the company is now in the hands of activist investors who may soon be dismantling it. If GE has done what looks on paper like the ideal transformation program, and yet fails in the end, what lessons can we draw from its story for innovation and management in times of disruption in general?
During his sixteen-year tenure, Immelt radically transformed the business from a classic multi-activity conglomerate into a company focused on few industrial activities. It sold low-growth, low-tech, non-industrial businesses – financial services, media, entertainment, plastics, and appliances. Better yet, Immelt doubled the R & D budget. Very conscious of the issues of the time, he pushed the company into the field of so-called “eco-innovation”, as well as the Internet of Things with an investment of over $4 billion.
But that’s not all. Impressed by Eric Ries’ “Lean Startup” book, Immelt pushed GE to adopt this entrepreneurial method and built his Fastworks program on this basis. In recent years, every GE executive has learned Lean Startup with the idea that GE would become a showcase for how today’s businesses can use entrepreneurial management to transform their culture and drive long-term growth.
How can a company that is so relentlessly abandoning low-growth activities and adopting as recognized a radical innovation method as Lean Startup fail? Well simply because a flurry of M&A combined with some fancy entrepreneurial efforts do not solve the fundamental problem of innovation.
To understand why, we need to take a step back and understand why a company fails to innovate even with the best of intentions. As innovation specialist Clayton Christensen has shown, it is very rare for companies to ignore the disruptions in their environment. The difficulty comes from the fact that an established company is the victim of a conflict between its historical activity and its future activity. If it bets too much on the future, it endangers its current activity. If, on the contrary, it devotes too many resources to defending its current activity, it runs the risk of missing the future opportunity. But faced with such a dilemma, it will always tend to choose the defense of its current activity. Why? Because if it focuses on the future, the current activity will suffer immediately while the results of the future will take time to show. Mechanically, and whatever its intentions, the majority of resources will continue to be allocated to the current activity. By resources we must not only understand the financial resources (investment) but also management attention and people: the “best talents” (as perceived by the company) will be devoted to the current activity and it will receive the bulk of time and attention form top management. When one looks at the considerable activity represented by the restructuring carried out by Immelt during all these years, one imagines that the management team had to be enormously busy to carry it out, leaving little time and attention to future activities. Not to mention that by definition, future activities are always microscopic at first and cannot be expected to contribute to the overall turnover before a long time.
When the current activity starts to decline and becomes underperforming, it is even more difficult: investors get impatient and demand a turnaround. The CEO then finds himself or herself under a very strong pressure, and the inevitable natural reaction will be to concentrate even further on the current activity, further decreasing the attentional resources allocated to innovative activities.
At this stage, the company pays the price of its lack of investment and innovation from previous years in both current and future activities. As an old saying goes, the best time to plant a tree was ten years ago. The same goes for innovation: Seed should be planted when the company does not need it, when the current activity is doing well, when, roughly speaking, the performance indicators are in good shape. If we wait for the decline to be seen in the figures, it’s too late to act. With companies now obsessed with numbers, monitoring everything with their Excel spreadsheet, it’s unfortunately become commonplace. GE’s real problem is therefore a conflict of commitment between the old and the new, a conflict that has never been settled, and whose source lies in what Immelt did not do ten years ago.
No training in Lean Startup or other innovation methodologies will solve this. No Lab, no coworking space, no hackathon will solve this. No internal investment fund will solve this. No observation post in Silicon Valley will solve this. No internal innovation competition will solve this. And one could add that no PR campaign along the lines of “We are entrepreneurial” will solve this. A fully trained Lean Startup executive will not be able to do anything if the organization continues to measure her performance against the current activity, with a time horizon of six months, both because a method is never a management model and because the method anyway does not target the problem where it is.
The GE case illustrates the limits of an innovation approach conceived as purely tactical, which I can unfortunately observe in many companies I work with. All of them have their arsenal of entrepreneurial initiatives and all die from lack of innovation. It’s not a paradox. It is because they don’t solve the right problem.
As long as one refuses to touch the heart of the organization, transformation will not take place. And the only way to touch the heart is to work not on methods, but on culture and the identification of areas of conflict between the old and the new. Innovation is an organizational and cultural issue, it is not, or not only, a matter of method.
The source for this article is Steve Blank’s article: Why GE’s Jeff Immelt Lost His Job – Disruption and Activist Investors. On the notion of conflict of engagement, read my article: Immunity to change: these rational commitments that prevent innovation. Read also: Transformation: No, you do not have a performance problem.