Wednesday, November 10, 2021

The great GE innovation experiment

 GE, once a large conglomerate, has announced that it will divide itself into three companies, a healthcare company, an energy company and an aviation company. There are a few things I'd like to comment on about this announcement, but what is really interesting (at least from an innovator's point of view) is that we get to have a live experiment about the innovation capabilities and capacities of three sister businesses, all entering the market at the same time. 

Here are a few things we can learn:

  • We can discover if being relieved of corporate overhead really matters to the individual businesses. 
  • We can find out if the three companies become little GE corporate clones or pave their own way.
  • We can also find out which leaders will adopt innovative measures, and change the cultures of their businesses, and which will "stay the course".

A word about the change in the marketplace

But first, as the advertisers used to say, a brief word about what this calving of a behemoth into three still very large companies says about the market and competition.  When the pace of change was slower, and change was more predictable, getting to economies of scale and growing a conglomerate made sense. This "history" as I am describing it, takes place in the 1950s, 1960s and 1970s, and probably began to end in the 1980s. As change accelerates and there's an increasing need to be agile or nimble, getting smaller and faster is key. As several commentators have noted, the future belongs to the fast, not the large.

If you needed evidence that competition, the pace of change, the need for agility and new business models is creating profound change, look no further than the house that Jack Welch built, which is being broken down and sold for parts.  All business must be fast, agile and innovative.

This division of the company is meant to make the new, smaller companies more focused, faster and more agile.  The question in my mind is:  what do they change?  Do these firms retain their existing processes, decision making models, org structures and so on, and hope to get more done with less cost?  Do they strive for greater efficiency, or do they dramatically rethink their cultures and become more innovative?

An experiment, hosted in real time

Scientists long for such a naturally occurring and easily observable experiment.  We've got a doozy.  Three new companies will be launched from the mother ship of GE.  They will bring with them the same people, the same products, the same culture as they had when they were operating divisions within GE.  They will also bring along existing decision and risk models, investment models, hiring structures and policies, pay scales, and more, as a legacy of the GE mothership.  In other words, they'll bring along the existing leadership and the existing corporate culture.

The folks who are the leaders of these businesses will (probably) remain the same as they were when launched, so the executives aren't likely to change dramatically.  This means that we're likely to see one of a few scenarios:

  1. The individual businesses reform themselves as mini-me's, built and organized and operating like GE did previously, with the hope that the GE brand and historical power, and some operational improvements are what is necessary to succeed.
  2. The individual businesses double down on efficiency, now that they no longer have to pay the corporate tax.  They strip down and operate as efficiently as possible, using lean practices and six sigma guidance (already well embedded) to improve operating margins.
  3. The individual businesses decide that scale is the only way to play, so they go on an acquisition binge.  It would not surprise me to see one or more of these businesses attempt to get bigger faster, since that too is a legacy of the GE business thinking.
  4. The individual businesses attempt a radical rethinking of how they work and operate in their chosen industries, and aim for more growth, driven by new products and services powered by innovation.  This will require the most radical change, since it attacks the decision making, cultural and risk factors that the organization may want to cling to from the mother ship.

The experiment we'll all watch is:  what works?  Getting smaller faster?  Getting larger through acquisitions?  Trying to become more innovative?  While I realize that the different businesses are in different sectors and therefore the competition is not the same, it won't be difficult to understand the decisions that the executives make, and see the results that occur.

What does Wall Street want?

My bet is that there is a lot of institutional pressure to grow margins, but these new companies aren't working in greenfields.  They are going up against established competitors that have competed with GE for years. Many of their competitors are much more aligned to their industries than GE as a whole was, so the competitors are more optimized to compete, and may make reaching for cost gains difficult, even without the GE corporate tax.

Michael Treacy built on Porter's work to argue that there are three interesting competitive positions:  product leadership, operational excellence or customer intimacy.  Which will the three companies choose?  The bias will be (I think) for operational excellence, since much of that is in GE's DNA, and cultures are difficult to change.  For some of the businesses, customer intimacy could be an option, but this avenue adds cost and changes the dynamic with customers.  Product leadership (the strategy most closely linked to innovation) seems possible but perhaps the most difficult to justify, especially in the short run, as there will be a lot of pressure on the new CEOs to demonstrate strong margins and to raise their respective stock prices.

Which matters most - executives, strategy or culture?

The final item that will be interesting to watch is to determine which matters most - the leadership and executives and the direction they want to go, stated strategies and how they are implemented, or how much of the legacy culture remains in the smaller businesses and how much resistance these cultures present to any change.  My bet here is that it will be difficult to change the culture, and only committed executives who are willing to create a burning platform and regularly engage with their teams will move their cultures.  And with a background and culture like GE's, it will be difficult to change, but I think necessary to change.

All in all, a very interesting experiment to watch, one in which we may witness several different strategic directions from the different corporate "sisters".  

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posted by Jeffrey Phillips at 12:52 PM


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