GE Sees the Light By learning to manage innovation, Jeffrey Immelt is remaking America's flagship industrial corporation into a technology and marketing powerhouse.
By Erick Schonfeld

(Business 2.0) – In a lobby at the General Electric Complex known as the "House of Magic" sits a desk that belonged to GE founder Thomas Edison. There, under glass, are copies of his notebook papers with sketches of his greatest achievement: the lightbulb. Two floors below, GE researcher Anil Duggal is working in a cramped, darkened lab on a replacement for that iconic invention. Duggal holds a flat, glowing 6-inch square that illuminates his face. The light is created by a thin layer of organic light-emitting diodes (OLEDs) sandwiched between two glass plates. Duggal hopes they will eventually be printed on plastic so that flexible lighting surfaces can be incorporated into wallpaper or furniture. Just as the OLEDs convert electricity into light, they can also do the reverse, and thus could someday become the basis for inexpensive plastic solar panels. They could be produced much like newspapers--"and newspapers are so cheap, we throw them away," Duggal says. Think of the possibilities, adds his colleague Sanjay Correa. "What if your rooftop were made of a cheap material that creates electricity, and then inside, your ceiling could take that electricity and turn it into light," he muses, a broad smile spreading across his face.

The work in this basement lab stands as a neon-bright metaphor for the transformation quietly under way at GE. Three years into chief executive Jeffrey Immelt's tenure, it's becoming clear that he's attempting a radical and risky reinvention of the 126-year-old flagship of American industry. Immelt, 48, is de-emphasizing some of the tenets that his famous predecessor Jack Welch used to build one of the most formidable records ever compiled by a CEO. Instead, Immelt has staked GE's future growth on the force that guided the company at its birth and for much of its history: breathtaking, mind-blowing, world-rattling technological innovation.

In a sense, Immelt has concluded that to power his $134 billion goliath forward, his managers must view GE not so much as a collection of huge, multibillion-dollar businesses but as a vast network of entrepreneurial, Silicon Valley-style--or better still, Edison-style--tech startups. He has ordered them to grab the scientific lead on the far technological frontiers of markets from clean energy to medical diagnostics to nanotech to security to jet-propulsion systems. And he wants to harness that revved-up innovation metabolism to a more highly developed and systematic marketing effort than GE has marshaled in many years, if ever.

The result, Immelt believes, will be a GE that looks like an entirely different company--more entrepreneurial, more science-based, and generating much more growth from its own internal operations than by simply acquiring other companies. "Constant reinvention," Immelt says, "is the central necessity at GE."

And necessity is the mother of this reinvention. GE has been going through one of its rare troughs: Its stock is down 50 percent from its mid-2000 peak, and in 2001 it broke a long streak of double-digit revenue and profit growth, benchmarks that have come to be seen as minimums for GE. In 2003 the company's revenue grew just 1.5 percent; profit was up only 6 percent. GE has been hurt by the fallout from 9/11 and the global recession, and its recent performance has led some critics to question whether Immelt's plan can revive the company's days of growth and glory. Meanwhile, cost pressures in many old-line GE businesses, from appliances to plastics, are fierce and worsening. Immelt himself sees the threat clearly. "We're all just a moment away from commodity hell," he says.

Still, seeking salvation through capturing the elusive, lightning-in-a-bottle instances of innovation is tough for any company. It becomes a monumental management challenge at a sprawling industrial empire with 11 different major business lines, tens of thousands of products, and 315,000 employees in more than 100 nations. "Pushing more of the entrepreneurial startup stuff will probably result in more failures at GE," says Noel Tichy, a professor at the University of Michigan Business School who ran GE's executive education institute in the 1980s. Spitting out a stream of entrepreneurial ideas that mostly flop in search of the one big score "is an unnatural act for many GE managers," he says.

Moreover, consider the sheer scale of what Immelt is attempting: He has set growth targets that would require GE to generate more than $9 billion in new revenue annually from internal operations alone. That's like adding the combined businesses of eBay, JetBlue, MGM, and Starbucks. Few companies in history have been able to consistently generate those kinds of dollars without acquisitions.

The challenges of getting there by igniting innovation at a colossus like GE are writ large, but in many ways they aren't so different from the issues all companies face in trying to unleash their latent entrepreneurial power. How Immelt is going about it contains broad lessons for managers everywhere. And let's be clear about what's at stake for GE. If Immelt's reinvention doesn't work, Tichy says, the almost unimaginable could happen: "GE could become just a tired, average company." Another probable result of failure is less difficult to envision. "Immelt," Tichy says, "would be toast."

Every Chief Executive of GE--and there have been only 10--is expected to put his own stamp on the company, even to radically remake it if necessary. Indeed, when Immelt took over, Welch reportedly gave him the same advice that a previous GE boss had given Welch: "Blow it up."

The marriage of technical innovation and marketing is Immelt's detonator, and he has been painstakingly wiring it up since he got the top job. For one thing, he quickly began edging away from some of Welch's legacy. Welch, of course, was a master innovator himself, but mainly in the field of financial management. He was to a large degree a growth-by-acquisition man, buying new businesses, many in high finance, and mercilessly culling out underperformers. "In the late '90s," Immelt says, "we became business traders and not business growers. Today organic growth is absolutely the biggest task of every one of our companies." To make that clear, Immelt has tied compensation to internal growth. "If we don't hit our organic revenue targets," he says, "people are not going to get paid."

He has also brought in more big brains to dream up innovations. GE has added 5,000 engineers since 2001, and there are now 21 engineers among the company's top 175 officers--up from only seven when Immelt took over. He has cut the acquisitions team by two-thirds. To drive home the renewed focus on marketing, he appointed Beth Comstock, a 15-year GE veteran, as chief marketing officer. The position had been eliminated under Welch. Immelt also assigned a marketing leader to each of GE's major business lines, another first. And he has hired 5,000 new salespeople.

By last year, however, it had become frustratingly clear to Immelt that the message was not taking hold fast enough. In September 2003 he summoned all the marketing directors to a company conference room and for hours hammered at the importance of new innovations. "We have to put growth on steroids," he told them. He ordered each of them to come back with five ideas for new growth businesses--"imagination breakthroughs," he christened them. The ideas could be for things totally new to GE, or they could leverage existing assets to create new products or business lines. But each idea should generate at least $100 million in new revenue within three years. "I want game changers," Immelt told them. "Take a big swing." He gave them two months.

Some in the room were stunned. "There was a collective gulp across the organization," Comstock recalls. "People were thinking, 'Is this real?'"

For Lorraine Bolsinger, a former engineer who was named last year to head up marketing at GE's huge aircraft engine division ($10.7 billion in 2003 revenue), reality sank in quickly. Within days of the meeting, Bolsinger arranged the first of 20 brainstorming sessions that brought together engineers, finance people, marketers, sales staff, and research scientists. She barred herself from the first round of meetings so people wouldn't be afraid to sound silly in front of the boss. Within six weeks, the group came up with 354 ideas, including some that were silly indeed: putting a million micro-engines on a plane, or soundproofing homes along a particular flight path to allow the use of bigger, noisier jet engines.

Bolsinger boiled the ideas down to five and then presented them to Immelt. He approved all five, including one that GE finds particularly promising: making a new class of small, superefficient jet engines for a coming generation of air taxis. "The breakthrough piece here is not just that we can serve the air taxi market," Bolsinger explains, "but I think that we can help build the air taxi market." She concedes that it's not clear air taxis will catch on, but adds that if the market does develop, "there's not a company in the world that could design, build, or support it better than GE."

This isn't total pie in the sky: GE already has a joint venture with Honda that's developing a compact, technologically sophisticated jet engine. By the end of the year, Bolsinger expects one major aircraft manufacturer to select that engine for a new class of business jets. Certification of the plane by the FAA will take at least another two years. But if all goes well, she says, the business of making small jet engines could eventually bring in as much as $500 million a year.

Of the 50 "imagination breakthroughs" presented to Immelt, 35 were green-lighted, including such novel ideas as mobile ultrasound machines and emergency water purification systems mounted on truck trailers. Many of them will amount to nothing, of course, but so what? "Just those 35 projects have the potential for $5 billion in revenue by 2006," he says. Besides, Immelt has ordered his teams to come up with another 50. This summer.

The heat from Immelt for fresh ideas has led many GE managers to scour their operations for promising but sidetracked technologies, and to dream up ways to refashion existing technologies for totally different markets. "I call it the Junkyard Wars approach to innovation," says Joe Krisciunas, global technology manager at GE's sensor business. "What can you find in your arsenal to meet new needs?"

Last year Krisciunas led a brainstorming session on industrial applications for an idea dubbed "smart dust," fingernail-size sensors that can communicate with one another. During the presentation, one veteran engineer familiar with how oil refineries operate had a lightbulb moment: Refineries might have a use for such wireless sensors even before they're fingernail-size. The group then figured out that infrared sensors used in microwave ovens could be combined with wireless technology designed for security systems to offer petrochemical plants a way to remotely monitor trouble spots in their electrical equipment and machinery. That job was often done by a person walking around with a thermal camera. The product, called GearTrak, hit the market in May.

Cross-fertilization also plays a role in a broader effort to modify the digital X-ray, ultrasound, and CT scanning gear GE sells to hospitals, so that it can be used to monitor a variety of industrial systems--from aircraft parts assembly plants to gas pipelines. These so-called nondestructive testing businesses, launched since 2001, brought in $400 million last year and could hit $1 billion by 2006--just the kind of internal growth Immelt is after.

Some of the software used in GE's medical-imaging devices is also inspiring GE's security division, whose mainstay products are alarm systems. Like many companies, GE sees security as a potentially huge growth area in the post-9/11 world. And as it turns out, the sophisticated systems that can identify a tumor in a lung are similar to the software needed to detect an intruder amid hundreds of hours of digital surveillance video. In a cluttered room called the Visualization Lab, scientist Greg Chambers eyes a screen showing people moving around a parking lot. They're being tracked by software that puts a big yellow rectangle around each person. But Chambers and his team don't merely want to track and record movements. "We want to calculate human intent," Chambers says.

The coders are trying to develop software that will sense minute deviations from normal patterns--at a shopping mall, in an airport, at a sporting event--and sound an alert when something seems out of order. For instance, if things aren't usually taken off a warehouse shelf at midnight on Sunday, and suddenly they are, the software could detect the abnormality and summon security. To work, the software will always have to stay one step ahead of crooks and terrorists. "There will be an arms race between us and them," Chambers says. "We're putting the pedal to the metal."

Some of these initiatives could add hundreds of millions or even billions of dollars to GE's revenue in coming years. And as Scott Donnelly, head of GE's global research and development efforts, points out, "a whole bunch of $1 billion things adds up after a while." But they stem mostly from adaptations of existing businesses or technologies; they aren't the jaw-dropping breakthroughs that can create entirely new businesses with gargantuan payoffs. That's the holy grail of Immelt's reinvention campaign, and it's being hunted diligently in the House of Magic.

More formally known as the Global Research Center, the House of Magic has a storied past. Originally set up in 1900 in a barn in Schenectady, N.Y., as a refuge for brilliant minds, it is now situated on 525 secluded acres nearby. Over the years it has hosted big thinkers like Albert Einstein and employed such celebrated scientists as Nobel Prize-winning chemist Irving Langmuir. Among the many inventions it has pumped out are the X-ray tube, synthetic diamonds, the high-frequency alternator that enabled the first radio broadcasts, and the plastic used in CDs. But in recent decades, the place became less central to GE's operations, particularly as the company focused more on financial services under Welch. One of Immelt's first moves was to pump new life into GE's pure research effort. He has upped its budget 14 percent to $359 million, spent $100 million on a new laboratory wing in Schenectady, and invested another $100 million to open research centers in Munich and Shanghai. He also started requiring top managers and marketers to regularly cycle through the House of Magic to keep in touch with the latest advances.

Though they do have plenty of room to roam, GE hasn't given the science wizards free rein. "To manage the kind of innovation we're looking for," Donnelly says, "first you have to have a strategy of where you want your company to be, where you can be a big player, and where technology can make a difference." One of Donnelly's first moves after being named R&D chief shortly before Immelt took over was to slash the number of projects at the research center from more than 1,000 to just 100 highly focused ones.

Margaret Blohm's nanotechnology work is one of them. In her House of Magic lab, she sets up a simple experiment to show the novel properties of very small things. She inserts a magnet into a test tube suspended over a rust-colored solution of iron nanoparticles. The solution flows upward--seemingly defying gravity--and collects around the test tube, forming a spiked ball of brown liquid. Blohm believes that the bizarre properties of nanoparticles could eventually lead to any number of profitable uses for GE: lighter metals, less brittle ceramics, sensors that can detect a single molecule of a given gas (such as sarin), plastics that conduct electricity. "For us, nano is the ultimate materials science," she says.

In a nearby lab, Nadeem Ishaque is already working on one use for Blohm's tiny particles. Ishaque, head of GE's advanced molecular imaging program, wants to pack 1,000 of them inside a biocompatible polymer shell and then attach an antibody that seeks out early signs of arterial plaque. Once inside the body, the iron nanoparticles would be picked up by an MRI scan, and thus help doctors pinpoint plaque buildups long before any current technology can.

GE scientists are also pouring resources into the quest for clean energy. Immelt has made a long-term bet that fossil fuels will have to be supplemented because of dwindling supplies and geopolitical and environmental constraints. GE has a team of 80 scientists dedicated to working on hydrogen-related projects, and they're trying everything. In one lab they've rigged up a lawn mower with canisters they want to fill with a metallic powder that could absorb and release hydrogen.

Closer to reality is GE's fuel cell, which could be providing clean power to malls or whole neighborhoods by the end of the decade, and ultimately could transform the way power is distributed. "Long before you burn hydrogen to make electricity in cars," says Correa, head of GE's energy and propulsion research, "you will have stationary fuel cells." Correa says the company's fuel cell will convert natural gas to electricity more efficiently than any power system today and produce less than 10 percent of the nitrous oxide coughed out by GE's gas turbines. Best of all, one of the by-products is hydrogen. GE believes that the market for clean power ultimately will be enormous--and isn't as far off as many people think. "We foresee a huge move to more sustainable energy," Correa says.

Immelt's goal is to get GE back on its double-digit growth path by ultimately generating up to 7 percent in added annual revenue from internal growth, making up the rest through acquisitions. Though he intends to de-emphasize buying growth, he hasn't turned his back on the practice, having this year made two of GE's largest purchases ever--a $10 billion deal for British biomedical company Amersham and a $14 billion purchase of Vivendi Universal Entertainment.

But do the math: Immelt's targets mean that he's demanding that a $134 billion behemoth innovate its way to annual internal growth of as much as $9.4 billion--and that number will grow, year after year. It's staggeringly ambitious, which is why his plan invites skepticism. Besides facing the law of large numbers, GE also risks becoming distracted by having too many irons in the fire. "Generating all that internal revenue growth is going to be tough," says analyst Tony Boase of A.G. Edwards. On the other hand, GE has been generally masterful at managing hundreds of different businesses at once. Even Tichy thinks Immelt has a good shot. "Jeff still has a lot more levers to pull," he says.

Immelt points to what he sees as major signs of progress: By next year he expects what he has labeled GE's seven "growth" businesses--everything but plastics, appliances, equipment leasing, and insurance--to account for 85 percent of revenue, up from 68 percent in 2000. Last year six smaller GE units, all relatively new and encompassing things like water purification, health-care IT, and wind turbines (see "Growing in the Wind," page 85), generated combined revenue of $9 billion, up 50 percent from a year earlier. And Immelt strongly believes that continued supercharging of the company's marketing machine will go a long way toward keeping those trends moving in the right direction.

But, as he says, "marketing is bullshit without stuff." Back in the House of Magic, Tony Dean, head of GE's advanced propulsion program, is working on stuff that may lead to the ultimate growth engine: a kind of air-breathing rocket that many people--not just inside GE--believe could revolutionize aviation. In a test chamber at the research center, this "pulse detonation engine" is fired, rat-a-tat-tatting like a howitzer spitting out thousands of rounds. Instead of the rotating turbines of today's jet engines, this one creates thrust by sparking controlled explosions in a steel tube filled with gas fuel. In theory, it could power small airliners that could fly at supersonic speeds--more than twice as fast as today's passenger jets. And it's expected to use 5 percent less fuel than a standard jet engine. "That's worth many billions of dollars a year to the airline industry," Dean says.

It doesn't take an Edison to figure out what ideas like that could mean for Jeff Immelt and GE.

Erick Schonfeld (eschonfeld@business2.com) is editor-at-large at Business 2.0.