Q & A: On the Hot Seat

(Fortune Magazine) -- A deep conversation with either General Electric (Charts) CEO Jeff Immelt or Procter & Gamble (Charts) chief A.G. Lafley is rare and valuable, but getting both of them together - that's like winning the lottery.

The grand finale of this year's C-Suite Strategies series brought them to the Time Warner Center in New York City, where they sat down with Fortune's Geoff Colvin before an invited audience. Immelt and Lafley, who are friends, talked about their new approaches to innovation, developing leaders for this century, organic growth and much else. Edited excerpts:

"Most people just assume that big companies are slow and lethargic," says GE's Immelt. "But if you get good processes, you can make size an advantage."

"We did have to kill not-invented-here," says Lafley of his company, Procter & Gamble. "We have to make 'reapplied with pride' just as important a part of the culture as 'invented here.' "

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Video More video GE's Jeff Immelt and Procter & Gamble's A.G. Lafley discuss their strategies for driving growth. Play video

A.G., you told me that when you and Jeff became CEOs, you felt you were in similar situations with similar missions. What did you mean?

Lafley: We had to set the strategic direction for our companies. We came into the job in different situations, but in both cases we felt that strategy needed to change. I think we also felt that while our companies had strong core strengths, there were some capabilities we didn't have that we needed to add. Third, we came in at a time, 2000-01, when a lot of things were changing in the world, and I think the expectations of what a chief executive would be and would do were quite a bit different from the 90s and 80s.

Jeff, is that what you were thinking? Despite many overlaps and connections, you two didn't know each other well until you both became CEOs.

Immelt: In my case, I was taking over a well-known company that had been led by a famous and excellent CEO. But I never wanted to run that company, and I never wanted to be that CEO. [But] I knew the company had to change.

I would say most of us were trained to have a pretty healthy disrespect for history. We respect performance, respect integrity, but everybody was trained to have a look-forward attitude instead of look-backward.

I inherited a company that had great strengths for a long time - good risk management, good cost control, good productivity - and I viewed the mission for my generation as not to lose those things but to build capability around growth, which we didn't have. There are maybe four companies in the world that have done this - Toyota (Charts), I think P&G is one. Not many have what I would call ambidextrous leadership.

Ambidextrous, meaning what?

Immelt: Growth and cost control - and sustained excellence at both. I viewed P&G as a company we could learn from.

So let me ask both of you about growth. You have to produce huge amounts to satisfy investor expectations - Jeff, you've got to find about $15 billion of new revenue this year; A.G., something like $7 billion of new revenue. And if you give even a hint that you're not going to find it, your stock gets hammered. So what's your strategy?

Lafley: Well, it's challenging. And it's not just any old growth that would do. Despite a string of acquisitions from 1998 through last year, with Gillette, we try to focus hard on sustainable organic growth. We're in markets that in a good year grow 2 or 3 percent, so for us to do 5 to 7 percent top-line growth, which is our goal at the end of this decade, we've got to grow market shares and move into adjacencies and create new categories of business.

So the name of the game is innovation. We work really hard to try to turn innovation into a strategy and a process that's a little more consistent, a little more reliable, so that we can build a portfolio of innovations and get the yield we need to get that $6 billion or $7 billion a year.

Organic growth is also a mantra at GE. But Jeff, I don't know any company your size that has achieved your target for organic growth, which is about 8 percent a year. What makes you think you can do it?

Immelt: We're not a monolithic company. So I sit here and say we have a $17 billion health-care business that competes in a $4 trillion industry that's growing 8 percent a year. I can grow that business 8 percent. I've got a consumer-finance business in a $40 trillion global market growing 10 percent a year. We can grow those. I would say, with A.G., it's not just any growth. We want to create growth that is visible, reliable and valuable. It's important to make growth a process. In a multibusiness structure, to make it something we can talk to investors about, we've got to drive it across the company.

GE this year will have $30 billion of revenue in developing countries - China, India, the Middle East, Africa, Latin America. When I joined GE in 1982, we were a $25 billion company. Now the developing world is $30 billion, growing 20 percent a year.

Just like A.G., I want a pipeline of innovation. Some projects will fail. But the goal for a company like ours or P&G is using size as an advantage. Most people just assume big companies are slow and lethargic, and only a small company can grow. But if you get good processes, you can make size an advantage.

You've invested hundreds of millions in the R&D labs at GE, but there's more to it than just putting more money into it. What have you done to get more revenues?

Immelt: Three things. First, 25 years ago [then-CEO] Jack Welch looked at Crotonville, the leadership institute. The place looked like crap. He put money into it and said, We're going to make this a showcase for GE. In a multibusiness company, for building culture, you need things like that.

Flash forward. Our global research center in Schenectady looked lousy. The physical plant, the amount of customers who came through every year - we'd just fallen behind. It's one of our best assets. So the first thing we did is just fix that physical plant to give it the look of a winner. Then we globalized it and opened up centers in Bangalore and Shanghai and Munich.

Third, we had a high-priced job shop. We had more than 2,000 projects being done in that infrastructure. I cut it to 80. I went and said, Molecular medicine - we're going to own it. Nanotechnology - we're going to own it. Renewable energy, energy efficiency, environmental technology - we're going to own it.

All this [stuff] around some guy saying, I'm selling billable hours in the research center - I say throw that all out. You all work for me. I'm going to tell you exactly what I want you to do, and here's what the business is going to pay for. It's going to be very clear. Here's what you have to deliver on.

Now we still do discounted cash flows and things like that. But if you're going to run a central research center, you've got to pick areas you're going to own no matter what. Nobody can do ceramic aircraft engine parts better than GE. We will own that space for 50 years. Rolls-Royce, Pratt & Whitney won't ever touch us. That's the research center - that's what they do because we said, That's what you have to go do.

A.G., you also changed the innovation process significantly, though in a completely different way. Why?

Lafley: The starting point was similar; narrowing the focus makes a difference, so we focus on eight to ten core technologies where we want to be world-class. I don't know how it happens, but in every case I've been associated with over almost 30 years, the focus gets diffuse. More projects get started than anybody can manage. At the corporate innovation-fund level we had way too many; we went through every one in detail and chucked two-thirds.

The second thing we did, maybe a little earlier than GE, was globalize our R&D platform. We distributed our R&D centers into Asia. We've grown out of the one we have in China, and we're building a new one there. Where we made big changes is with what we call connect and develop. The underlying assumption is that great invention is going on anywhere and everywhere in the world.

We're good inventors but probably not better in a lot of areas than others outside. What we're really good at is developing, qualifying and commercializing for our industries and our channels. So we just opened up the front end. In 2000 a little more than 10 percent of our innovation was partnered with at least one external partner. We set a goal of 50 percent. Last year a bit more than 40 percent of what we commercialized had at least one external partner.

In our pipeline through the end of the decade, half of the innovation has an external partner - and that means we're going to be more effective, more efficient. More of what we do will get commercialized. My principle scientists and my engineers would point to the patents on the wall. Well, the sad fact was that only about 15 percent of those patents had been commercialized. So we wanted to get our batting average way up. Why shouldn't 75 or 80 percent of the innovation commercialized be done with a world-class partner?

You had to kill not-invented-here.

Lafley: We did have to kill not-invented-here. We have to make "reapplied with pride" just as important a part of the culture as "invented here."

Your two companies have two of the most celebrated leadership-development programs in the world, yet you have both changed them. How come?

Immelt: I worked for GE for about 25 years and worked on maybe five or six initiatives. The initiative we're driving now is organic growth. If that's your initiative, it doesn't make sense to be training people exactly the same way you trained them in the past. So we identified about 15 companies that had grown at three times the rate of GDP, and asked what they had in common. It was five things: external focus, decisiveness, inclusiveness, risk taking and domain expertise. So we reoriented the way we evaluate and train along those lines. We just recently added leadership, innovation and growth, which is basically oriented around teams. This is the first team training we've done in ten or 15 years.

Lafley: We made innovations in two areas. First was in the leadership training we felt we would need for the 21st century. We have an inspirational leadership program that is highly individualized for handpicked managers. They're nominated by business leaders or functional leaders, and I pick them. A big chunk of it is about personal development. We also have a general-manager program, right before or right after you become a general manager. And then we have an executive-leadership program for individuals headed to be a president or a group president. It's pretty intense.

The other thing we pushed at - and Jeff and I talked about this - is, How do we get a global leadership team. Some 55 percent of our business today is outside the U.S., so my top leadership team for the first time in our history is now up to half non-Americans. We pushed really hard to get there. It makes for a very different discussion when we get together for our quarterly or semester meetings. I think we're a lot more challenging of each other.

A recent poll found that big business ranked second lowest in public trust - below Congress. Is the public wrong?

Lafley: I understand the way they feel. You just have to pick up a newspaper.

Do you guys feel victimized?

Lafley: No. No, not at all.

Your companies came through the scandals without problems, yet you're probably paying a price in public attitude.

Immelt: Three things happened more or less at the same time - the end of the bubble economy, Enron and 9/11. And I think big institutions of all kinds weren't trusted. When things like Enron are taking place, everybody is going to pay a price.

When I went to work for GE in 1982, the country had 15 to 20 percent interest rates and 12 percent unemployment, and people rooted for big business. Today unemployment is 4.5 percent, and people are afraid - "Am I going to get my pension?" The country is in a different place.

What I can do on behalf of investors is to be known as a good company. There's nothing wrong with making money and solving big issues at the same time.

A.G., your company employs more people outside the U.S. than in it and has for a long time. Jeff, at GE it's about fifty-fifty, and you've said you make major appliances in Louisville but can't make a dime of profit doing it. Can American workers compete and raise their living standard in a global economy?

Immelt: It's all about innovation and technology. Look at jet engines. We spend $1 billion here on R&D. We have a dominant competitive position. Our workers are very highly paid and highly skilled, and we can export from Boston or Cincinnati to the rest of the world; 80 percent of our orders come from outside the U.S. We can go toe to toe with anybody, and we'll be able to do that for a long time.

Appliances - we can't do that. Our high-end appliances are now made in China and Mexico. Our responsibility - and again I learned this from Jack [Welch] - is not to throw a bomb in the middle of the place. But every year we'll shut down a line. We'll get 80 percent, 90 percent of the people to retirement and pay to retrain the others, and we'll have a thriving business as we do it. It doesn't do any good to be dishonest with people. We're not going to put big investments in Louisville just to lose money.

Now, when I go to China - we just got a big order from the Ministry of Rail. I got it on a Sunday - the whole ministry is working all day on a Sunday. I believe in quality of worklife and all that stuff, but that's the competition.

The point is, Are we willing to compete for the future? We've got to make everybody in our companies want to compete for the future. We've got to motivate them, give them inspiration, whatever it takes so that whether they're in China, the U.S., or anyplace else, they want to compete and win.

Lafley: One of the challenges for the business community broadly is to articulate in a simple way the benefits of globalization and then face head-on the fact that there will be some disruption. When a company like GE or P&G has plants to shut down, we have a pretty enlightened program for handling retraining and early retirements, so employees have the best chance to have a good income and a good life. We do need to be a little more creative in that area because there are a lot of instances that doesn't happen. But I don't think it's for lack of funding or because there aren't opportunities somewhere in the economy. Our employment rate is still the envy of the world.

You have two of the best windows into the economy of any people around. What do you see? Some people think a slowdown has started in the U.S. economy - do you see it?

Lafley: At least in our business, which is consumer-oriented, we watch the relevant consumption rates, and even though GDP will fluctuate, the consumption rates have been pretty stable in the developed economies. In the U.S. the consumption rate has been running ahead of GDP. A lot is written about when consumers are going to run out of runway, but so far it looks like they've found a way.

Immelt: I don't see a slowdown. Housing definitely took it on the chin - 17 interest rate increases will do that. Automotive also took it on the chin; you can see that in the third-quarter GDP numbers. But more broadly speaking, I think the U.S. consumer is still in pretty good shape. Unemployment is low, risk positions are healthy, so maybe the economy is growing by 4 percent and it'll slow down to 3 percent or something like that, but it's still going to be very good.

Europe still is not robust, but it's positive. The developing world continues at a pretty good clip. The odds of China slowing down before the 2008 Olympics are de minimis. Oil at $60 a barrel transfers $300 billion a year to five countries in the Middle East; they're going to spend a lot of money. Latin America is very strong. So the global economy I think is going to be pretty good, pretty good.