January 4, 2019 at 5:00 am ET
Former General Electric Chief Executive Jeff Immelt once wisely opined that the key job of a CEO is to make bets on future markets. He made that remark at USC’s Marshall School of Business, coincidentally in California, which has created the most markets of the future.
One of Immelt’s biggest bets was the purchase of the French company Alstom. Alstom, like GE, represented the past. Each company flourished on technologies, such as power turbines, that run on coal and gas. The hope was that the mergers would yield great manufacturing efficiencies. However, the growth market for power-generating technologies lay elsewhere: in wind and solar power and efficient batteries for their storage.
Companies such as Tesla, SolarCity and Vestas had limited cash but rich valuations because these companies represented the future. Companies such as GE and Alstom had huge sales but low valuations because they represented the past. All these companies, while linked to power, adopt radically different technologies for generating or using it.
Besides current efficiencies, another focus of GE was on cash generation. The company indulged in numerous accounting and financial shenanigans, through GE Capital, to generate cash and maintain its dividend to shareholders each quarter, even when fundamentals were not strong. This effort was based on the wrong premise that the market values cash above all other metrics.
However, the market also values growth, as the examples above show, perhaps even more than cash. Cash is a treacherous metric because a large conglomerate such as GE can manipulate it. Growth is a more transparent metric, which is difficult to game.
During a separate talk, also hosted by USC Marshall, former GE Executive Director of Global Innovation Steve Liguori quipped that the market valued GE less than Apple: GE manufactured the engines that powered the plane, while Apple manufactured a cellphone (a mere toy for the plane). One could make a similar comparison between GE and Amazon. GE technologies generated the power that ran the internet. Amazon merely ran an e-store that exploited the internet. Yet between 2000 and 2018, Amazon and Apple rose to be trillion-dollar companies, while GE declined precipitously.
The difference is primarily due to bets on markets. Amazon bet on the future of transactions with numerous radical innovations: easy comparison shopping, one-click buying, automated goods handling, e-marketplace, cloud storage, robots, drones, and many others. Likewise, Apple created or transformed the markets for mobile music, smartphones, apps and smartwatches. In comparison, GE manipulated the present (cash flow) or perfected the past (gas- and coal-fired power-generating technologies).
One might argue that the comparison between GE, Apple and Amazon is not valid because they are entirely different industries. The former is heavy industry, and the latter are in digital markets. But stock market valuations are based on investments, which are entirely fungible, going to companies and industries that provide the best long-term returns.
Moreover, major incumbents have stumbled or failed even in digital industries: Kodak, HP, Sony, Nokia and Blackberry. In all these cases, the causes have been the same: focus on the past, perfecting incremental innovations, or failure to embrace radical innovations.
Ironically, GE rose by exploiting radical innovations: incandescent light bulbs, electric locomotives, portable X-ray machines, electric home appliances, televisions, jet engines, laser technologies, and imaging devices. Sadly, in the last few decades, that innovation-driven growth strategy gave way to cash and efficiency-focused acquisitions.
In fact, huge growth markets exist in GE’s backyard: wind and solar power, rocket engines, and battery storage. The real difference between GE on the one hand and Apple and Amazon on the other is not industry but radical innovation.
GE focused on incremental innovations in its current portfolio of technologies. Apple and Amazon embraced radical innovations, each of which opened new markets or transformed current ones. GE focused on accounting shenanigans to generate cash. The growth potential of Apple and Amazon were relatively transparent.
The lessons for senior managers and advisory boards are clear: Focus on the future rather than the past; target transparent innovation-driven growth rather than manipulate cash; and strive for radical innovations rather than staying immersed in incremental innovations.
Radical innovations power future growth.
Dr. Gerard J. Tellis, Ph.D., is a professor, director of the Center for Global Innovation, and Neely Chair of American Enterprise at the USC Marshall School of Business, and he is co-author of “How Transformative Innovations Shaped the Rise of Nations: From Ancient Rome to Modern America” and author of “Unrelenting Innovation: How to Build a Culture for Market Dominance.”
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