The Digital Industrial Ambition in GE’s Reset
On Monday November 13, 2017, GE presented its new strategy to the investors where the new CEO, John Flannery declared that 2018 will be a ‘reset year.’ The New York Times declared: “G.E. rolls back the breadth of its ambitions.” The Economist summarized that the “plan has three main components: slash costs, sharpen the culture and shrink to the core.” Bill George — ex CEO of Medtronics — writing for CNBC observed: “Barring a strategy for revitalization and dominance of its global markets, GE is destined to become an industrial holding company that buys and sells businesses during market cycles and whose only mission is making money.” Indeed most analysis and comments related to the 50% dividend cut and the portfolio composition. Few opined whether GE was retreating from what the previous CEO Jeff Immelt imagined as the leading ‘digital industrial company.’
Immelt titled his farewell CEO letter in 2016 “Leading in a Digital Industrial Era.” In it, he remarked: “We are investing in disruptive innovation that will drive industrial productivity in the future. We have established two new businesses — GE Digital and GE Additive Manufacturing — that are in the early stages of value creation for GE investors.” As recent as three months back, GE was supposedly well on its way from unrelated conglomerate to becoming a digital industrial company that combined historical strengths in materials science with new capabilities in analytics.
John Flannery took over as the CEO on August 1, 2017. Just few weeks later — on September 15, 2017 —he wrote a piece on LinkedIn titled, Our Future is Digital: “I have a lot of decisions to make in my new role as CEO, but one decision is easy: GE is all in on digital…We have fully embraced the digital industrial transformation, and we believe in its potential to change the world.”
Where’s Digital in GE’s Future?
The November 13 presentation to the investors signaled a more moderated role for digital. The new CEO commented that: “the main message from me to you about digital is a much more focused strategy. We are still deeply committed to it but we want a much more focused strategy.”
The chart from the Investor presentation below illustrates the scaled-down ambition for digital within GE — at least in the short-term.
The message from Flannery was clear: Digital helps deliver customer outcomes and that the investments would be prioritized towards go to market initiatives in those GE business verticals where the win rate is higher with Predix-driven applications. GE Digital supports GE’s business strategy and is not shaping the future of GE.
My assessment of the reset and the accompanying resource allocation is:
Digitization support’s GE’s portfolio of businesses. It doesn’t shape the future of GE as a digital industrial company.
This is in sharp contrast from the message just a year back as seen in this chart below. There, the message was that GE will use digital to create significant efficiencies through digital thread (integrating disparate silos within GE operations), design and deploy digital twins and applications to enhance customer outcomes. Then, evolve to establish Predix as the definitive platform for connecting machines to the cloud. Immelt’s design was to go beyond internal efficiency of operations and enhanced outcomes for the customers that GE served. His ambition was to become the definitive digital industrial company where the platform would extend to non-GE products, services and installed base. Or, in his view — GE Predix for the World.
Flannery’s reset. By indicating clearly that 90% of GE digital would be directed at a focused portfolio of products and customers of GE and its partners, Flannery is scaling back GE’s digital ambition as part of his reset. Given the financial position that GE finds itself in 2017, this is understandable. Flannery and his team didn't really have a choice: the financial resources were needed elsewhere to support the investments in the three businesses — aviation, power and healthcare — and pre-fund pension obligations.
I commend Immelt’s foresight to remake GE as digital industrial leader. Over the last decade, we have witnessed the digital transformation of asset-light industries such as advertising, publishing, telecommunications, media & entertainment. The next decade will see digital transformation of asset-heavy industries and those that bring digital capabilities (e.g., digital twin, digital thread, cloud connectivity, analytics, AI, machine learning and 3D printing) to complement traditional competencies in design and manufacturing are more likely to win.
Immelt’s ambition has now been scaled back — not because the approach was wrong but because GE now doesn’t have the requisite financial resources to pursue the lofty goals.
GE and The Digital Matrix
Earlier this year, I wrote a book, The Digital Matrix: New Rules for Business Transformation through Technology. It was aimed at industry incumbents to guide them to recognize and respond to digital shifts.
My assertion in the book was that at every company, in every sector, everywhere in the world will find itself competing against three types of players: (1) traditional incumbents that have embarked on their digital business transformation journey by putting digital at the core. (2) ambitious technology startups with blatant disregard for historical ways of doing things and believe in the power of digital functionality to disrupt and transform different industries. (3) digital giants such as Amazon, Alphabet, Apple, Microsoft and others who now bring their digital prowess to impact and influence traditional industries; they have shown their relevance in asset-light industries over the last decade and could well be formidable players in asset-rich industries that GE operates in. These three types of players take advantage of different types of digital technologies across three phases of transformation: (1) experimentation at the edge; (2) collison at the core; and (3) reinvention at the root. Picture the Digital Matrix as a control panel with nine screens arranged in a three-by-three grid. Along one axis are the three types of players. Along the other axis are the three phases of digital transformation. The Digital Matrix highlights the dynamics — the actions, reactions, and the follow-on decisions — to ensure that incumbent leaders are continually taking advantage of developments with different technologies to evolve their business for the digital future.
The industrial sectors are in the early stages of experimentation as multiple different companies are positioning to reinvent the sectors for the digital future.
What are the risks for GE in scaling back with digital?
- Traditional industrial giants such as Siemens, ABB, Honeywell and others step in to design the broader industrial internet platform(s) and establish the ecosystems of software developers and other startups. Siemens had previously announced its Digital Enterprise initiative and ABB has its own digital capability (ABB ability) — they look a lot like GE Digital and Predix. GE should watch carefully how these and other companies design and deploy their versions of digital industrial platforms to go after GE’s customer base and beyond.
- Ambitious entrepreneurs supported by venture capitalists accelerate their disruptive moves. Here, the companies to watch include: Uptake — that provides a competitive industrial analytics platform to increase productivity, security, safety and reliability; Flutura — focused on monetizing machine data through next-generation data analytics; and many other startups focused on industrial IoT. GE should carefully track venture investments that flow to start-ups to create focused offerings that take advantage of developments in artificial intelligence, machine learning, blockchain and related technologies.
- Digital giants have been mostly quiet when it comes to digitization of industries, preferring to partner with industrial companies (e.g., IBM Watson IoT and ABB; Microsoft and Apple with GE) as experiments. However, they all recognize the importance of digitization of industries and the next wave of automation that’s sometimes called as the Fourth Industrial Revolution or Industry 4.0. GE should track and analyze the potential threat from digital giants — especially IBM, Microsoft and Samsung — as they steadily establish their digital superiority by connecting smart devices and machines to their ever-expanding cloud functionality.
- Talent. GE has been successful in attracting talent to work on world’s important problems in healthcare, aviation and power. You may have seen one of their ads.
5. New Orchestrators of Digital Industrial Ecosystems. GE — with its first-mover advantage — has been in the driver’s seat to orchestrate the digital industrial ecosystems involving traditional industry players, digital giants and ambitious startups. It had dominant market positions in the industry sectors that it operated in and had invested resources (in the range of $4–5 billion) in software and analytics to demonstrate value to lead customers. The risk is that GE could be vulnerable to someone else stepping into orchestrate this space and seize the advantage. We are clearly in the early days of digitizing industries and GE could well regain its erstwhile leadership position but the risk of losing the orchestrator role is real and should be recognized.
Mechanic or Digital Architect?
Clearly there are two viewpoints about GE. One is reflected in the title of The Economist article: “Right Mechanic? Flannery unveils his strategy to revive GE.” The choice of the term, mechanic reinforces the viewpoint that GE is an industrial company. The other viewpoint — albeit minority opinion that I subscribe to — is that Flannery is the digital architect (my label) — who will eventually reinvent GE as digital industrial company with digital competencies supporting the three major business areas — aviation, power and healthcare — and also shaping the platforms and ecosystems to architect the full-scale digital transformation of global industries.
To achieve the latter, the company must be ruthlessly efficient in running the portfolio while steadily expanding the scale and scope of GE Digital to focus on “GE for the World.” It may not happen by 2020 as outlined in the graph from the Immelt-era but that goal but the ambition should not be scaled-back. Over the next few years, it may take different twists and turns and may involve partnerships along the lines of BakerHughes or CNBC or MSNBC (perhaps the first partnership between a digital giant, Microsoft and an industrial giant, GE) set up decades back.
GE’s leaders are understandably in the ‘reset mode’ now but its future is not bright if they reset the legendary company to operate the individual businesses using the industrial-era playbook precisely during a period when the economies of the world are embracing digital technologies to transform. My bet is that Flannery emerges as a digital architect who navigated GE during this troubled period of ‘reset’ and not as a mechanic who dismantled GE into its independent businesses. The five buckets of risks that I identified above are real and severe but I am hopeful that GE will pull together the leadership team with the requisite digital mindset and skillset to transform, reinvent and win. It may be different from Immelt’s ambition and vision. If GE were to transform and thrive over the next century, it must embrace and accelerate with digital at the core.
