Embracing the Disruption — Beth Comstock, Vice Chair General Electric

The Industrialist’s Dilemma — March 3, 2016

Almost a decade ago, General Electric set out on a path of transformation. GE determined to participate in the digital revolution in industrial production — with full awareness that the world was changing around them.

We were lucky enough to have Beth Comstock, the Vice Chair of General Electric, join us for our last session of class. This was particularly special for us because, over the past three years, GE has always stood out as the prime example of excellence in this transition. While other companies have struggled to identify how significant the role of software would be in industry, General Electric saw software’s rise across industry as an opportunity to further build its competitive advantage in ways it never could have before. Over the last decade, the moves GE has made to capture this opportunity can only be referred to as drastic. The company has set out to use its strong market position in industrial sectors to build one of the world’s largest software companies. It has hired more than 2500 people in the Bay Area to staff its first “digital foundry.” And it has even moved its headquarters to a more innovation friendly location in Boston.

Needless to say, expectations were high. Thankfully, the conversation with Beth did not disappoint.

Aaron and Beth Go Deep on GE’s Software Business

A number of themes emerged when we debriefed on the session. But among those themes, three stood out above the rest.

The Difference Between Can and Must

Early into the 2000s, the leadership team at General Electric asked themselves what the digitization of industry was going to mean for the company. It was impossible to deny that every industry — regardless of how complex the challenge it addressed — would be impacted by the growing digital economy. The challenge for GE’s leadership was to forecast how extensive that impact would be. The conclusion: if you looked far enough out it was clear that software would enter the industry and that software would increasingly be the thing that differentiated a physical asset.

GE didn’t know what that really meant. But they did know it was going to be critical. So, in Beth’s words, the company set out to “name it and claim it,” gaining ownership of the concept of the Industrial Internet.

As Beth described GE’s entry into the Industrial Internet, it was clear that GE understood the difference between pursuing something they must do over something they could do. When we asked what GE needed to look like 15 years from now, Beth described a time when industrial production would face new types of commoditization. As she put it, “You can’t run an airline without jet engines.” GE, Siemens, ABB, and Rolls Royce wouldn’t be out of the businesses of supplying these types of products. The question was how important would these big-iron offerings be relative to the software that supported them. In the mind of GE’s leadership, the only way to prevent commoditization was by taking their intrinsic advantage and moving into a space that reinforced it. How could they use the wedge of the jet-engine to build the business the next critical asset for their customers?

Over the last few years of exploration, it’s been striking how little of the conversation about digital transformation has been about what must be done. Too many executives concentrate on the apps or adjacent businesses that they might be able to spin up to build minor revenue streams. Few look out 15 years or more and just ask simple questions to gauge what their core business must look like to remain competitive. For automotive OEMs, they must reach autonomous driving and electric. For payments networks, they must power online transactions. And for GE, they must use software to improve the utilization of their big iron assets. Marketing focused applications and orthogonal businesses might seem interesting today and won’t create tension among existing leaders inside the company, but they won’t get you to the future you need.

When we asked Beth how the company became so prescient, she mentioned that the NBC experience gave them incredible insight. General Electric owned NBC during a time of enormous transformation within the industry. Because they’d seen how rapid the change had been in media, GE executives were capable of looking past the near term and agreeing first on what the future would look like and then working back to what they had to be doing today. Oddly, this is very similar to the thought process that Elon Musk credits with coming up with the ideas for Tesla, Solar City, and SpaceX.

The Pie Gets Bigger, the Pieces Get Smaller

Agreeing on a concept of the future is a lot easier than the cultural transformation that is required to participate in that future. One of the things that struck me most deeply was a discussion of how a digitally enabled future for industrial companies was going to look very different than their tightly controlled past.

Namely, Beth mentioned that in a world of digital, “The pie gets bigger and the pieces get smaller.” Again, GE had seen this type of transformation through digital. Many of the content aggregators (channels) of a bygone era lost share to platforms for distribution like YouTube or Netflix. In the new future, with free flowing information, it would always be easier for customers to find the perfect product for them (be it software, a security system, or a physical device). The largest winners in these environments would be the people that operated on the lowest layers of the stack, providing the platform that others could build atop for only a small portion of the revenue.

In theory, that simple articulation of who might win is wonderful. In practice, it’s a lot messier. Beyond just knowing that they would want to participate in a future where the pie gets bigger and the pieces get smaller, Beth explained that the test for GE was embracing that mentality. Historically, the company had a culture of going it alone. They could build anything as well or better than a partner. That mentality had to change in a digital world.

Over the last few years the company has thoughtfully changed their leadership training programs to include lessons from both digital and physical areas of specialization. Six-sigma would stay in focus but so would Lean Startup practices and an understanding of agile development. The first step was agreeing that the future required them to change. The second step was deciding the best position to be in at the end of the journey. And the third step was changing the mentality of the company’s leaders to be one that could win in this new environment.

Different Metrics for Different Businesses

The last critical lesson we took away from class was actually hidden in the discussion. When Aaron, Rob, and I reconvened over the weekend, however, it took center stage. Namely, that new businesses require new metrics.

Beth repeatedly mentioned throughout our fireside chat that the new businesses General Electric was building were measured differently than the legacy businesses. While that might not be surprising, what struck us was how different the new metrics were. GE Software is currently focused primarily on Assets on the platform. Not dollars. Not margin. Not revenue growth. For a company that famously builds P&L driven general managers, that’s an incredible departure.

When we discussed all that we’d heard, we could only conclude that GE’s leadership team agreed that the best proxy for the success of the Industrial Internet would be nodes on the network. Facebook made a similar bet. In the early years the company was singularly focused on network growth, believing that revenue could easily be generated once the network had enough adoption and embedded information. The bet worked out — but it required the company to have a strong point of view.

Thinking about why a manager leverages input vs. output metrics.

For General Electric, the challenge is two fold. First, they have to maintain a strong point of view on what will drive value for the business. Second, they need to be open to running different businesses with very different types of metrics. Over the past 50 years, General Electric has famously held their leaders accountable to business performance. To show a willingness to focus on such different metrics — metrics that are only proxies for performance in the future — is impressive.

Our intuition is that this willingness to focus on the things that will create value on long timelines, not drive next quarter’s earnings, and will be a major reason GE continues to lead the transition into a digitally enabled industrial future.