Innovation Ain’t So Easy Mr. President – Think Google, Not GE
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It was good to hear the U.S. President call for more innovation in his State of the Union address this week. And it sounded like he wants much of it to come from business, rather than government.
But I’m reminded the President is a lawyer and politician. As a businessman, well, let’s say he’s a bit naive. Most businesses don’t have a clue how to be innovative, as Forbes pointed out in November, 2009 in “Why the Pursuit of Innovation Usually Fails.”
Businesses Don’t Like to Innovate
Businesses by and large are not designed to be innovative. Modern management theory, going back to the days of Frederick Taylor, has been dominated by efficiency. For the last decade businesses have reacted to global competition by seeking additional efficiency – such as by offshoring information technology and manufacturing – eliminating millions of American jobs, driving unemployment to double digits and undermining new job creation keeping unemployment stubbornly high.
It’s not surprising business leaders avoid innovation, when the august Wall Street Journal headlines on January 20 “In Race to Market, It Pays to Be Latecomer.” Citing a number of innovator failures, including automobiles, browsers and small computers, the Journal concludes that it is smarter business to not innovate. Rather leaders should wait, let someone else innovate and then hope they can take the idea and make something of it down the road. Not a ringing recommendation for how “best practices” would support the President’s innovation agenda!
Traditional Business Leaders Prefer Cost Cutting to Innovation
The professors cited in the Journal article take a point of view common amongst business leaders. Because innovators fail, don’t be one. Lower your risk, come in later, hope you can catch the market at a future time. Keep your eyes on being efficient – and innovation is anything but efficient! Because most businesspeople don’t understand how to manage innovation, don’t try. Keep doing what you know – cut costs and promote efficiency in your old business! Leave innovation for the radicals like Steve Jobs and Mark Zuckerberg.
Most executives, managers and investors have come to believe that cost cutting, and striving for more efficiency, is the solution for most business problems. According to the Washington Post, “Immelt To Head New Advisory Board on Job Creation.” President Obama appointed the GE Chairman to this highly visible position, yet Mr. Immelt has spent most of the last decade destroying value as GE’s market cap declined from $415B in March, 2001 to $216B today (decline of just under 50%), and pushing jobs offshore, rather than growing the company in new technology or information markets – especially domestically. Gone are several GE businesses created in the 1990s – including the recent spin out of NBC to Comcast – sold too often at prices less than paid at acquisition. It’s ironic that the President would appoint someone who has overseen downsizings and offshoring to this new position, instead of someone who has demonstrated the ability to create value and jobs over the last decade. It belies the President’s real commitment to innovation – selecting a leader of a large company, but one that’s done pretty poorly the last decade, and who has no track record of implementing innovation to create jobs or growth!
As one can easily imagine, efficiency is not the handmaiden of innovation. To the contrary, as we build organizations the desire for efficiency in “professional management” impedes innovation. According to Portfolio.com in “Can Google Be Entrepreneurial” even Google, a leading technology company with such exciting new products as Android and Chrome, has replaced its CEO Eric Schmidt with founder Larry Page in order to improve its ability innovate and take innovation to market. The contention is that the 55 year old Schmidt created innovation barriers within the rapidly growing and wildly entrepreneurial tech giant as he implemented professional management. If a company as young and successful as Google struggles to innovate, one can only imagine the difficulties at more traditional, aged American businesses! Especially “old line” manufacturers.
America Has No Inherent Advantage at Innovation
While many will trumpet America’s leadership in all business categories, Forbes’ Fred Allen is correct to challenge our thinking in “The Myth of American Superiority at Innovation.” For decades America’s “Myth of Efficiency” has pushed organizations to streamline, cutting anything that is not essential to doing what it historically did better, faster or cheaper. Innovation inside businesses was limited to improving existing processes, usually cutting cost and jobs, not developing new markets with high growth that creates jobs and economic growth. Most executives would 10x rather see a plan to cut costs, saving “hard dollars” in the supply chain, or sales and marketing, than a plan for new product introduction into new markets where the executive has to deal with “unknowns.” Where American superiority in innovation originates, if at all, is unclear.
To give the President a break, lawyers are not historically known for their creativity, or innovation. Hours spent studying precedent doesn’t usually free the mind to “think outside the box” or figure out innovative solutions.
Business folks have their own “precedent managers” – internal experts who set themselves up intentionally to block experimentation and innovation in the name of lowering risk, being conservative and carefully managing the core business. To innovate most organizations will be forced to “Fire the Status Quo Police” as I called for last September here in Forbes. But that isn’t easy. It requires incentives to overcome their historical organizational clout.
America can be very innovative. Just look at how adroitly Apple has turned around by moving beyond its roots in personal computing to success in music (iPod and iTunes), mobile telephony and data (iPhone) and mobile computing (iPad). Netflix has used a couple of rounds of innovation to unseat old leader Blockbuster! But Apple and Netflix are still the rarities – innovators amongst the hoards of myopic organizations still focused on optimization. Look no further than the problems Microsoft – a tech company – has had balancing its desire to maintain PC domination while ineffectively attempting to market innovation in these markets now lost to Apple, Google and Facebook.
Increasing Innovation Will Require Incentives, or Put Your Money Where Your Mouth Is
Mr. President, if you want innovation what America needs is less bully pulpit, and more incentives. Consider implementing some (or all) of the following:
- Increase tax credits for R&D
- Increase tax deductions and (and tradeable tax credits) for new product launches by expanding the definition of what constitutes R&D in the tax code and making credits sellable by innovators that have no profits
- Create tax advantages, such as investment deductability, for early stage financing, including Angel investing and Venture Capital
- Implement penalties on offshore outsourcing to discourage the efficiency focus and the chronic push to low-cost global resources
- Lower capital gains taxes to encourage wealth creation through new business creation
- Manage the deficit by implementing VAT (value added taxes) which add cost to supply chain transactions, thus lowering the value of “efficiency” moves
- Make it much easier for foreign graduate students in America to receive their green cards so we can keep them here and quit exporting some of the brightest innovators we develop to foreign countries
- Create more tax incentives for investing in high tech industries – from nanotech to biotech to infotech – and quit wasting money trying to favor investments in manufacturing. Provide accelerated or double deductions for buying lab equipment, and stretch out deductions for brick-and-mortar spending
- Quit spending so much government money on road construction and lending to disastrous companies like GM, and instead give credits to people who buy computers, software, game machines (like xBox Kinect,) lab equipment and other innovation tools
- Propose regulations on executive compensation so leaders aren’t encouraged to undertake short-term cost cutting measures merely to prop up short-term profits at the expense of long-term viability via innovation investments
- Quit putting “old guard” leaders who have seen their companies do poorly in highly placed positions. Reach out to those who really understand the information economy to fill such positions – like Eric Schmidt from Google, or John Chambers at Cisco Systems, or Clayton Christensen at Harvard
- Reform the FDA so new bio-engineered solutions (biologics) do not follow regulations based on 50 year old pharmaceutical technology and instead streamline go-to-market processes for these new innovations
- Quit spending so much money on border fences, DEA crack-downs on marijuana users and traditional defense projects. Put the money into grants for universities and entrepreneurs to create and implement innovation.
Mr. President, innovation ain’t so easy as just asking for it. Most companies aren’t designed to innovate, and most executives don’t want to do it. Don’t expect traditional business to do what it has not done for the last decade. If you want innovation, take actions that will create innovation. American business can do it, but it will take more than asking for it. It will take a change in incentives, and management approach, to push leaders at Alcoa, Caterpillar, DuPont and Kraft to act more like leaders at Apple, Google or Facebook.
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[...] This post was mentioned on Twitter by TechnologyInnovation, Amit Kumar, Bernard Mgba, Ranchhod Vasava, WorldBusinessFinder and others. WorldBusinessFinder said: [FORBES]: Innovation Ain't So Easy Mr. President – Think Google, Not GE: The President calls for more innovation… http://bit.ly/fpHA3y [...]
Gary Sheffer from GE. Mr. Hartung is right that the president deserves different perspectives on innovation and job growth. That will be the case as the competitiveness council will include a diverse group of business leaders.
On GE, respectfully, Mr. Hartung is wrong. GE remains one of America’s most innovative companies. A few facts:
• We design and make some of the world’s most advanced energy, healthcare, aviation and transportation technology.
• We are one of the largest manufacturers in the U.S. and our employment is up in the last decade in the U.s. in our largest manufacturing businesses.
* We are the nation’s second-largest exporter of manufactured goods.
• GE is spending more than ever on research and development and is introducing more new products than ever.
• Over the past 10 years, the number of engineers working for GE in the U.S. has risen 23 percent and the number of patents awarded to GE is up 42 percent.
• We have the world’s leading research center in Niskayuna, N.Y., employing 2,000 scientists exploring path-breaking inventions. We recently opened a research center for advanced manufacturing technology near Detroit that will employ more than 1,100 people.
• We have announced or added 6,000 new manufacturing jobs in the U.S. in the last two years. For example, GE invested $150 million to develop advanced battery technology at our New York research center. We will build a $100 million manufacturing plant for the batteries in nearby Schenectady that will employ 350 people.
• We’ve re-invented our appliances business, investing more than $1 billion in U.S. plants and creating more than 1,300 jobs over the next four years.
• GE advances in materials and jet engine technology have led to new or expanded manufacturing facilities in the last few years in Mississippi, Alabama and South Carolina and 850 new jobs.
These are examples of our strategy for growth — invest in innovative products and services that deliver value to customers.
Hi Gary, and thanks for commenting. There is no doubt GE is HUGE, and spends a lot of money, and has had some successful innovations. The employees of GE should be proud of those accomplishments!
What my blog points out is that since 2001, the value of GE has declined 50%. Some $200B of market capitalization has evaporated. Nobody should be lauded who has seen that kind of value destruction. What could you, or anyone else do, with that $200B?
GE has done good, but it definitely could have done better. Mr. Immelt has not maintained the breakneck pace of innovation and growth established by his predecessor, and notably over-invested in financial services (a largely non-innovative industry) to the point of jeapardizing GE’s future. (Thanks to Berkshire Hathaway for stepping in, a shoring up the short-term finances a few years back. Of course, the big win there went to the Mr. Buffett’s team.)
As an example, for all the great stuff you mentioned at GE, why did NBC miss the shift in media? Why is GE selling NBC for less than acquisition cost? Instead of creating Facebook, or using its HULU investment to reformulate NBC into a powerhouse on-line comparable to YouTube squared, GE is now handing NBC to new management, and GE’s investors are taking a loss. That’s the kind of “missed innovation opportunity” that was too prevalent (amidst the successes you mentioned) during the years under Mr. Immelt’s leadership.
Compare the size of GE’s revenue to Apple, Facebook, Google and then see, on a comparable basis, how well GE has done at producing breakthrough products and solutions that drive economic growth. While the much of the management at GE has done well, consider how you could do better. Especially given the massive resources at GE (including all those incredibly smart people!)
Then, imagine half the recommendations I offer are implemented, and consider the explosion in innovation possible at GE!
Keep up the good work. GE is certainly an admirable company. We all look forward to even more breakthroughs this decade.
In response to another comment. See in context »Say Gary, I discovered this article from MediaPost.com that claims GE U.S. workforce declined by 24,000 during Mr. Immelt’s leadership. According to the author’s analysis, despite a 50% valuation decline the primary prop behind the company is its historical reputation and investor views of investment potential. In other words, hope things will return to the way they were prior to Mr. Immelt’s ascendency to the top position.
http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=143606&nid=123029#comments
In response to another comment. See in context »[...] This post was mentioned on Twitter by Ken Cooper, openinnovation3. openinnovation3 said: Innovation Ain’t So Easy Mr. President – Think Google, Not GE – Adam Hartung – Growth – Dealing with Market Shif… http://bit.ly/hM6gpG [...]
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Mr. Hartung,
I think that the point both you and POTUS are missing in the innovation discussion is a big company like GE can generally buy all of the innovation that they need. GE of course have a huge R&D operation which creates all sorts new profitable inventions. More to the however, if someone comes along and invents something that they really, they can buy it. A small start-up company works hards, innovates, and strikes gold, well then all GE has to do is buy the company. The entrapenuers get rich and retire and GE is still GE. Alternately, GE’s R&D staff can reverse engineer an equivalent bit of technology without (or even with) violating any patents, one that can already benefit for the mistakes that little start-up made. Either way, GE comes out on top.
Quite aside from all of that, job creation is entirely different from innovation. All sorts of wonderful new technology is developed in laboratories in the US all of the time. However, when those technologies are brought to market, they are manufactured overseas, and that is where the jobs are created, not here. GE is a classic case. GE holds many patents for light bulb, including original one from 1887 by Thomas Edison but also most of latest ones. Despite this, GE makes no light bulbs in the US. GE recently closed their last US bulb factory. Why? They invented the newer energy efficient compact fluorescent bulb which only manufactured overseas while their older incandescent technology, which had been manufactured in the US, was losing market share.
GE’s innovation destroyed US jobs.
Your light bulb story is enlightening (oh sorry, I just could not avoid the pun.) Don’t let my humorous attempt undercut the seriousness of your point, however. All too often, the ongoing work is not in the USA.
I think we have to distinguish, however, between jobs and manufacturing jobs. It is a pipe dream to think that manufacturing jobs will come back to the USA. Our labor force is simply too expensive (and really too skilled) to produce high-volume, low-end (genericized) items. We should recognize it would take mountains of subsidies to ever expect America to re-employ all its original manufacturing talent back into manufacturing. Just like we could never expect to employ nearly the volume of workers on the farm as we did in 1900, we’ll never employ as many people in manufacturing as we did in 1970. The world has shifted, and that work has gone elsewhere.
But that doesn’t mean there isn’t a need for labor. Lots of need to move innovations through design, product development, marketing, derivative designs, prototype production, design for manufacturing, short-run specialty items and even prolific variation creation. There’s also all those marketing, customer service, branding and market feedback projects to undertake.
Even if we don’t make the mass-produced items, there is a lot of work to be done if we understand the volume of possible innovations and what it means for market growth.
It’s even important to recognize that a lot of prototyping, design for production and quality design may likely be done in lower cost locations. That just ups the importance of America pushing, driving, the innovation machine to keep developing more, new solutions that keep us ahead of competitors.
And of course their is the opportunity to be a leader in services – such as health care and finance – where we’ve historically had a lead. But we’re letting obstacles impede our ability to innovate. We can create a lot of jobs providing services to the globe if we really understand we must constantly innovate and take those innovations to market if we want to remain the leader.
In response to another comment. See in context »Mr. Hartung,
You point is certainly well taken however the number of jobs created outside of manufacturing to support manufacturing by new technologies is pitifully in comparison to those created by the actual manufacturing process itself. More to the point, the steady economic decline seen in places like Detroit and elsewhere cannot be reversed by the type and number jobs you quite correctly describe as being created by the innovation that is being discussed. There is a fairly narrow sector of society that is already affluent, lawyers, marketers, sales people, bankers, brokers, lobbyists, &c. who will benefit for the types of innovation you describe. However no else will.
You may be correct that the high paying blue collar jobs that created the prosperity of the 1950’s and ’60’s are gone and not coming back but marketing products invented in the US but manufactured overseas won’t replace them.
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