known as the House of Magic sits a desk that belonged to GE founder Thomas Edison. There, under glass, are copies of his notebook papers with sketches of his great- est achievement: the lightbulb. Two floors below, GE re- searcher Anil Duggal is working in a cramped, darkened lab on a replacement for that iconic invention. Duggal holds a flat, glowing 6-inch square that illuminates his face. The light is created by a thin layer of organic light-emitting diodes (OLEDs) sandwiched between two glass plates. Duggal hopes they will eventually be printed on plastic so that flexible lighting surfaces can be incorporated into wallpaper or furniture. Just as the OLEDs convert electricity into light, they can also do the reverse, and thus could someday become the basis for in- expensive plastic solar panels. They could be produced much like newspapersand newspapers are so cheap, we throw them away, Duggal says. Think of the possibilities, adds his colleague Sanjay Correa. What if your rooftop were made of a cheap material that creates elec- tricity, and then inside, your ceiling could take By learning to manage innovation, Jeffrey Immelt is remaking Americas flagship industrial corporation into a technology and marketing powerhouse. B Y E R I C K S C H O N F E L D P H O T O G R A P H S B Y D A R R Y L E S T R I N E WHERE BUSINESS IS GOING WWW. BUSINESS2.COM J ULY 2004 that electricity and turn it into light,hemus- es, a broad smile spreading across his face. The work in this basement lab stands as a neon-bright metaphor for the transfor- mation quietly under way at GE. Three years into chief executive Jeffrey Immelts tenure, its becoming clear that hes at- tempting a radical and risky reinvention of the 126-year-old flagship of American in- dustry. Immelt, 48, is de-emphasizing some of the tenets that his famous predecessor Jack Welch used to build one of the most formidable records ever compiled by a CEO. Instead, Immelt has staked GEs fu- ture growth on the force that guided the company at its birth and for much of its history: breathtaking, mind-blowing, world- rattling technological innovation. In a sense, Immelt has concluded that to power his $134billion goliath forward, his managers must view GE not so much as a collection of huge, multibillion-dollar busi- nesses but as a vast network of entrepre- neurial, Silicon Valley-styleor better still, Edison-styletech startups. Hehas ordered them to grab the scientific lead on the far technological frontiers of markets from clean energy to medical diagnostics to nanotech to security to jet-propulsion systems. And he wants to harness that revved-up innova- tion metabolism to a morehighly developed and systematic marketing effort than GE has marshaled in many years, if ever. The result, Immelt believes, will be a GE that looks like an entirely different compa- nymore entrepreneurial, more science- based, and generating much more growth from its own internal operations than by simply acquiring other companies. Con- stant reinvention,Immelt says, is thecen- tral necessity at GE. And necessity is the mother of this re- invention. GE has been going through one of its rare troughs: Its stock is down 50per- cent from its mid-2000peak, and in 2001it broke a long streak of double-digit revenue and profit growth, benchmarks that have come to be seen as minimums for GE. In 2003the companys revenue grew just 1.5 percent; profit was up only 6percent. GE has been hurt by the fallout from 9/11 and the global recession, and its recent per- formance has led some critics to question whether Immelts plan can revive the com- panys days of growth and glory. Mean- while, cost pressures in many old-line GE businesses, from appliances to plastics, are fierce and worsening. Immelt himself sees the threat clearly. Were all just a moment away from commodity hell,he says. Still, seeking salvation through capturing the elusive, lightning-in-a-bottle instances of innovation is tough for any company. It becomes a monumental management chal- lenge at a sprawling industrial empire with 11different major business lines, tens of thousands of products, and 315,000em- ployees in more than 100nations. Pushing more of the entrepreneurial startup stuff will probably result in morefailures at GE, says Noel Tichy, a professor at the Univer- High Hurdles Immelts plan to turbocharge GE through the marriage of innovation and marketing is ambitious to say the least. sity of Michigan Business School who ran GEs executive education institute in the 1980s. Spitting out a stream of entre- preneurial ideas that mostly flop in search of theonebig scoreis an unnatural act for many GE managers,he says. Moreover, consider the sheer scale of what Immelt is attempting: He has set growth targets that would require GE to generatemorethan $9billion in new rev- enue annually from internal operations alone. Thats likeadding thecombined busi- nesses of eBay, JetBlue, MGM, and Star- bucks. Few companies in history have been able to consistently generate those kinds of dollars without acquisitions. The challenges of getting there by ignit- ing innovation at a colossus likeGE arewrit large, but in many ways they arent so dif- ferent from the issues all companies face in trying to unleash their latent entrepreneurial power. How Immelt is going about it con- tains broad lessons for managers everywhere. And lets be clear about whats at stake for GE. If Immelts reinvention doesnt work, Tichy says, the almost unimaginable could happen: GE could become just a tired, av- eragecompany.Another probableresult of failureis less difficult to envision. Immelt, Tichy says, would be toast. E VERY CHIEF EXECUTIVE OF GEand there have been only 10is expected to put his own stamp on the company, even to radically remakeit if necessary. Indeed, when Immelt took over, Welch reportedly gave him thesameadvicethat a previous GE boss had given Welch: Blow it up. Themarriageof technical innovation and marketing is Immelts detonator, and hehas been painstakingly wiring it up since he got the top job. For one thing, he quickly be- gan edging away from someof Welchs lega- cy. Welch, of course, was a master innova- tor himself, but mainly in the field of financial management. He was to a large degreea growth-by-acquisition man, buying new businesses, many in high finance, and mercilessly culling out underperformers. In thelate90s,Immelt says, webecamebusi- ness traders and not business growers. Today organic growth is absolutely thebiggest task Immelts Laws of Reinvention 1 CHASE BIG CHANGE GE is targeting markets undergoing a transformationenergy, health care, transportation, securityfor potential billion-dollar scores. $ 134B 1.5% >10% 7% $ 9.4B * $ 9.1B GEs 2003 revenue Revenue growth, 2003 Annual revenue growth target Annual internal growth target (excluding acquisitions) Annual internal growth target (excluding acquisitions) Combined 2003revenue of eBay, JetBlue, MGM, Starbucks * Based on 2003 revenue. Source: Company filings sors that can communicate with one an- other. During the presentation, one veter- an engineer familiar with how oil refineries operatehad a lightbulb moment: Refineries might have a use for such wireless sensors even beforetheyrefingernail-size. Thegroup then figured out that infrared sensors used in microwaveovens could becombined with wireless technology designed for security systems to offer petrochemical plants a way to remotely monitor trouble spots in their electrical equipment and machinery. That job was often done by a person walking around with a thermal camera. The prod- uct, called GearTrak, hit themarket in May. Cross-fertilization also plays a role in a broader effort to modify the digital X-ray, ultrasound, and CT scanning gear GE sells to hospitals, so that it can be used to monitor a variety of industrial systems from aircraft parts assembly plants to gas pipelines. These so-called nondestructive testing businesses, launched since 2001, brought in $400million last year and could hit $1billion by 2006just the kind of in- ternal growth Immelt is after. Some of the software used in GEs medical-imaging devices is also inspiring GEs security division, whose mainstay products are alarm systems. Like many companies, GE sees security as a potential- ly huge growth area in the post-9/11world. And as it turns out, the sophisticated sys- tems that can identify a tumor in a lung are similar to the software needed to detect an intruder amid hundreds of hours of digi- tal surveillance video. In a cluttered room called the Visualization Lab, scientist Greg Chambers eyes a screen showing people moving around a parking lot. Theyre be- ing tracked by software that puts a big yel- low rectangle around each person. But Chambers and his team dont merely want to track and record movements. We want to calculate human intent,Chambers says. on a plane, or soundproofing homes along a particular flight path to allow the use of bigger, noisier jet engines. Bolsinger boiled the ideas down to five and then presented them to I mmelt. He approved all five, including one that GE finds particularly promising: making a new class of small, superefficient jet engines for a coming generation of air taxis. The breakthrough piece here is not just that we can serve the air taxi market, Bolsinger explains, but I think that wecan help build the air taxi market.She concedes that its not clear air taxis will catch on, but adds that if the market does develop, theres not a company in the world that could de- sign, build, or support it better than GE. This isnt total pie in the sky: GE already has a joint venture with Honda thats de- veloping a compact, technologically so- phisticated jet engine. By the end of the year, Bolsinger expects one major aircraft manufacturer to select that engine for a new class of business jets. Certification of the plane by the FAA will take at least an- other two years. But if all goes well, she says, the business of making small jet en- gines could eventually bring in as much as $500million a year. Of the 50imagination breakthroughs presented to Immelt, 35 were green-lighted, including such novel ideas as mobile ultra- sound machines and emergency water pu- rification systems mounted on truck trailers. Many of them will amount to nothing, of course, but so what? Just those 35projects have the potential for $5billion in revenue by 2006, he says. Besides, Immelt has or- dered his teams to come up with another 50. This summer. T HE HEAT FROM IMMELT FOR fresh ideas has led manyGE man- agers to scour their operations for promising but sidetracked tech- nologies, and to dream up ways to refash- ion existing technologies for totally differ- ent markets. I call it the J unkyard Wars approach to innovation, says Joe Krisci- unas, global technology manager at GEs sensor business. What can you find in your arsenal to meet new needs? Last year Krisciunas led a brainstorming session on industrial applications for an idea dubbed smart dust, fingernail-size sen- of every one of our companies. To make that clear, Immelt has tied compensation to internal growth. If wedont hit our organic revenue targets, he says, people are not going to get paid. He has also brought in more big brains to dream up innovations. GE has added 5,000engineers since 2001, and there are now 21engineers among thecompanys top 175 officersup from only seven when Im- melt took over. He has cut the acquisitions team by two-thirds. To drive home the re- newed focus on marketing, he appointed Beth Comstock, a 15-year GE veteran, as chief marketing officer. The position had been eliminated under Welch. Immelt also assigned a marketing leader to each of GEs major business lines, another first. And he has hired 5,000new salespeople. By last year, however, it had becomefrus- tratingly clear to Immelt that the message was not taking hold fast enough. In Sep- tember 2003hesummoned all themarketing directors to a company conference room and for hours hammered at the importance of new innovations. Wehaveto put growth on steroids,he told them. He ordered each of them to come back with five ideas for new growth businessesimagination breakthroughs, he christened them. The ideas could be for things totally new to GE, or they could leverage existing assets to cre- ate new products or business lines. But each idea should generate at least$100million in new revenuewithin threeyears. I want game changers, Immelt told them. Take a big swing.He gave them two months. Some in the room were stunned. There was a collective gulp across the organiza- tion,Comstock recalls. Peoplewerethink- ing, Is this real? For LorraineBolsinger, a former engineer who was named last year to head up mar- keting at GEs huge aircraft engine division ($10.7 billion in 2003revenue), reality sank in quickly. Within days of themeeting, Bol- singer arranged the first of 20 brainstorm- ing sessions that brought together engineers, finance people, marketers, sales staff, and research scientists. She barred herself from the first round of meetings so people wouldnt be afraid to sound silly in front of the boss. Within six weeks, the group came up with 354ideas, including somethat were silly indeed: putting a million micro-engines 2 REPURPOSE EVERYTHING GE managers have been ordered to find new markets for existing products; modi- fying medical-imaging technology to monitor industrial systems, for instance, is expected to bring in $1 billion in 2006. Thecoders aretrying to develop software that will sense minute deviations from nor- mal patternsat a shopping mall, in an air- port, at a sporting eventand sound an alert when something seems out of order. For instance, if things arent usually taken off a warehouse shelf at midnight on Sun- day, and suddenly they are, the software could detect the abnormality and summon security. To work, the software will always have to stay one step ahead of crooks and terrorists. There will be an arms race be- tween us and them,Chambers says. Were putting the pedal to the metal. S OME OF THESE INITIATIVES could add hundreds of millions or even billions of dollars to GEs revenue in coming years. And as Scott Donnelly, head of GEs global re- search and development efforts, points out, a whole bunch of $1billion things adds up after a while. But they stem mostly from adaptations of existing businesses or technologies; they arent the jaw-dropping breakthroughs that can create entirely new businesses with gargantuan payoffs. Thats the holy grail of Immelts reinvention cam- paign, and its being hunted diligently in the House of Magic. More formally known as the Global Research Center, the House of Magic has a storied past. Originally set up in 1900 in a barn in Schenectady, N.Y., as a refuge for brilliant minds, it is now situated on 525secluded acres nearby. Over the years it has hosted big thinkers like Albert Ein- stein and employed such celebrated sci- entists as Nobel Prize-winning chemist I rving Langmuir. Among the many in- ventions it has pumped out are the X-ray tube, synthetic diamonds, the high-fre- quency alternator that enabled the first radio broadcasts, and the plastic used in CDs. But in recent decades, the place be- came less central to GEs opera- tions, particularly as the company fo- cused more on fi- nancial services under Welch. One of I mmelts first moves was to pump new life into tors pinpoint plaque buildups long before any current technology can. GE scientists are also pouring resources into the quest for clean energy. Immelt has made a long-term bet that fossil fuels will have to be supplemented because of dwin- dling supplies and geopolitical and envi- ronmental constraints. GE has a team of 80 scientists dedicated to working on hydrogen-related projects, and theyre try- ing everything. In one lab theyve rigged up a lawn mower with canisters they want to fill with a metallic powder that could absorb and release hydrogen. Closer to reality is GEs fuel cell, which could be providing clean power to malls or whole neighborhoods by the end of the decade, and ultimately could transform the way power is distributed. Long before you burn hydrogen to make electricity in cars, says Correa, head of GEs energy and pro- pulsion research, you will have stationary fuel cells. Correa says the companysfuel cell will convert natural gas to electricity more efficiently than any power system to- day and produceless than 10 percent of the nitrous oxide coughed out by GEs gas tur- bines. Best of all, one of the by-products is hydrogen. GE believes that the market for clean power ultimately will be enor- mousand isnt as far off as many people think. We foresee a huge move to more sustainable energy,Correa says. I MMELTS GOALIS TO GET GE BACK on its double-digit growth path by ulti- mately generating up to 7percent in added annual revenue from internal growth, making up the rest through acqui- sitions. Though he intends to de-emphasize buying growth, he hasnt turned his back on thepractice, havingthis year madetwo of GEs largest purchases evera $10billion deal for British biomedical company Amer- sham and a$14 billion purchase of Viven- di Universal Entertainment. But do the math: Immelts targets mean that hes demanding that a $134billion be- hemoth innovate its way to annual internal growth of as much as $9.4billionand that number will grow, year after year. Its stag- geringly ambitious, which is why his plan invites skepticism. Besides facing the law of large numbers, GE also risks becoming dis- tracted by having too many irons in thefire. GEs pure research effort. He has upped its budget 14 percent to $359 million, spent $100million on a new laboratory wing in Schenectady, and invested an- other $100million to open research cen- ters in Munich and Shanghai. He also started requiring top managers and mar- keters to regularly cycle through the House of Magic to keep in touch with the latest advances. Though they do have plenty of room to roam, GE hasnt given the science wizards free rein. To manage the kind of innova- tion werelooking for,Donnelly says, first you have to have a strategy of where you want your company to be, where you can be a big player, and where technology can make a difference.One of Donnellys first moves after being named R&D chief short- ly before I mmelt took over was to slash the number of projects at the research cen- ter from more than 1,000to just 100high- ly focused ones. Margaret Blohms nanotechnology work is one of them. In her House of Magic lab, she sets up a simple experiment to show the novel properties of very small things. She inserts a magnet into a test tube suspended over a rust-colored solution of iron nanopar- ticles. The solution flows upwardseem- ingly defying gravityand collects around thetest tube, forming a spiked ball of brown liquid. Blohm believes that thebizarreprop- erties of nanoparticles could eventually lead to any number of profitable uses for GE: lighter metals, less brittle ceramics, sensors that can detect a single molecule of a given gas (such as sarin), plastics that conduct elec- tricity. For us, nano is the ultimate materi- als science,she says. In a nearby lab, Nadeem Ishaque is al- ready working on one use for Blohms tiny particles. Ishaque, head of GEs advanced molecular imaging program, wants to pack 1,000 of them inside a biocompatible polymer shell and then attach an anti- body that seeks out early signs of arteri- al plaque. Once in- side the body, the iron nanoparticles would be picked up by an MRI scan, and thus help doc- 3 SELL LIKE CRAZY Immelt created the post of chief marketing officer, named marketing execs for each of GEs 11 major divisions, and added 5,000new salespeople. Generating all that internal revenue growth is going to be tough,says analyst Tony Boase of A.G. Edwards. On the oth- er hand, GE has been generally masterful at managing hundreds of different busi- nesses at once. Even Tichy thinks Immelt has a good shot. Jeff still has a lot more levers to pull,he says. Immelt points to what he sees as major signs of progress: By next year he expects what he has labeled GEs seven growth businesseseverything but plastics, ap- pliances, equipment leasing, and insur- anceto account for 85percent of rev- enue, up from 68percent in 2000. Last year six smaller GE units, all relatively new and encompassing things like water purification, health-care IT, and wind turbines (see Growing in the Wind, page 85), generated combined revenue of $9billion, up 50percent from a year earlier. And Immelt strongly believes that continued supercharging of the compa- nys marketing machinewill go a long way toward keeping thosetrends moving in the right direction. But, as he says, marketing is bullshit without stuff. Back in the House of Magic, Tony Dean, head of GEs ad- vanced propulsion program, is working on stuff that may lead to the ultimate growth engine: a kind of air-breathing rocket that many peoplenot just in- side GEbelieve could revolutionize aviation. I n a test chamber at the re- search center, this pulse detonation en- gineis fired, rat-a-tat-tatting like a how- itzer spitting out thousands of rounds. I nstead of the rotating turbines of to- days jet engines, this one creates thrust by sparking controlled explosions in a steel tube filled with gas fuel. I n theo- ry, it could power small airliners that could fly at supersonic speedsmore than twice as fast as todays passenger jets. And its expected to use 5 percent less fuel than a standard jet engine. Thats worth many billions of dollars a year to the airline industry, Dean says. It doesnt take an Edison to figure out what ideas likethat could mean for Jeff Im- melt and GE. Growing in the Wind O ne answer to GEs growth challenges is already in the air. Among the com- panys hottest business- es is a two-year-old unit that sells wind-power turbines. GE Wind Ener- gys revenue more than doubled to $1.2 billion last year, and the compa- ny has rapidly become the worlds No. 2 maker of wind-power systems. That remarkable growth has come from a combination of buying into the business and bringing to bear tech- nologies and expertise from all across the company. GE acquired Enrons wind assets in 2002 for $285 million and immediately faced a big prob- lem: The erratic nature of the power sourcewind gustsis taxing on tur- bine components, especially the gear- box vital to transforming the spinning of the blades into electricity. GE knows gearboxes: Its transportation division makes huge, highly efficient ones, including those used in 300-ton mining trucks. That expertise helped GE develop more reliable wind-tur- bine gearboxes. Meanwhile, GE jet-engine scien- tists began working on fiber com- posites to lighten the giant blades each nearly as big as the wingspan of a Boeing 747and expect to cut the blades weight 25 percent by next year. GE al so has teams of Ph.D.s in India and China working on computer simulations to test components for new wind turbine models (there are 23 now, each de- signed for specific wind conditions). We really understand the physics of the machine, says Steve Zwolin- ski, GE Winds CEO. All the work is paying off in wind turbines that are far more durable and efficient than they were when GE acquired the business. Manufac- turing costs have also come down 30 percent. With wind power likely to become an increasingly impor- tant part of the global energy pic- ture, GE believes its set to see bil- lions of dollars of future growth breezing its way. 4 UNLEASH THE MAD SCIENTISTS Immelt reinvigorated GEs famed House of Magic research center, hiring hundreds of new scientists to dream up groundbreaking innovations. Produced exclusively by Business 2.0 Custom Reprints. 2004 Time Inc. All rights reserved.