Ge- Evo Project
CHRISTOPHER A. BARTLETT BRIAN J. HALL NICOLE S. BENNETT GE’s Imagination Breakthroughs: The Evo Project As he prepared for the December 2006 meeting with GE’s CEO Jeff Immelt, Pierre Comte faced some difficult decisions. Only eight months into his job as chief marketing officer (CMO) of GE’s Transportation business, Comte would be presenting Transportation’s recommendations on some of the most visible growth initiatives in its locomotive business—projects that had been designated “Imagination Breakthroughs. IBs, as they were called within GE, were new projects with the potential to generate $100 million in new business within two to three years, and were a key part of Immelt’s organic growth strategy. At the IB Review, Immelt expected to hear how Transportation was progressing with each of its locomotive IBs and what plans they had for their future. Within GE Transportation, however, the future of several IBs had been a source of considerable debate, with none more sensitive than the Hybrid locomotive.
Launched two years earlier in the belief that it could become a disruptive technology that could redefine the industry, the Hybrid had struggled to develop cost-effective performance, and some of its key sponsors were beginning to wonder if resources should continue to be committed to it. The ongoing debate had resurfaced in November at a growth review meeting in Erie, Pennsylvania, where Transportation’s CEO John Dineen asked Comte and Brett BeGole, head of Transportation’s Locomotive P&L unit, to describe how they planned to update Immelt on the Hybrid IB.
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BeGole, an experienced and effective business leader, explained that problems with the cost and performance of batteries had made the project’s future highly uncertain. Feeling it was sapping resources from more profitable growth opportunities, he wondered whether it should be sidelined until the technology was further developed. Comte was uncomfortable with that proposition. He felt that the Hybrid represented a real opportunity for GE to lead fundamental market change, and hat sidelining the project could cause it to lose the resources and attention it needed at this critical stage of its development. He also worried about Immelt’s reaction, especially since the Hybrid was one of his favorite IB projects. But while he knew that the IB process was designed to encourage risk-taking, Comte also realized that at the end of the day, it had to be commercially viable. In GE, the bottom line always mattered. As Dineen listened to his direct reports, he understood the source of their differences.
BeGole was responsible for the profitability and growth of the Locomotive P&L unit, and would be held accountable for its bottom-line results. But Comte, with his mandate to develop market knowledge and competitive intelligence, had been asked to challenge and stretch the existing organization. Indeed, Dineen recalled telling his new CMO, “Pierre, your job is to make marketing ‘the point of the ________________________________________________________________________________________________________________ Professors Christopher A. Bartlett and Brian J.
Hall and Research Associate Nicole S. Bennett prepared this case. Some company information and data have been disguised for confidentiality. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. bsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 907-048 GE’s Imagination Breakthroughs: The Evo Project spear’; to take us to places we don’t want to go. ” Now, after listening to the debate, Dineen wondered what Transportation’s position on the Hybrid should be in its upcoming IB Review with Immelt.
Immelt Takes Charge: New Demands, New Responsesa On Friday, September 7, 2001, 43-year-old Jeff Immelt became GE’s ninth CEO in its 109-year history. Four days later, two planes crashed into the World Trade Center towers. In the turmoil that followed, an already fragile post-Internet bubble stock market dropped further, and the subsequent downturn in the economy resulted in a drop in confidence that spread rapidly around the globe.
Despite his many efforts to tighten operations while continuing to grow the business, the new CEO did not have an easy initiation as he tried to deal with the resulting economic downturn, the post-Enron suspicions of large corporations, and the growing global political instability. In 2002, after promising that earnings would grow by double digits, Immelt had to report a modest 7% increase in GE’s profits on revenues that were up only 5% on the 2001 sales, which had declined 3% from the prior year. (See Exhibit 1 for GE financials, 1996–2006. By the end of 2002, GE’s stock was trading at $24, down 39% from a year earlier and 60% from its all-time high of $60 in August 2000. With considerable understatement, Immelt said, “This was not a great year to be a rookie CEO. ”1 Driving Growth: The Strategic Priority Beyond this immediate market pressure, Immelt was acutely aware that he stood in the very long shadow cast by his predecessor, Jack Welch, under whose leadership GE had generated a total return to shareholders of 23% per annum for 20 years, representing an astonishing $380 billion increase in shareholder wealth over his two decades as CEO.
Much of the company’s stock price premium was due to the fact that Welch had built GE into a disciplined, efficient machine that delivered on its promise of consistent growth in sales and earnings. The results were achieved in part through effective operations management that drove a 4% per annum organic growth rate (much of it productivity driven), but primarily through a continuous stream of timely acquisitions and clever deal making. This two-pronged approach had resulted in double-digit revenue and profit increases through most of the 1990s.
But Immelt knew that he could not hope to replicate such a performance by simply continuing the same strategy. The environment in the new millennium had changed too much. The new CEO wanted to use GE’s size and diversity as sources of strength and to drive growth by investing in places and in ways that others could not easily follow. He began to articulate a strategy that would rely on technology leadership, commercial excellence, and global expansion to build new business bases that would capitalize on what he described as “unstoppable trends. Beginning in 2002, he challenged his business leaders to identify these new “growth platforms” with the potential to generate $1 billion in operating profit within the next few years. In response, several opportunities emerged, and the company soon began engaging in new fields such as oil and gas technology, securities and sensors, water technology, Hispanic broadcasting, and consumer finance, all of which were growing at a 15% annual rate. ”The growth platforms we have identified are in markets that have above average growth rates and can uniquely benefit from GE’s capabilities,” said Immelt. Growth is the initiative, the core competency that we are building in GE. ”2 a This section summarizes “GE’s Growth Strategy: The Immelt Initiative,” Harvard Business School Case No. 306-087. 2 GE’s Imagination Breakthroughs: The Evo Project 907-048 Building New Capabilities: Investing in Technology and Marketing To reposition GE’s portfolio to leverage growth, Immelt’s team lost little time in acquiring companies such as Telemundo to build a base in Hispanic broadcasting, Interlogix in security systems, BetzDearborn in water-processing services, and Enron Wind in renewable energy.
After completing $35 billion worth of acquisitions in 2001 and 2002, GE completed the biggest acquisition year in its history in 2003, including two megadeals: $14 billion for media giant Vivendi Universal Entertainment (VUE), and $10 billion for UK-based Amersham, a leader in biosciences. But Immelt also recognized that he would have to make equally significant internal investments to ensure that his strategy of technology-driven, commercially-oriented global expansion could build on this new growth platform.
Within his first six months, he had committed $100 million to upgrade GE’s major R&D facility at Niskayuna in upstate New York. Then, in 2002, he authorized a new Global Research Center (GRC) in Shanghai, and in 2003 agreed to build another GRC in Munich, investments involving another $100 million. And despite the slowing economy, he upped the R&D budget 14% to $359 million in 2003. When asked about the increase in spending during such a difficult time for the company, he said, “Organic growth is the driver.
Acquisitions are secondary to that. I can’t see us go out and pay a start-up $100 million for technology that, if we had just spent $2 million a year for 10 years, we could have done a better job at it. I hate that, I just hate that. ”3 Rather than concentrating primarily on short-term product development as it had in the past, the GRCs’ agenda become more oriented toward the long term. R&D also became more focused, with more than 1,000 projects slashed to just 100.
Furthermore, the research group identified five very long-term technology areas for special attention, in fields as diverse as nanotechnology, advanced propulsion, and biotechnology. It was a longer-term R&D focus than GE had seen for many years. The other core competency Immelt wanted to use to drive organic growth was marketing. As an ex-salesman, he had always focused on the customer and felt that an unintended by-product of Welch’s obsession with operating efficiency and cost-cutting had been the development of a culture that was too internally focused.
He wanted the organization to turn its attention to the marketplace and to bring in a more commercially oriented perspective to its decisions. In one of Immelt’s first appointments, Beth Comstock was named GE’s chief marketing officer, a position Welch had abolished decades earlier. (See Exhibit 2 for the GE’s corporate organization chart. ) Immelt also redeployed most of GE’s large acquisition-oriented corporate business development staff into marketing roles, and asked each of GE’s businesses to appoint a VP-level marketing head to develop that capability in the business.
Because of the shortage of internal talent, many of these marketing leaders had to be recruited from outside, an uncommon practice at GE. To provide a forum for these new leaders to monitor and drive the change Immelt wanted, in 2003 he formed a Commercial Council made up of 20 respected commercial leaders drawn from a diverse range of GE businesses. Not all members were corporate officers, or even among the top 600 in GE’s Senior Executive Band, but all shared the distinction of being personally selected by the CEO for their innovative thinking.
Meeting monthly by phone and quarterly in person, the group used this forum to discuss mega-trends, to identify broad strategies for international growth, and to diffuse best marketing practices rapidly throughout GE. To underline its importance, Immelt chaired the council. Realigning Personal Competencies: Developing “Growth Leaders” The investment in new capabilities had an immediate impact on GE’s management profile. Within Immelt’s first two years, the company recruited over 5000 engineers, and among the 175 corporate officers, the number of engineers grew from seven to 21.
The same dramatic change was occurring in 3 907-048 GE’s Imagination Breakthroughs: The Evo Project sales and marketing, and in 2003, the company began a process to increase GE’s under-resourced marketing staff by 2000 over the next two years. To help integrate this influx of senior-level marketers into GE’s culture and systems, the Experienced Commercial Leadership Program was created. As big a task as it was, recruiting top talent into these growth-driving functions was less of a concern to the CEO than the challenge of developing new capabilities in his current management team.
While strong in operations and finance, some lacked the skills Immelt felt they would need to succeed in the more entrepreneurial, risk-taking environment he wanted to create. To help define the leadership behaviors that would be required to drive organic growth, the human resources staff researched the competency profiles at 15 large, fast-growth global companies such as Toyota, P&G, and Dell. They concluded that five leadership traits would be key to driving organic growth in GE: • • • • • An external focus
An ability to think clearly Imagination and courage Inclusiveness and connection with people In-depth expertise Soon, all courses at GE’s Crotonville education center focused on developing these characteristics, and Immelt made it clear that unless managers had these traits or were developing them, they would not be likely to succeed at GE regardless of their past track record. And to underline his commitment to supporting a new generation of “growth leaders,” he began making changes to some of GE’s wellestablished norms and practices.
For example, to develop leaders with more in-depth market and technological knowledge and domain expertise, Immelt decided to slow the job rotations that had long been central to management development at GE; to build new technological and marketing capabilities rapidly, he accepted the need to recruit from the outside; and to encourage individuals to take risks, and even to fail, Immelt adjusted the evaluation and reward processes that previously had been tied to flawless execution of short-term budget objectives.
Embedding Growth in Processes and Metrics In classic GE form, all elements of the new organic growth initiative were soon being reinforced in metrics, systems, and processes to ensure that the new objectives received the disciplined follow-up that characterized GE’s management style. It was this cycle of tightly linked and mutually supportive systems and processes and that were the backbone of the company’s Operating System that supported GE’s reputation for clear strategy and a disciplined implementation.
At the heart of the Operating System were three core processes that had framed management reviews over many decades—Session C, Session I, and Session II. (See Exhibit 3 for a graphic representation. ) Each was now harnessed to drive the growth agenda. For example, the Session C organization, staffing, and succession reviews each May became a powerful tool to reinforce the recruitment, promotion, and deployment of technological and marketing talent, as well as the development of a new generation of “growth leaders” willing to take risks to build new businesses.
Next, in July, Session I (GE’s strategy review process that Immelt renamed the Growth Playbook) required each business to drill down on how market trends and customer needs provided opportunities for them to grow their business organically. And in November’s Session II, discussions of the operating budget (driven in the GE model by stretch targets rather than line item expense reviews) made sure that each business’s commitments to invest in and deliver on growth projects were not cut back in order to meet short-term performance objectives.
Further, the metrics used in the implementation of each of these systems were also changed to reflect the new growth objectives. For example, individual development reviews and performance 4 GE’s Imagination Breakthroughs: The Evo Project 907-048 evaluations leading up to Session C now evaluated managers against the new growth traits. In the first year, only corporate officers were evaluated; the following year, the metrics were extended to the 600 in the Senior Executive Band; and by year three, the top 7000 executives were getting feedback and development support around the required growth traits.
New metrics in the Session I/Growth Playbook review required managers to develop and defend strategies to achieve Immelt’s objective organic growth rate of 5% above GDP growth by doubling GE’s organic growth from 4% to 8% annually. And in Session II, a new Net Promoter Score was added to hold managers accountable for a demanding measure of customer loyalty and repurchase. Imagination Breakthroughs: Engine of Organic Growth By the end of 2003, Immelt told investors that he had now completed the big investments needed to re-position the company’s business platforms for the uture. But results were still disappointing, and with both income and revenue barely above the levels of 2000, some observers were beginning to question whether the GE’s greatest growth was behind it. Immelt rejected that notion, and saw no reason for GE to slow down as long as it was able to change its approach and emphasize organic growth. “In the late 1990s, we became business traders not business growers,” he said. “Today, organic growth is absolutely the biggest task in every one of our companies. 4 Having spent his first two years repositioning the business portfolio and investing in new organizational capabilities, Immelt now wanted to drive the pursuit of organic growth much deeper into the company. In September 2003, he convened a meeting of marketing directors from each of GE’s businesses and challenged to develop by November five proposals for new growth businesses— “Imagination Breakthroughs” he called them, or IBs as they quickly became known. “We have to put growth on steroids,” he said. “I want game changers. Take a big swing. 5 Over the next two months, the marketing leaders engaged management of all of GE’s businesses to respond to Immelt’s challenge. In November, they presented 50 IB proposals to the CEO and a small group of corporate marketing staff who now became the IB Review Committee. Of this initial portfolio, the CEO green-lighted 35, which the businesses were then expected to fund, adapt, and pursue. And Immelt indicated that he intended to monitor progress—personally and closely. GE Transportation’s First IB: The Evo Story In September 2003, in response to Immelt’s request, GE Transportation identified its five potential IBs.
Perhaps the most exciting was the Evolution Locomotive, a product already on the shelf as a planned new product introduction, but struggling to get support due to challenges in both its technical development and its market acceptance. The designation of this project as an IB turned a corporate spotlight on its funding and put a supercharger on its commercialization. Origins of the Evolution Locomotive GE began serving the North American rail market in 1918, and through numerous cycles over the better part of the next century, the company steadily built a good business selling to North America’s six large rail companies.
By the mid-1990s, with revenues approaching $2 billion, GE had built a dominant market share, and its AC4400 long-haul locomotive was recognized as the most successful engine on the market. But it was a mature and conservative industry, and an unlikely place to jumpstart an initiative that called for cutting-edge technology, innovation, and risk taking. In a rare innovative move in the industry, in 1995 GE introduced its much anticipated “superloco,” the AC 6000. Touted as the most powerful locomotive on the market, its size and hauling 5 907-048
GE’s Imagination Breakthroughs: The Evo Project capability were impressive. But within a year of its launch, North American customers were reporting that most of the AC6000’s new capabilities were unnecessary or uneconomical. This unfortunate misreading of market needs led to only 207 units of the 6000 being sold over the next five years compared with more than 3,000 classic AC4400 locomotives in the same period. 6 Worse, many of those that were sold either failed to deliver on their promised cost-benefit performance or had reliability problems.
The AC6000 locomotive was eventually discontinued and became a black eye on GE’s otherwise strong record in the industry. Meanwhile, in December 1997, Environmental Protection Agency (EPA) upset the predictable rail market by announcing strict emissions requirements for all new locomotives to be put in service after January 1, 2005. The regulations posed serious engineering challenges and a major commercial risk for locomotive manufacturers whose safest response was to modify existing models to meet the new standards.
While most companies chose to follow this conservative strategy, GE engineers committed to a riskier and more expensive approach of designing a completely new platform able to meet future emissions standards while also keeping fuel costs down. Over the following three years, engineers in Erie and at the Global Research Center in Niskayuna worked to redefine the paradigm of locomotive design by eliminating the traditional tradeoff between fuel efficiency and emissions.
The result was the Evolution Locomotive (quickly dubbed the Evo) which used a revolutionary engine combined with a patented cooling system to achieve 3% to 5% fuel savings while generating 40% less emissions than the previous generation. It also incorporated a locomotive control system enhancement that managed the speed and throttle settings to minimize fuel consumption and/or emissions, taking into account train composition, terrain, track conditions, train dynamics, and weather, without negatively impacting the train’s arrival time.
Although this radical new engine represented a clear technical advancement, the decision to take it from design to production was a gamble. Because locomotives delivered before January 1, 2005 were exempt from the new regulations, some predicted that there would be a spike in demand for old models in 2004, leaving little market for the Evo in 2005. Indeed, the sales force reported that most customers were wary about making early commitments to meet the new requirements. But the believers on the GE team argued that the Evo could deliver real savings in fuel and labor, areas in which costs were mounting rapidly in the industry.
In a major bet, in 2002 GE committed to building its Evolution locomotive. (See Exhibit 4 for a photo and basic specifications for the Evo. ) Evo Becomes an IB The earlier AC6000 product failure coupled with the looming change in environmental regulations in the industry put the locomotive business leaders in Erie under intense pressure to prove to the CEO that they could grow their mature business organically. When Immelt announced his quest for $100 million Imagination Breakthroughs, it was clear that the Evo would be a “make or break” project.
Despite the continuing uncertainty around its market potential, the Evo became the centerpiece of Transportation’s presentation in its first IB Review with Immelt. The CEO was immediately taken by the project’s potential and told the sponsoring managers that he would be monitoring progress in regular review meetings that he planned to conduct monthly with those responsible for IBs. True to his word, Immelt conducted reviews of several businesses’ IBs every month. This meant that every six months or so, those directly responsible or Evo—the P&L leader, the technology leader, and/or the marketing leader—met with him to describe progress and outline next steps for their project. As the team soon learned, PowerPoint presentations were strictly prohibited in these meetings. To encourage an atmosphere of discussion and debate, presenters were allowed no more than one page of documentation for each IB. Although the meetings were small and informal, the 6 GE’s Imagination Breakthroughs: The Evo Project 907-048 managers were not necessarily relaxed. They knew that questioning would be intense, and were advised to be prepared to discuss a range of sample questions. See Exhibit 5 for a preparatory list. ) So meeting the CEO (supported by just a few of his corporate marketing staff), created some nervous tension. As one manager reflected, “Do you really want to be the only business that shows no imagination or, compared to other business’s IBs being presented, has no breakthrough? ” Managers came to IB Review meetings armed with extensive market information, the result of a rigorous analytical process called CECOR that was being rolled out by the corporate marketing group to help business-level marketing teams systematize analysis to support the IB process. (See Exhibit 6 for an outline of the CECOR process and tools. ) Because of Immelt’s understanding of the issues and his direct, in-depth questioning, some began calling the IB Review meetings the “Committee of One. ” In the glare of the IB spotlight, the Evo product management and sales team found themselves under increased pressure to perform. But discussions with customers revealed that GE was still “paying for sins of the past,” as one salesman put it, and the team concluded that it would not be able to sell the Evo’s value proposition from a piece of paper and a set of specifications.
After the failure of the AC6000, customers wanted solid evidence of the benefits being promised. In a leap of faith, GE Transportation took the financial risk of committing $100 million to build 50 Evo units, which they then planned to lease to customers for a nominal fee. The locomotives were to be carried on GE’s books, but would be operated by customers and used on their North American lines. The goal was to log five million miles before the 2005 launch, thereby regaining customers’ trust by proving the engine’s reliability and the value of the technological advancements.
Preparing to Launch: The Agony . . . In early 2004, vague concerns about Evo began turning to panic. A year into the leasing plan, the sales team did not have a single firm order. Sales reps were getting positive feedback about performance of the leased Evos, but customers were still reluctant to make the capital expenditure. Transportation’s November SII Budget Review for Evo had been grim: worst-case scenarios projected sales of only 30 or 50 locomotives out of a total 2005 capacity of 600 Evos. It was a performance that would result in significant losses.
While some felt that GE might have to offer the Evo at an attractive initial price to attract sales, Immelt challenged that assumption. At IB Review meetings, he was pushing the team in the opposite direction, urging them to focus on how to price the soon-to-belaunched product to capture its full value. Because the Evo offered significant economic savings to the railroads over its lifecycle, Immelt asked why it could not be sold at a premium over the previous model. Discussion about the impact of rising energy costs in the IB Review meetings spilled over into detailed market and product analysis in Growth Playbook sessions.
These meetings with Immelt were very different from the Session I strategy reviews over which Welch had presided. Where Welch had been cost and efficiency-driven, Immelt was focused on the market value of technological advancements like the Evo. “In a deflationary world, you could get margin by working productivity,” Immelt said. “Now you need marketing to get a price. ” 7 As a result of these discussions, the IB team refined Evo’s value story to focus on its lifecycle costs, and decided to reflect the Evo’s significant performance improvements in a 10% price premium. CECOR stood for Calibrate, Explore, Create, Organize, and Realize, an analytical process that the corporate marketing group had developed. It was supported by a portfolio of tools borrowed from a variety of sources including the consulting groups Bain and McKinsey, which had proved helpful in doing market segmentation, customer analysis, competitive analysis, etc. 7 907-048 GE’s Imagination Breakthroughs: The Evo Project Knowing that this decision would cause anxiety within the sales ranks, Dave Tucker, Transportation’s VP of Global Sales, turned the annual January sales meeting in Coco Beach, Florida into a call to arms for the Evo.
Despite having a single firm order, in the opening session he announced that by June the sales team needed to sell out the factory—and at a significant price premium over the previous model. “It scared the hell out of the sales force,” Tucker recalled. “Frankly, we had never had a step-function increase in pricing like that. ” Tucker challenged his sales force to come up with the means to implement the plan. In addition to worries about the expected customer reaction, some expressed concerns about the likely response of a key competitor who had not made the same upfront investment.
But the marketing group’s analysis suggested that rising oil prices, increased rail traffic, and tightening emission standards could make customers more open to Evo’s benefits. After several days of joint discussions with marketing and product management, the sales force hit the streets committed to booking orders at the new price. Implementing the Launch: . . . The Ecstasy Over the following months, the sales team went back to its customers, emphasizing value to convince them that Evo was worth its price premium.
As if responding to a cue, oil prices continued to rise — from $32 a barrel in January 2004, to $40 by June, and $50 by October. At the same time, driven by surging Chinese imports entering the U. S. on the West Coast, transcontinental rail traffic was booming. And state regulatory bodies’ demands were making emissions an industry-wide concern. The marketing analyses had proved correct: customers were ready for the Evo. By the launch date on January 1, 2005, not only was Evo’s entire 2005 production sold out, product was on backorder through much of 2006.
Despite earlier concerns about a risk of a temporary drop in market share, industry experts estimated that GE maintained or increased its 70% share through the launch and outsold its competition by three to one in the U. S. market during 2005. 8 By mid-2006, there was a backlog of 1500 locomotives, representing two years of production capacity. The early success of the Evo continued into 2007, with all-time highs in deliveries surpassing records set just one year earlier. The Evo had become a poster-child IB success story.
Managing the IB Lifecycle: Raising the Evo Babies When John Dineen became CEO of GE Transportation in the summer of 2005, Evo was well on its way to being one of the outstanding IB successes. But Dineen made it clear that he wanted to drive even more growth from this old-line, mature portfolio of businesses. To emphasize that objective, he reinforced Immelt’s annual corporate Growth Playbook process by creating a Growth Council, to which he invited his entire management team to engage in a monthly review of growth initiatives in each of Transportation’s businesses.
His objective was to build a growth agenda into the pulse of the business and make it part of the ongoing management discussion. Birth of an Evo Baby: The Global Modular Locomotive Acknowledging that the slow-growth domestic markets already dominated by GE were unlikely to be the major source of new business, Dineen emphasized the opportunities for international expansion. Responding to that challenge, Tim Schweikert, general manager of the Locomotive P&L unit, began to explore with his team the challenge of breaking into the global locomotive market.
They soon identified the hurdles they would have to clear in order to sell internationally. First, because railway gauge width, weight limits, and clearance requirements varied widely by country, the team decided that there could be no standardized “global locomotive. ” Furthermore, the number of locomotives called for in most international tenders (as few as 10 or 15) made the huge upfront 8 GE’s Imagination Breakthroughs: The Evo Project 907-048 investment in engineering a major cost barrier.
And finally, because governments were typically the operators of railways, the selling process usually involved complex political negotiations. Recognizing all of these constraints, Schweikert and his team developed a product concept that it termed the Global Modular Locomotive (GML), a design developed around a set of standard components that could be built to different national requirements using a Lego-like construction approach. With great excitement, they took their idea to Dineen’s monthly Growth Council where it was endorsed as a candidate for Immelt’s IB Review.
Presenting their ideas in this forum in September 2005, the locomotive team preempted Immelt’s opening question by identifying GML’s three value-creating objectives: to reduce the response time in international tender processing, to reduce the amount spent on nonrecurring engineering, and to reduce the time between the order and the sale. After further probing questions, Immelt congratulated them and approved GML as an IB. To help Schweikert implement the new IB project, Dineen assigned Gokhan Bayhan to the role of marketing leader for the Locomotive P&L unit.
The move was part of a larger strategy of transferring recognized talent into the fledgling business marketing roles. “We took some of our best people from our commercial and engineering organization and put them into these roles,” said Dineen. “As soon as you start doing that, the rest of the organization realizes it’s important. Initially, we had to draft people and assure them that the move was going to be good for their careers. But it was hard. Every bone in their body was telling them not to do it because there was no track record. ” (See Exhibit 7 for GE Transportation’s organization chart. Because Bayhan had earlier worked on a locomotive modernization contract that GE had won to overhaul and rebuild 400 locomotives for the state-owned railway in Kazakhstan, he decided this was a perfect place to explore GML’s potential. Soon, he and the sales team were talking to government contacts about the new concept and about the opportunity for GE to help them expand and modernize their railway system to meet the needs of Kazakhstan’s fast-growing China trade. The disciplined process of analyzing the market opportunities and customer needs was part of the marketing group’s responsibility.
But because this analysis was a new element in the existing process of bringing a product to market, gaining acceptance was not always easy, as Bayhan explained: The relationships between product management, sales, and engineering were well established, so a lot of marketing team members had difficulty breaking into that process, and taking on a role that didn’t exist before. It was hardest for those from the outside, and they were the majority. It helped that I’d been in the organization in various product management and finance roles because it allowed me to use my access and credibility to contribute a marketing point of view.
But lots of others had a hard time with it. Meanwhile, as sales, engineering, and marketing worked together to test and approve the GML concept, a major boost to the effort occurred in December 2005 when the company announced that it had received an order for 300 GML locomotives from the Chinese railway. In October, Schweikert, who had been close to the Chinese negotiations, was transferred from his position in Erie to become head of GE transportation in China, not only to oversee this important contract, but to use it to expand GE’s penetration into this huge market.
Making Marketing Mainstream As the role and impact of the marketing function grew within Transportation, Dineen accelerated his efforts to find a head of marketing who could not only accelerate existing marketing efforts, but could also provide the function with greater access and influence at the most senior levels of discussion in the company. Finally, in early 2006, he found the person he felt could fill the role. Pierre 9 907-048 GE’s Imagination Breakthroughs: The Evo Project Comte became chief marketing officer of GE Transportation in May 2006.
Surprisingly, although he had a strong commercial background built up through an international career, he did not come from a traditional marketing background. Most recently he had run the rail signaling business at a major European transportation company. But to Dineen, he seemed an ideal fit—someone with relevant industry expertise, good frontline experience, and a strong enough personality to deal credibly with his P&L leaders, and understand their pressures and constraints. In his first meeting with his new CMO, Dineen told Comte to “create a crisis around growth. But Comte realized he would first have to convince his bottom-line-driven peers that he could help them: When you run a $2 billion Locomotive P&L that’s doing great, you don’t have a pressing need to reinvent yourself and your business. The role of the marketing group is to push the P&L leaders to revisit their portfolios. But they won’t listen to chart makers or theoreticians. So I spent three months telling them, “I’m like you, I’m a business guy; I’ve lived in Asia and Europe. I’ve run a P&L with a couple of thousand people reporting to me. I know that the last thing you want is another headquarters guy giving you more work to do.
I’m not going to do that. I’m here to help you make your P&Ls bigger, stronger. ” Under Comte, the new marketing team began to take a more active role in the business, a role that became more and more evident as the Evo offshoot businesses started to grow. The contributions that Gokhan Bayhan made to the redefinition of GML provided a classic example. The Baby Grows into a Family In April 2006, as members of the locomotive management team sat down to prepare for their presentation to Immelt at Transportation’s Growth Playbook/Session I review in June, some of the initial ideas behind the GML concept were beginning to seem questionable.
Doubts were being expressed by people from project management, marketing, and engineering about whether the GML’s Lego design would work in practice. To resolve the concerns, Brett BeGole, Schweikert’s replacement as global operations general manager for the Locomotive P&L unit, commissioned a “Tiger Team” of six people from engineering, product management, and marketing and gave them two weeks to recommend what changes, if any, should be made to the GML concept. Much of the team’s work was based on a rigorous analysis of a rich set of data on ustomers, competitors, and market trends that Gokhan Bayhan had assembled. Using CECOR tools including a customer needs analysis, a competitive response analysis, and a market segmentation map, Bayhan presented Steve Gray, his engineering counterpart on the Tiger Team, a rich picture of the critical technical and quality elements that customers were demanding. After an intense two weeks of analysis, the team came to the conclusion that the GML concept was too complex and too expensive to serve the market efficiently.
Instead, they proposed that GML’s modular approach be replaced by a platform concept that defined five different families of locomotives, which together would serve 85% to 90% of the global market demand. Three of the five platforms to be developed were based on the Evo engine, while the two other family members would use another engine still under development. The Tiger Team’s recommendations were presented at Transportation’s Growth Council in May, where Dineen backed their recommendation by committing to invest in the development engineering required for the Global Locomotive Families (GLF) ahead of any orders being received.
It was a major change in practice for the business. With strong analysis and data to support the team’s proposal and a clear commitment to invest in it, the new GLF concept was quickly accepted and supported in July’s Growth Playbook /Session I review with Immelt and became one of Transportation’s official IBs. 10 GE’s Imagination Breakthroughs: The Evo Project 907-048 The concept was soon validated when, in September of 2006, the Kazakhstan Railway placed an order for 310 locomotives; soon after, GE received an additional large order from a mining company in Australia; and before year’s end it won a tender for 40 more locomotives in Egypt.
Bayhan described it as the industry’s “perfect storm”: The big driver was what we call the “China Effect. ” Our analysis showed how increased trade with China is driving a big surge in demand for all forms of transportation. Around the world, GDP is growing, industrialization is happening, and the China Effect is spreading to other countries. And we were right there when it happened with a good understanding of the customers’ needs and the newest technology to meet them.
So we were able to respond to the perfect storm with a great product, the right commercial strategy, and perfect market timing. Like the China order nine months earlier, the big Kazakhstan order came with a condition that after building the first 10 locomotives in Erie, GE would commit to transferring the assembly operation to Kazakhstan in the second half of 2008. The facility would assemble kits shipped from Erie and would become the regional source for locomotives sold to other countries in the CIS (the Commonwealth of Independent States, consisting of 11 former Soviet Republics in Eurasia).
It was part of GE’s “In Country, For Country” international strategy, and a matter of great pride for the country’s prime minister, who proudly announced that Kazakhstan had locomotives with the same technology as the U. S. models. The Morphing Continues: The New Regional Strategy As the locomotive contract negotiations were being finalized, they provided a convenient market entree to other parts of GE’s transportation business.
In particular, the sales and marketing people from the Services and Signaling P&Ls began using the Locomotive team’s contacts to introduce their own products and services. For example, Transportation’s Service P&L planned to link any new locomotive sales with a service contract to renew and refurbish worn components locally rather than replacing them with imported new parts. Not only could they promise to save the customer money, they could offer to transfer technology and bring employment to the country.
As initiatives such as this became the norm in markets where locomotive contracts had been signed, the management team of the Locomotive P&L began to explore whether an integrated regional approach to growth might be a more effective business model than the product-based Global Families approach. It was an approach that Comte believed had great value. As he grew the Transportation marketing staff from 14 people to 32, he began moving a significant number of them out of Erie and into the field where they could be closer to the customer.
As part of a new geographic-based capability, he deployed seven Regional Marketing Strategists, each of whom built his own local capabilities to support Transportation’s regional general managers. (See Exhibit 8 for Transportation’s marketing organization. ) In December 2006, when the message came down that the Commercial Council would like to see businesses submitting more IB proposals for new emerging countries, it gave support to the growing notion that there was a need to reconfigure the global locomotive IB project once again.
One proposal was to morph the major thrust of the GLF project into three integrated regional IBs—one for China, one for Russia/CIS, and one for India—each responsible for driving growth by developing its market for an integrated package of GE locomotives, signals, services, etc. It was an intriguing idea with the potential to roll out to other regions, but would mark the third iteration of this IB in its young, less than 18 month life. Some were concerned that it might seem like project churning. 11 907-048 GE’s Imagination Breakthroughs: The Evo Project
The Hybrid Engine Dilemma: To Be or Not to Be? At the same December IB Review, the Transportation business was also scheduled to present its latest plans for the Hybrid Locomotive IB. As the entire management team understood, almost three years earlier the Hybrid had captured Immelt’s attention as a perfect candidate to fit into the company’s just-announced Ecomagination program committed to environmentally responsive innovation. Indeed, it had been the CEO’s suggestion to elevate the research on the Hybrid engine and to give it IB status.
As he had publicly stated, the Hybrid Locomotive represented “the right solution for the customer, for the market, for the environment, and for GE. ” The plans for the Hybrid were centered on a diesel-electric engine that would capture the energy generated during braking and store it in a series of sophisticated batteries. That stored energy could then be used on demand, reducing fuel consumption by as much as 15% and emissions by as much as 50% compared with freight locomotives already in service. 8 But as the concept was translated into a roduct, it became clear that the battery technology at the core of its design was not able to achieve the proposed customer benefits or provide them at a cost that would make the project economical. As a result, three years into the program, there was no clear evidence that the Hybrid IB would be able to meet any of its original stated objectives—to add value to the customer, to provide returns to GE, and to allow access to new markets. This led some to suggest that the Hybrid should join of the lapsed IBs that had been declared “worthwhile experiments that did not work out. At Transportation’s monthly Growth Council preparing for Immelt’s December IB Review, Dineen, BeGole, and Comte explored the options. BeGole argued that with all the opportunities available in other product-line extensions and geographic expansions, the opportunity cost of the Hybrid project was very high. Specifically, he explained that because of his limited finances and engineering resources (particularly the latter), committing to this option would mean postponing the rollout of some of the promising new international regional platforms for Evo.
On the other hand, as Compte reminded the team, the long-term trend away from fossil fuels and toward alternative energy meant that eventually GE would have to develop hybrid technology. Knowing Immelt’s commitment to the Hybrid project, Compte asked whether the team had done enough to understand how customer value could be created in different segments, to explore alternative technological solutions, or to pursue other sources of funding.
On the last point, he explained that while his marketing organization had located some potential government funding for hybrid development, they had not applied for funds since this was not GE’s normal approach to project financing. In response to questioning, however, Compte acknowledge that even with such additional funds, investing in the Hybrid would mean diverting resources from other growth prospects that seemed more immediately promising. As Dineen summarized the discussions, he posed three alternative scenarios that could be presented at the December IB Review: • • 12
The first option would be to explain that while the project as currently defined appeared to have very limited to short- to medium-term commercial viability, the business would commit to it as an IB and continue to explore alternative ways to make it successful. The second approach would be to acknowledge the Hybrid’s long-term potential, but suggest that it be placed on hold as an IB, perhaps by transferring primary responsibility to the Global Research Center to work on the battery technology in collaboration with various GE businesses—including Transportation—that had an interest in its development.
GE’s Imagination Breakthroughs: The Evo Project • 907-048 The final alternative would be to recommend that the company acknowledge the fact that after three years of hard work on Hybrid, neither the technology development nor the market acceptance of the concept had indicated that it could be a viable commercial proposition in the foreseeable future, and therefore that it be dropped as an IB. As the management team talked through these options, they tried to balance the best interest of the business with what Immelt was likely to believe was in the best interests of the company.
With 83 IBs now approved, and 35 already launched and generating more than $2 billion in additional revenues, the CEO and felt that the process of generating organic growth was established. But that did not mean that he was becoming less involved. He personally tracked every IB, and focused even more intently on those that had caught his attention—like the Hybrid Locomotive. But in true GE fashion, he also held each business responsible for its current performance. As Transportation’s management team realized, determining the Hybrid’s future was a tough and vital decision that it must now make. 13 19. 5%
Earned on average shareowner’s equity 1. 99 10,675 Dividends declared 161,000 aStock price adjusted for stock split in 2000. Compiled from GE annual reports, various years. 319,000 Total employees Source: 165,000 Other countries 316,000 155,000 155,000 10,569,805 212,281 673,321 37. 34-32. 67 0. 91 1. 76 1. 76 17. 8% 9,647 16,711 (1,922) 18,631 147,956 2005 United States Employees at year-end: 10,359,320 260,804 Long-term borrowings Shares outstanding—average (in thousands) 697,239 Total assets of continuing operations 38. 49-32. 06 Dividends declared Stock price 1. 03 Net earnings—diluted rangea 1. 99
Net earnings Per share: 20,829 163 20,666 163,391 Net earnings Loss from discontinued operations Earnings from continuing operations Revenues 2006 GE Financial Performance, 1992–2006 ($ millions) General Electric Company & Consolidated Affiliates Exhibit 1 307,000 142,000 165,000 10,399,629 207,871 750,617 37. 75-28. 88 0. 82 1. 59 1. 59 17. 9% 8,594 17,160 559 16,601 134,291 2004 305,000 150,000 155,000 10,018,587 170,309 647,834 32. 43-21. 30 0. 77 1. 4 1. 4 20% 7,759 14,091 2,057 15,589 113,421 2003 0. 66 1. 37 1. 41 27. 1% 6,555 13,684 (444) 14,128 125,913 2001 315,000 154,000 161,000 9,947,113 138,570 75,018 310,000 152,000 158,000 9,932,245 79,806 495,023 41. 84-21. 40 52. 90–28. 25 0. 73 1. 52 1. 46 25. 2% 7,266 14,629 (616) 15,133 132,226 2002 313,000 145,000 168,000 3,299,037 82,132 437,006 60. 5-41. 66 1. 71 3. 81 3. 87 27. 5% 5,647 12,735 0 12,735 129,853 2000 -14- 222,000 72,000 150,000 1,683,812 51,027 228,035 73. 13-49. 88 1. 69 3. 90 23. 5% 2,838 6,573 6,573 70,028 1995 907-048 Source: GE Corporate Structure GE Annual Report, 2006, pp. 114–115. Daniel S. Henson VP, Chief Marketing Officer William Conaty SVP, HR Advisor John F. Lynch SVP, Human Resources Mark M. Little SVP, Global Research Gary M.
Reiner SVP, CIO Keith S. Sherin SVP, CFO Key Corporate Staff Jeffrey Immelt Chairman & CEO GE Corporate Structure Exhibit 2 NBC Universal Jeffrey A. Zucker, President and CEO GE Healthcare Joseph Hogan, President and CEO Infrastructure John G. Rice, President and CEO, GE Money David R. Nissen President and CEO Business Leaders Commercial Finance Michael Neal, Chairman, GE Capital Services Industrial Lloyd G. Trotter, President and CEO 907-048 -15- Source: Corporate Executive Council (CEC) March April Session D Compliance Leadership meetings Global Leadership Mtg. (GLM) January February GE Opinion Survey May
Session C Org. /Staffing/ Succession Core business processes CEC June July Growth Playbook CEC August Session C Follow Up September November SEB Orientation Meeting Corporate Officers Mtg. (COM) October CEC December C-II Follow Up S-II Operating Plan Annual Integrated Business and Leadership Processes GE Operating System GE’s Operating System GE internal documents. Exhibit 3 907-048 -16- GE’s Imagination Breakthroughs: The Evo Project Exhibit 4 Source: 907-048 Evolution Locomotive Product Specifications Evolution Locomotive brochure, GE Transportation website: http://www. getransportation. com/na/en/evolution. tml. 17 907-048 18 GE’s Imagination Breakthroughs: The Evo Project GE’s Imagination Breakthroughs: The Evo Project Exhibit 5 907-048 IB Review Preparation: Sample Questions The following are a few of the questions given to IB teams to help them prepare for reviews: Market Opportunity • • • • Can you start with the answer: Where would you like to be and why? How does this fit in your strategy? What does it take to be good at this? How does technology play a role here? Does it give us an advantage? Competition • • • • Is anyone else doing this? Who is best at this? How we placed vis-a-vis the competition?
How many others have tried this? Have they succeeded or failed? Do our competitors make money at this? Pricing • • • • How much would we make on this product? How much would the customer pay for this product? How do we price it correctly? Why aren’t we charging a higher price? Resources • • • • Where do we have in-house expertise? Are you working with any other GE business on this? How do we use GE Financial Services as a weapon? What resources do we need to hit the growth target? A doubling/tripling of resources? Go to Market • • • • Source: What is standing in our way in order to execute this well?
Is there a way to tap into global suppliers to fill the global pipeline? What is the value proposition? How would you differentiate? How will you build capability? GE internal documents. 19 CECOR Tool Kit ones will you target? ! Which are our potential avenues of growth? ! What EXPLORE E •Capability Assessment • Ideation Sessions • Positioning is the customer value? ! What are our best ideas? CREATE C ! What •Five Forces •Customer •Market Maps Experience Grid •Profit Pools •Segmentation •Value Chain •Competitive Assessment •Targeting Tools are the customers and what do they need? ! Who industry are ou in? ! What CALIBRATE C •Conjoint Analysis •Value Proposition •Value Based Pricing •Branding you prepared to implement? ! Are the go-tomarket plan aligned with the value proposition? ! Is ORGANIZE O Identifying questions to ask and tools to apply CECOR Framework Exhibit 6 1 •Go-to-Market Plan •Continuous Feedback (VoC) •Impact Metrics will you measure customer and GE impact? ! How you meet your revenue and income plans? ! Will REALIZE R 907-048 -20- Source: GE internal documents. GROWTH PLAYBOOK CALIBRATE C EXPLORE E NPI ORGANIZE O REALIZE R PROTOTYPE TEST LAUNCH TECHNICAL OR COMMERCIAL INNOVATION
DESIGN NEW PRODUCT INTRODUCTION CREATE C DEVELOPMENT AND GO TO MARKET CONCEPT AND TESTING IDEATION AND FILTERING STRATEGY, GOALS AND PUNCH LIST CECOR’s fit in GE’s operating rigor Exhibit 6 (continued) 2 907-048 -21- Source: GE internal documents. President, Transportation Brazil Timothy Schweikert, President, Transportation, China Regional Leaders Steve Grey, VP, Global Technology John M. Dineen President, CEO GE Transportation John Rice, President & CEO, Infrastructure GM, Global Supply Chain Pratt Kumar, India Operations Leader, GE Infrastructure Pierre Comte GM, Marketing GE Transportation
GE Transportation Organizational Chart General Counsel, Legal Exhibit 7 Brett BeGole, GM, Commercial Operations GM, Marine and Stationary Engines GM, Global Rail Operations GM, Global Signaling Quality Leader and CIO GM, Propulsion & Specialty Services CFO Division Leaders David B. Tucker, VP, Global Sales GE Water & Process Technologies GE Oil & Gas GE Energy GE Aviation GM, Services 907-048 -22- Casewriter, based on GE internal documents. Casewriter, based on GE internal documents. Source: Comte’s Marketing Organization Source: Exhibit 8 907-048 -23- 907-048 GE’s Imagination Breakthroughs: The Evo Project
Endnotes 1 2 GE 2003 Annual Report, p. 9. 3 Robert Buderi, “GE Finds Its Inner Edison,” Technology Review, October, 2003, pp. 46–50. 4 Jeffrey R. Immelt, “Growth As a Process,” Harvard Business Review, June 2006, p. 64. 5 Erick Schonfeld, “GE Sees the Light,” Business 2. 0, July 2004, Vol. 5, Iss. 6, pp. 80–86. 6 “US loco market still a two-horse race,” Railway Gazette International, July 1, 2006. 7 Jeffrey R. Immelt, “Growth As a Process,” Harvard Business Review, June 2006, p. 64. 8 24 GE 2002 Annual Report, p. 5. From GE press documents. “Ecomagination: The Hybrid Locomotive,” www. ge. com.