"GE is flat-footed, not knowledgeable and missing what the local market needs"

Forbes India talked to James Schrager about what drives GE, Jeff Immelt and GEs management strategy.

Published: Dec 16, 2009

James Schrager, Clinical Professor of Entrepreneurship and Strategic Management at University of Chicago’s Booth School of Business, has been a GE watcher for a long time. He believes that GE is late to the party in India.

How do you view the current set of changes at GE? What do you think is the trigger?

James Schrager believes GE is late to the party in India
James Schrager believes GE is late to the party in India
The trigger is the same one that’s always driven GE. One simple word: Growth. Jeff Immelt [chairman and chief executive] has figured out that GE is not really known for its brilliant innovation. It’s known for being a good player but not really for leading the pack very much. GE has a much better profile when they are either in a growing industry such as the jet engine industry or a growing economy. India is still a very small part of GE’s business right now. When you think about growth that Immelt worries about, India is a very vibrant rapidly growing economy. He rightly says when GE is sitting in a good place, good things happen.

But if you go a level deeper and think of it from Immelt’s point of view and say which of my decisions will give me some really nice growth in India? The nuclear plant business in India, for instance — those are big jobs over a long period of time. That’s real GE gravy. India is growing, India is vibrant. It seems like a really good play. This is just plain old blocking and tackling.

The second piece is that disruption play is corporate jujitsu — you take your opponent’s strength and turn it into your advantage. Immelt took a page out of the classic strategy book and said if I am being invaded, let me go back to the source of the invasion and see if we can team up or beat the invader. GE’s medical products, for instance, are being invaded by low cost alternatives. India has this incredible ability to do something so let’s go there and let’s be the disruptor rather than have our own medical business disrupted.

Jack Welch made one very powerful change in GE – which is to have as small a corporate office as possible. Presidents of divisions run their business with as little innovation from corporate as possible. There are two basic ways to run a company like this. One is to have a set of independent businesses that report straight to the top. The other is called matrix management where a local company president has two or more bosses. So there is a line boss – maybe the president of GE or someone very near the top. And then we have the boss for marketing, the boss for engineering, etc. That’s the matrix system wherein one company president has to serve many masters. It was in GE before Welch got there. Welch said jet engines are its own business and they don’t need a corporate executive for marketing, or a corporate executive for engineering. That president has to run it all. One of the innovations that powered GE during the Welch era was this.

The last thing is a senior vice president in charge of India to whom all Indian businesses will report. When we take that apart we have GE Healthcare in India, GE nuclear power plants in India. There is already a president of GE Healthcare which is headquartered in Europe. Adding a senior VP for India who will have some power over India, goes back to matrix management. I don’t think it kicks one of the pillars of the old Welch idea but it certainly is an impediment.

What you are saying is that during the Welch time there was this vertical structure, and right now it’s more a matrix structure. Is this better?

Both ways can work but GE worked with having the vertical structure, knocking away the horizontal structure. I can’t give you a 100 percent prediction that this won’t work but I can tell you that we are taking away something that was central to the ongoing success of GE in the Welch era and we are replacing it. I would highly question it and watch it carefully.

GE Capital, the big engine driver, is being downscaled. What kind of impact will it have on growth and a market like India?

Everyone has said that the big dirty little secret of GE is that it lives and dies on GE Capital. As GE Capital goes, so goes the company. The second thing is the slower growth, particularly in the US. And particularly with the latest government action, the concern about continued slow growth, continued high unemployment, it is extremely difficult when you have a huge growth agenda to be stuck in a country that is not growing. The only way you grow is when you go out and buy firms – and that is not happening right now. The other way is to be extremely innovative with great new products. And GE doesn’t play out in any of those fields anymore.

How do you evaluate GE’s run in emerging markets so far?

They have not been largely successful, particularly in India which is such a vibrant place. Second, they have been late to the party in India. Anyone watching the world and India in the 1990s had the formula for tremendous growth. The great downside of the vertical system is that that person is very powerful. So if GE, the corporation, wants to go to India, Immelt or whoever is running the place has to go to each president and lobby for them to go to that place. It’s clumsy when you try to organise all these separate entities to be in one place that appears to be high growth – lobbying and cajoling individual presidents. GE has been fairly clumsy in going into new markets. They haven’t been fabulous innovators in trying to break into India. They have less than $3 billion in revenues in India out of a $182 billion or so. That shows how much they haven’t done here. GE has much to do in terms of operating well in Asia. Immelt is right in pointing to straight-up numbers because that’s where the growth is but I don’t think he has the formula to make GE, as we know and see it today, highly successful in a country like India which doesn’t respond readily to the arsenal that GE has and is ready to fire.

You said that GE is not a fabulous innovator…

GE under Welch had its own formula and that’s one of the keys because to be really successful in emerging markets mean different things in a different way produced in a different style. Immelt’s recent ‘disruption’ of making very low-cost medical devices in India is a perfect example of what he is attempting to get GE to figure out. GE makes very high end healthcare devices in the US. These are very expensive devices. So you walk in with your big American feet and Immelt sits you down in a president’s conference and says we got to do more in India. The guy who runs GE Healthcare says I am going to go to India and take my MRI machine that costs $3.5 million and does unbelievably fabulous stuff. He’ll take it to India and some teaching institution that will look at it and he’ll say it isn’t a big market. GE is missing — because it works at a very high end in the healthcare business — everything that’s going on in India. GE is flat-footed, not knowledgeable and missing what the local market needs. And this kind of fanfare of making $1,000 EKG machines, its okay but it’s just very late. So [it’s] late to the party, but understanding what’s going on. Before the Indian manufacturers simply find a distributor here and take away his business.

A large part of the transformation GE is talking about is in healthcare. Is healthcare really as big a bet for GE as it seems to be? And does reverse innovation extend beyond healthcare?

GE has a very nice technology position in healthcare. That’s why it is big for GE. Healthcare is getting GE into a very nimble field where entrepreneurs are changing the rules of the game. Watching GE in healthcare is a very good barometer — you know what kind of game these guys play at GE. It has also been for the past 20 years an absolutely reliable 10-20 percent growth per year unlike jet engines where airplane production which can slow you down.

The game is changing on GE – and GE isn’t changing it. The $1,000 EKG machine is not an innovation from GE. It is a realisation that their market dominance is going to end very soon. They can either allow it to do so — so hang on to the $1,000 EKG machine, pull out a few features. Or do this ‘disruption’ — we realise they are coming fast. Does it extend beyond healthcare? We haven’t seen it. Nuclear power and aviation, for instance, are very heavily regulated industries with huge scale. Healthcare is a completely different industry profile — loads of players, loads of innovation. Scale doesn’t really matter — if you have a great idea — a $1,000 EKG machine, you can have it manufactured somewhere else. Healthcare is a lot more competition, innovation-driven, level playing field.

About this transformation happening in India? Apparently there is some amount of scepticism about it at the very top.

Jack Welch’s great innovation was to get headquarters out of my face. When Welch ran the plastics division before he became CEO and he got sick and tired of the headquarters telling him what to do. His basic insight was they are dumb people — I know more about my business than they do. So the general swing at how does headquarters push innovation in far flung areas is a very bad idea. It’s extremely hard to get done. Specifically at GE, GE under Welch decided it’s a bad idea and they stopped it. So they said you are the president, you run that division, I talk to you but you tell me you will get X percent growth and you get it. If you don’t get X percent growth, I am going to talk to you some more but I will not have a matrix management system where you will have two, three, four, five bosses. If I am running the company from the top and I say that we really don’t have a good presence in Detroit and we must have it. The guy gives you 16 reasons why there are better competitors in Detroit and there are local manufacturers in Detroit for my product. It’s a big pain in the rear. If the guy says I want to be in Bangalore and here are all the reasons why, you have just increased the complexity 30 times. The idea of top-down dragging your company into foreign places has a very tough history of getting done. I think Immelt has done a smart thing by using healthcare as an example. He has given everyone a model. We got attacked in healthcare so we went to India. I think it’s a very good model which can be replicated in other parts of the business.

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