With Jack Welch retiring as CEO in April, 2001, GE faces the challenge of replacing one of the grandmasters of strategy. While the company's management skills and depth of talent are legendary, Welch's shoes will be hard to fill. His successor will have to address one critical strategic issue: How will GE play to win in the digital economy?
Welch made bureaucracy-prone GE the most quick thinking and entrepreneurial company of its size, and he changed the way the game is played. In The Profit Zone, we described how Welch understood how his customers' priorities and economics were changing and the implications of these changes for strategy:
When Welch took the helm in 1981, he saw that market share leadership, more than scale economies, was the way to increase profit per product sold. So Welch raised the bar for operating units to be No. 1 or No. 2 in their business or simply get out.
When market share no longer guaranteed success, Welch initiated Work-Out-literally, take unnecessary work out of the process-- anticipating the reengineering wave by nearly half a decade. He insisted that the No. I market share position be translated to a No. 1 productivity position in every one of GE's businesses.
When Welch recognized that productivity leadership was no longer enough because profit was migrating downstream from making a product to offering product-based solutions and services, Welch led the way again.
Typically, GE has been way ahead of the curve whenever the source of competitive advantage was going to shift. This is why it has captured a disproportionate share of its industries' profit and shareholder value. But is GE leading or lagging in the next discontinuous change, the advent of digital business design?
Based on GE's demonstrated capacity for radical change, the company appears more ready than most traditional, incumbent firms to lead the transition from a conventional to a digital business design. Indeed, GE has already developed numerous Internet initiatives. Like all companies, GE expects e-commerce to lower procurement costs and its 28 business units are moving procurement online, some even installing Internet kiosks on factory floors for line workers. GE Capital Services sells mortgages online and has established platforms to pursue the small business market for financial services. NBC is rapidly trying to build its brand online; it was the first GE business to have its own Internet investments, and now holds a $600 million portfolio of about 35 Web companies including Snap.com and iVillage.
ATOMS OR BITS
Making the transition to a genuine digital business design, however, represents a bigger shift in mindset, and bigger potential benefits for value growth, than did any of those shifts that spurred Welch's previous reinventions. It will radically change the way GE relates to its customers, manages its finances, and recruits top talent. Given the company's stature as a pacesetter in strategy and leadership development, GE's response to the Internet could have even broader implications, by serving as a model for other incumbents.
The concept of going digital derives from the insight by Nicholas Negroponte of MIT that the fundamental distinction in the new economy is between atoms (whether paper and pencil, machinery, or storefronts) and bits (email, e-commerce, or satellite tracking), The Internet is not the only technology enabling the digital revolution, but its breadth and open architecture make it the most important.
Thanks to the Internet, customers will soon be able to describe exactly what they want, and suppliers will be able to deliver the desired product or service without compromise or delay. The innovation that catalyzes this shift is what we call the Choiceboard system-an interactive, online system that allows individual customers to design their own products by choosing from a dynamic menu of attributes, …