Jeffrey Immelt and the reinvention of GE

This essay is adapted from Capitalism At Risk: Rethinking the Role of Business, by Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine.

Tick, tick, tickets – defusing an Olympic PR bomb

Two sets of forces— one from outside the economic system and one arising naturally from within it—have jointly created a series of large-scale challenges that threaten the foundations and future of the global market system. Threats come from many sources: the lack of education and opportunity in some areas, the rise of radical political movements in others, environmental degradation and climate change worldwide, growing disparities in the distribution of income and benefits flowing from the system in many countries, and failures of governance across critical sectors. The challenges are large and growing, and effective countervailing forces have yet to arise or at least to become complete and effective. From this vantage point, the prospects for significantly ameliorating these constellations of negative forces appear bleak. One possible source of countervailing force is business itself. To what extent can this growing array of threats to the market system be addressed through actions by individual firms and entrepreneurs? Many would say that the challenges are too great and too massive in scale for individual firms to have a significant impact. And many argue that governments and multilateral institutions are ultimately the only actors capable of managing risks of this magnitude and that the proper role for business is to get out of the way and let governments do their job. This assessment, however, misses the mark. Companies and entrepreneurs can make a material difference. By aligning their activities with the needs of a sustainable economy and bringing their distinctive skills and capabilities to bear on these disruptive forces, companies can help strengthen the system and put it on a more secure footing.

Consider “ecomagination,” General Electric’s signature environmental effort. Conceived in 2004, ecomagination was aimed at driving innovation and generating superior returns by tackling some of the planet’s biggest problems—energy efficiency and harmful environmental impacts. Within five years, the initiative accounted for more than ninety products and services and some $18 billion in revenues.

As CEO Jeff Immelt tells it, GE was going through its annual strategic planning review in June 2004 when the management team realized that six of the company’s core businesses were deeply involved in environment- and energy-related projects. The appliance business was exploring energy conservation; the plastics business was working on the replacement of PCBs (polychlorinated biphenyls, once widely used industrial compounds found to be harmful to health and the environment); and the energy business was examining alternatives to fossil fuels. Other businesses were dealing with emissions reduction, resource scarcity, and energy efficiency. Far from reflecting a deliberate strategy on GE’s part, these projects had all been initiated by GE in response to demands from its customers.

When these common issues surfaced across different lines of business in the midst of its planning process, the group realized that something was going on that GE needed to better understand and possibly become part of. Immelt announced that he wanted to learn about greenhouse gas emissions, and the company set about educating itself on critical energy and environmental issues. Meetings with leading customers were arranged, and the management team launched a study of the science behind climate change. “We went through a process of really understanding and coming to our own points of view on the science,” recalled Immelt. At the same time, GE deepened its engagement with government officials and regulators on environmental issues and hired a consulting firm to help it understand the NGO landscape. This same consulting firm would eventually help GE identify promising products and services for its environmental portfolio.

As the management team gathered information and perspectives from external sources, GE also looked inward. A review of the company’s technologies and technical capabilities revealed some important gaps that needed to be filled. The culture, some managers felt, needed to become more innovative and more externally focused. At several points in the learning and self-evaluation process, Immelt shared the management group’s findings with GE’s board of directors. He wanted board members to understand both the financial and the social aspects of the “green is green” message that was emerging and to be comfortable with the strategy that was taking shape.

After nearly a year of information gathering and analysis, the management team settled on an environmentally focused strategy that would cut across five or six key businesses. Immelt had become convinced that the world was changing dramatically and that climate change was a “technical fact.” He believed that GE could prosper by helping its customers improve their environmental performance.Some of his deputies disagreed, but Immelt was ready to put people and resources behind these ideas. The new strategy was dubbed “ecomagination” for its links to economics and ecology and its echo of GE’s “imagination at work” tagline. As Immelt made clear, ecomagination was not a feel-good effort or just a rebranding move—it was aimed fundamentally at driving growth and innovation.

With dedicated funding in place, Immelt tapped one of the company’s promising young leaders as the program’s first manager. In characteristic GE fashion, the leadership team wrestled with finding the right metrics to guide and measure success. “If I stood up and talked about this as something we wanted to do without any output metrics, nobody would follow,” noted Immelt, referring to GE’s rigorous use of metrics as a company hallmark. He also stressed the importance of a program that could be easily understood and replicated: “It’s got to be repeatable, it’s got to be learnable, it’s got to be teachable, and it’s got to be something that investors can understand we are doing across the company.”

The management team ultimately chose four core metrics, but only after extensive discussion and analysis over six months. As originally framed, the initiative would be assessed by R&D spending, growth in revenue from eco products, increased customer activation, and reductions in GE’s own greenhouse gas emissions. Reductions in water use and heightened public engagement would be added later. GE set targets for doubling its R&D investment in clean technologies to $1.5 billion per year by 2010 and growing revenues from eco products to $20 billion by 2010. In its own operations, GE set out to cut greenhouse gas intensity—a measure of emissions against output—by 30 percent by 2008 and to cut absolute emissions by 1 percent by 2012 (as compared with what would have been a 40 percent increase in a business-as-usual scenario). These corporate goals were broken into subgoals and parceled out across the relevant businesses.

To fill gaps in its technology portfolio, GE put together an investment program that included in-house R&D efforts and a sizable venture fund to invest in innovative environmental and energy solutions. By investing in early-stage ventures in core areas such as renewable energy, water use, carbon management, and smart-grid development, GE enlarged its innovation network and forged relationships with a cohort of creative entrepreneurs and scientists. The company also formed an outside advisory board of energy and environmental thought leaders. Members of the advisory board offered a valuable external perspective on the company’s efforts and shared with the heads of GE businesses insights on emerging issues and opportunities.

Immelt’s team recognized the importance of the evolving policy framework to the ultimate success of its strategy. Rather than leaving matters to chance, GE joined forces with a select group of other U.S. companies and environmental NGOs to develop a proposed framework on climate change. The United States Climate Action Partnership issued a call for action in late 2006, laying out a set of principles and proposals, including support for legislation to cap carbon dioxide emissions. Immelt’s answer to critics of this foray into the policy arena was succinct: “We are much better as a company getting ahead of [climate change policy] than we are pretending like it doesn’t exist.”

As ecomagination got under way, Immelt found himself walking the fine line between staying ahead of the market but not so far ahead that it would alienate some of GE’s biggest customers—not all of whom were as convinced as Immelt about climate change and the need for legislation capping emissions. With those more skeptical customers, some of whom were personal friends, Immelt’s approach was one of candor and transparency. “You are going to hate this,” he told one particularly close but dubious customer who ran a major utility. “I’m going to make it so the public utility commission [says] you’ve got to do coal gasification—but I’m transparent and you’re going to know every step of the way what we’re doing.”

When ecomagination was announced in May 2005, investor reactions were mixed. Some analysts deemed the strategy “sensible and intelligent” and pronounced the individual products well aligned with market demand.5 Others, however, questioned whether the strategy could be made to pay—and whether the environmental markets that Immelt envisioned would actually materialize. For those who had lived through earlier periods of environmental concern, the current enthusiasm was just that—a passing enthusiasm.

By 2010, GE had overcome much of the early skepticism about its new direction, though the global slowdown after the financial crisis of 2008 had hit the company hard. GE stock lost nearly half its value in the crisis. Nonetheless, the company met its original goal of doubling its annual investment in clean technologies by 2009 (a year ahead of plan) and exceeded its original targets for reducing its own greenhouse gas emission. Taking a page from its playbook for customers, GE adopted many of its own new technologies and mobilized the efforts of employees at fifty GE facilities around the world. The result was a 41 percent reduction in greenhouse gas intensity by 2008, well above the originally targeted 30 percent by 2008. A major contributor was media and entertainment company NBC Universal, where a number of television and movie production studios embraced the go-green message by adopting comprehensive programs to save energy and reduce their carbon footprint.

Even in the absence of U.S. legislation capping carbon emissions, GE was also on track to achieve its original goal of at least $20 billion in revenues from ecomagination products by 2010. And, noted Steve Fludder, ecomagination’s head until mid-2010, GE’s eco products were among its most profitable. Contrary to widespread expectations that the financial crisis would kill the company’s environmental business, the crisis actually proved to be something of a boon. Virtually all the postcrisis stimulus packages put in place by governments around the world included a significant environmental component earmarked for just the kinds of projects that GE was prepared to deliver, thanks to ecomagination. GE won contracts for a range of major infrastructure projects aimed at laying the foundations of a new energy future: clean-coal demonstration plants, renewable energy generation, electric-grid modernization, and many others.

Although the cumulative environmental impact of ecomagination innovations was difficult to assess, GE pointed to significant improvements in a number of areas—such as increased fuel efficiency for jet engines and avoided carbon dioxide emissions from using wind power. GE had grown its wind turbine business, purchased from a postbankruptcy Enron, from $200 million a year in 2002 to $6 billion for 2008. The company calculated that the nearly twelve thousand wind turbines it had installed around the world were avoiding 32 million metric tons of carbon dioxide emissions annually, compared with traditional U.S. grid sources. By its estimates, GE had also improved turbine reliability by 11 percent, creating another $2 billion in value on a net-presentvalue basis for the turbine owners.

From a certain perspective, the ecomagination story can be seen simply as a continuation of GE’s hundred-year-plus tradition of using manufacturing and process excellence to improve the efficiency and performance of the technologies it offers the marketplace. But Fludder sees it as much more. From his vantage point, ecomagination has allowed GE to create new solutions that individual business units, left to their own devices and following their historic focus on pushing products out the door, would not have been able to develop. “By bringing the outside in and mobilizing the company to address a major multiconstituent problem in society, ecomagination has helped transform GE’s relationship with the world,” he noted. “The initiative has shown that you can make money and make the world a better place at the same time.”

Reprinted by permission of Harvard Business Review Press. Excerpted from Capitalism at Risk: Rethinking the Role of Business. Copyright 2011 Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine. All rights reserved.