Innovation Tyrant: David Brooks: Competitiveness Vs Creativity: GE vs Apple

How is your business achieving top line growth in the downturn?

In an interesting NYT column, The Creative Monopoly, David Brooks contrasts competitiveness and creativity in individuals: a bright young man called Peter Thiel could have been a highly competitive lawyer, but instead, he left the law, created PayPal and later became an investor in Facebook and other celebrated technology firms.
Brooks agrees with Thiel, now a lecturer at Stanford, that

“we tend to confuse capitalism with competition. We tend to think that whoever competes best comes out ahead. In the race to be more competitive, we sometimes confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value…Instead of being slightly better than everybody else in a crowded and established field, it’s often more valuable to create a new market and totally dominate it. The profit margins are much bigger, and the value to society is often bigger, too.”
A focus on competing in existing markets, says Brooks, leads us down pre-determined paths that are antagonistic to creativity, innovation and value-creation.

“First, students have to jump through ever-more demanding, preassigned academic hoops. Instead of developing a passion for one subject, they’re rewarded for becoming professional students, getting great grades across all subjects, regardless of their intrinsic interests… Then they move into a ranking system in which the most competitive college, program and employment opportunity is deemed to be the best. Then they move into businesses in which the main point is to beat the competition, in which the competitive juices take control and gradually obliterate other goals…. Competition has trumped value-creation. In this and other ways, the competitive arena undermines innovation.”
Brooks’ thesis is also borne out by the current trajectories of two American icons: GE [GE] and Apple [AAPL].
GE, by competing in existing mature markets, has lost 40 percent of its share value in the last ten years, while Apple, by rejuvenating and opening up markets, has gained around 4,500 percent in its share value in the last ten years.

The sad case of GE
In a short-term financial sense, GE is doing just fine. GE’s quarterly earnings per share were 34 cents compared to Wall Street’s expectation of 33 cents. GE has $86 billion in cash on hand. GE ranks as the 6^th largest firm in the U.S., the 14^th most profitable and the #7 company for leaders as ranked by Fortune. It is the #5 best global brand according to Interbrand. It is #15 most admired company (Fortune), and #19 most innovative company according to Fast Company. GE’s work in Ecomagination has been saluted as innovative and environmentally friendly.
Although GE has been through some hard times during the financial meltdown, some analysts say that GE has “turned a corner.” “Hope at last” said Barron’s in 2011. “General Electric is ready to revive.”
So why has GE lost 40 percent of its share value in the last ten years, and more than half its of its share value since Jeff Immelt became CEO? Why doesn’t the stock market see much of a future for GE?

A culture of the bottom line
Obviously, the results of any large company are caused by many moving parts, but one of the root causes of GE’s decline is what CEO Jeff Immelt revealed in his 2006 conversation with Harvard Business Review (“Growth As A Process”)

“At GE, the only things that move the culture are ones that show up in our income statement. It’s just the way we were raised.”
GE is the quintessential company that is run by the numbers, focused on making money for the shareholders. Because GE does it as well as anyone, its fate can tell us where this approach leads.
For a start, what it means, as Steve Jobs once explained, is that the people who are at ‘the white-hot center of the company’s daily life’ are the salesmen, the accountants and the money men. They are the ones who can ‘move the needle on revenues’, not the the engineers, the designers and the creative people who add real value to customers.
As a result, the quality of the product and the value for customers become less important in the firm’s activities than whether the firm is making money in the quarter.
It is thus no surprise to find, when you look more closely to see how GE ‘made its numbers’ in the last few quarters, that revenues were up but margins were down—a sign that GE has to lower prices in order to make its financial targets.
When you have the accountants and the money men searching the firm high and low to find new and ingenious ways to cut costs, the activities dispirit the creators, the product engineers and the designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability and making the firm ‘more competitive’, they are the ones that are as a class celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

Why the bottom line kills innovation
Once a company focuses on the bottom line, innovation suffers as a matter of mathematics. As Gary Hamel points out, “Typically any incremental investment has about a 90 percent chance of earning a solid return. Yet by definition, when we undertake basic innovation, most of the ideas that we start out with are going to have less than a 25% probability of success.” Since R&D is expensed rather than capitalized, cuts in R&D spending yield immediate increases in profit. Moreover, gains in basic innovation may take years to materialize whereas cuts in spending or incremental improvements often take effect immediately. So in any contest for the allocation of resources, basic innovations have little chance because:

The returns have a much lower chance of success

The returns take longer to materialize

The costs which are expensed rather than capitalized weigh more heavily and immediately on the bottom line than capital expenditures.

GE exits from ‘mature sectors’
We can see this process steadily unfolding at GE, as the management finds it easier to milk existing cash cows or get out of “slow-moving sectors” rather than add new value to customers.
Thus CEO Jeff Immelt sold GE’s insurance business and said in 2011 that he wishes he “had sold our insurance business right after 9/11. We just had no business being in [insurance] at all.” Heavy losses “just created a headwind for the rest of the portfolio.” There is no indication of any thought as to why an insurance firm like Arch Capital Group Ltd (ACGL) has grown the share value of its insurance business by 300 percent in the last ten years.
Similarly, when GE acquired NBC in 1986, NBC was the top rated network. Under GE’s management over several decades, it became the fourth-ranking network. In 2011, GE gave up on the management challenge and sold a majority interest to Comcast.
Immelt would like to get rid of its home and business division which enjoys low profit margins. However in this case, GE can’t sell it an attractive price, so Immelt makes the best of a bad situation: “Nobody can run it better than we can… I just think selling it doesn’t create shareholder value.” There is no indication of any rethinking the business from the customer’s perspective so as to create new opportunities for growth.
Over recent years, Immelt has gotten rid of other “poor performing sectors”, including plastics and subprime-lending operations. The result is a firm now focused on infrastructure businesses, in particular energy, water and health care, to go along with aviation and transportation. The result, Immelt contended in 2011, “is the best portfolio I’ve had since I’ve been CEO.”
The real issue is whether mere “positioning of the portfolio”, by getting out of slow moving sectors is enough to create new value for customers. Can the inside-out thinking that couldn’t see any upside in insurance, television or plastics be able to create a strong upside in the remaining businesses?
Looking at the world from the perspective of what the firm can deliver to its bottom line automatically narrows and cramps the imagination. So long as the thinking is taking place within GE’s bottom-line culture, rather than from a customer-focused value-adding perspective, the business possibilities will always look very limited.

Apple rejuvenated mature sectors
By contrast, Apple took four slow-moving, ‘mature’ sectors—desktop computers, music, mobile phones and tablet computers—and turned them into explosively growing markets by adding new value to customers. When GE looked out in the 2000s, it saw only slow-growing sectors. When Apple looked at slow-growing sectors, it saw opportunity.
Apple continues to shine. Quarterly profit at Apple Inc (AAPL) almost doubled after a jump in iPhone sales. Apple shares jumped 10 percent today to $615.40.
“Another amazing quarter from Apple that is single handedly driving markets this morning,” wrote Peter Boockvar, an equity strategist and portfolio manager at Miller Tabak in New York in a note today.
Why doesn’t GE amaze us like Apple? Obviously in any firm as large as GE, there pockets of innovation. The Ecomagination program is one positive sign, Maybe there are others. Based on the information released by GE, we don’t know the full story.
What we do know is that it is only when GE management as a whole adopts outside-in perspective of adding value for customers, rather than feeding the financial bottom line, that the myriad business possibilities available to GE will become visible and we will be seeing genuine imagination at work.

GE’s main problem today: 20th Century management
GE’s main problem today is thus a 20^th Century management mindset focused on making a profit by pushing products and services at customers. It was a way of managing that worked reasonably well, decades ago, when the marketplace was dominated by a few oligopolies (customers lacked both options and information about the options) and most work was semi-skilled.
Today that world has all but vanished. The reality is that we now live in the age of customer capitalism. As a result of epochal shift of power in the marketplace from seller to buyer, the customer is now in charge. Making money and corporate survival now depend not merely on satisfying customers but delighting them. To prosper, firms must have knowledge workers who are continuously innovating and delivering a steady supply of new value to customers and delivering it sooner. The new bottom line of business is: is the customer delighted? It’s a fundamental shift from outputs to outcomes.

Creating blue oceans rather than finding them
The strategy that Brooks describes for individuals is applicable to businesses as W. Chan Kim and Renée Mauborgne explain in Blue Ocean Strategy (2005) where they illustrate the high growth and profits that an organization can generate by creating value for customers in an uncontested market space, i.e. a “blue ocean”, rather than by competing head-to-head with other suppliers in the bloody shark-infested waters with known customers in an existing sector.
By looking at the world from the customer’s point of view, a firm doesn’t find new ways to delight the customer: it creates them. Thus the Cirque du Soleil was able to enter a dying industry—circuses—and by eliminating animals, deemphasizing individual stars, and combining extreme athletic skill with sophisticated dance and music, created a high growth business appealing to all ages.
Similarly, by looking at the world from the customer’s point of view and finding ways to delight the customer, Amazon [AMZN] was able to take several fully “mature” sectors—retail book, second hand books, computer storage, and retail generally—and turn them into high growth businesses.
By looking at the world from the customer’s point of view and finding ways to delight the customer, Apple [APPL] has been able to take “mature” low-margin sectors—retail computers, music, and mobile phones, tablet computers—and turn them into huge money-makers.
In strategic thinking, we have learned that there is no such thing as a mature industry: there is only an industry to which imagination has yet to be applied.
The critical element is to apply the imagination from the point of view of the customer. When looked at through the lens of what the firm is currently doing, value-adding opportunities will look narrow and risky. When imagination is applied from the perspective of the customer, the opportunities are boundless.

Welcome to the Creative Economy!
The economy is thus undergoing a transition from an industrial economy to a Creative Economy, where, as David Brooks suggests, the big gains come from creativity rather than competitiveness. The Creative Economy is an economy in which the driving force is innovation. It is an economy in which organizations are nimble and agile and continually offering new value to customers and delivering it sooner. The Creative Economy is an economy in which firms focus not on short-term financial returns but rather on creating long-term customer value based on trust, as described in Richard Florida’s classic book, The Rise of the Creative Class (2003).
A firm like GE with a culture focused on the financial bottom-line is ill-equipped to compete in the emerging Creative Economy. GE is still operating within a factory mindset oriented to economies of scale. It is still focused principally on maximizing short-term shareholder value. It is not organized for continuous innovation. This way of managing is unlikely to mobilize the full creative talents of its employees. GE is sitting on $86 billion and unable to find productive uses for its money in a stagnant economy. So long as GE stays imprisoned by its culture of the bottom line—which even Jack Welch says is “the dumbest idea in the world”—it will have difficulty in stemming its decline.
To thrive in this new world, GE must master the management principles needed for continuous innovation and delight customers. To delight customers, a radically different kind of management needs to be in place, with a different role for the managers, a different way of coordinating work, a different set of values and a different way of communicating. This is not rocket science. It’s called radical management.
Apple [AAPL] is not alone in showing the way. Amazon [AMZN] or Salesforce [CRM] are other examples. Firms that opt not to change are unlikely to survive, let alone thrive. The economics will drive the transition. The choice is steadily becoming clearer: delight or die.
Read also:

Inside Apple: Can It Thrive Without Steve Jobs?

Apple’s Retail Stores Are More Than Magic

Is The US In A Phase Change To The Creative Economy

Don’t Blame Green For GE’s Problems

The Five Surprises of Radical Management
________________________

Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).
Follow Steve Denning on Twitter @stevedenning
Want to learn how to make the entire organization Agile? Check out the innovative three-day workshop in Washington DC on May 21-23, 2012