In Portfolio, the new Conde Nast business
monthly, Intel's CEO from 1987-1998, one of the
pioneers of the modern computing industry and one
of the most "strategic" business thinkers gives
his opinion about where Walmart and General
Electric can find new markets. GE is an investor
in battery maker A123Systems, and has been
working on hybrid locomotives for some time, so
it has a toe in the water....below we've included
the entire introduction but edited out some of
the paragraphs detailing his ideas for Walmart.
Innovation At Big Companies
by Andy Grove December 2007 Issue
Forget about startups, says Intel's co-founder.
It's large companies that generate real change.
Apple upended the music industry. Wal-Mart may
reinvent health care. Now if only G.E. would build an electric car.
Known as a skeptical and blunt taskmaster, Andy
Grove served as C.E.O. of Intel from 1987 to 1998
and helped usher in the modern computing industry
Video: Andy Grove's Disruption Theory
Video: Condé Nast Portfolio deputy editor Blaise
Zerega discusses the piece Grove wrote for
Portfolio on his newest business theory. See All Video & Multimedia
I usually try to control myself and resist giving
compliments or unsolicited advice to people I
dont know well. But I recently did just that. I
emailed letters to Lee Scott, C.E.O. of Wal-Mart,
and Jeff Immelt, C.E.O. of General Electric. I
wanted to share with them some of my thoughts
about their businesses. Both companies are
leviathans that have struggled recently to grow
in ways that satisfy shareholders. Wal-Mart, I
wrote to Scott, has created a phenomenal
opportunity for itself by offering in-store
health clinics and, in the process, may transform
the U.S. health-care industry. G.E., I told
Immelt, could boost its fortunes by complementing
its experience in power generation with building an electric car.
In my position as a lecturer at Stanford Graduate
School of Business, Ive been working with my
colleague Professor Robert Burgelman to examine
how large companies can defeat the law of big
numbers. Successful businesses sooner or later
encounter a situation in which the reward for
their success becomes a punishment of sorts. The
reward is that they get big. The punishment is
that when they get big, it gets harder and harder
for them to grow. And then their investors pile on the abuse.
In looking at various companies that have been
hindered by their own success, we found that
under certain conditions a firm can create a new
growth spurt for itself by entering an entirely
different industry. The target industry must be
stagnant and populated with companies that cling
to doing business the way they always have. The
corporation that enters this environment with an
innovative product or service can shake up the
status quo and reap big profits. Burgelman and I
call this phenomenon cross-boundary disruption, or XBD for short.
The defining example of this kind of move is
Apples incursion into the sluggish music
business with the introduction of the iPod in
2001 and then the iTunes music store in 2003. At
the time, Apple faced market saturation in its
niche. (Its relatively high-end computers were
stuck with a single-digit market share.) It had
all the resources of an established, well-run
corporation: highly skilled employees, brand
appeal, and access to capital. And it was hungry
for growth. Since Apple entered the music
business, the companys profit has increased more
than 3,000 percent, from $57 million in 2003 to nearly $2 billion in 2006.
The XBD phenomenon is something separate from the
more familiar pattern of startups forging
industry change in steps. Clayton Christensen
described that process in his book The
Innovator's Dilemma. In Christensens scenario, a
small company penetrates an industry by first
establishing a position in the least demanding
portion of it and then progressing into
more-demanding segments. Christensen shows how
minimills entered the U.S. steel industry in the
1970s by concentrating on the low-margin area of
the market that the established players had
largely given up on. The new companies grew until
they were strong enough to attack larger and
larger market segments. By 2000, these minimills
had increased their production to almost 50 percent of the raw-steel market.
Cross-boundary disruption is different. Im
talking about established giants seeking to
transform markets other than their own. It's
Apple jumping into music. Its Wal-Mart entering
health care. Or as my email to Immelt urged, it
could be G.E. building an electric car and taking
on the energy industry. These are companies big
and powerful enough to solve intractable,
industrywide problems and produce lasting change.
When Apple launched iTunes, music labels were
desperately struggling with the impact of digital
technology. CD sales were declining as fans
grabbed music from file-sharing sites. Between
2000 and 2006, according to the Recording
Industry Association of America, CD shipments
tumbled 35 percentfrom 942.5 million to 614.9
million. Executives at record companies should
have worried that things would get worse, yet
their attitude seemed disconnected from reality.
About 10 years ago, I listened in disbelief as a
top music executive asserted that people like the
experience of going into stores to see and
touch CDs and prefer to get their music that
way. This view remained widespread even as
illegal downloading of music went mainstream.
Meanwhile, Apple was enjoying a strong position
in the computer industry but found that it needed
to look beyond its native market in order to
create growth. The companys tiny market share
suggested that sales of its somewhat pricey
products had peaked. As an established brand,
Apple could afford to develop a digital
distribution system and attack the entrenched
players. Startups like Napster could not, and
they were easily thwarted by the record companies.
Interestingly, Apple also had an advantage in
C.E.O. Steve Jobs. Executives of potential XBDs
are often blind to cross-boundary opportunities
because they tend to focus only on their own
marketseven though other industries may offer
huge potential. Burgelman and I call this the
disrupters paradox. Those who are strong enough
to mount an attack on another industry will
rarely be aware of the opportunity to do so.
Jobs, however, had a long involvement with the
media industry through his investment in Pixar
Animation Studios, the creator of Toy Story and
other megahits. This experience most likely
helped him avoid the disrupter's paradox.
Since Apple introduced the iPod and iTunes, it
has sold more than 100 million of the digital
music players and more than 3 billion song
downloads. Profits have soared. Meanwhile, CD
sales continue to fall. In the first six months
of 2007, they dropped 19 percent, according to Nielsen SoundScan.
Digital technology is bound to facilitate other
cross-boundary disruptions. Googles move into
advertising with its AdSense program may prove to
have a revolutionary impact on advertising, not
only because it diverts revenue away from
traditional media, but also because it allows for
increasingly well-targeted context-sensitive ads
in which the commercial message is presented to
readers or audiences at precisely the right time
and closely matches their interests. Whoever has
a good understanding of these possibilities and
can move aggressively might redefine the business
of advertising and, by extension, the media that
carry commercial messages. Its not surprising
that a rule breaker like Google is driving this change.
In my email to Scott, I wrote that transforming
the health-care industry could become "the most
appropriate emerging example" of cross-boundary
disruption. I should have said most important.
The health-care industry ultimately helps define
each of our lives, our childrens well-being, and
the way we spend our golden years. It is huge,
big enough to provide fertile ground for any
would-be XBD. In the U.S., this market is worth
an estimated $2.26 trillion, more than six times
the size of Wal-Mart, which reported revenue of
$349 billion last year. The industry's structure
is inscrutable. Almost anyone who has had to
navigate physician networks, hospital chains, and
giant insurance companies ends up wishing that
somebody would do something to fix health care.
Whats more, the medical systems willingnessand
abilityto change is questionable. It should be
an attractive target for a player from another
industry with the resources and core competencies to attack it.
Wal-Mart may emerge as a superb XBD.
Judging from the comments of the business press
and analysts, G.E. has a problem similar to
Wal-Mart's: Its too big. The company's market
capitalization is $414 billion, and last year's
revenue was $152 billion. Profits that inch up or
down dont seem to move the stock much. Something extraordinary is required.
What could be an opportunity worthy of the
awesome resources held by one of the most
aggressive corporations of our time? What could
make G.E. into an XBD? In my email to Immelt, I
suggested that he focus the company, or part of
it, on developing an electric car.
A successful disrupter of the huge and complex
energy industry has to be big, patient, and
daring. I think G.E. has these qualities.
Carmaker incumbents like General Motors, Ford,
and Chrysler, as well as energy providers like
Exxon Mobil, Royal Dutch Shell, and BP, seem
reluctant to adapt to the needs of our economy,
the environment, and our national security. Its
hard to think of a better fit than G.E.
G.E. Energy, which reported a profit of $3
billion on revenue of $18.8 billion in 2006,
would likely benefit from a shift toward
electric-powered transportation. It could tackle
both an electric car and the construction of the
infrastructure that electric vehicles would
require. The use of electricity in transportation
would allow us to exploit not only oil but also
wind, hydro, nuclear, and photovoltaic energy, as
well as coal and gas. This is a monumental
change, and it is the only way our country can
shed its dependence on foreign sources of energy.
I have no idea how much G.E. should spend on such
an effort or how soon the behemoth could expect
it to be profitable. But I do know that the
needed funds are a match for G.E.s vast balance
sheet. Tesla Motors, a Silicon Valley startup,
says it spent less than $105 million to develop
its line of superfast electric vehicles. It's
exciting that Teslas Roadster accelerates faster
than most Porsches, but does the tiny carmaker
have the resources to take on Detroit and the oil
companies? G.E. does. Plus, the companys name already reflects such a move.
I'm still waiting for Immelt to write back. And
Im wondering if he will. Maybe hes already
doing what he needs to and doesnt want to give
away G.E.s secret. Scott hasnt written back
either. But Wal-Mart did hire Dr. John Agwunobi,
the former assistant secretary for health at the
U.S. Department of Health and Human Services, as
senior V.P. to oversee the companys health-care
effort. And it continues to open more in-store
clinics. Perhaps thats Scotts answer. If so, it's more eloquent than words.
-- -- -- -- -- -- -- -- -- -- -- --
Felix Kramer fkramer@...
Founder California Cars Initiative
-- -- -- -- -- -- -- -- -- -- -- --