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Intel's Andy Grove: GE Should Build Electric Cars

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  • Felix Kramer
    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
    Message 1 of 1 , Dec 1, 2007
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      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
      Think Disruptive
      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
      don’t 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, I’ve 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
      Apple’s 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 company’s 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 Christensen’s 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. I’m
      talking about established giants seeking to
      transform markets other than their own. It's
      Apple jumping into music. It’s 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 percent—from 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 company’s 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
      markets—even though other industries may offer
      huge potential. Burgelman and I call this the
      disrupter’s 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. Google’s 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. It’s 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 children’s 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.
      What’s more, the medical system’s willingness—and
      ability—to 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: It’s too big. The company's market
      capitalization is $414 billion, and last year's
      revenue was $152 billion. Profits that inch up or
      down don’t 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. It’s
      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 Tesla’s 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 company’s name already reflects such a move.

      I'm still waiting for Immelt to write back. And
      I’m wondering if he will. Maybe he’s already
      doing what he needs to and doesn’t want to give
      away G.E.’s secret. Scott hasn’t 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 company’s health-care
      effort. And it continues to open more in-store
      clinics. Perhaps that’s Scott’s answer. If so, it's more eloquent than words.

      -- -- -- -- -- -- -- -- -- -- -- --
      Felix Kramer fkramer@...
      Founder California Cars Initiative
      -- -- -- -- -- -- -- -- -- -- -- --
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