One of the Most Important Lessons on Innovation for Every CEO

When you think of today's most valuable companies the ones that come to mind are Apple, Amazon, Google, Microsoft, and Facebook. However, just 20 years ago the company that you'd have instantly thought of was GE.

Today GE's market cap is a paltry 70 Billion, about one ninth of its value at the company's apex.

Understanding what happened to GE requires a much more sophisticated analysis than I could ever present here. However, there are certain aspects of GE's rise and fall that have long fascinated me and which have important lesson to teach all CEOs. And most interesting among those is how GE balanced its obsession with Six Sigma with innovation. 

Six Sigma

If you weren't around in the 1990s to experience it, the best way to describe the Six Sigma phenomenon that swept through industry was as a religion.

The term Six Sigma referred to a statistical measure of quality that was achieved when an error or defect rate dropped to 3.4 occurrences per million. While the math is straight-forward, actually defining what constitutes a single process, product, or defect isn't. Which is why there was an entire priesthood of experts that made a living off of Six Sigma. Boasting what was termed a green or black belt in Six Sigma made you a high priest worthy of respect and adulation from your peers.

Six Sigma originated well before GE's adoption of it in Edward Deming's work in post WWII Japan. It was first institutionalized (and named) at Motorola. But it was undoubtedly at GE where it achieved superstar popularity under the support of GE's iconic CEO, Jack Welch. Welch invested heavily in Six Sigma. By some estimates upwards of one billion dollars. He even tied bonuses and stock options for GE's employees and managers to Six Sigma qualifications.

You can't argue with the impact Six Sigma had on GE's success in the 1990s. 

The Rise and Fall

However, GE's decline has renewed one of the perennial debates surrounding innovation--the tug of war between operational excellence and innovation, which are often positioned as diametric opposing forces in an organization. Operational excellence is Six Sigma, a rigid and disciplined approach to insuring that quality and variability fall within strict parameters. Disruptive innovation is, well, the disruptor that undermines consistency and quality. 

The narrative that's evolved is that GE spent so much time focusing on Six Sigma that they lost the ability to innovate. I want to challenge that because it ignores what I believe to be a critical responsibility of leadership in all companies, not just the F500.

I can tell you from first hand experience, in countless organizations, that trying to pick between operational excellence and innovation is wasted effort. Too many people make it a religious battle between the two. While I agree that there is definitely tension between these schools of thought, the key to success isn't found in one religion or the other. In fact what most people miss is that the most successful organizations have leadership that understands the need to create a way for the two to not only coexist but to support each other.

For example, much of GE's amazing growth, under Welch, came from its ability to support an insatiable appetite to acquire innovative businesses while maintaining extraordinary quality. While GE was innovating through acquisitions it was also propping up the enormous complexity of its organization through Six Sigma. Not only were innovation and operational excellence coexisting but they were symbiotic, feeding off of each other.

The conventional wisdom is that the banking crisis, which hit GE's largest business unit, financial services, ultimately spooked analysts to what was perceived as the inherent risk of GE's overly complex business model. That pressure from investors lead Welch's successor, Jeff Immelt, to simplify and sell off large pieces of GE such as its plastics, media, and appliances businesses in order to streamline and simplify. Six Sigma may well have run its course, but shunning Six Sigma, as Immelt did explicitly, did not somehow spur innovation. The two are not a zero-sum proposition.

Balancing Act

Innovation in large companies isn't difficult just because these companies focus on operational excellence, it's hard because the complexity of the organization rejects anything that is remotely disruptive and introduces uncertainty. 

The only thing, in my experience, that can change that is enormous commitment from the CEO to counterbalance the organization's need to avoid uncertainty with an ability to innovate. That was Welch's core competency, the ability to marry these two otherwise opposing forces. I'd suggest that the same is true of all great leaders of companies that are able to sustain innovation. When Welch left that balance left with him.

As for Six Sigma, it eventually fell out of favor at GE, as it did across the board. Today you hear much more talk about the value of failing fast and disrupting business models. What does that mean about today's most valuable companies? Is there a lesson to learn in observing GE's fate?