Innovation Inc.

Issues 2006 - Since I became CEO of General Electric in 2001, I've tried to get the company more focused on using technology to solve customer problems. The goal is to drive organic growth, as opposed to growth through acquisitions. Take our rail business. We've been in the diesel-locomotive business for about 90 years. We have deep relationships with the major U.S. railroads, and increasingly with foreign railroads, too. Those companies would like to do a better job of computer-aided dispatching, to know when a locomotive has been shut down for a long time and to figure out how they can get it into more productive service.

So it was natural for us to get into rail- information technology. We had zero revenue in those businesses in 2000. Today we have $500 million in revenue and we'll have close to $1 billion in two or three years. And it comes not from golly-gee-whiz innovation, but from a whole new business that came to us from solving traditional customers' problems.

To find these opportunities, we try to understand our customers' businesses really well. This fall we had about 40 health-care leaders at our training center. They were hospital CEOs, pharma CEOs, people from Washington think tanks. We spent a day framing some of the major trends in health care, discussing how technology needs to integrate with them and going through a whole series of exercises on how we can make it happen. That's what we call a "dreaming session." It's not overly sophisticated. It's really just looking beyond the next quarter to find out what's on customers' minds. Some of that data feed into what we call "imagination breakthroughs." They're projects we think can generate $100 million in incremental revenue within a three- to five-year time period. We've got about 100 of them right now. For example, we have a team working to produce hybrid locomotives.

Creating and implementing these kinds of ideas takes a talented work force, and the quality and costs of labor are two of the key things we think about when deciding where to locate our businesses. In technical businesses, the best of all worlds is when you can locate in a place with a low-cost, high-quality work force of both technical and production workers, and where you also have domain expertise. By that I mean it's the area where the most sophisticated users of that technology live.

If you look at our appliance business, we still have jobs in the United States, and we will for the foreseeable future. But many of those jobs could be in China or Mexico because people there are familiar with the products, the technology is not all that new and you have access to great local markets as well as the ability to transport products globally. If you look at health care, the domain experts are in the United States or Western Europe, so in that business we probably wouldn't want to locate our engineering in China or India and be thousands of miles away from them. If you look at cell phones, the Chinese have five times as many as Americans do, so China is a natural place to locate a cell-phone business.

Viewed through that lens, it's unclear how many manufacturers will choose to keep their businesses in the United States. I think it depends upon a few variables. Number one, we need to graduate more engineers because technology is going to determine where things get made, and engineers are a good leading indicator of where technology is going to take place. Right now our engineering graduation rate is abysmal. Number two, the United States has got to do some better thinking about both health care and energy costs. The other variable is government policy as it pertains to nurturing manufacturing, whether it's tax policy, tort reform, a whole series of political things that can be done to encourage manufacturing. I always reflect on the U.K. economy, which has largely gone from a manufacturing economy to a service economy and has flourished, at least vis-a-vis its European brethren. But ultimately, somebody other than me is going to have to define whether keeping manufacturing jobs is important for the United States.

Immelt is chairman and CEO of General Electric.

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