What becomes of the house that Jack built?
Issue Date: March 2000, Posted On: 3/1/2000

This month next year, the icon of late 20th century business leadership retires after 20 years—roughly two normal CEO tenures—as General Electric's CEO. The question everybody is asking is, "Who will succeed Jack Welch?" Arguably, the more interesting question is, "What kind of company should GE become after he leaves?” CE asked four GE watchers to anticipate what the future could hold for GE in a post-Welchian world.

Michael Allen, William E. Rothschild,Adrian J. Slywotzky and David J. Morrison

GE 2025

By Michael Allen

President ,The Michael Allen Co.

Succeeding Jack Welch as the next CEO of General Electric will require a host of skills, not the least of which are the will, the skill, and the energy to craft and realize a vision that surpasses the GE of today.

Anyone contemplating the task of surpassing Jack Welch and becoming the ninth CEO in the 125-year history of the General Electric Co. must be asking, as have their predecessors: "What is the destiny of GE in the next 25 years?"

A linear projection, to 2025, assuming a repeat of the company's growth trend of the last 25 years, produces a GE of awesome proportions. If this pace of performance improvement were to be repeated, the GE of 2025 would have: revenues approaching $1,000 billion and share-owner value ($3 trillion) greater than the GDP of all but two nations today and greater than the market value of the Fortune Top 40 today (excluding GE).

Such dimensions of an enterprise seem hard to comprehend. Nevertheless, we need to go beyond this projection, based as it is on size, profitability and value. We need also to envision the fundamental business structure, managerial systems, and cultural changes that the next 25 years might require. We can safely predict that GE will change in each of these dimensions. And it will evolve in even more astounding and fundamental ways than have occurred in the past.

To envision GE's future requires a projection of what major external socio-economic forces, that will evolve over the next two-and-a-half decades, are most salient in framing the task of leading GE.

WHAT THE FUTURE COULD HOLD FOR GE

GE leaders will need to deal with both the opportunities and threats presented by at least seven long waves of change:

1. Platforms For Post-Industrial Growth. As Baby Boomers in developed post-industrial economies age (from 45 years to 70 years), they will continue to graduate from materialistic to self-actualization needs fueling a bulge in demand for superior physical wellbeing (health, fitness, nourishment), mental and emotional wellbeing, (elder care, therapy, lifestyle products) work and play satisfaction (work conditions, financial success, entertainment, sports, travel), and many more. GE leaders will need to establish strong growth platforms in the businesses that will flourish in meeting the post-industrial societies' needs. For example, GE's business portfolio, while strong today, could be better developed in such fields as health therapy, biotechnology, investment management, communications, information services, and personal wellbeing. GE has beachheads into these arenas, but not central, industry-defining power positions.

2. Economic Development Engineering. Having 'electrified' America, GE's international expansion is driven by the infrastructure and trade development needs of emerging and developing economies. These economies have huge development potential over the next 25 years. For instance, in nations where GDP/capita is still below $2,000, there is a population of 3.5 billion which is projected by the U.N. to grow to over 5.0 billion by 2025. If their average GDP/capita rises from $676 today to $1,349 in 2025, the economic growth 'gap' to be filled would be $4,000 billion. This will be the new `product' economy. Without such development, the gaps between have and have-not economies will worsen—with severe consequences that would probably include economic turmoil, escalating trade wars, and sharply heightened religious and political enmity. GE leaders will need to plan international business development and alliances with a shrewd insight into national and regional political trends. Business investments often take longer to make and to payoff than the tenure of political parties and government economic policies. GE and its peer global multinationals will be powerful forces in creating thriving economies and jobs in the populous underdeveloped nations. GE leaders will need highly tuned political sensitivity and skills.

3. Big Bang of the High Bandwidth Network Economy. We are living in revolutionary business times driven by giant leaps in technology capability to create, comprehend, and communicate information. These advances are driving convulsive change in consumer, business, and work-behavior— requiring businesses to undertake several phases of business redesign, reconfiguration, reinvestment, and transformation. E-business development experienced thus far seems dramatic (e-commerce has grown to $300 billion in five years, and is expected to reach $1.3 trillion by 2003-9.4 percent of total business sales); yet it still resembles the early days of TV, circa 1950, in both technology (valves) and content (soaps). Generations of change are to come--as they did to TV with miniaturization, big flat screens, 24-hour global news channels, cable movies, etc.

Inevitably, other technological revolutions will also occur as global education and economic standards rise and the stresses of population growth require solutions. Quantum change can be expected in the technologies of food production, disease diagnosis, lifestyle pharmaceuticals, laser therapies, environmental protection, learning methods and many more.

GE leaders will need to determine where and in what technological arena the company can be a sustained strategic leader. Business wealth creation has been heavily based on physical or intellectual property rights, defended by litigious muscle. Information and communications power is breaking down these protections. GE leaders will need fresh thinking on these issues.

4. New Measures of Corporate Value. The bases of business valuation and the information to assess it will continue to change, causing fundamental change in corporate structure and governance. Increasingly complex corporations have become virtually impossible to analyze from an investment viewpoint. Historical financial patterns are poor predictors of future potential. Markets are turning to customer-based indicators of future earnings such as customer franchise dynamics, customer lifetime potential, etc., and are using new data sources to analyze them. E-commerce businesses are measured mostly on assessment of future earnings potential as indicated by their customer base and rate of growth, and customers' spending rates. Whether these businesses can serve the demand they create in such a way as to make a sustainable profit remains problematical. Nevertheless, investors and investment managers are gaining in sophistication.

More and more they examine the 'business model' and, as in the case of pharmaceuticals or biotech companies, the technology pipeline. They are putting greater and greater emphasis on indicators of future potential in addition to measures of past results. GE leaders have uniquely succeeded in managing large-scale diversity where many conglomerates failed. This has been crucial to GE's shareowner value. Its performance has been more reliable than 'narrower' single-industry corporations. It cannot be taken for granted that GE's diversity value and power will always be appreciated—when portfolio risk can be managed by a bewildering array of mutual funds.

GE leaders must continue to show why the whole is greater than the sum of the parts—particularly in an investment environment captivated with new economy 'shooting stars,' where the valuation gap between yesterday's businesses and tomorrow's businesses grows wider. GE leaders will need to rebuild and sustain the company's appetite for technology development risk... even in the face of spectacular failure. They might do so, for example, by innovating a new accounting method for taking a technology risk reserve in technologically volatile industries. They might create new technology venture net- work alliances with 'start-up' companies.

5. The Next Stratum of Leadership Capacity. Work complexity and change are already opening talent and learning gaps at most management levels. The complexity of mega-corporations today is already considered unmanageable by many. It has spawned prescriptions such as "Chaos Theory" and analogies with biological ecosystems. Some chief executives, who are already in complexity shock, retreat to a holding company mode or resort to 'break up' strategies. Management theorists and Web disciples alike denounce the ability of centralized, command-and-control managerial styles to handle explosive network complexity. Yet, they admit that "bottom-up control will freeze when options are many"; "without some element of leadership the many will be paralyzed with choices."

GE, always a leader in managerial development, will need to do it again, i.e. create a new managerial leadership system and talent development school. Future GE leaders will re-graduate not just as bigger business leaders or multi-business leaders, but as a new breed of meta-business leaders. These will be the Amazons of the industrial world—businesses that provide a whole customer defined system of which many of today's SBUs are just one product or service. Such meta-businesses provide and manage the entire fleet of an airline; the diagnostic capabilities of a health care group; the utilities of a home; the total vacation or retirement experience.

6. Reversing Talent Hollowing. The last two decades have seen huge displacements and migrations in the U.S. work force. Despite aggressive employment reductions caused by large productivity-driven corporations and industry consolidations, overall employment continues at a very high level and there are acute shortages of skilled middle-level managers and workers. Work mix will continue to change dynamically, requiring quantum leaps in talent development. There will be continued pressure to make better use of the talents and time of women, minorities, and older citizens. Employment contracts will continue to become more flexible and the concept of retirement at 65 is likely to disappear. Charles Handy's predictions in his 1990 book, The Age of Unreason, will continue to come true—reshaping the individual contract with the institution. GE leaders will need to deal with a change in the relationships between people and the large-scale companies or institutions for whom they work. How will GE cope with its relationship with the very able aged between 65 and 90, when these people want to work on interesting problems, and have the capacity to do so? GE leaders will have new opportunities to create an `extended work alliance network.' At the forefront of this wave will be the relationship of very talented individuals with corporations—which already requires reengineering. Companies cannot continue to be 'hollowed out' in terms of brainpower, and be forced to rely on transient careerists or inconstant consultants.

7. Countering Anti-Corporatism. As the pervasiveness and power of communications grow, it is quite probable that there will be further increases in investigative reporting, attack journalism, attack politics, scandal-mongering, exposes—all the apparatus of public political power. Increasingly, these may be turned against what are perceived to be powerful, profitable targets such as mega-corporations. The sheer size of the 2025 GE would have such a large power position in the world's economic activities that one can assume the arguments that led to the anti-trust laws in the earlier period of this century would revive in some form early in the next millennium. Politicians will ask questions like, "should it be permitted to be this powerful?" The reasons may not always be rational, but it's clear that anti-corporate attacks can be prompted by regional, special, and competitive interests, and legal or shareowner activism, and that they will be sophisticated and sometimes ruthless.

A MESSAGE TO THE NEXT CEO OF GE

It is evident from just these waves of change that a very different and quite new GE will emerge over the next 25 years. It will reinvent its management systems to master complexity, create new career magnets for special talent, operate in politically sensitive alliances, and do so in the oft-hostile spotlight of instant networked information and communications.

The magnificent legacy of Jack Welch is that he has proved that GE's large scale diversity and complexity can be turned to advantage in business growth, global reach, profitability, management capacity, shareowner value, and social responsibility. He did so in a period that other diverse enterprises like ITT or Westinghouse did not survive. Like his predecessors, Jack set a high standard of forward-looking actions to create a constantly new General Electric.

In doing so, he has created a platform on which you, his successor, will build. You have the ability to restructure a portfolio of businesses and redefine the meta-market of each business to expand its growth potential. You are not fazed by the challenges of rapidly changing technologies, by the new business models of cyberspace, nor by the new rules of the network economy. You have the political acumen and skill to be an ally of governments and commercial partners around the world. You can create a 'new deal' for a changing, individualized work culture.

In short, you can create the force to cause GE to surpass itself.

Michael Allen is president of The Michael Allen Co., consultants in strategic growth management based in Westport, CT. He was vice president of Corporate Strategy at GE from 1972 to 1979.



Succeeding a legend
By William E. Rothschild ,CEO
Rothschild Strategies Unlimited, LLC

Very few business Leaders are considered to be legends-------Jack Welch is clearly one of them.

On April 2, 2001, the oldest company on the Dow Jones, General Electric, will elect a new CEO. This new CEO will have no small challenge: succeeding a business legend. There are several candidates that we are all publicly aware of. I won't speculate on who will replace Welch, but rather will focus on what the new CEO should do to become a legend in his own right. Jack himself has made it clear that the new CEO should have a minimum of 15 years in office, which in today's business world is an eternity and why Jack's replacement will need to establish his own mark as a legend.

To become a legend the new CEO should ask the following questions.
How and why did Jack Welch become a legend.
Is the current GE business portfolio sufficient to replicate the Welch track record?
What are my strategic alternatives to make me a long-term winner?

HOW AND WHY DID JACK WELCH BECOME A LEGEND?

There are four characteristics of Jack Welch that, I believe have contributed to his remarkable success. Jack is 1) a skillful, intuitive portfolio strategist; 2) willing to change the rules if required; 3) highly competitive; and 4) a great communicator and motivator.

1) The skill intuitive portfolio strategist. Jack knows what he likes and dislikes. With focus and careful analysis, he is willing to bet on his instincts. He has focused on what he believed were the winners and eliminated the pieces that didn't fit his strategy, but did so with an excellent sense of timing and the recognition that business or product lines that didn't fit GE were potential strategic fits with other companies.

He has exhibited the same sense of value and timing in making acquisitions. In the past few years he has made strategic acquisitions in Japan and Europe at very attractive prices. Welch acquired RCA at a bargain price, merged its market leading consumer electronics business with a losing GE brand and then traded it to Thompson for Medical Systems properties and cash. He also spun off Utah International at a profit and sold the Aerospace and Defense businesses and has made money on the Martin Lockheed stock.


2) Willing to change the rules as needed. Jack Welch's predecessors were unwilling to sell a business unit with the GE brand name for fear that the brand would be negatively impacted. Jack changed that thinking, carefully selling the GE brand with both the small appliance and consumer electronics businesses. He took advantage of the huge profits made from the GE pension programs to supplement company earnings, as well as to use this know-how to manage other company pension programs.

3) Jack, the competitor. As with his golf game, Jack in business sought to be the leader in every market. His vision was simply: Be #1 or #2 or don't play. He emphasized the need to be "different" and create sustainable long-term competitive strengths.

He used GE's financial strengths and skills to gain dominant positions in many of its capital goods markets. GE has become the largest owner and leaser of aircraft, thereby pulling through aircraft engines and services. It did the same in the locomotive, turbine, and medical systems businesses.

Welch increased GE's emphasis on selling of services and solutions, rather than just products. Services have become a major contributor to earnings and even permitted the company to sustain positions in stagnant markets, such as Nuclear and Steam generation.

4) A great communicator and motivator. An effective communications strategy has been critical to energizing the GE troops. Numerous books and articles have been written about Jack's management style, and frequent and recognized speaking engagements at MBA schools have spread his success to the academic community and to their students.

IS THE CURRENT GE BUSINESS PORTFOLIO SUFFICIENT TO REPLICATE THE WELCH TRACK RECORD?

The new CEO must accept that GE is a strategically led portfolio company with a mix of businesses in different phases of the life cycle, which enables GE to deliver consistent earnings. This is the current "macro" portfolio of the company.

Jack Welch has had several favorite businesses during his reign. The first is financial services, which he has used as both a means (to pull through other GE products and services) and an end (becoming a major owner and leaser of capital goods equipment). Aircraft Engines and Medical Systems (included in Technical) have been other favorites and he has made a significant number of acquisitions to enhance the position of all three. The other businesses have been able to create strong positions and contribute to the company's earnings and cash flow.

There are other issues to be addressed, such as, what are the impact of the changes financial services regulations and the creation of enormous financial service companies going to have on GECS? What is the risk inherent in the "own/ lease/ provide equipment and service" strategy? Can the mature businesses continue to be the earnings and cash generators or have they reached a point where new technological and innovative strategies will be required?

The portfolio has done a remarkable job, but it will require new ideas and innovations to remain strong. The following, among others, is a list of what GE owns and leases either by itself or with partners:
A fleet of 850 owned and managed aircraft;
950,000 cars and trucks under lease and service management;
Fleet of over 1,100,000 TEU;
13 Communications satellites;
186,000 railcars;
Over 100 modular buildings and facilities.

WHAT ARE MY STRATEGIC ALTERNATIVES TO MAKE ME A LONG-TERM WINNER?

Continue to do what Jack did....

This is going to prove very difficult. It would require that he be the intuitive portfolio leader, flexible, highly competitive, and a good motivator and communicator. Obviously, these are positive characteristics, but rarely has a successor been able to replicate the legend. Plus, the current GE portfolio is vulnerable and does not appear to have the ability to produce the same results for next decade and beyond.
Re-institute the Technological and Market Innovation of GE's past.

Welch did not become a legend because of any notable technological break-throughs made by GE under his command. But there have been innovations in financing, services and applications, which stimulated growth.

The new CEO may wish to review the strategic history of GE and determine if past innovations could help. In 1963, GE was faced with the need to find new growth areas. It commissioned the "Growth Council" and challenged it to find opportunities that were growing faster than the GNP and built on GE strengths. The council came up with 10 areas (see below).

Many of these recommendations were the foundation of significant GE businesses. Financial services, polymer chemicals, aircraft engines, and medical systems were great successes. For GE others opportunities such as computers, community development, and education failed, but did prove to be major growth industries. One of the major problems GE had was that it tried all of them. It was not selective and it assumed that managers could manage anything.

The new CEO might wish to commission a similar council comprised of the best and brightest inside and outside the company. This council could identify areas that build on GE's significant financial, services, and applications strengths and identify acquisitions or partnerships to enhance its technological and marketing skills.

The major issue is how much risk does the new CEO want to take? GE has not truly succeeded in more than 60 percent of their new ventures, but their batting average is better than their competitors.

Recognize that GE might fare better as more than one firm.

In the past decade many companies have decided to split themselves up. AT&T has done it twice: once to comply with the court rulings and once to create shareholder value and focus. ITT split because its business portfolio was not strong enough.

Jack Welch has studied his options and strongly rejects splitting GE up. When asked by Forbes what he though if his successor splits up GE, Jack was quote as saying, "It means I've picked the wrong guy—I haven't done my job well." The company position is that GE is now "boundaryless" and that it gains from exchanging ideas across businesses.

This may all be true, but it's still an option the new CEO must consider. He should step back and be objective about what is best for the company in the next two decades and not what has worked in the past. The process should be evolutionary, not revolutionary. Jack Welch took three years before he started his evolutionary process. Making timely decisions is what makes the legend during the evolutionary process.

The first step in this evolution is to create at least three companies and establish tracking stocks:

1 Traditional GE. This would include the electrical, electro-mechanical, and chemical based components of the company. Lighting, power systems, aircraft engines, and plastics would all be part of this company. Its mission would to be to continue to grow profitable sales and maintain strong positions, using the skills and resources of GE Capital as required. In essence, this is the continuation of the current strategies. There may be, however, some pruning required, with Major Appliances as a disposition candidate.

2 GE Financial Services. In essence, it is now a separate company and behaves like one. This company should aggressively but selectively continue to gain position and be the financial arm of the other components, which would enable GE to adapt to the dynamic changes in the industry. It may require the acquisition of or merger with a major financial services company. GE Technology. This is the major change in the portfolio and Welch strategy. Jack elected not to become a major player in the information and communications, biotechnology, and new IT-based markets. GE has made many acquisitions in the medical systems and communications areas, but nothing really dramatic; most have been either line or market extensions. It has not really decided how to use NBC as a platform for the revolutions taking place in the information, communications, and entertainment arenas. The new CEO must take decisive and major steps in these markets before it's too late. New ventures will be required, as will investing in ventures, creating new products and services and so on, all of which GE did before the Welch era.

By creating these three companies the new CEO would be able to focus each one and be positioned to participant in new markets. The tracking stocks are likely to increase overall stockholder value and reduce the need for debt. But most importantly, it would enable the company to clarify what it really is and develop the most appropriate management and teams to meet the unique needs of the three companies. Integration and communications need not suffer if they are managed.
AS WELCH MIGHT SAY: SO WHAT?

The old adage, "if it ain't broke, don't fix it," seems to be the major reason that the multi-GE approach is rejected. Jack Welch, however, didn't live by these rules. He was proactive in taking actions before they became problems. The new CEO must do the same. He must be creative and not just try to emulate Jack. He will need Jack Welch's intuitively strategic, competitive communications and motivational skills, but he must use these skills to create a truly new GE.

Bill Rothschild is CEO of Rothschild Strategies Unlimited, LLC, a strategic consulting and software firm. He was the senior corporate strategist at GE until 1984. This article is based on Bill's long-term study of Jack Welch and General Electric and not on any internal information.



GE in the Digital economy

By Adrian J. Slywotzky and David J. Morrison

Mercer Management Consulting

Over the past two decades, GE as always led the pack in strategy and in execution. But the digital economy poses a completely differed challenge for the person who succeeds Jack Welch.

With Jack Welch retiring as CEO in April, 2001, GE faces the challenge of replacing one of the grandmasters of strategy. While the company's management skills and depth of talent are legendary, Welch's shoes will be hard to fill. His successor will have to address one critical strategic issue: How will GE play to win in the digital economy?

Welch made bureaucracy-prone GE the most quick thinking and entrepreneurial company of its size, and he changed the way the game is played. In The Profit Zone, we described how Welch understood how his customers' priorities and economics were changing and the implications of these changes for strategy:
When Welch took the helm in 1981, he saw that market share leadership, more than scale economies, was the way to increase profit per product sold. So Welch raised the bar for operating units to be No. 1 or No. 2 in their business or simply get out.
When market share no longer guaranteed success, Welch initiated Work-Out—literally, take unnecessary work out of the process—anticipating the reengineering wave by nearly half a decade. He insisted that the No. 1 market share position be translated to a No. 1 productivity position in every one of GE's businesses.
When Welch recognized that productivity leadership was no longer enough because profit was migrating downstream from making a product to offering product-based solutions and services, Welch led the way again.

Typically, GE has been way ahead of the curve whenever the source of competitive advantage was going to shift. This is why it has captured a disproportionate share of its industries' profit and shareholder value. But is GE leading or lagging in the next discontinuous change, the advent of digital business design?

Based on GE's demonstrated capacity for radical change, the company appears more ready than most traditional, incumbent firms to lead the transition from a conventional to a digital business design. Indeed, GE has already developed numerous Internet initiatives. Like all companies, GE expects e-commerce to lower procurement costs and its 28 business units are moving procurement online, some even installing Internet kiosks on factory floors for line workers. GE Capital Services sells mortgages online and has established platforms to pursue the small business market for financial services. NBC is rapidly trying to build its brand online; it was the first GE business to have its own Internet investments, and now holds a $600 million portfolio of about 35 Web companies including Snap.com and iVillage.

ATOMS OR BITS

Making the transition to a genuine digital business design, however, represents a bigger shift in mindset, and bigger potential benefits for value growth, than did any of those shifts that spurred Welch's previous reinventions. It will radically change the way GE relates to its customers, manages its finances, and recruits top talent. Given the company's stature as a pacesetter in strategy and leadership development, GE's response to the Internet could have even broader implications, by serving as a model for other incumbents.

The concept of going digital derives from the insight by Nicholas Negroponte of MIT that the fundamental distinction in the new economy is between atoms (whether paper and pencil, machinery, or storefronts) and bits (email, e-commerce, or satellite tracking). The Internet is not the only technology enabling the digital revolution, but its breadth and open architecture make it the most important.

Thanks to the Internet, customers will soon be able to describe exactly what they want, and suppliers will be able to deliver the desired product or service without compromise or delay. The innovation that catalyzes this shift is what we call the Choiceboard system—an interactive, online system that allows individual customers to design their own products by choosing from a dynamic menu of attributes, components, prices, and delivery options. The customer's selections send signals to the supplier that set in motion the wheels of procurement, assembly, and delivery.

The outcome of a choiceboard is that it allows a complete reinvention of the enterprise from a classic make/finance/sell model to one of sell/customer financing/make the product. This new approach requires significantly changing internal business processes in order to incorporate customer information into enterprise resource planning systems, inventory systems, supply chain systems, and accounting systems.

Choiceboards are already in use in some industries. Customers can design their own computers with Dell's online configurator, create their own dolls with Mattel's My Design Barbie, assemble their own investment portfolios with Schwab's mutual-fund evaluator, and design their own golf clubs with Chipshot.com's PerfectFit system. By the end of this decade, we anticipate that choiceboards will be involved in at least one-third of U.S. commercial activity.

Because choiceboards provide unparalleled information on customer behavior, smart suppliers can more rapidly adapt their offering to the customer's changing needs. In the new economy, the sturdiest barrier to competition is customer allegiance—building the strongest relationships with the most profitable customers. When backed up with smart supply chain management, the choiceboard secures very strong customer loyalty. Thus it is an emerging point of "strategic control," serving as a way to protect profits from migrating to competitors and even (through lower prices) to customers themselves.

As we're in the early stages of the choiceboard revolution, first movers tend to gain enormous advantages. Successful choiceboards exert a strong pull over existing customers, and draw in each new wave of digital-ready buyers. They also attract key suppliers, who are hungry for accurate, timely information about demand. One big question for GE, then, is: Will it control the choiceboards in its industries?

Besides providing real-time information on customer behavior, a digital business design offers the potential for order-of-magnitude improvements in capital efficiency, cost, and response time. It can also profoundly impact the way companies can finance themselves. For example, Dell's direct-to-consumer PC model via the Internet allows it to receive credit card payment from customers immediately, yet the firm has a week before it has to pay suppliers. Dell can operate with negative working capital (current liabilities are greater than current assets), unheard of for a manufacturer. Customers actually finance the business as it grows.

In addition, in an environment where top talent is scarce, those companies that have digitized their recruiting efforts are establishing several advantages in the talent market—reducing the cost of landing great people, and raising the odds of a great fit between the recruit and the job. Cisco Systems, the computer networking company based in Silicon Valley, has been a pioneer of digital recruiting. Cisco aims to hire the top sliver of engineering and business talent, so it recruits almost exclusively through the Internet, exploiting the technology-based affinities of likely prospects. Cisco's well-designed, regularly improved recruiting Web site includes a "profiler" tool that allows prospects to submit personal information online. The outcome is a specialized resume that Cisco recruiters can match to job openings. Cisco also posts recruitment ads on Web sites where its prospects are most likely to hang out, such as The Dilbert Zone. Digital recruiting of the right people has helped fuel Cisco's phenomenal growth, while the company has kept its turnover rate far below the industry average.

DESTROYYOURBUSINESS.COM

GE is ahead of most Fortune 500 firms in its digital transition. But in the digital economy, the relevant benchmarks are different. Here, the benchmarks are set by players outside a company's own industry. Compared to digital pioneers such as Dell, Cisco, Microsoft, Amazon, and Schwab, is GE leading or lagging?

GE's digital efforts to date have, for the most part, focused on improvements in procurement, internal communications, and other operational areas. They may not yet be strategic, in the sense of fundamentally redefining the relationship with the customer. And with venture capital abundant, GE faces the risk that competitors, whether spinoffs of established firms or startups on the edge of GE's radar screen, will beat GE to the next profit zones in the digital economy.

Jack Welch has acknowledged as much with his "destroyyourbusiness.com" initiative, which is charged with reevaluating all of GE's business endeavors in the context of the Internet. This venture indicates that GE may be willing to cannibalize its own businesses rather than lose to a competitor. Welch hired new e-commerce executives into each unit, and staffed the initiative with young people who are not constrained by a perspective on how the business has operated historically.

There's no doubt that Welch understands the urgency of the digital revolution. Going digital represents a bigger transition than any of the past reinventions. There is a digital dark side, a pathway strewn with numerous traps on the way to digital advantage. The track record of using technology (such as enterprise resource planning) to make money is disastrous. In the digital world, the mistakes—not understanding the customer, digitizing the wrong process, digitizing the wrong business model—will be greater. GE's skills in creating innovative business designs will be tested as never before, as it will have to build hybrid "clicks-and-mortar" businesses that deftly offer the customer the right blend of physical and digital capabilities.

Perhaps the biggest bottleneck of all for GE is the rapid organizational evolution required. The Internet economy changes the rules for human capital strategy. Going digital changes communication, requiring internal marketing that is even more sophisticated than external marketing. Going digital changes compensation, with most new-economy firms relying heavily on equity stakes to reward employees.

Going digital also changes the organization, with an emphasis on speed and relentless iteration and adaptation. GE's myriad operations will have to behave more like risk-taking startups. That raises the issue of whether GE has the talent needed for digital business design innovation? As Welch worried recently in an interview with Fortune, "Do we have the right gene pool? Do people who join big companies want to break glass?"

IT'S ALL ABOUT THE BUSINESS DESIGN

The point of going digital is not for GE to put up more Web sites or wire the whole enterprise. It's not about moving more product or tweaking the efficiency of current processes. It's about using technology to enable fundamental changes in GE's business design. The main trap to avoid is digitizing business designs that are—or are about to become—obsolete. As Michael Dell has remarked: "Let's be clear about one thing. If you take a business that is a bad business and put it online, it's still a bad business; it's just become an online, bad business."

To steer clear of wasteful forays into technology, or digitizing yesterday's models, Welch and his successor need to evaluate the health of each of GE's current business units. They will have to determine the appropriate sequencing of digital moves, so they can match investment with the highest potential returns. To do so, they should answer these questions:
What are the most important business issues facing each unit?
What are the smartest design choices that would enable GE to address those issues?
Which of those activities are in essence physical atoms? Which are electronic bits?
Which of the information-intensive bits are used to manage, in real time, the value proposition to the customer?
How can GE get that number to 100 percent?
Is GE's organization capable of getting there?

Going digital is the perfect start-of-millennium challenge for GE's next CEO. The design points for the business have changed, and therefore the design points for the successor's skills must also change. Even if Welch had stayed on another decade, he would have had to hire a successor: a reinvented, digital Jack Welch.

Adrian J Slywotzky and David J. Morrison are vice presidents of Mercer Management Consulting based in Boston. Their most recent book is Profit Patterns (Times Business/Random House, 1999).