Chapter 1 Respect the Past, Invent the Future: Creating the Modern Company When I first began working with GE six years ago, I sat down for a conversation with CEO Jeff Immelt. Something he said to me that day has stayed with me ever since: "Nobody wants to work at an old-fashioned company. Nobody wants to buy products from an old-fashioned company. And nobody wants to invest in an old-fashioned company." What followed was an in-depth discussion of what makes a company truly modern. How do you know it when you see it? I asked him to imagine the following: if I selected an employee of the company at random, from any level or function or region, and they had an absolutely brilliant idea that would unlock a dramatic new source of growth for the company, how would they get it implemented? Does the company have an automatic process for testing a new idea, to see if it is actually any good? And does the company have the management tools necessary to scale this idea up to maximum impact, even if it doesn''t align with any of the company''s current lines of business? That''s what a modern company does: harnesses the creativity and talent of every single one of its employees. Jeff answered me directly: "That''s what your next book should be about." The Marketplace of Uncertainty I think most business leaders recognize that the everyday challenges of executing their core business leave little time and energy for harnessing and testing new ideas.

This stands to reason, as today''s companies are operating in an environment quite different from their predecessors. I''ve had the privilege of meeting thousands of managers around the world in the past few years. Over and over again, I see their incredible anxiety about the unpredictability of the world they live in. The most common concerns I hear: 1. Globalization and the rise of new global competitors. 2. "Software eating the world" and the way automation and IT seem to destroy the competitive "moats" companies have been able to set up around their products and services in the past. 3.

The increasing speed of technological change and consumer preference. 4. The ridiculous number of new potential high-growth startups that are entering every industry--even if most of them flame out. And those are just examples of the external sources of uncertainty that face today''s managers. Increasingly, today''s managers are also under pressure to create more uncertainty themselves: by launching new innovative products, seeking new sources of growth, or entering new markets. It''s important to see this as the change it is. For most of the twentieth century, growth in most industries was constrained by capacity. It was considered completely obvious what a company would do if it had extra capacity: make more stuff and then sell it.

"New products" meant mostly variations of what they already made. "New growth" usually meant putting out more advertising to reach new audiences with existing products. The bases for competition were primarily price, quality, variety, and distribution. Barriers to entry were high, and if competitors did come on the scene, they entered and grew relatively slowly--by today''s standards. Today, global communications means that new products can be conceived and built anywhere, and customers can discover them at an unprecedented pace. This setup flips Karl Marx''s old dictum on its head; what he called the means of production can now be rented. Entire global supply chains can be borrowed at little more than the marginal cost of the underlying products they produce. This dramatically lowers the initial capital costs required to try something new.

The Management Portfolio In addition, he basis of competition is shifting. Today''s consumers have more choices and are more demanding. Technology trends reward businesses who have the broadest reach with near-monopoly type power. The basis of competition is often design, brand, business model, or technology platform. This is the context in which a modern company operates. Plenty of companies still make commodity products. But more often, they require new sources of growth that can only come from innovation. This has very real effects for what I call the management portfolio of a company.

Incremental improvements to existing products or new variations thereof are relatively predictable investments, as are process improvements to increase quality and margins. The tools of traditional management--from forecasting to typical performance objectives--work fine in these situations. But for other parts of the management portfolio, where leaps of innovation are being attempted, the traditional management tools don''t fit. Yet most companies don''t have anything to replace them with--yet. Why Traditional Management Tools Struggle with Uncertainty Some years ago, I picked up one of the classics of the management genre, Alfred Sloan''s My Years with General Motors (1963). In it, he recounts the moment in 1921 that GM almost ran out of cash. The cause? Not some devastating catastrophe or embezzlement scandal. No, they simply dramatically overbought their inventory supplies, to the tune of several hundred million dollars (in 1920s dollars!), unaware that the general economy was slumping that year and demand would prove to be soft in 1920-21.

After saving the company through emergency measures, Sloan undertook a several-years-long journey to find a new management principle that could prevent this kind of problem from recurring. Eventually he made a breakthrough discovery, which he called "The Key to Co-ordinated Control of Decentralized Operations." The foundation of this system was the rigorous production of estimates, for each divisional manager, of the precise number of cars that GM should sell in an "ideal" year. Using these estimates in combination with a number of internal targets and external macroeconomic factors, the company would produce a forecast of how many cars each division was responsible for selling. Managers that exceeded this total were promoted, those that fell short were not. Once put into place, the system worked to prevent the kind of miscalculation and waste of resources that had previously occurred in the company. The structure that Alfred Sloan pioneered became the basis for all of twentieth-century general management. You can''t run a multi-product, multi-division, multi-national company and its attendant global supply chains without it.

It is one of the true revolutionary ideas of the past one hundred years and is still widely in use today. Everyone knows the drill: beat your forecast, your stock goes up, you get promoted. Miss it and watch out. But when I first read this story, what I thought was: You''re telling me that. once upon a time. people made forecasts. and they came true? And, not only that, the forecasts were so accurate that they could be used as a fair system for deciding who gets promoted and who doesn''t? As an entrepreneur, I had never experienced or heard of such a thing. The startups I had always worked on and got to know in Silicon Valley couldn''t make accurate forecasts because they had no operating history at all.

Because their product was unknown, their market was unknown--and in some cases, even the functionality of the technology itself was unknown--accurate forecasting was entirely impossible. Nevertheless, startups make forecasts, too--just not accurate ones. Early in my career, I knew why I had always made a forecast for my businesses: you can''t raise money for a startup without one. I assumed it was a kind of kabuki ritual where entrepreneurs prove to investors how tough they are by showing how much spreadsheet pain they can endure. It was a fantasy exercise driven by our desire to show an outcome remotely plausible for an idea that was--usually, at that point--totally unproven. Eventually, though, I found out that some investors actually believed the forecast. They would even try to use it as a tool of accountability. If a startup failed to match the numbers in the original business plan, the investors would take this as a sign of poor execution.

As an entrepreneur, I found this baffling. Didn''t they know that those numbers were entirely made up? Later in my career, I befriended more managers in traditional corporate jobs who were trying to drive innovation. The more corporate innovators I met, the more I heard about how much faith their bosses put in forecasts as a tool for holding people ­accountable--even senior managers who (I thought) surely would know better. The "fantasy plan" of the original pitch is often far too optimistic to be used as a real forecast. But managers, lacking any other system to use, need something to hold on to. Without an alternative, they cling to the forecast--even if it''s "just made up." You''ve probably started to sense the problem here: an older system of forecasting, designed in a very different time and for a very different context, is still being used in situations where it doesn''t work. Sometimes, failure to hit the forecast means a team executed poorly.

But sometimes it means the forecast itself was a fantasy. How can we tell the difference? How Do We Deal with Failure? No doubt you''ve heard of Six Sigma, one of the most famous corporate transformations in management history--it''s just one of the systems Sloan''s work spawned. Introduced to GE in 1995 by CE.