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How to Succeed at the Right Kind of Failure

August 7, 2017

Just four days after 43-year-old Jeff Immelt became CEO of GE, 19 terrorists hijacked four commercial jets and launched a devastating attack on the United States. In the days and weeks that followed, political and economic turmoil spread on a global scale.

The post-9/11 era had begun.

It was a tough start for a newly minted CEO. One year later, after GE failed to reach its earnings goals and saw its stock plummet nearly 40 percent, Immelt knew the company needed a new strategy – one that would require risk and reinvention to weather the storms.

“Nobody likes being out at sea with no idea where they are,” says Dr. Matthew Semadeni, professor of strategy at the W. P. Carey School of Business at Arizona State University. “A leader can focus their organization, give them a sense of where they are and the process to get where they want to go. Even if it ultimately doesn’t work, this helps navigate a lot of uncertainty.”

 “Nobody likes being out at sea with no idea where they are. A leader can focus their organization.” Click to tweet

Semadeni, who is teaching a one-day Thunderbird School of Global Management Executive Education course, Succeeding through Failure, on September 5, says what Immelt did next is a case study on embracing the right kind of failure to achieve success.

Immelt challenged GE’s business leaders to identify “growth platforms” – opportunities in industries that could uniquely benefit from GE’s capabilities – and generate an extra $1 billion in operating profit in the coming years. “And then he put them in a pressure cooker,” Semadeni says. “He knew the company could atrophy unless he forced employees to embrace uncertainty, to compete – and even fail.”

Changing the culture

To drive that competition, Immelt set out to develop a culture where failure was okay – but not just any type of failure. “Fast failure,” Semadeni says. “If you don’t create anxiety around failure, you don’t get the outcome you’re trying to drive.”

Immelt took aim at GE’s evaluation and rewards process, ensuring it was no longer tied to flawless execution of short-term budget objectives. Instead, the core processes that for years had driven management reviews were recalibrated to drive a growth agenda.

Immelt also assembled a team of GE “growth leaders” willing to take risks to build new businesses for GE. And he was ready to put real money into those risks. Not surprisingly, the growth leaders had to overcome a natural resistance to failure.

“When there’s a failure, it’s like a death in the family – nobody wants to talk about it – and that’s massively unproductive.” Click to tweet

It’s a resistance most of us share, Semadeni says, no matter our industry or position. “All the incentive structures and reward structures out there are aligned with success,” he says. “And that puts an implicit bias toward success. When there’s a failure, it’s like a death in the family – nobody wants to talk about it – and that’s massively unproductive.”

Semadeni points to his own field as an example: “As I’m trying to publish research, I don’t get a pat on the back for getting a rejection from an academic journal. I get rewarded for success,” he says. “But that failure can be instrumental in reshaping a manuscript in a way that then moves it forward.”

For an organization to truly leverage failures into success, the company culture must go beyond mere tolerance of failure – it must accept and embrace it.

“Many entrepreneurs wear failure like a badge of honor,” he says. “They talk about their failures with almost as much pride as their successes because they learned from them and were ultimately successful. You’ll hear them say, ‘I failed – I bankrupted three companies before I became a billionaire.’”

‘Imagination Breakthroughs’

As part of the culture change at GE, Immelt challenged marketing directors across the company’s business sectors to propose “Imagination Breakthroughs,” or IBs, to encourage growth. These would be game-changing projects and Immelt would personally monitor their progress.

Among the 35 green-lighted proposals was the Evolution Locomotive. Evo, as it was known, had been languishing due to technical and marketing challenges. A rail-industry powerhouse, GE had in recent years logged a major failure with its powerful AC6000 locomotive. A misreading of the market led to massive underselling of the product, which also suffered performance and reliability flaws.

GE needed to regain its rail customers’ trust. And Evo offered the promise of a revolutionary engine that strengthened the technical control system while shrinking fuel consumption and emissions. Tighter emissions regulations would kick in by 2005, providing a timely marketing opportunity.

“Some entrepreneurs wear failures like a badge of honor, because they learned from them and were ultimately successful.” Click to tweet

Despite the financial risk, in 2002 GE invested $100 million in Evo, moving it to the IB front burner. Immelt challenged pricing assumptions, pushing for a premium price rather than a price cut to boost advance sales. The marketing team reworked Evo’s story to focus on long-term savings, energy efficiency, and performance improvements. The team’s analysis predicted that rising oil prices, increased rail traffic, and stricter emission standards would boost interest in Evo and validate its premium price.

GE’s predictions turned out to be correct on all fronts: oil prices, rail traffic, and emission regulations. By the start of 2005, Evo’s entire production for the year was sold out and on back order well into 2006. GE outsold its competition three to one in the U.S. market that year.

Prediction success

GE’s initial struggles in the post-9/11 economy had driven the company to adopt a culture that learned from failure and embraced risk-taking. To reduce the frequency of failure, that risk-taking was accompanied by thorough, vetted predicting.

GE’s prediction success with Evo stands out, says Semadeni, because “companies and individuals often do a horrible job at prediction. We all do, because of some very natural biases. We believe we can control things, but we can’t.”

“We’re susceptible to emotional and social biases that make us say things like ‘Well, if Goldman Sachs is selling CDOs (collateralized debt obligations), then it’s got to be good,’” he says. “And so we have a tendency to take cognitive shortcuts that lead to errors. If we actually sat down and worked through it better, we could mitigate a lot of failure.”

Immelt saw opportunity in that process, and as a result, GE gained knowledge from failure, improved its systems and achieved success, Semadeni says. “To orchestrate that entire process – both the successes and failures – that’s a leader’s job.”

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