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The question of the moment seems to be: Can dinosaurs dance? Can big corporations innovate fast enough to keep up with start-ups such as Amazon.com or eBay, or will they fade into extinction? We figured we’d try to answer that question by going straight to the source: We asked a couple of our favorite dinosaurs. Actually, both of our friends—Ken Krushel and Rakesh Kaul—have personally been anything but dinosaurs. But Krushel, at General Electric, and Kaul, at Hanover Direct, worked inside behemoths that fit the description. Despite all its success and resources, GE is limited in what it can do on-line because it’s unwilling to dilute earnings and won’t consider Silicon Valley practices—such as granting employees options in an internal start-up—for fear of alienating people in its many other, already-established businesses. Nor does GE have the patience to feed and nurture start-ups. Losses are too intensive, the outcome too risky. Hanover Direct, a catalog retailer, likewise has to worry about cultural issues. It also suffers from a languishing stock price that leaves it with the tiniest fraction of GE’s resources. Yet both Krushel and Kaul have succeeded. GE’s NBC unit, where Krushel was until recently senior vice president of strategy, avoided GE’s constraints by doing its innovating outside corporate walls. NBC used a small amount of money and NBC “peacock dollars” to buy a stake in an on-line portal, Snap, and, through splendid maneuvering, morphed that into a group of on-line properties called NBCi, whose stock began trading publicly late last year. NBC is at the forefront as broadcasters try to figure out how to use the Internet to develop new relationships with their core audience and reinvent their threatened core business. At Hanover Direct, Kaul, the chief executive, skirted internal problems by showing his organization that the entrepreneurial techniques he used in an internal incubator would become the standard business model for the whole company. In the process, he built a very promising business, called Keystone, that operates in a hot market: It handles order processing and the shipment of goods for e-commerce companies, many of which are more than happy to outsource those logistical nightmares. Both men would do some things differently if given the chance—in fact, Krushel left NBC late last year, becoming chairman and chief executive of College Enterprises, an Internet company that provides custom publishing and software development. But both have done far better than the norm. Their stories of life on the front lines of e-commerce hold lessons for all of us.
At GE, profit is king (that, and golf). NBC doesn’t have a vast treasury to exploit for Internet investments because that would be dilutive to earnings. The result is creativity, using limited dollars, combined with promotional ads on NBC’s platforms, whether network, cable, or Internet. The other challenge is scale. Is it reasonable to start small and invest in incubating Web ventures? For the most part, within NBC, the answer is no. That’s not what GE is about. Instead, we were fortunate to have found an underperforming asset, Snap, and were able to ratchet it up through creative marketing and relentless deal-doing. Not a lot of cash was required, and not a lot was generated, but we created phenomenal asset value, positioning, and press coverage. NBC moved its Internet position from being a small content tail barely wagging, to being a significant portal dog. RAKESH KAUL: Our approach to the Keystone venture was a hybrid. When we determined that e-commerce would be the killer app on the Internet, we decided to launch a venture business that would help companies do business on the Internet. But the new operation takes advantage of the main company’s distribution centers and the basic technology platform that we’ve built at Hanover Direct. For the employees who were brought in, we took the best lessons of Silicon Valley. We gave Keystone quasi-independence. We gave people equity incentives so that our employees would be very motivated and would feel that they were in charge of creating this business venture. KRUSHEL: How did the rest of the team at Hanover feel about this essentially separate division and the way its people are compensated? KAUL: Good question. We did have issues. It took us 18 months to learn how to set up the right compensation structure, and, during that time, we lost several key employees. But, happily, we were able to convince our compensation committee that the Keystone compensation model should be viewed not as an exception to the rule but as a model for the entire company. So, we ended up taking the whole company in the direction of the Keystone equity model. I wish I had gone to the mat sooner on this issue, giving people equity even if they had only been with the company for two weeks. That’s something that I think we figured out too late in the game. KRUSHEL: The entrepreneurial options issue is condemningly difficult for big successful companies, especially when compared with the agility and psychology of Internet companies. GE executives will tell you that the company is a team environment—that you can’t just introduce a new incentive structure to a select corral of NBC executives, when other people working on an assembly line or in some hierarchical division in jet engines or appliances have equally contributed to building the GE brand. And you know what? That’s right. But life is tough. Some of the best people leave. NBC, to its credit, finally did agree to issue stock (NBCi) to give it a new currency. At NBC, we realized that without such a currency we were going to be disabled in two areas. First, we wouldn’t be able to buy Internet companies because of the inflated value assigned to them. Second, despite the “GE as a team” rhetoric, it was obvious that without options you simply wouldn’t compete for the best of the talent pool. Sure, many employees at NBC receive GE options, and, as Jack Welch will tell you, in the past four years the stock has essentially tripled. OK. Great performance. But that isn’t the workable answer. You still have this undeniable division between GE and the Internet dynamic. Instead, you must work from the outside in. Essentially, Snap was reverse-merged into Xoom, along with other NBC digital assets. The mix of companies, in which we own 48%, was renamed NBCi, for NBC Interactive. NBC employees will have NBCi options. Give credit to NBC. It has outmaneuvered every other broadcast network; but we could have done significantly more and sooner if the legacy mentality at NBC had crumbled more quickly. Ironically, if Internet evaluations hadn’t risen so irrationally, I don’t think the Snap/Xoom/NBCi reconfiguration would have occurred. Market psychosis led to ingenuity. Now, the NBC Internet portfolio asset value has made up the earnings gap that NBC and just about every other network has experienced. Not only has the Internet site not proven dilutive, but market alchemy has made it accretive. KAUL: It’s a struggle to get people to feel like owners when you’re operating a venture inside your organization. There’s a lot of trial and error in figuring out the answers. But the key thing is to innovate, whether you’re talking about compensation or about breaking the company into smaller, more nimble pieces. It’s much easier to give ownership to employees who are very, very much tied to a specific business unit. So, we’ve broken Hanover Direct into three divisions, one for merchandise, one for Web services, and one for new on-line enterprises. We have, further, split the three divisions into different profit centers. We are basically telling the world that we intend to match Silicon Valley. We will go toe to toe. We tell people we want to recruit that Hanover Direct is like an incubator of innovative ideas. But, unlike at a Silicon Valley incubator, our employees have the benefits of having real information systems as a platform to build on. Our employees have the benefits of real resources, as opposed to just money, and we will match what recruits are being offered by Silicon Valley in terms of equity. There’s another thing that we’re changing, too, about compensation, and that I think other businesses need to change. The change has to do with the whole notion of budgeting. Budgets are among the classic management tools that established companies have used in compensation. If an executive beats his annual budget, he gets a big bonus. If he doesn’t make his budget, he doesn’t get as big a bonus. Well, one of the things that we have discovered—and I’m sure that all large incumbents have the same problem—is that budgeting in the world of the Internet is nonsensical. I mean, you can’t run your business based on a budget that was developed 12 or 15 months ago. In the world of the Internet, the first milestone is the only milestone that counts. As the saying goes: First things first, second things never. If you win in the Internet world, you move on to the next milestone. If you don’t win, you’re out of the game. So, what do you do now? You have to come up with new ways of defining success, beyond whether someone met his budget. If you’re going to give people equity incentives, you have to somehow know whether a management team earned the incentives. That requires changing the rules of the game. KRUSHEL: Unfortunately, I think there’s an issue of scale here. Rakesh, you have a clear vision and can go out and implement it because of the size of your company. In a company the size of GE, regardless of the hype, walls don’t fall down with the blast of a trumpet. GE has such an astounding record of financial success, however you measure it, that it’s difficult to innovate. Real innovators are entrepreneurs who assume real risk with no safety net. But, understandably, GE can’t embrace gonzo entrepreneurism. Still, in spite of the size, GE manages to remain alert, and at least periodically it shakes the rafters. KAUL: The conclusion I would draw is that every business that’s an incumbent has to ask itself a fundamental question: Is it going to continue to play the game in the real world, or is it going to play the game in the world of the Internet? There are many businesses, believe it or not, that are going to be able to continue in the real world, without being touched by the Internet. But many businesses will be transformed by the Internet, and for those, as painful as it may be, I see no choice except to begin adjusting management techniques, control mechanisms, and cultures. Otherwise, businesses will find themselves losing very talented people like you, Ken, because they’ll say, Look, I think I’ll move over to the world of start-ups. My advice to CEOs who are trying to capitalize on the Internet is to be sure that their various divisions are developing a portfolio of Internet options. The CEO should create a war chest of Internet dollars that the various managers of its units should be competing for. Giving people the opportunity to do creative things will not only generate good ideas but keep good people. If it turns out that a CEO is not getting enough creative ideas from the management team, or is not catching up but is falling behind, then I think it really requires some very radical redirection from the very top. KRUSHEL: One of the problems we had at NBC is that, for seemingly justifiable reasons, people pay attention to what is big—size does matter. There’s an anathema about building what people refer to as “popcorn stands.” Little things just don’t have much impact on a business as big as General Electric. But what we usually forget is that big things sometimes begin in small packages. Part of our problem with the Internet is that when we saw some opportunities three or four years ago, they were just too incipient. They were just too pregnant with potential. There wasn’t enough of an asset on the table. We had an opportunity to get involved early with a long list of companies. But we passed them up. Now we’re playing catch up. It’s not by accident that we did our early deal on the Internet with Microsoft. If it had been some marginal player that had an ingenious, inventive, breakthrough concept, the likelihood that we would have done a deal with that company would have been remote. No one would want to be blamed for making a mistake bidding on a company that did not have a marquee brand. KAUL: I think GE may be one of the few companies that, because of its size, success, and scale, can make the rules. GE has the resources to stick to its philosophy for a long, long time. But, as I look at the marketplace, I see something interesting happening. When they invest in start-ups that sell to consumers, as opposed to other businesses, venture capitalists are beginning to diversify their bets. We are beginning to see a lot more examples of partnerships between the venture community and corporations with major consumer brands. Look at Nordstrom and Benchmark Capital, which are jointly developing an on-line retailing business. My assessment is that these joint ventures will be the catalyst within large corporations and will lead these companies to transform themselves in ways that they wouldn’t on their own. KRUSHEL: Rakesh, I think that’s exactly right. The game-changing innovation isn’t at 30 Rock [NBC’s headquarters]. The creativity is outside hunting buffalo, not worried where they will fit at a board table. Ironically, NBC admits this. Thus, the investments to assist NBC in getting closer to the next generation of Ciscos and Yahoos before the rest of the world joins the parade of investment. It's strategy by stealth.
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